FIRST DIVISION

[G.R. Nos. L-28508-9. July 7, 1989.]

ESSO STANDARD EASTERN, INC., (formerly, Standard Vacuum Oil Company), petitioner, vs. THE
COMMISSIONER OF INTERNAL REVENUE, respondent.
Padilla Law Office for petitioner.
SYLLABUS
1.
STATUTORY CONSTRUCTION; LEGISLATIVE HISTORY OF AN ACT RESORTED TO
ONLY WHERE THE LANGUAGE OF THE STATUTE IS AMBIGUOUS. Only in extremely
doubtful matters of interpretation does the legislative history of an act of Congress become important.
As a matter of fact, there may be no resort to the legislative history of the enactment of a statute, the
language of which is plain and unambiguous, since such legislative history may only be resorted to for
the purpose of solving doubt, not for the purpose of creating it. [50 Am. Jur. 328.]
2.
TAXATION; REPUBLIC ACT NO. 2609, MARGIN FEE; NOT A TAX BUT AN EXACTION.
A margin fee is not a tax but an exaction designed to curb the excessive demands upon our
international reserve. (Caltex [Phil.] Inc. v. Acting Commissioner of Customs, 22 SCRA 779; Chamber
of Agriculture and Natural Resources of the Philippines v. Central Bank, 14 SCRA 630).
3.
ID.; ID.; AN EXERCISE OF POLICE POWER. The margin fee under Republic Act No.
2609 was imposed by the State in the exercise of its police power and not the power of taxation.
4.
ID.; ID.; NOT A DEDUCTIBLE EXPENSE; REASON. The fees were paid for the
remittance by ESSO as part of the profits to the head office in the United States. Such remittance was
an expenditure necessary and proper for the conduct of its corporate affairs. As stated in the Lopez
case, the margin fees are not expenses in connection with the production or earning of petitioner's
incomes in the Philippines. They were expenses incurred in the disposition of said incomes; expenses
for the remittance of funds after they have already been earned by petitioner's branch in the Philippines
for the disposal of its Head Office in New York which is already another distinct and separate income
taxpayer.
5.
ID.; NATIONAL INTERNAL REVENUE CODE; INCOME TAX ON BUSINESS;
CONDITIONS FOR DEDUCTIBILITY OF EXPENSE. We come, then, to the statutory test of
deductibility where it is axiomatic that to be deductible as a business expense, three conditions are
imposed, namely: (1) the expense must be ordinary and necessary, (2) it must be paid or incurred
within the taxable year, and (3) it must be paid or incurred in carrying on a trade or business. In
addition, not only must the taxpayer meet the business test, he must substantially prove by evidence or
records the deductions claimed under the law, otherwise, the same will be disallowed. The mere
allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its
deduction. (Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal
Revenue, 102 SCRA 246)
6.
ID.; ID.; CLAIMS FOR DEDUCTIONS, A MATTER OF LEGISLATIVE GRACE AND
CONSTRUED STRICTLY AGAINST THE TAXPAYER. The paramount rule is that claims for
deductions are a matter of legislative grace and do not turn on mere equitable considerations. . . . The
taxpayer in every instance has the burden of justifying the allowance of any deduction claimed.
DECISION
CRUZ, J p:
On appeal before us is the decision of the Court of Tax Appeals 1 denying petitioner's claims for refund
of overpaid income taxes of P102,246.00 for 1959 and P434,234.93 for 1960 in CTA Cases No. 1251
and 1558 respectively.
I
In CTA Case No. 1251, petitioner ESSO deducted from its gross income for 1959, as part of its
ordinary and necessary business expenses, the amount it had spent for drilling and exploration of its
petroleum concessions. This claim was disallowed by the respondent Commissioner of Internal

Revenue on the ground that the expenses should be capitalized and might be written off as a loss only
when a "dry hole" should result. ESSO then filed an amended return where it asked for the refund of
P323,279.00 by reason of its abandonment as dry holes of several of its oil wells. Also claimed as
ordinary and necessary expenses in the same return was the amount of P340,822.04, representing
margin fees it had paid to the Central Bank on its profit remittances to its New York head office.
On August 5, 1964, the CIR granted a tax credit of P221,033.00 only, disallowing the claimed
deduction for the margin fees paid.
In CTA Case No. 1558, the CR assessed ESSO a deficiency income tax for the year 1960, in the
amount of P367,994.00, plus 18% interest thereon of P66,238.92 for the period from April 18, 1961 to
April 18, 1964, for a total of P434,232.92. The deficiency arose from the disallowance of the margin
fees of P1,226,647.72 paid by ESSO to the Central Bank on its profit remittances to its New York head
office. LibLex
ESSO settled this deficiency assessment on August 10, 1964, by applying the tax credit of P221,033.00
representing its overpayment on its income tax for 1959 and paying under protest the additional amount
of P213,201.92. On August 13, 1964, it claimed the refund of P39,787.94 as overpayment on the
interest on its deficiency income tax. It argued that the 18% interest should have been imposed not on
the total deficiency of P367,944.00 but only on the amount of P146,961.00, the difference between the
total deficiency and its tax credit of P221,033.00.
This claim was denied by the CIR, who insisted on charging the 18% interest on the entire amount of
the deficiency tax. On May 4, 1965, the CIR also denied the claims of ESSO for refund of the
overpayment of its 1959 and 1960 income taxes, holding that the margin fees paid to the Central Bank
could not be considered taxes or allowed as deductible business expenses.
ESSO appealed to the CTA and sought the refund of P102,246.00 for 1959, contending that the margin
fees were deductible from gross income either as a tax or as an ordinary and necessary business
expense. It also claimed an overpayment of its tax by P434,232.92 in 1960, for the same reason.
Additionally, ESSO argued that even if the amount paid as margin fees were not legally deductible,
there was still an overpayment by P39,787.94 for 1960, representing excess interest.
After trial, the CTA denied petitioner's claim for refund of P102,246.00 for 1959 and P434,234.92 for
1960 but sustained its claim for P39,787.94 as excess interest. This portion of the decision was
appealed by the CIR but was affirmed by this Court in Commissioner of Internal Revenue v. ESSO,
G.R. No. L-28502-03, promulgated on April 18, 1989. ESSO for its part appealed the CTA decision
denying its claims for the refund of the margin fees P102,246.00 for 1959 and P434,234.92 for 1960.
That is the issue now before us.
II
The first question we must settle is whether R.A. 2609, entitled An Act to Authorize the Central Bank
of the Philippines to Establish a Margin Over Banks' Selling Rates of Foreign Exchange, is a police
measure or a revenue measure. If it is a revenue measure, the margin fees paid by the petitioner to the
Central Bank on its profit remittances to its New York head office should be deductible from ESSO's
gross income under Sec. 30(c) of the National Internal Revenue Code. This provides that all taxes paid
or accrued during or within the taxable year and which are related to the taxpayer's trade, business or
profession are deductible from gross income.
The petitioner maintains that margin fees are taxes and cites the background and legislative history of
the Margin Fee Law showing that R.A. 2609 was nothing less than a revival of the 17% excise tax on
foreign exchange imposed by R.A. 601. This was a revenue measure formally proposed by President
Carlos P. Garcia to Congress as part of, and in order to balance, the budget for 1959-1960. It was
enacted by Congress as such and, significantly, properly originated in the House of Representatives.
During its two and a half years of existence, the measure was one of the major sources of revenue used
to finance the ordinary operating expenditures of the government. It was, moreover, payable out of the
General Fund.

On the claimed legislative intent, the Court of Tax Appeals, quoting established principles, pointed out
that
We are not unmindful of the rule that opinions expressed in debates, actual proceedings of the
legislature, steps taken in the enactment of a law, or the history of the passage of the law through the
legislature, may be resorted to as an aid in the interpretation of a statute which is ambiguous or of
doubtful meaning. The courts may take into consideration the facts leading up to, confident with, and in
any way connected with, the passage of the act, in order that they may properly interpret the legislative
intent. But it is also well-settled jurisprudence that only in extremely doubtful matters of interpretation
does the legislative history of an act of Congress become important. As a matter of fact, there may be
no resort to the legislative history of the enactment of a statute, the language of which is plain and
unambiguous, since such legislative history may only be resorted to for the purpose of solving doubt,
not for the purpose of creating it. [50 Am. Jur. 328.]
Apart from the above consideration, there are at least two cases where we have held that a margin fee is
not a tax but an exaction designed to curb the excessive demands upon our international reserve.
In Caltex (Phil.) Inc. v. Acting Commissioner of Customs, 2 the Court stated through Justice Jose P.
Bengzon:
A margin levy on foreign exchange is a form of exchange control or restriction designed to discourage
imports and encourage exports, and ultimately, `curtail any excessive demand upon the international
reserve' in order to stabilize the currency. Originally adopted to cope with balance of payment
pressures, exchange restrictions have come to serve various purposes, such as limiting non-essential
imports, protecting domestic industry and when combined with the use of multiple currency rates
providing a source of revenue to the government, and are in many developing countries regarded as a
more or less inevitable concomitant of their economic development programs. The different measures
of exchange control or restriction cover different phases of foreign exchange transactions, i.e., in
quantitative restriction, the control is on the amount of foreign exchange allowable. In the case of the
margin levy, the immediate impact is on the rate of foreign exchange; in fact, its main function is to
control the exchange rate without changing the par value of the peso as fixed in the Bretton Woods
Agreement Act. For a member nation is not supposed to alter its exchange rate (at par value) to correct
a merely temporary disequilibrium in its balance of payments. By its nature, the margin levy is part of
the rate of exchange as fixed by the government.
As to the contention that the margin levy is a tax on the purchase of foreign exchange and hence should
not form part of the exchange rate, suffice it to state that We have already held the contrary for the
reason that a tax is levied to provide revenue for government operations, while the proceeds of the
margin fee are applied to strengthen our country's international reserves.
Earlier, in Chamber of Agriculture and Natural Resources of the Philippines v. Central Bank, 3 the
same idea was expressed, though in connection with a different levy, through Justice J.B.L. Reyes:
Neither do we find merit in the argument that the 20% retention of exporter's foreign exchange
constitutes an export tax. A tax is a levy for the purpose of providing revenue for government
operations, while the proceeds of the 20% retention, as we have seen, are applied to strengthen the
Central Bank's international reserve.
We conclude then that the margin fee was imposed by the State in the exercise of its police power and
not the power of taxation.
Alternatively, ESSO prays that if margin fees are not taxes, they should nevertheless be considered
necessary and ordinary business expenses and therefore still deductible from its gross income. The fees
were paid for the remittance by ESSO as part of the profits to the head office in the United States. Such
remittance was an expenditure necessary and proper for the conduct of its corporate affairs.
The applicable provision is Section 30(a) of the National Internal Revenue Code reading as follows:
SEC. 30.
Deductions from gross income. In computing net income there shall be allowed as
deductions

(a)
Expenses:
(1)
In general. All the ordinary and necessary expenses paid or incurred during the taxable year
in carrying on any trade or business, including a reasonable allowance for salaries or other
compensation for personal services actually rendered; traveling expenses while away from home in the
pursuit of a trade or business; and rentals or other payments required to be made as a condition to the
continued use or possession, for the purpose of the trade or business, of property to which the taxpayer
has not taken or is not taking title or in which he has no equity.
(2)
Expenses allowable to non-resident alien individuals and foreign corporations. In the case of
a non-resident alien individual or a foreign corporation, the expenses deductible are the necessary
expenses paid or incurred in carrying on any business or trade conducted within the Philippines
exclusively.
In the case of Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal
Revenue, 4 the Court laid down the rules on the deductibility of business expenses, thus:
The principle is recognized that when a taxpayer claims a deduction, he must point to some specific
provision of the statute in which that deduction is authorized and must be able to prove that he is
entitled to the deduction which the law allows. As previously adverted to, the law allowing expenses as
deduction from gross income for purposes of the income tax is Section 30(a) (1) of the National
Internal Revenue which allows a deduction of 'all the ordinary and necessary expenses paid or incurred
during the taxable year in carrying on any trade or business.' An item of expenditure, in order to be
deductible under this section of the statute, must fall squarely within its language.
We come, then, to the statutory test of deductibility where it is axiomatic that to be deductible as a
business expense, three conditions are imposed, namely: (1) the expense must be ordinary and
necessary, (2) it must be paid or incurred within the taxable year, and (3) it must be paid or incurred in
carrying on a trade or business. In addition, not only must the taxpayer meet the business test, he must
substantially prove by evidence or records the deductions claimed under the law, otherwise, the same
will be disallowed. The mere allegation of the taxpayer that an item of expense is ordinary and
necessary does not justify its deduction.
While it is true that there is a number of decisions in the United States delving on the interpretation of
the terms 'ordinary and necessary, as used in the federal tax laws, no adequate or satisfactory definition
of those terms is possible. Similarly, this Court has never attempted to define with precision the terms
'ordinary and necessary.' There are however, certain guiding principles worthy of serious consideration
in the proper adjudication of conflicting claims. Ordinarily, an expense will be considered `necessary,
where the expenditure is appropriate and helpful in the development of the taxpayer's business. It is
'ordinary' when it connotes a payment which is normal in relation to the business of the taxpayer and
the surrounding circumstances. The term 'ordinary' does not require that the payments be habitual or
normal in the sense that the same taxpayer will have to make them often; the payment may be unique
or non-recurring to the particular taxpayer affected.
There is thus no hard and fast rule on the matter. The right to a deduction depends in each case on the
particular facts and the relation of the payment to the type of business in which the taxpayer is engaged.
The intention of the taxpayer often may be the controlling fact in making the determination. Assuming
that the expenditure is ordinary and necessary in the operation of the taxpayer's business, the answer to
the question as to whether the expenditure is an allowable deduction as a business expense must be
determined from the nature of the expenditure itself, which in turn depends on the extent and
permanency of the work accomplished by the expenditure.
In the light of the above explanation, we hold that the Court of Tax Appeals did not err when it held on
this issue as follows:
Considering the foregoing test of what constitutes an ordinary and necessary deductible expense, it may
be asked: Were the margin fees paid by petitioner on its profit remittances to its Head Office in New
York appropriate and helpful in the taxpayer's business in the Philippines? Were the margin fees

incurred for purposes proper to the conduct of the affairs of petitioner's branch in the Philippines? Or
were the margin fees incurred for the purpose of realizing a profit or of minimizing a loss in the
Philippines? Obviously not. As stated in the Lopez case, the margin fees are not expenses in connection
with the production or earning of petitioner's incomes in the Philippines. They were expenses incurred
in the disposition of said incomes; expenses for the remittance of funds after they have already been
earned by petitioner's branch in the Philippines for the disposal of its Head Office in New York which
is already another distinct and separate income taxpayer.
xxx
xxx
xxx
Since the margin fees in question were incurred for the remittance of funds to petitioner's Head Office
in New York, which is a separate and distinct income taxpayer from the branch in the Philippines, for
its disposal abroad, it can never be said therefore that the margin fees were appropriate and helpful in
the development of petitioner's business in the Philippines exclusively or were incurred for purposes
proper to the conduct of the affairs of petitioner's branch in the Philippines exclusively or for the
purpose of realizing a profit or of minimizing a loss in the Philippines exclusively. If at all, the margin
fees were incurred for purposes proper to the conduct of the corporate affairs of Standard Vacuum Oil
Company in New York, but certainly not in the Philippines.
ESSO has not shown that the remittance to the head office of part of its profits was made in furtherance
of its own trade or business. The petitioner merely presumed that all corporate expenses are necessary
and appropriate in the absence of a showing that they are illegal or ultra vires. This is error. The public
respondent is correct when it asserts that "the paramount rule is that claims for deductions are a matter
of legislative grace and do not turn on mere equitable considerations . . . The taxpayer in every instance
has the burden of justifying the allowance of any deduction claimed." 5
It is clear that ESSO, having assumed an expense properly attributable to its head office, cannot now
claim this as an ordinary and necessary expense paid or incurred in carrying on its own trade or
business. cdrep
WHEREFORE, the decision of the Court of Tax Appeals denying the petitioner's claims for refund of
P102,246.00 for 1959 and P434,234.92 for 1960, is AFFIRMED, with costs against the petitioner.
SO ORDERED.
Narvasa, Gancayco, Grio-Aquino and Medialdea, JJ ., concur.
Footnotes
1.
Penned by Associate Judge E. Alvarez, with Presiding Judge Umali and Associate Judge
Avancea concurring.
2.
22 SCRA 779.
3.
14 SCRA 630.
4.
102 SCRA 246.
5.
Merten's, Law of Federal Income Taxation, Section 25.03.

SECOND DIVISION
[G.R. No. L-54108. January 17, 1984.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF TAX APPEALS and
SMITH KLINE & FRENCH OVERSEAS CO. (PHILIPPINE BRANCH), respondents.
The Solicitor General for petitioner.
Siguion Reyna, Montecillo & Ongsiako and J .C . Castaeda, Jr. and E.C . Alcantara for respondents.
SYLLABUS
1.
TAXATION; NATIONAL INTERNAL REVENUE CODE; INCOME TAX OF
CORPORATIONS; DEDUCTIONS; EXPENSES RELATED TO PRODUCTION OF PHILIPPINE
DERIVED INCOME AND TO PHILIPPINE OPERATIONS DEDUCTIBLE. From the provisions,
Section 37(b) of the old National Internal Revenue Code, Commonwealth Act No. 466, which is
reproduced in Presidential Decree No. 1158, the National Internal Revenue Code of 1977, and Sec. 160
of Revenue Regulations No. 2 it is manifest that where an expense is clearly related to the production
of Philippine-derived income or to Philippine operations (e.g. salaries of Philippine personnel, rental of
office building in the Philippines), that expense can be deducted from the gross income acquired in the
Philippines without resorting to apportionment. Under the same provisions also, where there are items
included in the overhead expenses incurred by the parent company, all of which directly benefit its
branches, including the Philippines, which cannot be definitely allocated or identified with the
operations of the Philippine branch, the company may claim as its deductible share a ratable part of
such expenses based upon the ratio of the local branch's gross income to the total gross income,
worldwide, of the multinational corporation.
2.
ID.; ID.; ID.; AMENDED RETURN ALLOWED WHERE OVERHEAD EXPENSES WERE
ESTIMATED. Smith Kline had to amend its return because it is of common knowledge that audited
financial statements are generally completed three or four months after the close of the accounting
period. There being no financial statements yet when the certification of January 11, 1972 was made,
the treasurer could not have correctly computed Smith Kline's share in the home office overhead
expenses in accordance with the gross income formula prescribed in section 160 of the Revenue
Regulations. What the treasurer certified was a mere estimate. Smith Kline likewise submits that it has
presented ample evidence to support its claim for refund. To this end, it has presented before the Tax
Court the authenticated statement of Peat, Marwick, Mitchell and Company to show that since the
gross income of the Philippine branch was P7,143,155 ($1,098,617) for 1971 as per audit report
prepared by Sycip, Gorres, Velayo and Company, and the gross income of the corporation as a whole
was $6,891,052, Smith Kline's share at 15.94% of the home office overhead expenses was P1,427,484
($219,547). Clearly, the weight of evidence bolsters its position that the amount of P1,427.484
represents the correct ratable share, the same having been computed pursuant to Section 37(b) and
Section 160.
3.
ID.; ID.; ID.; ID.; REFUND, PROPER. In a manifestation dated July 19, 1983, Smith Kline
declared that with respect to its share of the head office overhead expenses in its income tax returns for
the years 1973 to 1981, it deducted its ratable share of the total overhead expenses of its head office for
those years as computed by the independent auditors hired by the parent company in Philadelphia,
Pennsylvania, U.S.A., as soon as said computations were made available to it. We hold that Smith
Kline's amended 1971 return is in conformity with the law and regulations. The Tax Court correctly
held that the refund or credit of the resulting overpayment is in order.
DECISION
AQUINO, J p:
This case is about the refund of a 1971 income tax amounting to P324,255. Smith Kline and French
Overseas Company, a multinational firm domiciled in Philadelphia, Pennsylvania, is licensed to do
business in the Philippines. It is engaged in the importation, manufacture and sale of pharmaceuticals,
drugs and chemicals. LLjur

In its 1971 original income tax return, Smith Kline declared a net taxable income of P1,489,277 (Exh.
A) and paid P511,247 as tax due. Among the deductions claimed from gross income was P501,040
($77,060) as its share of the head office overhead expenses. However, in its amended return filed on
March 1, 1973, there was an overpayment of P324,255 "arising from underdeduction of home office
overhead" (Exh, E). It made a formal claim for the refund of the alleged overpayment.
It appears that sometime in October, 1972, Smith Kline received from its international independent
auditors, Peat, Marwick, Mitchell and Company, an authenticated certification to the effect that the
Philippine share in the unallocated overhead expenses of the main office for the year ended December
31, 1971 was actually $219,547 (1,427,484). It further stated in the certification that the allocation was
made on the basis of the percentage of gross income in the Philippines to gross income of the
corporation as a whole. By reason of the new adjustment, Smith Kline's tax liability was greatly
reduced from P511,247 to P186,992 resulting in an overpayment of P324,255.
On April 2, 1974, without awaiting the action of the Commissioner of Internal Revenue on its claim,
Smith Kline filed a petition for review with the Court of Tax Appeals.
In its decision of March 21, 1980, the Tax Court ordered the Commissioner to refund the overpayment
or grant a tax credit to Smith Kline. The Commissioner appealed to this Court.
The governing law is found in section 37 of the old National Internal Revenue Code, Commonwealth
Act No. 466, which is reproduced in Presidential Decree No. 1158, the National Internal Revenue Code
of 1977 and which reads:
"SEC. 37.
Income from sources within the Philippines.
xxx
xxx
xxx
"(b) Net income from sources in the Philippines. From the items of gross income specified in
subsection (a) of this section there shall be deducted the expenses, losses, and other deductions
properly apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions
which cannot definitely be allocated to some item or class of gross income. The remainder, if any, shall
be included in full as net income from sources within the Philippines.
xxx
xxx
xxx"
Revenue Regulations No. 2 of the Department of Finance contains the following provisions on the
deductions to be made to determine the net income from Philippine sources:
"SEC. 160. Apportionment of deductions. From the items specified in section 37(a), as being
derived specifically from sources within the Philippines there shall be deducted the expenses, losses,
and other deductions properly apportioned or allocated thereto and a ratable part of any other expenses,
losses or deductions which can not definitely be allocated to some item or class of gross income. The
remainder shall be included in full as net income from sources within the Philippines. The ratable part
is based upon the ratio of gross income from sources within the Philippines to the total gross income.
"Example:
A non-resident alien individual whose taxable year is the calendar year, derived gross
income from all sources for 1939 of P180,000, including therein:
Interest on bonds of a domestic
corporation P9,000
Dividends on stock of a domestic
corporation 4,000
Royalty for the use of patents
within the Philippines12,000
Gain from sale of real property located
within the Philippines11,000

Total P36,000
=======
that is, one-fifth of the total gross income was from sources within the Philippines. The remainder of

the gross income was from sources without the Philippines, determined under section 37(c).
"The expenses of the taxpayer for the year amounted to P78,000. Of these expenses the amount of
P8,000 is properly allocated to income from sources within the Philippines and the amount of P40,000
is properly allocated to income from sources without the Philippines.
"The remainder of the expense, P30,000, cannot be definitely allocated to any class of income. A
ratable part thereof, based upon the relation of gross income from sources within the Philippines to the
total gross income, shall be deducted in computing net income from sources within the Philippines.
Thus, there are deducted from the P36,000 of gross income from sources within the Philippines
expenses amounting to P14,000 [representing P8,000 properly apportioned to the income from sources
within the Philippines and P6,000, a ratable part (one fifth) of the expenses which could not be
allocated to any item or class of gross income]. The remainder, P22,000, is the net income from sources
within the Philippines."
From the foregoing provisions, it is manifest that where an expense is clearly related to the production
of Philippine-derived income or to Philippine operations (e.g. salaries of Philippine personnel, rental of
office building in the Philippines), that expense can be deducted from the gross income acquired in the
Philippines without resorting to apportionment.
The overhead expenses incurred by the parent company in connection with finance, administration, and
research and development, all of which directly benefit its branches all over the world, including the
Philippines, fall under a different category however. These are items which cannot be definitely
allocated or identified with the operations of the Philippine branch. For 1971, the parent company of
Smith Kline spent $1,077,739. Under section 37(b) of the Revenue Code and section 160 of the
regulations, Smith Kline can claim as its deductible share a ratable part of such expenses based upon
the ratio of the local branch's gross income to the total gross income, worldwide, of the multinational
corporation. LexLib
In his petition for review, the Commissioner does not dispute the right of Smith Kline to avail itself of
section 37(b) of the Tax Code and section 160 of the regulations. But the Commissioner maintains that
such right is not absolute and that as there exists a contract (in this case a service agreement) which
Smith Kline has entered into with its home office, prescribing the amount that a branch can deduct as
its share of the main office's overhead expenses, that contract is binding.
The Commissioner contends that since the share of the Philippine branch has been fixed at $77,060,
Smith Kline itself cannot claim more than the said amount. To allow Smith Kline to deduct more than
what was expressly provided in the agreement would be to ignore its existence. It is a cardinal rule that
a contract is the law between the contracting parties and the stipulations therein must be respected
unless these are proved to be contrary to law, morals, good customs and public policy. There being
allegedly no showing to the contrary, the provisions thereof must be followed.
The Commissioner also argues that the Tax Court erred in relying on the certification of Peat, Marwick,
Mitchell and Company that Smith Kline is entitled to deduct P1,427,484 ($219,547) as its allotted share
and that Smith Kline has not presented any evidence to show that the home office expenses chargeable
to Philippine operations exceeded $77,060.
On the other hand, Smith Kline submits that the contract between itself and its home office cannot
amend tax laws and regulations. The matter of allocated expenses which are deductible under the law
cannot be the subject of an agreement between private parties nor can the Commissioner acquiesce in
such an agreement.
Smith Kline had to amend its return because it is of common knowledge that audited financial
statements are generally completed three or four months after the close of the accounting period. There
being no financial statements yet when the certification of January 11, 1972 was made, the treasurer
could not have correctly computed Smith Kline's share in the home office overhead expenses in
accordance with the gross income formula prescribed in section 160 of the Revenue Regulations. What
the treasurer certified was a mere estimate.

Smith Kline likewise submits that it has presented ample evidence to support its claim for refund. To
this end, it has presented before the Tax Court the authenticated statement of Peat, Marwick, Mitchell
and Company to show that since the gross income of the Philippine branch was P7,143,155
($1,098,617) for 1971 as per audit report prepared by Sycip, Gorres, Velayo and Company, and the
gross income of the corporation as a whole was $6,891,052, Smith Kline's share at 15.94% of the home
office overhead expenses was P1,427,484 ($219,547) (Exh. G to G-2, BIR Records, 4-5). LLpr
Clearly, the weight of evidence bolsters its position that the amount of P1,427,484 represents the
correct ratable share, the same having been computed pursuant to section 37(b) and section 160.
In a manifestation dated July 19, 1983, Smith Kline declared that with respect to its share of the head
office overhead expenses in its income tax returns for the years 1973 to 1981, it deducted its ratable
share of the total overhead expenses of its head office for those years as computed by the independent
auditors hired by the parent company in Philadelphia, Pennsylvania, U.S.A., as soon as said
computations were made available to it.
We hold that Smith Kline's amended 1971 return is in conformity with the law and regulations. The Tax
Court correctly held that the refund or credit of the resulting overpayment is in order. cdrep
WHEREFORE, the decision of the Tax Court is hereby affirmed. No costs.
SO ORDERED.
Makasiar, Concepcion, Jr., Guerrero, De Castro and Escolin, JJ ., concur.
Abad Santos, J ., took no part.

THIRD DIVISION
[G.R. No. 143672. April 24, 2003.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. GENERAL FOODS (PHILS.), INC.,
respondent.
Rhodora J. Corcuera-Menzon for petitioner.
Ortega Del Castillo Bacorro Odulio Calma & Carbonell for respondent.
SYNOPSIS
Respondent corporation filed its income tax return for the fiscal year ending February 28, 1985. In said
tax return, respondent claimed as deduction, among other business expenses, the amount of P9,461,246
for media advertising for "Tang" one of its products. The Commissioner disallowed 50% or P4,730,623
of the deduction claimed by respondent. The latter filed a motion for reconsideration, but the same was
denied. Respondent appealed to the Court of Tax Appeals, but the appeal was dismissed. Aggrieved,
respondent filed a petition for review at the Court of Appeals which rendered a decision reversing and
setting aside the decision of the Court of Tax Appeals. Hence, the present petition for review. The
Commissioner of Internal Revenue presented to the Court the lone issue of whether or not the subject
media advertising expense for "Tang" incurred by respondent was an ordinary and necessary expense
fully deductible under the National Internal Revenue Code (NIRC). ICASEH
The Supreme Court reversed and set aside the decision of the Court of Appeals and ordered private
respondent General Foods (Phils); Inc., to pay its deficiency income tax in the amount of
P2,635,141.42, plus 25% surcharge for late payment and 20% annual interest computed from August
25, 1989, the date of the denial of its protest, until the same is fully paid. The Court found the subject
expense for the advertisement of a single product to be inordinately large, and even if indeed it is
necessary, it cannot be considered an ordinary expense deductible under Section 29 (a) (1) (A) of the
NIRC. According to the Court, the subject advertisement is one designed to stimulate the future sale of
merchandise or use of services. Said venture of respondent to protect its brand franchise was
tantamount to efforts to establish a reputation and is akin to the acquisition of capital assets, and should
not, therefore, be considered as business expenses but as capital expenditures which normally should be
spread out over a reasonable period of time.
SYLLABUS
1.
TAXATION; INCOME TAXATION; DEDUCTIONS FROM GROSS INCOME;
DEDUCTIONS FOR INCOME TAX PURPOSES PARTAKE OF THE NATURE OF TAX
EXEMPTIONS AND ARE THEREFORE STRICTLY CONSTRUED AGAINST THE TAXPAYER
AND LIBERALLY IN FAVOR OF THE TAXING AUTHORITY. It is a governing principle in
taxation that tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in
favor of the taxing authority; and he who claims an exemption must be able to justify his claim by the
clearest grant of organic or statute law. An exemption from the common burden cannot be permitted to
exist upon vague implications. Deductions for income tax purposes partake of the nature of tax
exemptions; hence, if tax exemptions are strictly construed, then deductions must also be strictly
construed.
2.
ID.; ID.; ID.; EXPENSES; ORDINARY AND NECESSARY TRADE BUSINESS OR
PROFESSIONAL EXPENSES; WHEN DEDUCTIBLE. To be deductible from gross income, the
subject advertising expense must comply with the following requisites: (a) the expense must be
ordinary and necessary; (b) it must have been paid or incurred during the taxable year; (c) it must have
been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be supported
by receipts, records or other pertinent papers.
3.
ID.; ID.; ID.; ID.; FACTORS IN DETERMINING THE REASONABLENESS OF AN
ADVERTISING EXPENSE. There is yet to be a clear-cut criteria or fixed test for determining the
reasonableness of an advertising expense. There being no hard and fast rule on the matter, the right to a
deduction depends on a number of factors such as but not limited to: the type and size of business in

which the taxpayer is engaged; the volume and amount of its net earnings; the nature of the expenditure
itself; the intention of the taxpayer and the general economic conditions. It is the interplay of these,
among other factors and properly weighed, that will yield a proper evaluation.
4.
ID.; ID.; ID.; ID.; ID.; SUBJECT EXPENSE FOR THE ADVERTISEMENT OF A SINGLE
PRODUCT FOUND TO BE INORDINATELY LARGE AND CANNOT BE CONSIDERED AS AN
ORDINARY EXPENSE EVEN IF IT IS NECESSARY. In the case at bar, the P9,461,246 claimed
as media advertising expense for "Tang" alone was almost one-half of its total claim for "marketing
expenses." Aside from that, respondent-corporation also claimed P2,678,328 as "other advertising and
promotions expense" and another P1,548,614, for consumer promotion. Furthermore, the subject
P9,461,246 media advertising expense for "Tang" was almost double the amount of respondent
corporation's P4,640,636 general and administrative expenses. We find the subject expense for the
advertisement of a single product to be inordinately large. Therefore, even if it is necessary, it cannot be
considered an ordinary expense deductible under then Section 29 (a) (1) (A) of the NIRC. HCTaAS
5.
ID.; ID.; ID.; ID.; ID.; AN ADVERTISING TO STIMULATE THE FUTURE SALE OF
MERCHANDISE OR USE OF SERVICES IS NOT DEDUCTIBLE AS BUSINESS EXPENSE.
Advertising is generally of two kinds: (1) advertising to stimulate the current sale of merchandise or
use of services and (2) advertising designed to stimulate the future sale of merchandise or use of
services. The second type involves expenditures incurred, in whole or in part, to create or maintain
some form of goodwill for the taxpayer's trade or business or for the industry or profession of which
the taxpayer is a member. If the expenditures are for the advertising of the first kind, then, except as to
the question of the reasonableness of amount, there is no doubt such expenditures are deductible as
business expenses. If, however, the expenditures are for advertising of the second kind, then normally
they should be spread out over a reasonable period of time. We agree with the Court of Tax Appeals
that the subject advertising expense was of the second kind. Not only was the amount staggering; the
respondent corporation itself also admitted, in its letter protest to the Commissioner of Internal
Revenue's assessment, that the subject media expense was incurred in order to protect respondent
corporation's brand franchise, a critical point during the period under review.
6.
ID.; ID.; ID.; ID.; ID.; CORPORATION'S EXPENSE TO PROTECT ITS BRAND
FRANCHISE IS CONSIDERED AS CAPITAL EXPENDITURE; CASE AT BAR. The protection
of brand franchise is analogous to the maintenance of goodwill or title to one's property. This is a
capital expenditure which should be spread out over a reasonable period of time. Respondent
corporation's venture to protect its brand franchise was tantamount to efforts to establish a reputation.
This was akin to the acquisition of capital assets and therefore expenses related thereto were not to be
considered as business expenses but as capital expenditures. True, it is the taxpayer's prerogative to
determine the amount of advertising expenses it will incur and where to apply them. Said prerogative;
however, is subject to certain considerations. The first relates to the extent to which the expenditures
are actually capital outlays; this necessitates an inquiry into the nature or purpose of such expenditures.
The second, which must be applied in harmony with the first, relates to whether the expenditures are
ordinary and necessary. Concomitantly, for an expense to be considered ordinary, it must be reasonable
in amount. The Court of Tax Appeals ruled that respondent corporation failed to meet the two foregoing
limitations. We find said ruling to be well founded. Respondent corporation incurred the subject
advertising expense in order to protect its brand franchise. We consider this as a capital outlay since it
created goodwill for its business and/or product. The P9,461,246 media advertising expense for the
promotion of a single product, almost one-half of petitioner corporation's entire claim for marketing
expenses for that year under review, inclusive of other advertising and promotion expenses of
P2,678,328 and P1,548,614 for consumer promotion, is doubtlessly unreasonable. TASCEc
DECISION
CORONA, J p:
Petitioner Commissioner of Internal Revenue (Commissioner) assails the resolution 1 of the Court of

Appeals reversing the decision 2 of the Court of Tax Appeals which in turn denied the protest filed by
respondent General Foods (Phils.), Inc., regarding the assessment made against the latter for deficiency
taxes. aDHScI
The records reveal that, on June 14, 1985, respondent corporation, which is engaged in the manufacture
of beverages such as "Tang," "Calumet" and "Kool-Aid," filed its income tax return for the fiscal year
ending February 28, 1985. In said tax return, respondent corporation claimed as deduction, among
other business expenses, the amount of P9,461,246 for media advertising for "Tang."
On May 31, 1988, the Commissioner disallowed 50% or P4,730,623 of the deduction claimed by
respondent corporation. Consequently, respondent corporation was assessed deficiency income taxes in
the amount of P2,635,141.42. The latter filed a motion for reconsideration but the same was denied.
On September 29, 1989, respondent corporation appealed to the Court of Tax Appeals but the appeal
was dismissed:
With such a gargantuan expense for the advertisement of a singular product, which even excludes
"other advertising and promotions" expenses, we are not prepared to accept that such amount is
reasonable "to stimulate the current sale of merchandise" regardless of Petitioner's explanation that
such expense "does not connote unreasonableness considering the grave economic situation taking
place after the Aquino assassination characterized by capital fight, strong deterioration of the
purchasing power of the Philippine peso and the slacking demand for consumer products" (Petitioner's
Memorandum, CTA Records, p. 273). We are not convinced with such an explanation. The staggering
expense led us to believe that such expenditure was incurred "to create or maintain some form of good
will for the taxpayer's trade or business or for the industry or profession of which the taxpayer is a
member." The term "good will" can hardly be said to have any precise signification; it is generally used
to denote the benefit arising from connection and reputation (Words and Phrases, Vol. 18, p. 556 citing
Douhart vs. Loagan, 86 III. App. 294). As held in the case of Welch vs. Helvering, efforts to establish
reputation are akin to acquisition of capital assets and, therefore, expenses related thereto are not
business expenses but capital expenditures. (Atlas Mining and Development Corp. vs. Commissioner
of Internal Revenue, supra). For sure such expenditure was meant not only to generate present sales but
more for future and prospective benefits. Hence, "abnormally large expenditures for advertising are
usually to be spread over the period of years during which the benefits of the expenditures are
received" (Mertens, supra, citing Colonial Ice Cream Co., 7 BTA 154).
WHEREFORE, in all the foregoing, and finding no error in the case appealed from, we hereby
RESOLVE to DISMISS the instant petition for lack of merit and ORDER the Petitioner to pay the
respondent Commissioner the assessed amount of P2,635,141.42 representing its deficiency income tax
liability for the fiscal year ended February 28, 1985." 3
Aggrieved, respondent corporation filed a petition for review at the Court of Appeals which rendered a
decision reversing and setting aside the decision of the Court of Tax Appeals:
Since it has not been sufficiently established that the item it claimed as a deduction is excessive, the
same should be allowed.
WHEREFORE, the petition of petitioner General Foods (Philippines), Inc. is hereby GRANTED.
Accordingly, the Decision, dated 8 February 1994 of respondent Court of Tax Appeals is REVERSED
and SET ASIDE and the letter, dated 31 May 1988 of respondent Commissioner of Internal Revenue is
CANCELLED.
SO ORDERED. 4
Thus, the instant petition, wherein the Commissioner presents for the Court's consideration a lone
issue: whether or not the subject media advertising expense for "Tang" incurred by respondent
corporation was an ordinary and necessary expense fully deductible under the National Internal
Revenue Code (NIRC).
It is a governing principle in taxation that tax exemptions must be construed in strictissimi juris against
the taxpayer and liberally in favor of the taxing authority; 5 and he who claims an exemption must be

able to justify his claim by the clearest grant of organic or statute law. An exemption from the common
burden cannot be permitted to exist upon vague implications. 6
Deductions for income tax purposes partake of the nature of tax exemptions; hence, if tax exemptions
are strictly construed, then deductions must also be strictly construed.
We then proceed to resolve the singular issue in the case at bar. Was the media advertising expense for
"Tang" paid or incurred by respondent corporation for the fiscal year ending February 28, 1985
"necessary and ordinary," hence, fully deductible under the NIRC? Or was it a capital expenditure, paid
in order to create "goodwill and reputation" for respondent corporation and/or its products, which
should have been amortized over a reasonable period? DHcTaE
Section 34 (A) (1), formerly Section 29 (a) (1) (A), of the NIRC provides:
(A)
Expenses.
(1)
Ordinary and necessary trade, business or professional expenses.
(a)
In general. There shall be allowed as deduction from gross income all ordinary and necessary
expenses paid or incurred during the taxable year in carrying on, or which are directly attributable to,
the development, management, operation and/or conduct of the trade, business or exercise of a
profession.
Simply put, to be deductible from gross income, the subject advertising expense must comply with the
following requisites: (a) the expense must be ordinary and necessary; (b) it must have been paid or
incurred during the taxable year; (c) it must have been paid or incurred in carrying on the trade or
business of the taxpayer; and (d) it must be supported by receipts, records or other pertinent papers. 7
The parties are in agreement that the subject advertising expense was paid or incurred within the
corresponding taxable year and was incurred in carrying on a trade or business. Hence, it was
necessary. However, their views conflict as to whether or not it was ordinary. To be deductible, an
advertising expense should not only be necessary but also ordinary. These two requirements must be
met.
The Commissioner maintains that the subject advertising expense was not ordinary on the ground that
it failed the two conditions set by U.S. jurisprudence: first, "reasonableness" of the amount incurred
and second, the amount incurred must not be a capital outlay to create "goodwill" for the product
and/or private respondent's business. Otherwise, the expense must be considered a capital expenditure
to be spread out over a reasonable time.
We agree.
There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of an advertising
expense. There being no hard and fast rule on the matter, the right to a deduction depends on a number
of factors such as but not limited to: the type and size of business in which the taxpayer is engaged; the
volume and amount of its net earnings; the nature of the expenditure itself; the intention of the taxpayer
and the general economic conditions. It is the interplay of these, among other factors and properly
weighed, that will yield a proper evaluation.
In the case at bar, the P9,461,246 claimed as media advertising expense for "Tang" alone was almost
one-half of its total claim for "marketing expenses." Aside from that, respondent-corporation also
claimed P2,678,328 as "other advertising and promotions expense" and another P1,548,614, for
consumer promotion.
Furthermore, the subject P9,461,246 media advertising expense for "Tang" was almost double the
amount of respondent corporation's P4,640,636 general and administrative expenses.
We find the subject expense for the advertisement of a single product to be inordinately large.
Therefore, even if it is necessary, it cannot be considered an ordinary expense deductible under then
Section 29 (a) (1) (A) of the NIRC.
Advertising is generally of two kinds: (1) advertising to stimulate the current sale of merchandise or
use of services and (2) advertising designed to stimulate the future sale of merchandise or use of
services. The second type involves expenditures incurred, in whole or in part, to create or maintain

some form of goodwill for the taxpayer's trade or business or for the industry or profession of which
the taxpayer is a member. If the expenditures are for the advertising of the first kind, then, except as to
the question of the reasonableness of amount, there is no doubt such expenditures are deductible as
business expenses. If, however, the expenditures are for advertising of the second kind, then normally
they should be spread out over a reasonable period of time. CIcTAE
We agree with the Court of Tax Appeals that the subject advertising expense was of the second kind.
Not only was the amount staggering; the respondent corporation itself also admitted, in its letter protest
8 to the Commissioner of Internal Revenue's assessment, that the subject media expense was incurred
in order to protect respondent corporation's brand franchise, a critical point during the period under
review.
The protection of brand franchise is analogous to the maintenance of goodwill or title to one's property.
This is a capital expenditure which should be spread out over a reasonable period of time. 9
Respondent corporation's venture to protect its brand franchise was tantamount to efforts to establish a
reputation. This was akin to the acquisition of capital assets and therefore expenses related thereto were
not to be considered as business expenses but as capital expenditures. 10
True, it is the taxpayer's prerogative to determine the amount of advertising expenses it will incur and
where to apply them. 11 Said prerogative, however, is subject to certain considerations. The first relates
to the extent to which the expenditures are actually capital outlays; this necessitates an inquiry into the
nature or purpose of such expenditures. 12 The second, which must be applied in harmony with the
first, relates to whether the expenditures are ordinary and necessary. Concomitantly, for an expense to
be considered ordinary, it must be reasonable in amount. The Court of Tax Appeals ruled that
respondent corporation failed to meet the two foregoing limitations.
We find said ruling to be well founded. Respondent corporation incurred the subject advertising
expense in order to protect its brand franchise. We consider this as a capital outlay since it created
goodwill for its business and/or product. The P9,461,246 media advertising expense for the promotion
of a single product, almost one-half of petitioner corporation's entire claim for marketing expenses for
that year under review, inclusive of other advertising and promotion expenses of P2,678,328 and
P1,548,614 for consumer promotion, is doubtlessly unreasonable.
It has been a long standing policy and practice of the Court to respect the conclusions of quasi-judicial
agencies such as the Court of Tax Appeals, a highly specialized body specifically created for the
purpose of reviewing tax cases. The CTA, by the nature of its functions, is dedicated exclusively to the
study and consideration of tax problems. It has necessarily developed an expertise on the subject. We
extend due consideration to its opinion unless there is an abuse or improvident exercise of authority. 13
Since there is none in the case at bar, the Court adheres to the findings of the CTA.
Accordingly, we find that the Court of Appeals committed reversible error when it declared the subject
media advertising expense to be deductible as an ordinary and necessary expense on the ground that "it
has not been established that the item being claimed as deduction is excessive." It is not incumbent
upon the taxing authority to prove that the amount of items being claimed is unreasonable. The burden
of proof to establish the validity of claimed deductions is on the taxpayer. 14 In the present case, that
burden was not discharged satisfactorily.
WHEREFORE, premises considered, the instant petition is GRANTED. The assailed decision of the
Court of Appeals is hereby REVERSED and SET ASIDE. Pursuant to Sections 248 and 249 of the Tax
Code, respondent General Foods (Phils.), Inc. is hereby ordered to pay its deficiency income tax in the
amount of P2,635,141.42, plus 25% surcharge for late payment and 20% annual interest computed
from August 25, 1989, the date of the denial of its protest, until the same is fully paid. DcaCSE
SO ORDERED.
Puno, Panganiban, Sandoval-Gutierrez and Carpio-Morales, JJ., concur.
Footnotes
1.
Penned by Associate Justice Andres B. Reyes and concurred in by Associate Justices Quirino D.

Abad Santos, Jr. and Romeo A. Brawner of the Third Division.

2.
Penned by Associate Judge Manuel K. Gruba and concurred in by Associate Judge Ramon O. de
Veyra.
3.
Rollo, pp. 22-23.
4.
Id., p. 24.
5.
Commissioner of Internal Revenue vs. Visayan Electric Co., 23 SCRA 715 [1968].
6.
Asiatic Petroleum Co. vs. Llanas, 49 Phil 466 [1926] cited in Davao Light & Power Co. vs.
Commissioner of Customs, 44 SCRA 122 [1972].
7.
Zamora vs. Collector, 8 SCRA 163 [1963].
8.
Dated June 14, 1988; Petition for Review, p. 8 citing BIR Records, pp. 198-199; Rollo, p. 15.
9.
Mertens, Vol. 4A 25.38 p. 190 citing Colonial Ice Cream Co., 7 BTA 154.
10.
Welch vs. Helvering, 290 US 111 [1933].
11.
Revenue Audit Memorandum Order No. 1-87.
12.
Mertens, Vol. 4A 25.38 p. 190, citing E.H. Sheldon & Co., 19 TC 481 [1952].
13.
Commissioner vs. Court of Tax Appeals & Atlas Consolidated Mining and Development Co.,
204 SCRA 182 [1991].
14.
Commissioner vs. Algue, Inc., 158 SCRA 9 [1988].

EN BANC
[G.R. No. L-16626. October 29, 1966.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. CARLOS PALANCA, JR., respondent.
Solicitor General for petitioner.
Manuel B. San Jose for respondent.
SYLLABUS
1.
TAXATION; TAXES AND DEBTS AS LEGAL CONCEPTS DISTINGUISHED. While
taxes and debts are distinguishable legal concepts, in certain cases as in the suit at bar, on account of
their nature, the distinction becomes inconsequential. This qualification is recognized even in the
United States. Thus, "The term debt is properly used in a comprehensive sense as embracing not merely
money due by contract, but whatever one is bound to render to another, either for contract or the
requirement of the law. (Camden vs. Fink Coule and Coke Co., 61 ALR 584).
"Where statutes impose a personal liability for a tax, the tax becomes at least in a broad sense, a debt."
(Idem)
"Some American authorities hold that, especially for remedial purposes, Federal taxes are debts." (Tax
Commission vs. National Malleable Castings Co., 35 ALR 1448.)
2.
ID.; ID.; ID.; RULE IN OUR JURISDICTION. In our jurisdiction, the rule is settled that
although taxes already due have not, strictly speaking, the same concept as debts, they are however,
obligations that may be considered as such. (Sambrano vs. Court of Tax Appeals, G. R. No. L-8652,
March 30, 1957). In a more recent case, Commissioner of Internal Revenue vs. Prieto, G. R. No. L13192, September 30, 1960, we explicitly announced that while the distinction between "taxes" and
"debts" was recognized in this jurisdiction, the variance in their legal conception does not extend to the
interests paid on them, at least insofar as section 30(b) (1) of the National Internal Revenue Code is
concerned.
3.
ID.; INTERESTS ON TAXES TO BE CONSIDERED AS INTERESTS ON INDEBTEDNESS.
The taxpayer sought the allowance as deductible items from the gross income of the amounts paid
by them as interests on delinquent tax liabilities. Of course, what was involved in the cited case (Prieto
case) was the donor's tax while the present suit pertains to interest paid on the estafa and inheritance
tax. This difference, however, submits no appreciable consequence to the rationale of this Court's
previous determination that interests on taxes should be considered as interests on indebtedness within
the meaning of section 30(b) (1) of the Tax Code. The interpretation we have placed upon the said
section was predicated on the congressional intent, not on the nature of the tax for which the interest
was paid.
4.
ID.; PRESCRIPTION OF CLAIM FOR REFUND OF TAX UNDER SEC. 11 OF REP. ACT
1125 AND UNDER SEC. 306 OF THE INTERNAL REVENUE CODE. The 30-day period under
Section 11 of Republic Act 1125 should be computed from the receipt of the final denial by the Bureau
of Internal Revenue of the said claim. Palanca's claim in this incident was filed with the Court of Tax
Appeals even before it had been denied by the herein petitioner or the Bureau of Internal Revenue, i.e.,
the claim was filed with the former Court on Aug. 13, 1958, while the petitioner denied it on July 24,
1959. The claim at bar refers to the alleged overpayment by respondents of the 1955 income tax.
Inasmuch as the said account was paid by him by installment, then the computation of the two-year
prescriptive period, under Section 306 of the National Internal Revenue Code, should be from the date
of the last installment, (Antonio Prieto, et al. vs. Collector of Internal Revenue, G. R. No. L-11976,
August 29, 1961). Palanca paid the last installment on his 1955 income tax on August 14, 1956. His
claim for refund of the alleged overpayment was filed with the Court on August 13, 1958. It was,
therefore, still timely instituted.
DECISION
REGALA, J .:
This is an appeal by the Government from the decision of the Court of Tax Appeals in CTA Case No.

571 ordering the petitioner to refund to the respondent the amount of P20,624.01 representing alleged
overpayment of income taxes for the calendar year 1955. The facts are:
"Sometime in July, 1950, the late Don Carlos Palanca, Sr. donated in favor of his son, the petitioner
herein, shares of stock in La Tondea, Inc. amounting to 12,500 shares. For failure to file a return on
the donation within the statutory period, the petitioner was assessed the sums of P97,691.23,
P24,442.81 and P47,868.70 as gift tax, 25% surcharge and interest, respectively, which he paid on June
22, 1955.
"On March 1, 1956, the petitioner filed with the Bureau of Internal Revenue his income tax return for
the calendar year 1955, claiming, among others, a deduction for interest amounting to P9,706.45 and
reporting a taxable income of P65,982.12. On the basis of this return, he was assessed the sum of
P21,052.91*, as income tax, which he paid, as follows:
Taxes withheld by the La Tondea Inc.
from Mr. Palanca's wage
P13,172.41
Payment under Income Tax Receipt
No. 677359 dated May 11, 1956
3,939.80
Payment under Income Tax Receipt
No. 742334 dated August 14, 1956 3,939.80
Total P21,052.01
"Subsequently, on November 10, 1956, the petitioner filed an amended return for the calendar year
1955, claiming therein an additional deduction in the amount of P47,868.70 representing interest paid
on the donee's gift tax, thereby reporting a taxable net income of P18,113.42 and a tax due thereon in
the sum of P3,167.00. The claim for deduction was based on the provisions of Section 30(b)(1) of the
Tax Code, which authorizes the deduction from gross income of interest paid within the taxable year on
indebtedness. A claim for the refund of alleged overpaid income taxes for the year 1955 amounting to
P17,885.01, which is the difference between the amount of P21,052.01 he paid as income taxes under
his original return and of P3,167.00, was filed together with this amended return. In a communication
dated June 20, 1957, the respondent (BIR) denied the claim for refund.
"On August 27, 1957, the petitioner reiterated his claim for refund, and at the same time requested that
the case be elevated to the Appellate Division of the Bureau of Internal Revenue for decision. The
reiterated claim was denied on October 14, 1957.
"On November 2, 1957, the petitioner requested that the case be referred to the Conference Staff of the
Bureau of Internal Revenue for review. Later, on November 6, 1957, he requested the respondent to
hold his action on the case in abeyance until after the Court of Tax Appeals renders its decision on a
similar case. And on November 7, 1957, the respondent denied the claim for the refund of the sum of
P17,885.01.
"Meanwhile, the Bureau of Internal Revenue considered the transfer of 12,500 shares of stock of La
Tondea, Inc. to be a transfer in contemplation of death pursuant to section 88(b) of the National
Internal Revenue Code. Consequently the respondent assessed against the petitioner the sum of
P191,591.62 as estate and inheritance taxes on the transfer of said 12,500 shares of stock. The amount
of P170,002.74 paid on June 22, 1955 by the petitioner as gift tax, including interest and surcharge,
under Official Receipt No. 2855 was applied to his estate and inheritance tax liability. On the tax
liability of P191,591.62, the petitioner paid the amount of P60,581.80 as interest for delinquency as
follows:
1 % monthly interest on P76,724.38
September 2, 1952 to February 16, 1955
P22,633.69
1 % monthly interest on P71,264.77
February 16, 1955 to March 31, 1955
1,068.97
1 % monthly interest on P114,867.24
September 2, 1952 to April 16, 1953 4,287.99

1%

monthly interest on P50,832.77

March 31, 1955 to June 22, 1955
1,372.48
1 % monthly interest on P119,155.23
April 16, 1953 to June 22, 1955
31,218.67

Total
P60,581.80
"On August 12, 1958, the petitioner once more filed an amended income tax return for the calendar
year 1955, claiming, in addition to the interest deduction of P9,076.45 appearing in his original return,
a deduction in the amount of P60,581.80, representing interest on the estate and inheritance taxes on
the 12,500 shares of stock, thereby reporting a net taxable income for 1955 in the amount of P5,400.32
and an income tax due thereon in the sum of P428.00. Attached to this amended return was a letter of
the petitioner, dated August 11, 1958, wherein he requested the refund of P20,624.01 which is the
difference between the amounts of P21,052.01 he paid as income tax under his original return and of
P428.00.
"Without waiting for the respondent's decision on this claim for refund, the petitioner filed his petition
for review before this Court on August 13, 1958. On July 24, 1959, the respondent denied the
petitioner's request for the refund of the sum of P20,624.01."
The Commissioner of Internal Revenue now seeks the reversal of the Court of Tax Appeal's ruling on
the aforementioned petition for review. Specifically, he takes issue with the said court's determination
that the amount paid by respondent Palanca for interest on his delinquent estate and inheritance tax is
deductible from the gross income for that year under section 30(b)(1) of the Revenue Code, and, that
said respondent's claim for refund therefor has not prescribed.
On the first point, the Commissioner urges that a tax is not an indebtedness. Citing American cases, he
argues that there is a material and fundamental distinction between a "tax" and a "debt." (Meriwether
vs. Garrett, 102 U.S. 427; Liberty Mutual Ins. Co. vs. Johnson Shipyards Corporation, 5 AFTR pp.
5504, 5507; City of Camden vs. Allen, 26, N. J. Law, p. 398). He adopts the view that "debts are due to
the government in its corporate capacity, while taxes are due to the government in its sovereign
capacity. A debt is a sum of money due upon contract express or implied or one which is evidenced by
a judgment. Taxes are imposts levied by government for its support or some special purpose which the
government has recognized." In view of the distinction, then, the Commissioner submits that the
deductibility of "interest on indebtedness" from a person's income tax under section 30(b)(1) cannot
extend to "interest on taxes."
We find for the respondents. While "taxes" and "debt" are distinguishable legal concepts, in certain
cases as in the suit at bar, on account of their nature, the distinction becomes inconsequential. This
qualification is recognized even in the United States. Thus,
"The term 'debt' is properly used in a comprehensive sense as embracing not merely money due by
contract, but whatever one is bound to render to another, either for contract or the requirements of the
law. (Camden vs. Fink Coule and Coke Co., 61 ALR 584).
"Where statutes impose a personal liability for a tax, the tax becomes at least in a broad sense, a debt."
(Idem.)
"Some American authorities hold that, especially for remedial purposes, Federal taxes are debts." (Tax
Commission vs. National Malleable Castings Co., 35 ALR 1448)
In our jurisdiction, the rule is settled that although taxes already due have not, strictly speaking, the
same concept as debts, they are, however, obligations that may be considered as such. (Sambrano vs.
Court of Tax Appeals, 101 Phil. 1). In a more recent case, Commissioner of Internal Revenue vs. Prieto,
109 Phil. 592, we explicitly announced that while the distinction between "taxes" and "debts" was
recognized in this jurisdiction, the variance in their legal conception does not extend to the interests
paid on them, at least insofar as Section 30(b) (1) of the National Internal Revenue Code is concerned.
Thus,

"Under the law, for interest to be deductible, it must be shown that there be an indebtedness, that there
should be interest upon it, and that what is claimed as an interest deduction should have been paid or
accrued within the year. It is here conceded that the interest paid by respondent was in consequence of
the late payment of her donor's tax, and the same was paid within the year it is sought to be deducted.
The only question to be determined, as stated by the parties, is whether or not such interest was paid
upon an indebtedness within the contemplation of Section (30) (b) (1) of the Tax Code, the pertinent
part of which reads:
"Sec. 30.
Deductions from gross income. In computing net income there shall be allowed as
deductions
xxx
xxx
xxx
'Interest:
'(1)
In general. The amount of interest paid within the taxable year on indebtedness, except on
indebtedness incurred or continued to purchase or carry obligations the interest upon which is exempt
from taxation as income under this Title.
'The term "indebtedness" as used in the Tax Code of the United States containing similar provisions as
in the above-quoted section has been defined as the unconditional and legally enforceable obligation
for the payment of money. (Federal Taxes Vol. 2, p. 13,019, Prentice Hall, Inc.; Merterns' Law of
Federal Income Taxation, Vol. 4 p. 542.) Within the meaning of that definition it is apparent that a tax
may be considered an indebtedness . . . (Emphasis supplied)
'It follows that the interest paid by herein respondent for the late payment of her donor's tax is
deductible from her gross income under Section 30(b) of the Tax Code above-quoted.'"
We do not see any element in this case which can justify a departure from or abandonment of the
doctrine in the Prieto case above. In both this and the said case, the taxpayer sought the allowance as
deductible items from the gross income of the amounts paid by them as interests on delinquent tax
liabilities. Of course, what was involved in the cited case was the donor's tax while the present suit
pertains to interest paid on the estate and inheritance tax. This difference, however, submits no
appreciable consequence to the rationale of this Court's previous determination that interests on taxes
should be considered as interest on indebtedness within the meaning of Section 30(b)(1) of the Tax
Code. The interpretation we have placed upon the said section was predicated on the congressional
intent, not on the nature of the tax for which the interest was paid.
On the issue of prescription: There were actually two claims for refund filed by the herein respondent,
Carlos Palanca, Jr., anent the case at bar. The first one was on November 10, 1956, when he filed a
claim for refund on the interest paid by him on the donee's gift tax of P17,885.01, as originally
demanded by the Bureau of Internal Revenue. The second one was the one filed by him on August 12,
1958, which was a claim for refund on the interest paid by him on the estate and inheritance tax
assessed by the same Bureau in the amount of P20,624.01. Actually, this second assessment by the
Bureau was for the same transaction as that for which they assessed respondent Palanca the above
donee's gift tax. The Bureau, however, on further consideration, decided that the donation of the stocks
in question was made in contemplation of death, and hence, should be assessed as an inheritance. Thus
the second assessment. The first claim was denied by the petitioner for the first time on June 20, 1957.
Thereafter, the said denial was twice reiterated: on October 14, 1957 and November 7, 1957, upon
respondent Palanca's plea for the reconsideration of the ruling of June 20, 1957. The second claim was
filed with the Court of Tax Appeals on August 13, 1958, or even before the same had been denied by
the petitioner. Respondent Palanca's second claim was denied by the latter on July 24, 1959.
The petitioner contends that under Section 11 of Republic Act 1124, 1 the herein claimant's claim for
refund has prescribed since the same was filed outside the 30-day period provided for therein.
According to the petitioner, the said prescriptive period commenced to run on October 14, 1947 when
the denial by the Bureau of Internal Revenue of the respondent Palanca's claim for refund, under his
letter of November 10, 1956, became final. Considering that the case was filed with the Court of Tax

Appeals only on August 13, 1958, then it is urged that the same had prescribed.
The petitioner also invokes prescription, at least with respect to the sum of P17,112.21, under Section
306 of the Tax Code. 2 He claims that for the calendar year 1955, respondent Palanca paid his income
tax as follows:
Taxes withheld by La Tondea, Inc. from
Mr. Palanca's wages P13,172.41
Payment under Income Tax Receipt No.
677395 dated May 11, 1956 3,939.89 *
Payment under Income Tax Receipt No.
742334 dated August 14, 1956
3,939.89

P21,952.01**
Therefore, the petitioner contends, the amounts paid by claimant Palanca under his withheld tax and
under Receipt No. 677395 dated May 11, 1956 may no longer be refunded since the claim therefor was
filed in court only on August 13, 1958, or beyond two years of their payment.
We find the petitioner's contention on prescription untenable.
In the first place, the 30-day period under Section 11 of Republic Act 1125 did not even commence to
run in this incident. It should be recalled that while the herein petitioner originally assessed the
respondent-claimant for alleged gift tax liabilities, the said assessment was subsequently abandoned
and in its lieu, a new one was prepared and served on the respondent-taxpayer. In this new assessment,
the petitioner charged the said respondent with an entirely new liability and for a substantially different
amount from the first. While initially the petitioner assessed the respondent for donee's gift tax in the
amount of P170,002.74, in the subsequent assessment the latter was asked to pay P191,591.62 for
delinquent estate and inheritance tax. Considering that it is the interest paid on this latter-assessed
estate and inheritance tax that respondent Palanca is claiming refund for, then the 30-day period under
the above-mentioned section of Republic Act 1125 should be computed from the receipt of the final
denial by the Bureau of Internal Revenue of the said claim. As has earlier been recited, respondent
Palanca's claim in this incident was filed with the Court of Tax Appeals even before it had been denied
by the herein petitioner or the Bureau of Internal Revenue. The case was filed with the said court on
August 13, 1958 while the petitioner denied the claim subject of the said case only on July 24, 1959.
In the second place, the claim at bar refers to the alleged overpayment by respondent Palanca of his
1955 income tax. Inasmuch as the said account was paid by him by installment, then the computation
of the 2-year prescriptive period, under Section 306 of the National Internal Revenue Code, should be
from the date of the last installment. (Antonio Prieto et al vs. Collector of Internal Revenue, G. R. No.
L-11976, August 29, 1961). Respondent Palanca paid the last installment on his 1955 income tax
account on August 14, 1956. His claim for refund of the alleged overpayment on it was filed with the
court on August 13, 1958. It was, therefore, still timely instituted.
WHEREFORE, the decision appealed from is affirmed in full, without pronouncement on costs.
Concepcion, C. J., Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ.,
concur.
Footnotes
*
Editor's Note: P21,052.01(?)
1.
Section 11. Who may appeal; effect of appeal. Any person, association or corporation
adversely affected by a decision or ruling of the Collector of Internal Revenue, the Collector of
Customs or any provincial or city Board of Assessment Appeals may file an appeal in the Court of Tax
Appeals within thirty days after the receipt of such decision or ruling.
2.
Sec. 306.
Recovery of tax erroneously or illegally collected. No suit or proceeding shall
be maintained in any court for the recovery of any national internal-revenue tax hereafter alleged to
have been erroneously or illegally assessed or collected, or of any penalty claimed to have been

collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully
collected, until a claim for refund or credit has been filed with the Collector of Internal Revenue; but
such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid
under protest or duress. In any case, no such suit or proceeding shall be begun after the expiration of
two years from the date of payment of the tax or penalty.
*
Editor's Note: P3,939.80(?)
**
Editor's Note: P21,052.01(?)

October 6, 1977
REVENUE REGULATIONS NO. 12-77
SUBJECT
:
Substantiation Requirement for Losses Arising from Casualty, Robbery, Theft or
Embezzlement
TO
:
All Internal Revenue Officers and Others Concerned
Pursuant to the provisions of Section 326 in relation to Section 4 of the National Internal Revenue
Code of 1977, these regulations are hereby promulgated to govern the manner of reporting losses
arising from casualty, robbery, theft, or embezzlement, for income tax purposes. cdtai
SECTION 1. Nature of deductible losses. Any loss arising from fires, storms or other casualty, and
from robbery, theft or embezzlement, is allowable as a deduction under Section 30(d) for the taxable
year in which the loss is sustained. The term "casualty" is the complete or partial destruction of
property resulting from an identifiable event of a sudden, unexpected, or unusual nature. It denotes
accident, some sudden invasion by hostile agency, and excludes progressive deterioration through
steadily operating cause. Generally, theft is the criminal appropriation of another's property to the use
of the taker. Embezzlement is the fraudulent appropriation of another's property by a person to whom it
has been entrusted or into whose hands it has lawfully come.
SECTION 2. Requirements of substantiation. The taxpayer bears the burden of proving and
substantiating his claim for deduction for losses allowed under Section 30(d) and should comply with
the following substantiation requirements:
(a)
A declaration of loss which must be filed with the Commissioner of Internal Revenue or his
deputies within a certain period prescribed in these regulations after the occurrence of the casualty,
robbery, theft or embezzlement.
(b)
Proof of the elements of the loss claimed, such as the actual nature and occurrence of the event
and amount of the loss.
SECTION 3. Declaration of loss. Within forty-five days after the date of the occurrence of casualty
or robbery, theft or embezzlement, a taxpayer who sustained loss therefrom and who intends to claim
the loss as a deduction for the taxable year in which the loss was sustained shall file a sworn
declaration of loss with the nearest Revenue District Officer. The sworn declaration of loss shall
contain, among other things, the following information:
(a)
The nature of the event giving rise to the loss and the time of its occurrence;
(b)
A description of the damaged property and its location;
(c)
The items needed to compute the loss such as cost or other basis of the property; depreciation
allowed or allowable if any; value of property before and after the event; cost of repair;
(d)
Amount of insurance or other compensation received or receivable.
Evidence to support these items should be furnished, if available. Examples are purchase contracts and
deeds, receipted bills for improvements, and pictures and competent appraisals of the property before
and after the casualty.
SECTION 4. Proof of loss. (a) In general. The declaration of loss, being one of the essential
requirements of substantiation of a claim for a loss deduction, is subject to verification and does not
constitute sufficient proof of the loss that will justify its deductibility for income tax purposes.
Therefore, the mere filing of a declaration of loss does not automatically entitle the taxpayer to deduct
the alleged loss from gross income. The failure, however, to submit the said declaration of loss within
the period prescribed in these regulations will result in the disallowance of the casualty loss claimed in
the taxpayer's income tax return. The taxpayer should therefore file a declaration of loss and should be
prepared to support and substantiate the information reported in the said declaration with evidence
which he should gather immediately or as soon as possible after the occurrence of the casualty or event
causing the loss.
(b)
Casualty loss. Photographs of the property as it existed before it was damaged will be helpful
in showing the condition and value of the property prior to the casualty. Photographs taken after the

casualty which show the extent of damage will be helpful in establishing the condition and value of the
property after it was damaged. Photographs showing the condition and value of the property after it
was repaired, restored or replaced may also be helpful.
Furthermore, since the valuation of the property is of extreme importance in determining the amount of
loss sustained, the taxpayer should be prepared to come forward with documentary proofs, such as
cancelled checks, vouchers, receipts and other evidence of cost.
The foregoing evidence should be kept by the taxpayer as part of his tax records and be made available
to a revenue examiner, upon audit of his income tax return and the declaration of loss.
(c)
Robbery, theft or embezzlement losses. To support the deduction for losses arising from
robbery, theft or embezzlement, the taxpayer must prove by credible evidence all the elements of the
loss, the amount of the loss, and the proper year of the deduction. The taxpayer bears the burden of
proof, and no deduction will be allowed unless he shows the property was stolen, rather than misplaced
or lost. A mere disappearance of property is not enough, nor is a mere error or shortage in accounts.
Failure to report theft or robbery to the police may be a factor against the taxpayer. On the other hand, a
mere report of alleged theft or robbery to the police authorities is not a conclusive proof of the loss
arising therefrom.
SECTION 5. Determination of amount deductible. (a) In general. The amount of casualty loss
deductible is limited to the difference between the value of the property immediately preceding the
casualty and its value immediately thereafter, but shall not exceed an amount equal to the cost or other
adjusted basis of the property, or depreciated cost in the case of property used in business, reduced by
any insurance or other compensation received.
(b)
Method of valuation. (i) The fair market value of the property immediately before and
immediately after the casualty for purposes of determining the amount of casualty loss deductible under
this section shall be ascertained by an impartial but competent appraisal. This appraisal must recognize
the effects of any general market decline affecting undamaged, as well as damaged property, which
may occur simultaneously with the casualty in order that any deduction under this section shall be
limited to actual loss resulting from damage to property.
(ii)
The cost of repairs to the property damaged is acceptable as evidence of the loss of value if the
taxpayer shows that (1) the repairs are necessary to restore the property to its condition immediately
before the casualty, (2) the amount spent for such repairs is not excessive, (3) the repairs do not cover
more than the damage suffered, and (4) the value of the property after the repairs does not as a result of
the repairs exceed the value of the property immediately before the casualty.
(c) Examples.
The application of this section may be illustrated by the following examples:
(i)
Property not used in business:
Cost or adjusted basis P18,000.00
Value of property before casualty 15,000.00
Value of property after casualty
10,000.00
Insurance recovered 3,000.00
The casualty loss is computed as follows:
Value of property before casualty P15,000.00
Value of property after casualty
10,000.00

Difference
P5,000.00
========
Loss to be taken into account for
purposes of Section 30(d):
lesser amount of property
actually destroyed (P5,000)

or adjusted basis of property

actually destroyed (P18,000) P5,000.00
Less: Insurance received
3,000.00

AMOUNT OF LOSS DEDUCTIBLE

P2,000.00
=======
(ii)
Property used in business:
(A)
Total destruction. In case of losses arising from total destruction of property used in business
(ordinary asset) the net book value (cost less accumulated depreciation) immediately preceding the
casualty should be used as the basis in claiming losses, also to be reduced by any amount of insurance
or compensation received.
To illustrate:
Assume that
Acquisition cost of property P10,000
Accumulated depreciation 5,000
Insurance recovered 2,500
Amount deductible is computed as follows:
Acquisition cost
P10,000
Less: Accumulated depreciation
5,000

Amount of loss suffered

P5,000
Less: Amount recovered through insurance 2,500

AMOUNT DEDUCTIBLE P2,500

======
(B)
Partial destruction. In case of losses arising from partial damages of property used in
business, the replacement cost to restore the property back to its normal operating condition should be
used for purposes of computing deductible losses, but in no case shall the deductible loss be more, than
the net book value of the property as a whole immediately before the casualty. The excess over the net
book value immediately before the casualty should be capitalized subject to depreciation over the
remaining useful life of the property.
To illustrate:
Assume:
Acquisition cost
P100,000
Accumulated depreciation 90,000

Net book value

P10,000
=======
Estimated remaining useful life
5 years
Replacement cost of damaged portion
P20,000

In the above example, the loss deductible for tax purposes would be limited to P10,000 which is equal
to the net book value of the whole property:
Net book value
P10,000
Replacement cost
20,000

Excess of replacement cost to be

capitalized
P10,000
======

Consequently, the new cost basis subject to depreciation charges over the remaining useful life of the
property which is five (5) years, would be P20,000 as shown hereunder:
Net book value before casualty
P10,000
Add: Excess of replacement cost over
book value 10,000

New cost basis

P20,000
======
Yearly depreciation
P20,000

5 years =
P4,000
(iii) Farm losses. In the case of losses sustained, by farmers, the following rules shall apply:
(a)
Loss of livestock. The loss sustained in the death of livestock shall be allowed as a deduction
to the extent of the acquisition cost only if no inventories are taken into account in determining the
income from the business of farming.
If inventories are taken into account in determining the income from the trade or business of farming,
no deduction shall be allowed for losses sustained during the taxable year upon livestock or other
products, whether purchased for resale or produced on the farm, to the extent such losses are reflected
in the inventory on hand at the close of the taxable year.
(b)
Other farm losses. Where ground is prepared and planted or stocked as in case of sugar,
coconut and other agricultural plantations, orchards, fishponds and other farms and its value is
completely destroyed by the overflow or seepage of water from natural causes, the cost of the
preparation and planting or stocking up to the time of the disaster shall be deductible loss in the year in
which it is incurred.
SECTION 6. Determination of amount deductible robbery, theft and embezzlement losses. The
amount deductible in respect of robbery, theft and embezzlement loss shall be determined consistently
with the manner prescribed in the preceding section for determining the amount of casualty loss
allowable as a deduction. In applying the provisions of the preceding section for this purpose, the fair
market value of the property immediately after the theft shall be considered to be zero. This section
does not apply to losses reflected in the inventories of the taxpayer.
Example:
In 1969, B purchases for personal use a diamond brooch costing P40,000. On November 30, 1975 at
which time it has a fair market value of P35,000 the brooch was stolen. The brooch was fully insured
against theft. A controversy develops with the insurance company over its liability in respect of the
loss. However, in 1976; B has a reasonable prospect of recovery of the fair market value of the brooch
from the insurance company. The controversy is settled in March, 1977, at which time B receives
P20,000 in insurance proceeds to cover the loss from theft. No deduction for loss is allowable for 1975
or 1976; but the amount of the deduction allowable for the taxable year 1977 is P15,000, computed as
follows:
Value of property immediately before theft P35,000
Less: Value of property immediately after
theft -0
Loss to be taken into account (P35,000 but
not to exceed adjusted basis of P40,000
at the time of theft) P35,000
Less: Insurance received in 1977
20,000

Deduction allowable for 1977

P15,000
======
SECTION 7. Year of deduction. If a casualty occurs which may result in a loss and, in the year of
such casualty or event, there exist a claim for reimbursement with respect to which there is a reasonable
prospect of recovery, no portion of the loss with respect to which reimbursement may be received is
sustained until it can be ascertained with reasonable certainty whether or not such reimbursement will
be received. Whether a reasonable prospect of recovery exist with respect to a claim for a
reimbursement of a loss is a question of fact to be determined upon an examination of all facts and
circumstances. Whether or not such reimbursement will be received may be ascertained with
reasonable certainty, for example, by a settlement of the claim, by an adjudication of the claim, or by an
abandonment of the claim. When a taxpayer claims that the taxable year in which a loss is sustained is
fixed by his abandonment of the claim for reimbursement, he must be able to produce objective
evidence of his having abandoned the claim, such as the execution of a release.
SECTION 8. Effectivity of these regulations. These regulations shall be applicable to losses
sustained or arising from casualties, robbery, theft or embezzlement occurring on or after the approval
of these regulations.
With respect however to such losses arising before the approval of these regulations, the declaration of
loss required under these regulations should be filed within forty-five days from the approval of these
regulations.
ALFREDO PIO DE RODA, JR.
Acting Secretary of Finance
Recommended by:
EFREN I. PLANA
Acting Commissioner
ANNEX
B.I.R. Form No. 1746
DECLARATION OF LOSS ARISING FROM CASUALTY,
ROBBERY, THEFT OR EMBEZZLEMENT
Name of taxpayer: _____________________________________________________
Address: ____________________________________________________________
T.A.N. ______________________________________________________________
A. NATURE OF LOSS
1.
Event causing the loss ______________________________________________
2.
Date of occurrence of event __________________________________________
3.
Description of damaged property and its location (an itemized list should be attached)
________________________________________________________________
4.
Facts and circumstances surrounding the loss of the property:
5.
Name of insurance company or other entity from which recovery claim may be made:
_______________________________________________________________
B. VALUATION OF LOSS
1.
Nonbusiness property
Original cost or adjusted basis
P____________
Value immediately before casualty P____________
____________
Value immediately after casualty
____________
____________
Amount of insurance recoverable ____________
2.
Business property Total destruction
Acquisition cost of property P____________
Accumulated depreciation ____________
Amount of insurance recovered
____________

3.
Business property partial damage
Net book value immediately before P____________
Amount of replacement cost to restore the property
back to its normal operating condition
____________

December 12, 1979

REVENUE REGULATIONS NO. 10-79
SUBJECT
:
Amendment of Revenue Regulations No. 12-77
TO
:
All Internal Revenue Officers and Others Concerned
Pursuant to the provisions of Section 326 in relation to Section 4 of the National Internal Revenue
Code, these regulations are hereby promulgated and shall be known as Revenue Regulations No. 10-79.
SECTION 1. Subparagraph (1) of paragraph (a) of Section 4 of Revenue Regulations No. 12-77 is
hereby amended to read as follows:
"Sec. 4.
Proof of loss. (a) In general. The declaration of loss, being one of the essential
requirements of substantiation of a claim for a loss deduction, is subject to verification and does not
constitute sufficient proof of the loss that will justify its deductibility for income tax purposes.
Therefore, the mere filing of a declaration of loss does not automatically entitle the taxpayer to deduct
the alleged loss from gross income. The failure, however, to submit the said declaration of loss within
the period prescribed in these regulations will result in the disallowance of the casualty loss claimed in
the taxpayer's income tax return. The taxpayer should therefore file a declaration of loss and should be
prepared to support and substantiate the information reported in the said declaration with evidence
which he should gather immediately or as soon as possible after the occurrence of the casualty or event
causing the loss.
FOR PURPOSES OF PRE-AUDIT, A TAXPAYER CLAIMING DEDUCTION FOR CASUALTY,
THEFT, ROBBERY, OR EMBEZZLEMENT LOSS SHALL ATTACH TO HIS RETURN A COPY OF
HIS DECLARATION OF LOSS (SHOWING THE IMPRINT OF THE DATE OF RECEIPT
THEREOF BY THE REVENUE RECEIVING OFFICE). FAILURE TO ATTACH A COPY OF HIS
DECLARATION OF LOSS WILL RESULT IN THE DISALLOWANCE OF THE LOSS IN THE
PRE-AUDIT OF HIS INCOME TAX RETURN, WITHOUT PREJUDICE, HOWEVER, TO THE
SAID LOSS BEING TAKEN UP UPON INVESTIGATION OF THE RETURN.
SECTION 2. Effectivity of these Regulations. The additional requirement for the attachment of a
copy of declaration of loss to the return shall be effective beginning with the 1979 individual income
tax returns. cdtai
CESAR VIRATA
Minister of Finance
Recommending Approval:
RUBEN B. ANCHETA
Acting Commissioner
ANNEX A
December 17, 1979
MEMORANDUM FOR:
The Acting Commissioner
(Thru The Revenue Service Chief, Assessment)
Attached is the proposed draft regulations amending Section 4 of Revenue Regulations No. 12-77, by
requiring that a copy of the declaration of loss be attached to the return.
Under the present regulations, the declaration of loss is required to be filed within 45 days from the
date of the occurrence of casualty or robbery, theft or embezzlement.
Upon the pre-audit of individual returns, particularly refundable returns, any amount of loss declared,
as determined or computed by the taxpayer, is automatically allowed with or without the declaration of
loss, which is required to contain the items of information necessary to the computation of the amount
of loss to be allowed.
Based on our pre-audit experience of refundable returns, most filers claim deductions for losses. Since
not all returns are verified, imaginary, erroneous, as well as inflated losses are in effect allowed in full
as deductions. In the case of refundable returns, the amount of tax corresponding to the unallowable

loss deduction should not have been refunded. Moreover, even assuming that the return will ultimately
be verified within the 5-year period, the government, in the meantime, is deprived of the use of the
revenue.
Respectfully submitted,
MANUEL M. SAN DIEGO
Chief, Withholding Tax Division
TAN: 1516-149-0
ANNEX B
B.I.R. Form No. 1746
DECLARATION OF LOSS ARISING FROM CASUALTY, ROBBERY, THEFT OR
EMBEZZLEMENT
Name of taxpayer: ___________________________________________________
Address: __________________________________________________________
T.A.N. ____________________________________________________________
A. NATURE OF LOSS
1.
Event causing the loss _____________________________________________
2.
Date of occurrence of event _________________________________________
3.
Description of damaged property and its location (an itemized list should be attached)
_______________________________________________________________
4.
Facts and circumstances surrounding the loss of the property:________________
5.
Name of insurance company or other entity from which recovery claim may be made:
_______________________________________________________________
B. VALUATION OF LOSS
1.
Nonbusiness property
Original cost or adjusted basis
P______
Value immediately before casualty P______
______
Value immediately after casualty
_______
_______
Amount of insurance recoverable _______
2.
Business property Total destruction
Acquisition cost of property P_______
Accumulated depreciation _______
Amount of insurance recovered
_______
3.
Business property partial damage
Net book value immediately before P_______
Amount of replacement cost to restore the
property back to its normal operating condition
_______
SUBSCRIBED AND SWORN to before me this _________ day of ________, 19___ affiant exhibited
his/her residence certificate No. A-______ issued at ______ on _____, 19_____. aisa dc
NOTARY PUBLIC
Until December 31, 19___
Doc. No._____
Page No._____
Book No._____
Series of 19____

EN BANC
[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.
SYNOPSIS
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. First
CBC Capital (Asia), Ltd. became 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. The Commissioner held the view that the
shares should 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 Court of Tax Appeals (CTA). The tax court sustained the Commissioner.
When the decision was appealed to the Court of Appeals, the latter upheld the CTA. Hence, the present
petition. Petitioner bank assailed the appellate court in affirming the CTA's decision. THaAEC
The Supreme Court affirmed the decision of the Court of Appeals. The Court ruled that shares of stock
held by way of an investment are considered as capital assets under the law and when said shares held
by such investor become worthless, the loss is deemed to be a loss from the sale or exchange of capital
assets under Section 29(d)(4)(B) of the National Internal Revenue Code. 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.
The Court also ruled that equity holdings cannot come close to being, within the purview of "evidence
of indebtedness" under Section 33 of the NIRC. The loss of petitioner bank in its equity investment in
the Hongkong subsidiary cannot also be deductible as a bad debt. The shares of stock in question did
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.
SYLLABUS
1.
TAXATION; NATIONAL INTERNAL REVENUE CODE; INCOME TAXATION; GROSS
INCOME; DEDUCTIONS FROM GROSS INCOME; SHARES OF STOCK HELD BY INVESTOR
BECOMING WORTHLESS; NOT DEDUCTIBLE, LOSS SUSTAINED DEEMED TO BE A LOSS
FROM THE SALE OR EXCHANGE OF CAPITAL ASSETS. 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. Shares
of stock, like the other securities defined in Section 20(t) 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. 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. - Provides 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." A 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. 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. cTCaEA
2.
ID.; ID.; ID.; LOSSES IN EQUITY INVESTMENT LIKE SHARES OF STOCK NOT
DEDUCTIBLE AS BAD DEBT; EQUITY HOLDINGS SUCH AS SHARES OF STOCK NOT
WITHIN THE PURVIEW OF "EVIDENCE OF INDEBTEDNESS" UNDER OF SECTION 33 (c) OF
THE NATIONAL INTERNAL REVENUE CODE. The exclusionary clause found in Section 33(c)
of the National Internal Revenue Code 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 investment 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.
DECISION
VITUG, J p:
The Commissioner of Internal Revenue denied the deduction from gross income of "securities
becoming worthless" claimed by China Banking Corporation ("CBC"). The Commissioner's
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. IDcTEA
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 "deposittaking" 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-taking" 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. ScEaAD
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 statements, 1) there may really be no need, however, to
go at 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." TcCSIa
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 taxable" year and are capital assets, the loss resulting therefrom shall, for the purposes of
this 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. " 5 A 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
xxx
"(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 and
shall not be included in determining the applicability of such limitation to other losses." ITADaE
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 investment 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 the 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 money's 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. CIScaA
"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
WHEREFORE, the Petition is DENIED. The decision of the Court of Appeals disallowing the claimed
deduction of P16,227,851.80 is AFFIRMED. TaSEHD
SO ORDERED.
Davide, Jr., C.J., Bellosillo, Melo, Puno, Kapunan, Mendoza, Panganiban, Quisumbing, Purisima,
Pardo, Buena, Gonzaga-Reyes, Ynares-Santiago, and De Leon, Jr., JJ., concur.
Footnotes
1.
Let it be stressed that referred to here are the intangibles of First CBC Capital (Asia), Ltd.,
specifically its franchise and goodwill, and not of CBC or its investments nor to any outstanding shares
of stock for that matter of either corporation which are correctly treated as equity capital of First CBC

Capital or investment of CBC, as the case may be, and thus invariably reflected as such in financial
statements.
2.
See Sections 29 and 30, NIRC.
3.
Section 20(z) of the NIRC provides:
"(z) The term 'ordinary income' includes any gain from the sale or exchange of
property which is not a capital asset or property described in Section 34 (now 33) (a). Any gain from
the sale or exchange of property which is treated or considered, under other provisions of this Title, as
'ordinary income' shall be treated as from the sale or exchange of property which is not a capital asset
as defined in Section 34 (now 33) (a). The term 'ordinary loss' includes any loss from the sale or
exchange of property which is not a capital asset. Any loss from the sale or exchange of property which
is treated or considered, under other provisions of this Title, as 'ordinary loss' shall be treated as loss
from the sale or exchange of property which is not a capital asset."
4.
"(t) The term 'securities' means shares of stock in a corporation and rights to subscribe for or to
receive such shares. The term includes bonds, debentures, notes, or certificates, or other evidence of
indebtedness, issued by any corporation, including those issued by a government or political
subdivision thereof, with interest coupons or in registered form."
5.
Sec. 29(4)(B) of the NIRC.
6.
Sec. 33(e) and (f), NIRC, provides:
xxx
xxx
xxx
(e)
Retirement of bonds, etc. For the purposes of this Title, amounts received by
the holder upon the retirement of bonds, debentures, notes or certificates or other evidences of
indebtedness issued by any corporation (including those issued by a government or political
subdivision thereof) with the interest coupons or in registered form, shall be considered as amounts
received in exchange therefor.
(f)
Gains and losses from short sales, etc. For the purpose of this Title
(1)
Gains or losses from short sales of property shall be considered as gains or losses
from sales or exchanges of capital assets; and
(2)
Gains or losses attributable to the failure to exercise privileges or options to buy
or sell property shall be considered as capital gains or losses.
7.
Sec. 34(c), NIRC.
8.
See Sections 29, 30, 32 and 33, NIRC.
9.
Sec. 33(1), NIRC.
10.
Sec. 29(D)(4)(B), NIRC.
11.
Sec. 33 (c), in relation to Sec. 29(d)(4)(B), NIRC; evidently, no such capital gains have been
derived by CBC during the taxable year in question.

SECOND DIVISION
[G.R. No. 118794. May 8, 1996.]
PHILIPPINE REFINING COMPANY (now known as "UNILEVER PHILIPPINES [PRC], INC."),
petitioner, vs. COURT OF APPEALS, COURT OF TAX APPEALS, and THE COMMISSIONER OF
INTERNAL REVENUE, respondents.
Antonio H. Garces for petitioner.
The Solicitor General for respondents.
SYLLABUS
1.
REMEDIAL LAW; EVIDENCE; FINDINGS OF FACT OF THE COURT OF TAX APPEALS,
GENERALLY UPHELD ON APPEAL; CASE AT BENCH. The Court of Tax Appeals is a highly
specialized body specifically created for the purpose of reviewing tax cases. Through its expertise, it is
undeniably competent to determine the issue of whether or not the debt is deductible through the
evidence presented before it. Because of this recognized expertise, the findings of the CTA will not
ordinarily be reviewed absent a showing of gross error or abuse on its part. The findings of fact of the
CTA are binding on this Court and in the absence of strong reasons for this Court to delve into facts,
only questions of law are open for determination. Were it not, therefore, due to the desire of this Court
to satisfy petitioner's calls for clarification and to use this case as a vehicle for exemplification, this
appeal could very well have been summarily dismissed.
2.
TAXATION; NATIONAL INTERNAL REVENUE CODE; INCOME TAX; BAD DEBTS;
REQUISITES FOR DEDUCTION. For debts to be considered as "worthless," and thereby qualify
as "bad debts" making them deductible, the taxpayer should show that (1) there is a valid and subsisting
debt; (2) the debt must be actually ascertained to be worthless and uncollectible during the taxable year;
(3) the debt must be charged off during the taxable year; and (4) the debt must arise from the business
or trade of the taxpayer. Additionally, before a debt can be considered worthless, the taxpayer must also
show that it is indeed uncollectible even in the future. Furthermore, there are steps outlined to be
undertaken by the taxpayer to prove that he exerted diligent efforts to collect the debts, viz: (1) sending
of statement of accounts; (2) sending of collection letters; (3) giving the account to a lawyer for
collection; and (4) filing a collection case in court.
3.
ID.; ID.; ID.; DEFICIENCY TAX ASSESSMENT; FAILURE TO PAY WITHIN 30 DAYS
RENDERS TAXPAYER LIABLE FOR PAYMENT OF 25% SURCHARGE AND 20% INTEREST.
As correctly pointed out by the Solicitor General, the deficiency tax assessment in this case, which was
the subject of the demand letter of respondent Commissioner dated April 11, 1989, should have been
paid within thirty (30) days from receipt thereof. By reason of petitioner's default thereon, the
delinquency penalties of 25% surcharge and interest of 20% accrued from April 11, 1989. The fact that
petitioner appealed the assessment to the CTA and that the same was modified does not relieve
petitioner of the penalties incident to delinquency. The reduced amount of P237,381.25 is but a part of
the original assessment of P1,892,584.00.
4.
ID.; TAX LAWS IMPOSING PENALTIES FOR DELINQUENCIES, INTENDED TO
HASTEN PAYMENT OF TAXES. Tax laws imposing penalties for delinquencies, so we have long
held, are intended to hasten tax payments by punishing evasions or neglect of duty in respect thereof. If
penalties could be condoned for flimsy reasons, the law imposing penalties for delinquencies would be
rendered nugatory, and the maintenance of the Government and its multifarious activities will be
adversely affected.
5.
ID.; NATIONAL INTERNAL REVENUE CODE; COLLECTION OF PENALTY AND
INTEREST IN CASE OF DELINQUENCY, MANDATORY. We have likewise explained that it is
mandatory to collect penalty and interest at the stated rate in case of delinquency. The intention of the
law is to discourage delay in the payment of taxes due the Government and, in this sense, the penalty
and interest are not penal but compensatory for the concomitant use of the funds by the taxpayer
beyond the date when he is supposed to have paid them to the Government.

DECISION
REGALADO, J p:
This is an appeal by certiorari from the decision of respondent Court of Appeals 1 affirming the
decision of the Court of Tax Appeals which disallowed petitioner's claim for deduction as bad debts of
several accounts in the total sum of P395,324,27, and imposing a 25% surcharge and 20% annual
delinquency interest on the alleged deficiency income tax liability of petitioner. Cdpr
Petitioner Philippine Refining Company (PRC) was assessed by respondent Commissioner of Internal
Revenue (Commissioner) to pay a deficiency tax for the year 1985 in the amount of P1,892,584.00,
computed as follows:
Deficiency Income Tax
Net Income per investigation
P197,502,568.00
Add: Disallowances
Bad Debts
P713,070.93
Interest Expense
P2,666,545.49 P3,379,616.00

Net Taxable Income

P200,882,184.00

Tax Due Thereon

P70,298,764.00
Less: Tax Paid
P69,115,899.00
Deficiency Income Tax
P1,182,865.00
Add: 20% Interest (60% max.)
P709,719.00

Total Amount Due and Collectible

P1,892.584.00 2

The assessment was timely protested by petitioner on April 26, 1989, on the ground that it was based
on the erroneous disallowances of "bad debts" and "interest expense" although the same are both
allowable and legal deductions. Respondent Commissioner, however, issued a warrant of garnishment
against the deposits of petitioner at a branch of City Trust Bank, in Makati, Metro Manila, which action
the latter considered as a denial of its protest.
Petitioner accordingly filed a petition for review with the Court of Tax Appeals (CTA) on the same
assignment of error, that is, that the "bad debts" and "interest expense" are legal and allowable
deductions. In its decision 3 of February 3, 1993 in C.T.A. Case No. 4408, the CTA modified the
findings of the Commissioner by reducing the deficiency income tax assessment to P237,381.26, with
surcharge and interest incident to delinquency. In said decision, the Tax Court reversed and set aside the
Commissioner's disallowance of the interest expense of P2,666,545.19 but maintained the disallowance
of the bad debts of thirteen (13) debtors in the total sum of P395,324.27.
Petitioner then elevated the case to respondent Court of Appeals which, as earlier stated, denied due
course to the petition for review and dismissed the same on August 24, 1994 in CA-G.R. S.P. No
31190, 4 on the following ratiocination:
We agree with respondent Court of Tax Appeals:
Out of the sixteen (16) accounts alleged as bad debts, We find that only three (3) accounts have met the
requirements of the worthlessness of the accounts, hence were properly written off as bad debts,
namely:
1.
Petronila Catap
(Pet Mini Grocery) P29,098.30
2.
Esther Guinto
(Esther Sari-sari Store)
254,375.54

3.

Manuel Orea
(Elman Gen. Mdsg.) 34,272.82

TOTAL
P317,746.66
xxx
xxx
xxx
With regard to the other accounts, namely:
1.
Remoblas Store
P11,961.00
2.
Tomas Store 16,842.79
3.
AFPCES
13,833.62
4.
CM Variety Store
10,895.82
5.
U'Ren Mart Enterprise
10,487.08
6.
Aboitiz Shipping Corp.
89,483.40
7.
J. Ruiz Trucking
69,640.34
8.
Renato Alejandro
13,550.00
9.
Craig, Mostyn Pty. Ltd.
23,738.00
10.
C. Itoh 19,272.22
11.
Crocklaan B. V.
77,690.00
12.
Enriched Food Corp. 24,158.00
13.
Lucito Sta. Maria
13,772.00

TOTAL
P395,324.27
=========
We find that said accounts have not satisfied the requirements of the 'worthlessness of a debt'. Mere
testimony of the Financial Accountant of the Petitioner explaining the worthlessness of said debts is
seen by this Court as nothing more than a self-serving exercise which lacks probative value. There was
no iota of documentary evidence (e.g., collection letters sent, report from investigating fieldmen, letter
of referral to their legal department, police report/affidavit that the owners were bankrupt due to fire
that engulfed their stores or that the owner has been murdered etc.), to give support to the testimony of
an employee of the Petitioner. Mere allegations cannot prove the worthlessness of such debts in 1985.
Hence, the claim for deduction of these thirteen (13) debts should be rejected." 5
1.
This pronouncement of respondent Court of Appeals relied on the ruling of this Court in
Collector vs. Goodrich International Rubber Co., 6 which established the rule in determining the
"worthlessness of a debt." In said case, we held that for debts to be considered as "worthless," and
thereby qualify as "bad debts" making them deductible, the taxpayer should show that (1) there is a
valid and subsisting debt; (2) the debt must be actually ascertained to be worthless and uncollectible
during the taxable year; (3) the debt must be charged off during the taxable year; and (4) the debt must
arise from the business or trade of the taxpayer. Additionally, before a debt can be considered
worthless, the taxpayer must also show that it is indeed uncollectible even in the future.
Furthermore, there are steps outlined to be undertaken by the taxpayer to prove that he exerted diligent
efforts to collect the debts, viz: (1) sending of statement of accounts; (2) sending of collection letters;
(3) giving the account to a lawyer for collection; and (4) filing a collection case in court.
On the foregoing considerations, respondent Court of Appeals held that petitioner did not satisfy the
requirements of "worthlessness of a debt" as to the thirteen (13) accounts disallowed as deductions.
It appears that the only evidentiary support given by PRC for its aforesaid claimed deductions was the
explanation or justification posited by its financial adviser or accountant, Guia D. Masagana. Her
allegations were not supported by any documentary evidence, hence, both the Court of Appeals and the
CTA ruled that said contentions per se cannot prove that the debts were indeed uncollectible and can be
considered as bad debts as to make them deductible. That both lower courts are correct is shown by
petitioner's own submission and the discussion thereof which we have taken time and patience to cull

from the antecedent proceedings in this case, albeit bordering on factual settings.
The accounts of Remoblas Store in the amount of P11,961.00 and CM Variety Store in the amount of
P10,895.82 are uncollectible, according to petitioner, since the stores were burned in November, 1984
and in early 1985, respectively, and there are no assets belonging to the debtors that can be garnished
by PRC. 7 However, PRC failed to show any documentary evidence for said allegations. Not a single
document was offered to show that the stores were burned, even just a police report or an affidavit
attesting to such loss by fire. In fact, petitioner did not send even a single demand letter to the owners
of said stores.
The account of Tomas Store in the amount of P16,842.79 is uncollectible, claims petitioner PRC, since
the owner thereof was murdered and left no visible assets which could satisfy the debt. Withal, just like
the accounts of the two other stores just mentioned, petitioner again failed to present proof of the
efforts exerted to collect the debt, other than the aforestated asseverations of its financial adviser.
The accounts of Aboitiz Shipping Corporation and J. Ruiz Trucking in the amounts of P89,483.40 and
P69,640.34, respectively, both of which allegedly arose from the hijacking of their cargo and for which
they were given 30% rebates by PRC, are claimed to be uncollectible. Again, petitioner failed to
present an iota of proof, not even a copy of the supposed policy regulation of PRC that it gives rebates
to clients in case of loss arising from fortuitous events or force majeure, which rebates it now passes off
as uncollectible debts.
As to the account of P13,550.00 representing the balance collectible from Renato Alejandro, a former
employee who failed to pay the judgment against him, it is petitioner's theory that the same can no
longer be collected since his whereabouts are unknown and he has no known property which can be
garnished or levied upon. Once again, petitioner failed to prove the existence of the said case against
that debtor or to submit any documentation to show that Alejandro was indeed bound to pay any
judgment obligation.
The amount of P13,772.00 corresponding to the debt of Lucito Sta. Maria is allegedly due to the loss of
his stocks through robbery and the account is uncollectible due to his insolvency. Petitioner likewise
failed to submit documentary evidence, not even the written reports of the alleged investigation
conducted by its agents as testified to by its aforenamed financial adviser.
Regarding the accounts of C. Itoh in the amount of P19,272.22, Crocklaan B.V. in the sum of
P77,690.00, and Craig, Mostyn Pty. Ltd. with a balance of P23,738.00, petitioner contends that these
debtors being foreign corporations, it can sue them only in their country of incorporation; and since this
will entail expenses more than the amounts of the debts to be collected, petitioner did not file any
collection suit but opted to write them off as bad debts. Petitioner was unable to show proof of its
efforts to collect the debts, even by a single demand letter therefor. While it is not required to file suit, it
is at least expected by the law to produce reasonable proof that the debts are uncollectible although
diligent efforts were exerted to collect the same.
The account of Enriched Food Corporation in the amount of P24,158.00 remains unpaid, although
petitioner claims that it sent several letters. This is not sufficient to sustain its position, even if true, but
even smacks of insouciance on its part. On top of that, it was unable to show a single copy of the
alleged demand letters sent to the said corporation or any of its corporate officers.
With regard to the account of AFPCES for unpaid supplies in the amount of P13,833.62, petitioner
asserts that since the debtor is an agency of the government, PRC did not file a collection suit therefor.
Yet, the mere fact that AFPCES is a government agency does not preclude PRC from filing suit since
said agency, while discharging proprietary functions, does not enjoy immunity from suit. Such
pretension of petitioner cannot pass judicial muster.
No explanation is offered by petitioner as to why the unpaid account of U'Ren Mart Enterprise in the
amount of P10,487.08 was written off as a bad debt. However, the decision of the CTA includes this
debtor in its findings on the lack of documentary evidence to justify the deductions claimed, since the
worthlessness of the debts involved are sought to be established by the mere self-serving testimony of

its financial consultant.

The contentions of PRC that nobody is in a better position to determine when an obligation becomes a
bad debt than the creditor itself, and that its judgment should not be substituted by that of respondent
court as it is PRC which has the facilities in ascertaining the collectibility or uncollectibility of these
debts, are presumptuous and uncalled for. The Court of Tax Appeals is a highly specialized body
specifically created for the purpose of reviewing tax cases. Through its expertise, it is undeniably
competent to determine the issue of whether or not the debt is deductible through the evidence
presented before it. 8
Because of this recognized expertise, the findings of the CTA will not ordinarily be reviewed absent a
showing of gross error or abuse on its part. 9 The findings of fact of the CTA are binding on this Court
and in the absence of strong reasons for this Court to delve into facts, only questions of law are open
for determination. 10 Were it not, therefore, due to the desire of this Court to satisfy petitioner's calls
for clarification and to use this case as a vehicle for exemplification, this appeal could very well have
been summarily dismissed.
The Court vehemently rejects the absurd thesis of petitioner that despite the supervening delay in the
tax payment, nothing is lost on the part of the Government because in the event that these debts are
collected, the same will be returned as taxes to it in the year of the recovery. This is an irresponsible
statement which deliberately ignores the fact that while the Government may eventually recover
revenues under that hypothesis, the delay caused by the non-payment of taxes under such a contingency
will obviously have a disastrous effect on the revenue collections necessary for governmental
operations during the period concerned. cdphil
2.
We need not tarry at length on the second issue raised by petitioner. It argues that the imposition
of the 25% surcharge and the 20% delinquency interest due to delay in its payment of the tax assessed
is improper and unwarranted, considering that the assessment of the Commissioner was modified by
the CTA and the decision of said court has not yet become final and executory.
Regarding the 25% surcharge penalty, Section 248 of the Tax Code provides:
"SECTION 248.
Civil Penalties. (a) There shall be imposed, in addition to the tax required to
be paid, a penalty equivalent to twenty-five percent (25%) of the amount due, in the following cases:
xxx
xxx
xxx
(3)
Failure to pay the tax within the time prescribed for its payment."
With respect to the penalty of 20% interest, the relevant provision is found in Section 249 of the same
Code, as follows:
"SECTION 249.
Interest. (a) In general. There shall be assessed and collected on any unpaid
amount of tax, interest at the rate of twenty percent (20%) per annum, or such higher rate as may be
prescribed by regulations, from the date prescribed for payment until the amount is fully paid.
xxx
xxx
xxx
(c)
Delinquency interest. In case of failure to pay:
(1)
The amount of the tax due on any return required to be filed, or
(2)
The amount of the tax due for which no return is required, or
(3)
A deficiency tax, or any surcharge or interest thereon, on the due date appearing in the notice
and demand of the Commissioner,
there shall be assessed and collected, on the unpaid amount, interest at the rate prescribed in paragraph
(a) hereof until the amount is fully paid, which interest shall form part of the tax " (Emphasis supplied)
xxx
xxx
xxx
As correctly pointed out by the Solicitor General, the deficiency tax assessment in this case, which was
the subject of the demand letter of respondent Commissioner dated April 11, 1989, should have been
paid within thirty (30) days from receipt thereof. By reason of petitioner's default thereon, the
delinquency penalties of 25% surcharge and interest of 20% accrued from April 11, 1989. The fact that
petitioner appealed the assessment to the CTA and that the same was modified does not relieve

petitioner of the penalties incident to delinquency. The reduced amount of P237,381.25 is but a part of
the original assessment of P1,892.584.00.
Our attention has also been called to two of our previous rulings and these we set out here for the
benefit of petitioner and whosoever may be minded to take the same stance it has adopted in this case.
Tax laws imposing penalties for delinquencies, so we have long held, are intended to hasten tax
payments by punishing evasions or neglect of duty in respect thereof. If penalties could be condoned
for flimsy reasons, the law imposing penalties for delinquencies would be rendered nugatory, and the
maintenance of the Government and its multifarious activities will be adversely affected. 11
We have likewise explained that it is mandatory to collect penalty and interest at the stated rate in case
of delinquency. The intention of the law is to discourage delay in the payment of taxes due the
Government and, in this sense, the penalty and interest are not penal but compensatory for the
concomitant use of the funds by the taxpayer beyond the date when he is supposed to have paid them to
the Government. 12 Unquestionably, petitioner chose to turn a deaf ear to these injunctions.
ACCORDINGLY, the petition at bar is DENIED and the judgment of respondent Court of Appeals is
hereby AFFIRMED, with treble costs against petitioner.
SO ORDERED.
Romero, Puno, Mendoza and Torres, Jr., JJ., concur.
Footnotes
1.
Justice Eduardo G. Montenegro, ponente, and Justices Minerva Gonzaga-Reyes and Conrado
M. Vasquez, Jr., concurring.
2.
Rollo, 48.
3.
Ibid., 63; penned by Associate Judge Ramon O. de Veyra, with the concurrence of Presiding
Judge Ernesto D. Acosta and Associate Judge Manuel K. Gruba.
4.
Ibid., 41-42.
5.
Rollo, 42-43.
6.
L-22265, December 26, 1967, 21 SCRA 1336.
7.
Rollo, 58.
8
Commissioner of Internal Revenue vs. Wander Philippines, Inc., et al., G.R. No. 68375, April
15, 1988, 160 SCRA 573.
9.
The Coca-Cola Export Corporation vs. Commissioner of Internal Revenue, et al., L-23604,
March 15, 1974, 56 SCRA 5; Nasiad, et al. vs. Court of Tax Appeals, L-29318, November 29, 1974, 61
SCRA 238.
10.
Commissioner of Internal Revenue vs. Tours Specialists, Inc., et al., G.R. No. 66416, March 21,
1990, 183 SCRA 402.
11.
Jamora, et al. vs. Meer, etc., et al., 74 Phil. 22 (1942).
12.
Republic vs. Philippine Bank of Commerce, L-20951, July 31, 1970, 34 SCRA 361.

EN BANC
[G.R. No. L-22492. September 5, 1967.]
BASILAN ESTATES, INC., petitioner, vs. THE COMMISSIONER OF INTERNAL REVENUE and
THE COURT OF TAX APPEALS, respondents.
Felix A. Gulfin and Antonio S. Alano for petitioner.
The Solicitor General for respondents.
SYLLABUS
1.
NOTICE OF ASSESSMENT, WHEN DEEMED MADE. Under Section 331 of the Tax
Code requiring 5 years within which to assess deficiency taxes, the assessment is deemed made when
notice to this effect is released, mailed or sent by the Collector of Internal Revenue to the taxpayer, and
it is not required that the notice be received by the taxpayer within the aforementioned 5-year period
(Collector of Internal Revenue vs. Bautista, L-12250 & L-12259, May 27, 1959)
2.
ID.; DEPRECIATION; DEFINITION. Depreciation is the gradual diminution in the useful
value of tangible property resulting from wear and tear and normal obsolescence. The term is also
applied to amortization of the value of intangible assets, the use of which in the trade or business is
definitely limited in duration (Jose Aranas, Annotation and Jurisprudence on the National Internal
Revenue Code, as Amended, 2nd Ed., Vol. 1, p. 263).
3.
ID.; ID.; WHEN DEPRECIATION COMMENCES. Depreciation commences with the
acquisition of the property and its owner is not bound to see his property gradually waste, without
making provision out of earnings for its replacement. It is entitled to see that from earnings the value of
the property invested is kept unimpaired, so that at the end of any given term of years, the original
investment remains as it was in the beginning. It is not only the right of a company to make such a
provision, but it is its duty to its bond and stockholders, and, in the case of a public service corporation,
at least, its plain duty to the public (Knoxville vs. Knoxville Water Co., 212 U.S. 1, 53 L. Ed. 371).
Accordingly, the law permits the taxpayer to recover gradually his capital investment in wasting assets
free from income tax (Detroit Edison Co. vs. Commissioner, 131 F 2d. 619). Precisely, Section 30(f)
(1) of the Tax Code allows a deduction from gross income for depreciation but limits the recovery to
the capital invested in the asset being depreciated.
4.
ID.; BASIS OF DEPRECIATION. The income tax law does not authorize the depreciation of
an asset beyond its acquisition cost. Hence, a deduction over and above such cost cannot be claimed
and allowed. The reason is that deduction from gross income are privileges (Palmer vs. State
Commission of Revenue & Taxation, 156 Kan. 690, 135 P. 2d. 899), not matters of right (Southern
Weaving Co. vs. Query, 206 SC 307, 34 SE 2d. 51). They are not created by implication but upon clear
expression in the law (Gutierrez vs. Collector of Internal Revenue, L-19537, May 20, 1965). Moreover,
the recovery, free of income tax, of an amount more than the invested capital in an asset will transgress
the underlying purpose of a depreciation allowance. For then what the taxpayer would recover will be,
not only the acquisition cost, but also some profit. Recovery in due time through depreciation of
investment made is the philosophy behind depreciation allowance; the idea of profit on the investment
made has never been the underlying reason for the allowance of a deduction for depreciation.
5.
ID.; TRAVELING EXPENSES; PERIOD WITHIN WHICH TO KEEP SUPPORTING
PAPERS; CASE AT BAR. Under Section 337 of the National Internal Revenue Code, receipts and
papers supporting traveling expenses need be kept by the taxpayer for a period of five years from the
last entry.
6.
ID.; SURTAX ON UNREASONABLY ACCUMULATED PROFITS; TEST TO DETERMINE
REASONABLENESS ACCUMULATION OF PROFITS. Persuasive jurisprudence on the matter
such as those in the United States from where our tax law was deprived (Collector of Internal Revenue
vs. Binalbagan Estate, Inc., L-12752, Jan. 30, 1965), has it that: "In order to determine whether profits
were accumulated for the reasonable needs of the business or to avoid the surtax upon shareholders, the
controlling intention of the taxpayer is that which is manifested at the time of the accumulation, not

subsequently declared intentions which are merely the products of afterthought (Jacob Mertens, Jr., The
Law of Federal Income Taxation, Vol. 7, Cumulative Supplement, p. 213). In determining whether
accumulations of earnings or profits in a particular year are within the reasonable needs of a
corporation, it is necessary to take unto account prior accumulations, since accumulations prior to the
year involved may have been sufficient to cover the business needs and additional accumulations
during the year involved would not reasonably be necessary. (Ibid, p. 202).
DECISION
BENGZON, J.P., J p:
A Philippine corporation engaged in coconut industry, Basilan Estate, Inc. with principal offices in
Basilan City, filed on March 24, 1954 its income tax returns for 1953 and paid an income tax of
P8,028. On February 26, 1959, the Commissioner of Internal Revenue, per examiner's report of
February 19, 1959, assessed Basilan Estates, Inc., a deficiency income tax of P3,912 for 1953 and
P86,867.85 as 25% surtax on unreasonably accumulated profits as of 1953 pursuant to Section 25 of
the Tax Code. On non-payment of the assessed amount, a warrant of distraint and levy was issued but
the same was not executed because Basilan Estate, Inc. succeeded in getting the Deputy Commissioner
of Internal Revenue to order the Director of the district in Zamboanga City to hold execution and
maintain constructive embargo instead. Because of its refusal to waive the period of prescription, the
corporation's request for reinvestigation was not given due course, and on December 2, 1960, notice
was served the corporation that the warrant of distraint and levy would be executed.
On December 20, 1960, Basilan Estate, Inc. filed before the Court of Tax Appeals a petition for review
of the Commissioner's assessment, alleging prescription of the period of assessment and collection;
error in disallowing claimed depreciations, travelling and miscellaneous expenses and error in finding
the existence of unreasonably accumulated profits and the imposition of 25% surtax thereon. On
October 31, 1963, the Court of Tax Appeals found that there was no prescription and affirmed the
deficiency assessment in toto.
On February 21, 1964, the case was appealed to Us by the taxpayer, upon the following issues:
1.
Has the Commissioner's right to collect deficiency income tax prescribed?
2.
Was the disallowance of items claimed as deductible proper?
3.
Have there been unreasonably accumulated profits? If so, should the 25% surtax be imposed on
the balance of the entire surplus from 1947-1953, or only for 1953?
4.
Is the petitioner exempt from the penalty tax under Republic Act 1823 amending Section 25 of
the Tax Code?
PRESCRIPTION
There is no dispute that the assessment of the deficiency tax was made on February 26, 1959; but the
petitioner claims that it never received notice of such assessment or if it did, it received the notice
beyond the five-year prescriptive period. To show prescription, the annotation on the notice (Exhibit
10, No. 52 ACR, p. 54-A of the BIR records) "No accompanying letter 11/25/" is advanced as
indicative of the fact that receipt of the notice was after March 24, 1959, the last date of the five year
period within which to assess deficiency tax, since the original returns were filed on March 24, 1954.
Although the evidence is not clear on this point, We cannot accept this interpretation of the petitioner,
considering the presence of circumstances that lead Us to presume regularity in the performance of
official functions. The notice of assessment shows the assessment to have been made on February 26,
1959, well within the five-year period. On the right side of the notice is also stamped "Feb. 26, 1959"
denoting the date of release, according to Bureau of Internal Revenue practice. The Commissioner
himself in his letter (Exh. H, p. 84 of BIR records) answering petitioner's request to lift the warrant of
distraint and levy, asserts that notice had been sent to petitioner. In the letter of the Regional Director
forwarding the case to the Chief of the Investigation Division which the latter received on March 10,
1959 (p. 71 of the BIR records), notice of assessment was said to have been sent to petitioner.
Subsequently, the Chief of the Investigation Division indorsed on March 18, 1959 (p. 24 of the BIR

records) the case to the Chief of the Law Division. There it was alleged that notice was already sent to
petitioner on February 26, 1959. These circumstances pointing to official performance of duty must
necessarily prevail over petitioner's contrary interpretation. Besides, even granting that notice had been
received by the petitioner late, as alleged, under Section 331 of the Tax Code requiring five years
within which to assess deficiency taxes, the assessment is deemed made when notice to this effect is
released, mailed or sent by the Collector to the taxpayer and it is not required that the notice be
received by the taxpayer within the aforementioned five-year period. 1
ASSESSMENT
The questioned assessment is as follows:
Net Income per return
P40,142.90
Add: Overclaimed depreciation P10,500.49
Mis. expenses disallowed
6,759.17
Officer's travelling expenses
disallowed
2,300.40
19,560.06
_________ _________
Net Income per
Investigation
P59,702.96
_________
20% tax on P59,702.96
11,940.00
Less: Tax already assessed
8,028.00
________
Deficiency income tax
P3,912.00
Add Additional tax of 25% on
P347,507.01
86,876.75
_________
Tax Due & Collectible
P90,788.75
=========
The Commissioner disallowed:
Overclaimed depreciation
P10,500.49
Miscellaneous expenses
6,759.17
Officer's travelling expenses
2,300.40
DEDUCTIONS
A.
Depreciation. Basilan Estates, Inc. claimed deductions for the depreciation of its assets up to
1949 on the basis of their acquisition cost. As of January 1, 1950 it changed the depreciable value of
said assets by increasing it to conform with the increase in cost for their replacement. Accordingly,
from 1950 to 1953 it deducted from gross income the value of depreciation computed on the
reappraised value.
In 1953, the year involved in this case, taxpayer claimed the following depreciation deduction:
Reappraised assets P47,342.53
New assets consisting of hospital building
and equipment
3,910.45
__________
Total depreciation
P51,252.98
__________
Upon investigation and examination of taxpayer's books and papers, the Commissioner of Internal
Revenue found that the reappraised assets depreciated in 1953 were the same ones upon which
depreciation was claimed in 1952. And for the year 1952, the Commissioner had already determined,
with taxpayer's concurrence, the depreciation allowable on said assets to be P36,842.04, computed on

their acquisition cost at rates fixed by the taxpayer. Hence, the Commissioner pegged the deductible
depreciation for 1953 on the same old assets at P36,842.04 and disallowed the excess thereof in the
amount of P10,500.49.
The question for resolution therefore is whether depreciation shall be determined on the acquisition
cost or on the reappraised value of the assets.
Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and
tear and normal obsolescence. The term is also applied to amortization of the value of intangible assets,
the use of which in the trade or business is definitely limited in duration. 2 Depreciation commences
with the acquisition of the property and its owner is not bound to see his property gradually waste,
without making provision out of earnings for its replacement. It is entitled to see that from earnings the
value of the property invested is kept unimpaired, so that at the end of any given term of years, the
original investment remains as it was in the beginning. It is not only the right of a company to make
such a provision, but it is its duty to its bond and stockholders, and, in the case of a public service
corporation, at least, its plain duty to the public. 3 Accordingly, the law permits the taxpayer to recover
gradually his capital investment in wasting assets free from income tax. 4 Precisely, Section 30 (f) (1)
which states:
"(1) In general. A reasonable allowance for deterioration of property arising out of its use or
employment in the business or trade, or out of its not being used: Provided, that when the allowance
authorized under this subsection shall equal the capital invested by the taxpayer . . . no further
allowance shall be made. . . ."
allows a deduction from gross income for depreciation but limits the recovery to the capital invested in
the asset being depreciated.
The income tax law does not authorize the depreciation of an asset beyond its acquisition cost. Hence, a
deduction over and above such cost cannot be claimed and allowed. The reason is that deductions from
gross income are privileges, 5 not matters of right. 6 They are not created by implication but upon clear
expression in the law. 7
Moreover, the recovery, free of income tax, of an amount more than the invested capital in an asset will
transgress the underlying purpose of a depreciation allowance. For then what the taxpayer would
recover will be, not only the acquisition cost, but also some profit. Recovery in due time thru
depreciation of investment made is the philosophy behind depreciation allowance; the idea of profit on
the investment made has never been the underlying reason for the allowance of a deduction for
depreciation.
Accordingly, the claim for depreciation beyond P36,842.04 or in the amount of P10,500.49 has no
justification in the law. The determination, therefore, of the Commissioner of Internal Revenue
disallowing said amount, affirmed by the Court of Tax Appeals, is sustained.
B.
Expenses. The next item involves disallowed expenses incurred in 1953, broken as follows:
Miscellaneous expenses
P6,759.17
Officer's travelling expenses 2,300.40
_________
Total P9,059.57
_________
These were disallowed on the ground that the nature of these expenses could not be satisfactorily
explained nor could the same be supported by appropriate papers.
Felix Gulfin, petitioner's accountant, explained the P6,759.17 as actual expenses credited to the account
of the president of the corporation incurred in the interest of the corporation during the president's trip
to Manila (pp. 33-34 of TSN of Dec. 5, 1962); he stated that the P2,300.40 was the president's
travelling expenses to and from Manila; as to the vouchers and receipts of these, he said the same were
made but got burned during the Basilan fire on March 30, 1962 (p. 40 of same TSN). Petitioner further
argues that when it sent its records to Manila in February, 1959, the papers in support of these

miscellaneous and travelling expenses were not included for the reason that by February 9, 1959, when
the Bureau of Internal Revenue decided to investigate, petitioner had no more obligation to keep the
same since five years had lapsed from the time these expenses were incurred (p. 41 of same TSN). On
this ground, the petitioner may be sustained for under Section 337 of the Tax Code, receipts and papers
supporting such expenses need be kept by the taxpayer for a period of five years from the last entry. At
the time of the investigation, said five years had lapsed. Taxpayer's stand on this issue is therefore
sustained.
UNREASONABLY ACCUMULATED PROFITS
Section 25 of the Tax Code which imposes a surtax on profits unreasonably accumulated, provides:
"SEC 25.
Additional tax on corporations improperly accumulating profits or suplus (a)
Imposition of Tax. If any corporation, except banks, insurance companies, or personal holding
companies, whether domestic or foreign, is formed or availed of for the purpose of preventing the
imposition of the tax upon its shareholders or members or the shareholders or members of another
corporation, through the medium of permitting its gains and profits to accumulate instead of being
divided or distributed, there is levied and assessed against such corporation, for each taxable year, a tax
equal to twenty-five per centum of the undistributed portion of its accumulated profits or surplus which
shall be in addition to the tax imposed by section twenty-four, and shall be computed, collected and
paid in the same manner and subject to the same provisions of law including penalties, as that tax."
The Commissioner found that in violation of the abovequoted section, petitioner had unreasonably
accumulated profits as of 1953 in the amount of P347,507.01, based on the following circumstances
(Examiner's Report, pp. 62-68 of BIR records):
1.
Strong financial position of the petitioner as of December 31, 1953. Assets were P388,617.00
while the liabilities amounted to only P61,117.31 or a ratio of 6:1.
2.
As of 1953, the corporation had considerable capital adequate to meet the reasonable needs of
the business amounting to P327,499.69 (assets less liabilities).
3.
The P200,000 reserved for electrification of drier and mechanization and the P50,000 reserved
for malaria control were reverted to its surplus in 1953.
4.
Withdrawal of shareholders of large sums of money as personal loans.
5.
Investment of undistributed earnings in assets having no proximate connection with the
business as hospital building and equipment worth P59,794.72.
6.
In 1953, with an increase of surplus amounting to P677,232.01, the capital stock was increased
to P500,000 although there was no need for such increase.
Petitioner tried to show that in considering the surplus, the examiner did not take into account the
possible expenses for cultivation, labor, fertilization, drainage, irrigation, repair, etc. (pp. 235-237 of
TSN of Dec. 7, 1962). As aptly answered by the examiner himself, however, they were already
included as part of the working capital (pp. 237-238 of TSN of Dec. 7, 1962).
In the unreasonable accumulation of P347,507.01 are included P200,000 for electrification of driers
and mechanization and P50,000 for malaria control which were reserved way back in 1948 (p. 67 of the
BIR records) but reverted to the general fund only in 1953. If there were any plans for these amounts to
be used in further expansion through projects, it did not appear in the records as was properly indicated
in 1948 when such amounts were reserved. Thus, while in 1948 it was already clear that the money was
intended to go to future projects, in 1953 upon reversion to the general fund, no such intention was
shown. Such reversion therefore gave occasion for the Government to consider the same for tax
purposes. The P250,000 reverted to the general fund was sought to be explained as later used
elsewhere: "part of it in the Hilano Industries, Inc. in building the factory site and buildings to house
technical men . . . part of it was spent in the facilities for the waterworks system and for
industrialization of the coconut industry" (p. 117 of TSN of Dec. 6, 1962). This is not sufficient
explanation. Persuasive jurisprudence on the matter such as those in the United States from where our
tax law was derived, 8 has it that "In order to determine whether profits were accumulated for the

reasonable needs of the business or to avoid the surtax upon shareholders, the controlling intention of
the taxpayer is that which is manifested at the time of the accumulation, not subsequently declared
intentions which are merely the products of afterthought. 9 The reversion here was made because the
reserved amount was not enough for the projects intended, without any intent to channel the same to
some particular future projects in mind.
Petitioner argues that since it has P560,717.44 as its expenses for the year 1953, a surplus of
P347,507.01 is not unreasonably accumulated. As rightly contended by the Government, there is no
need to have such a large amount at the beginning of the following year because during the year,
current assets are converted into cash and with the income realized from the business as the year goes,
these expenses may well be taken care of (pp. 238 of TSN of Dec. 7, 1962). Thus, it is erroneous to say
that the taxpayer is entitled to retain enough liquid net assets in amounts approximately equal to current
operating needs for the year to cover "cost of goods sold and operating expenses" for "it excludes
proper consideration of funds generated by the collection of notes receivable as trade accounts during
the course of the year. 10 In fact, just because the total accumulations are less than 70% of the annual
operating expenses of the year, it does not mean that the accumulations are reasonable as a matter of
law." 11
Petitioner tried to show that investments were made with Basilan Coconut Producers Cooperative
Association and Basilan Hospital (pp. 103-105 of TSN of Dec. 6, 1962) totalling P59,794.72 as of
December 31, 1953. This shows all the more the unreasonable accumulation. As of December 31, 1953
already P59,794.72 was spent yet as of that date there was still a surplus of P347,507.01.
Petitioner questions why the examiner covered the period from 1948-1953 when the taxable year on
review was 1953. The surplus of P347,507.01 was taken by the examiner from the balance sheet of
petitioner for 1953. To check the figure arrived at, the examiner traced the accumulation process from
1947 until 1953, and petitioner's figure stood out to be correct. There was no error in the process
applied, for previous accumulations should be considered in determining unreasonable accumulations
for the year concerned. "In determining whether accumulations of earnings or profits in a particular
year are within the reasonable needs of a corporation, it is necessary to take into account prior
accumulations, since accumulations prior to the year involved may have been sufficient to cover the
business needs and additional accumulations during the year involved would not reasonably be
necessary. 12
Another factor that stands put to show unreasonable accumulation is the fact that large amounts were
withdraw by or advanced to the stockholders. For the year 1953 alone these totalled P197,229.26. Yet
the surplus of P347,507.01 was left as of December 31, 1953. We find unacceptable petitioner's
explanation that these were advances made in furtherance of the business purposes of the petitioner. As
correctly held by the Court of Tax Appeals, while certain expenses of the corporation were credited
against these amounts, the unspent balance was retained by the stockholders without refunding them to
petitioner at the end of each year. These advances were in fact indirect loans to the stockholders
indicating the unreasonable accumulation of surplus beyond the needs of the business.
ALLEGED EXEMPTION
Petitioner wishes to avail of the exempting proviso in Sec. 25 of the Internal Revenue Code as amended
by R.A. 1823, approved June 27, 1957, whereby accumulated profits or surplus if invested in any
dollar-producing or dollar-earning industry or in the purchase of bonds issued by the Central Bank may
not be subject to the 25% surtax. We have but to point out that the unreasonable accumulation was in
1953. The exemption was by virtue of Republic Act 1823 which amended Sec. 25 only on June 22,
1957 more than three years after the period covered by the assessment.
In resume, Basilan Estates Inc. is liable for the payment of deficiency income tax and surtax for the
year 1953 in the amount of P88,977.42, computed as follows:
Net income per returnP40,142.90
Add: Overclaimed depreciation
10,500.49

_________
Net income per finding
P50,643.39
__________
20% tax on P50,643.39
10,128.67
Less: tax already assessed 8,028.00
_________
Deficiency income tax
2,100 67
Add: 25% surtax on P347,507.01 86,876.75
_________
Total tax due and collectible 88,977.42
_________
WHEREFORE, the judgment appealed from is modified to the extent that petitioner is allowed its
deductions for travelling and miscellaneous expenses, but affirmed insofar as the petitioner is liable for
P2,100.67 as 25% deficiency income tax for 1953 and P86,876.75 as 25% surtax on the unreasonably
accumulated profit of P347,507.01. No costs. So ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Ruiz Castro, Angeles and
Fernando, JJ., concur.
Footnotes
1.
Collector of Internal Revenue vs. Bautista, L-12250 & L-12259, May 27, 1959.
2.
Jose Araas, Annotations and Jurisprudence on the National Internal Revenue Code, as
Amended, Second Ed., Vol. 1, p. 263.
3.
Knoxville vs. Knoxville Water Co., 212 U.S. 1, 53 L. ed. 371.
4.
Detroit Edison Co. vs. Commissioner, 131 F (2d) 619 (CCA 6th, 1942), Aff'd 319 U.S. 98, 87 L.
ed. 1286, 63 S.Ct. 902.
5.
Palmer vs. State Commission of Revenue & Taxation, 156 Kan. 690, 135 P. 2d. 899.
6.
Southern Weaving Co. vs. Query, 206 SC 307, 34 SE 2d 51.
7.
See Gutierrez vs. Collector of Internal Revenue, L-19537, May 20, 1965.
8.
Collector of Internal Revenue vs. Binalbagan Estate, Inc., L- 12752, Jan. 30, 1965.
9.
Jacob Mertens, Jr., The Law of Federal Income Taxation, Vol. 7, Cumulative Supplement, p.
213.
10.
Ibid., p. 229.
11.
Ibid., p. 222.
12.
Ibid., p. 202.

EN BANC
[G.R. No. L-21551. September 30, 1969.]
FERNANDEZ HERMANOS, INC., petitioner, vs. COMMISSIONER OF INTERNAL REVENUE and
COURT OF TAX APPEALS., respondents.
[G.R. No. L-21557. September 30, 1969.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. FERNANDEZ HERMANOS, INC.,
and COURT OF TAX APPEALS, respondents.
[G.R. No. L-24972. September 30, 1969.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. FERNANDEZ HERMANOS, INC.,
and the COURT OF TAX APPEALS, respondents.
[G.R. No. L-24978. September 30, 1969.]
FERNANDEZ HERMANOS, INC., petitioner, vs. THE COMMISSIONER OF INTERNAL
REVENUE, and HON. ROMAN A. UMALI, COURT OF TAX APPEALS, respondents.
L-21551
Rafael Dinglasan for petitioner.
Solicitor General Arturo A. Alafriz, Solicitor Alejandro B. Afurong and Special Attorney Virgilio G.
Saldajeno for respondent.
L-21557:
Solicitor General for petitioner.
Rafael Dinglasan for respondent Fernandez Hermanos, Inc.
L-24972:
Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete and Special
Attorney Virgilio G. Saldajeno for petitioner.
Rafael Dinglasan for respondent Fernandez Hermanos, Inc.
L-24978:
Rafael Dinglasan for petitioner.
Solicitor General Antonio P. Barredo, Assistant Solicitor General Antonio G. Ibarra and Special
Attorney Virgilio G. Saldajeno for respondent.
SYLLABUS
1.
TAXATION; NATIONAL INTERNAL REVENUE CODE; INCOME TAX ALLOWABLE
DEDUCTIONS; WORTHLESS SECURITIES; WRITING-OFF PROPER IN INSTANT CASE. We
find no reason to disturb the Tax Court's allowance of the taxpayer's writing-off as worthless securities
in its 1950 return the sum of P8,050.00 representing the cost of shares of stock of Mati Lumber Co.
acquired by the taxpayer on January 1, 1948. There was adequate basis for the writing off of the stock
as worthless securities. As found by the Tax Court, the Mati Lumber Co. ceased operation in 1949
when its manager and owner left for Spain where he subsequently died. When the company ceased to
operate, it had no assets. Assuming that the Company would later somehow realize some proceeds from
its sawmill and equipment, which were still existing as claimed by the Commissioner, and that such
proceeds would later be distributed to its stockholders such as the taxpayer, the amount so received by
the taxpayer would then properly be reportable as income of the taxpayer on the year it is received.
2.
ID.; ID.; ID.; ID.; BAD DEBT, WHEN CONSIDERED. The Tax Court's disallowance of the
writing-off in 1951 as a loss or bad debt the sum of P353,134.25, which it had advanced or loaned to
Palawan Manganese Mines, Inc., was proper. The Solicitor General has rightly pointed out that the
taxpayer has taken an "ambiguous position" and "has not definitely taken a stand on whether the
amount involved is claimed as losses or as bad debts but insists that it is either a loss or a bad debt. "We
sustain the government's position that the advances made by the taxpayer to its 100% subsidiary,
Palawan Manganese Mines, Inc. amounting to P587,308.07 as of 1951 were investments and not loans.
The evidence on record shows that the board of directors of the two companies since August, 1945
were identical and that the only capital of Palawan Manganese Mines, Inc. is the amount of

P100,000.00 entered in the taxpayer's balance sheet as its investment in its subsidiary company. This
fact explains the liberality with which the taxpayer made such large advances to the subsidiary, despite
the latter's admittedly poor financial condition.
3.
ID.; ID.; ID.; ID.; DEBT OR INVESTMENT OF CORPORATION NOT WORTHLESS IF
CORPORATION IS STILL IN OPERATION. The Tax Court correctly held that the subsidiary
company was still in operation in 1951 and 1952 and the taxpayer continued to give it advances in
those years, and therefore, the alleged debt or investment could not properly be considered worthless
and deductible in 1951, as claimed by the taxpayer. Furthermore, neither under Section 30(d)(c) of our
Tax Code providing for deduction by corporations of losses actually sustained and charged off during
the taxable year nor under Section 30 (e)(1) thereof providing for deduction of bad debts actually
ascertained to be worthless and charged off within the taxable year, can there be a partial writing-off of
a loss or bad debt, as was sought to be done here by the taxpayer. For such losses or bad debts must be
ascertained to be so and written-off during the taxable year, are therefore deductible in full or not at all,
in the absence of any express provision in the Tax Code authorizing partial deductions.
4.
ID.; ID.; ID.; ID.; LOSSES; DISALLOWANCE THEREOF PROPER IN INSTANT CASE.
The Court sustains the Tax Court's disallowance of the sums of P8,989.76 and P27,732.66 spent by the
taxpayer for the operation of its Balamban coal mine in Cebu in 1950 and 1951, respectively, ad
claimed as losses in the taxpayer's returns for said years. The Tax Court correctly held that the losses
"are deductible in 1952, when the mines were abandoned, and not in 1950 and 1951, when they were
still in operation." The taxpayer's claim that these expenditures should be allowed as losses for the
corresponding years that they were incurred, because it made no sales of coal during said years, since
the promised road or outlet through which the coal could be transported from the mines to the
provincial road was not constructed, cannot be sustained. Some definite event must fix the time when
the loss is sustained, and there it was the event of actual abandonment of the mines in 1952.
5.
ID.; ID.; ID.; ID.; LOSSES BY INVENTORY METHOD; DISALLOWANCE OF LOSSES
THEREOF, NOT PROPER. Where respondent Commissioner concedes that under Section 100 of
Revenue Regulations No. 2, it does not specify how the inventories are to be made and the Tax Court is
satisfied with the evidence presented by the taxpayer ... which merely consisted of an alleged physical
count of the number of the livestock in Hacienda Dalupiri for the years involved and the method
adopted by the taxpayer as a farmer breeding livestock, reporting on the basis of receipts and
disbursements, there is no compelling reason to disturb the ruling of the Tax Court overruling the
Commissioner's disallowance of losses in Hacienda Dalupiri (1950 to 1954) and Hacienda Samal
(1951-1952).
6.
ID.; ID.; ID.; ID.; DEPRECIATION OF BUILDINGS; ANNUAL RATE OF 10%
DEPRECIATION, EXCESSIVE; DISALLOWANCE PROPER. During the year 1950 to 1954, the
taxpayer claimed a depreciation allowance for its buildings at the annual rate of 10%. The
Commissioner claimed that the reasonable depreciation rate is only 3% annually. We sustain the Tax
Court's finding that the taxpayer did not submit adequate proof of the correctness of the taxpayer's
claim that the depreciable assets or buildings in question had a useful life only of 10 years so as to
justify its 10% depreciation per annum claim, such finding being supported by the record. The
taxpayer's contention that it has many zero or one-peso assets, support the Commissioner's position that
a 10% annual depreciation rate was excessive.
7.
ID.; ID.; ID.; INCREASE IN NET WORTH NOT TAXABLE IF NOT DUE TO TAXABLE
RECEIPT. Where it is shown that the increase in the taxpayer's net worth were not the result of the
receipt by it of unreported or unexplained taxable income but were merely the result of the correction
of errors in its entries in its books relating to its debtedness to certain creditors, which had been
erroneously overstated or listed as outstanding when they had in fact duly paid, these increase in the
taxpayer's net worth were not taxable increases in net worth.
8.
ID.; ID.; ID. ALLEGED UNREPORTED GAIN FROM SALE OF REAL PROPERTY, NO

BASIS. Where it was sufficiently proved from the taxpayer's books that after acquiring the property
in 1926 for P11,852.74, the gain derived from the sale of the said property for P60,000.00 was correctly
reported by the taxpayer at P37,000.00.
9.
ID.; ID.; ID.; CAPITAL INVESTMENT, NOT BASIS FOR DEPLETION. The taxpayer
insists in this appeal that it could use as a method for depletion under the pertinent provision of the Tax
Code its "capital investment" representing the alleged value of its contractual rights and titles to mining
claims in the sum of P242,408.10 and thus deduct outright one-fifth (1/5) of this "Capital investment"
ever year, regardless of whether it had actually mined the product and sold the products. HELD: The
alleged "capital investment" method invoked by the taxpayer is not a method of depletion, but the Tax
Code provision, prior to its amendment by Section 1 of Republic Act No. 2698, which took effect on
June 18, 1960, expressly provided that "when the allowances shall equal capital invested . . . no further
allowances shall be made;" in other words, the "capital investment" was but the limitation of the
amount of depletion that could be claimed. The outright deduction by the taxpayer of 1/5 of the cost of
the mines, as if it were a "straight line" rate of depreciations was correctly held by the Tax Court not to
be authorized by the Tax Code.
10.
ID.; ID.; ASSESSMENT AND COLLECTION OF INCOME TAX; PRESCRIPTION; ACTION
FOR COLLECTION IN INSTANT CASE HAS NOT PRESCRIBED. In the present case,
regardless of whether the assessments were made on February 24 and 27, 1956, as claimed by the
Commissioner, or on December 27, 1955 as claimed by the taxpayer, the government's right to collect
the taxes due has clearly not prescribed, as the taxpayer's appeal or petition for review was filed with
the Tax Court on May 4, 1960, with the Commissioner filing on May 20, 1960 his answer with a prayer
for payment of the taxes due, long before the expiration of the five-year period to effect collection by
judicial action counted from the date of assessment.
DECISION
TEEHANKEE, J p:
These four appeals involve two decisions of the Court of Tax Appeals determining the taxpayer's
income tax liability for the years 1950 to 1954 and for the year 1957. Both the taxpayer and the
Commissioner of Internal Revenue, as petitioner and respondent in the cases a quo respectively,
appealed from the Tax Court's decisions, insofar as their respective contentions on particular tax items
were therein resolved against them. Since the issues raised are interrelated, the Court resolves the four
appeals in this joint decision.
Cases L-21551 and L-21557
The taxpayer, Fernandez Hermanos, Inc., is a domestic-corporation organized for the principal purpose
of engaging in business as an "investment company" with main office at Manila. Upon verification of
the taxpayer's income tax returns for the period in question, the Commissioner of Internal Revenue
assessed against the taxpayer the sums of P13,414.00, P119,613.00, P11,698.00, P6,887.00 and
P14,451.00 as alleged deficiency income taxes for the years 1950, 1951, 1952, 1953 and 1954,
respectively. Said assessments were the result of alleged discrepancies found upon the examination and
verification of the taxpayer's income tax returns for the said years, summarized by the Tax Court in its
decision of June 10, 1963 in CTA Case No. 787, as follows:
"1.
Losses
a.
Losses in Mati Lumber Co. (1950) P 8,050.00
b.
Losses in or bad debts of Palawan
Manganese Mines, Inc. (1951)
353,134.25
c.
Losses in Balamban Coal
Mines 1950
8,989.76
1951 27,732.66
d.
Losses in Hacienda Dalupiri
1950 17,418.95

1951 29,125.82
1952 26,744.81
1953 21,932.62
1954 42,933.56
e.
Losses in Hacienda Samal
1951 8,380.25
1952 7,621.73
2.
Excessive depreciation of Houses
1950 P 8,180.40
1951 8,768.11
1952 18,002.16
1953 13,655.25
1954 29,314.98
3.
Taxable increase in net worth
1950 P 30,050.00
1951 1,382.85
4.
Gain realized from sale of real property in
1950 P 11,147.26" 1
The Tax Court sustained the Commissioner's disallowances of Item 1, sub-items (b) and (c) and Item 2
of the above summary, but overruled the Commissioner's disallowances of all the remaining items. It
therefore modified the deficiency assessments accordingly, found the total deficiency income taxes due
from the taxpayer for the years under review to amount to P23,436.00 instead of P166,063.00 as
originally assessed by the Commissioner, and rendered the following judgment:
"RESUME
1950 P 2,748.00
1951 108,724.00
1952 3,600.00
1953 2,501,00
1954 5,863.00

Total P123,436.00
"WHEREFORE, the decision appealed from is hereby modified, and petitioner is ordered to pay the
sum of P123,436.00 within 30 days from the date this decision becomes final. If the said amount, or
any part thereof, is not paid within said period there shall be added to the unpaid amount as surcharge
of 5% plus interest as provided in Section 51 of the National Internal Revenue Code, as amended. With
costs against petitioner." (Pp. 75, 76, Taxpayer's Brief as appellant)
Both parties have appealed from the respective adverse rulings against them in the Tax Court's
decision. Two main issues are raised by the parties: first, the correctness of the Tax Court's rulings with
respect to the disputed items of disallowances enumerated in the Tax Court's summary reproduced
above, and second, whether or not the government's right to collect the deficiency income taxes in
question has already prescribed.
On the first issue, we will discuss the disputed items of disallowances seriatim.
1.
Re allowances/disallowances of losses.
(a)
Allowance of losses in Mati Lumber Co. (1950). The Commissioner of Internal Revenue
questions the Tax Court's allowance of the taxpayer's writing off as worthless securities in its 1950
return the sum of P8,050.00 representing the cost of shares of stock of Mati Lumber Co. acquired by
the taxpayer on January 1, 1948, on the ground that the worthlessness of said stock in the year 1950
had not been clearly established. The Commissioner contends that although the said Company was no
longer in operation in 1950, it still had its sawmill and equipment which must be of considerable value.

The Court, however, found that "the company ceased operations in 1949 when its Manager and owner,
a certain Mr. Rocamora, left for Spain where he subsequently died. When the company ceased to
operate, it had no assets, in other words, completely insolvent. This information as to the insolvency of
the Company reached (the taxpayer) in 1950," when properly claimed the loss as a deduction in its
1950 tax return, pursuant to Section 30(d) (4) (b) or Section 30 (e) (3) of the National Internal Revenue
Code. 2
We find no reason to disturb this finding of the Tax Court. There was adequate basis for the writing off
of the stock as worthless securities. Assuming that the Company would later somehow realize some
proceeds from its sawmill and equipment, which were still existing as claimed by the Commissioner,
and that such proceeds would later be distributed to its stockholders such as the taxpayer, the amount so
received by the taxpayer would then properly be reportable as income of the taxpayer in the year it is
received.
(b)
Disallowance of losses in or bad debts of Palawan Manganese Mines, Inc. (1951). The
taxpayer appeals from the Tax Court's disallowance of its writing off in 1951 as a loss or bad debt the
sum of P353,134.25, which it had advanced or loaned to Palawan Manganese Mines, Inc. The Tax
Court's findings on this item follow:
"Sometime in 1945, Palawan Manganese Mines, Inc., the controlling stockholders of which are also the
controlling stockholders of petitioner corporation, requested financial help from petitioner to enable it
to resume its mining operations in Coron, Palawan. The request for financial assistance was readily and
unanimously approved by the Board of Directors of petitioner, and thereafter a memorandum
agreement was executed on August 12, 1945, embodying the terms and conditions under which the
financial assistance was to be extended, the pertinent provisions of which are as follows:
'WHEREAS, the FIRST PARTY, by virtue of its resolution adopted on August 10, 1945, has agreed to
extend to the SECOND PARTY the requested financial help by way of accommodation advances and
for this purpose has authorized its President, Mr. Ramon J. Fernandez to cause the release of funds to
the SECOND PARTY.
'WHEREAS, to compensate the FIRST PARTY for the advances that it has agreed to extend to the
SECOND PARTY, the latter has agreed to pay to the former fifteen per centum (15%) of its net profits.
'NOW THEREFORE, for and in consideration of the above premises, the parties hereto have agreed
and covenanted that in consideration of the financial help to be extended by the FIRST PARTY to the
SECOND PARTY to enable the latter to resume its mining operations in Coron, Palawan, the SECOND
PARTY has agreed and undertaken as it hereby agrees and undertakes to pay to the FIRST PARTY
fifteen per centum (15%) of its net profits.' (Exh. H-2)
Pursuant to the agreement mentioned above, petitioner gave to Palawan Manganese Mines, Inc. yearly
advances starting from 1945, which advances amounted to P587,308.07 by the end of 1951. Despite
these advances and the resumption of operations by Palawan Manganese Mines, Inc., it continued to
suffer losses. By 1951, petitioner became convinced that those advances could no longer be recovered.
While it continued to give advances, it decided to write off as worthless the sum of P353,134.25. This
amount 'was arrived at on the basis of the total of advances made from 1945 to 1949 in the sum of
P438,981.39, from which amount the sum of P35,647.14 had to be deducted, the latter sum
representing its pre-war assets. (t.s.n., pp. 136-139, Id.).' (Page 4, Memorandum for Petitioner.)
Petitioner decided to maintain the advances given in 1950 and 1951 in the hope that it might be able to
recover the same, as in fact it continued to give advances up to 1952. From these facts, and as admitted
by petitioner itself, Palawan Manganese Mines, Inc., was still in operation when the advances
corresponding to the years 1945 to 1949 were written off the books of petitioner. Under the
circumstances, was the sum of P353,134.25 properly claimed by petitioner as deduction in its income
tax return for 1951, either as losses or bad debts?
"It will be noted that in giving advances to Palawan Manganese Mines, Inc., petitioner did not expect to
be repaid. It is true that some testimonial evidence was presented to show that there was some

agreement that the advances would be repaid, but no documentary evidence was presented to this
effect. The memorandum agreement signed by the parties appears to be very clear that the
consideration for the advances made by petitioner was 15% of the net profits of Palawan Manganese
Mines, Inc. In other words, if there were no earnings or profits, there was no obligation to repay those
advances. It has been held that the voluntary advances made without expectation of repayment do not
result in deductible losses. 1965 PH Fed. Taxes, Par. 13, 329, citing W.F. Young, Inc. v. Comm., 120 F
2d. 159, 27 AFTR 395; George B. Markle, 17 TC. 1593.
"Is the said amount deductible as a bad debt? As already stated, petitioner gave advances to Palawan
Manganese Mines, Inc., without expectation of repayment. Petitioner could not sue for recovery under
the memorandum agreement because the obligation of Palawan Manganese Mines, Inc. was to pay
petitioner 15% of its net profits, not the advances. No bad debt could arise where there is no valid and
subsisting debt.
"Again, assuming that in this case there was a valid and subsisting debt and that the debtor was
incapable of paying the debt in 1951, when petitioner wrote off the advances and deducted the amount
in its return for said year, yet the debt is not deductible in 1951 as a worthless debt. It appears that the
debtor was still in operation in 1951 and 1952, as petitioner continued to give advances in those years.
It has been held that if the debtor corporation, although losing money or insolvent, was still operating at
the end of the taxable year, the debt is not considered worthless and therefore not deductible." 3
The Tax Court's disallowance of the write-off was proper. The Solicitor General has rightly pointed out
that the taxpayer has taken an "ambiguous position" and "has not definitely taken a stand on whether
the amount involved is claimed as losses or as bad debts but insists that it is either a loss or a bad debt."
4 We sustain the government's position that the advances made by the taxpayer to its 100% subsidiary,
Palawan Manganese Mines, Inc. amounting to P587,308,07 as of 1951 were investments and not loans.
5 The evidence on record shows that the board of directors of the two companies since August, 1945,
were identical and that the only capital of Palawan Manganese Mines, Inc. is the amount of
P100,000.00 entered in the taxpayer's balance sheet as its investment in its subsidiary company. 6 This
fact explains the liberality with which the taxpayer made such large advances to the subsidiary, despite
the latter's admittedly poor financial condition.
The taxpayer's contention that its advances were loans to its subsidiary as against the Tax Court's
finding that under their memorandum agreement, the taxpayer did not expect to be repaid, since if the
subsidiary had no earnings, there was no obligation to repay those advances, becomes immaterial, in
the light of our resolution of the question. The Tax Court correctly held that the subsidiary company
was still in operation in 1951 and 1952 and the taxpayer continued to give it advances in those years,
and, therefore, the alleged debt or investment could not properly be considered worthless and
deductible in 1951, as claimed by the taxpayer. Furthermore, neither under Section 30 (d) (2) of our
Tax Code providing for deduction by corporations of losses actually sustained and charged off during
the taxable year nor under Section 30 (e) (1) thereof providing for deduction of bad debts actually
ascertained to be worthless and charged off within the taxable year, can there be a partial writing off of
a loss or bad debt, as was sought to be done here by the taxpayer. For such losses or bad debts must be
ascertained to be so and written off during the taxable year, are therefore deductible in full or not at all,
in the absence of any express provision in the Tax Code authorizing partial deductions.
The Tax Court held that the taxpayer's loss of its investment in its subsidiary could not be deducted for
the year 1951, as the subsidiary was still in operation in 1951 and 1952. The taxpayer, on the other
hand, claims that its advances were irretrievably lost because of the staggering losses suffered by its
subsidiary in 1951 and that its advances after 1949 were "only limited to the purpose of salvaging
whatever ore was already available, and for the purpose of paying the wages of the laborers who
needed help." 7 The correctness of the Tax Court's ruling in sustaining the disallowance of the write-off
in 1951 of the taxpayer's claimed losses is borne out by subsequent events shown in Cases L-24972 and
L-24978 involving the taxpayer's 1957 income tax liability. (Infra, paragraph 6.) It will there be seen

that by 1956, the obligation of the taxpayer's subsidiary to it had been reduced from P587,398.97 in
1951 to P442,885.23 in 1956, and that it was only on January 1, 1956 that the subsidiary decided to
cease operations. 8
(c)
Disallowance of losses in Balamban Coal Mines (1950 and 1951). The Court sustains the
Tax Court's disallowance of the sums of P8,989.76 and P27,732.66 spent by the taxpayer for the
operation of its Balamban coal mines in Cebu in 1950 and 1951, respectively, and claimed as losses in
the taxpayer's returns for said years. The Tax Court correctly held that the losses "are deductible in
1952, when the mines were abandoned, and not in 1950 and 1951, when they were still in operation." 9
The taxpayer's claim that these expeditions should be allowed as losses for the corresponding years that
they were incurred, because it made no sales of coal during said years, since the promised road or outlet
through which the coal could be transported from the mines to the provincial road was not constructed,
cannot be sustained. Some definite event must fix the time when the loss is sustained, and here it was
the event of actual abandonment of the mines in 1952. The Tax Court held that the losses, totalling
P36,722.42 were properly deductible in 1952, but the appealed judgment does not show that the
taxpayer was credited therefor in the determination of its tax liability for said year. This additional
deduction of P36,722.42 from the taxpayer's taxable income in 1952 would result in the elimination of
the deficiency tax liability for said year in the sum of P3,600.00 as determined by the Tax Court in the
appealed judgment.
(d) and (e)
Allowance of losses in Hacienda Dalupiri (1950 to 1954) and Hacienda Samal (19511952). The Tax Court overruled the Commissioner's allowance of these items of losses thus:
"Petitioner deducted losses in the operation of its Hacienda Dalupiri the sums of P17,418.95 in 1950,
P29,125.82 in 1951, P26,744.81 in 1952, P21,932.62 in 1953, and P42,938.56 in 1954. These
deductions were disallowed by respondent on the ground that the farm was operated solely for pleasure
or as a hobby and not for profit. This conclusion is based on the fact that the farm was operated
continuously at a loss.
"From the evidence, we are convinced that the Hacienda Dalupiri was operated by petitioner for
business and not pleasure. It was mainly a cattle farm, although a few race horses were also raised. It
does not appear that the farm was used by petitioner for entertainment, social activities, or other nonbusiness purposes. Therefore, it is entitled to deduct expenses and losses in connection with the
operation of said farm. (See 1955 PH Fed. Taxes, Par. 13, 663, citing G.C.M. 21103, CB 1939-1, p.
164)
"Section 100 of Revenue Regulations No. 2, otherwise known as the Income Tax Regulations,
authorizes farmers to determine their gross income on the basis of inventories. Said regulations
provide:
'If gross income is ascertained by inventories, no deduction can be made for livestock or products lost
during the year, whether purchased for resale, produced on the farm, as such losses will be reflected in
the inventory by reducing the amount of livestock or products on hand at the close of the year.'
"Evidently, petitioner determined its income or losses in the operation of said farm on the basis of
inventories. We quote from the memorandum of counsel for petitioner:
'The Taxpayer deducted from its income tax returns for the years from 1950 to 1954 inclusive, the
corresponding yearly losses sustained in the operation of Hacienda Dalupiri, which losses represent the
excess of its yearly expenditures over the receipts; that is, the losses represent the difference between
the sales of livestock and the actual cash disbursements or expenses.' (Pages 21-22, Memorandum for
Petitioner.)
"As the Hacienda Dalupiri was operated by petitioner for business and since it sustained losses in its
operation, which losses were determined by means of inventories authorized under Section 100 of
Revenue Regulations No. 2, it was error for respondent to have disallowed the deduction of said losses.
The same is true with respect to losses sustained in the operation of the Hacienda Samal for the years
1951 and 1952." 10

The Commissioner questions that the losses sustained by the taxpayer were properly based on the
inventory method of accounting. He concedes, however, "that the regulations referred to does not
specify how the inventories are to be made. The Tax Court, however, felt satisfied with the evidence
presented by the taxpayer . . . which merely consisted of an alleged physical count of the number of the
livestock in Hacienda Dalupiri for the years involved." 11 The Tax Court was satisfied with the method
adopted by the taxpayer as a farmer breeding livestock, reporting on the basis of receipts and
disbursements. We find no compelling reason to disturb its findings.
2.
Disallowance of excessive depreciation of buildings (1950- 1954). During the years 1950 to
1954, the taxpayer claimed a depreciation allowance for its buildings at the annual rate of 10%. The
Commissioner claimed that the reasonable depreciation rate is only 3% per annum, and, hence,
disallowed as excessive the amount claimed as depreciation allowance in excess of 3% annually. We
sustain the Tax Court's finding that the taxpayer did not submit adequate proof of the correctness of the
taxpayer's claim that the depreciable assets or buildings in question had a useful life only of 10 years so
as to justify its 10% depreciation per annum claim, such finding being supported by the record. The
taxpayer's contention that it has many zero or one-peso assets, 12 representing very old and fully
depreciated assets serves but to support the Commissioner's position that a 10% annual depreciation
rate was excessive.
3.
Taxable increase in net worth (1950-1951). The Tax Court set aside the Commissioner's
treatment as taxable income of certain increases in the taxpayer's net worth. It found that:
"For the year 1950, respondent determined that petitioner had an increase in net worth in the sum of
P30,050.00 and for the year 1951, the sum of P1,382.85. These amounts were treated by respondent as
taxable income of petitioner for said years.
"It appears that petitioner had an account with the Manila Insurance Company, the records bearing on
which were lost. When its records were reconstituted the amount of P349,800.00 was set up as its
liability to the Manila Insurance Company. It was discovered later that the correct liability was only
P319,750.00, or a difference of P30,050.00, so that the records were adjusted so as to show the correct
liability. The correction or adjustment was made in 1950. Respondent contends that the reduction of
petitioners liability to Manila Insurance Company resulted in the increase of petitioner's net worth to
the extent of P30,050.00 which is taxable. This is erroneous. The principle underlying the taxability of
an increase in the net worth of a taxpayer rests on the theory that such an increase in net worth, if
unreported and not explained by the taxpayer, comes from income derived from a taxable source. (See
Perez v. Araneta G.R. No. L-9193, May 29, 1957; Coll. vs. Reyes, G.R. Nos. L-11534 & L-11558, Nov.
25, 1958.) In this case, the increase in the net worth of petitioner for 1950 to the extent of P30,050.00
was not the result of the receipt by it of taxable income. It was merely the outcome of the correction of
an error in the entry in its books relating to its indebtedness to the Manila Insurance Company. The
Income Tax Law imposes a tax on income; it does not tax any or every increase in net worth whether or
not derived from income. Surely, the said sum of P30,050.00 was not income to petitioner; and it was
error for respondent to assess a deficiency income tax on said amount.
"The same holds true in the case of the alleged increase in net worth of petitioner for the year 1951 in
the sum of P1,382.85. It appears that certain items (all amounting to P1,382.85) remained in petitioner's
books as outstanding liabilities of trade creditors. These accounts were discovered in 1951 as having
been paid in prior years, so that the necessary adjustments were made to correct the errors. If there was
an increase in net worth of the petitioner, the increase in net worth was not the result of receipt by
petitioner of taxable income." 13
The Commissioner advances no valid grounds in his brief for contesting the Tax Court's findings.
Certainly, these increases in the taxpayer's net worth were not taxable increases in net worth, as they
were not the result of the receipt by it of unreported or unexplained taxable income, but were shown to
be merely the result of the correction of errors in its entries in its books relating to its indebtednesses to
certain creditors, which had been erroneously overstated or listed as outstanding when they had in fact

been duly paid. The Tax Court's action must be affirmed.

4.
Gain realized from sale of real property (1950). We likewise sustain as being in accordance
with the evidence the Tax Court's reversal of the Commissioner's assessment on an alleged unreported
gain in the sum of P11,147.26 in the sale of a certain real property of the taxpayer in 1950. As found by
the Tax Court, the evidence shows that this property was acquired in 1926 for P11,852.74, and was sold
in 1950 for P60,000.00, apparently, resulting in a gain of P48,147.26. 14 The taxpayer reported in its
return a gain of P37,000.00, or a discrepancy of P11,147.26. 15 It was sufficiently proved from the
taxpayer's books that after acquiring the property, the taxpayer had made improvements totalling
P11,147.26, 16 accounting for the apparent discrepancy in the reported gain. In other words. this figure
added to the original acquisition cost of P11,852.74 results in a total cost of P23,000.00, and the gain
derived from the sale of the property for P60,000.00 was correctly reported by the taxpayer at
P37,000.00.
On the second issue of prescription, the taxpayer's contention that the Commissioner's action to recover
its tax liability should be deemed to have prescribed for failure on the part of the Commissioner to file
a complaint for collection against it in an appropriate civil action, as contradistinguished from the
answer filed by the Commissioner to its petition for review of the questioned assessments in the case a
quo has long been rejected by this Court. This Court has consistently held that "a judicial action for the
collection of a tax is begun by the filing of a complaint with the proper court of first instance, or where
the assessment is appealed to the Court of Tax Appeals, by filing an answer to the taxpayer's petition
for review wherein payment of the tax is prayed for." 17 This is but logical for where the taxpayer
avails of the right to appeal the tax assessment to the Court of Tax Appeals, the said Court is vested
with the authority to pronounce judgment as to the taxpayer's liability to the exclusion of any other
court. In the present case, regardless of whether the assessments were made on February 24 and 27,
1956, as claimed by the Commissioner, or on December 27, 1955 as claimed by the taxpayer, the
government's right to collect the taxes due has clearly not prescribed, as the taxpayer's appeal or
petition for review was filed with the Tax Court on May 4, 1960, with the Commissioner filing on May
20, 1960 his Answer with a prayer for payment of the taxes due, long before the expiration of the fiveyear period to effect collection by judicial action counted from the date of assessment.
Cases L-24972 and L-24978
These cases refer to the taxpayer's income tax liability for the year 1957. Upon examination of its
corresponding income tax return, the Commissioner assessed it for deficiency income tax in the amount
of P38,918.76, computed as follows:
"Net income per return
P 29,178.70
Add: Unallowable deductions:
(1)
Net loss claimed on Ha. Dalupiri
89,547.33
(2)
Amortization of Contractual right
claimed as an expense under
Mines Operations
48,481.62

Net income per investigation P 167,297.65

Tax due thereon
38.818.00

Less: Amount already assessed

5,836.00
Balance
P32,982.00
Add: 1/2% monthly interest from 6-20-59 to
6-20-62
5,936.76

TOTAL AMOUNT DUE AND

COLLECTIBLE
P38,918.76" 18

The Tax Court overruled the Commissioner's disallowance of the taxpayer's losses in the operation of
its Hacienda Dalupiri in the sum of P89,547.33 but sustained the disallowance of the sum of
P48,481.62, which allegedly represented 1/5 of the cost of the "contractual right" over the mines of its
subsidiary, Palawan Manganese Mines, Inc. which the taxpayer had acquired. It found the taxpayer
liable for deficiency income tax for the year 1957 in the amount of P9,696.00, instead of P32,982.00 as
originally assessed, and rendered the following judgment:
"WHEREFORE, the assessment appealed from is hereby modified. Petitioner is hereby ordered to pay
to respondent the amount of P9,696.00 as deficiency income tax for the year 1957, plus the
corresponding interest provided in Section 51 of the Revenue Code. If the deficiency tax is not paid in
full within thirty (30) days from the date this decision becomes final and executory, petitioner shall pay
a surcharge of five per cent (5%) of the unpaid amount, plus interest at the rate of one per cent (1%) a
month, computed from the date this decision becomes final until paid, provided that the maximum
amount that may be collected as interest shall not exceed the amount corresponding to a period of three
(3) years. Without pronouncement as to costs." 19
Both parties again appealed from the respective adverse rulings against them in the Tax Court's
decision.
5.
Allowance of losses in Hacienda Dalupiri (1957). The Tax Court cited its previous decision
overruling the Commissioner's disallowance of losses suffered by the taxpayer in the operation of its
Hacienda Dalupiri, since it was convinced that the hacienda was operated for business and not for
pleasure. And in this appeal, the Commissioner cites his arguments in his appellant's brief in Case No.
L-21557. The Tax Court, in setting aside the Commissioner's principal objections, which were directed
to the accounting method used by the taxpayer found that:
"It is true that petitioner followed the cash basis method of reporting income and expenses in the
operation of the Hacienda Dalupiri and used the accrual method with respect to its mine operations.
This method of accounting, otherwise known as the hybrid method, followed by petitioner is not
without justification.
'. . . A taxpayer may not, ordinarily, combine the cash and accrual bases. The 1954 Code provisions
permit, however, the use of a hybrid method of accounting, combining a cash and accrual method,
under circumstances and requirements to be set out in Regulations to be issued. Also, if a taxpayer is
engaged in more than one trade or business he may use a different method of accounting for each trade
or business. And a taxpayer may report income from a business on accrual basis and his personal
income on the cash basis.' (See Mertens, Law of Federal Income Taxation, Zimet & Stanley Revision,
Vol. 2, Sec 12.08, p. 26.)" 20
The Tax Court, having satisfied itself with the adequacy of the taxpayer's accounting method and
procedure as properly reflecting the taxpayer's income or losses, and the Commissioner having failed to
show the contrary, we reiterate our ruling [supra, paragraph 1 (d) and (e)] that we find no compelling
reason to disturb its findings.
6.
Disallowance of amortization of alleged "contractual rights." The reasons for sustaining this
disallowance are thus given by the Tax Court:
"It appears that the Palawan Manganese Mines, Inc., during a special meeting of its Board of Directors
on January 19, 1956, approved a resolution, the pertinent portions of which read as follows:
'RESOLVED, as it is hereby resolved, that the corporation's current assets composed of ores, fuel, and
oil, materials and supplies, spare parts and canteen supplies appearing in the inventory and balance
sheet of the Corporation as of December 31, 1955, with an aggregate value of P97,636.93, contractual
rights for the operation of various mining claims in Palawan with a value of P100,000.00, its title on
various mining claims in Palawan with a value of P142,408.10 or a total value of P340,045.02 be, as
they are hereby ceded and transferred to Fernandez Hermanos, Inc., as partial settlement of the
indebtedness of the corporation to said Fernandez Hermanos, Inc., in the amount of P442,885.23.' (Exh.

E, p. 17, CTA rec.)

"On March 29, 1956, petitioner's corporation accepted the above offer of transfer, thus:
"WHEREAS, the Palawan Manganese Mines, Inc., due to its yearly substantial losses has decided to
cease operation on January 1, 1956 and in order to satisfy at least a part of its indebtedness to the
Corporation, it has proposed to transfer its current assets in the amount of NINETY SEVEN
THOUSAND SIX HUNDRED THIRTY SIX PESOS & 98/100 (P97,636.93) as per its balance sheet as
of December 31, 1955, its contractual rights valued at ONE HUNDRED THOUSAND PESOS
(P100,000.00) and its title over various mining claims valued at ONE HUNDRED FORTY TWO
THOUSAND FOUR HUNDRED EIGHT PESOS & 10/100 (P142,408.10) or a total valuation of
THREE HUNDRED FORTY THOUSAND FORTY FIVE PESOS & 08/100 (P340,045.08) which shall
be applied in partial settlement of its obligation to the Corporation in the amount of FOUR HUNDRED
FORTY TWO THOUSAND EIGHT HUNDRED EIGHTY FIVE PESOS & 23/100 (P442,885.23),'
(Exh. E-1, p. 18, CTA rec.)
"Petitioner determined the cost of the mines at P242,408.10 by adding the value of the contractual
rights (P100,000.00) and the value of its mining claims (P142,408.10). Respondent disallowed the
deduction on the following grounds: (1) that the Palawan Manganese Mines, Inc. could not transfer
P242,408.10 worth of assets to petitioner because the balance sheet of the said corporation for 1955
shows that it had only current assets worth P97,636.96; and (2) that the alleged amortization of
'contractual rights' is not allowed by the Revenue Code.
"The law in point is Section 30 (g) (1) (B) of the Revenue Code, before its amendment by Republic Act
No. 2698, which provided in part:
'(g)
Depletion of oil and gas wells and mines:
'(1)
In general. . . . (B) in the case of mines, a reasonable allowance for depletion thereof not to
exceed the market value in the mine of the product thereof, which has been mined and sold during the
year for which the return and computation are made. The allowances shall be made under rules and
regulations to be prescribed by the Secretary of Finance: Provided, That when the allowances shall
equal the capital invested, . . . no further allowance shall be made.'
"Assuming, arguendo, that the Palawan Manganese Mines, Inc. had assets worth P242,408.10 which it
actually transferred to the petitioner in 1956, the latter cannot just deduct one-fifth (1/5) of said amount
from its gross income for the year 1957 because such deduction in the form of depletion charge was not
sanctioned by Section 30(g) (1) (B) of the Revenue Code, as above-quoted.
xxx
xxx
xxx
"The sole basis of petitioner in claiming the amount of P48,481.62 as a deduction was the
memorandum of its mining engineer (Exh. 1, pp. 31-32, CTA rec.), who stated that the ore reserves of
the Busuanga Mines (Mines transferred by the Palawan Manganese Mines, Inc. to the petitioner) would
be exhausted in five (5) years, hence, the claim for P48,481.62 or one-fifth (1/5) of the alleged cost of
the mines corresponding to the year 1957 and every year thereafter for a period of 5 years. The said
memorandum merely showed the estimated ore reserves of the mines and its probable selling price. No
evidence whatsoever was presented to show the produced mine and for how much they were sold
during the year for which the return and computation were made. This is necessary in order to
determine the amount of depletion that can be legally deducted from petitioner's gross income. The
method employed by petitioner in making an outright deduction of 1/5 of the cost of the mines is not
authorized under Section 30(g) (1) (B) of the Revenue Code. Respondent's disallowance of the alleged
'contractual rights' amounting to P48,481.62 must therefore be sustained." 21
The taxpayer insists in this appeal that it could use as a method for depletion under the pertinent
provision of the Tax Code its "capital investment," representing the alleged value of its contractual
rights and titles to mining claims in the sum of P242,408.10 and thus deduct outright one-fifth (1/5) of
this "capital investment" every year, regardless of whether it had actually mined the product and sold
the products. The very authorities cited in its brief give the correct concept of depletion charges that

they "allow for the exhaustion of the capital value of the deposits by production"; thus, "as the cost of
the raw materials must be deducted from the gross income before the net income can be determined, so
the estimated cost of the reserve used up is allowed." 22 The alleged "capital investment" method
invoked by the taxpayer is not a method of depletion, but the Tax Code provision, prior to its
amendment by Section 1, of Republic Act No. 2698, which took effect on June 18, 1960, expressly
provided that "when the allowances shall equal the capital invested . . . no further allowances shall be
made;" in other words, the "capital investment" was but the limitation of the amount of depletion that
could be claimed. The outright deduction by the taxpayer of 1/5 of the cost of the mines, as if it were a
"straight line" rate of depreciation, was correctly held by the Tax Court not to be authorized by the
Code.
ACCORDINGLY, the judgment of the Court of Tax Appeals, subject of the appeals in Cases Nos. L21551 and L-21557, as modified by the crediting of the losses of P36,722.42 disallowed in 1951 and
1952 to the taxpayer for the year 1953 as directed in paragraph 1 (c) of this decision, is hereby
affirmed. The judgment of the Court of Tax Appeals appealed from in Cases Nos. L-24972 and L24978 is affirmed in toto. No costs. So ordered.
Concepcion, C . J ., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Fernando, Capistrano and Barredo,
JJ ., concur.
Footnotes
1.
Taxpayer's Brief as appellant, pp. 57-59.
2.
CTA decision in Case 787, Taxpayer's Brief as appellant, p. 62.
3.
CTA decision in Cafe 787, Taxpayer's Brief as appellant, pp. 63-66.
4.
Commissioner's Brief as appellee, p. 9.
5.
Idem., p. 18.
6.
Idem., p. 18.
7.
Taxpayer's Brief as appellant, p. 22.
8.
CTA Decision in Case 787, Taxpayer's Brief, p. 74.
9.
Idem, pp. 66-67.
10.
CTA decision in Case 787, Taxpayer's Brief as appellant, pp. 68-70.
11.
Commissioner's Brief as appellant, pp. 15-16.
12.
Taxpayer's Brief as appellant, p. 44.
13.
CTA decision in Case 787, Taxpayer's Brief as appellant, pp. 70-72.
14.
Not P48,127.26, as erroneously stated in the CTA decision.
15.
Not P11,852.74 as erroneously stated in the CTA decision.
16.
Idem. Apparently, the CTA inadvertently switched the figures.
17.
Alhambra Cigar & Cigarette Mfg. Co. vs. Collector, 105 Phil. 1337, cited in Palanca vs.
Commissioner, 4 SCRA 263, 266; Collector vs. Bohol Land Trans. Co., 107 Phil. 965, 972.
18.
CTA decision in CTA Case 1389, Annex C, Commissioner's Petition, p. 1.
19.
CTA decision in CTA Case 1389, Annex C, Commissioner's Petition, p. 6.
20.
CTA decision in CTA Case 1389, Annex C, Commissioner's Petition, p. 3.
21.
CTA Decision in CTA Case 1389. Annex C, Commissioner's Petition, pp. 4-5.
22.
Copied verbatim from documents obtained directly from the Supreme Court.

EN BANC
[G.R. No. 45425. April 29, 1939.]
JOSE GATCHALIAN, ET AL., plaintiffs-appellants, vs. THE COLLECTOR OF INTERNAL
REVENUE, defendant-appellee.
Guillermo B. Reyes for appellants.
Solicitor-General Tuason for appellee.
SYLLABUS
1.
PARTNERSHIP OF A CIVIL NATURE; COMMUNITY OF PROPERTY; SWEEPSTAKES;
INCOME TAX. According to the stipulated facts the plaintiffs organized a partnership of a civil
nature because each of them put up money to buy a sweepstakes ticket for the sole purpose of dividing
equally the prize which they may win, as they did in fact in the amount of P60,000 (article 166C, Civil
Code). The partnership was not only formed, but upon the organization thereon and the winning of the
prize, J. G. personally appeared in the office of the Philippine Charity Sweepstakes, in his capacity as
co-partner, as such collected the prize, the office issued the check for P60,000 in favor of J. G. and
company, and the said partner, in the same capacity, collected the check. All these circumstances repel
the idea that the plaintiffs organized and formed a community of property only.
2.
ID.; ID.; ID.; ID. Having organized and constituted a partnership of a civil nature, the said
entity is the one bound to pay the income tax which the defendant collected under the aforesaid section
10 (a) of Act No. 2833, as amended by section 2 of Act No. 3761. There is no merit in plaintiffs'
contention that the tax should be prorated among them and paid individually, resulting in their
exemption from the tax.
DECISION
IMPERIAL, J p:
The plaintiff brought this action to recover from the defendant Collector of Internal Revenue the sum of
P1,863.44, with legal interest thereon, which they paid under protest by way of income tax. They
appealed from the decision rendered in the case on October 23, 1936 by the Court of First Instance of
the City of Manila, which dismissed the action with the costs against them.
The case was submitted for decision upon the following stipulation of facts:
"Come now the parties to the above-mentioned case, through their respective undersigned attorneys,
and hereby agree to respectfully submit to this Honorable Court the case upon the following statement
of facts:
"1.
That plaintiffs are all residents of the municipality of Pulilan, Bulacan, and that defendant is the
Collector of Internal Revenue of the Philippines;
"2.
That prior to December 15, 1934 plaintiffs, in order to enable them to purchase one sweepstakes
ticket valued at two pesos (P2), subscribed and paid therefor the amounts as follows:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.

Jose Gatchalian
Gregoria Cristobal
Saturnina Silva
Guillermo Tapia
Jesus Legaspi .15
Jose Silva
.07
Tomasa Mercado
Julio Gatchalian
Emiliana Santiago
Maria C. Legaspi
Francisco Cabral
Gonzalo Javier
Maria Santiago

P0.18
.18
.08
.13
.08
.18
.18
.16
.13
.14
.17

14.
15.

Buenaventura Guzman
Mariano Santos
.14

Total
2.00

.13

"3.
That immediately thereafter but prior to December 16, 1934, plaintiffs purchased, in the
ordinary course of business, from one of the duly authorized agents of the National Charity
Sweepstakes Office one ticket bearing No. 178637 for the sum of two pesos (P2) and that the said
ticket was registered in the name of Jose Gatchalian and Company;
"4.
That as a result of the drawing of the sweepstakes on December 15, 1934, the above-mentioned
ticket bearing No. 178637 won one of the third prizes in the amount of P50,000 and that the
corresponding check covering the above-mentioned prize of P50,000 was drawn by the National
Charity Sweepstakes Office in favor of Jose Gatchalian & Company against the Philippine National
Bank, which check was cashed during the latter part of December, 1934 by Jose Gatchalian &
Company;
"5
That on December 29, 1934, Jose Gatchalian was required by income tax examiner Alfredo
David to file the corresponding income tax return covering the prize won by Jose Gatchalian &
Company and that on December 29, 1934, the said return was signed by Jose Gatchalian, a copy of
which return is enclosed as Exhibit A and made a part hereof;
"6.
That on January 8, 1935, the defendant made an assessment against Jose Gatchalian &
Company requesting the payment of the sum of P1,499.94 to the deputy provincial treasurer of Pulilan,
Bulacan, giving to said Jose Gatchalian & Company until January 20, 1935 within which to pay the
said amount of P1,499.94, a copy of which letter marked Exhibit B is inclosed and made a part hereof;
"7.
That on January 20, 1935, the plaintiffs, through their attorney, sent to defendant a reply, a copy
of which marked Exhibit C is attached and made a part hereof, requesting exemption from the payment
of the income tax to which reply there were enclosed fifteen (15) separate individual income tax returns
filed separately by each one of the plaintiffs, copies of which returns are attached and marked Exhibits
D-1 to D-15, respectively, in order of their names listed in the caption of this case and made parts
hereof; a statement of sale signed by Jose Gatchalian showing the amounts put up by each of the
plaintiffs to cover up the cost price of P2 of said ticket, copy of which statement is attached and marked
as Exhibit E and made a part hereof; and a copy of the affidavit signed by Jose Gatchalian dated
December 29, 1934 is attached and marked Exhibit F and made part hereof;
"8.
That the defendant in his letter dated January 28, 1935, a copy of which marked Exhibit G is
enclosed, denied plaintiffs' request of January 20, 1935, for exemption from the payment of tax and
reiterated his demand for the payment of the sum of P1,499.94 as income tax and gave plaintiffs until
February 10, 1935 within which to pay the said tax;
"9.
That in view of the failure of the plaintiffs to pay the amount of tax demanded by the defendant,
notwithstanding subsequent demand made by defendant upon the plaintiffs through their attorney on
March 23, 1935, a copy of which marked Exhibit H is enclosed, defendant on May 13, 1935 issued a
warrant of distraint and levy against the property of the plaintiffs, a copy of which warrant marked
Exhibit I is enclosed and made a part hereof;
"10. That to avoid embarrassment arising from the embargo of the property of the plaintiffs, the said
plaintiffs on June 15, 1935, through Gregoria Cristobal, Maria C. Legaspi and Jesus Legaspi, paid
under protest the sum of P601.51 as part of the tax and penalties to the municipal treasurer of Pulilan,
Bulacan, as evidenced by official receipt No. 7454879 which is attached and marked Exhibit J and
made a part hereof, and requested defendant that plaintiffs be allowed to pay under protest the balance
of the tax and penalties by monthly installments;
"11. That plaintiffs' request to pay the balance of the tax and penalties was granted by defendant
subject to the condition that plaintiffs file the usual bond secured by two solvent persons to guarantee

prompt payment of each installments as it becomes due;

"12. That on July 16, 1935, plaintiff filed a bond, a copy of which marked Exhibit K is inclosed and
made a part hereof, to guarantee the payment of the balance of the alleged tax liability by monthly
installments at the rate of P118.70 a month, the first payment under protest to be effected on or before
July 31, 1935;
"13.
That on July 16, 1935 the said plaintiffs formally protested against the payment of the sum of
P602.51, a copy of which protest is attached and marked Exhibit L but that defendant in his letter dated
August 1, 1936 overruled the protest and denied the request for refund of the plaintiffs;
"14. That, in view of the failure of the plaintiffs to pay the monthly installments in accordance with
the terms and conditions of the bond filed by them, the defendant in his letter dated July 23, 1935, copy
of which is attached and marked Exhibit M, ordered the municipal treasurer of Pulilan, Bulacan to
execute within five days the warrant of distraint and levy issued against the plaintiffs on March 13,
1935;
"15. That in order to avoid annoyance and embarrassment arising from the levy of their property, the
plaintiffs on August 28, 1936, through Jose Gatchalian, Guillermo Tapia, Maria Santiago and Emiliano
Santiago, paid under protest to the municipal treasurer of Pulilan, Bulacan. the sum of P1,260.93
representing the unpaid balance of the income tax and penalties demanded by defendant as evidenced
by income tax receipt No. 35811 which is attached and marked Exhibit N and made a part hereof; and
that on September 3, 1936, the plaintiffs formally protested to the defendant against the payment of
said amount and requested the refund thereof, copy of which is attached and marked Exhibit O and
made part hereof; but that on September 4, 1936, the defendant overruled the protest and denied the
refund thereof; copy of which is attached and marked Exhibit P and made a part hereof; and
"16. That plaintiffs demanded upon defendant the refund of the total sum of one thousand eight
hundred and sixty-three pesos and forty-four centavos (P1,863.44) paid under protest by them but that
defendant refused and still refuses to refund ,the said amount notwithstanding the plaintiffs' demands.
"17. The parties hereto reserve the right to present other and additional evidence if necessary."
Exhibit E referred to in the stipulation is of the following tenor:
"To whom it my concern:
"I, Jose Gatchalian, a resident of Pulilan, Bulacan, married, of age, hereby certify, that on the 11th day
of August, 1934, I sold parts of my share on ticket No. 178637 to the persons and for the amount
indicated below and the part of my share remaining is also shown to wit:
Purchaser
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.

Amount

Mariano Santos
P0.14
Buenaventura Guzman
Maria Santiago
.17
Gonzalo Javier
.14
Francisco Cabral
.13
Maria C. Legaspi
.16
Emiliana Santiago
.13
Julio Gatchalian
.13
Jose Silva
.07
Do.
Tomasa Mercado
.08
Jesus Legaspi .16
Do.
Guillermo Tapia
.18
Saturnina Silva
.08
Gregoria Cristobal .18
Jose Gatchalian
.18

Address
Pulilan, Bulacan.
.13
Do.
Do.
Do.
Do.
Do.
Do.
Do.
Do.
Do.
Do.
Do.
Do.


2.00 Total cost of said ticket; and that, therefore, the persons named above are entitled
to the parts of whatever prize that might be won by said ticket.
"Pulilan, Bulacan, P. I.
(Sgd.) "JOSE GATCHALIAN"
And a summary of Exhibits D-1 to D-15 inserted in the bill of exceptions as follows:
"RECAPITULATIONS OF 15 INDIVIDUAL INCOME TAX RETURNS FOR 1934 ALL DATED
JANUARY 19, 1935 SUBMITTED TO THE COLLECTOR OF INTERNAL REVENUE.
ExhibitPurchase
Name No. Price won
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.

Price
Expenses

Jose Gatchalian
D-1 P0.18
Gregoria Cristobal D-2 .18
Saturnina Silva
D-3 .08
Guillermo Tapia
D-4 .13
Jesus Legaspi by Maria
Cristobal
D-5 .15
3,825
Jose Silva
D-6 .08
1,875
Tomasa Mercado
D-7 .07
Julio Gatchalian by Bea
triz Guzman D-8 .13
3,150
Emiliana Santiago
D-9 .13
Maria C. Legaspi
D-10 .16
Francisco Cabral
D-11 .13
Gonzalo Javier
D-12 .14
Maria Santiago
D-13 .17
Buenaventura Guzman
D-14
Mariano Santos
D-15 .14

2.00 50,000"

Net
prize

P4,425 P480
4,575 2,000
1,875 360
3,325 360

3,945
2,575
1,515
2,965

720 3,105
360 1,615
1,875 360 1,515
240
3,325
4,100
3,325
3,325
4,350
.13
3,325

2,910
360
960
360
360
360
3,325
360

2,966
3,140
2965
2,965
3,990
360 2,965
2,965

The legal questions raised in plaintiffs-appellants' five assigned errors may properly be reduced to the
two following: (1) Whether the plaintiffs formed a partnership, or merely a community of property
without a personality of its own; in the first case it is admitted that the partnership thus formed is liable
for the payment of income tax, whereas if there was merely a community of property, they are exempt
from such payment; and (2) whether they should pay the tax collectively or whether the latter should be
prorated among them and paid individually.
The Collector of Internal Revenue collected the tax under section 10 of Act No. 2833, as last amended
by section 2 of Act No. 3761, reading as follows:
"SEC. 10.
(a) There shall be levied, assessed, collected, and paid annually upon the total net
income received in the preceding calendar year from all sources by every corporation, joint-stock
company, partnership, joint account (cuenta en participacion), association or insurance company,
organized in the Philippine Islands, no matter how created or organized, but not including duly
registered general co-partnerships (compaias colectivas), a tax of three per centum upon such income;
and a like tax shall be levied, assessed, collected, and paid annually upon the total net income received
in the preceding calendar year from all sources within the Philippine Islands by every corporation,
joint-stock company, partnership, joint account (cuenta en participacion), association, or insurance
company organized, authorized, or existing under the laws of any foreign country, including interest on

bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise: Provided,

however, That nothing in this section shall be construed as permitting the taxation of the income
derived from dividends or net profits on which the normal tax has been paid.
"The gain derived or loss sustained from the sale or other disposition by a corporation, joint-stock
company, partnership, joint account (cuenta en participacion), association, or insurance company, or
property, real, personal, or mixed, shall be ascertained in accordance with subsections (c) and (d) of
section two of Act Numbered Two thousand eight hundred and thirty-three, as amended by Act
Numbered Twenty-nine hundred and twenty-six.
"The foregoing tax rate shall apply to the net income received by every taxable corporation, joint-stock
company, partnership, joint account (cuenta en participacion), associations or insurance company in the
calendar year nineteen hundred and twenty and in each year thereafter."
There is no doubt that if the plaintiffs merely formed a community of property the latter is exempt from
the payment of income tax under the law. But according to the stipulated facts the plaintiffs organized a
partnership of a civil nature because each of them put up money to buy a sweepstakes ticket for the sole
purpose of dividing equally the prize which they may win, as they did in fact in the amount of P50,000
(article 1665, Civil Code). The partnership was not only formed, but upon the organization thereof and
the winning of the prize, Jose Gatchalian personally appeared in the office of the Philippine Charity
Sweepstakes, in his capacity as co-partner, as such collected the prize, the office issued the check for
P50,000 in favor of Jose Gatchalian and company, and the said partner. in the same capacity, collected
the said check. All these circumstances repel the idea that the plaintiffs organized and formed a
community of property only.
Having organized and constituted a partnership of a civil nature, the said entity is the one bound to pay
the income tax which the defendant collected under the aforesaid section 10 (a) of Act No. 2833, as
amended by section 2 of Act No. 3761. There is no merit in plaintiffs' contention that the tax should be
prorated among them and paid individually, resulting in their exemption from the tax.
In view of the foregoing, the appealed decision is affirmed, with the costs of this instance to the
plaintiff. appellants. So ordered.
Avancea, C.J., Villa-Real, Diaz, Laurel, Concepcion and Moran, JJ., concur.

SECOND DIVISION
[G.R. No. L-68118. October 29, 1985.]
JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P. OBILLOS,
brothers and sisters, petitioners, vs. COMMISSIONER OF INTERNAL REVENUE and COURT OF
TAX APPEALS, respondents.
Demosthenes B. Gadioma for petitioners.
DECISION
AQUINO, J p:
This case is about the income tax liability of four brothers and sisters who sold two parcels of land
which they had acquired from their father.
On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots with areas of
1,124 and 963 square meters located at Greenhills, San Juan, Rizal. The next day he transferred his
rights to his four children, the petitioners, to enable them to build their residences. The company sold
the two lots to petitioners for P178,708.12 on March 13 (Exh. A and B, p. 44, Rollo). Presumably, the
Torrens titles issued to them would show that they were co-owners of the two lots. LexLib
In 1974, or after having held the two lots for more than a year, the petitioners resold them to the Walled
City Securities Corporation and Olga Cruz Canda for the total sum of P313,050 (Exh. C and D). They
derived from the sale a total profit of P134,341.88 or P33,584 for each of them. They treated the profit
as a capital gain and paid an income tax on one-half thereof or on P16,792.
In April, 1980, or one day before the expiration of the five year prescriptive period, the Commissioner
of Internal Revenue required the four petitioners to pay corporate income tax on the total profit of
P134,336 in addition to individual income tax on their shares thereof. He assessed P37,018 as corporate
income tax, P18,509 as 50% fraud surcharge and P15,547.56 as 42% accumulated interest, or a total of
P71,074 56. LexLib
Not only that. He considered the share of the profits of each petitioner in the sum of P33,584 as a
"distributive dividend" taxable in full (not a mere capital gain of which 1/2 is taxable) and required
them to pay deficiency income taxes aggregating P56,707.20 including the 50% fraud surcharge and
the accumulated interest.
Thus, the petitioners are being held liable for deficiency income taxes and penalties totalling
P127,781.76 on their profit of P134, 336, in addition to the tax on capital gains already paid by them.
The Commissioner acted on the theory that the four petitioners had formed an unregistered partnership
or joint venture within the meaning of sections 24(a) and 84(b) of the Tax Code (Collector of Internal
Revenue vs. Batangas Trans. Co., 102 Phil. 822).
The petitioners contested the assessments. Two Judges of the Tax Court sustained the same. Judge
Roaquin dissented. Hence, the instant appeal.
We hold that it is error to consider the petitioners as having formed a partnership under article 1767 of
the Civil Code simply because they allegedly contributed P178,708.12 to buy the two lots, resold the
same and divided the profit among themselves.
To regard the petitioners as having formed a taxable unregistered partnership would result in oppressive
taxation and confirm the dictum that the power to tax involves the power to destroy. That eventuality
should be obviated.
As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple. To
consider them as partners would obliterate the distinction between a co-ownership and a partnership.
The petitioners were not engaged in any joint venture by reason of that isolated transaction.
Their original purpose was to divide the lots for residential purposes. If later on they found it not
feasible to build their residences on the lots because of the high cost of construction, then they had no
choice but to resell the same to dissolve the co-ownership. The division of the profit was merely
incidental to the dissolution of the co-ownership which was in the nature of things a temporary state. It
had to be terminated sooner or later. Castan Tobeas says:

"Como establecer el deslinde entre la comunidad ordinaria o copropiedad y la sociedad?

"El criterio diferencial segun la doctrina m s generalizada est : por razon del origen, en que la
sociedad presupone necesariamente la convencion, mientras que la comunidad puede existir y existe
ordinariamente sin ella; y por razon del fin u objecto, en que el objeto de la sociedad es obtener lucro,
mientras que el de la indivision es solo mantener en su integridad la cosa comun y favorecer su
conservacion.
"Reflejo de este criterio es la sentencia de 15 de octubre de 1940, en la que se dice que si en nuestro
Derecho positivo se ofrecen a veces dificultades al tratar de fijar la linea divisoria entre comunidad de
bienes y contrato de sociedad, la moderna orientacion de la doctrina cientifica seala como nota
fundamental de diferenciacion, aparte del origen o fuente de que surgen, no siempre uniforme, la
finalidad perseguida por los interesados: lucro comun partible en la sociedad, y mera conservacion y
aprovechamiento en la comunidad." (Derecho Civil Espaol, Vol. 2, Part 1, 10 Ed., 1971, 328-329).
Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself establish
a partnership, whether or not the persons sharing them have a joint or common right or interest in any
property from which the returns are derived". There must be an unmistakable intention to form a
partnership or joint venture. **
Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67 Phil. 666 where 15 persons
contributed small amounts to purchase a two-peso sweepstakes ticket with the agreement that they
would divide the prize. The ticket won the third prize of P50,000. The 15 persons were held liable for
income tax as an unregistered partnership. Cdpr
The instant case is distinguishable from the cases where the parties engaged in joint ventures for profit.
Thus, in Ona vs. Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after
an extrajudicial settlement the co-heirs used the inheritance or the incomes derived therefrom as a
common fund to produce profits for themselves, it was held that they were taxable as an unregistered
partnership.
It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198 where father
and son purchased a lot and building, entrusted the administration of the building to an administrator
and divided equally the net income, and from Evangelista vs. Collector of Internal Revenue, 102 Phil.
140 where the three Evangelista sisters bought four pieces of real property which they leased to various
tenants and derived rentals therefrom. Clearly, the petitioners in these two cases had formed an
unregistered partnership.
In the instant case, what the Commissioner should have investigated was whether the father donated the
two lots to the petitioners and whether he paid the donor's tax (See art. 1448, Civil Code). We are not
prejudging this matter. It might have already prescribed.
WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are cancelled.
No costs.
SO ORDERED.
Abad Santos, Escolin, Cuevas and Alampay, JJ ., concur.
Concepcion, Jr ., is on leave.
Footnotes
** This view is supported by the following rulings of respondent Commissioner:
"Co-ownership distinguished from partnership. We find that the case at bar is
fundamentally similar to the De Leon case. Thus, like the De Leon heirs, the Longa heirs inherited the
'hacienda' in question pro-indiviso from their deceased parents; they did not contribute or invest
additional capital to increase or expand the inherited properties; they merely continued dedicating the
property to the use to which it had been put by their forebears; they individually reported in their tax
returns their corresponding shares in the income and expenses of the 'hacienda', and they continued for
many years the status of co-ownership in order, as conceded by respondent, 'to preserve its (the
'hacienda') value and to continue the existing contractual relations with the Central Azucarera de Bais

for milling purposes.'" (Longa vs. Araas, CTA Case No. 653, July 31, 1963).
"All co-ownerships are not deemed unregistered partnership. Co-heirs who own
properties which produce income should not automatically be considered partners of an unregistered
partnership, or a corporation, within the purview of the income tax law. To hold otherwise, would be to
subject the income of all co-ownerships of inherited properties to the tax on corporations, inasmuch as
if a property does not produce an income at all, it is not subject to any kind of income tax, whether the
income tax on individuals or the income tax on corporation." (De Leon vs. CIR, CTA Case No. 738,
September 11, 1961, cited in Araas, 1977 Tax Code Annotated, Vol. 1, 1979 Ed., pp. 77-78).

FIRST DIVISION
[G.R. No. 78133. October 18, 1988.]
MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners, vs. THE COMMISSIONER OF
INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
De la Cuesta, De las Alas and Callanta Law Offices for petitioners.
The Solicitor General for respondents.
SYLLABUS
1.
CIVIL LAW; PARTNERSHIP; HOW ESTABLISHED. The sharing of returns does not in
itself establish a partnership whether or not the persons sharing therein have a joint or common right or
interest in the property. There must be a clear intent to form a partnership, the existence of a juridical
personality different from the individual partners, and the freedom of each party to transfer or assign
the whole property.
2.
COMMERCIAL LAW; CORPORATE INCOME TAX; PARTIES IN CASE AT BAR NOT
LIABLE FOR THE PAYMENT THEREOF. In the present case, there is clear evidence of coownership between the petitioners. There is no adequate basis to support the proposition that they
thereby formed an unregistered partnership. The two isolated transactions whereby they purchased
properties and sold the same a few years thereafter did not thereby make them partners. They shared in
the gross profits as co-owners and paid their capital gains taxes on their net profits and availed of the
tax amnesty thereby. Under the circumstances, they cannot be considered to have formed an
unregistered partnership which is thereby liable for corporate income tax, as the respondent
commissioner proposes. As petitioners have availed of the benefits of tax amnesty as individual
taxpayers in these transactions, they are thereby relieved of any further tax liability arising therefrom.
DECISION
GANCAYCO, J p:
The distinction between co-ownership and an unregistered partnership or joint venture for income tax
purposes is the issue in this petition. prLL
On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et al. and on
May 28, 1966, they bought another three (3) parcels of land from Juan Roque. The first two parcels of
land were sold by petitioners in 1968 to Marenir Development Corporation, while the three parcels of
land were sold by petitioners to Erlinda Reyes and Maria Samson on March 19, 1970. Petitioners
realized a net profit in the sale made in 1968 in the amount of P165,224.70, while they realized a net
profit of P60,000.00 in the sale made in 1970. The corresponding capital gains taxes were paid by
petitioners in 1973 and 1974 by availing of the tax amnesties granted in the said years. LLphil
However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana, petitioners
were assessed and required to pay a total amount of P107,101.70 as alleged deficiency corporate
income taxes for the years 1968 and 1970.
Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had availed of
tax amnesties way back in 1974.
In a reply of August 22, 1979, respondent Commissioner informed petitioners that in the years 1968
and 1970, petitioners as co-owners in the real estate transactions formed an unregistered partnership or
joint venture taxable as a corporation under Section 20(b) and its income was subject to the taxes
prescribed under Section 24, both of the National Internal Revenue Code; 1 that the unregistered
partnership was subject to corporate income tax as distinguished from profits derived from the
partnership by them which is subject to individual income tax; and that the availment of tax amnesty
under P.D. No. 23, as amended, by petitioners relieved petitioners of their individual income tax
liabilities but did not relieve them from the tax liability of the unregistered partnership. Hence, the
petitioners were required to pay the deficiency income tax assessed. Cdpr
Petitioners filed a petition for review with the respondent Court of Tax Appeals docketed as CTA Case
No. 3045. In due course, the respondent court by a majority decision of March 30, 1987, 2 affirmed the

decision and action taken by respondent commissioner with costs against petitioners.
It ruled that on the basis of the principle enunciated in Evangelista, 3 an unregistered partnership was in
fact formed by petitioners which like a corporation was subject to corporate income tax distinct from
that imposed on the partners.
In a separate dissenting opinion, Associate Judge Constante Roaquin stated that considering the
circumstances of this case, although there might in fact be a co-ownership between the petitioners,
there was no adequate basis for the conclusion that they thereby formed an unregistered partnership
which made them liable for corporate income tax under the Tax Code.
Hence, this petition wherein petitioners invoke as basis thereof the following alleged errors of the
respondent court:
"A.
IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE
RESPONDENT COMMISSIONER, TO THE EFFECT THAT PETITIONERS FORMED AN
UNREGISTERED PARTNERSHIP SUBJECT TO CORPORATE INCOME TAX, AND THAT THE
BURDEN OF OFFERING EVIDENCE IN OPPOSITION THERETO RESTS UPON THE
PETITIONERS.
B.
IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE
TRANSACTIONS, THAT AN UNREGISTERED PARTNERSHIP EXISTED, THUS IGNORING
THE REQUIREMENTS LAID DOWN BY LAW THAT WOULD WARRANT THE
PRESUMPTION/CONCLUSION THAT A PARTNERSHIP EXISTS.
C.
IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA CASE
AND THEREFORE SHOULD BE DECIDED ALONGSIDE THE EVANGELISTA CASE.
D.
IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS FROM
PAYMENT OF OTHER TAXES FOR THE PERIOD COVERED BY SUCH AMNESTY." (pp. 12-13,
Rollo.)
The petition is meritorious.
The basis of the subject decision of the respondent court is the ruling of this Court in Evangelista. 4
In the said case, petitioners borrowed a sum of money from their father which together with their own
personal funds they used in buying several real properties. They appointed their brother to manage their
properties with full power to lease, collect, rent, issue receipts, etc. They had the real properties rented
or leased to various tenants for several years and they gained net profits from the rental income. Thus,
the Collector of Internal Revenue demanded the payment of income tax on a corporation, among
others, from them.
In resolving the issue, this Court held as follows:
"The issue in this case is whether petitioners are subject to the tax on corporations provided for in
section 24 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue Code, as
well as to the residence tax for corporations and the real estate dealers' fixed tax. With respect to the tax
on corporations, the issue hinges on the meaning of the terms 'corporation' and 'partnership' as used in
sections 24 and 84 of said Code, the pertinent parts of which read:
'Sec. 24.
Rate of the tax on corporations. There shall be levied, assessed, collected, and paid
annually upon the total net income received in the preceding taxable year from all sources by every
corporation organized in, or existing under the laws of the Philippines, no matter how created or
organized but not including duly registered general co-partnerships (companias colectivas), a tax upon
such income equal to the sum of the following: . . .'
'Sec. 84(b). The term 'corporation' includes partnerships, no matter how created or organized, joint
stock companies, joint accounts (cuentas en participation), associations or insurance companies, but
does not include duly registered general co-partnerships (companias colectivas).'
"Article 1767 of the Civil Code of the Philippines provides:
'By the contract of partnership two or more persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the profits among themselves.'

"Pursuant to this article, the essential elements of a partnership are two, namely: (a) an agreement to
contribute money, property or industry to a common fund; and (b) intent to divide the profits among the
contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly,
petitioners have agreed to, and did, contribute money and property to a common fund. Hence, the issue
narrows down to their intent in acting as they did. Upon consideration of all the facts and circumstances
surrounding the case, we are fully satisfied that their purpose was to engage in real estate transactions
for monetary gain and then divide the same among themselves, because:
1.
Said common fund was not something they found already in existence. It was not a property
inherited by them pro indiviso. They created it purposely. What is more they jointly borrowed a
substantial portion thereof in order to establish said common fund.
2.
They invested the same, not merely in one transaction, but in a series of transactions. On
February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots for
P18,000.00. This was soon followed, on April 23, 1944, by the acquisition of another real estate for
P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for P237,234.14. The number of
lots (24) acquired and transactions undertaken, as well as the brief interregnum between each,
particularly the last three purchases, is strongly indicative of a pattern or common design that was not
limited to the conservation and preservation of the aforementioned common fund or even of the
property acquired by petitioners in February, 1943. In other words, one cannot but perceive a character
of habituality peculiar to business transactions engaged in for purposes of gain.
3.
The aforesaid lots were not devoted to residential purposes, or to other personal uses, of
petitioners herein. The properties were leased separately to several persons, who, from 1945 to 1948
inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still being so let,
for petitioners do not even suggest that there has been any change in the utilization thereof.
4.
Since August, 1945, the properties have been under the management of one person, namely,
Simeon Evangelista, with full power to lease, to collect rents, to issue receipts, to bring suits, to sign
letters and contracts, and to indorse and deposit notes and checks. Thus, the affairs relative to said
properties have been handled as if the same belonged to a corporation or business enterprise operated
for profit.
5.
The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen
(15) years since the first property was acquired, and over twelve (12) years, since Simeon Evangelista
became the manager.
6.
Petitioners have not testified or introduced any evidence, either on their purpose in creating the
set up already adverted to, or on the causes for its continued existence. They did not even try to offer an
explanation therefor.
Although, taken singly, they might not suffice to establish the intent necessary to constitute a
partnership, the collective effect of these circumstance is such as to leave no room for doubt on the
existence of said intent in petitioners herein. Only one or two of the aforementioned circumstances
were present in the cases cited by petitioners herein, and, hence, those cases are not in point." 5
In the present case, there is no evidence that petitioners entered into an agreement to contribute money,
property or industry to a common fund, and that they intended to divide the profits among themselves.
Respondent commissioner and/or his representative just assumed these conditions to be present on the
basis of the fact that petitioners purchased certain parcels of land and became co-owners thereof.
In Evangelista, there was a series of transactions where petitioners purchased twenty-four (24) lots
showing that the purpose was not limited to the conservation or preservation of the common fund or
even the properties acquired by them. The character of habituality peculiar to business transactions
engaged in for the purpose of gain was present.
In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same nor
make any improvements thereon. In 1966, they bought another three (3) parcels of land from one seller.
It was only 1968 when they sold the two (2) parcels of land after which they did not make any

additional or new purchase. The remaining three (3) parcels were sold by them in 1970. The
transactions were isolated. The character of habituality peculiar to business transactions for the purpose
of gain was not present.
In Evangelista, the properties were leased out to tenants for several years. The business was under the
management of one of the partners. Such condition existed for over fifteen (15) years. None of the
circumstances are present in the case at bar. The co-ownership started only in 1965 and ended in 1970.
Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:
"I wish however to make the following observation: Article 1769 of the new Civil Code lays down the
rule for determining when a transaction should be deemed a partnership or a co-ownership. Said article
paragraphs 2 and 3, provides;
'(2)
Co-ownership or co-possession does not itself establish a partnership, whether such co-owners
or co-possessors do or do not share any profits made by the use of the property;
'(3)
The sharing of gross returns does not of itself establish a partnership, whether or not the persons
sharing them have a joint or common right or interest in any property from which the returns are
derived;'
"From the above it appears that the fact that those who agree to form a co-ownership share or do not
share any profits made by the use of the property held in common does not convert their venture into a
partnership. Or the sharing of the gross returns does not of itself establish a partnership whether or not
the persons sharing therein have a joint or common right or interest in the property. This only means
that, aside from the circumstance of profit, the presence of other elements constituting partnership is
necessary, such as the clear intent to form a partnership, the existence of a juridical personality different
from that of the individual partners, and the freedom to transfer or assign any interest in the property by
one with the consent of the others (Padilla, Civil Code of the Philippines Annotated, Vol. I, 1953 ed.,
pp. 635-636)
"It is evident that an isolated transaction whereby two or more persons contribute funds to buy certain
real estate for profit in the absence of other circumstances showing a contrary intention cannot be
considered a partnership.
'Persons who contribute property or funds for a common enterprise and agree to share the gross returns
of that enterprise in proportion to their contribution, but who severally retain the title to their respective
contribution, are not thereby rendered partners. They have no common stock or capital, and no
community of interest as principal proprietors in the business itself which the proceeds derived.
(Elements of the Law of Partnership by Floyd D. Mechem, 2nd Ed., section 83, p. 74.)
'A joint purchase of land, by two, does not constitute a co-partnership in respect thereto; nor does an
agreement to share the profits and losses on the sale of land create a partnership; the parties are only
tenants in common.' (Clark vs. Sideway, 142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)
'Where plaintiff, his brother, and another agreed to become owners of a single tract of realty, holding as
tenants in common, and to divide the profits of disposing of it, the brother and the other not being
entitled to share in plaintiff's commission, no partnership existed as between the three parties, whatever
their relation may have been as to third parties.' (Magee vs. Magee, 123 N.E. 673, 233 Mass. 341.)
'In order to constitute a partnership inter sese there must be: (a) An intent to form the same; (b)
generally participating in both profits and losses; (c) and such a community of interest, as far as third
persons are concerned as enables each party to make contract, manage the business and dispose of the
whole property.' Municipal Paving Co. vs. Herring, 150 P. 1067, 50 III 470.)
'The common ownership of property does not itself create a partnership between the owners, though
they may use it for the purpose of making gains; and they may, without becoming partners, agree
among themselves as to the management, and use of such property and the application of the proceeds
therefrom.' (Spurlock vs. Wilson, 142 S.W. 363, 160 No. App. 14.)" 6
The sharing of returns does not in itself establish a partnership whether or not the persons sharing
therein have a joint or common right or interest in the property. There must be a clear intent to form a

partnership, the existence of a juridical personality different from the individual partners, and the
freedom of each party to transfer or assign the whole property.
In the present case, there is clear evidence of co-ownership between the petitioners. There is no
adequate basis to support the proposition that they thereby formed an unregistered partnership. The two
isolated transactions whereby they purchased properties and sold the same a few years thereafter did
not thereby make them partners. They shared in the gross profits as co-owners and paid their capital
gains taxes on their net profits and availed of the tax amnesty thereby. Under the circumstances, they
cannot be considered to have formed an unregistered partnership which is thereby liable for corporate
income tax, as the respondent commissioner proposes.
And even assuming for the sake of argument that such unregistered partnership appears to have been
formed, since there is no such existing unregistered partnership with a distinct personality nor with
assets that can be held liable for said deficiency corporate income tax, then petitioners can be held
individually liable as partners for this unpaid obligation of the partnership. 7 However, as petitioners
have availed of the benefits of tax amnesty as individual taxpayers in these transactions, they are
thereby relieved of any further tax liability arising therefrom.
WHEREFORE, the petition is hereby GRANTED and the decision of the respondent Court of Tax
Appeals of March 30, 1987 is hereby REVERSED and SET ASIDE and another decision is hereby
rendered relieving petitioners of the corporate income tax liability in this case, without pronouncement
as to costs.
SO ORDERED.
Cruz, Grio-Aquino and Medialdea, JJ., concur.
Narvasa, J., took no part.
Footnotes
1.
Annex "C" of the Petition, citing Evangelista v. Collector, G.R. No. 9996, Oct. 15, 1957, 102
Phil. 140.
2.
Penned by Presiding Judge Amante Filler, concurred in by Associate Judge Alex Z. Reyes,
Associate Judge Roaquin dissented in a separate opinion.
3.
Supra.
4.
Supra.
5.
Supra, pp. 144-146; emphasis supplied.
6.
Supra, pp. 150-151; emphasis supplied.
7.
Article 1816. All partners, including industrial ones, shall be liable pro rata with all their
property and after all the partnership assets have been exhausted, for the contracts which may be
entered into in the name and for the account of the partnership, under its signature and by a person
authorized to act for the partnership. However, any partner may enter into a separate obligation to
perform a partnership contract. (Civil Code of the Philippines).
See also Articles 1817 and 1818, Supra.

FIRST DIVISION
[G.R. No. L-9996. October 15, 1957.]
EUFEMIA EVANGELISTA, MANUELA EVANGELISTA and FRANCISCA EVANGELISTA,
petitioners, vs. THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX
APPEALS, respondents.
Santiago F. Alidio and Angel S. Dakila, Jr. for petitioner.
Solicitor General Ambrosio Padilla, Assistant Solicitor General Esmeraldo Umali and Solicitor
Felicisimo R. Rosete for the respondents.
SYLLABUS
1.
TAXATION; TAX ON CORPORATIONS INCLUDES ORGANIZATION WHICH ARE NOT
NECESSARY PARTNERSHIP. "Corporations" strictly speaking are distinct and different from
"partnership". When our Internal Revenue Code includes "partnership" among the entities subject to the
tax on "corporations", it must be allude to organization which are not necessarily "partnership" in the
technical sense of the term.
2.
ID.; DULY REGISTERED GENERAL PARTNERSHIP ARE EXEMPTED FROM THE TAX
UPON CORPORATIONS. Section 24 of the Internal Revenue Code exempts from the tax imposed
upon corporations "duly registered general partnership", which constitute precisely one of the most
typical form of partnership in this jurisdiction.
3.
ID.; CORPORATION INCLUDES PARTNERSHIP NO MATTER HOW ORGANIZED. As
defined in section 84 (b) of the Internal Revenue Code "the term corporation includes partnership, no
matter how created or organized." This qualifying expression clearly indicates that a joint venture need
not be undertaken in any of the standards form, or conformity with the usual requirements of the law on
partnerships, in order that one could be deemed constituted for the purposes of the tax on corporations.
4.
ID.; CORPORATIONS INCLUDES "JOINT ACCOUNT" AND ASSOCIATIONS WITHOUT
LEGAL PERSONALITY. Pursuant to Section 84 (b) of the Internal Revenue Code, the term
"corporations" includes, among the others, "joint accounts (cuenta en participacion)" and
"associations", none of which has a legal personality of its own independent of that of its members. For
purposes of the tax on corporations, our National Internal Revenue Code includes these partnership.
with the exception only of duly registered general partnership. within the purview of the term
"corporations." Held: That the petitioners in the case at bar, who are engaged in real estate transactions
for monetary gain and divide the same among themselves, constitute a partnership, so far as the said
Code is concerned, and are subject to the income tax for the corporation.
5.
ID.; CORPORATION; PARTNERSHIP WITHOUT LEGAL PERSONALITY SUBJECT TO
RESIDENCE TAX ON CORPORATION. The pertinent part of the provision of Section 2 of
Commonwealth Act No. 465 which says: "The term corporation as used in this Act includes joint-stock
company, partnership, joint account (cuentas en participacion), association or insurance company, no
matter how created or organized." is analogous to that of Section 24 and 84 (b) of our Internal Revenue
Code which was approved the day immediately after the approval of said Commonwealth Act No. 565.
Apparently, the terms "corporation" and "Partnership" are used both statutes with substantially the
same meaning, Held: That the petitioners are subject to the residence tax corporations.
DECISION
CONCEPCION, J p:
This is a petition, filed by Eufemia Evangelista, Manuela Evangelista and Francisca Evangelista, for
review of a decision of the Court of Tax Appeals, the dispositive part of which reads:
"FOR ALL THE FOREGOING, we hold that the petitioners are liable for the income tax, real estate
dealer's tax and the residence tax for the years 1945 to 1949, inclusive, in accordance with the
respondent's assessment for the same in the total amount of P6,878.34, which is hereby affirmed and
the petition for review filed by petitioners is hereby dismissed with costs against petitioners."
It appears from the stipulation submitted by the parties:

"1.
That the petitioners borrowed from their father the sum of P59,140.00 which amount together
with their personal monies was used by them for the purpose of buying real properties;
"2.
That on February 2, 1943 they bought from Mrs. Josefina Florentino a lot with an area of
3,713.40 sq. m. including improvements thereon for the sum of P100,000.00; this property has an
assessed value of P57,517.00 as of 1948;
"3.
That on April 3, 1944 they purchased from Mrs. Josefa Oppus 21 parcels of land with an
aggregate area of 3,718.40 sq. m. including improvements thereon for P18,000.00; this property has an
assessed value of P8,255.00 as of 1948;
"4.
That on April 23, 1944 they purchased from the Insular Investments, Inc., a lot of 4,358 sq. m.
including improvements thereon for P108,825.00. This property has an assessed value of P4,983.00 as
of 1943;
"5.
That on April 28, 1944 they bought from Mrs. Valentin Afable a lot of 8,371 sq. m. including
improvements thereon for P237,234.14. This property has an assessed value of P59,140.00 as of 1948;
"6.
That in a document dated August 16, 1945, they appointed their brother Simeon Evangelista to
'manage their properties with full power to lease; to collect and receive rents; to issue receipts therefor;
in default of such payment, to bring suits against the defaulting tenant; to sign all letters, contracts, etc.,
for and in their behalf, and to endorse and deposit all notes and checks for them;
"7.
That after having bought the above-mentioned real properties, the petitioners had the same
rented or leased to various tenants;
"8.
That from the month of March, 1945 up to and including December, 1945, the total amount
collected as rents on their real properties was P9,599.00 while the expenses amounted to P3,650.00
thereby leaving them a net rental income of P5,948.33;
"9.
That in 1946, they realized a gross rental income in the sum of P24,786.30, out of which
amount was deducted the sum of P16,288.27 for expenses thereby leaving them a net rental income of
P7,498.13;
"10. That in 1948 they realized a gross rental income of P17,453.00 out of the which amount was
deducted the sum of P4,837.65 as expenses, thereby leaving them a net rental income of P12,615.35."
It further appears that on September 24, 1954, respondent Collector of Internal Revenue demanded the
payment of income tax on corporations, real estate dealer's fixed tax and corporation residence tax for
the years 1945-1949, computed, according to the assessments made by said officer, as follows:
INCOME TAXES
1945...........................................................P614.84
1946...........................................................1,144.71
1947..............................................................910.34
1948...........................................................1,912.30
1949...........................................................1,575.90
_______________
Total including surcharge and compromise P6,157.09
REAL ESTATE DEALER'S FIXED TAX
1946.................................................................P37.50
1947.................................................................150.00
1948.................................................................150.00
1949.................................................................150.00
____________
Total including penalty
P527.50
RESIDENCE TAXES OF CORPORATION
1945................................................................P38.75
1946..................................................................38.75
1947..................................................................38.75

1948..................................................................38.75
1949..................................................................38.75
______________
Total including surcharge
P193.75
TOTAL TAXES DUEP6,878.34
Said letter of demand and the corresponding assessments were delivered to petitioners on December 3,
1954, whereupon they instituted the present case in the Court of Tax Appeals, with a prayer that "the
decision of the respondent contained in his letter of demand dated September 24, 1954" be reversed,
and that they be absolved from the payment of the taxes in question, with costs against the respondent.
After appropriate proceedings, the Court of Tax Appeals rendered the above-mentioned decision for the
respondent, and, a petition for reconsideration and new trial having been subsequently denied, the case
is now before Us for review at the instance of the petitioners.
The issue in this case is whether petitioners are subject to the tax on corporations provided for in
section 24 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue Code, as
well as to the residence tax for corporations and the real estate dealers' fixed tax. With respect to the tax
on corporations, the issue hinges on the meaning of the terms "corporation" and "partnership", as used
in sections 24 and 84 of said Code, the pertinent parts of which read:
"SEC. 24.
Rate of tax on corporations. There shall be levied, assessed, collected, and paid
annually upon the total net income received in the preceding taxable year from all sources by every
corporation organized in, or existing under the laws of the Philippines, no matter how created or
organized but not including duly registered general co-partnerships (compaias colectivas), a tax upon
such income equal to the sum of the following: . . . ."
"Sec. 84(b). The term 'corporation' includes partnerships, no matter how created or organized, jointstock companies, joint accounts (cuentas en participacion), associations or insurance companies, but
does not include duly registered general copartnerships (compaias colectivas)."
Article 1767 of the Civil Code of the Philippines provides:
"By the contract of partnership two or more persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the profits among themselves."
Pursuant to this article, the essential elements of a partnership are two, namely: (a) an agreement to
contribute money, property or industry to a common fund; and (b) intent to divide the profits among the
contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly,
petitioners have agreed to, and did, contribute money and property to a common fund. Hence, the issue
narrows down to their intent in acting as they did. Upon consideration of all the facts and circumstances
surrounding the case, we are fully satisfied that their purpose was to engage in real estate transactions
for monetary gain and then divide the same among themselves, because:
1.
Said common fund was not something they found already in existence. It was not a property
inherited by them pro indiviso. They created it purposely. What is more they jointly borrowed a
substantial portion thereof in order to establish said common fund.
2.
They invested the same, not merely in one transaction, but in a series of transactions. On
February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots for
P18,000.000. This was soon followed, on April 23, 1944, by the acquisition of another real estate for
P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for P237,234.14. The number of
lots (24) acquired and transactions undertaken, as well as the brief interregnum between each,
particularly the last three purchases, is strongly indicative of a pattern or common design that was not
limited to the conservation and preservation of the aforementioned common fund or even of the
property acquired by petitioners in February, 1943. In other words, one cannot but perceive a character
of habituality peculiar to business transactions engaged in for purposes of gain.
3.
The aforesaid lots were not devoted to residential purposes, or to other personal uses, of
petitioners herein. The properties were leased separately to several persons, who, from 1945 to 1948

inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still being so let,
for petitioners do not even suggest that there has been any change in the utilization thereof.
4.
Since August, 1945, the properties have been under the management of one person, namely,
Simeon Evangelista, with full power to lease, to collect rents, to issue receipts, to bring suits, to sign
letters and contracts, and to indorse and deposit notes and checks. Thus, the affairs relative to said
properties have been handled as if the same belonged to a corporation or business enterprise operated
for profit.
5.
The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen
(15) years, since the first property was acquired, and over twelve (12) years, since Simeon Evangelista
became the manager.
6.
Petitioners have not testified or introduced any evidence, either on their purpose in creating the
set up already adverted to, or on the causes for its continued existence. They did not even try to offer an
explanation therefor.
Although, taken singly, they might not suffice to establish the intent necessary to constitute a
partnership, the collective effect of these circumstances is such as to leave no room for doubt on the
existence of said intent in petitioners herein. Only one or two of the aforementioned circumstances
were present in the cases cited by petitioners herein, and, hence, those cases are not in point.
Petitioners insist, however, that they are mere co-owners, not copartners, for, in consequence of the acts
performed by them, a legal entity, with a personality independent of that of its members, did not come
into existence, and some of the characteristics of partnerships are lacking in the case at bar. This
pretense was correctly rejected by the Court of Tax Appeals.
To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking, are
distinct and different from "partnerships". When our Internal Revenue Code includes "partnerships"
among the entities subject to the tax on "corporations", said Code must allude, therefore, to
organizations which are not necessarily "partnerships", in the technical sense of the term. Thus, for
instance, section 24 of said Code exempts from the aforementioned tax "duly registered general
partnerships", which constitute precisely one of the most typical forms of partnerships in this
jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term corporation includes
partnerships, no matter how created or organized." This qualifying expression clearly indicates that a
joint venture need not be undertaken in any of the standard forms, or in conformity with the usual
requirements of the law on partnerships, in order that one could be deemed constituted for purposes of
the tax on corporations. Again, pursuant to said section 84(b), the term "corporation" includes, among
other, "joint accounts, (cuentas en participacion)" and "associations", none of which has a legal
personality of its own, independent of that of its members. Accordingly, the lawmaker could not have
regarded that personality as a condition essential to the existence of the partnerships therein referred to.
In fact, as above stated, "duly registered general copartner ships" which are possessed of the
aforementioned personality have been expressly excluded by law (sections 24 and 84 [b]) from the
connotation of the term "corporation." It may not be amiss to add that petitioners' allegation to the
effect that their liability in connection with the leasing of the lots above referred to, under the
management of one person even if true, on which we express no opinion tends to increase the
similarity between the nature of their venture and that of corporations, and is, therefore, an additional
argument in favor of the imposition of said tax on corporations.
Under the Internal Revenue Laws of the United States, "corporations" are taxed differently from
"partnerships". By specific provision of said laws, such "corporations" include "associations, jointstock companies and insurance companies." However, the term "association" is not used in the
aforementioned laws
". . . in any narrow or technical sense. It includes any organization, created for the transaction of
designated affairs, or the attainment of some object, which, like a corporation, continues
notwithstanding that its members or participants change, and the affairs of which, like corporate affairs,

are conducted by a single individual, a committee, a board, or some other group, acting in a
representative capacity. It is immaterial whether such organization is created by an agreement, a
declaration of trust, a statute, or otherwise. It includes a voluntary association, a joint-stock corporation
or company, a 'business' trusts a 'Massachusetts' trust, a 'common law' trust, and 'investment' trust
(whether of the fixed or the management type), an interinsurance exchange operating through an
attorney in fact, a partnership association, and any other type of organization (by whatever name
known) which is not, within the meaning of the Code, a trust or an estate, or a partnership." (7A
Merten's Law of Federal Income Taxation, p. 788; italics ours.)
Similarly, the American Law.
". . . provides its own concept of a partnership. Under the term 'partnership' it includes not only a
partnership as known at common law but, as well, a syndicate, group, pool, joint venture, or other
unincorporated organization which carries on any business, financial operation, or venture, and which
is not, within the meaning of the Code, a trust, estate, or a corporation. . . .." (7A Merten's Law of
Federal Income Taxation, p. 789; italics ours.)
"The term 'partnership' includes a syndicate, group, pool, joint venture or other unincorporated
organization, through or by means of which any business, financial operation, or venture is carried on, .
. .." (8 Merten's Law of Federal Income Taxation, p. 562 Note 63; italics ours.)
For purposes of the tax on corporations, our National Internal Revenue Code, includes these
partnerships with the exception only of duly registered general copartnerships within the purview
of the term "corporation." It is, therefore, clear to our mind that petitioners herein constitute a
partnership, insofar as said Code is concerned, and are subject to the income tax for corporations.
As regards the residence tax for corporations, section 2 of Commonwealth Act No. 465 provides in
part:
"Entities liable to residence tax. Every corporation, no matter how created or organized, whether
domestic or resident foreign, engaged in or doing business in the Philippines shall pay an annual
residence tax of five pesos and an annual additional tax which, in no case, shall exceed one thousand
pesos, in accordance with the following schedule: . . .
"The term 'corporation' as used in this Act includes joint-stock company, partnership, joint account
(cuentas en participacion), association or insurance company, no matter how created or organized."
(italics ours.)
Considering that the pertinent part of this provision is analogous to that of sections 24 and 84(b) of our
National Internal Revenue Code (Commonwealth Act No. 466), and that the latter was approved on
June 15, 1939, the day immediately after the approval of said Commonwealth Act No. 465 (June 14,
1939), it is apparent that the terms "corporation" and "partnership" are used in both statutes with
substantially the same meaning. Consequently, petitioners are subject, also, to the residence tax for
corporations.
Lastly, the records show that petitioners have habitually engaged in leasing the properties above
mentioned for a period of over twelve years, and that the yearly gross rentals of said properties from
1945 to 1948 ranged from P9,599 to P17,453. Thus, they are subject to the tax provided in section 193
(q) of our National Internal Revenue Code, for "real estate dealers," inasmuch as, pursuant to section
194(s) thereof:
"'Real estate dealer' includes any person engaged in the business of buying, selling, exchanging,
leasing, or renting property or his own account as principal and holding himself out as a full or parttime dealer in real estate or as an owner of rental property or properties rented or offered to rent for an
aggregate amount of three thousand pesos or more a year. . . .." (Italics ours.)
Wherefore, the appealed decision of the Court of Tax Appeals is hereby affirmed with costs against the
petitioners herein. It is so ordered.
Paras, C. J., Bengzon, Padilla, Reyes, A., Reyes, J. B. L., Endencia and Felix, JJ., concur.
Separate Opinions

BAUTISTA ANGELO, J., concurring:

I agree with the opinion that petitioners have actually contributed money to a common fund with
express purpose of engaging in real estate business for profit. The series of transactions which they had
undertaken attest to this. This appears in the following portion of of the decision:
"2.
They invested the same, not merely in one transaction, but in a series of transactions. On
February 2, 1943, they bought a lot for P100,000. On April 3, 1944, they purchased 21 lots for
P18,000. This was soon followed on April 23, 1944, by the acquisition of another real estate for
P108,825. Five (5) days later (April 28, 1944), they got a fourth lot for P237,234.14. The number of
lots (24) acquired and transactions undertaken, as well as the brief interregnum between each,
particularly the last three purchases, is strongly indicative of a pattern or common design that was not
limited to the conservation and preservation of the afore-mentioned common fund or even of the
property acquired by petitioner in February, 1943. In other words, one cannot but perceive a character
of habituality peculiar to business transactions engaged in for purposes of gain."
I wish however to make the following observation: Article 1769 of the new Civil Code lays down the
rule for determining when a transaction should be deemed a partnership or a co-ownership. Said article
paragraphs 2 and 3, provides:
"(2) Co-ownership or co-possession does not of itself establish a partnership, whether such coowners or co-possessors do or do not share any profits made by the use of the property;
"(3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons
sharing them have a joint or common right or interest in any property from which the returns are
derived;"
From the above it appears that the fact that those who agree to form a co-ownership share or do not
share any profits made by the use of the property held in common does not convert their venture into a
partnership Or the sharing of the gross returns does not of itself establish a partnership whether or not
the persons sharing therein have a joint or common right or interest in the property. This only means
that, aside from the circumstance of profit, the presence of other elements constituting partnership is
necessary, such as the clear intent to form a partnership, the existence of a juridical personality different
from that of the individual partners, and the freedom to transfer or assign any interest in the property by
one with the consent of the others (Padilla, Civil Code of the Philippines Annotated, Vol. I, 1953 ed.,
pp. 635-636).
It is evident that an isolated transaction whereby two or more persons contribute funds to buy certain
real estate for profit in the absence of other circumstances showing a contrary intention cannot be
considered a partnership.
"Persons who contribute property or funds for a common enterprise and agree to share the gross returns
of that enterprise in proportion to their contribution, but who severally retain the title to their respective
contribution, are not thereby rendered partners. They have no common stock or capital, and no
community of interest as principal proprietors in the business itself which the proceeds derived."
(Elements of the law of Partnership by Floyd R. Mechem, 2n Ed., section 83, p. 74.)
"A joint purchase of land, by two, does not constitute a copartnership in respect thereto; nor does an
agreement to share the profits and losses on the sale of land create a partnership; the parties are only
tenants in common." (Clark vs. Sideway, 142 U. S. 682, 12 S. Ct. 327, 35 L. Ed., 1157.)
"Where plaintiff, his brother, and another agreed to become owners of a single tract of realty, holding as
tenants in common, and to divide the profits of disposing of it, the brother and the other not being
entitled to share in plaintiff's commissions, no partnership existed as between the three parties,
whatever their relation may have been as to third parties." (Magee vs. Magee, 123 N. E. 673, 233 Mass.
341.)
"In order to constitute a partnership inter sese there must be: (a) An intent to form the same; (b)
generally a participating in both profits and losses; (c) and such a community of interest, as far as third
persons are concerned as enables each party to make contract, manage the business, and dispose of the

whole property." (Municipal Paving Co. vs. Herring, 150 P. 1067, 50 Ill. 470.)
"The common ownership of property does not itself create a partnership between the owners, though
they may use it for purpose of making gains; and they may, without becoming partners, agree among
themselves as to the management and use of such property and the application of the proceeds
therefrom." (Spurlock vs. Wilson, 142 S. W. 363, 160 No. App. 14.)
This is impliedly recognized in the following portion of the decision: "Although, taken singly, they
might not suffice to establish the intent necessary to constitute a partnership, the collective effect of
these circumstances (referring to the series of transactions) such as to leave no room for doubt on the
existence of said intent in petitioners herein."

SECOND DIVISION
[G.R. No. L-19342. May 25, 1972.]
LORENZO T. OA, and HEIRS OF JULIA BUNALES, namely: RODOLFO B. OA, MARIANO B.
OA, LUZ B. OA, VIRGINIA B. OA, and LORENZO B. OA, JR., petitioners, vs. THE
COMMISSIONER OF INTERNAL REVENUE, respondent.
Orlando Velasco for petitioners.
Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete and Special
Attorney Purificacion Ureta for respondent.
SYLLABUS
1.
TAXATION; INTERNAL REVENUE CODE; CORPORATE TAX; UNREGISTERED
PARTNERSHIP; FORMATION THEREOF WHERE INCOME FROM SHARES OF CO-HEIRS
CONTRIBUTED TO COMMON FUND. From the moment petitioners allowed not only the
incomes from their respective shares of the inheritance but even the inherited properties themselves to
be used by Lorenzo T. Oa (who managed the properties) as a common fund in undertaking several
transactions or in business, with the intention of deriving profit to be shared by them proportionally,
such act was tantamount to actually contributing such incomes to a common fund and, in effect, they
thereby formed an unregistered partnership within the purview of the provisions of the Tax Code.
2.
ID.; ID.; ID.; WHEN HEIRS NOT CONSIDERED AS UNREGISTERED CO-PARTNERS
AND NOT SUBJECT TO SUCH TAX. In cases of inheritance, there is a period when the heirs can
be considered as co-owners rather than unregistered co-partners within the contemplation of our
corporate tax laws. Before the partition and distribution of the estate of the deceased, all the income
thereof does belong commonly to all the heirs, obviously, without them becoming thereby unregistered
co-partners.
3.
ID.; ID.; ID.; CIRCUMVENTIONS OF SECTIONS 24 AND 84(b) OF TAX CODE WHEN
HEIRS CONTINUE AS CO-OWNERS. For tax purposes, the co-ownership of inherited properties
is automatically converted into an unregistered partnership, for it is easily conceivable that after
knowing their respective shares in the partition, they (heirs) might decide to continue holding said
shares under the common management of the administrator or executor or of anyone chosen by them
and engage in business on that basis. Withal, if this were not so, it would be the easiest thing for heirs
in any inheritance to circumvent and render meaningless Sections 24 and 84(b) of the National Internal
Revenue Code.
4.
ID.; ID.; ID., HEIRS AS UNREGISTERED CO-PARTNERS; PARTNERSHIP
CONTEMPLATED IN CIVIL CODE NOT APPLICABLE. Petitioners' reliance on Article 1769,
par. (3) of the Civil Code, providing that: "The sharing of gross returns does not of itself establish a
partnership, whether or not the persons sharing them have a joint or common right or interest in any
property from which the returns are derived," and, for that matter, on any other provision of said code
on partnerships is unavailing. In Evangelista (102 Phil. 140), this Court clearly differentiated the
concept of partnerships under the Civil Code from that of unregistered partnerships which are
considered as "corporations" under Sections 24 and 84(b) of the National Internal Revenue Code.
5.
ID.; ID.; ID.; ID.; SEGREGATION OF INCOME FROM BUSINESS FROM THAT OF
INHERITED PROPERTIES, NOT PROPER. Where the inherited properties and the income derived
therefrom were used in business of buying and selling other real properties and corporate securities, the
partnership income must include not only the income derived from the purchase and sale of other
properties but also the income of the inherited properties.
6.
ID.; ID.; INCOME TAX; ACTION FOR REIMBURSEMENT SUBJECT TO PRESCRIPTION.
A taxpayer who has paid the wrong tax, assuming that the failure to pay the corporate taxes in
question was not deliberate, has the right to be reimbursed what he has erroneously paid, but the law is
very clear that the claim and action for such reimbursement are subject to the bar of prescription. And
since the period for the recovery of the excess income taxes in the case of herein petitioners has already

lapsed, it would not seem right to virtually disregard prescription merely upon the ground that the
reason for the delay is precisely because the taxpayers failed to make the proper return and payment of
the corporate taxes legally due from them.
DECISION
BARREDO, J p:
Petition for review of the decision of the Court of Tax Appeals in CTA Case No. 617, similarly entitled
as above, holding that petitioners have constituted an unregistered partnership and are, therefore,
subject to the payment of the deficiency corporate income taxes assessed against them by respondent
Commissioner of Internal Revenue for the years 1955 and 1956 in the total sum of P21,891.00, plus 5%
surcharge and 1% monthly interest from December 15, 1958, subject to the provisions of Section 51 (e)
(2) of the Internal Revenue Code, as amended by Section 8 of Republic Act No. 2343 and the costs of
the suit, 1 as well as the resolution of said court denying petitioners' motion for reconsideration of said
decision.
The facts are stated in the decision of the Tax Court as follows:
"Julia Buales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo T. Oa and her
five children. In 1948, Civil Case No. 4519 was instituted in the Court of First Instance of Manila for
the settlement of her estate. Later, Lorenzo T. Oa, the surviving spouse was appointed administrator of
the estate of said deceased (Exhibit 3, pp. 34-41, BIR rec.). On April 14, 1949, the administrator
submitted the project of partition, which was approved by the Court on May 16, 1949 (See Exhibit K).
Because three of the heirs, namely Luz, Virginia and Lorenzo, Jr., all surnamed Oa, were still minors
when the project of partition was approved, Lorenzo T. Oa, their father and administrator of the estate,
filed a petition in Civil Case No. 9637 of the Court of First Instance of Manila for appointment as
guardian of said minors. On November 14, 1949, the Court appointed him guardian of the persons and
property of the aforenamed minors (See p. 3, BIR rec.).
"The project of partition (Exhibit K; see also pp. 77-70, BIR rec.) shows that the heirs have undivided
one-half (1/2) interest in ten parcels of land with a total assessed value of P87,860.00, six houses with a
total assessed value of P17,590.00 and an undetermined amount to be collected from the War Damage
Commission. Later, they received from said Commission the amount of P50,000.00, more or less. This
amount was not divided among them but was used in the rehabilitation of properties owned by them in
common (t.s.n., p. 46). Of the ten parcels of land aforementioned, two were acquired after the death of
the decedent with money borrowed from the Philippine Trust Company in the amount of P72,173.00
(t.s.n., p. 24; Exhibit 3, pp. 34-31, BIR rec.).
"The project of partition also shows that the estate shares equally with Lorenzo T. Oa, the
administrator thereof, in the obligation of P94,973.00, consisting of loans contracted by the latter with
the approval of the Court (see p. 3 of Exhibit K; or see p. 74, BIR rec.).
"Although the project of partition was approved by the Court on May 16, 1949, no attempt was made to
divide the properties therein listed. Instead, the properties remained under the management of Lorenzo
T. Oa who used said properties in business by leasing or selling them and investing the income
derived therefrom and the proceeds from the sales thereof in real properties and securities. As a result,
petitioners' properties and investments gradually increased from P105,450.00 in 1949 to P480,005.20
in 1956 as can be gleaned from the following year-end balances:
"Year Investment Land Building
Account
Account
Account
1949
P 87,860
P 17,590.00
1950 P 24,657.65 128,566.72 96,076.26
1951 51,301.31
120,349.28 110,605.11
1952 67,927.52
87,065.28
152,674.39
1953 61,258.27
84,925.68
161,463.83
1954 63,623.37
99,001.20
167,962.04

1955 100,786.00 120,249.78 169,262.52

1956 175,028.68 135,714.68 169,262.52
(See Exhibits 3 & K; t.s.n., pp. 22, 25-26, 40, 50, 102-104)
"From said investments and properties petitioners derived such incomes as profits from installment
sales of subdivided lots, profits from sales of stocks, dividends, rentals and interests (see p. 3 of Exhibit
3; p. 32, BIR rec.; t.s.n., pp. 37-38). The said incomes are recorded in the books of account kept by
Lorenzo T. Oa, where the corresponding shares of the petitioners in the net income for the year are
also known. Every year, petitioners returned for income tax purposes their shares in the net income
derived from said properties and securities and/or from transactions involving them (Exhibit 3, supra;
t.s.n., pp. 25-26). However, petitioners did not actually receive their shares in the yearly income. (t.s.n.,
pp. 25-26, 40, 98, 100). The income was always left in the hands of Lorenzo T. Oa who, as heretofore
pointed out, invested them in real properties and securities. (See Exhibit 3, t.s.n., pp. 50, 102-104).
"On the basis of the foregoing facts, respondent (Commissioner of Internal Revenue) decided that
petitioners formed an unregistered partnership and therefore, subject to the corporate income tax,
pursuant to Section 24, in relation to Section 84(b), of the Tax Code. Accordingly, he assessed against
the petitioners the amounts of P8,092.00 and P13,899.00 as corporate income taxes for 1955 and 1956,
respectively. (See Exhibit 5, amended by Exhibit 17, pp. 50 and 86, BIR rec.). Petitioners protested
against the assessment and asked for reconsideration of the ruling of respondent that they have formed
an unregistered partnership. Finding no merit in petitioners' request, respondent denied it (See Exhibit
17, p. 86, BIR rec.). (See Pp. 1-4, Memorandum for Respondent, June 12, 1961).
"The original assessment was as follows:
"1955
"Net income as per investigation
P40,209.89

Income tax due thereon

8,042.00
25% surcharge
2,010.50
Compromise for non-filing 50.00

Total P10,102.50
==========
"1956
"Net income as per investigation
P69,245.23

Income tax due thereon

13,849.00
25% surcharge
3,462.25
Compromise for non-filing 50.00

Total 17,361.25
==========
(See Exhibit 13, page 50, BIR records)
"Upon further consideration of the case, the 25% surcharge was eliminated in line with the ruling of the
Supreme Court in Collector v. Batangas Transportation Co., G.R. No. L-9692, Jan. 6, 1958, so that the
questioned assessment refers solely to the income tax proper for the years 1955 and 1956 and the
'Compromise for non-filing,' the latter item obviously referring to the compromise in lieu of the
criminal liability for failure of petitioners to file the corporate income tax returns for said years. (See
Exh. 17, page 86, BIR records)." (Pp. 1-3, Annex C to Petition).
Petitioners have assigned the following as alleged errors of the Tax Court:
"I
"THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONERS FORMED AN

UNREGISTERED PARTNERSHIP;
"II
"THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS WERE
CO-OWNERS OF THE PROPERTIES INHERITED AND (THE) PROFITS DERIVED FROM
TRANSACTIONS THEREFROM (sic);
"III
"THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS WERE LIABLE
FOR CORPORATE INCOME TAXES FOR 1955 AND 1956 AS AN UNREGISTERED
PARTNERSHIP;
"IV
"ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN UNREGISTERED
PARTNERSHIP, THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE
PETITIONERS WERE AN UNREGISTERED PARTNERSHIP TO THE EXTENT ONLY THAT
THEY IN VESTED THE PROFITS FROM THE PROPERTIES OWNED IN COMMON AND THE
LOANS RECEIVED USING THE INHERITED PROPERTIES AS COLLATERALS;.
"V
"ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED PARTNERSHIP, THE COURT
OF TAX APPEALS ERRED IN NOT DEDUCTING THE VARIOUS AMOUNTS PAID BY THE
PETITIONERS AS INDIVIDUAL INCOME TAX ON THEIR RESPECTIVE SHARES OF THE
PROFITS ACCRUING FROM THE PROPERTIES OWNED IN COMMON, FROM THE
DEFICIENCY TAX OF THE UNREGISTERED PARTNERSHIP."
In other words, petitioners pose for our resolution the following questions: (1) Under the facts found by
the Court of Tax Appeals, should petitioners be considered as co-owners of the properties inherited by
them from the deceased Julia Buales and the profits derived from transactions involving the same, or,
must they be deemed to have formed an unregistered partnership subject to tax under Sections 24 and
84(b) of the National Internal Revenue Code? (2) Assuming they have formed an unregistered
partnership, should this not be only in the sense that they invested as a common fund the profits earned
by the properties owned by them in common and the loans granted to them upon the security of the said
properties, with the result that as far as their respective shares in the inheritance are concerned, the total
income thereof should be considered as that of co-owners and not of the unregistered partnership? And
(3) assuming again that they are taxable as an unregistered partnership, should not the various amounts
already paid by them for the same years 1955 and 1956 as individual income taxes on their respective
shares of the profits accruing from the properties they owned in common be deducted from the
deficiency corporate taxes, herein involved, assessed against such unregistered partnership by the
respondent Commissioner?
Pondering on these questions, the first thing that has struck the Court is that whereas petitioners'
predecessor in interest died way back on March 23, 1944 and the project of partition of her estate was
judicially approved as early as May 16, 1949, and presumably petitioners have been holding their
respective shares in their inheritance since those dates admittedly under the administration or
management of the head of the family, the widower and father Lorenzo T. Oa, the assessment in
question refers to the later years 1955 and 1956. We believe this point to be important because,
apparently, at the start, or in the years 1944 to 1954, the respondent Commissioner of Internal Revenue
did treat petitioners as co-owners, not liable to corporate tax, and it was only from 1955 that he
considered them as having formed an unregistered partnership. At least, there is nothing in the record
indicating that an earlier assessment had already been made. Such being the case, and We see no reason
how it could be otherwise, it is easily understandable why petitioners' position that they are co-owners
and not unregistered co-partners, for the purposes of the impugned assessment, cannot be upheld. Truth
to tell, petitioners should find comfort in the fact that they were not similarly assessed earlier by the
Bureau of Internal Revenue.

The Tax Court found that instead of actually distributing the estate of the deceased among themselves
pursuant to the project of partition approved in 1949, "the properties remained under the management
of Lorenzo T. Oa who used said properties in business by leasing or selling them and investing the
income derived therefrom and the proceeds from the sales thereof in real properties and securities," as a
result of which said properties and investments steadily increased yearly from P87,860.00 in "land
account" and P17,590.00 in "building account" in 1949 to P175,028.68 in "investment account,"
P135.714.68 in "land account" and P169,262.52 in "building account" in 1956 And all these became
possible because, admittedly, petitioners never actually received any share of the income or profits
from Lorenzo T. Oa, and instead, they allowed him to continue using said shares as part of the
common fund for their ventures, even as they paid the corresponding income taxes on the basis of their
respective shares of the profits of their common business as reported by the said Lorenzo T. Oa.
It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit themselves
to holding the properties inherited by them. Indeed, it is admitted that during the material years herein
involved, some of the said properties were sold at considerable profit, and that with said profit,
petitioners engaged, thru Lorenzo T. Oa, in the purchase and sale of corporate securities. It is likewise
admitted that all the profits from these ventures were divided among petitioners proportionately in
accordance with their respective shares in the inheritance. In these circumstances, it is Our considered
view that from the moment petitioners allowed not only the incomes from their respective shares of the
inheritance but even the inherited properties themselves to be used by Lorenzo T. Oa as a common
fund in undertaking several transactions or in business, with the intention of deriving profit to be shared
by them proportionally, such act was tantamount to actually contributing such incomes to a common
fund and, in effect, they thereby formed an unregistered partnership within the purview of the abovementioned provisions of the Tax Code.
It is but logical that in cases of inheritance, there should be a period when the heirs can be considered
as co-owners rather than unregistered co-partners within the contemplation of our corporate tax laws
aforementioned. Before the partition and distribution of the estate of the deceased, all the income
thereof does belong commonly to all the heirs, obviously, without them becoming thereby unregistered
co-partners, but it does not necessarily follow that such status as co-owners continues until the
inheritance is actually and physically distributed among the heirs, for it is easily conceivable that after
knowing their respective shares in the partition, they might decide to continue holding said shares
under the common management of the administrator or executor or of anyone chosen by them and
engage in business on that basis. Withal, if this were to be allowed, it would be the easiest thing for
heirs in any inheritance to circumvent and render meaningless Sections 24 and 84(b) of the National
Internal Revenue Code.
It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the reasons for holding
the appellants therein to be unregistered co-partners for tax purposes, that their common fund "was not
something they found already in existence" and that "[i]t was not a property inherited by them pro
indiviso," but it is certainly far fetched to argue therefrom, as petitioners are doing here, that ergo, in all
instances where an inheritance is not actually divided, there can be no unregistered co-partnership. As
already indicated, for tax purposes, the co-ownership of inherited properties is automatically converted
into an unregistered partnership the moment the said common properties and/or the incomes derived
therefrom are used as a common fund with intent to produce profits for the heirs in proportion to their
respective shares in the inheritance as determined in a project partition either duly executed in an
extrajudicial settlement or approved by the court in the corresponding testate or intestate proceeding.
The reason for this is simple. From the moment of such partition, the heirs are entitled already to their
respective definite shares of the estate and the incomes thereof, for each of them to manage and dispose
of as exclusively his own without the intervention of the other heirs, and, accordingly he becomes
liable individually for all taxes in connection therewith. If after such partition, he allows his share to be
held in common with his co-heirs under a single management to be used with the intent of making

profit thereby in proportion to his share, there can be no doubt that, even if no document or instrument
were executed for the purpose, for tax purposes, at least, an unregistered partnership is formed. This is
exactly what happened to petitioners in this case.
In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil Code, providing
that: "The sharing of gross returns does not of itself establish a partnership, whether or not the persons
sharing them have a joint or common right or interest in any property from which the returns are
derived," and, for that matter, on any other provision of said code on partnerships is unavailing. In
Evangelista, supra, this Court clearly differentiated the concept of partnerships under the Civil Code
from that of unregistered partnerships which are considered as "corporations" under Sections 24 and
84(b) of the National Internal Revenue Code. Mr. Justice Roberto Concepcion, now Chief Justice,
elucidated on this point thus:
"To begin with, the tax in question is one imposed upon 'corporations', which, strictly speaking, are
distinct and different from 'partnerships'. When our Internal Revenue Code includes 'partnerships'
among the entities subject to the tax on 'corporations', said Code must allude, therefore, to
organizations which are not necessarily 'partnerships', in the technical sense of the term. Thus, for
instance, section 24 of said Code exempts from the aforementioned tax 'duly registered general
partnerships', which constitute precisely one of the most typical forms of partnerships in this
jurisdiction. Likewise, as defined in section 84(b) of said Code, 'the term corporation includes
partnerships, no matter how created or organized.' This qualifying expression clearly indicates that a
joint venture need not be undertaken in any of the standard forms, or in conformity with the usual
requirements of the law on partnerships, in order that one could be deemed constituted for purposes of
the tax on corporation. Again, pursuant to said section 84(b), the term 'corporation' includes, among
other, 'joint accounts, (cuentas en participacion)' and 'associations', none of which has a legal
personality of its own, independent of that of its members. Accordingly, the lawmaker could not have
regarded that personality as a condition essential to the existence of the partnerships therein referred to.
In fact, as above stated, 'duly registered general co-partnerships' which are possessed of the
aforementioned personality have been expressly excluded by law (sections 24 and 84 [b]) from the
connotation of the term 'corporation.' . . .
xxx
xxx
xxx
"Similarly, the American Law
'. . . provides its own concept of a partnership. Under the term 'partnership' it includes not only a
partnership as known as common law but, as well, a syndicate, group, pool, joint venture, or other
unincorporated organization which carries on any business, financial operation, or venture, and which
is not, within the meaning of the Code, a trust, estate, or a corporation. . . .' (7A Merten's Law of
Federal Income Taxation, p. 789; emphasis ours.).
'The term "partnership" includes a syndicate, group, pool, joint venture or other unincorporated
organization, through or by means of which any business, financial operation, or venture is carried on. .
. .' (8 Merten's Law of Federal Income Taxation, p. 562 Note 63; emphasis ours.)
"For purposes of the tax on corporations, our National Internal Revenue Code, includes these
partnerships with the exception only of duly registered general co-partnerships within the
purview of the term 'corporation.' It is, therefore, clear to our mind that petitioners herein constitute a
partnership, insofar as said Code is concerned, and are subject to the income tax for corporations."
We reiterated this view, thru Mr. Justice Fernando, in Reyes vs. Commissioner of Internal Revenue, G.
R. Nos. L-24020-21, July 29, 1968, 24 SCRA 198, wherein the Court ruled against a theory of coownership pursued by appellants therein.
As regards the second question raised by petitioners about the segregation, for the purposes of the
corporate taxes in question, of their inherited properties from those acquired by them subsequently, We
consider as justified the following ratiocination of the Tax Court in denying their motion for
reconsideration:

"In connection with the second ground, it is alleged that, if there was an unregistered partnership, the
holding should be limited to the business engaged in apart from the properties inherited by petitioners.
In other words, the taxable income of the partnership should be limited to the income derived from the
acquisition and sale of real properties and corporate securities and should not include the income
derived from the inherited properties. It is admitted that the inherited properties and the income derived
therefrom were used in the business of buying and selling other real properties and corporate securities.
Accordingly, the partnership income must include not only the income derived from the purchase and
sale of other properties but also the income of the inherited properties."
Besides, as already observed earlier, the income derived from inherited properties may be considered as
individual income of the respective heirs only so long as the inheritance or estate is not distributed or,
at least, partitioned, but the moment their respective known shares are used as part of the common
assets of the heirs to be used in making profits, it is but proper that the income of such shares should be
considered as the part of the taxable income of an unregistered partnership. This, We hold, is the clear
intent of the law.
Likewise, the third question of petitioners appears to have adequately resolved by the Tax Court in the
aforementioned resolution denying petitioners' motion for reconsideration of the decision of said court.
Pertinently, the court ruled this Wise:
"In support of the third ground, counsel for petitioners allege:
'Even if we were to yield to the decision of this Honorable Court that the herein petitioners have
formed an unregistered partnership and, therefore, have to be taxed as such, it might be recalled that the
petitioners in their individual income tax returns reported their shares of the profits of the unregistered
partnership. We think it only fair and equitable that the various amounts paid by the individual
petitioners as income tax on their respective shares of the unregistered partnership should be deducted
from the deficiency income tax found by this Honor able Court against the unregistered partnership.'
(page 7, Memorandum for the Petitioner in Support of Their Motion for Reconsideration, Oct. 28,
1961.)
In other words, it is the position of petitioners that the taxable income of the partnership must be
reduced by the amounts of income tax paid by each petitioner on his share of partnership profits. This
is not correct; rather, it should be the other way around. The partnership profits distributable to the
partners (petitioners herein) should be reduced by the amounts of income tax assessed against the
Partnership. Consequently, each of the petitioners in his individual capacity overpaid his income tax for
the years in question, but the income tax due from the partnership has been correctly assessed. Since
the individual income tax liabilities of petitioners are not in issue in this proceeding, it is not proper for
the Court to pass upon the same."
Petitioners insist that it was error for the Tax Court to so rule that whatever excess they might have paid
as individual income tax cannot be credited as part payment of the taxes herein in question. It is argued
that to sanction the view of the Tax Court is to oblige petitioners to pay double income tax on the same
income, and, worse, considering the time that has lapsed since they paid their individual income taxes,
they may already be barred by prescription from recovering their overpayments in a separate action.
We do not agree. As We see it, the case of petitioners as regards the point under discussion is simply
that of a taxpayer who has paid the wrong tax, assuming that the failure to pay the corporate taxes in
question was not deliberate. Of course, such taxpayer has the right to be reimbursed what he has
erroneously paid, but the law is very clear that the claim and action for such reimbursement are subject
to the bar of prescription, And since the period for the recovery of the excess income taxes in the case
of herein petitioners has already lapsed, it would not seem right to virtually disregard prescription
merely upon the ground that the reason for the delay is precisely because the taxpayers failed to make
the proper return and payment of the corporate taxes legally due from them. In principle, it is but
proper not to allow any relaxation of the tax laws in favor of persons who are not exactly above
suspicion in their conduct vis-a-vis their tax obligation to the State.

IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax Appeals appealed from is
affirmed, with costs against petitioners.
Makalintal, Zaldivar, Fernando, Makasiar and Antonio, JJ ., concur.
Concepcion, C . J ., is on official leave.
Reyes, J.B.L., Actg. C . J ., and Teehankee, JJ ., in the result.
Castro, J ., took no part.
Footnotes
1.
In other words, the assessment was affirmed except for the sum of P100.00 which was the total
of two P50-items purportedly for "Compromise for non-filing" which the Tax Court held h be
unjustified, since there was no compromise agreement to speak of.

EN BANC
[G.R. No. L-24020-21. July 29, 1968.]
FLORENCIO REYES and ANGEL REYES, petitioners, vs. COMMISSIONER OF INTERNAL
REVENUE and HON. COURT OF TAX APPEALS, respondents.
Jose W . Diokno and Domingo Sandoval for petitioners.
Solicitor General for respondents.
SYLLABUS
1.
TAXATION; INCOME TAX ON CORPORATIONS IMPOSABLE ON PARTNERSHIP,
EXCEPT DULY REGISTERED GENERAL CO-PARTNERSHIPS. For purposes of the tax on
corporations, the National Internal Revenue Code includes partnerships, with the exception only of
duly registered general co-partnerships.
2.
ID.; RULING IN EVANGELISTA v. COLLECTOR OF INTERNAL REVENUE APPLIED.
Where petitioners (father and son) purchased the lot and building for P835,000.00 of which they paid
the sum of P375,000.00 leaving a balance of P460,000.00 representing the mortgage obligation of the
vendors with the China Banking Corporation which was assumed by petitioners; that such initial
payment was shared equally by petitioners; that administration of the building was entrusted to an
administrator who collected the rents, kept its books and records and rendered statements of accounts to
petitioners, negotiated leases and made repairs and disbursed payments; and where petitioners divided
equally the income derived from the building after deducting expenses of operation and maintenance,
petitioners are not only co-owners but partners. And since under Section 84(b) of the Revenue Code,
the term corporation includes partnerships no matter how created or organized, this qualifying
expression clearly indicates that a joint venture need not be undertaken in any of the standard forms or
in conformity with the usual requirements of the law on partnerships. Pursuant to the same Section
84(b), the term 'corporation' includes among other, joint accounts (cuentas en participacion) and
associations, none of which has a legal personality of its own, independent of that of its members. The
lawmaker could not have regarded personality as a condition precedent to the existence of partnerships
referred to therein.
3.
ID.; ID.; SLIGHT DIFFERENCES DO NOT CALL FOR A DIFFERENT RULING. In the
Evangelista case the following circumstances were found to exist: a common fund created purposely,
the investment of the same not merely in one transaction but in a series of transactions, the lots not
being devoted to residential purposes or to other personal purposes, the properties being under the
management of one person with full power to lease, collect rents, issue receipts, bring suits and that
all these conditions existed for over 10 years. In the case at bar, petitioners could claim that this was
only one transaction, that their intention was to house in that building purchased their respective
enterprises and to effect a division in 10 years. But while the purchase was made in 1950, as late as
1965, or almost 15 years later, there was no allegation of such division and the facts show that the
building continued to be leased by other parties with petitioners dividing equally the income after
deducting operational expenses. Differences of such slight significance do not call for a different
ruling. They do not suffice to preclude the applicability of the Evangelista decision.
4.
ID.; COURT OF TAX APPEALS; FINDINGS ENTITLED TO RESPECT OWING TO ITS
EXPERTISE ON SUBJECT. As a matter of principle, it is not advisable for the appellate Court to
set aside the conclusion reached by an agency such as the Court of Tax Appeals which is, by the very
nature of its function, dedicated exclusively to the study and consideration of tax problems and has
necessarily developed an expertise on the subject unless there has been an abuse or improvident
exercise of its authority.
DECISION
FERNANDO, J p:
Petitioners in this case were assessed by respondent Commissioner of Internal Revenue the sum of
P46,647.00 as income tax, surcharge and compromise for the years 1951 to 1954, an assessment

subsequently reduced to P37,528.00. This assessment sought to be reconsidered unsuccessfully was the
subject of an appeal to respondent Court of Tax Appeals. Thereafter, another assessment was made
against petitioners, this time for back income taxes plus surcharge and compromise in the total sum of
P25,973.75, covering the years 1955 and 1956. There being a failure on their part to have such
assessments reconsidered, the matter was likewise taken to the respondent Court of Tax Appeals. The
two cases 1 involving as they did identical issues and ultimately traceable to facts similar in character
were heard jointly with only one decision being rendered.
In that joint decision of respondent Court of Tax Appeals, the tax liability for the years 1951 to 1954
was reduced to P37,128.00 and for the years 1955 and 1956, to P20,619.00 as income tax due "from the
partnership formed" by petitioners. 2 The reduction was due to the elimination of surcharge, the failure
to file the income tax return being accepted as due to petitioners' honest belief that no such liability was
incurred as well as the compromise penalties for such failure to file. 3 A reconsideration of the
aforesaid decision was sought and denied by respondent Court of Tax Appeals. Hence this petition for
review.
The facts as found by respondent Court of Tax Appeals, which being supported by substantial evidence,
must be respected 4 follow: "On October 31, 1950, petitioners, father and son, purchased a lot and
building, known as the Gibbs Building, situated at 671 Dasmarias Street, Manila, for P835,000.00, of
which they paid the sum of P375,000.00, leaving a balance of P460,000.00, representing the mortgage
obligation of the vendors with the China Banking Corporation, which mortgage obligations was
assumed by the vendees. The initial payment of P375,000.00 was shared equally by petitioners. At the
time of the purchase, the building was leased to various tenants, whose rights under the lease contracts
with the original owners the purchasers, petitioners herein, agreed to respect. The administration of the
building was entrusted to an administrator who collected the rents; kept its books and records and
rendered statements of accounts to the owners; negotiated leases; made necessary repairs and disbursed
payments, whenever necessary, after approval by the owners; and performed such other functions
necessary for the conservation and preservation of the building. Petitioners divided equally the income
derived from the building after deducting the expenses of operation and maintenance. The gross income
from rentals of the building amounted to about P90,000.00 annually." 5
From the above facts, the respondent Court of Tax Appeals applying the appropriate provisions of the
National Internal Revenue Code, the first of which imposes an income tax on corporations "organized
in, or existing under the laws of the Philippines, no matter how created or organized but not including
duly registered general co-partnerships (companias colectivas), . . ." 6 a term, which according to the
second provision cited, includes partnership "no matter how created or organized, . . .," 7 and applying
the leading case of Evangelista v. Collector of Internal Revenue, 8 sustained the action of respondent
Commissioner of Internal Revenue, but reduced the tax liability of petitioners, as previously noted.
Petitioners maintain the view that the Evangelista ruling does not apply; for them, the situation is
dissimilar. Consequently, they allege that the reliance by respondent Court of Tax Appeals was
unwarranted and the decision should be set aside. If their interpretation of the authoritative doctrine
therein set forth commands assent, then clearly what respondent Court of Tax Appeals did fails to find
shelter in the law. That is the crux of the matter. A perusal of the Evangelista decision is therefore
unavoidable.
As noted in the opinion of the Court, penned by the present Chief Justice, the issue was whether
petitioners are subject to the tax on corporations provided for in section 24 of Commonwealth Act No.
466, otherwise known as the National Internal Revenue Code, . . ." 9 After referring to another section
of the National Internal Revenue Code, which explicitly provides that the term corporation "includes
partnerships" and then to Article 1767 of the Civil Code of the Philippines, defining what a contract of
partnership is, the opinion goes on to state that "the essential elements of a partnership are two, namely:
(a) an agreement to contribute money, property or industry to a common fund; and (b) intent to divide
the profits among the contracting parties. The first element is undoubtedly present in the case at bar,

for, admittedly, petitioners have agreed to, and did, contribute money and property to a common fund.
Hence, the issue narrows down to their intent in acting as they did. Upon consideration of all the facts
and circumstances surrounding the case, we are fully satisfied that their purpose was to engage in real
estate transactions for monetary gain and then divide the same among themselves, . . ." 10
In support of the above conclusion, reference was made to the following circumstances, namely, the
common fund being created purposely not something already found in existence, the investment of the
same not merely in one transaction but in a series of transactions; the lots thus acquired not being
devoted to residential purposes or to other personal uses of petitioners in that case; such properties
having been under the management of one person with full power to lease, to collect rents, to issue
receipts, to bring suits, to sign letters and contracts and to endorse notes and checks; the above
conditions having existed for more than 10 years since the acquisition of the above properties; and no
testimony having been introduced as to the purpose "in creating the set up already adverted to, or on the
causes for its continued existence." 11 The conclusion that emerged had all the imprint of inevitability.
Thus: "Although, taken singly, they might not suffice to establish the intent necessary to constitute a
partnership, the collective effect of these circumstances is such as to leave no room for doubt on the
existence of said intent in petitioners herein." 12
It may be said that there could be a differentiation made between the circumstances above detailed and
those existing in the present case. It does not suffice though to preclude the applicability of the
Evangelista decision. Petitioners could harp on these being only one transaction. They could stress that
an affidavit of one of them found in the Bureau of Internal Revenue records would indicate that their
intention was to house in the building acquired by them the respective enterprises, coupled with a plan
of effecting a division in 10 years. It is a little surprising then that while the purchase was made on
October 31, 1950 and their brief as petitioners filed on October 20, 1965, almost 15 years later, there
was no allegation that such division as between them was in fact made. Moreover, the facts as found
and as submitted in the brief made clear that the building in question continued to be leased by other
parties with petitioners dividing "equally the income . . . after deducting the expenses of operation and
maintenance . . . " 13 Differences of such slight significance do not call for a different ruling.
It is obvious that petitioners' effort to avoid the controlling force of the Evangelista ruling cannot be
deemed successful. Respondent Court of Tax Appeals acted correctly. It yielded to the command of an
authoritative decision; it recognized its binding character. There is clearly no merit to the second error
assigned by petitioners, who would deny its applicability to their situation.
The first alleged error committed by respondent Court of Tax Appeals in holding that petitioners, in
acquiring the Gibbs Building, established a partnership subject to income tax as a corporation under the
National Internal Revenue Code is likewise untenable. In their discussion in their brief of this alleged
error, stress is laid on their being co-owners and not partners. Such an allegation was likewise made in
the Evangelista case.
This is the way it was disposed of in the opinion of the present Chief Justice: "This pretense was
correctly rejected by the Court of Tax Appeals." 14 Then came the explanation why: "To begin with,
the tax in question is one imposed upon 'corporations', which, strictly speaking, are distinct and
different from 'partnerships'. When our Internal Revenue Code includes 'partnerships' among the
entities subject to the tax on 'corporations', said Code must allude, therefore, to organizations which are
not necessarily 'partnerships', in the technical sense of the term. Thus, for instance, section 24 of said
Code exempts from the aforementioned tax 'duly registered general partnerships', which constitute
precisely one of the most typical forms of partnerships in this jurisdiction. Likewise, as defined in
section 84(b) of said Code, 'the term corporation includes partnerships, no matter how created or
organized.' This qualifying expression clearly indicates that a joint venture need not be undertaken in
any of the standard forms, or in conformity with the usual requirements of the law on partnerships, in
order that one could be deemed constituted for purposes of the tax on corporations. Again, pursuant to
said section 84(b), the term 'corporation' includes, among other, 'joint accounts, (cuentas en

participacion)' and 'associations', none of which has a legal personality of its own, independent of that
of its members. Accordingly, the lawmaker could not have regarded that personality as a condition
essential to the existence of the partnerships therein referred to. In fact, as above stated, 'duly registered
general co-partnerships which are possessed of the aforementioned personality have been
expressly excluded by law (sections 24 and 84 [b]) from the connotation of the term 'corporation'." 15
The opinion went on to summarize the matter aptly: "For purposes of the tax on corporations, our
National Internal Revenue Code, include these partnerships with the exception only of duly
registered general co-partnerships within the purview of the term 'corporation'. It is, therefore, clear
to our mind that petitioners herein constitute a partnership, insofar as said Code is concerned, and are
subject to the income tax for corporations." 16
In the light of the above, it cannot be said that the respondent Court of Tax Appeals decided the matter
incorrectly. There is no warrant for the assertion that it failed to apply the settled law to uncontroverted
facts. Its decision cannot be successfully assailed. Moreover, an observation made in Alhambra Cigar &
Cigarette Manufacturing Co. v. Commissioner of Internal Revenue, 17 is well-worth recalling. Thus:
"Nor as a matter of principle is it advisable for this Court to set aside the conclusion reached by an
agency such as the Court of Tax Appeals which is, by the very nature of its function, dedicated
exclusively to the study and consideration of tax problems and has necessarily developed an expertise
on the subject, unless, as did not happen here, there has been an abuse or improvident exercise of its
authority."
WHEREFORE, the decision of the respondent Court of Tax Appeals ordering petitioners "to pay the
sums of P37,128.00 as income tax due from the partnership formed by herein petitioners for the years
1951 to 1954 and P20,619.00 for the years 1955 and 1956 within thirty days from the date this decision
becomes final, plus the corresponding surcharge and interest in case of delinquency," is affirmed. With
costs against petitioners.
Concepcion, C . J ., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro and Angeles, JJ .,
concur.
Footnotes
1.
CTA Cases No. 518 and No. 519.
2.
Annex A, Brief for Petitioners, p. 39.
3.
Ibid, p. 38.
4.
Alhambra Cigar & Cigarette Mfg. Co. v. Commissioner of Internal Revenue, L-23226,
November 28, 1967, citing Sanchez v. Commissioner of Customs, 102 Phil. 37 (1957); Castro v.
Collector of Internal Revenue, L-12174, April 26, 1962; Commissioner of Internal Revenue v. Priscilla
Estate, Inc., L-18282, May 29, 1964; Philippine Guaranty Co., Inc. v. Commissioner of Internal
Revenue, L-22074, September 6, 1965; Yupangco & Sons v. Commissioner of Customs, L-22259,
January 19, 1966; Republic v. Razon & Jai Alai Corp., L-17462, May 29, 1967; Balbas v. Domingo, L19804, October 23, 1967.
5.
Annex A, Brief for Petitioners, pp. 33-34.
6.
Section 24, National Internal Revenue Code.
7.
Section 84(b), id.
8.
102 Phil. 140 (1957).
9.
Ibid, p. 144.
10.
Ibid, pp. 144-145.
11.
Ibid, pp. 145-146.
12.
Ibid, p. 146.
13.
Brief for Petitioners, p. 6.
14.
Evangelista v. Collector of Internal Revenue, 107 Phil. 140, 146 (1957).
15.
Ibid, pp. 146-147, In support of the above view excerpts from Merten's Law of Federal Income
Taxation, Vol. 7A, pp. 788-789 and Vol. 8, p. 562 were cited.

16.
17.

Ibid, p. 148.
L-23226, November 28, 1967.

THIRD DIVISION
[G.R. No. 76573. September 14, 1989.]
MARUBENI CORPORATION (formerly Marubeni Iida, Co., Ltd.), petitioner, vs.
COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX APPEALS, respondents.
Melquiades C. Gutierrez for petitioner.
The Solicitor General for respondents.
SYLLABUS
1.
TAXATION; NATIONAL INTERNAL REVENUE CODE; INCOME TAX ON
CORPORATIONS; RESIDENT FOREIGN CORPORATION, DEFINED. Under the Tax Code, a
resident foreign corporation is one that is "engaged in trade or business" within the Philippines.
2.
ID.; ID.; ID.; A SINGLE CORPORATION CANNOT BE BOTH A RESIDENT AND NONRESIDENT CORPORATION. A single corporate entity cannot be both a resident and a non-resident
corporation depending on the nature of the particular transaction involved. Accordingly, whether the
dividends are paid directly to the head office or coursed through its local branch is of no moment for
after all, the head office and the office branch constitute but one corporate entity, the Marubeni
Corporation, which, under both Philippine tax and corporate laws, is a resident foreign corporation
because it is transacting business in the Philippines.
3.
ID.; ID.; ID.; EACH TAX HAS A DIFFERENT TAX BASIS; CASE AT BAR. But while
public respondents correctly concluded that the dividends in dispute were neither subject to the 15%
profit remittance tax nor to the 10% intercorporate dividend tax, the recipient being a non-resident
stockholder, they grossly erred in holding that no refund was forthcoming to the petitioner because the
taxes thus withheld totalled the 25% rate imposed by the Philippine-Japan Tax Convention pursuant to
Article 10 (2) (b). To simply add the two taxes to arrive at the 25% tax rate is to disregard a basic rule
in taxation that each tax has a different tax basis. While the tax on dividends is directly levied on the
dividends received, "the tax base upon which the 15% branch profit remittance tax is imposed is the
profit actually remitted abroad."
4.
ID.; ID.; ID.; PHILIPPINE-JAPAN TAX TREATY; 25% MAXIMUM RATE, IMPOSABLE
ONLY WHEN THE LOCAL TAX EXCEEDS THE SAME. Public respondents likewise erred in
automatically imposing the 25% rate under Article 10 (2) (b) of the Tax Treaty as if this were a flat rate.
A closer look at the Treaty reveals that the tax rates fixed by Article 10 are the maximum rates as
reflected in the phrase "shall not exceed." This means that any tax imposable by the contracting state
concerned should not exceed the 25% limitation and that said rate would apply only if the tax imposed
by our laws exceeds the same. In other words, by reason of our bilateral negotiations with Japan, we
have agreed to have our right to tax limited to a certain extent to attain the goals set forth in the Treaty.
5.
ID.; ID.; ID.; ID.; NON-RESIDENT CORPORATION IS TAXED 35% OF ITS GROSS
INCOME FROM ALL SOURCES WITHIN THE PHILIPPINES. Petitioner, being a non-resident
foreign corporation with respect to the transaction in question, the applicable provision of the Tax Code
is Section 24 (b) (1) (iii) in conjunction with the Philippine-Japan Treaty of 1980. Proceeding to apply
the above section to the case at bar, petitioner, being a non-resident foreign corporation, as a general
rule, is taxed 35% of its gross income from all sources within the Philippines. [Section 24 (b) (1)].
6.
ID.; ID.; ID.; ID.; ID.; DISCOUNTED RATE OF 15% GRANTED WHERE A TAX CREDIT
OF NOT LESS THAN 20% OF THE DIVIDENDS RECEIVED IS EXTENDED TO OUR
DOMESTIC CORPORATION. A discounted rate of 15% is given to petitioner on dividends
received from a domestic corporation (AG&P) on the condition that its domicile state (Japan) extends
in favor of petitioner, a tax credit of not less than 20% of the dividends received. This 20% represents
the difference between the regular tax of 35% on non-resident foreign corporations which petitioner
would have ordinarily paid, and the 15% special rate on dividends received from a domestic
corporation.
7.
ID.; ID.; ID.; ID.; ID.; TAX REFUND PROPER WHERE A FOREIGN NON-RESIDENT

CORPORATION PAID INCOME TAX ON BRANCH PROFIT REMITTANCE WITHIN THE

MAXIMUM CEILING RATE DECREED IN THE TAX TREATY. Petitioner is entitled to a refund
on the transaction in question. It is readily apparent that the 15% tax rate imposed on the dividends
received by a foreign non-resident stockholder from a domestic corporation under Section 24 (b) (1)
(iii) is easily within the maximum ceiling of 25% of the gross amount of the dividends as decreed in
Article 10 (2) (b) of the Tax Treaty.
8.
REMEDIAL LAW; BATAS PAMBANSA BLG. 129; DOES NOT INCLUDE
REORGANIZATION OF THE COURT OF TAX APPEALS. BP Blg. 129 does not include the
Court of Tax Appeals which has been created by virtue of a special law, Republic Act No. 1125.
Respondent court is not among those courts specifically mentioned in Section 2 of BP Blg. 129 as
falling within its scope.
9.
ID.; REPUBLIC ACT NO. 1125; COURT OF TAX APPEALS; THIRTY (30) DAYS PERIOD
TO APPEAL FROM NOTICE; PERIOD BEGINS AGAIN FROM NOTICE OF DENIAL OF
MOTION FOR RECONSIDERATION; CASE AT BAR. Under Section 18 of Republic Act No.
1125, a party adversely affected by an order, ruling or decision of the Court of Tax Appeals is given
thirty (30) days from notice to appeal therefrom. Otherwise, said order, ruling, or decision shall become
final. Records show that petitioner received notice of the Court of Tax Appeal's decision denying its
claim for refund on April 15, 1986. On the 30th day, or on May 15, 1986 (the last day for appeal),
petitioner filed a motion for reconsideration which respondent court subsequently denied on November
17, 1986, and notice of which was received by petitioner on November 26, 1986. Two days later, or on
November 28, 1986, petitioner simultaneously filed a notice of appeal with the Court of Tax Appeals
and a petition for review with the Supreme Court. From the foregoing, it is evident that the instant
appeal was perfected well within the 30-day period provided under R.A. No. 1125, the whole 30-day
period to appeal having begun to run again from notice of the denial of petitioner's motion for
reconsideration.
DECISION
FERNAN, C.J p:
Petitioner, Marubeni Corporation, representing itself as a foreign corporation duly organized and
existing under the laws of Japan and duly licensed to engage in business under Philippine laws with
branch office at the 4th Floor, FEEMI Building, Aduana Street, Intramuros, Manila seeks the reversal
of the decision of the Court of Tax Appeals 1 dated February 12, 1986 denying its claim for refund or
tax credit in the amount of P229,424.40 representing alleged overpayment of branch profit remittance
tax withheld from dividends by Atlantic Gulf and Pacific Co. of Manila (AG&P).
The following facts are undisputed: Marubeni Corporation of Japan has equity investments in AG&P of
Manila. For the first quarter of 1981 ending March 31, AG&P declared and paid cash dividends to
petitioner in the amount of P849,720 and withheld the corresponding 10% final dividend tax thereon.
Similarly, for the third quarter of 1981 ending September 30, AG&P declared and paid P849,720 as
cash dividends to petitioner and withheld the corresponding 10% final dividend tax thereon. 2
AG&P directly remitted the cash dividends to petitioner's head office in Tokyo, Japan, net not only of
the 10% final dividend tax in the amounts of P764,748 for the first and third quarters of 1981, but also
of the withheld 15% profit remittance tax based on the remittable amount after deducting the final
withholding tax of 10%. A schedule of dividends declared and paid by AG&P to its stockholder
Marubeni Corporation of Japan, the 10% final intercorporate dividend tax and the 15% branch profit
remittance tax paid thereon, is shown below:
1981 FIRST QUARTER THIRD QUARTER TOTAL OF FIRST
(three months (three months and Third
ended 3.31.81)
ended 9.30.81)
quarters
(In Pesos)

Cash
Dividends
Paid 849,720.44 849,720.00 1,699,440.00
10% Dividend
Tax Withheld 84,972.00
84,972.00
169,944.00
Cash Dividend
net of 10% Dividend
Tax Withheld 764,748.00 764,748.00 1,529,496.00
15% Branch Profit
Remittance Tax
Withheld
114,712.20 114,712.20
229,424.40 3
Net Amount
Remitted to
Petitioner
650,035.80 650,035.80 1,300,071.60
The 10% final dividend tax of P84,972 and the 15% branch profit remittance tax of P114,712.20 for the
first quarter of 1981 were paid to the Bureau of Internal Revenue by AG&P on April 20, 1981 under
Central Bank Receipt No. 6757880. Likewise, the 10% final dividend tax of P84,972 and the 15%
branch profit remittance tax of P114,712 for the third quarter of 1981 were paid to the Bureau of
Internal Revenue by AG&P on August 4, 1981 under Central Bank Confirmation Receipt No. 7905930.
4
Thus, for the first and third quarters of 1981, AG&P as withholding agent paid 15% branch profit
remittance on cash dividends declared and remitted to petitioner at its head office in Tokyo in the total
amount of P229,424.40 on April 20 and August 4, 1981. 5
In a letter dated January 29, 1981, petitioner, through the accounting firm Sycip, Gorres, Velayo and
Company, sought a ruling from the Bureau of Internal Revenue on whether or not the dividends
petitioner received from AG&P are effectively connected with its conduct or business in the Philippines
as to be considered branch profits subject to the 15% profit remittance tax imposed under Section 24
(b) (2) of the National Internal Revenue Code as amended by Presidential Decrees Nos. 1705 and 1773.
In reply to petitioner's query, Acting Commissioner Ruben Ancheta ruled:
"Pursuant to Section 24 (b) (2) of the Tax Code, as amended, only profits remitted abroad by a branch
office to its head office which are effectively connected with its trade or business in the Philippines are
subject to the 15% profit remittance tax. To be 'effectively connected' it is not necessary that the income
be derived from the actual operation of taxpayer-corporation's trade or business; it is sufficient that the
income arises from the business activity in which the corporation is engaged. For example, if a resident
foreign corporation is engaged in the buying and selling of machineries in the Philippines and invests in
some shares of stock on which dividends are subsequently received, the dividends thus earned are not
considered 'effectively connected' with its trade or business in this country. (Revenue Memorandum
Circular No. 55-80).
In the instant case, the dividends received by Marubeni from AG&P are not income arising from the
business activity in which Marubeni is engaged. Accordingly, said dividends if remitted abroad are not
considered branch profits for purposes of the 15% profit remittance tax imposed by Section 24 (b) (2)
of the Tax Code, as amended . . . ." 6
Consequently, in a letter dated September 21, 1981 and filed with the Commissioner of Internal
Revenue on September 24, 1981, petitioner claimed for the refund or issuance of a tax credit of
P229,424.40 "representing profit tax remittance erroneously paid on the dividends remitted by Atlantic
Gulf and Pacific Co. of Manila (AG&P) on April 20 and August 4, 1981 to . . . head office in Tokyo." 7
On June 14, 1982, respondent Commissioner of Internal Revenue denied petitioner's claim for

refund/credit of P229,424.40 on the following grounds:

"While it is true that said dividends remitted were not subject to the 15% profit remittance tax as the
same were not income earned by a Philippine Branch of Marubeni Corporation of Japan; and neither is
it subject to the 10% intercorporate dividend tax, the recipient of the dividends, being a non-resident
stockholder, nevertheless, said dividend income is subject to the 25% tax pursuant to Article 10 (2) (b)
of the Tax Treaty dated February 13, 1980 between the Philippines and Japan.
Inasmuch as the cash dividends remitted by AG&P to Marubeni Corporation, Japan is subject to 25%
tax, and that the taxes withheld of 10% as intercorporate dividend tax and 15% as profit remittance tax
totals (sic) 25%, the amount refundable offsets the liability, hence, nothing is left to be refunded." 8
Petitioner appealed to the Court of Tax Appeals which affirmed the denial of the refund by the
Commissioner of Internal Revenue in its assailed judgment of February 12, 1986. 9
In support of its rejection of petitioner's claimed refund, respondent Tax Court explained:
"Whatever the dialectics employed, no amount of sophistry can ignore the fact that the dividends in
question are income taxable to the Marubeni Corporation of Tokyo, Japan. The said dividends were
distributions made by the Atlantic, Gulf and Pacific Company of Manila to its shareholder out of its
profits on the investments of the Marubeni Corporation of Japan, a non-resident foreign corporation.
The investments in the Atlantic Gulf & Pacific Company of the Marubeni Corporation of Japan were
directly made by it and the dividends on the investments were likewise directly remitted to and
received by the Marubeni Corporation of Japan. Petitioner Marubeni Corporation Philippine Branch
has no participation or intervention, directly or indirectly, in the investments and in the receipt of the
dividends. And it appears that the funds invested in the Atlantic Gulf & Pacific Company did not come
out of the funds invested by the Marubeni Corporation of Japan to the Marubeni Corporation Philippine
Branch. As a matter of fact, the Central Bank of the Philippines, in authorizing the remittance of the
foreign exchange equivalent of (sic) the dividends in question, treated the Marubeni Corporation of
Japan as a non-resident stockholder of the Atlantic Gulf & Pacific Company based on the supporting
documents submitted to it.
"Subject to certain exceptions not pertinent hereto, income is taxable to the person who earned it.
Admittedly, the dividends under consideration were earned by the Marubeni Corporation of Japan, and
hence, taxable to the said corporation. While it is true that the Marubeni Corporation Philippine Branch
is duly licensed to engage in business under Philippine laws, such dividends are not the income of the
Philippine Branch and are not taxable to the said Philippine branch. We see no significance thereto in
the identity concept or principal-agent relationship theory of petitioner because such dividends are the
income of and taxable to the Japanese corporation in Japan and not to the Philippine branch." 10
Hence, the instant petition for review.
It is the argument of petitioner corporation that following the principal-agent relationship theory,
Marubeni, Japan is likewise a resident foreign corporation subject only to the 10% intercorporate final
tax on dividends received from a domestic corporation in accordance with Section 24(c) (1) of the Tax
Code of 1977 which states:
"Dividends received by a domestic or resident foreign corporation liable to tax under this Code (1)
Shall be subject to a final tax of 10% on the total amount thereof, which shall be collected and paid as
provided in Sections 53 and 54 of this Code . . ."
Public respondents, however, are of the contrary view that Marubeni, Japan, being a non-resident
foreign corporation and not engaged in trade or business in the Philippines, is subject to tax on income
earned from Philippine sources at the rate of 35% of its gross income under Section 24 (b) (1) of the
same Code which reads:
"(b) Tax on foreign corporations (1) Nonresident corporations. A foreign corporation not
engaged in trade or business in the Philippines shall pay a tax equal to thirty-five per cent of the gross
income received during each taxable year from all sources within the Philippines as . . . dividends . . ."
but expressly made subject to the special rate of 25% under Article 10(2) (b) of the Tax Treaty of 1980

concluded between the Philippines and Japan. 11 Thus:

"Article 10 (1) Dividends paid by a company which is a resident of a Contracting State to a resident of
the other Contracting State may be taxed in that other Contracting State.
"(2) However, such dividends may also be taxed in the Contracting State of which the company
paying the dividends is a resident, and according to the laws of that Contracting State, but if the
recipient is the beneficial owner of the dividends the tax so charged shall not exceed;
"(a) . . .
"(b) 25 per cent of the gross amount of the dividends in all other cases."
Central to the issue of Marubeni, Japan's tax liability on its dividend income from Philippine sources is
therefore the determination of whether it is a resident or a non-resident foreign corporation under
Philippine laws.
Under the Tax Code, a resident foreign corporation is one that is "engaged in trade or business" within
the Philippines. Petitioner contends that precisely because it is engaged in business in the Philippines
through its Philippine branch that it must be considered as a resident foreign corporation. Petitioner
reasons that since the Philippine branch and the Tokyo head office are one and the same entity, whoever
made the investment in AG&P, Manila does not matter at all. A single corporate entity cannot be both a
resident and a non-resident corporation depending on the nature of the particular transaction involved.
Accordingly, whether the dividends are paid directly to the head office or coursed through its local
branch is of no moment for after all, the head office and the office branch constitute but one corporate
entity, the Marubeni Corporation, which, under both Philippine tax and corporate laws, is a resident
foreign corporation because it is transacting business in the Philippines.
The Solicitor General has adequately refuted petitioner's arguments in this wise: llcd
"The general rule that a foreign corporation is the same juridical entity as its branch office in the
Philippines cannot apply here. This rule is based on the premise that the business of the foreign
corporation is conducted through its branch office, following the principal-agent relationship theory. It
is understood that the branch becomes its agent here. So that when the foreign corporation transacts
business in the Philippines independently of its branch, the principal-agent relationship is set aside. The
transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the
foreign corporation, not the branch or the resident foreign corporation.
"Corollarily, if the business transaction is conducted through the branch office, the latter becomes the
taxpayer, and not the foreign corporation." 12
In other words, the alleged overpaid taxes were incurred for the remittance of dividend income to the
head office in Japan which is a separate and distinct income taxpayer from the branch in the
Philippines. There can be no other logical conclusion considering the undisputed fact that the
investment (totalling 283.260 shares including that of nominee) was made for purposes peculiarly
germane to the conduct of the corporate affairs of Marubeni, Japan, but certainly not of the branch in
the Philippines. It is thus clear that petitioner, having made this independent investment attributable
only to the head office, cannot now claim the increments as ordinary consequences of its trade or
business in the Philippines and avail itself of the lower tax rate of 10%.
But while public respondents correctly concluded that the dividends in dispute were neither subject to
the 15% profit remittance tax nor to the 10% intercorporate dividend tax, the recipient being a nonresident stockholder, they grossly erred in holding that no refund was forthcoming to the petitioner
because the taxes thus withheld totalled the 25% rate imposed by the Philippine-Japan Tax Convention
pursuant to Article 10 (2) (b).
To simply add the two taxes to arrive at the 25% tax rate is to disregard a basic rule in taxation that
each tax has a different tax basis. While the tax on dividends is directly levied on the dividends
received, "the tax base upon which the 15% branch profit remittance tax is imposed is the profit
actually remitted abroad." 13
Public respondents likewise erred in automatically imposing the 25% rate under Article 10 (2) (b) of

the Tax Treaty as if this were a flat rate. A closer look at the Treaty reveals that the tax rates fixed by
Article 10 are the maximum rates as reflected in the phrase "shall not exceed." This means that any tax
imposable by the contracting state concerned should not exceed the 25% limitation and that said rate
would apply only if the tax imposed by our laws exceeds the same. In other words, by reason of our
bilateral negotiations with Japan, we have agreed to have our right to tax limited to a certain extent to
attain the goals set forth in the Treaty. LexLib
Petitioner, being a non-resident foreign corporation with respect to the transaction in question, the
applicable provision of the Tax Code is Section 24 (b) (1) (iii) in conjunction with the Philippine-Japan
Treaty of 1980. Said section provides:
"(b) Tax on foreign corporations. (1) Nonresident corporations . . . (iii) On dividends received
from a domestic corporation liable to tax under this Chapter, the tax shall be 15% of the dividends
received, which shall be collected and paid as provided in Section 53 (d) of this Code, subject to the
condition that the country in which the non-resident foreign corporation is domiciled shall allow a
credit against the tax due from the non-resident foreign corporation, taxes deemed to have been paid in
the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on
corporations and the tax (15%) on dividends as provided in this Section; . . ."
Proceeding to apply the above section to the case at bar, petitioner, being a non-resident foreign
corporation, as a general rule, is taxed 35% of its gross income from all sources within the Philippines.
[Section 24 (b) (1)].
However, a discounted rate of 15% is given to petitioner on dividends received from a domestic
corporation (AG&P) on the condition that its domicile state (Japan) extends in favor of petitioner, a tax
credit of not less than 20% of the dividends received. This 20% represents the difference between the
regular tax of 35% on non-resident foreign corporations which petitioner would have ordinarily paid,
and the 15% special rate on dividends received from a domestic corporation.
Consequently, petitioner is entitled to a refund on the transaction in question to be computed as
follows:
Total cash dividend paid
P1,699,440.00
less 15% under Sec. 24
(b) (1) (iii)
254,916.00

Cash dividend net of 15% tax

due petitioner P1,444.524.00
less net amount
actually remitted
1,300,071.60

Amount to be refunded to petitioner

representing overpayment of
taxes on dividends remitted P144.452.40
==========
It is readily apparent that the 15% tax rate imposed on the dividends received by a foreign non-resident
stockholder from a domestic corporation under Section 24 (b) (1) (iii) is easily within the maximum
ceiling of 25% of the gross amount of the dividends as decreed in Article 10 (2) (b) of the Tax Treaty.
There is one final point that must be settled. Respondent Commissioner of Internal Revenue is laboring
under the impression that the Court of Tax Appeals is covered by Batas Pambansa Blg. 129, otherwise
known as the Judiciary Reorganization Act of 1980. He alleges that the instant petition for review was
not perfected in accordance with Batas Pambansa Blg. 129 which provides that "the period of appeal
from final orders, resolutions, awards, judgments, or decisions of any court in all cases shall be fifteen
(15) days counted from the notice of the final order, resolution, award, judgment or decision appealed
from . . ."

This is completely untenable. The cited BP Blg. 129 does not include the Court of Tax Appeals which
has been created by virtue of a special law, Republic Act No. 1125. Respondent court is not among
those courts specifically mentioned in Section 2 of BP Blg. 129 as falling within its scope.
Thus, under Section 18 of Republic Act No. 1125, a party adversely affected by an order, ruling or
decision of the Court of Tax Appeals is given thirty (30) days from notice to appeal therefrom.
Otherwise, said order, ruling, or decision shall become final. llcd
Records show that petitioner received notice of the Court of Tax Appeal's decision denying its claim for
refund on April 15, 1986. On the 30th day, or on May 15, 1986 (the last day for appeal), petitioner filed
a motion for reconsideration which respondent court subsequently denied on November 17, 1986, and
notice of which was received by petitioner on November 26, 1986. Two days later, or on November 28,
1986, petitioner simultaneously filed a notice of appeal with the Court of Tax Appeals and a petition for
review with the Supreme Court. 14 From the foregoing, it is evident that the instant appeal was
perfected well within the 30-day period provided under R.A. No. 1125, the whole 30-day period to
appeal having begun to run again from notice of the denial of petitioner's motion for reconsideration.
WHEREFORE, the questioned decision of respondent Court of Tax Appeals dated February 12, 1986
which affirmed the denial by respondent Commissioner of Internal Revenue of petitioner Marubeni
Corporation's claim for refund is hereby REVERSED. The Commissioner of Internal Revenue is
ordered to refund or grant as tax credit in favor of petitioner the amount of P144,452.40 representing
overpayment of taxes on dividends received. No costs.
So ordered.
Gutierrez, Jr., Bidin and Cortes, JJ ., concur.
Feliciano, J ., is on leave.
Footnotes
1.
Penned by Amante Filler, Presiding Judge and concurred in by Constante Roaquin and Alex
Reyes, Associate Judges.
2.
Rollo, p. 37.
3.
Amount sought to be refunded. See Rollo, p. 38.
4.
Rollo, pp. 38-39.
5.
Rollo, p. 39.
6.
Annex C, Ruling No. 157-81, Original Record, pp. 11-12.
7.
Original B.I.R. Record, p. 8.
8.
Annex E, Original Record, p. 15.
9.
Original Record, p. 122.
10.
Original Record, pp. 119-121.
11.
Convention between the Republic of the Philippines and Japan for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income.
12.
Memorandum, p. 142, Rollo.
13.
Commissioner of Internal Revenue vs. Burroughs, Limited, G.R. No. 66653, June 19, 1986, 142
SCRA 324.
14.
Rollo, p. 2; Original Record, p. 170.

THIRD DIVISION
[G.R. No. 103092. July 21, 1994.]
BANK OF AMERICA NT & SA, petitioner, vs. HONORABLE COURT OF APPEALS, AND THE
COMMISSIONER OF INTERNAL REVENUE, respondents.
[G.R. No. 103106. July 21, 1994.]
BANK OF AMERICA NT & SA, petitioner, vs. THE HONORABLE COURT OF APPEALS AND
THE COMMISSIONER OF INTERNAL REVENUE, respondents.
Sycip, Salazar, Hernandez & Gatmaitan and Agcaoili & Associates for petitioner.
DECISION
VITUG, J p:
Section 24 (b) (2) (ii) of the National Internal Revenue Code, in the language it was worded in 1982
(the taxable period relevant to the case at bench), provided, in part, thusly:
"SECTION 24.
Rates of tax on corporations. . . .
"(b) Tax on foreign corporations. . . .
"(2) (ii) Tax on branch profit and remittances.
"Any profit remitted abroad by a branch to its head office shall be subject to a tax of fifteen per cent
(15%) . . . ."
Petitioner Bank of America NT & SA argues that the 15% branch profit remittance tax on the basis of
the above provision should be assessed on the amount actually remitted abroad, which is to say that the
15% profit remittance tax itself should not form part of the tax base. Respondent Commissioner of
Internal Revenue, contending otherwise, holds the position that, in computing the 15% remittance tax,
the tax should be inclusive of the sum deemed remitted. LLpr
The statement of facts made by the Court of Tax Appeals, later adopted by the Court of Appeals, and
not in any serious dispute by the parties, can be quoted thusly:
"Petitioner is a foreign corporation duly licensed to engaged in business in the Philippines with
Philippines branch office at BA Lepanto Bldg., Paseo de Roxas, Makati, Metro Manila. On July 20,
1982 it paid 15% branch profit remittance tax in the amount of P7,538,460.72 on profit from its regular
banking unit operations and P445,790.25 on profit from its foreign currency deposit unit operations or
a total of P7,984,250.97. The tax was based on net profits after income tax without deducting the
amount corresponding to the 15% tax.
"Petitioner filed a claim for refund with the Bureau of Internal Revenue of that portion of the payment
which corresponds to the 15% branch profit remittance tax, on the ground that the tax should have been
computed on the basis of profits actually remitted, which is P45,244,088.85, and not on the amount
before profit remittance tax, which is P53,228,339.82. Subsequently, without awaiting respondent's
decision, petitioner filed a petition for review on June 14, 1984 with this Honorable Court for the
recovery of the amount of P1,041,424.03 computed as follows: Cdpr
Net Profits After
Profit Tax Due
Alleged
Income Tax But
Remittance Alleged by Overpayment
Before Profit Tax Paid
Petitioner
Item 1-2
Remittance Tax
A.
1.
2.

Regular Banking
Unit Operations
(P50,256,404.82)
Computation of BIR
15% x P50,256,404.82
- P7,538,460.72
Computation of
Petitioner
- P50,256,404.82 x 15%
P6,555,183.24 P983,277.48


1.15
Foreign Currency
Deposit Unit Operations
(P2,971,935)
1.
Computation of
BIR 15% x - P2,971,935.00
P 445,790.25
2.
Computation of Petitioner
= P2,971,935.00 x 15%
P387,643.70 P58,146.55

T O TAL
P7,984,250.97 P6,942,286.94 P1,041,424.02" 1
============
==========
===========
The Court of Tax Appeals upheld petitioner bank in its claim for refund. The Commissioner of Internal
Revenue filed a timely appeal to the Supreme Court (docketed G.R. No. 76512) which referred it to the
Court of Appeals following this Court's pronouncement in Development Bank of the Philippines vs.
Court of Appeals, et al. (180 SCRA 609). On 19 September 1990, the Court of Appeals set aside the
decision of the Court of Tax Appeals. Explaining its reversal of the tax court's decision, the appellate
court said: LLpr
"The Court of Tax Appeals sought to deduce legislative intent vis-a-vis the aforesaid law through an
analysis of the wordings thereof, which to their minds reveal an intent 'to mitigate at least the harshness
of successive taxation.' The use of the word remitted may well be understood as referring to that part of
the said total branch profits which would be sent to the head office as distinguished from the total
profits of the branch (not all of which need be sent or would be ordered remitted abroad). If the
legislature indeed had wanted to mitigate the harshness of successive taxation, it would have been
simpler to just lower the rates without in effect requiring the relatively novel and complicated way of
computing the tax, as envisioned by the herein private respondent. The same result would have been
achieved." 2
Hence, these petitions for review in G. R. No. 103092 and G.R. No. 103106 (filed separately due to
inadvertence) by the law firms of "Agcaoili and Associates" and of "Sycip, Salazar, Hernandez and
Gatmaitan" in representation of petitioner bank.
We agree with the Court of Appeals that not much reliance can be made on our decision in Burroughs
Limited vs. Commissioner of Internal Revenue (142 SCRA 324), for there we ruled against the
Commissioner mainly on the basis of what the Court so then perceived as his position in a 21 January
1980 ruling the reversal of which, by his subsequent ruling of 17 March 1982, could not apply
retroactively against Burroughs in conformity with Section 327 (now Section 246, re: non-retroactivity
of rulings) of the National Internal Revenue Code. Hence. we held: cdrep
"Petitioner's aforesaid contention is without merit. What is applicable in the case at bar is still the
Revenue Ruling of January 21, 1980 because private respondent Burroughs Limited paid the branch
profit remittance tax in question on March 14, 1979. Memorandum Circular No. 8-82 dated March 17,
1982 cannot be given retroactive effect in the light of Section 327 of the National Internal Revenue
Code which provides
"'SECTION 327.
Non-retroactivity of rulings. Any revocation, modification, or reversal of any of
the rules and regulations promulgated in accordance with the preceding section or any of the rulings or
circulars promulgated by the Commissioner shall not be given retroactive application if the revocation,
modification, or reversal will be prejudicial to the taxpayer except in the following cases (a) where the
taxpayer deliberately misstates or omits material facts from his return or in any document required of
him by the Bureau of Internal Revenue; (b) where the facts subsequently gathered by the Bureau of
Internal Revenue are materially different from the facts on which the ruling is based, or (c) where the
taxpayer acted in bad faith. (ABS-CBN Broadcasting Corp. v. CTA, 108 SCRA 151-152)'
B.

"The prejudice that would result to private respondent Burroughs Limited by a retroactive application
of Memorandum Circular No. 8-82 is beyond question for it would be deprived of the substantial
amount of P172,058.90. And, insofar as the enumerated exceptions are concerned, admittedly,
Burroughs Limited does not fall under any of them."
The Court of Tax Appeals itself commented similarly when it observed thusly in its decision: Cdpr
"In finding of the Commissioner's contention without merit, this Court however ruled against the
applicability of Revenue Memorandum Circular No. 8-82 dated March 17, 1982 to the Burroughs
Limited case because the taxpayer paid the branch profit remittance tax involved therein on March 14,
1979 in accordance with the ruling of the Commissioner of Internal Revenue dated January 21, 1980.
In view of Section 327 of the then in force National Internal Revenue Code, Revenue Memorandum
Circular No. 8-82 dated March 17, 1982 cannot be given retroactive effect because of any revocation or
modification of any ruling or circular of the Bureau of Internal Revenue should not be given retroactive
application if such revocation or modification will, subject to certain exceptions not pertinent thereto,
prejudice taxpayers."3
The Solicitor General correctly points out that almost invariably in an ad valorem tax, the tax paid or
withheld is not deducted from the tax base. Such impositions as the ordinary income tax, estate and gift
taxes, and the value added tax are generally computed in like manner. In these cases, however, it is so
because the law, in defining the tax base and in providing for tax withholding, clearly spells it out to be
such. As so well expounded by the Tax Court
". . . In all the situations . . . where the mechanism of withholding of taxes at source operates to ensure
collection of the tax, and which respondent claims the base on which the tax is computed is the amount
to be paid or remitted, the law applicable expressly, specifically and unequivocally mandates that the
tax is on the total amount thereof which shall be collected and paid as provided in Sections 53 and 54
of the Tax Code. Thus:
"'Dividends received by an individual who is a citizen or resident of the Philippines from a domestic
corporation, shall be subject to a final tax at the rate of fifteen (15%) per cent on the total amount
thereof, which shall be collected and paid as provided in Sections 53 and 54 of this Code. (Emphasis
supplied; Sec. 21, Tax Code).
'Interest from Philippine Currency bank deposits and yield from deposit substitutes whether received by
citizens of the Philippines or by resident aliens individuals, shall be subject to a final tax as follows: (a)
15% of the interest or savings deposits, and (b) 20$ of the interest on time deposits and yield from
deposits substitutes, which shall be collected and paid as provided in Sections 53 and 54 of this
Code: . . . (Emphasis supplied; Sec. 21, Tax Code applicable.)'
"And on rental payments payable by the lessee to the lessor (at 5%), also cited by respondent, Section
1, paragraph (C), of Revenue Regulations No. 13-78, November 1, 1978, provides that: llcd
"'SECTION 1.Income payments subject to withholding tax and rates prescribed therein. Except as
therein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified
for each class of payee from the following items of income payments to persons residing in the
Philippines.
"xxx
xxx
xxx
'(c)
Rentals When the gross rental or the payment required to be made as a condition to the
continued use or possession of property, whether real or personal, to which the payor or obligor has not
taken or is not taking title or in which he has no equity, exceeds five hundred pesos (P500.00) per
contract or payment whichever is greater five per centum (5%).'
"Note that the basis of the 5% withholding tax, as expressly and unambiguously provided therein, is on
the gross rental. Revenue Regulations No. 13-78 was promulgated pursuant to Section 53 (f) of the then
in force National Internal Revenue Code which authorized the Minister of Finance, upon
recommendation of the Commissioner of Internal Revenue, to require the withholding of income tax on
the same items of income payable to persons (natural or juridical) residing in the Philippines by the

persons making such payments at the rate of not less than 2 1/2% but not more than 35% which are to
be credited against the income tax liability of the taxpayer for the taxable year.
"On the other hand, there is absolutely nothing in Section 24(b) (2) (ii), supra, which indicates that the
15% tax on branch profit remittance is on the total amount of profit to be remitted abroad which shall
be collected and paid in accordance with the tax withholding device provided in Sections 53 and 54 of
the Tax Code. The statute employs 'Any profit remitted abroad by a branch to its head office shall be
subject to a tax of fifteen per cent (15%)' without more. Nowhere is there said of 'base on the total
amount actually applied for by the branch with the Central Bank of the Philippines as profit to be
remitted abroad, which shall be collected and paid as provide in Sections 53 and 54 of this Code.'
Where the law does not qualify that the tax is imposed and collected at source based on profit to be
remitted abroad, that qualification should not be read into the law. It is a basic rule of statutory
construction that there is no safer nor better canon of interpretation than that when the language of the
law is clear and unambiguous, it should be applied as written. And to our mind, the term 'any profit
remitted abroad' can only mean such profit as 'forwarded, sent, or transmitted abroad' as the word
'remitted' is commonly and popularly accepted and understood. To say therefore that the tax on branch
profit remittance is imposed and collected at source and necessarily the tax base should be the amount
actually applied for the branch with the Central Bank as profit to be remitted abroad is to ignore the
unmistakable meaning of plain words." 4
In the 15% remittance tax, the law specifies its own tax base to be on the "profit remitted abroad."
There is absolutely nothing equivocal or uncertain about the language of the provision. The tax is
imposed on the amount sent abroad, and the law (then in force) calls for nothing further. The taxpayer
is a single entity, and it should be understandable if, such as in this case, it is the local branch of the
corporation, using its own local funds, which remits the tax to the Philippine Government. cdll
The remittance tax was conceived in an attempt to equalize the income tax burden on foreign
corporations maintaining, on the one hand, local branch offices and organizing, on the other hand,
subsidiary domestic corporations where at least a majority of all the latter's shares of stock are owned
by such foreign corporations. Prior to the amendatory provisions of the Revenue Code, local branches
were made to pay only the usual corporate income tax of 25%-35% on net income (now a uniform
35%) applicable to resident foreign corporations (foreign corporations doing business in the
Philippines). While Philippine subsidiaries of foreign corporations were subject to the same rate of
25%-35% (now also a uniform 35%) on their net income, dividend payments, however, were
additionally subjected to a 15% (withholding) tax (reduced conditionally from 35%). In order to avert
what would otherwise appear to be an unequal tax treatment on such subsidiaries vis-a-vis local branch
offices, a 20%, later reduced to 15% profit remittance tax was imposed on local branches on their
remittances of profits abroad. But this is where the tax pari-passu ends between domestic branches and
subsidiaries of foreign corporations.
The Solicitor General suggests that the analogy should extend to the ordinary application of the
withholding tax system and so that the rule on constructive remittance concept as well. It is difficult to
accept the proposition. In the operation of the withholding tax system, the payee is the taxpayer, the
person on whom the tax is imposed, while the payor, a separate entity, acts no more than an agent of the
government for the collection of the tax in order to ensure its payment. Obviously, the amount thereby
used to settle the tax liability is deemed sourced from the proceeds constructive of the tax base. Since
the payee, not the payor, is the real taxpayer, the rule on constructive remittance (or receipt) can be
easily rationalized, if not indeed, made clearly manifest. It is hardly the case, however, in the
imposition of the 15% remittance tax where there is but one taxpayer using its own domestic funds in
the payment of the tax. To say that there is constructive remittance even of such funds would be
stretching far too much that imaginary rule. Sound logic does not defy but must concede to facts. LLpr
We hold, accordingly, that the written claim for refund of the excess tax payment filed, within the twoyear prescriptive period, with the Court of Tax Appeals has been lawfully made.

WHEREFORE, the decision of the Court of Appeals appealed from is REVERSED and SET ASIDE,
and that of the Court of Tax Appeals is REINSTATED.
SO ORDERED.
Bidin, Romero and Melo, JJ., concur.
Feliciano, J., took no part.
Footnotes
1.
Rollo of G.R. No. 103106, pp. 47-48.
2.
Rollo of G.R. No. 103106, p. 54.
3.
Rollo of G.R. No. 103106, p. 50.
4.
Rollo of G.R. No. 103106, pp. 133-135.

SECOND DIVISION
[G.R. No. 66838. April 15, 1988.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PROCTER & GAMBLE PHILIPPINE
MANUFACTURING CORPORATION & THE COURT OF TAX APPEALS, respondents.
SYLLABUS
1.
REMEDIAL LAW; COURT CANNOT DETERMINE AND DECIDE ISSUE NOT RAISED
AT THE ADMINISTRATIVE FORUM. To allow a litigant to assume a different posture when he
comes before the court and challenges the position he had accepted at the administrative level, would
be to sanction a procedure whereby the Court which is supposed to review administrative
determinations would not review, but determine and decide for the first time, a question not raised at
the administrative forum.
2.
ID.; CIVIL PROCEDURE; APPEALS; ISSUE CANNOT BE RAISED FOR THE FIRST TIME
ON APPEAL. It is well settled that under the same underlying principle of prior exhaustion of
administrative remedies, on the judicial level, issues not raised in the lower court cannot generally be
raised for the first time on appeal. (Pampanga Sugar Dev. Co., Inc. v. CIR, 114 SCRA 725 [1982];
Garcia v. C.A., 102 SCRA 597 [1981]; Matialonzo v. Servidad, 107 SCRA 726 [1981]).
3.
ID.; ESTOPPEL; STATE NOT SUBJECT THEREOF. 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 government's financial position.
4.
TAXATION; NATIONAL INTERNAL REVENUE CODE; INCOME TAX ON
CORPORATION; OVERPAYMENT OF WITHHOLDING TAX ON DIVIDENDS; CLAIM FOR
REIMBURSEMENTS MAY BE FILED BY MOTHER CORPORATION, NOT WITHHOLDING
AGENT. The submission of the Commissioner of Internal Revenue that PMC-Phil. is but a
withholding agent of the government and therefore cannot claim reimbursement of the alleged over
paid taxes, is completely meritorious. The real party in interest being the mother corporation in the
United States, it follows that American entity is the real party in interest, and should have been the
claimant in this case.
5.
ID.; ID.; ID.; TAX CREDIT; NOT JUSTIFIED WHERE TAXPAYER FAILED TO MEET
CONDITIONS. There is nothing in the aforecited provision that would justify tax return of the
disputed 15% to the private respondent, Furthermore, as ably argued by the petitioner, the private
respondent failed to meet certain conditions necessary in order that the dividends received by the nonresident parent company in the United States may be subject to the preferential 15% tax instead of
35%.
DECISION
PARAS, J p:
This is a petition for review on certiorari filed by the herein petitioner, Commissioner of Internal
Revenue, seeking the reversal of the decision of the Court of Tax Appeals dated January 31, 1984 in
CTA Case No. 2883 entitled "Procter and Gamble Philippine Manufacturing Corporation vs. Bureau of
Internal Revenue," which declared petitioner therein, Procter and Gamble Philippine Manufacturing
Corporation to be entitled to the sought refund or tax credit in the amount of P4,832,989.00
representing the alleged overpaid withholding tax at source and ordering payment thereof.
The antecedent facts that precipitated the instant petition are as follows:
Private respondent, Procter and Gamble Philippine Manufacturing Corporation (hereinafter referred to
as PMC-Phil.), a corporation duly organized and existing under and by virtue of the Philippine laws, is
engaged in business in the Philippines and is a wholly owned subsidiary of Procter and Gamble, U.S.A.
(hereinafter referred to as PMC-USA), a non-resident foreign corporation in the Philippines, not
engaged in trade and business therein. As such PMC-U.S.A. is the sole shareholder or stockholder of
PMC-Phil., as PMC-U.S.A. owns wholly or by 100% the voting stock of PMC-Phil. and is entitled to
receive income from PMC-Phil. in the form of dividends, if not rents or royalties. In addition, PMC-

Phil. has a legal personality separate and distinct from PMC-U.S.A. (Rollo, pp. 122-123). LLphil
For the taxable year ending June 30, 1974 PMC-Phil. realized a taxable net income of P56,500,332.00
and accordingly paid the corresponding income tax thereon equivalent to P25%-35% or
P19,765,116.00 as provided for under Section 24(a) of the Philippine Tax Code, the pertinent portion of
which reads:
"SEC. 24.
Rates of tax on corporation. (a) Tax on domestic corporations. A tax in hereby
imposed upon the taxable net income received during each taxable year from all sources by every
corporation organized in, or existing under the laws of the Philippines, and partnerships, no matter how
created or organized, but not including general professional partnerships, in accordance with the
following:
'Twenty-five per cent upon the amount by which the taxable net income does not exceed one hundred
thousand pesos; and
'Thirty-five per cent upon the amount by which the taxable net income exceeds one hundred thousand
pesos."
After taxation its net profit was P36,735,216.00. Out of said amount it declared a dividend in favor of
its sole corporate stockholder and parent corporation PMC-U.S.A. in the total sum of P17,707,460.00
which latter amount was subjected to Philippine taxation of 35% or P6,197,611.23 as provided for in
Section 24(b) of the Philippine Tax Code which reads in full:
"SECTION 1. The first paragraph of subsection (b) of Section 24 of the National Bureau Internal
Revenue Code, as amended, is hereby further amended to read as follows:
'(b)
Tax on foreign corporations. - (1) Nonresident corporation. - A foreign corporation not engaged
in trade or business in the Philippines, including a foreign life insurance company not engaged in the
life insurance business in the Philippines, shall pay a tax equal to 35% of the gross income received
during its taxable year from all sources within the Philippines, as interest (except interest on foreign
loans which shall be subject to 15% tax), dividends, rents, royalties, salaries, wages, premiums,
annuities, compensations, remunerations for technical services or otherwise, emoluments or other fixed
or determinable, annual, periodical or casual gains, profits, and income, and capital gains: Provided,
however, That premiums shall not include re-insurance premiums: Provided, further, That
cinematographic film owners, lessors, or distributors, shall pay a tax of 15% on their gross income
from sources within the Philippines: Provided, still further That on dividends received from a domestic
corporation liable to tax under this Chapter, the tax shall be 15% of the dividends received, which shall
be collected and paid as provided in Section 53(d) of this Code, subject to the condition that the
country in which the nonresident foreign corporation is domiciled shall allow a credit against the tax
due from the nonresident foreign corporation, taxes deemed to have been paid in the Philippines
equivalent to 20% which represents the difference between the regular tax (35%) on corporations and
the tax (15%) on dividends as provided in this section: Provided, finally, That regional or area
headquarters established in the Philippines by multinational corporations and which headquarters do
not earn or derive income from the Philippines and which act as supervisory, communications and
coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region shall not be
subject to tax."
For the taxable year ending June 30, 1975 PMC-Phil. realized a taxable net income of P8,735,125.00
which was subjected to Philippine taxation at the rate of 25%-35% or P2,952,159.00, thereafter leaving
a net profit of P5,782,966.00. As in the 2nd quarter of 1975, PMC-Phil. again declared a dividend in
favor of PMC-U.S.A. at the tax rate of 35% or P6,457,485.00. LLphil
In July, 1977 PMC-Phil., invoking the tax-sparing credit provision in Section 24(b) as aforequoted, as
the withholding agent of the Philippine government, with respect to the dividend taxes paid by PMCU.S.A., filed a claim with the herein petitioner, Commissioner of Internal Revenue, for the refund of
the 20 percentage-point portion of the 35 percentage-point whole tax paid, arising allegedly from the
alleged "overpaid withholding tax at source or overpaid withholding tax in the amount of

P4,832,989.00," computed as follows:

Dividend Income
Tax withheld 15% tax underAlleged
of PMC-U.S.A.
at source at "tax sparing over
35% proviso"
payment

P17,707,460 P6,196,611 P2,656,119 P3,541,492

6,457,485
2,260,119
968,622
1,291,497

P24,164,946 P8,457,731 P3,624,941 P4,832,989

========= ======== ======== ========
There being no immediate action by the BIR on PMC-Phils' letter-claim the latter sought the
intervention of the CTA when on July 13, 1977 it filed with herein respondent court a petition for
review docketed as CTA No. 2883 entitled "Procter and Gamble Philippine Manufacturing Corporation
vs. The Commissioner of Internal Revenue," praying that it be declared entitled to the refund or tax
credit claimed and ordering respondent therein to refund to it the amount of P4,832,989.00, or to issue
tax credit in its favor in lieu of tax refund. (Rollo, p. 41)
On the other hand therein respondent, Commissioner of Internal Revenue, in his answer, prayed for the
dismissal of said petition and for the denial of the claim for refund. (Rollo, p. 48)
On January 31, 1974 the Court of Tax Appeals in its decision (Rollo, p. 63) ruled in favor of the herein
petitioner, the dispositive portion of the same reading as follows:
"Accordingly, petitioner is entitled to the sought refund or tax credit of the amount representing the
overpaid withholding tax at source and the payment therefor by the respondent hereby ordered. No
costs.
"SO ORDERED."
Hence this petition.
The Second Division of this Court without giving due course to said petition resolved to require the
respondents to comment (Rollo, p. 74). Said comment was filed on November 8, 1984 (Rollo, pp. 8390). Thereupon this Court by resolution dated December 17, 1984 resolved to give due course to the
petition and to consider respondents' comment on the petition as Answer. (Rollo, p. 93)
Petitioner was required to file brief on January 21, 1985 (Rollo, p. 96). Petitioner filed his brief on May
13, 1985 (Rollo, p. 107), while private respondent PMC-Phil. filed its brief on August 22, 1985. LibLex
Petitioner raised the following assignments of errors:
I
THE COURT OF TAX APPEALS ERRED IN HOLDING WITHOUT ANY BASIS IN FACT AND IN
LAW, THAT THE HEREIN RESPONDENT PROCTER & GAMBLE PHILIPPINE
MANUFACTURING CORPORATION (PMC-PHIL. FOR SHORT) 'IS ENTITLED TO THE
SOUGHT REFUND OR TAX CREDIT' OF P4,832,989.00, REPRESENTING ALLEGEDLY THE
DIVIDEND TAX OVER WITHHELD BY PMC-PHIL. UPON REMITTANCE OF DIVIDEND
INCOME IN THE TOTAL SUM OF P24,164,946.00 TO PROCTER & GAMBLE, USA (PMC-USA,
FOR SHORT).
II
THE COURT OF TAX APPEALS ERRED IN HOLDING, WITHOUT ANY BASIS IN FACT AND
IN LAW, THAT PMC-USA, A NONRESIDENT FOREIGN CORPORATION UNDER SECTION
24(b) (1) OF THE PHILIPPINE TAX CODE AND A DOMESTIC CORPORATION DOMICILED IN
THE UNITED STATES, IS ENTITLED UNDER THE U.S. TAX CODE AGAINST ITS U.S.
FEDERAL TAXES TO A UNITED STATES FOREIGN TAX CREDIT EQUIVALENT TO AT LEAST
THE 20 PERCENTAGE-POINT PORTION (OF THE 35 PERCENT DIVIDEND TAX) SPARED OR
WAIVED OR OTHERWISE CONSIDERED OR DEEMED PAID BY THE PHILIPPINE
GOVERNMENT.

The sole issue in this case is whether or not private respondent is entitled to the preferential 15% tax
rate on dividends declared and remitted to its parent corporation.
From this issue two questions are posed by the petitioner Commissioner of Internal Revenue, and they
are (1) Whether or not PMC-Phil. is the proper party to claim the refund and (2) Whether or not the
U.S. allows as tax credit the "deemed paid" 20% Philippine Tax on such dividends?
The petitioner maintains that it is the PMC-U.S.A., the tax payer and not PMC-Phil. the remitter or
payor of the dividend income, and a mere withholding agent for and in behalf of the Philippine
Government, which should be legally entitled to receive the refund if any. (Rollo, p. 129)
It will be observed at the outset that petitioner raised this issue for the first time in the Supreme Court.
He did not raise it at the administrative level, nor at the Court of Tax Appeals. As clearly ruled by Us
"To allow a litigant to assume a different posture when he comes before the court and challenges the
position he had accepted at the administrative level," would be to sanction a procedure whereby the
Court - which is supposed to review administrative determinations - would not review, but determine
and decide for the first time, a question not raised at the administrative forum." Thus it is well settled
that under the same underlying principle of prior exhaustion of administrative remedies, on the judicial
level, issues not raised in the lower court cannot generally be raised for the first time on appeal.
(Pampanga Sugar Dev. Co., Inc. v. CIR, 114 SCRA 725 [1982]; Garcia v. C.A., 102 SCRA 597 [1981];
Matialonzo v. Servidad, 107 SCRA 726 [1981]).
Nonetheless 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 government's financial position.
The submission of the Commissioner of Internal Revenue that PMC-Phil. is but a withholding agent of
the government and therefore cannot claim reimbursement of the alleged over paid taxes, is completely
meritorious. The real party in interest being the mother corporation in the United States, it follows that
American entity is the real party in interest, and should have been the claimant in this case.
Closely intertwined with the first assignment of error is the issue of whether or not PMC-U.S.A. a
non-resident foreign corporation under Section 24(b)(1) of the Tax Code (the subsidiary of an
American) a domestic corporation domiciled in the United States, is entitled under the U.S. Tax Code
to a United States Foreign Tax Credit equivalent to at least the 20 percentage paid portion (of the 35%
dividend tax) spared or waived as otherwise considered or deemed paid by the government. The law
pertinent to the issue is Section 902 of the U.S. Internal Revenue Code, as amended by Public Law 87834, the law governing tax credits granted to U. S. corporations on dividends received from foreign
corporations, which to the extent applicable reads:
"SEC. 902 CREDIT FOR CORPORATE STOCKHOLDERS IN FOREIGN CORPORATION.
(a)
Treatment of Taxes Paid by Foreign Corporation For purposes of this subject, a domestic
corporation which owns at least 10 percent of the voting stock of a foreign corporation from which it
receives dividends in any taxable year shall
(1)
to the extent such dividends are paid by such foreign corporation out of accumulated profits [as
defined in subsection (c) (1) (a)] of a year for which such foreign corporation is not a less developed
country corporation, be deemed to have paid the same proportion of any income, war profits, or excess
profits taxes paid or deemed to be paid by such foreign corporation to any foreign country or to any
possession of the United States on or with respect to such accumulated profits, which the amount of
such dividends (determined without regard to Section 78) bears to the amount of such accumulated
profits in excess of such income, war profits, and excess profits taxes (other than those deemed paid);
and
(2)
to the extent such dividends are paid by such foreign corporation out of accumulated profits [as
defined in subsection (c) (1) (b)] of a year for which such foreign corporation is a less developed
country corporation, be deemed to have paid the same proportion of any income, war profits, or excess
profits taxes paid or deemed to be paid by such foreign corporation to any foreign country or to any

possession of the United States on or with respect to such accumulated profits, which the amount of
such dividends bears to the amount of such accumulated profits. Cdpr
xxx
xxx
xxx
(c)
Applicable Rules
(1)
Accumulated profits defined. - For purposes of this section, the term 'accumulated profits'
means with respect to any foreign corporation.
(A)
for purposes of subsections (a) (1) and (b) (1), the amount of its gains, profits, or income
computed without reduction by the amount of the income, war profits, and excess profits taxes imposed
on or with respect to such profits or income by any foreign country. . . ; and
(B)
for purposes of subsections (a) (2) and (b) (2), the amount of its gains, profits, or income in
excess of the income, war profits, and excess profits taxes imposed on or with respect to such profits or
income.
The Secretary or his delegate shall have full power to determine from the accumulated profits of what
year or years such dividends were paid, treating dividends paid in the first 20 days of any year as
having been paid from the accumulated profits of the preceding year or years (unless to his satisfaction
shows otherwise), and in other respects treating dividends as having been paid from the most recently
accumulated gains, profits, or earnings . . ." (Rollo, pp. 55-56)
To Our mind there is nothing in the aforecited provision that would justify tax return of the disputed
15% to the private respondent, Furthermore, as ably argued by the petitioner, the private respondent
failed to meet certain conditions necessary in order that the dividends received by the non-resident
parent company in the United States may be subject to the preferential 15% tax instead of 35%. Among
other things, the private respondent failed: (1) to show the actual amount credited by the U.S.
government against the income tax due from PMC-U.S.A. on the dividends received from private
respondent; (2) to present the income tax return of its mother company for 1975 when the dividends
were received; and (3) to submit any duly authenticated document showing that the U.S. government
credited the 20% tax deemed paid in the Philippines. LibLex
PREMISES CONSIDERED, the petition is GRANTED and the decision appealed from, is
REVERSED and SET ASIDE.
SO ORDERED.
Yap, Melencio-Herrera, Padilla and Sarmiento, JJ., concur.

EN BANC
[G.R. No. 66838. December 2, 1991.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PROCTER & GAMBLE PHILIPPINE
MANUFACTURING CORPORATION and THE COURT OF TAX APPEALS, respondents.
T.A. Tejada & C.N. Lim for private respondent.
SYLLABUS
1.
TAXATION; REFUND; QUESTION OF INCAPACITY OF CLAIMANT; CANNOT BE
RAISED FOR THE FIRST TIME ON APPEAL; CASE AT BAR. There are certain preliminary
aspects of the question of the capacity of P&G-Phil. to bring the present claim for refund or tax credit,
which need to be examined. This question was raised for the first time on appeal, i.e., in the
proceedings before this Court on the Petition for Review filed by the Commissioner of Internal
Revenue. The question was not raised by the Commissioner on the administrative level, and neither
was it raised by him before the CTA. We believe that the Bureau of Internal Revenue ("BIR") should
not be allowed to defeat an otherwise valid claim for refund by raising this question of alleged
incapacity for the first time on appeal before this Court. This is clearly a matter of procedure. Petitioner
does not pretend that P&G-Phil., should it succeed in the claim for refund, is likely to run away, as it
were, with the refund instead of transmitting such refund or tax credit to its parent and sole stockholder.
It is commonplace that in the absence of explicit statutory provisions to the contrary, the government
must follow the same rules of procedure which bind private parties. It is, for instance, clear that the
government is held to compliance with the provisions of Circular No. 1-88 of this Court in exactly the
same way that private litigants are held to such compliance, save only in respect of the matter of filing
fees from which the Republic of the Philippines is exempt by the Rules of Court. More importantly,
there arises here a question of fairness should the BIR, unlike any other litigant, be allowed to raise for
the first time on appeal questions which had not been litigated either in the lower court or on the
administrative level. For, if petitioner had at the earliest possible opportunity, i.e., at the administrative
level, demanded that P&G-Phil. produce an express authorization from its parent corporation to bring
the claim for refund, then P&G-Phil. would have been able forthwith to secure and produce such
authorization before filing the action in the instant case. The action here was commenced just before
expiration of the two (2)-year prescriptive period.
2.
ID.; ID.; CLAIMING THEREOF BEFORE COMMISSIONER OF INTERNAL REVENUE;
ESSENTIAL FOR MAINTENANCE OF A SUIT FOR RECOVERY OF TAXES ERRONEOUSLY
OR ILLEGALLY COLLECTED. Under Section 306 of the NIRC, a claim for refund or tax credit
files with the Commissioner of Internal Revenue is essential for maintenance of a suit for recovery of
taxes allegedly erroneously or illegally assessed or collected. Section 309 (3) of the NIRC, in turn,
provides for the Authority of Commissioner to Take Compromises and to Refund Taxes.
3.
ID.; ID.; CAPACITY OF WITHHOLDING AGENT TO CLAIM THEREOF; WARRANTED
IN CASE AT BAR; REASONS THEREOF. Since the claim for refund was filed by P&G-Phil., the
question which arises is: is P&G-Phil. a "taxpayer" under Section 309 (3) of the NIRC? The term
"taxpayer" is defined in our NIRC as referring to "any person subject to tax imposed by the Title [on
Tax on Income]." It thus becomes important to note that under Section 53 (c) of the NIRC, the
withholding agent who is "required to deduct and withhold any tax" is made personally liable for such
tax" and indeed is indemnified against any claims and demands which the stockholder might wish to
make in questioning the amount of payments effected by the withholding agent in accordance with the
provisions of the NIRC. The withholding agent, P&G-Phil., is directly and independently liable for the
correct amount of the tax that should be withheld from the dividend remittances. The withholding agent
is, moreover, subject to and liable for deficiency assessments, surcharges and penalties should the
amount of the tax withheld be finally found to be less than the amount that should have been withheld
under law. A "person liable for tax" has been held to be a "person subject to tax" and properly
considered a "taxpayer." The terms "liable for tax" and "subject to tax" both connote legal obligation or

duty to pay a tax. It is very difficult, indeed conceptually impossible, to consider a person who is
statutorily made "liable for tax" as not "subject to tax." By any reasonable standard, such a person
should be regarded as a party in interest, or as a person having sufficient legal interest, to bring a suit
for refund of taxes he believes were illegally collected from him.
4.
ID.; ID.; WITHHOLDING AGENT; ACTS AS AN AGENT OF BOTH THE GOVERNMENT
AND TAXPAYER. In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, (15
SCRA 1 (1965)) this Court pointed out that a withholding agent is in fact the agent both of the
government and of the taxpayer, and that the withholding agent is not an ordinary government agent:
"The law sets no condition for the personal liability of the withholding agent to attach. The reason is to
compel the withholding agent to withhold the tax under all circumstances. In effect, the responsibility
for the collection of the tax as well as the payment thereof is concentrated upon the person over whom
the Government has jurisdiction. Thus, the withholding agent is constituted the agent of both the
Government and the taxpayer. With respect to the collection and/or withholding of the tax, he is the
Government's agent. In regard to the filing of the necessary income tax return and the payment of the
tax to the Government, he is the agent of the taxpayer. The withholding agent, therefore, is no ordinary
government agent especially because under Section 53 (c) he is held personally liable for the tax he is
duty bound to withhold; whereas the Commissioner and his deputies are not made liable by law." If, as
pointed out in Philippine Guaranty, the withholding agent is also an agent of the beneficial owner of the
dividends with respect to the filing of the necessary income tax return and with respect to actual
payment of the tax to the government, such authority may reasonably be held to include the authority to
file a claim for refund and to bring an action for recovery of such claim. This implied authority is
especially warranted where, as in the instant case, the withholding agent is the wholly owned
subsidiary of the parent-stockholder and therefore, at all times, under the effective control of such
parent-stockholder. In the circumstances of this case, it seems particularly unreal to deny the implied
authority of P&G-Phil. to claim a refund and to commence an action for such refund.
5.
ID.; TAX ON FOREIGN CORPORATION; NON-RESIDENT CORPORATION;
APPLICABILITY OF THE REDUCED REMITTANCE OF FIFTEEN PERCENT (15%) TAX RATE;
RULE. The applicability to the dividend remittances by P&G-Phil. to P&G-USA of the fifteen
percent (15%) tax rate provided for in Section 24 (b) (1) of the NIRC. The ordinary thirty-five (35%)
tax rate applicable to dividend remittances to non-resident corporate stockholders of a Philippine
corporation, goes down to fifteen percent (15%) if the country of domicile of the foreign stockholder
corporation "shall allow" such foreign corporation tax a credit for "taxes deemed paid in the
Philippines," applicable against the tax payable to the domiciliary country by the foreign stockholder
corporation. In other words, in the instant case, the reduced fifteen percent (15%) dividend tax rate is
applicable if the USA "shall allow" to P&G-USA a tax credit for "taxes deemed paid in the Philippines"
applicable against the US taxes of P&G-USA. The NIRC specifies that such tax credit for "taxes
deemed paid in the Philippines" must, as a minimum, reach an amount equivalent to twenty (20)
percentage points which represents the difference between the regular thirty-five percent (35%)
dividend tax rate and the preferred fifteen percent (15%) dividend tax rate. It is important to note that
Section 24 (b)(1), NIRC, does not require that the US must give a "deemed paid" tax credit for the
dividend tax (20 percentage points) waived by the Philippines in making applicable the preferred
dividend tax rate of fifteen percent (15%). In other words, our NIRC does not require that the US tax
law deem the parent-corporation to have paid the twenty (20) percentage points of dividend tax waived
by the Philippines. The NIRC only requires that the US "shall allow" P&G-USA a "deemed paid" tax
credit in an amount equivalent to the twenty (20) percentage points waived by the Philippines.
6.
ID.; ID.; ID.; ID.; ID.; APPLICABLE IN CASE AT BAR. The parent-corporation P&G-USA
is "deemed to have paid" a portion of the Philippine corporate income tax although that tax was
actually paid by its Philippine subsidiary, P&G-Phil., not by P&G-USA. This "deemed paid" concept
merely reflects economic reality, since the Philippine corporate income tax was in fact paid and

deducted from revenues earned in the Philippines, thus reducing the amount remittable as dividends to
P&G-USA. In other words, US tax law treats the Philippine corporate income tax as if it came out of
the pocket, as it were, of P&G-USA as a part of the economic cost of carrying on business operations in
the Philippines through the medium of P&G-Phil. and here earning profits. What is, under US law,
deemed paid by P&G-USA are not "phantom taxes" but instead Philippine corporate income taxes
actually paid here by P&G-Phil., which are very real indeed. It is also useful to note that both (i) tax
credit for the Philippine dividend tax actually withheld, and (ii) the tax credit for the Philippine
corporate income tax actually paid by P&G-Phil. but "deemed paid" by P&G-USA, are tax credits
available or applicable against the US corporate income tax of P&G-USA. These tax credits are
allowed because of the US congressional desire to avoid or reduce double taxation of the same income
stream.
7.
ID.; ID.; ID.; ID.; ID.; DETERMINING FACTORS. In order to determine whether US tax
law complies with the requirements for applicability of the reduced or preferential fifteen percent
(15%) dividend tax rate under Section 24 (b) (1), NIRC, it is necessary: a) to determine the amount of
the 20 percentage points dividend tax waived by the Philippine government under Section 24 (b) (1),
NIRC, and which hence goes to P&G-USA; b) to determine the amount of the "deemed paid" tax credit
which US tax law must allow to P&G-USA; and c) to ascertain that the amount of the "deemed paid"
tax credit allowed by US law is at least equal to the amount of the dividend tax waived by the
Philippine Government.
8.
ID.; ID.; ID.; ID.; "DEEMED PAID" TAX CREDIT; NEED NOT HAVE BEEN GRANTED
BEFORE THE PREFERENTIAL FIFTEEN PERCENT (15%) DIVIDEND TAX RATE. Clearly,
the "deemed paid" tax credit which, under Section 24 (b) (1), NIRC, must be allowed by US law to
P&G-USA, is the same "deemed paid tax credit that Philippine law allows to a Philippine corporation
with a wholly- or majority-owned subsidiary in (for instance) the US. The "deemed paid" tax credit
allowed in Section 902, US Tax Code, is no more a credit for "phantom taxes" than is the "deemed
paid" tax credit granted in Section 30 (c) (8), NIRC. We believe, in the first place, that we must
distinguish between the legal question before this Court from questions of administrative
implementation arising after the legal question has been answered. The basic legal issue is, of course,
this: which is the applicable dividend tax rate in the instant case: the regular thirty-five percent (35%)
rate or the reduced fifteen percent (15%) rate? The question of whether or not P&G-USA is in fact
given by the US tax authorities a "deemed paid" tax credit in the required amount, relates to the
administrative implementation of the applicable reduced tax rate. In the second place, Section 24 (b)
(1), NIRC, does not in fact require that the "deemed paid" tax credit shall have actually been granted
before the applicable dividend tax rate goes down from thirty-five percent (35%) to fifteen percent
(15%). As noted several time earlier, Section 24 (b)(1), NIRC, merely requires, in the case at bar, that
the USA "shall allow a credit against the tax due from [P&G-USA for] taxes deemed to have been paid
in the Philippines . . ." There is neither statutory provision nor revenue regulation issued by the
Secretary of Finance requiring the actual grant of the "deemed paid" tax credit by the US Internal
Revenue Service to P&G-USA before the preferential fifteen percent (15%) dividend rate becomes
applicable. Section 24 (b)(1), NIRC, does not create a tax exemption nor does it provide a tax credit; it
is a provision which specifies when a particular (reduced) tax rate is legally applicable.
9.
ID.; ID.; ID.; ID.; ADMINISTRATIVE IMPLEMENTATION THEREOF; LODGED WITH
THE BUREAU OF INTERNAL REVENUE. A requirement relating to administrative
implementation is not properly imposed as a condition for the applicability, as a matter of law, of a
particular tax rate. Upon the other hand, upon the determination or recognition of the applicability of
the reduced tax rate, there is nothing to prevent the BIR from issuing implementation regulations that
would require P&G-Phil., or any Philippine corporation similarly situated, to certify to the BIR the
amount of the "deemed paid" tax credit actually subsequently granted by the US tax authorities to
P&G-USA or a US parent corporation for the taxable year involved. Since the US tax laws can and do

change, such implementing regulations could also provide that failure of P&G-Phil. to submit such
certification within a certain period of time, would result in the imposition of a deficiency assessment
for the twenty (20) percentage points differential. The task of this Court is to settle which tax rate is
applicable, considering the state of US law at a given time. We should leave details relating to
administrative implementation where they properly belong with the BIR.
10.
ID.; ID.; ID.; ID.; PURPOSE OF THE REDUCTION. An interpretation of a tax statute that
produces a revenue flow for the government is not, for that reason alone, necessarily the correct reading
of the statute. There are many tax statutes or provisions which are designed, not to trigger off an instant
surge of revenues, but rather to achieve longer-term and broader-gauge fiscal and economic objectives.
The task of our Court is to give effect to the legislative design and objectives as they are written into
the statute even if, as in the case at bar, some revenues have to be foregone in that process. The
economic objectives sought to be achieved by the Philippine Government by reducing the thirty-five
percent (35%) dividend rate to fifteen percent (15%) are set out in the preambular clauses of P.D. No.
369 which amended Section 24 (b)(1), NIRC, into its present form. More simply put, Section 24 (b)(1),
NIRC, seeks to promote the in-flow of foreign equity investment in the Philippines by reducing the tax
cost of earning profits here and thereby increasing the net dividends remittable to the investor. The
foreign investor, however, would not benefit from the reduction of the Philippine dividend tax rate
unless its home country gives it some relief from double taxation (i.e., second-tier taxation) (the home
country would simply have more "post-R.P. tax" income to subject to its own taxing power) by
allowing the investor additional tax credits which would be applicable against the tax payable to such
home country. Accordingly, Section 24 (b)(1), NIRC, requires the home or domiciliary country to give
the investor corporation a "deemed paid" tax credit at least equal in amount to the twenty (20)
percentage points of dividend tax foregone by the Philippines, in the assumption that a positive
incentive effect would thereby be felt by the investor.
CRUZ, J., concurring:
TAXATION; TAX ON FOREIGN CORPORATION; NON-RESIDENT CORPORATION; DIVIDEND
REMITTANCE TAX RATE REDUCED FROM THIRTY-FIVE PERCENT (35%) TO FIFTEEN
PERCENT (15%); PURPOSE. The intention of Section 24(b) of our Tax Code is to attract foreign
investors to this country by reducing their 35% dividend tax rate to 15% if their own state allows them
a deemed paid tax credit at least equal in amount to the 20% waived by the Philippines. This tax credit
would offset the tax payable by them on their profits to their home state. In effect, both the Philippines
and the home state of the foreign investors reduce their respective tax "take" of those profits and the
investors wind up with more left in their pockets. Under this arrangement, the total taxes to be paid by
the foreign investors may be confined to the 35% corporate income tax and 15% dividend tax only,
both payable to the Philippines, with the US tax liability being offset wholly or substantially by the US
"deemed paid" tax credits. Without this arrangement, the foreign investors will have to pay to the local
state (in addition to the 35% corporate income tax) a 35% dividend tax and another 35% or more to
their home state or a total of 70% or more on the same amount of dividends. In this circumstance, it is
not likely that many such foreign investors, given the onerous burden of the two-tier tax system, i.e.,
local state plus home state, will be encouraged to do business in the local state. It is conceded that the
law will "not trigger off an instant surge of revenue," as indeed the tax collectible by the Republic from
the foreign investor is considerably reduced. This may appear unacceptable to the superficial viewer.
But this reduction is in fact the price we have to offer to persuade the foreign company to invest in our
country and contribute to our economic development. The benefit to us may not be immediately
available in instant revenues but it will be realized later, and in greater measure, in terms of a more
stable and robust economy.
BIDIN, J., concurring opinion:
1.
TAXATION; COMMISSIONER OF INTERNAL REVENUE; SUBJECT TO THE SAME
STRINGENT CONDITION APPLICABLE TO AN ORDINARY LITIGANT. Mr. Justice Edgardo

L. Paras in his dissenting opinion argues that the failure of petitioner Commissioner of Internal
Revenue to raise before the Court of Tax Appeals the issue of who should be the real party in interest in
claiming a refund cannot prejudice the government, as such failure is merely a procedural defect; and
that moreover, the government can never be in estoppel, especially in matters involving taxes. In a
word, the dissenting opinion insists that errors of its agents should not jeopardize the government's
position. The above rule should not be taken absolutely and literally; if it were, the government would
never lose any litigation which is clearly not true. The issue involved here is not merely one of
procedure; it is also one of fairness: whether the government should be subject to the same stringent
conditions applicable to an ordinary litigant. As the Court had declared in Wander: ". . . To allow a
litigant to assume a different posture when he comes before the court and challenge the position he had
accepted at the administrative level, would be to sanction a procedure whereby the Court which is
supposed to review administrative determinations would not review, but determine and decide for
the first time, a question not raised at the administrative forum. . . ." (160 SCRA at 566-577) Had
petitioner been forthright earlier and required from private respondent proof of authority from its parent
corporation, Procter and Gamble USA, to prosecute the claim for refund, private respondent would
doubtless have been able to show proof of such authority. By any account, it would be rank injustice
now at this late stage to require petitioner to submit such proof.
2.
ID.; TAX CREDIT; CLAIMING THEREOF DOES NOT REQUIRE DOCUMENTARY
PROOF OF PARENT CORPORATION TO HAVE ACTUALLY RECEIVED THE "DEEMED PAID"
TAX CREDIT TO PROPER TAX AUTHORITY. Paras, J., stressed that private respondent had
failed: (1) to show the actual amount credited by the US government against the income tax due from P
& G USA on the dividends received from private respondent; (2) to present the 1975 income tax return
of P & G USA when the dividends were received; and (3) to submit any duly authenticated document
showing that the US government credited the 20% tax deemed paid in the Philippines. I agree with the
main opinion of my colleague, Feliciano, J., specifically in page 23 et seq. thereof, which, as I
understand it, explains that the US tax authorities are unable to determine the amount of the "deemed
paid" credit to be given P & G USA so long as the numerator of the fraction, i.e., dividends actually
remitted by P & G to P & G USA, is still unknown. Stated in other words, until dividends have actually
been remitted to the US (which presupposes an actual imposition and collection of the applicable
Philippine dividend tax rate), the US tax authorities cannot determine the "deemed paid" portion of the
tax credit sought by P & G USA. To require private respondent to show documentary proof of its parent
corporation having actually received the "deemed paid" tax credit from the proper tax authorities,
would be like putting the cart before the horse. The only way of cutting through this (what Feliciano, J.,
termed) "circularity" is for our BIR to issue rulings (as they have been doing) to the effect that the tax
laws of particular foreign jurisdictions, e.g., USA, comply with the requirements in our tax code for
applicability of the reduced 15% dividend tax rate. Thereafter, the taxpayer can be required to submit,
within a reasonable period, proof of the amount of "deemed paid" tax credit actually granted by the
foreign tax authority. Imposing such a resolutory condition should resolve the knotty problem of
circularity.
3.
ID.; TAX REFUND; STRICT CONSTRUCTION AGAINST CLAIMANT THEREOF; MUST
CONSIDER THE LEGISLATIVE INTENT IN IMPLEMENTING THEREOF. Page 8 of the
dissenting opinion of Paras, J., further declares that tax refunds, being in the nature of tax exemptions,
are to be construed strictissimi juris against the person or entity claiming the exemption; and that
refunds cannot be permitted to exist upon "vague implications." Notwithstanding the foregoing canon
of construction, the fundamental rule is still that a judge must ascertain and give effect to the legislative
intent embodied in a particular provision of law. If a statute (including a tax statute reducing a certain
(tax rate) is clear, plain and free from ambiguity, it must be given its ordinary meaning and applied
without interpretation. In the instant case, the dissenting opinion of Paras, J., itself concedes that the
basic purpose of Pres. Decree No. 369, when it was promulgated in 1975 to amend Section 24(b), [1] of

the National Internal Revenue Code, was "to decrease the tax liability" of the foreign capital investor
and thereby to promote more inward foreign investment. The same dissenting opinion hastens to add,
however, that the granting of a reduced dividend tax rate "is premised on reciprocity."
4.
ID.; REDUCED DIVIDEND REMITTANCE; CONDITION OF RECIPROCITY; NOT
REQUIRED TO GRANT THE PRIVILEGE. Nowhere in the provisions of P.D. No. 369 or in the
National Internal Revenue Code itself would one find reciprocity specified as a condition for the
granting of the reduced dividend tax rate in Section 24 (b), [1], NIRC. Upon the other hand, where the
law-making authority intended to impose a requirement of reciprocity as a condition for grant of a
privilege, the legislature does so expressly and clearly. For example, the gross estate of non-citizens
and non-residents of the Philippines normally includes intangible personal property situated in the
Philippines, for purposes of application of the estate tax and donor's tax. However, under Section 98 of
the NIRC (as amended by P.D. 1457), no taxes will be collected by the Philippines in respect of such
intangible personal property if the law or the foreign country of which the decedent was a citizen and
resident at the time of his death allows a similar exemption from transfer or death taxes in respect of
intangible personal property located in such foreign country and owned by Philippine citizens not
residing in that foreign country. There is no statutory requirement of reciprocity imposed as a condition
for grant of the reduced dividend tax rate of 15%. Moreover, for the Court to impose such a
requirement of reciprocity would be to contradict the basic policy underlying P.D. 369 which amended
Section 24(b), [1], NIRC. P.D. 369 was promulgated in the effort to promote the inflow of foreign
investment capital into the Philippines. A requirement of reciprocity, i.e., a requirement that the U.S.
grant a similar reduction of U.S. subsidiaries of Philippine corporations, would assume a desire on the
part of the U.S. and of the Philippines to attract the flow of Philippine capital into the U.S.. But the
Philippines precisely is a capital importing, and not a capital exporting country. If the Philippines had
surplus capital to export, it would not need to import foreign capital into the Philippines. In other
words, to require dividend tax reciprocity from a foreign jurisdiction would be to actively encourage
Philippine corporations to invest outside the Philippines, which would be inconsistent with the notion
of attracting foreign capital into the Philippines in the first place.
PARAS, J., dissenting:
1.
TAXATION; TAX ON FOREIGN CORPORATIONS; NON-RESIDENT CORPORATION;
WITHHOLDING AGENT THEREOF CANNOT CLAIM TAX REFUND IN BEHALF OF PARENT
CORPORATION. It is true that private respondent, as withholding agent, is obliged by law to
withhold and to pay over to the Philippine government the tax on the income of the taxpayer, PMCU.S.A. (parent company). However, such fact does not necessarily connote that private respondent is
the real party in interest to claim reimbursement of the tax alleged to have been overpaid. Payment of
tax is an obligation physically passed off by law on the withholding agent, if any, but the act of
claiming tax refund is a right that, in a strict sense, belongs to the taxpayer which is private
respondent's parent company. The role or function of PMC-Phils., as the remitter or payor of the
dividend income, is merely to insure the collection of the dividend income taxes due to the Philippine
government from the taxpayer, "PMC-U.S.A." the non-resident foreign corporation not engaged in
trade or business in the Philippines, as "PMC-U.S.A." is subject to tax equivalent to thirty five percent
(35%) of the gross income received from "PMC-Phils." in the Philippines "as . . . dividends . . ." (Sec.
24 [b], Phil. Tax Code). Being a mere withholding agent of the government and the real party in interest
being the parent company in the United States, private respondent cannot claim refund of the alleged
overpaid taxes. Such right properly belongs to PMC-U.S.A. It is therefore clear that as held by the
Supreme Court in a series of cases, the action in the Court of Tax Appeals as well as in this Court
should have been brought in the name of the parent company as petitioner and not in the name of the
withholding agent. This is because the action should be brought under the name of the real party in
interest. (See Salonga v. Warner Barnes, & Co., Ltd., 88 Phil. 125; Sutherland, Code Pleading, Practice,
& Forms, p. 11; Ngo The Hua v. Chung Kiat Hua, L-17091, Sept. 30, 1963, 9 SCRA 113, Gabutas v.

Castellanes, L-17323, June 23, 1965, 14 SCRA 376; Rep. v. PNB, L-16485, January 30, 1945). It is
true that under the Internal Revenue Code the withholding agent may be sued by itself if no remittance
tax is paid, or if what was paid is less than what is due. From this, Justice Feliciano claims that in case
of an overpayment (or claim for refund) the agent must be given the right to sue the Commissioner by
itself (that is, the agent here is also a real party in interest). He further claims that to deny this right
would be unfair. This is not so. While payment of the tax due is an OBLIGATION of the agent, the
obtaining of a refund is a RIGHT. While every obligation has a corresponding right (and vice-versa),
the obligation to pay the complete tax has the corresponding right of the government to demand the
deficiency; and the right of the agent to demand a refund corresponds to the government's duty to
refund. Certainly. The obligation of the withholding agent to pay in full does not correspond to its right
to claim for the refund. It is evident therefore that the real party in interest in this claim for
reimbursement is the principal (the mother corporation) and NOT the agent.
2.
ID.; ID.; ID.; U.S. FOREIGN TAX CREDIT; OPERATES ONLY ON FOREIGN TAXES
ACTUALLY PAID BY U.S. CORPORATE TAXPAYER; CASE AT BAR. The U.S. foreign tax
credit system operates only on foreign taxes actually paid by U.S. corporate taxpayers, whether directly
or indirectly. Nowhere under a statute or under a tax treaty, does the U.S. government recognize much
less permit any foreign tax credit for spared or ghost taxes, as in reality the U.S. foreign-tax credit
mechanism under Sections 901-905 of the U.S. Internal Revenue Code does not apply to phantom
dividend taxes in the form of dividend taxes waived, spared or otherwise considered "as if" paid by any
foreign taxing authority, including that of the Philippine government. Beyond that, the private
respondent failed: (1) to show the actual amount credited by the U.S. government against the income
tax due from PMC-U.S.A. on the dividends received from private respondent; (2) to present the income
tax return of its parent company for 1975 when the dividends were received; and (3) to submit any duly
authenticated document showing that the U.S. government credited the 20% tax deemed paid in the
Philippines.
3.
ID.; TAX REFUND; STRICTLY CONSTRUED AGAINST THE PERSON OR ENTITY
CLAIMING THEREOF. Tax refunds are in the nature of tax exemptions. As such, they are regarded
as in derogation or sovereign authority and to be construed strictissimi juris against the person or entity
claiming the exemption. The burden of proof is upon him who claims the exemption in his favor and he
must be able to justify his claim by the clearest grant of organic or statute law . . . and cannot be
permitted to exist upon vague implications. (Asiatic Petroleum Co. v. Llanes, 49 Phil. 466; Northern
Phil. Tobacco Corp. v. Mun. of Agoo, La Union, 31 SCRA 304; Rogan v. Commissioner, 30 SCRA
968; Asturia Sugar Central, Inc. v. Commissioner of Customs, 29 SCRA 617; Davao Light and Power
Co. Inc. v. Commissioner of Custom, 44 SCRA 122). Thus, when tax exemption is claimed, it must be
shown indubitably to exist, for every presumption is against it, and a well founded doubt is fatal to the
claim (Farrington v. Tennessee & Country Shelby, 95 U.S. 679, 686; Manila Electric Co. v. Vera, L29987, Oct. 22, 1975; Manila Electric Co. v. Tabios, L-23847, Oct. 22, 1975, 67 SCRA 451).
4.
ID.; TAX CREDIT APPERTAINING TO REMITTANCE ABROAD OF DIVIDEND EARNED
HERE IN THE PHILIPPINES; PURPOSE. It will be remembered that the tax credit appertaining to
remittances abroad of dividend earned here in the Philippines was amplified in Presidential Decree No.
369 promulgated in 1975, the purpose of which was to "encourage more capital investment for large
projects." And its ultimate purpose is to decrease the tax liability of the corporation concerned. But this
granting of a preferential right is premised on reciprocity, without which there is clearly a derogation of
our country's financial sovereignty. No such reciprocity has been proved, nor does it actually exist.
5.
CIVIL LAW; ESTOPPEL; DOES NOT APPLY TO GOVERNMENT AGENCIES. Petitioner
Commissioner of Internal Revenue's failure to raise before the Court of Tax Appeals the issue relating
to the real party in interest to claim the refund cannot, and should not, prejudice the government. Such
is merely a procedural defect. It is axiomatic that the government can never be in estoppel, particularly
in matters involving taxes. Thus, for example, the payment by the tax-payer of income taxes, pursuant

to a BIR assessment does not preclude the government from making further assessments. The errors or
omissions of certain administrative officers should never be allowed to jeopardize the government's
financial position. (See: Phil. Long Distance Tel. Co. v. Coll. of Internal Revenue, 90 Phil. 674; Lewin
v. Galang, L-15253, Oct. 31, 1960; Coll. of Internal Revenue v. Ellen Wood McGrath, L-12710, L12721, Feb. 28, 1961; Perez v. Perez, L-14874, Sept. 30, 1960; Republic v. Caballero, 79 SCRA 179;
Favis v. Municipality of Sabongan, L-26522, Feb. 27, 1963)
RESOLUTION
FELICIANO, J p:
For the taxable year 1974 ending on 30 June 1974, and the taxable year 1975 ending 30 June 1975,
private respondent Procter and Gamble Philippine Manufacturing Corporation ("P&G-Phil.") declared
dividends payable to its parent company and sole stockholder, Procter and Gamble Co., Inc. (USA)
("P&G-USA"), amounting to P24,164,946.30, from which dividends the amount of P8,457,731.21
representing the thirty-five percent (35%) withholding tax at source was deducted.
On 5 January 1977, private respondent P&G-Phil. filed with petitioner Commissioner of Internal
Revenue a claim for refund or tax credit in the amount of P4,832,989.26 claiming, among other things,
that pursuant to Section 24 (b) (1) of the National Internal Revenue Code ("NIRC"), 1 as amended by
Presidential Decree No. 369, the applicable rate of withholding tax on the dividends remitted was only
fifteen percent (15%) (and not thirty-five percent [35%]) of the dividends.
There being no responsive action on the part of the Commissioner, P&G-Phil., on 13 July 1977, filed a
petition for review with public respondent Court of Tax Appeals ("CTA") docketed as CTA Case No.
2883. On 31 January 1984, the CTA rendered a decision ordering petitioner Commissioner to refund or
grant the tax credit in the amount of P4,832,989.00.
On appeal by the Commissioner, the Court through its Second Division reversed the decision of the
CTA and held that:
(a)
P&G-USA, and not private respondent P&G-Phil., was the proper party to claim the refund or
tax credit here involved; prcd
(b)
"there is nothing in Section 902 or other provisions of the US Tax Code that allows a credit
against the US tax due from P&G-USA of taxes deemed to have been paid in the Philippines equivalent
to twenty percent (20%) which represents the difference between the regular tax of thirty-five percent
(35%) on corporations and the tax of fifteen percent (15%) on dividends;" and
(c)
private respondent P&G-Phil. failed to meet certain conditions necessary in order that "the
dividends received by its non-resident parent company in the US (P&G-USA) may be subject to the
preferential tax rate of 15% instead of 35%."
These holdings were questioned in P&G-Phil.'s Motion for Reconsideration and we will deal with them
seriatim in this Resolution resolving that Motion.
I
1.
There are certain preliminary aspects of the question of the capacity of P&G-Phil. to bring the
present claim for refund or tax credit, which need to be examined. This question was raised for the first
time on appeal, i.e., in the proceedings before this Court on the Petition for Review filed by the
Commissioner of Internal Revenue. The question was not raised by the Commissioner on the
administrative level, and neither was it raised by him before the CTA.
We believe that the Bureau of Internal Revenue ("BIR") should not be allowed to defeat an otherwise
valid claim for refund by raising this question of alleged incapacity for the first time on appeal before
this Court. This is clearly a matter of procedure. Petitioner does not pretend that P&G-Phil., should it
succeed in the claim for refund, is likely to run away, as it were, with the refund instead of transmitting
such refund or tax credit to its parent and sole stockholder. It is commonplace that in the absence of
explicit statutory provisions to the contrary, the government must follow the same rules of procedure
which bind private parties. It is, for instance, clear that the government is held to compliance with the
Provisions of Circular No. 1-88 of this Court in exactly the same way that private litigants are held to

such compliance, save only in respect of the matter of filing fees from which the Republic of the
Philippines is exempt by the Rules of Court.
More importantly, there arises here a question of fairness should the BIR, unlike any other litigant, be
allowed to raise for the first time on appeal questions which had not been litigated either in the lower
court or on the administrative level. For, if petitioner had at the earliest possible opportunity, i.e., at the
administrative level, demanded that P&G-Phil. produce an express authorization from its parent
corporation to bring the claim for refund, then P&G-Phil. would have been able forthwith to secure and
produce such authorization before filing the action in the instant case. The action here was commenced
just before expiration of the two (2)-year prescriptive period.
2.
The question of the capacity of P&G-Phil. to bring the claim for refund has substantive
dimensions as well which, as will be seen below, also ultimately relate to fairness. LexLib
Under Section 306 of the NIRC, a claim for refund or tax credit filed with the Commissioner of
Internal Revenue is essential for maintenance of a suit for recovery of taxes allegedly erroneously or
illegally assessed or collected:
"SECTION 306.
Recovery of tax erroneously or illegally collected. No suit or proceeding shall
be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to
have been erroneously or illegally assessed or collected, or of any penalty claimed to have been
collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully
collected, until a claim for refund or credit has been duly filed with the Commissioner of Internal
Revenue; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has
been paid under protest or duress. In any case, no such suit or proceeding shall be begun after the
expiration of two years from the date of payment of the tax or penalty regardless of any supervening
cause that may arise after payment: . . ." (Emphasis supplied).
Section 309 (3) of the NIRC, in turn, provides:
"SECTION 309.
Authority of Commissioner to Take Compromises and to Refund Taxes. The
Commissioner may:
xxx
xxx
xxx
(3)
credit or refund taxes erroneously or illegally received, . . . No credit or refund of taxes or
penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit
or refund within two (2) years after the payment of the tax or penalty." (As amended by P.D. No. 69)
(Emphasis supplied).
Since the claim for refund was filed by P&G-Phil., the question which arises is: is P&G-Phil. a
"taxpayer" under Section 309 (3) of the NIRC? The term "taxpayer" is defined in our NIRC as referring
to "any person subject to tax imposed by the Title [on Tax on Income]." 2 It thus becomes important to
note that under Section 53 (c) of the NIRC, the withholding agent who is required to deduct and
withhold any tax" is made "personally liable for such tax" and indeed is indemnified against any claims
and demands which the stockholder might wish to make in questioning the amount of payments
effected by the withholding agent in accordance with the provisions of the NIRC. The withholding
agent, P&G-Phil., is directly and independently liable 3 for the correct amount of the tax that should be
withheld from the dividend remittances. The withholding agent is, moreover, subject to and liable for
deficiency assessments, surcharges and penalties should the amount of the tax withheld be finally
found to be less than the amount that should have been withheld under law. cdll
A "person liable for tax" has been held to be a "person subject to tax"" and properly considered a
"taxpayer." 4 The terms liable for tax" and "subject to tax" both connote legal obligation or duty to pay
a tax. It is very difficult, indeed conceptually impossible, to consider a person who is statutorily made
liable for tax" as not "subject to tax." By any reasonable standard, such a person should be regarded as
a party in interest, or as a person having sufficient legal interest, to bring a suit for refund of taxes he
believes were illegally collected from him.
In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, 5 this Court pointed out

that a withholding agent is in fact the agent both of the government and of the taxpayer, and that the
withholding agent is not an ordinary government agent:
"The law sets no condition for the personal liability of the withholding agent to attach. The reason is to
compel the withholding agent to withhold the tax under all circumstances. In effect, the responsibility
for the collection of the tax as well as the payment thereof is concentrated upon the person over whom
the Government has jurisdiction. Thus, the withholding agent is constituted the agent of both the
Government and the taxpayer. With respect to the collection and/or withholding of the tax, he is the
Government's agent. In regard to the filing of the necessary income tax return and the payment of the
tax to the Government, he is the agent of the taxpayer. The withholding agent, therefore, is no ordinary
government agent especially because under Section 53 (c) he is held personally liable for the tax he is
duty bound to withhold; whereas the Commissioner and his deputies are not made liable by law." 6
(Emphasis supplied).
If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the beneficial owner
of the dividends with respect to the filing of the necessary income tax return and with respect to actual
payment of the tax to the government, such authority may reasonably be held to include the authority to
file a claim for refund and to bring an action for recovery of such claim. This implied authority is
especially warranted where, as in the instant case, the withholding agent is the wholly owned
subsidiary of the parent-stockholder and therefore, at all times, under the effective control of such
parent-stockholder. In the circumstances of this case, it seems particularly unreal to deny the implied
authority of P&G-Phil. to claim a refund and to commence an action for such refund.
We believe that, even now, there is nothing to preclude the BIR from requiring P&G-Phil. to show
some written or telexed confirmation by P&G-USA of the subsidiary's authority to claim the refund or
tax credit and to remit the proceeds of the refund, or to apply the tax credit to some Philippine tax
obligation of, P&G-USA, before actual payment of the refund or issuance of a tax credit certificate.
What appears to be vitiated by basic unfairness is petitioner's position that, although P&G-Phil. is
directly and personally liable to the Government for the taxes and any deficiency assessments to be
collected, the Government is not legally liable for a refund simply because it did not demand a written
confirmation of P&G-Phil.'s implied authority from the very beginning. A sovereign government
should act honorably and fairly at all times, even vis-a-vis taxpayers.
We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly regarded as a
"taxpayer" within the meaning of Section 309, NIRC, and as impliedly authorized to file the claim for
refund and the suit to recover such claim. llcd
II
1.
We turn to the principal substantive question before us: the applicability to the dividend
remittances by P&G-Phil. to P&G-USA of the fifteen percent (15%) tax rate provided for in the
following portion of Section 24 (b) (1) of the NIRC:
"(b) Tax on foreign corporations.
(1)
Non-resident corporation. A foreign corporation not engaged in trade and business in the
Philippines, . . ., shall pay a tax equal to 35% of the gross income receipt during its taxable year from
all sources within the Philippines, as . . . dividends . . . Provided, still further, that on dividends
received from a domestic corporation liable to tax under this Chapter, the tax shall be 15% of the
dividends, which shall be collected and paid as provided in Section 53 (d) of this Code, subject to the
condition that the country in which the non-resident foreign corporation is domiciled shall allow a
credit against the tax due from the non-resident foreign corporation, taxes deemed to have been paid in
the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on
corporations and the tax (15%) on dividends as provided in this Section . . ."
The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to non-resident
corporate stockholders of a Philippine corporation, goes down to fifteen percent (15%) if the country of
domicile of the foreign stockholder corporation "shall allow" such foreign corporation a tax credit for

"taxes deemed paid in the Philippines," applicable against the tax payable to the domiciliary country by
the foreign stockholder corporation. In other words, in the instant case, the reduced fifteen percent
(15%) dividend tax rate is applicable if the USA "shall allow" to P&G-USA a tax credit for "taxes
deemed paid in the Philippines" applicable against the US taxes of P&G-USA. The NIRC specifies that
such tax credit for "taxes deemed paid in the Philippines" must, as a minimum, reach an amount
equivalent to twenty (20) percentage points which represents the difference between the regular thirtyfive percent (35%) dividend tax rate and the preferred fifteen percent (15%) dividend tax rate.
It is important to note that Section 24 (b) (1), NIRC, does not require that the US must give a "deemed
paid" tax credit for the dividend tax (20 percentage points) waived by the Philippines in making
applicable the preferred dividend tax rate of fifteen percent (15%). In other words, our NIRC does not
require that the US tax law deem the parent-corporation to have paid the twenty (20) percentage points
of dividend tax waived by the Philippines. The NIRC only requires that the US "shall allow" P&GUSA a "deemed paid" tax credit in an amount equivalent to the twenty (20) percentage points waived
by the Philippines.
2.
The question arises: Did the US law comply with the above requirement? The relevant
provisions of the US Internal Revenue Code ("Tax Code") are the following:
"SECTION 901 Taxes of foreign countries and possessions of United States.
(a)
Allowance of credit. If the taxpayer chooses to have the benefits of this subpart, the tax
imposed by this chapter shall, subject to the applicable limitation of section 904, be credited with the
amounts provided in the applicable paragraph of subsection (b) plus, in the case of a corporation, the
taxes deemed to have been paid under sections 902 and 960. Such choice for any taxable year may be
made or changed at any time before the expiration of the period prescribed for making a claim for
credit or refund of the tax imposed by this chapter for each taxable year. The credit shall not be allowed
against the tax imposed by section 531 (relating to the tax on accumulated earnings), against the
additional tax imposed for the taxable year under section 1333 (relating to war loss recoveries) or under
section 1351 (relating to recoveries of foreign expropriation losses), or against the personal holding
company tax imposed by section 541.
(b)
Amount allowed. Subject to the applicable limitation of section 904, the following amounts
shall be allowed as the credit under subsection (a):
(a)
Citizens and domestic corporations. In the case of a citizen of the United States and of a
domestic corporation, the amount of any income, war profits, and excess profits taxes paid or accrued
during the taxable year to any foreign country or to any possession of the United States; and LexLib
xxx
xxx
xxx
SECTION 902. Credit for corporate stockholders in foreign corporation.
(A)
Treatment of Taxes Paid by Foreign Corporation. For purposes of this subject, a domestic
corporation which owns at least 10 percent of the voting stock of a foreign corporation from which it
receives dividends in any taxable year shall
xxx
xxx
xxx
(2)
to the extent such dividends are paid by such foreign corporation out of accumulated profits [as
defined in subsection (c) (1) (b)] of a year for which such foreign corporation is a less developed
country corporation, be deemed to have paid the same proportion of any income, war profits, or excess
profits taxes paid or deemed to be paid by such foreign corporation to any foreign country or to any
possession of the United States on or with respect to such accumulated profits, which the amount of
such dividends bears to the amount of such accumulated profits.
xxx
xxx
xxx
(c)
Applicable Rules
(1)
Accumulated profits defined. For purposes of this section, the term 'accumulated profits'
means with respect to any foreign corporation,
(A)
for purposes of subsections (a) (1) and (b) (1), the amount of its gains, profits, or income

computed without reduction by the amount of the income, war profits, and excess profits taxes imposed
on or with respect to such profits or income by any foreign country. . . .; and
(B)
for purposes of subsections (a) (2) and (b) (2), the amount of its gains, profits, or income in
excess of the income, war profits, and excess profits taxes imposed on or with respect to such profits or
income.
The Secretary or his delegate shall have full power to determine from the accumulated profits of what
year or years such dividends were paid, treating dividends paid in the first 20 days of any year as
having been paid from the accumulated profits of the preceding year or years (unless to his satisfaction
shows otherwise), and in other respects treating dividends as having been paid from the most recently
accumulated gains, profits, or earning . . ." (Emphasis supplied).
Close examination of the above quoted provisions of the US Tax Code 7 shows the following:
a.
US law (Section 901, Tax Code) grants P&G-USA a tax credit for the amount of the dividend
tax actually paid (i.e., withheld) from the dividend remittances to P&G-USA;
b.
US law (Section 902, US Tax Code) grants to P&G-USA a "deemed paid" tax credit 8 for a
proportionate part of the corporate income tax actually paid to the Philippines by P&G-Phil.
The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine corporate
income tax although that tax was actually paid by its Philippine subsidiary, P&G-Phil., not by P&GUSA. This "deemed paid" concept merely reflects economic reality, since the Philippine corporate
income tax was in fact paid and deducted from revenues earned in the Philippines, thus reducing the
amount remittable as dividends to P&G-USA. In other words, US tax law treats the Philippine
corporate income tax as if it came out of the pocket, as it were, of P&G-USA as a part of the economic
cost of carrying on business operations in the Philippines through the medium of P&G-Phil. and here
earning profits. What is, under US law, deemed paid by P&G-USA are not "phantom taxes" but instead
Philippine corporate income taxes actually paid here by P&G-Phil., which are very real indeed.
It is also useful to note that both (i) the tax credit for the Philippine dividend tax actually withheld, and
(ii) the tax credit for the Philippine corporate income tax actually paid by P&G-Phil. but "deemed paid"
by P&G-USA, are tax credits available or applicable against the US corporate income tax of P&GUSA. These tax credits are allowed because of the US congressional desire to avoid or reduce double
taxation of the same income stream. 9
In order to determine whether US tax law complies with the requirements for applicability of the
reduced or preferential fifteen percent (15%) dividend tax rate under Section 24 (b) (1), NIRC, it is
necessary:
a.
to determine the amount of the 20 percentage points dividend tax waived by the Philippine
government under Section 24 (b) (1), NIRC, and which hence goes to P&G-USA;
b.
to determine the amount of the "deemed paid" tax credit which US tax law must allow to P&GUSA; and
c.
to ascertain that the amount of the "deemed paid" tax credit allowed by US law is at least equal
to the amount of the dividend tax waived by the Philippine Government. prcd
Amount (a), i.e., the amount of the dividend tax waived by the Philippine government is arithmetically
determined in the following manner:
P100.00
Pretax net corporate income earned by P&G-Phil.
x 35%
Regular Philippine corporate income tax rate

P35.00
Paid to the BIR by P&G-Phil. as Philippine
corporate income tax.
P100.00
35.00

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

P65.00
Dividends remittable to P&G-USA
x 35%
Regular Philippine dividend tax rate under Section

24 (b) (1), NIRC

P 22.75
Regular dividend tax.
P65.00
Dividends remittable to P&G-USA
x 15%
Reduced dividend tax rate under Section 24 (b)

(1), NIRC
P 9.75
Reduced dividend tax
P22.75
Regular dividend tax under Section 24 (b) (1), NIRC
9.75
Reduced dividend tax under Section 24 (b) (1),

NIRC
P13.00
Amount of dividend tax waived by Philippine
government under Section 24 (b) (1), NIRC
Thus, amount (a) above is P13.00 for every P100.00 of pre-tax net income earned by P&G-Phil.
Amount (a) is also the minimum amount of the "deemed paid" tax credit that US tax law shall allow if
P&G-USA is to qualify for the reduced or preferential dividend tax rate under Section 24 (b) (1),
NIRC.
Amount (b) above, i.e., the amount of the "deemed paid" tax credit which US tax law allows under
Section 902, Tax Code, may be computed arithmetically as follows:
P65.00
Dividends remittable to P&G-USA
9.75
Dividend tax withheld at the reduced (15%) rate

P55.25
Dividends actually remitted to P&G-USA
P35.00
Philippine corporate income tax paid by P&G-Phil.
to the BIR.
Dividends actually
remitted by P&G-Phil.
to P&G-USA P 55.25

x P35.00 = P29.75 10
Amount of accumulated
P 65.00
profits earned by P&GPhil. in excess of income tax.
Thus, for every P55.25 of dividends actually remitted (after withholding at the rate of 15%) by P&GPhil. to its US parent P&G-USA, a tax credit of P29.75 is allowed by Section 902 US Tax Code for
Philippine corporate income tax "deemed paid" by the parent but actually paid by the wholly-owned
subsidiary.
Since P29.75 is much higher than P13.00 (the amount of dividend tax waived by the Philippine
government), Section 902, US Tax Code, specifically and clearly complies with the requirements of
Section 24 (b) (1), NIRC.
3.
It is important to note also that the foregoing reading of Sections 901 and 902 of the US Tax
Code is identical with the reading of the BIR of Sections 901 and 902 as shown by administrative
rulings issued by the BIR.
The first Ruling was issued in 1976, i.e., BIR Ruling No. 76004, rendered by then Acting
Commissioner of Internal Revenue Efren I. Plana, later Associate Justice of this Court, the relevant
portion of which stated:
"However, after a restudy of the decision in the American Chicle Company case and the Provisions of
Section 901 and 902 of the U.S. Internal Revenue Code, we find merit in your contention that our
computation of the credit which the U.S. tax law allows in such cases is erroneous as the amount of tax
'deemed paid' to the Philippine government for purposes of credit against the U.S. tax by the recipient

of dividends includes a portion of the amount of income tax paid by the corporation declaring the
dividend in addition to the tax withheld from the dividend remitted. In other words, the U.S.
government will allow a credit to the U.S. corporation or recipient of the dividend, in addition to the
amount of tax actually withheld, a portion of the income tax paid by the corporation declaring the
dividend. Thus, if a Philippine corporation wholly owned by a U.S. corporation has a net income of
P100,000, it will pay P25,000 Philippine income tax thereon in accordance with Section 24(a) of the
Tax Code. The net income, after income tax, which is P75,000, will then be declared as dividend to the
U.S. corporation at 15% tax, or P11,250, will be withheld therefrom. Under the aforementioned
sections of the U.S. Internal Revenue Code, U.S. corporation receiving the dividend can utilize as
credit against its U.S. tax payable on said dividends the amount of P30,000 composed of: LLjur
(1)
The tax 'deemed paid' or indirectly paid on the dividend arrived at as follows:
P75,000 x P25,000 = P18,750
100,000 *
(2)
The amount of 15% of
P75,000 withheld
=
11,250
P30,000
The amount of P18,750 deemed paid and to be credited against the US. tax on the dividends received
by the U.S. corporation from a Philippine subsidiary is clearly more than 20% requirement of
Presidential Decree No. 369 as 20% of P75,000.00 the dividends to be remitted under the above
example, amounts to P15,000.00 only.
In the light of the foregoing, BIR Ruling No. 75-005 dated September 10, 1975 is hereby amended in
the sense that the dividends to be remitted by your client to its parent company shall be subject to the
withholding tax at the rate of 15% only.
This ruling shall have force and effect only for as long as the present pertinent provisions of the U.S.
Federal Tax Code, which are the bases of the ruling, are not revoked, amended and modified, the effect
of which will reduce the percentage of tax deemed paid and creditable against the U.S. tax on dividends
remitted by a foreign corporation to a U.S. corporation." (Emphasis supplied).
The 1976 Ruling was reiterated in, e.g., BIR Ruling dated 22 July 1981 addressed to Basic Foods
Corporation and BIR Ruling dated 20 October 1987 addressed to Castillo, Laman, Tan and Associates.
In other words, the 1976 Ruling of Hon. Efren I. Plana was reiterated by the BIR even as the case at bar
was pending before the CTA and this Court.
4.
We should not overlook the fact that the concept of "deemed paid" tax credit, which is
embodied in Section 902, US Tax Code, is exactly the same "deemed paid" tax credit found in our
NIRC and which Philippine tax law allows to Philippine corporations which have operations abroad
(say, in the United States) and which, therefore, pay income taxes to the US government.
Section 30 (c) (3) and (8), NIRC, provides:
"SECTION 30.
Deductions from Gross Income. In computing net income, there shall be
allowed as deductions . . .
(c)
Taxes. . . .
xxx
xxx
xxx
(3)
Credits against tax for taxes of foreign countries. If the taxpayer signifies in his return his
desire to have the benefits of this paragraphs, the tax imposed by this Title shall be credited with . . .
(a)
Citizen and Domestic Corporation. In the case of a citizen of the Philippines and of domestic
corporation the amount of net income, war profits or excess profits, taxes paid or accrued during the
taxable year to any foreign country." (Emphasis supplied)
Under Section 30 (c) (3) (a), NIRC, above, the BIR must give a tax credit to a Philippine corporation
for taxes actually paid by it to the US government e.g., for taxes collected by the US government on
dividend remittances to the Philippine corporation. This Section of the NIRC is the equivalent of
Section 901 of the US Tax Code.

Section 30 (c) (8), NIRC, is practically identical with Section 902 of the US Tax Code, and provides as
follows:
"(8) Taxes of foreign subsidiary. For the purposes of this subsection a domestic corporation
which owns a majority of the voting stock of a foreign corporation from which it receives dividends in
any taxable year shall be deemed to have paid the same proportion of any income, war profits, or
excess-profits taxes paid by such foreign corporation to any foreign country, upon or with respect to the
accumulated profits of such foreign corporation from which such dividends were paid, which the
amount of such dividends bears to the amount of such accumulated profits: Provided, That the amount
of tax deemed to have been paid under this subsection shall in no case exceed the same proportion of
the tax against which credit is taken which the amount of such dividends bears to the amount of the
entire net income of the domestic corporation in which such dividends are included. The term
'accumulated profits' when used in this subsection in reference to a foreign corporation, means the
amount of its gains, profits, or income in excess of the income, war-profits, and excess-profits taxes
imposed upon or with respect to such profits or income; and the Commissioner of Internal Revenue
shall have full power to determine from the accumulated profits of what year or years such dividends
were paid; treating dividends paid in the first sixty days of any year as having been paid from the
accumulated profits of the preceding year or years (unless to his satisfaction shown otherwise), and in
other respects treating dividends as having been paid from the most recently accumulated gains, profits,
or earnings. In the case of a foreign corporation, the income, war-profits, and excess-profits taxes of
which are determined on the basis of an accounting period of less than one year, the word 'year' as used
in this subsection shall be construed to mean such accounting period." (Emphasis supplied).
Under the above quoted Section 30 (c) (8), NIRC, the BIR must give a tax credit to a Philippine parent
corporation for taxes "deemed paid" by it, that is, e.g., for taxes paid to the US by the US subsidiary of
a Philippine-parent corporation. The Philippine parent or corporate stockholder is "deemed under our
NIRC to have paid a proportionate part of the US corporate income tax paid by its US subsidiary,
although such US tax was actually paid by the subsidiary and not by the Philippine parent.
Clearly, the "deemed paid" tax credit which, under Section 24 (b) (1), NIRC, must be allowed by US
law to P&G-USA, is the same "deemed paid" tax credit that Philippine law allows to a Philippine
corporation with a wholly- or majority-owned subsidiary in (for instance) the US. The "deemed paid"
tax credit allowed in Section 902, US Tax Code, is no more a credit for "phantom taxes" than is the
"deemed paid" tax credit granted in Section 30 (c) (8), NIRC.
III
1.
The Second Division of the Court, in holding that the applicable dividend tax rate in the instant
case was the regular thirty-five percent (35%) rate rather than the reduced rate of fifteen percent (15%),
held that P&G-Phil. had failed to prove that its parent, P&G-USA, had in fact been given by the US tax
authorities a "deemed paid" tax credit in the amount required by Section 24 (b) (1), NIRC.
We believe, in the first place, that we must distinguish between the legal question before this Court
from questions of administrative implementation arising after the legal question has been answered.
The basic legal issue is of course, this: which is the applicable dividend tax rate in the instant case: the
regular thirty-five percent (35%) rate or the reduced fifteen percent (15%) rate? The question of
whether or not P&G-USA is in fact given by the US tax authorities a "deemed paid" tax credit in the
required amount, relates to the administrative implementation of the applicable reduced tax rate.
In the second place, Section 24 (b) (1), NIRC, does not in fact require that the "deemed paid" tax credit
shall have actually been granted before the applicable dividend tax rate goes down from thirty-five
percent (35%) to fifteen percent (15%). As noted several times earlier, Section 24 (b) (1), NIRC,
merely requires, in the case at bar, that the USA "shall allow a credit against the tax due from [P&GUSA for] taxes deemed to have been paid in the Philippines . . ." There is neither statutory provision
nor revenue regulation issued by the Secretary of Finance requiring the actual grant of the "deemed
paid" tax credit by the US Internal Revenue Service to P&G-USA before the preferential fifteen percent

(15%) dividend rate becomes applicable. Section 24 (b) (1), NIRC, does not create a tax exemption nor
does it provide a tax credit; it is a provision which specifies when a particular (reduced) tax rate is
legally applicable. prcd
In the third place, the position originally taken by the Second Division results in a severe practical
problem of administrative circularity. The Second Division in effect held that the reduced dividend tax
rate is not applicable until the US tax credit for "deemed paid" taxes is actually given in the required
minimum amount by the US Internal Revenue Service to P&G-USA. But, the US "deemed paid" tax
credit cannot be given by the US tax authorities unless dividends have actually been remitted to the US,
which means that the Philippine dividend tax, at the rate here applicable, was actually imposed and
collected. 11 It is this practical or operating circularity that is in fact avoided by our BIR when it issues
rulings that the tax laws of particular foreign jurisdictions (e.g., Republic of Vanuatu, 12 Hongkong, 13
Denmark, 14 etc.) comply with the requirements set out in Section 24 (b) (1), NIRC, for applicability
of the fifteen percent (15%) tax rate. Once such a ruling is rendered, the Philippine subsidiary begins to
withhold at the reduced dividend tax rate.
A requirement relating to administrative implementation is not properly imposed as a condition for the
applicability, as a matter of law, of a particular tax rate. Upon the other hand, upon the determination or
recognition of the applicability of the reduced tax rate, there is nothing to prevent the BIR from issuing
implementing regulations that would require P&G-Phil., or any Philippine corporation similarly
situated, to certify to the BIR the amount of the "deemed paid" tax credit actually subsequently granted
by the US tax authorities to P&G-USA or a US parent corporation for the taxable year involved. Since
the US tax laws can and do change, such implementing regulations could also provide that failure of
P&G-Phil. to submit such certification within a certain period of time, would result in the imposition of
a deficiency assessment for the twenty (20) percentage points differential. The task of this Court is to
settle which tax rate is applicable, considering the state of US law at a given time. We should leave
details relating to administrative implementation where they properly belong with the BIR.
2.
An interpretation of a tax statute that produces a revenue flow for the government is not, for that
reason alone, necessarily the correct reading of the statute. There are many tax statutes or provisions
which are designed, not to trigger off an instant surge of revenues, but rather to achieve longer-term
and broader-gauge fiscal and economic objectives. The task of our Court is to give effect to the
legislative design and objectives as they are written into the statute even if, as in the case at bar, some
revenues have to be foregone in that process.
The economic objectives sought to be achieved by the Philippine Government by reducing the thirtyfive percent (35%) dividend rate to fifteen percent (15%) are set out in the preambular clauses of P.D.
No. 369 which amended Section 24 (b) (1), NIRC, into its present form:
"WHEREAS, it is imperative to adopt measures responsive to the requirements of a developing
economy foremost of which is the financing of economic development programs;
WHEREAS, nonresident foreign corporations with investments in the Philippines are taxed on their
earnings from dividends at the rate of 35%;
WHEREAS, in order to encourage more capital investment for large projects an appropriate tax need
be imposed on dividends received by non-resident foreign corporations in the same manner as the tax
imposed on interest on foreign loans;
xxx
xxx
xxx"
(Emphasis supplied)
More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-flow of foreign equity investment
in the Philippines by reducing the tax cost of earning profits here and thereby increasing the net
dividends remittable to the investor. The foreign investor, however, would not benefit from the
reduction of the Philippine dividend tax rate unless its home country gives it some relief from double
taxation (i.e., second-tier taxation) (the home country would simply have more "post-R.P. tax" income
to subject to its own taxing power) by allowing the investor additional tax credits which would be

applicable against the tax payable to such home country. Accordingly, Section 24 (b) (1), NIRC,
requires the home or domiciliary country to give the investor corporation a "deemed paid" tax credit at
least equal in amount to the twenty (20) percentage points of dividend tax foregone by the Philippines,
in the assumption that a positive incentive effect would thereby be felt by the investor.
The net effect upon the foreign investor may be shown arithmetically in the following manner:
P65.00
Dividends remittable to P&G-USA (please
see page 392 above)
9.75
Reduced R.P. dividend tax withheld by P&G-Phil.

P55.25
Dividends actually remitted to P&G-USA.
P55.25
x 46%
Maximum US corporate income tax rate

P25.415
US corporate tax payable by P&G-USA without tax
credits.
P25.415
9. 75
US tax credit for RP dividend tax withheld by P&G
Phil, at 15% (Section 901, US Tax Code)
P15.66
US corporate income tax payable after Section 901
tax credit.
P55.25
15.66

P39.59
Amount received by P&G-USA net of R.P. and U.S.
taxes without "deemed paid" tax credit.
P25.415
29.75
"Deemed paid" tax credit under Section 902 US

Tax Code (please see page 18 above)

-O- US corporate income tax payable on dividends
remitted by P&G-Phil, to P&G-USA after Section
902 tax credit.
P55.25
Amount received by P&G-USA net of RP and US
taxes after Section 902 tax credit.
It will be seen that the "deemed paid" tax credit allowed by Section 902, US Tax Code, could offset the
US corporate income tax payable on the dividend remitted by P&G-Phil. The result, in fine, could be
that P&G-USA would after US tax credits, still wind up with P55.25, the full amount of the dividends
remitted to P&G-USA net of Philippine taxes. In the calculation of the Philippine Government, this
should encourage additional investment or re-investment in the Philippines by P&G-USA. cdrep
3.
It remains only to note that under the Philippines-United States Convention "With Respect to
Taxes on Income," 15 the Philippines, by a treaty commitment, reduced the regular rate of dividend tax
to a maximum of twenty percent (20%) of the gross amount of dividends paid to US parent
corporations:
"ARTICLE 11. Dividends
xxx
xxx
xxx
(2)
The rate of tax imposed by one of the Contracting States on dividends derived from sources
within that Contracting State by a resident of the other Contracting State shall not exceed
(a)
25 percent of the gross amount of the dividend; or
(b)
When the recipient is a corporation, 20 percent of the gross amount of the dividend if during the
part of the paying corporation's taxable year which precedes the date of payment of the dividend and

during the whole of its prior taxable year (if any), at least 10 percent of the outstanding shares of the
voting stock of the paying corporation was owned by the recipient corporation."
xxx
xxx
xxx"
(Emphasis supplied)
The Tax Convention, at the same time, established a treaty obligation on the part of the United States
that it "shall allow" to a US parent corporation receiving dividends from its Philippine subsidiary "a
[tax] credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine
[subsidiary] ." 16 This is, of course, precisely the "deemed paid" tax credit provided for in Section
902, US Tax Code, discussed above. Clearly, there is here on the part of the Philippines a deliberate
undertaking to reduce the regular dividend tax rate of thirty-five percent (35%). Since, however, the
treaty rate of twenty percent (20%) is a maximum rate, there is still a differential or additional
reduction of five (5) percentage points which compliance of US law (Section 902) with the
requirements of Section 24 (b) (1), NIRC, makes available in respect of dividends from a Philippine
subsidiary.
We conclude that private respondent P&G-Phil. is entitled to the tax refund or tax credit which it seeks.
WHEREFORE, for all the foregoing, the Court Resolved to GRANT private respondent's Motion for
Reconsideration dated 11 May 1988, to SET ASIDE the Decision of the Second Division of the Court
promulgated on 15 April 1988, and in lieu thereof, to REINSTATE and AFFIRM the Decision of the
Court of Tax Appeals in CTA Case No. 2883 dated 31 January 1984 and to DENY the Petition for
Review for lack of merit. No pronouncement as to costs.
Narvasa, Gutierrez, Jr., Grio-Aquino, Medialdea and Romero, JJ., concur.
Fernan, C.J., is on leave.
Separate Opinions
CRUZ, J ., concurring:
I join Mr. Justice Feliciano in his excellent analysis of the difficult issues we are now asked to resolve.
As I understand it, the intention of Section 24(b) of our Tax Code is to attract foreign investors to this
country by reducing their 35% dividend tax rate to 15% if their own state allows them a deemed paid
tax credit at least equal in amount to the 20% waived by the Philippines. This tax credit would offset
the tax payable by them on their profits to their home state. In effect, both the Philippines and the home
state of the foreign investors reduce their respective tax "take" of those profits and the investors wind
up with more left in their pockets. Under this arrangement, the total taxes to be paid by the foreign
investors may be confined to the 35% corporate income tax and 15% dividend tax only, both payable to
the Philippines, with the US tax liability being offset wholly or substantially by the US "deemed paid"
tax credits.
Without this arrangement, the foreign investors will have two pay to the local state (in addition to the
35% corporate income tax) a 35% dividend tax end another 35% or more to their home state or a total
of 70% or more on the same amount of dividends. In this circumstance, it is not likely that many such
foreign investors, given the onerous burden of the two-tier system, i.e., local state plus home state, will
be encouraged to do business in the local state.
It is conceded that the law will "not trigger off an instant surge of revenue," as indeed the tax collectible
by the Republic from the foreign investor is considerably reduced. This may appear unacceptable to the
superficial viewer. But this reduction is in fact the price we have to offer to persuade the foreign
company to invest in our country and contribute to our economic development. The benefit to us may
not be immediately available in instant revenues but it will be realized later, and in greater measure, in
terms of a more stable and robust economy.
PARAS, J ., dissenting:
I dissent.
The decision of the Second Division of this Court in the case of "Commissioner of Internal Revenue vs.
Procter & Gamble Philippine Manufacturing Corporation, et al.," G.R. No. 66838, promulgated on

April 15, 1988 is sought to be reviewed in the Motion for Reconsideration filed by private respondent.
Procter & Gamble Philippines (PMC-Phils., for brevity) assails the Court's findings that:
"(a) private respondent (PMC-Phils.) is not a proper party to claim the refund/tax credit;
"(b) there is nothing in Section 902 or other provision of the US Tax Code that allows a credit
against the U.S. tax due from PMC-U.S.A. of taxes deemed to have been paid in the Phils. equivalent
to 20% which represents the difference between the regular tax of 35% on corporations and the tax of
15% on dividends;
"(c) private respondent failed to meet certain conditions necessary in order that the dividends
received by the non-resident parent company in the US may be subject to the preferential 15% tax
instead of 35%." (pp. 200-201, Motion for Reconsideration).
Private respondent's position is based principally on the decision rendered by the Third Division of this
Court in the case of "Commissioner of Internal Revenue vs. Wander Philippines, Inc. and the Court of
Tax Appeals," G.R. No. 68375, promulgated likewise on April 15, 1988 which bears the same issues as
in the case at bar, but held an apparent contrary view. Private respondent advances the theory that since
the Wander decision had already become final and executory it should be a precedent in deciding
similar issues as in this case at hand.
Yet, it must be noted that the Wander decision had become final and executory only by reason of the
failure of the petitioner therein to file its motion for reconsideration in due time. Petitioner received the
notice of judgment on April 22, 1988 but filed a Motion for Reconsideration only on June 6, 1988, or
after the decision had already become final and executory on May 9, 1988. Considering that entry of
final judgment had already been made on May 9, 1988, the Third Division resolved to note without
action the said Motion. Apparently therefore, the merits of the motion for reconsideration were not
passed upon by the Court.
The 1987 Constitution provides that a doctrine or principle of law previously laid down either en banc
or in Division may be modified or reversed by the court en banc. The case is now before this Court en
banc and the decision that will be handed down will put to rest the present controversy.
It is true that private respondent, as withholding agent, is obliged by law to withhold and to pay over to
the Philippine government the tax on the income of the taxpayer, PMC-U.S.A. (parent company).
However, such fact does not necessarily connote that private respondent is the real party in interest to
claim reimbursement of the tax alleged to have been overpaid. Payment of tax is an obligation
physically passed off by law on the withholding agent, if any, but the act of claiming tax refund is a
right that, in a strict sense, belongs to the taxpayer which is private respondent's parent company. The
role or function of PMC-Phils., as the remitter or payor of the dividend income, is merely to insure the
collection of the dividend income taxes due to the Philippine government from the taxpayer, "PMCU.S.A.," the non-resident foreign corporation not engaged in trade or business in the Philippines, as
"PMC-U.S.A." is subject to tax equivalent to thirty five percent (35%) of the gross income received
from "PMC-Phils." in the Philippines "as . . . dividends . . ." (Sec. 24 [b], Phil. Tax Code). Being a mere
withholding agent of the government and the real party in interest being the parent company in the
United States, private respondent cannot claim refund of the alleged overpaid taxes. Such right properly
belongs to PMC-U.S.A. It is therefore clear that as held by the Supreme Court in a series of cases, the
action in the Court of Tax Appeals as well as in this Court should have been brought in the name of the
parent company as petitioner and not in the name of the withholding agent. This is because the action
should be brought under the name of the real party in interest. (See Salonga v. Warner Barnes, & Co.,
Ltd., 88 Phil. 125; Sutherland, Code Pleading, Practice, & Forms, p. 11; Ngo The Hua v. Chung Kiat
Hua, L-17091, Sept. 30, 1963, 9 SCRA 113; Gabutas v. Castellanes, L-17323, June 23, 1965, 14 SCRA
376; Rep. v. PNB, L-16485, January 30, 1945).
Rule 3, Sec. 2 of the Rules of Court provides: LibLex
"SECTION 2. Parties in interest. Every action must be prosecuted and defended in the name of the
real party in interest. All persons having an interest in the subject of the action and in obtaining the

relief demanded shall be joined as plaintiffs. All persons who claim am interest in the controversy or
the subject thereof adverse to the plaintiff, or who are necessary to a complete determination or
settlement of the questions involved therein shall be joined as defendants."
It is true that under the Internal Revenue Code the withholding agent may be sued by itself if no
remittance tax is paid, or if what was paid is less than what is due. From this, Justice Feliciano claims
that in case of an overpayment (or claim for refund) the agent must be given the right to sue the
Commissioner by itself (that is, the agent here is also a real party in interest). He further claims that to
deny this right would be unfair. This is not so. While payment of the tax due is an OBLIGATION of the
agent, the obtaining of a refund is a RIGHT. While every obligation has a corresponding right (and
vice-versa), the obligation to pay the complete tax has the corresponding right of the government to
demand the deficiency; and the right of the agent to demand a refund corresponds to the government's
duty to refund. Certainly, the obligation of the withholding agent to pay in full does not correspond to
its right to claim for the refund. It is evident therefore that the real party in interest in this claim for
reimbursement is the principal (the mother corporation) and NOT the agent.
This suit therefore for refund must be DISMISSED.
In like manner, petitioner Commissioner of Internal Revenue's failure to raise before the Court of Tax
Appeals the issue relating to the real party in interest to claim the refund cannot, and should not,
prejudice the government. Such is merely a procedural defect. It is axiomatic that the government can
never be in estoppel, particularly in matter involving taxes. Thus, for example, the payment by the taxpayer of income taxes pursuant to a BIR assessment does not preclude the government from making
further assessments. The errors or omissions of certain administrative officers should never be allowed
to jeopardize the government's financial position. (See: Phil. Long Distance Tel. Co. v. Coll. of Internal
Revenue, 90 Phil. 674; Lewin v. Galang, L-15253, Oct. 31, 1960; Coll. of Internal Revenue v. Ellen
Wood Mc Grath, L-12710, L-12721, Feb. 28, 1961; Perez v. Perez, L-14874, Sept. 30, 1960; Republic
v. Caballero, 79 SCRA 179; Favis v. Municipality of Sabongan, L-26522, Feb. 27, 1963).
As regards the issue of whether PMC-U.S.A. is entitled under the U.S. Tax Code to a United States
Foreign Tax Credit equivalent to at least 20 percentage paid portion spared or waived as otherwise
deemed waived by the government, We reiterate our ruling that while apparently, a tax-credit is given,
there is actually nothing in Section 902 of the U.S. Internal Revenue Code, as amended by Public Law87-834 that would justify tax return of the disputed 15% to the private respondent. This is because the
amount of tax credit purportedly being allowed is not fixed or ascertained, hence we do not know
whether or not the tax credit contemplated is within the limits set forth in the law. While the
mathematical computations in Justice Feliciano's separate opinion appear to be correct, the
computations suffer from a basic defect, that is we have no way of knowing or checking the figure used
as premises. In view of the ambiguity of Sec. 902 itself, we can conclude that no real tax credit was
really intended. In the interpretation of tax statutes, it is axiomatic that as between the interest of
multinational corporations and the interest of our own government, it would be far better, if the absence
of definitive guidelines, to favor the national interest. As correctly pointed out by the Solicitor General:.
". . . the tax-sparing credit operates on dummy, fictional or phantom taxes, being considered as if paid
by the foreign taxing authority, the host country.
"In the context of the case at bar, therefore, the thirty five (35%) percent on the dividend income of
PMC-U.S.A. would be reduced to fifteen (15%) percent if & only if reciprocally PMC-U.S.A's home
country, the United States, not only would allow against PMC-U.S.A.'s U.S. income tax liability a
foreign tax credit for the fifteen (15%) percentage-point portion of the thirty five (35%) percent Phil.
dividend tax actually paid or accrued but also would allow a foreign tax 'sparing' credit for the twenty
(20%) percentage-point portion spared, waived, forgiven or otherwise deemed as if paid by the Phil.
gov't. by virtue of the 'tax credit sparing' proviso of Sec. 24(b), Phil. Tax Code." (Reply Brief, pp. 2324; Rollo, pp. 239-240).
Evidently, the U.S. foreign tax credit system operates only on foreign taxes actually paid by U.S.

corporate taxpayers, whether directly or indirectly. Nowhere under a statute or under a tax treaty, does
the U.S. government recognize much less permit any foreign tax credit for spared or ghost taxes, as in
reality the U.S. foreign tax credit mechanism under Sections 901-905 of the U.S. Internal Revenue
Code does not apply to phantom dividend taxes in the form of dividend taxes waived, spared or
otherwise considered "as if" paid by any foreign taxing authority, including that of the Philippine
government.
Beyond, that, the private respondent failed: (1) to show the actual amount credited by the U.S.
government against the income tax due from PMC-U.S.A. on the dividends received from private
respondent; (2) to present the income tax return of its parent company for 1975 when the dividends
were received; and (3) to submit any duly authenticated document showing that the U.S. government
credited the 20% tax deemed paid in the Philippines.
Tax refunds are in the nature of tax exemptions. As such, they are regarded as in derogation of
sovereign authority and to be construed strictissimi juris against the person or entity claiming the
exemption. The burden of proof is upon him who claims the exemption in his favor and he must be able
to justify his claim by the clearest grant of organic or statute law .. and cannot be permitted to exist
upon vague implications. (Asiatic Petroleum Co. v. Llanes, 49 Phil. 466; Northern Phil. Tobacco Corp.
v. Mun. of Agoo, La Union, 31 SCRA 304; Rogan v. Commissioner, 30 SCRA 968; Asturias Sugar
Central, Inc. v. Commissioner of Customs, 29 SCRA 617; Davao Light and Power Co. Inc. v.
Commissioner of Custom, 44 SCRA 122). Thus, when tax exemption is claimed, it must be shown
indubitably to exist, for every presumption is against it, and a well founded doubt is fatal to the claim
(Farrington v. Tennessee & Country Shelby, 95 U.S. 679, 686; Manila Electric Co. v. Vera, L-29987,
Oct. 22, 1975; Manila Electric Co. v. Tabios, L-23847, Oct. 22, 1975, 67 SCRA 451).
It will be remembered that the tax credit appertaining to remittances abroad of dividend earned here in
the Philippines was amplified in Presidential Decree No. 369 promulgated in 1975, the purpose of
which was to "encourage more capital investment for large projects." And its ultimate purpose is to
decrease the tax liability of the corporation concerned. But this granting of a preferential right is
premised on reciprocity, without which there is clearly a derogation of our country's financial
sovereignty. No such reciprocity has been proved, nor does it actually exist. At this juncture, it would
be useful to bear in mind the following observations:
The continuing and ever-increasing transnational movement of goods and services, the emergence of
multinational corporations and the rise in foreign investments has brought about tremendous pressures
on the tax system to strengthen its competence and capability to deal effectively with issues arising
from the foregoing phenomena.
International taxation refers to the operationalization of the tax system on an international level. As it
is, international taxation deals with the tax treatment of goods and services transferred on a global
basis, multinational corporations and foreign investments.
Since the guiding philosophy behind international trade is free flow of goods and services, it goes
without saying that the principal objective of international taxation is to see through this ideal by way
of feasible taxation arrangements which recognize each country's sovereignty in the matter of taxation,
the need for revenue and the attainment of certain policy objectives.
The institution of feasible taxation arrangements, however, is hard to come by. To begin with,
international tax subjects are obviously more complicated than their domestic counter-parts. Hence, the
devise of taxation arrangements to deal with such complications requires a welter of information and
data buildup which generally are not readily obtainable and available. Also, caution must be exercised
so that whatever taxation arrangements are set up, the same do not get in the way of free flow of goods
and services, exchange of technology, movement of capital and investment initiatives.
A cardinal principle adhered to in international taxation is the avoidance of double taxation. The
phenomenon of double taxation (i.e., taxing an item more than once) arises because of global
movement of goods and services. Double taxation also occurs because of overlaps in tax jurisdictions

resulting in the taxation of taxable items by the country of source or location (source or situs rule) and
the taxation of the same items by the country of residence or nationality of the taxpayer (domiciliary or
nationality principle).
An item may, therefore, be taxed in full in the country of source because it originated there, and in
another country because the recipient is a resident or citizen of that country. If the taxes in both
countries are substantial and no tax relief is offered, the resulting double taxation would serve as a
discouragement to the activity that gives rise to the taxable item. LLphil
As a way out of double taxation, countries enter into tax treaties. A tax treaty 1 is a bilateral convention
(but may be made multilateral) entered into between sovereign states for purposes of eliminating
double taxation on income and capital, preventing fiscal evasion, promoting mutual trade and
investment, and according fair and equitable tax treatment to foreign residents or nationals. 2
A more general way of mitigating the impact of double taxation is to recognize the foreign tax either as
a tax credit or an item of deduction.
Whether the recipient resorts to tax credit or deduction is dependent on the tax advantage or savings
that would be derived therefrom.
A principal defect of the tax credit system is when low tax rates or special tax concessions are granted
in a country for the obvious reason of encouraging foreign investments. For instance, if the usual tax
rate is 35 percent but a concession rate accrues to the country of the investor rather than to the investor
himself. To obviate this, a tax sparing provision may be stipulated. With tax sparing, taxes exempted or
reduced are considered as having been fully paid.
To illustrate:
"X" Foreign Corporation income
100
Tax rate (35%)
35
RP income
100
Tax rate (general, 35%,
concession rate, 15%)15
1.
"X" Foreign Corp. Tax Liability without Tax Sparing
"X" Foreign Corporation income
100
RP income
100
Total Income 200
"X" tax payable
70
Less: RP tax 15
Net "X" tax payable 55
2.
"X" Foreign Cop. Tax Liability with Tax Sparing.
"X" Foreign Corp. income 100
RP income
100
Total income 200
"X" Foreign Corp. tax payable
70
Less: RP tax (35% of 100, the
difference of 20% between 35%
and 15%, deemed paid to RP)
Net "X" Foreign Corp. tax payable 35
By way of resume, We may say that the Wander decision of the Third Division cannot, and should not
result in the reversal of the Procter & Gamble decision for the following reasons:
1)
The Wander decision cannot serve as a precedent under the doctrine of stare decisis. It was
promulgated on the same day the decision of the Second Division was promulgated, and while Wander
has attained finality this is simply because no motion for reconsideration thereof was filed within a
reasonable period. Thus, said Motion for Reconsideration was theoretically never taken into account by
said Third Division.

2)
Assuming that stare decisis can apply, We reiterate what a former noted jurist Mr. Justice Sabino
Padilla aptly said: "More pregnant than anything else is that the court shall be right." We hereby cite
settled doctrines from a treatise on Civil Law:
"We adhere in our country to the doctrine of stare decisis (let it stand, et non quieta movere) for reasons
of stability in the law. The doctrine, which is really 'adherence to precedents,' states that once a case has
been decided one way, then another case, involving exactly the same point at issue, should be decided
in the same manner.
"Of course, when a case has been decided erroneously such an error must not be perpetuated by blind
obedience to the doctrine of stare decisis. No matter how sound a doctrine may be, and no matter how
long it has been followed thru the years, still if found to be contrary to law, it must be abandoned. The
principle of stare decisis does not and should not apply when there is a conflict between the precedent
and the law (Tan Chong v. Sec. of Labor, 79 Phil. 249).
"While stability in the law is eminently to be desired, idolatrous reverence for precedent, simply, as
precedent, no longer rules. More pregnant than anything else is that the court shall be right (Phil. Trust
Co. v. Mitchell, 69 Phil. 30)."
3)
Wander deals with tax relations between the Philippines and Switzerland, a country with which
we have a pending tax treaty; our Procter & Gamble case deals with relations between the Philippines
and the United States, a country with which we had no tax treaty, at the time the taxes herein were
collected. prLL
4)
Wander cited as authority a BIR Ruling dated May 19, 1977, which requires a remittance tax of
only 15%. The mere fact that in this Procter and Gamble case the B.I.R. desires to charge 35%
indicates that the B.I.R. Ruling cited in Wander has been obviously discarded today by the B.I.R.
Clearly, there has been a change of mind on the part of the B.I.R.
5)
Wander imposes a tax of 15% without stating whether or not reciprocity on the part of
Switzerland exists. It is evident that without reciprocity the desired consequences of the tax credit
under P.D. No. 369 would be rendered unattainable.
6)
In the instant case, the amount of the tax credit deductible and other pertinent financial data
have not been presented, and therefore even were we inclined to grant the tax credit claimed, we find
ourselves unable to compute the proper amount thereof.
7)
And finally, as stated at the very outset, Procter & Gamble Philippines or P.M.C. (Phils.) is not
the proper party to bring up the case.
ACCORDINGLY, the decision of the Court of Tax Appeals should be REVERSED and the motion for
reconsideration of our own decision should be DENIED.
Melencio-Herrera, Padilla, Regalado and Davide, Jr., JJ., concur.
BIDIN, J ., concurring:
I agree with the opinion of my esteemed brother, Mr. Justice Florentino P. Feliciano. However, I wish
to add some observations of my own, since I happen to be the ponente in Commissioner of Internal
Revenue v. Wander Philippines, Inc. (160 SCRA 673 [1988]), a case which reached a conclusion that is
diametrically opposite to that sought to be reached in the instant Motion for Reconsideration.
1.
In page 5 of his dissenting opinion, Mr. Justice Edgardo L. Paras argues that the failure of
petitioner Commissioner of Internal Revenue to raise before the Court of Tax Appeals the issue of who
should be the real party in interest in claiming a refund cannot prejudice the government, as such
failure is merely a procedural defect; and that moreover, the government can never be in estoppel,
especially in matters involving taxes. In a word, the dissenting opinion insists that errors of its agents
should not jeopardize the government's position.
The above rule should not be taken absolutely and literally; if it were, the government would never lose
any litigation which is dearly not true. The issue involved here is not merely one of procedure; it is also
one of fairness: whether the government should be subject to the same stringent conditions applicable
to an ordinary litigant. As the Court had declared in Wander:

". . . To allow a litigant to assume a different posture when he comes before the court and challenge the
position he bad accepted at the administrative level, would be to sanction a procedure whereby the
Court which is supposed to review administrative determination would not review, but determine
and decide for the first time, a question not raised at the administrative forum. . . ." (160 SCRA at 566577).
Had petitioner been forthright earlier and required from private respondent proof of authority from its
parent corporation, Procter and Gamble USA, to prosecute the claim for refund, private respondent
would doubtless have been able to show proof of such authority. By any account, it would be rank
injustice now at this late stage to require petitioner to submit such proof.
2.
In page 8 of his dissenting opinion, Paras, J., stressed that private respondent had failed: (1) to
show the actual amount credited by the US government against the income tax due from P & G USA on
the dividends received from private respondent; (2) to present the 1976 income tax return of P & G
USA when the dividends were received; and (3) to submit any duly authenticated document showing
that the US government credited the 20% tax deemed paid in the Philippines.
I agree with the main opinion of my colleague, Feliciano, J., specifically in page 23 et seq. thereof,
which, as I understand it, explains that the US tax authorities are unable to determine the amount of the
"deemed paid" credit to be given P & G USA so long as the numerator of the fraction, i.e., dividends
actually remitted by P & G-Phil. to P & G USA, is still unknown. Stated in other words, until dividends
have actually been remitted to the US (which presupposes an actual imposition and collection of the
applicable Philippine dividend tax rate), the US tax authorities cannot determine the "deemed paid"
portion of the tax credit sought by P & G USA. To require private respondent to show documentary
proof of its parent corporation having actually received the "deemed paid" tax credit from the proper
tax authorities, would be like putting the cart before the horse. The only way of cutting through this
(what Feliciano, J., termed) "circularity" for our BIR to issue rulings (as they have been doing) to the
effect that the tax laws of particular foreign jurisdictions, e.g., USA, comply with the requirements in
our tax credit for applicability of the reduced 10% dividend tax rate. Thereafter, the taxpayer can be
required to submit, within a reasonable period, proof of the amount of "deemed paid" tax credit actually
granted by the foreign tax authority. Imposing such a resolutory condition should resolve the knotty
problem of circularity. llcd
3.
Page 8 of the dissenting opinion of Paras, J., further declares that tax refunds, being in the
nature of tax exemptions, are to be construed strictissimi juris against the person or entity claiming the
exemption; and that refunds cannot be permitted to exist upon "vague implications."
Notwithstanding the foregoing canon of construction, the fundamental rule is still that a judge must
ascertain and give effect to the legislative intent embodied in a particular provision of law. If a statute
(including a tax statute reducing a certain tax rate) is clear, plain and free from ambiguity, it must be
given its ordinary meaning and applied without interpretation. In the instant case, the dissenting
opinion of Paras, J., itself concedes that the basic purpose of Pres. Decree No. 369, when it was
promulgated in 1975 to amend Section 24(b), [1] of the National Internal Revenue Code, was "to
decrease the tax liability" of the foreign capital investor and thereby to promote more inward foreign
investment. The same dissenting opinion happens to add, however, that the granting of a reduced
dividend tax rate "is premised on reciprocity."
4.
Nowhere in the provisions of P.D. No. 369 or in the National Internal Revenue Code itself
would one find reciprocity specified as a condition for the granting of the reduced dividend tax rate in
Section 24 (b), [1], NIRC. Upon the other hand, where the law-ranking authority intended to impose a
requirement of reciprocity as a condition for grant of a privilege, the legislature does so expressly and
clearly. For example, the gross estate of non-citizens and non -residents of the Philippines normally
includes intangible personal property situated in the Philippines, for purposes of application of the
estate tax and donor's tax. However, under Section 98 of the NIRC (as amended by P.D. 1457), no taxes
will be collected by the Philippines in respect of such intangible personal property if the law or the

foreign country of which the decedent was a citizen and resident at the time of his death allows a
similar exemption from transfer or death taxes in respect of intangible personal property located in such
foreign country and owned by Philippine citizens not residing in that foreign country.
There is no statutory requirement of reciprocity imposed as a condition for grant of the reduced
dividend tax rate of 15%. Moreover, for the Court to impose such a requirement of reciprocity would
be to contradict the basic policy underlying P.D. 369 which amended Section 24(b), [1], NIRC, P.D.
369 was promulgated in the effort to promote the inflow of foreign investment capital into the
Philippines. A requirement of reciprocity, i.e., a requirement that the U.S. grant a similar reduction of
U.S. dividend taxes on remittances by the U.S. subsidiaries of Philippine corporations, would assume a
desire on the part of the U.S. and of the Philippines to attract the flow of Philippine capital into the U.S.
But the Philippines precisely is a capital importing, and not a capital exporting country. If the
Philippines had surplus capital to export, it would not need to import foreign capital into the
Philippines. In other words, to require dividend tax reciprocity from a foreign jurisdiction would be to
actively encourage Philippine corporations to invest outside the Philippines, which would be
inconsistent with the notion of attracting foreign capital into the Philippines in the first place.
5.
Finally, in page 15 of his dissenting opinion, Paras, J., brings up the fact that:
"Wander cited as authority a BIR ruling dated May 19, 1977, which requires a remittance tax of only
16%. The mere fact that in this Procter and Gamble case, the BIR desires to charge 36% indicates that
the BIR ruling cited in Wander has been obviously discarded today by the BIR. Clearly, there has been
a charge of mind on the part of the BIR."
As pointed out by Feliciano, J., in his main opinion, even while the instant case was pending before the
Court of Tax Appeals and this Court, the administrative rulings issued by the BIR from 1976 until as
late as 1987, recognized the "deemed paid" credit referred to in Section 902 of the U.S. Tax Code. To
date, no contrary ruling has been issued by the BIR.
For all the foregoing reasons, private respondent's Motion for Reconsideration should be granted and I
vote accordingly.
Footnotes
1.
We refer here (unless otherwise expressly indicated) to the provisions of the NIRC as they
existed during the relevant taxable years and at the time the claim for refund was made. We shall
hereafter refer simply to the NIRC.
2.
Section 20 (n), NIRC (as renumbered and re-arranged by Executive Order No. 273, 1 January
1988).
3.
E.g., Section 51 (e), NIRC:
"Sec. 51. Returns and payment of taxes withheld at source. . . .
xxx
xxx
xxx
(e)
Surcharge and interest for failure to deduct and withhold. If the withholding agent, in
violation of the provisions of the preceding section and implementing regulations thereunder, fails to
deduct and withhold the amount of tax required under said section and regulations, he shall be liable to
pay in addition to the tax required to be deducted and withheld, a surcharge of fifty per centum if the
failure is due to willful neglect or with intent to defraud the Government, or twenty-five per centum if
the failure is not due to such causes, plus interest at the rate of fourteen per centum per annum from the
time the tax is required to be withheld until the date of assessment.
xxx
xxx
xxx
Section 251 (Id.):
"Sec. 251.
Failure of a withholding agent to collect and remit tax. Any person required to
collect, account for, and remit any tax imposed by this Code who willfully fails to collect such tax, or
account for and remit such tax, or willfully assists in any manner to evade any such tax or the payment
thereof, shall, in addition to other penalties provided for under this Chapter, be liable to a penalty equal
to the total amount of the tax not collected, or not accounted for and remitted. (Italics supplied).

4.
Houston Street Corporation v. Commissioner of Internal Revenue, 84 F. 2nd. 821 (1936); Bank
of America v. Anglin, 138 F. 2nd. 7 (1943).
5.
15 SCRA 1 (1965).
6.
15 SCRA at 4.
7.
The following detailed examination of the tenor and import of Sections 901 and 902 of the US
Tax Code is, regrettably, made necessary by the fact that the original decision of the Second Division
overlooked those Sections in their entirety. In the original opinion in 160 SCRA 560 (1988),
immediately after Section 902, US Tax Code is quoted, the following appears: "To Our mind, there is
nothing in the aforecited provision that would justify tax return of the disputed 15% to the private
respondent" (160 SCRA at 567). No further discussion of Section 902 was offered.
8.
Sometimes also called a "derivative" tax credit or an "indirect" tax credit; Bittker and Ebb,
United States Taxation of Foreign Income and Foreign Persons, 319 (2nd Ed., 1968).
9.
American Chicle Co. v. U.S. 316 US 450, 86 L. ed. 1591 (1942); W.K Buckley, Inc. v. C.I.R.,
158 F. 2d. 158 (1946).
10.
In his dissenting opinion, Paras, J. writes that "the amount of the tax credit purportedly being
allowed is not fixed or ascertained, hence we do not know whether or not the tax credit contemplated is
within the limits set forth in the law" (Dissent, p. 6) Section 902 US Tax Code does not specify
particular fixed amounts or percentages as tax credits; what it does specify in Section 902 (A) (2) and
(C) (1) (B) is a proportion expressed in the fraction:
dividends actually remitted by P&G-Phil. to P&G-USA
_________________________________________________.
amount of accumulated profits earned by P&G-Phil. in excess of income tax.
The actual or absolute amount of the tax credit allowed by Section 902 will obviously
depend on the actual values of the numerator and the denominator used in the fraction specified. The
point is that the establishment of the proportion or fraction in Section 902 renders the tax credit there
allowed determinate and determinable.
*
The denominator used by Com. Plana is the total pre-tax income of the Philippine subsidiary.
Under Section 902 (c) (1) (B), US Tax Code, quoted earlier, the denominator should be the amount of
income of the subsidiary in excess of [Philippine] income tax.
11.
The US tax authorities cannot determine the amount of the "deemed paid" credit to be given
because the correct proportion cannot be determined: the numerator of the fraction is unknown, until
remittance of the dividends by P&G-Phil. is in fact effected. Please see computation, supra, p. 17.
12.
BIR Ruling dated 21 March 1983, addressed to the Tax Division, Sycip, Gorres, Velayo and
Company.
13.
BIR Ruling dated 13 October 1981, addressed to Mr. A.R. Sarvino, Manager-Securities,
Hongkong and Shanghai Banking Corporation.
14.
BIR Ruling dated 31 January 1983, addressed to the Tax Division, Sycip, Gorres, Velayo and
Company.
15.
Text in 7 Philippine Treaty Series 523; signed on 1 October 1976 and effective on 16 October
1982 upon ratification by both Governments and exchange of instruments of ratification.
16.
Art. 23(1), Tax Convention; the same treaty imposes a similar obligation upon the Philippines to
give to the Philippine parent of a US subsidiary a tax credit for the appropriate amount of US taxes paid
by the US subsidiary. (Art. 23 [2], id ) Thus, Sec. 902 US Tax Code and Sec. 30(c) (8), NIRC, have
been in effect been converted into treaty commitments of the United States and the Philippines,
respectively, in respect of US and Philippine corporations.
PARAS, J., dissenting:
1.
There are two types of credit systems. The first, is the underlying credit system which requires

the other contracting state to credit not only the 15% Philippine tax into company dividends but also
the 35% Philippine tax on corporations in respect of profits out of which such dividends were paid. The
Philippine corporation is assured of sufficient creditable taxes to cover their total tax liabilities in their
home country and in effect will no longer pay taxes therein. The other type provides that if any tax
relief is given by the Philippines pursuant to its own development program, the other contracting state
will grant credit for the amount of the Philippine tax which would have been payable but for such
relief.
2.
The Philippines, for one, has entered into a number of tax treaties in pursuit of the foregoing
objectives. The extent of tax treaties entered into by the Philippines may be seen from the following
tabulation:.
Table 1 RP Tax Treaties.
RP West Germany Ratified on Jan. 1, 1985
RP Malaysia
Ratified on Jan. 1, 1985
RP Nigeria Concluded in September,
Netherlands and
October and November, 1985,
Spain respectively (documents ready
for signature)
RP Yugoslavia
Negotiated in Belgrade,
Sept. 30-Oct. 4, 1985
Pending Ratification Signed Ratified
RP Italy Dec. 5, 1980 Nov. 28, 1983
RP Brazil Sept. 29, 1983
RP East Germany Feb. 17, 1984
RP Korea Feb. 21, 1984
Pending Signature
Negotiations concluded on
RP Sweden (rene- May 11, 1978
negotiated)
RP Romania
Feb. 1, 1983
RP Sri Lanka
June 10, 1983
RP Norway
Nov. 11, 1983
RP India March 30, 1984
RP Nigeria Sept. 27, 1985
RP Netherlands Oct. 8, 1985
RP Spain Nov. 22, 1985

THIRD DIVISION
[G.R. No. 68375. April 15, 1988.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. WANDER PHILIPPINES, INC. AND
THE COURT OF TAX APPEALS, respondents.
The Solicitor General for petitioner.
Felicisimo R. Quiogue and Cirilo P. Noel for respondents.
DECISION
BIDIN, J p:
This is a petition for review on certiorari of the January 19, 1984 Decision of the Court of Tax Appeals
* in C.T.A. Case No. 2884, entitled Wander Philippines, Inc. vs. Commissioner of Internal Revenue,
holding that Wander Philippines, Inc. is entitled to the preferential rate of 15% withholding tax on the
dividends remitted to its foreign parent company, the Glaro S.A. Ltd. of Switzerland, a non-resident
foreign corporation.
Herein private respondent, Wander Philippines, Inc. (Wander, for short), is a domestic corporation
organized under Philippine laws. It is wholly-owned subsidiary of the Glaro S.A. Ltd. (Glaro, for
short), a Swiss corporation not engaged in trade or business in the Philippines.
On July 18, 975, Wander filed its withholding tax return for the second quarter ending June 30, 1975
and remitted to its parent company, Glaro dividends in the amount of P222,000.00, on which 35%
withholding tax thereof in the amount of P77,700.00 was withheld and paid to the Bureau of Internal
Revenue.
Again, on July 14, 1976, Wander filed a withholding tax return for the second quarter ending June 30,
1976 on the dividends it remitted to Glaro amounting to P355,200.00, on which 35% tax in the amount
of P124,320.00 was withheld and paid to the Bureau of Internal Revenue.
On July 5, 1977, Wander filed with the Appellate Division of the Internal Revenue a claim for refund
and/or tax credit in the amount of P115,400.00, contending that it is liable only to 15% withholding tax
in accordance with Section 24 (b) (1) of the Tax Code, as amended by Presidential Decree Nos. 369
and 778, and not on the basis of 35% which was withheld and paid to and collected by the government.
Petitioner herein, having failed to act on the above-said claim for refund, on July 15, 1977, Wander
filed a petition with respondent Court of Tax Appeals.
On October 6, 1977, petitioner filed his Answer.
On January 19, 1984, respondent Court of Tax Appeals rendered a Decision, the decretal portion of
which reads:
"WHEREFORE, respondent is hereby ordered to grant a refund and/or tax credit to petitioner in the
amount of P115,440.00 representing overpaid withholding tax on dividends remitted by it to the Glaro
S.A. Ltd. of Switzerland during the second quarter of the years 1975 and 1976."
On March 7, 1984, petitioner filed a Motion for Reconsideration but the same was denied in a
Resolution dated August 13, 1984. Hence, the instant petition. cdphil
Petitioner raised two (2) assignment of errors, to wit:
I
ASSUMING THAT THE TAX REFUND IN THE CASE AT BAR IS ALLOWABLE AT ALL, THE
COURT OF TAX APPEALS ERRED IN HOLDING THAT THE HEREIN RESPONDENT WANDER
PHILIPPINES, INC. IS ENTITLED TO THE SAID REFUND.
II
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT SWITZERLAND, THE HOME
COUNTRY OF GLARO S.A. LTD. (THE PARENT COMPANY OF THE HEREIN RESPONDENT
WANDER PHILIPPINES, INC.), GRANTS TO SAID GLARO S A. LTD. AGAINST ITS SWISS
INCOME TAX LIABILITY A TAX CREDIT EQUIVALENT TO THE 20 PERCENTAGE-POINT
PORTION (OF THE 35 PERCENT PHILIPPINE DIVIDEND TAX) SPARED OR WAIVED OR
OTHERWISE DEEMED AS IF PAID IN THE PHILIPPINES UNDER SECTION 24 (b) (1) OF THE

PHILIPPINE TAX CODE.

The sole issue in this case is whether or not private respondent Wander is entitled to the preferential
rate of 15% withholding tax on dividends declared and remitted to its parent corporation, Glaro.
From this issue, two questions were posed by petitioner: (1) Whether or not Wander is the proper party
to claim the refund; and (2) Whether or not Switzerland allows as tax credit the "deemed paid" 20%
Philippine Tax on such dividends.
Petitioner maintains and argues that it is Glaro, the taxpayer, and not Wander, the remitter or payor of
the dividend income and a mere withholding agent for and in behalf of the Philippine Government,
which should be legally entitled to receive the refund if any.
It will be noted, however, that Petitioner's above-entitled argument is being raised for the first time in
this Court. It was never raised at the administrative level, or at the Court of Tax Appeals. To allow a
litigant to assume a different posture when he comes before the court and challenge the position he had
accepted at the administrative level, would be to sanction a procedure whereby the Court which is
supposed to review administrative determinations would not review, but determine and decide for
the first time, a question not raised at the administrative forum. Thus, it is well settled that under the
same underlying principle of prior exhaustion of administrative remedies, on the judicial level, issues
not raised in the lower court cannot be raised for the first time on appeal (Aguinaldo Industries
Corporation vs. Commissioner of Internal Revenue, 112 SCRA 136; Pampanga Sugar Dev. Co., Inc. vs.
CIR, 114 SCRA 725; Garcia vs. Court of Appeals, 102 SCRA 597; Matialonzo vs. Servidad, 107 SCRA
726).
In any event, the submission of petitioner that Wander is but a withholding agent of the government
and therefore cannot claim reimbursement of the alleged overpaid taxes, is untenable. It will be
recalled, that said corporation is first and foremost a wholly owned subsidiary of Glaro. The fact that it
became a withholding agent of the government which was not by choice but by compulsion under
Section 53 (b) of the Tax Code, cannot by any stretch of the imagination be considered as an abdication
of its responsibility to its mother company. Thus, this Court construing Section 53 (b) of the Internal
Revenue Code held that "the obligation imposed thereunder upon the withholding agent is
compulsory." It is a device to insure the collection by the Philippine Government of taxes on incomes,
derived from sources in the Philippines, by aliens who are outside the taxing jurisdiction of this Court
(Commissioner of Internal Revenue vs. Malayan Insurance Co., Inc., 21 SCRA 944). In fact, Wander
may be assessed for deficiency withholding tax at source, plus penalties consisting of surcharge and
interest (Section 54, NIRC). Therefore, as the Philippine counterpart, Wander is the proper entity who
should claim for the refund or credit of overpaid withholding tax on dividends paid or remitted by
Glaro. LibLex
Closely intertwined with the first assignment of error is the issue of whether or not Switzerland, the
foreign country where Glaro is domiciled, grants to Glaro a tax credit against the tax due it, equivalent
to 20%, or the difference between the regular 35% rate of the preferential 15% rate. The dispute in this
issue lies on the fact that Switzerland does not impose any income tax on dividends received by Swiss
corporation from corporations domiciled in foreign countries.
Section 24 (b) (1) of the Tax Code, as amended by P.D. 369 and 778, the law involved in this case,
reads:
"Sec. 1.
The first paragraph of subsection (b) of Section 24 of the National Internal Revenue
Code, as amended, is hereby further amended to read as follows:
'(b)
Tax on foreign corporations. (1) Non-resident corporation. A foreign corporation not
engaged in trade or business in the Philippines, including a foreign life insurance company not engaged
in the life insurance business in the Philippines, shall pay a tax equal to 35% of the gross income
received during its taxable year from all sources within the Philippines, as interest (except interest on
foreign loans which shall be subject to 15% tar.), dividends, premiums, annuities, compensations,
remuneration for technical services or otherwise, emoluments or other fixed or determinable, annual,

periodical or casual gains, profits, and income, and capital gains: . . . Provided, still further That on
dividends received from a domestic corporation liable to tax under this Chapter, the tax shall be 15% of
the dividends received, which shall be collected and paid as provided in Section 53 (d) of this Code,
subject to the condition that the country in which the non-resident foreign corporation is domiciled
shall allow a credit against the tax due from the non-resident foreign corporation taxes deemed to have
been paid in the Philippines equivalent to 20% which represents the difference between the regular tax
(35%) on corporations and the tax (15%) dividends as provided in this section: . . .' "
From the above-quoted provision, the dividends received from a domestic corporation liable to tax, the
tax shall be 15% of the dividends received, subject to the condition that the country in which the nonresident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident
foreign corporation taxes deemed to have been paid in the Philippines equivalent to 20% which
represents the difference between the regular tax (35%) on corporations and the tax (15%) dividends.
In the instant case, Switzerland did not impose any tax on the dividends received by Glaro.
Accordingly, Wander claims that full credit is granted and not merely credit equivalent to 20%.
Petitioner, on the other hand, avers the tax sparing credit is applicable only if the country of the parent
corporation allows a foreign tax credit not only for the 15 percentage-point portion actually paid but
also for the equivalent twenty percentage-point portion spared, waived or otherwise deemed as if paid
in the Philippines; that private respondent does not cite anywhere a Swiss law to the effect that in case
where a foreign tax, such as the Philippine 35% dividend tax, is spared, waived or otherwise considered
as if paid in whole or in part by the foreign country, a Swiss foreign-tax credit would be allowed for the
whole or for the part, as the case may be, of the foreign tax so spared or waived or considered as if paid
by the foreign country. LLphil
While it may be true that claims for refund are construed strictly against the claimant, nevertheless, the
fact that Switzerland did not impose any tax or the dividends received by Glaro from the Philippines
should be considered as a full satisfaction of the given condition. For, as aptly stated by respondent
Court, to deny private respondent the privilege to withhold only 15% tax provided for under
Presidential Decree No. 369, amending Section 24 (b) (1) of the Tax Code, would run counter to the
very spirit and intent of said law and definitely will adversely affect foreign corporations' interest here
and discourage them from investing capital in our country.
Besides, it is significant to note that the conclusion reached by respondent Court is but a confirmation
of the May 19, 1977 ruling of petitioner that "since the Swiss Government does not impose any tax on
the dividends to be received by the said parent corporation in the Philippines, the condition imposed
under the above-mentioned section is satisfied. Accordingly, the withholding tax rate of 15% is hereby
affirmed."
Moreover, as a matter of principle, this Court will not set aside the conclusion reached by an agency
such as the Court of Tax Appeals which is, by the very nature of its function, dedicated exclusively to
the study and consideration of tax problems and has necessarily developed an expertise on the subject
unless there has been an abuse or improvident exercise of authority (Reyes vs. Commissioner of
Internal Revenue, 24 SCRA 198), which is not present in the instant case.
WHEREFORE, the petition filed is DISMISSED for lack of merit.
SO ORDERED.
Fernan, Gutierrez, Jr., Feliciano and Cortes, JJ., concur.
Footnotes
*
Penned by Associate Judge Constante C. Roaquin and concurred to by Amante Filler, Presiding
Judge; and Alex Z. Reyes, Associate Judge.

THIRD DIVISION
[G.R. No. 76573. September 14, 1989.]
MARUBENI CORPORATION (formerly Marubeni Iida, Co., Ltd.), petitioner, vs.
COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX APPEALS, respondents.
Melquiades C. Gutierrez for petitioner.
The Solicitor General for respondents.
SYLLABUS
1.
TAXATION; NATIONAL INTERNAL REVENUE CODE; INCOME TAX ON
CORPORATIONS; RESIDENT FOREIGN CORPORATION, DEFINED. Under the Tax Code, a
resident foreign corporation is one that is "engaged in trade or business" within the Philippines.
2.
ID.; ID.; ID.; A SINGLE CORPORATION CANNOT BE BOTH A RESIDENT AND NONRESIDENT CORPORATION. A single corporate entity cannot be both a resident and a non-resident
corporation depending on the nature of the particular transaction involved. Accordingly, whether the
dividends are paid directly to the head office or coursed through its local branch is of no moment for
after all, the head office and the office branch constitute but one corporate entity, the Marubeni
Corporation, which, under both Philippine tax and corporate laws, is a resident foreign corporation
because it is transacting business in the Philippines.
3.
ID.; ID.; ID.; EACH TAX HAS A DIFFERENT TAX BASIS; CASE AT BAR. But while
public respondents correctly concluded that the dividends in dispute were neither subject to the 15%
profit remittance tax nor to the 10% intercorporate dividend tax, the recipient being a non-resident
stockholder, they grossly erred in holding that no refund was forthcoming to the petitioner because the
taxes thus withheld totalled the 25% rate imposed by the Philippine-Japan Tax Convention pursuant to
Article 10 (2) (b). To simply add the two taxes to arrive at the 25% tax rate is to disregard a basic rule
in taxation that each tax has a different tax basis. While the tax on dividends is directly levied on the
dividends received, "the tax base upon which the 15% branch profit remittance tax is imposed is the
profit actually remitted abroad."
4.
ID.; ID.; ID.; PHILIPPINE-JAPAN TAX TREATY; 25% MAXIMUM RATE, IMPOSABLE
ONLY WHEN THE LOCAL TAX EXCEEDS THE SAME. Public respondents likewise erred in
automatically imposing the 25% rate under Article 10 (2) (b) of the Tax Treaty as if this were a flat rate.
A closer look at the Treaty reveals that the tax rates fixed by Article 10 are the maximum rates as
reflected in the phrase "shall not exceed." This means that any tax imposable by the contracting state
concerned should not exceed the 25% limitation and that said rate would apply only if the tax imposed
by our laws exceeds the same. In other words, by reason of our bilateral negotiations with Japan, we
have agreed to have our right to tax limited to a certain extent to attain the goals set forth in the Treaty.
5.
ID.; ID.; ID.; ID.; NON-RESIDENT CORPORATION IS TAXED 35% OF ITS GROSS
INCOME FROM ALL SOURCES WITHIN THE PHILIPPINES. Petitioner, being a non-resident
foreign corporation with respect to the transaction in question, the applicable provision of the Tax Code
is Section 24 (b) (1) (iii) in conjunction with the Philippine-Japan Treaty of 1980. Proceeding to apply
the above section to the case at bar, petitioner, being a non-resident foreign corporation, as a general
rule, is taxed 35% of its gross income from all sources within the Philippines. [Section 24 (b) (1)].
6.
ID.; ID.; ID.; ID.; ID.; DISCOUNTED RATE OF 15% GRANTED WHERE A TAX CREDIT
OF NOT LESS THAN 20% OF THE DIVIDENDS RECEIVED IS EXTENDED TO OUR
DOMESTIC CORPORATION. A discounted rate of 15% is given to petitioner on dividends
received from a domestic corporation (AG&P) on the condition that its domicile state (Japan) extends
in favor of petitioner, a tax credit of not less than 20% of the dividends received. This 20% represents
the difference between the regular tax of 35% on non-resident foreign corporations which petitioner
would have ordinarily paid, and the 15% special rate on dividends received from a domestic
corporation.
7.
ID.; ID.; ID.; ID.; ID.; TAX REFUND PROPER WHERE A FOREIGN NON-RESIDENT

CORPORATION PAID INCOME TAX ON BRANCH PROFIT REMITTANCE WITHIN THE

MAXIMUM CEILING RATE DECREED IN THE TAX TREATY. Petitioner is entitled to a refund
on the transaction in question. It is readily apparent that the 15% tax rate imposed on the dividends
received by a foreign non-resident stockholder from a domestic corporation under Section 24 (b) (1)
(iii) is easily within the maximum ceiling of 25% of the gross amount of the dividends as decreed in
Article 10 (2) (b) of the Tax Treaty.
8.
REMEDIAL LAW; BATAS PAMBANSA BLG. 129; DOES NOT INCLUDE
REORGANIZATION OF THE COURT OF TAX APPEALS. BP Blg. 129 does not include the
Court of Tax Appeals which has been created by virtue of a special law, Republic Act No. 1125.
Respondent court is not among those courts specifically mentioned in Section 2 of BP Blg. 129 as
falling within its scope.
9.
ID.; REPUBLIC ACT NO. 1125; COURT OF TAX APPEALS; THIRTY (30) DAYS PERIOD
TO APPEAL FROM NOTICE; PERIOD BEGINS AGAIN FROM NOTICE OF DENIAL OF
MOTION FOR RECONSIDERATION; CASE AT BAR. Under Section 18 of Republic Act No.
1125, a party adversely affected by an order, ruling or decision of the Court of Tax Appeals is given
thirty (30) days from notice to appeal therefrom. Otherwise, said order, ruling, or decision shall become
final. Records show that petitioner received notice of the Court of Tax Appeal's decision denying its
claim for refund on April 15, 1986. On the 30th day, or on May 15, 1986 (the last day for appeal),
petitioner filed a motion for reconsideration which respondent court subsequently denied on November
17, 1986, and notice of which was received by petitioner on November 26, 1986. Two days later, or on
November 28, 1986, petitioner simultaneously filed a notice of appeal with the Court of Tax Appeals
and a petition for review with the Supreme Court. From the foregoing, it is evident that the instant
appeal was perfected well within the 30-day period provided under R.A. No. 1125, the whole 30-day
period to appeal having begun to run again from notice of the denial of petitioner's motion for
reconsideration.
DECISION
FERNAN, C.J p:
Petitioner, Marubeni Corporation, representing itself as a foreign corporation duly organized and
existing under the laws of Japan and duly licensed to engage in business under Philippine laws with
branch office at the 4th Floor, FEEMI Building, Aduana Street, Intramuros, Manila seeks the reversal
of the decision of the Court of Tax Appeals 1 dated February 12, 1986 denying its claim for refund or
tax credit in the amount of P229,424.40 representing alleged overpayment of branch profit remittance
tax withheld from dividends by Atlantic Gulf and Pacific Co. of Manila (AG&P).
The following facts are undisputed: Marubeni Corporation of Japan has equity investments in AG&P of
Manila. For the first quarter of 1981 ending March 31, AG&P declared and paid cash dividends to
petitioner in the amount of P849,720 and withheld the corresponding 10% final dividend tax thereon.
Similarly, for the third quarter of 1981 ending September 30, AG&P declared and paid P849,720 as
cash dividends to petitioner and withheld the corresponding 10% final dividend tax thereon. 2
AG&P directly remitted the cash dividends to petitioner's head office in Tokyo, Japan, net not only of
the 10% final dividend tax in the amounts of P764,748 for the first and third quarters of 1981, but also
of the withheld 15% profit remittance tax based on the remittable amount after deducting the final
withholding tax of 10%. A schedule of dividends declared and paid by AG&P to its stockholder
Marubeni Corporation of Japan, the 10% final intercorporate dividend tax and the 15% branch profit
remittance tax paid thereon, is shown below:
1981 FIRST QUARTER THIRD QUARTER TOTAL OF FIRST
(three months (three months and Third
ended 3.31.81)
ended 9.30.81)
quarters
(In Pesos)

Cash
Dividends
Paid 849,720.44 849,720.00 1,699,440.00
10% Dividend
Tax Withheld 84,972.00
84,972.00
169,944.00
Cash Dividend
net of 10% Dividend
Tax Withheld 764,748.00 764,748.00 1,529,496.00
15% Branch Profit
Remittance Tax
Withheld
114,712.20 114,712.20
229,424.40 3
Net Amount
Remitted to
Petitioner
650,035.80 650,035.80 1,300,071.60
The 10% final dividend tax of P84,972 and the 15% branch profit remittance tax of P114,712.20 for the
first quarter of 1981 were paid to the Bureau of Internal Revenue by AG&P on April 20, 1981 under
Central Bank Receipt No. 6757880. Likewise, the 10% final dividend tax of P84,972 and the 15%
branch profit remittance tax of P114,712 for the third quarter of 1981 were paid to the Bureau of
Internal Revenue by AG&P on August 4, 1981 under Central Bank Confirmation Receipt No. 7905930.
4
Thus, for the first and third quarters of 1981, AG&P as withholding agent paid 15% branch profit
remittance on cash dividends declared and remitted to petitioner at its head office in Tokyo in the total
amount of P229,424.40 on April 20 and August 4, 1981. 5
In a letter dated January 29, 1981, petitioner, through the accounting firm Sycip, Gorres, Velayo and
Company, sought a ruling from the Bureau of Internal Revenue on whether or not the dividends
petitioner received from AG&P are effectively connected with its conduct or business in the Philippines
as to be considered branch profits subject to the 15% profit remittance tax imposed under Section 24
(b) (2) of the National Internal Revenue Code as amended by Presidential Decrees Nos. 1705 and 1773.
In reply to petitioner's query, Acting Commissioner Ruben Ancheta ruled:
"Pursuant to Section 24 (b) (2) of the Tax Code, as amended, only profits remitted abroad by a branch
office to its head office which are effectively connected with its trade or business in the Philippines are
subject to the 15% profit remittance tax. To be 'effectively connected' it is not necessary that the income
be derived from the actual operation of taxpayer-corporation's trade or business; it is sufficient that the
income arises from the business activity in which the corporation is engaged. For example, if a resident
foreign corporation is engaged in the buying and selling of machineries in the Philippines and invests in
some shares of stock on which dividends are subsequently received, the dividends thus earned are not
considered 'effectively connected' with its trade or business in this country. (Revenue Memorandum
Circular No. 55-80).
In the instant case, the dividends received by Marubeni from AG&P are not income arising from the
business activity in which Marubeni is engaged. Accordingly, said dividends if remitted abroad are not
considered branch profits for purposes of the 15% profit remittance tax imposed by Section 24 (b) (2)
of the Tax Code, as amended . . . ." 6
Consequently, in a letter dated September 21, 1981 and filed with the Commissioner of Internal
Revenue on September 24, 1981, petitioner claimed for the refund or issuance of a tax credit of
P229,424.40 "representing profit tax remittance erroneously paid on the dividends remitted by Atlantic
Gulf and Pacific Co. of Manila (AG&P) on April 20 and August 4, 1981 to . . . head office in Tokyo." 7
On June 14, 1982, respondent Commissioner of Internal Revenue denied petitioner's claim for

refund/credit of P229,424.40 on the following grounds:

"While it is true that said dividends remitted were not subject to the 15% profit remittance tax as the
same were not income earned by a Philippine Branch of Marubeni Corporation of Japan; and neither is
it subject to the 10% intercorporate dividend tax, the recipient of the dividends, being a non-resident
stockholder, nevertheless, said dividend income is subject to the 25% tax pursuant to Article 10 (2) (b)
of the Tax Treaty dated February 13, 1980 between the Philippines and Japan.
Inasmuch as the cash dividends remitted by AG&P to Marubeni Corporation, Japan is subject to 25%
tax, and that the taxes withheld of 10% as intercorporate dividend tax and 15% as profit remittance tax
totals (sic) 25%, the amount refundable offsets the liability, hence, nothing is left to be refunded." 8
Petitioner appealed to the Court of Tax Appeals which affirmed the denial of the refund by the
Commissioner of Internal Revenue in its assailed judgment of February 12, 1986. 9
In support of its rejection of petitioner's claimed refund, respondent Tax Court explained:
"Whatever the dialectics employed, no amount of sophistry can ignore the fact that the dividends in
question are income taxable to the Marubeni Corporation of Tokyo, Japan. The said dividends were
distributions made by the Atlantic, Gulf and Pacific Company of Manila to its shareholder out of its
profits on the investments of the Marubeni Corporation of Japan, a non-resident foreign corporation.
The investments in the Atlantic Gulf & Pacific Company of the Marubeni Corporation of Japan were
directly made by it and the dividends on the investments were likewise directly remitted to and
received by the Marubeni Corporation of Japan. Petitioner Marubeni Corporation Philippine Branch
has no participation or intervention, directly or indirectly, in the investments and in the receipt of the
dividends. And it appears that the funds invested in the Atlantic Gulf & Pacific Company did not come
out of the funds invested by the Marubeni Corporation of Japan to the Marubeni Corporation Philippine
Branch. As a matter of fact, the Central Bank of the Philippines, in authorizing the remittance of the
foreign exchange equivalent of (sic) the dividends in question, treated the Marubeni Corporation of
Japan as a non-resident stockholder of the Atlantic Gulf & Pacific Company based on the supporting
documents submitted to it.
"Subject to certain exceptions not pertinent hereto, income is taxable to the person who earned it.
Admittedly, the dividends under consideration were earned by the Marubeni Corporation of Japan, and
hence, taxable to the said corporation. While it is true that the Marubeni Corporation Philippine Branch
is duly licensed to engage in business under Philippine laws, such dividends are not the income of the
Philippine Branch and are not taxable to the said Philippine branch. We see no significance thereto in
the identity concept or principal-agent relationship theory of petitioner because such dividends are the
income of and taxable to the Japanese corporation in Japan and not to the Philippine branch." 10
Hence, the instant petition for review.
It is the argument of petitioner corporation that following the principal-agent relationship theory,
Marubeni, Japan is likewise a resident foreign corporation subject only to the 10% intercorporate final
tax on dividends received from a domestic corporation in accordance with Section 24(c) (1) of the Tax
Code of 1977 which states:
"Dividends received by a domestic or resident foreign corporation liable to tax under this Code (1)
Shall be subject to a final tax of 10% on the total amount thereof, which shall be collected and paid as
provided in Sections 53 and 54 of this Code . . ."
Public respondents, however, are of the contrary view that Marubeni, Japan, being a non-resident
foreign corporation and not engaged in trade or business in the Philippines, is subject to tax on income
earned from Philippine sources at the rate of 35% of its gross income under Section 24 (b) (1) of the
same Code which reads:
"(b) Tax on foreign corporations (1) Nonresident corporations. A foreign corporation not
engaged in trade or business in the Philippines shall pay a tax equal to thirty-five per cent of the gross
income received during each taxable year from all sources within the Philippines as . . . dividends . . ."
but expressly made subject to the special rate of 25% under Article 10(2) (b) of the Tax Treaty of 1980

concluded between the Philippines and Japan. 11 Thus:

"Article 10 (1) Dividends paid by a company which is a resident of a Contracting State to a resident of
the other Contracting State may be taxed in that other Contracting State.
"(2) However, such dividends may also be taxed in the Contracting State of which the company
paying the dividends is a resident, and according to the laws of that Contracting State, but if the
recipient is the beneficial owner of the dividends the tax so charged shall not exceed;
"(a) . . .
"(b) 25 per cent of the gross amount of the dividends in all other cases."
Central to the issue of Marubeni, Japan's tax liability on its dividend income from Philippine sources is
therefore the determination of whether it is a resident or a non-resident foreign corporation under
Philippine laws.
Under the Tax Code, a resident foreign corporation is one that is "engaged in trade or business" within
the Philippines. Petitioner contends that precisely because it is engaged in business in the Philippines
through its Philippine branch that it must be considered as a resident foreign corporation. Petitioner
reasons that since the Philippine branch and the Tokyo head office are one and the same entity, whoever
made the investment in AG&P, Manila does not matter at all. A single corporate entity cannot be both a
resident and a non-resident corporation depending on the nature of the particular transaction involved.
Accordingly, whether the dividends are paid directly to the head office or coursed through its local
branch is of no moment for after all, the head office and the office branch constitute but one corporate
entity, the Marubeni Corporation, which, under both Philippine tax and corporate laws, is a resident
foreign corporation because it is transacting business in the Philippines.
The Solicitor General has adequately refuted petitioner's arguments in this wise: llcd
"The general rule that a foreign corporation is the same juridical entity as its branch office in the
Philippines cannot apply here. This rule is based on the premise that the business of the foreign
corporation is conducted through its branch office, following the principal-agent relationship theory. It
is understood that the branch becomes its agent here. So that when the foreign corporation transacts
business in the Philippines independently of its branch, the principal-agent relationship is set aside. The
transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the
foreign corporation, not the branch or the resident foreign corporation.
"Corollarily, if the business transaction is conducted through the branch office, the latter becomes the
taxpayer, and not the foreign corporation." 12
In other words, the alleged overpaid taxes were incurred for the remittance of dividend income to the
head office in Japan which is a separate and distinct income taxpayer from the branch in the
Philippines. There can be no other logical conclusion considering the undisputed fact that the
investment (totalling 283.260 shares including that of nominee) was made for purposes peculiarly
germane to the conduct of the corporate affairs of Marubeni, Japan, but certainly not of the branch in
the Philippines. It is thus clear that petitioner, having made this independent investment attributable
only to the head office, cannot now claim the increments as ordinary consequences of its trade or
business in the Philippines and avail itself of the lower tax rate of 10%.
But while public respondents correctly concluded that the dividends in dispute were neither subject to
the 15% profit remittance tax nor to the 10% intercorporate dividend tax, the recipient being a nonresident stockholder, they grossly erred in holding that no refund was forthcoming to the petitioner
because the taxes thus withheld totalled the 25% rate imposed by the Philippine-Japan Tax Convention
pursuant to Article 10 (2) (b).
To simply add the two taxes to arrive at the 25% tax rate is to disregard a basic rule in taxation that
each tax has a different tax basis. While the tax on dividends is directly levied on the dividends
received, "the tax base upon which the 15% branch profit remittance tax is imposed is the profit
actually remitted abroad." 13
Public respondents likewise erred in automatically imposing the 25% rate under Article 10 (2) (b) of

the Tax Treaty as if this were a flat rate. A closer look at the Treaty reveals that the tax rates fixed by
Article 10 are the maximum rates as reflected in the phrase "shall not exceed." This means that any tax
imposable by the contracting state concerned should not exceed the 25% limitation and that said rate
would apply only if the tax imposed by our laws exceeds the same. In other words, by reason of our
bilateral negotiations with Japan, we have agreed to have our right to tax limited to a certain extent to
attain the goals set forth in the Treaty. LexLib
Petitioner, being a non-resident foreign corporation with respect to the transaction in question, the
applicable provision of the Tax Code is Section 24 (b) (1) (iii) in conjunction with the Philippine-Japan
Treaty of 1980. Said section provides:
"(b) Tax on foreign corporations. (1) Nonresident corporations . . . (iii) On dividends received
from a domestic corporation liable to tax under this Chapter, the tax shall be 15% of the dividends
received, which shall be collected and paid as provided in Section 53 (d) of this Code, subject to the
condition that the country in which the non-resident foreign corporation is domiciled shall allow a
credit against the tax due from the non-resident foreign corporation, taxes deemed to have been paid in
the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on
corporations and the tax (15%) on dividends as provided in this Section; . . ."
Proceeding to apply the above section to the case at bar, petitioner, being a non-resident foreign
corporation, as a general rule, is taxed 35% of its gross income from all sources within the Philippines.
[Section 24 (b) (1)].
However, a discounted rate of 15% is given to petitioner on dividends received from a domestic
corporation (AG&P) on the condition that its domicile state (Japan) extends in favor of petitioner, a tax
credit of not less than 20% of the dividends received. This 20% represents the difference between the
regular tax of 35% on non-resident foreign corporations which petitioner would have ordinarily paid,
and the 15% special rate on dividends received from a domestic corporation.
Consequently, petitioner is entitled to a refund on the transaction in question to be computed as
follows:
Total cash dividend paid
P1,699,440.00
less 15% under Sec. 24
(b) (1) (iii)
254,916.00

Cash dividend net of 15% tax

due petitioner P1,444.524.00
less net amount
actually remitted
1,300,071.60

Amount to be refunded to petitioner

representing overpayment of
taxes on dividends remitted P144.452.40
==========
It is readily apparent that the 15% tax rate imposed on the dividends received by a foreign non-resident
stockholder from a domestic corporation under Section 24 (b) (1) (iii) is easily within the maximum
ceiling of 25% of the gross amount of the dividends as decreed in Article 10 (2) (b) of the Tax Treaty.
There is one final point that must be settled. Respondent Commissioner of Internal Revenue is laboring
under the impression that the Court of Tax Appeals is covered by Batas Pambansa Blg. 129, otherwise
known as the Judiciary Reorganization Act of 1980. He alleges that the instant petition for review was
not perfected in accordance with Batas Pambansa Blg. 129 which provides that "the period of appeal
from final orders, resolutions, awards, judgments, or decisions of any court in all cases shall be fifteen
(15) days counted from the notice of the final order, resolution, award, judgment or decision appealed
from . . ."

This is completely untenable. The cited BP Blg. 129 does not include the Court of Tax Appeals which
has been created by virtue of a special law, Republic Act No. 1125. Respondent court is not among
those courts specifically mentioned in Section 2 of BP Blg. 129 as falling within its scope.
Thus, under Section 18 of Republic Act No. 1125, a party adversely affected by an order, ruling or
decision of the Court of Tax Appeals is given thirty (30) days from notice to appeal therefrom.
Otherwise, said order, ruling, or decision shall become final. llcd
Records show that petitioner received notice of the Court of Tax Appeal's decision denying its claim for
refund on April 15, 1986. On the 30th day, or on May 15, 1986 (the last day for appeal), petitioner filed
a motion for reconsideration which respondent court subsequently denied on November 17, 1986, and
notice of which was received by petitioner on November 26, 1986. Two days later, or on November 28,
1986, petitioner simultaneously filed a notice of appeal with the Court of Tax Appeals and a petition for
review with the Supreme Court. 14 From the foregoing, it is evident that the instant appeal was
perfected well within the 30-day period provided under R.A. No. 1125, the whole 30-day period to
appeal having begun to run again from notice of the denial of petitioner's motion for reconsideration.
WHEREFORE, the questioned decision of respondent Court of Tax Appeals dated February 12, 1986
which affirmed the denial by respondent Commissioner of Internal Revenue of petitioner Marubeni
Corporation's claim for refund is hereby REVERSED. The Commissioner of Internal Revenue is
ordered to refund or grant as tax credit in favor of petitioner the amount of P144,452.40 representing
overpayment of taxes on dividends received. No costs.
So ordered.
Gutierrez, Jr., Bidin and Cortes, JJ ., concur.
Feliciano, J ., is on leave.
Footnotes
1.
Penned by Amante Filler, Presiding Judge and concurred in by Constante Roaquin and Alex
Reyes, Associate Judges.
2.
Rollo, p. 37.
3.
Amount sought to be refunded. See Rollo, p. 38.
4.
Rollo, pp. 38-39.
5.
Rollo, p. 39.
6.
Annex C, Ruling No. 157-81, Original Record, pp. 11-12.
7.
Original B.I.R. Record, p. 8.
8.
Annex E, Original Record, p. 15.
9.
Original Record, p. 122.
10.
Original Record, pp. 119-121.
11.
Convention between the Republic of the Philippines and Japan for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income.
12.
Memorandum, p. 142, Rollo.
13.
Commissioner of Internal Revenue vs. Burroughs, Limited, G.R. No. 66653, June 19, 1986, 142
SCRA 324.
14.
Rollo, p. 2; Original Record, p. 170.

THIRD DIVISION
[G.R. No. 123206. March 22, 2000.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF APPEALS, COURT OF
TAX APPEALS and JOSEFINA P. PAJONAR, as Administratrix of the Estate of Pedro P. Pajonar,
respondents.
Esther Ibaez and Pablo M. Bastes, Jr. for petitioner.
Leo B. Diocos for private respondent.
SYNOPSIS
Petitioner assailed the decision of the Court of Appeals which affirmed the Resolution of the Court of
Tax Appeals granting Josefina Pajonar, administratrix of the estate of Pedro Pajonar, a tax refund
representing erroneously paid estate taxes for the year 1988; and deduction of the notarial fee for the
Extrajudicial Settlement and the attorney's fees in the guardianship proceedings. Here in issue is the
allowance of said deductions. cISDHE
Administration expenses, as an allowable deduction from the gross estate of the decedent for purposes
of arriving at the value of the net estate, have been construed to include all expenses essential to the
proper settlement of the estate. The notarial fee paid for the extrajudicial settlement is clearly
deductible expense since such settlement effected the distribution of Pedro Pajonar's estate to his lawful
heirs. Similarly, the attorney's fees paid to PNB for acting as the guardian of Pedro Pajonar's property
during his lifetime should also be considered as a deductible administration expense.
SYLLABUS
1.
TAXATION; NATIONAL INTERNAL REVENUE CODE; ALLOWABLE DEDUCTIONS
FROM THE GROSS ESTATE OF A DECEDENT; DISCUSSED. The deductions from the gross
estate permitted under Section 79 of the Tax Code basically reproduced the deductions allowed under
Commonwealth Act No. 466 (CA 466), otherwise known as the National Internal Revenue Code of
1939, and which was the first codification of Philippine tax laws. Section 89 (a) (1) (B) of CA 466 also
provided for the deduction of the "judicial expenses of the testamentary or intestate proceedings" for
purposes of determining the value of the net estate. Philippine tax laws were, in turn, based on the
federal tax laws of the United States. In accord with established rules of statutory construction, the
decisions of American courts construing the federal tax code are entitled to great weight in the
interpretation of our own tax laws. Judicial expenses are expenses of administration. Administration
expenses, as an allowable deduction from the gross estate of the decedent for purposes of arriving at the
value of the net estate, have been construed by the federal and state courts of the United States to
include all expenses "essential to the collection of the assets, payment of debts or the distribution of the
property to the persons entitled to it." In other words, the expenses must be essential to the proper
settlement of the estate. Expenditures incurred for the individual benefit of the heirs, devisees or
legatees are not deductible.
2.
ID.; ID.; ID.; NOTARIAL FEE FOR THE EXTRAJUDICIAL SETTLEMENT AND
ATTORNEY'S FEES IN GUARDIANSHIP PROCEEDINGS IN CASE AT BAR; UPHELD. The
notarial fee paid for the extrajudicial settlement is clearly a deductible expense since such settlement
effected a distribution of Pedro Pajonar's estate to his lawful heirs. Similarly, the attorney's fees paid to
PNB for acting as the guardian of Pedro Pajonar's property during his lifetime should also be
considered as a deductible administration expense. PNB provided a detailed accounting of decedent's
property and gave advice as to the proper settlement of the latter's estate, acts which contributed
towards the collection of decedent's assets and the subsequent settlement of the estate. HDTSIE
RESOLUTION
GONZAGA-REYES, J p:
Assailed in this petition for review on certiorari is the December 21, 1995 Decision 1 of the Court of
Appeals 2 in CA-G.R. Sp. No. 34399 affirming the June 7, 1994 Resolution of the Court of Tax
Appeals in CTA Case No. 4381 granting private respondent Josefina P. Pajonar, as administratrix of the

estate of Pedro P. Pajonar, a tax refund in the amount of P76,502.42, representing erroneously paid
estate taxes for the year 1988.
Pedro Pajonar, a member of the Philippine Scout, Bataan Contingent, during the second World War,
was a part of the infamous Death March by reason of which he suffered shock and became insane. His
sister Josefina Pajonar became the guardian over his person, while his property was placed under the
guardianship of the Philippine National Bank (PNB) by the Regional Trial Court of Dumaguete City,
Branch 31, in Special Proceedings No. 1254. He died on January 10, 1988. He was survived by his two
brothers Isidro P. Pajonar and Gregorio Pajonar, his sister Josefina Pajonar, nephews Concordio Jandog
and Mario Jandog and niece Conchita Jandog.
On May 11, 1988, the PNB filed an accounting of the decedent's property under guardianship valued at
P3,037,672.09 in Special Proceedings No. 1254. However, the PNB did not file an estate tax return,
instead it advised Pedro Pajonar's heirs to execute an extrajudicial settlement and to pay the taxes on
his estate. On April 5, 1988, pursuant to the assessment by the Bureau of Internal Revenue (BIR), the
estate of Pedro Pajonar paid taxes in the amount of P2,557. prcd
On May 19, 1988, Josefina Pajonar filed a petition with the Regional Trial Court of Dumaguete City
for the issuance in her favor of letters of administration of the estate of her brother. The case was
docketed as Special Proceedings No. 2399. On July 18, 1988, the trial court appointed Josefina Pajonar
as the regular administratrix of Pedro Pajonar's estate.
On December 19, 1988, pursuant to a second assessment by the BIR for deficiency estate tax, the estate
of Pedro Pajonar paid estate tax in the amount of P1,527,790.98. Josefina Pajonar, in her capacity as
administratrix and heir of Pedro Pajonar's estate, filed a protest on January 11, 1989 with the BIR
praying that the estate tax payment in the amount of P1,527,790.98, or at least some portion of it, be
returned to the heirs. 3
However, on August 15, 1989, without waiting for her protest to be resolved by the BIR, Josefina
Pajonar filed a petition for review with the Court of Tax Appeals (CTA), praying for the refund of
P1,527,790.98, or in the alternative, P840,202.06, as erroneously paid estate tax. 4 The case was
docketed as CTA Case No. 4381.
On May 6, 1993, the CTA ordered the Commissioner of Internal Revenue to refund Josefina Pajonar
the amount of P252,585.59, representing erroneously paid estate tax for the year 1988. 5 Among the
deductions from the gross estate allowed by the CTA were the amounts of P60,753 representing the
notarial fee for the Extrajudicial Settlement and the amount of P50,000 as the attorney's fees in Special
Proceedings No. 1254 for guardianship. 6
On June 15, 1993, the Commissioner of Internal Revenue filed a motion for reconsideration 7 of the
CTA's May 6, 1993 decision asserting, among others, that the notarial fee for the Extrajudicial
Settlement and the attorney's fees in the guardianship proceedings are not deductible expenses.
On June 7, 1994, the CTA issued the assailed Resolution 8 ordering the Commissioner of Internal
Revenue to refund Josefina Pajonar, as administratrix of the estate of Pedro Pajonar, the amount of
P76,502.42 representing erroneously paid estate tax for the year 1988. Also, the CTA upheld the
validity of the deduction of the notarial fee for the Extrajudicial Settlement and the attorney's fees in
the guardianship proceedings.
On July 5, 1994, the Commissioner of Internal Revenue filed with the Court of Appeals a petition for
review of the CTA's May 6, 1993 Decision and its June 7, 1994 Resolution, questioning the validity of
the abovementioned deductions. On December 21, 1995, the Court of Appeals denied the
Commissioner's petition. 9
Hence, the present appeal by the Commissioner of Internal Revenue.
The sole issue in this case involves the construction of Section 79 10 of the National Internal Revenue
Code 11 (Tax Code) which provides for the allowable deductions from the gross estate of the decedent.
More particularly, the question is whether the notarial fee paid for the extrajudicial settlement in the
amount of P60,753 and the attorney's fees in the guardianship proceedings in the amount of P50,000

may be allowed as deductions from the gross estate of decedent in order to arrive at the value of the net
estate.
We answer this question in the affirmative, thereby upholding the decisions of the appellate courts.
prLL
In its May 6, 1993 Decision, the Court of Tax Appeals ruled thus:
Respondent maintains that only judicial expenses of the testamentary or intestate proceedings are
allowed as a deduction to the gross estate. The amount of P60,753.00 is quite extraordinary for a mere
notarial fee.
This Court adopts the view under American jurisprudence that expenses incurred in the extrajudicial
settlement of the estate should be allowed as a deduction from the gross estate. "There is no
requirement of formal administration. It is sufficient that the expense be a necessary contribution
toward the settlement of the case." [34 Am. Jur. 2d, p. 765; Nolledo, Bar Reviewer in Taxation, 10th
Ed. (1990), p. 481]
xxx
xxx
xxx
The attorney's fees of P50,000.00, which were already incurred but not yet paid, refers to the
guardianship proceeding filed by PNB, as guardian over the ward of Pedro Pajonar, docketed as Special
Proceeding No. 1254 in the RTC (Branch XXXI) of Dumaguete City. . . .
xxx
xxx
xxx
The guardianship proceeding had been terminated upon delivery of the residuary estate to the heirs
entitled thereto. Thereafter, PNB was discharged of any further responsibility.
Attorney's fees in order to be deductible from the gross estate must be essential to the collection of
assets, payment of debts or the distribution of the property to the persons entitled to it. The services for
which the fees are charged must relate to the proper settlement of the estate. [34 Am. Jur. 2d 767.] In
this case, the guardianship proceeding was necessary for the distribution of the property of the late
Pedro Pajonar to his rightful heirs.
xxx
xxx
xxx
PNB was appointed as guardian over the assets of the late Pedro Pajonar, who, even at the time of his
death, was incompetent by reason of insanity. The expenses incurred in the guardianship proceeding
was but a necessary expense in the settlement of the decedent's estate. Therefore, the attorney's fee
incurred in the guardianship proceedings amounting to P50,000.00 is a reasonable and necessary
business expense deductible from the gross estate of the decedent. 12
Upon a motion for reconsideration filed by the Commissioner of Internal Revenue, the Court of Tax
Appeals modified its previous ruling by reducing the refundable amount to P76,502.43 since it found
that a deficiency interest should be imposed and the compromise penalty excluded. 13 However, the tax
court upheld its previous ruling regarding the legality of the deductions
It is significant to note that the inclusion of the estate tax law in the codification of all our national
internal revenue laws with the enactment of the National Internal Revenue Code in 1939 were copied
from the Federal Law of the United States. [UMALI, Reviewer in Taxation (1985), p. 285] The 1977
Tax Code, promulgated by Presidential Decree No. 1158, effective June 3, 1977, reenacted
substantially all the provisions of the old law on estate and gift taxes, except the sections relating to the
meaning of gross estate and gift. [Ibid, p. 286.]
In the United States, [a]dministrative expenses, executor's commissions and attorney's fees are
considered allowable deductions from the Gross Estate. Administrative expenses are limited to such
expenses as are actually and necessarily incurred in the administration of a decedent's estate.
[PRENTICE-HALL, Federal Taxes Estate and Gift Taxes (1936), p. 120, 533.] Necessary expenses of
administration are such expenses as are entailed for the preservation and productivity of the estate and
for its management for purposes of liquidation, payment of debts and distribution of the residue among
the persons entitled thereto. [Lizarraga Hermanos vs. Abada, 40 Phil. 124.] They must be incurred for
the settlement of the estate as a whole. [34 Am. Jur. 2d, p. 765.] Thus, where there were no substantial

community debts and it was unnecessary to convert community property to cash, the only practical
purpose of administration being the payment of estate taxes, full deduction was allowed for attorney's
fees and miscellaneous expenses charged wholly to decedent's estate. [Ibid., citing Estate of Helis, 26
T.C. 143 (A).]
Petitioner stated in her protest filed with the BIR that "upon the death of the ward, the PNB, which was
still the guardian of the estate, (Annex 'Z'), did not file an estate tax return; however, it advised the heirs
to execute an extrajudicial settlement, to pay taxes and to post a bond equal to the value of the estate,
for which the estate paid P59,341.40 for the premiums. (See Annex 'K')." [p. 17, CTA record.]
Therefore, it would appear from the records of the case that the only practical purpose of settling the
estate by means of an extrajudicial settlement pursuant to Section 1 of Rule 74 of the Rules of Court
was for the payment of taxes and the distribution of the estate to the heirs. A fortiori, since our estate
tax laws are of American origin, the interpretation adopted by American Courts has some persuasive
effect on the interpretation of our own estate tax laws on the subject. LexLib
Anent the contention of respondent that the attorney's fees of P50,000.00 incurred in the guardianship
proceeding should not be deducted from the Gross Estate, We consider the same unmeritorious.
Attorneys' and guardians' fees incurred in a trustee's accounting of a taxable inter vivos trust
attributable to the usual issues involved in such an accounting was held to be proper deductions
because these are expenses incurred in terminating an inter vivos trust that was includible in the
decedent's estate. [Prentice Hall, Federal Taxes on Estate and Gift, p. 120, 861] Attorney's fees are
allowable deductions if incurred for the settlement of the estate. It is noteworthy to point that PNB was
appointed the guardian over the assets of the deceased. Necessarily the assets of the deceased formed
part of his gross estate. Accordingly, all expenses incurred in relation to the estate of the deceased will
be deductible for estate tax purposes provided these are necessary and ordinary expenses for
administration of the settlement of the estate. 14
In upholding the June 7, 1994 Resolution of the Court of Tax Appeals, the Court of Appeals held that:
2.
Although the Tax Code specifies "judicial expenses of the testamentary or intestate
proceedings," there is no reason why expenses incurred in the administration and settlement of an
estate in extrajudicial proceedings should not be allowed. However, deduction is limited to such
administration expenses as are actually and necessarily incurred in the collection of the assets of the
estate, payment of the debts, and distribution of the remainder among those entitled thereto. Such
expenses may include executor's or administrator's fees, attorney's fees, court fees and charges,
appraiser's fees, clerk hire, costs of preserving and distributing the estate and storing or maintaining it,
brokerage fees or commissions for selling or disposing of the estate, and the like. Deductible attorney's
fees are those incurred by the executor or administrator in the settlement of the estate or in defending or
prosecuting claims against or due the estate. (Estate and Gift Taxation in the Philippines, T. P. Matic,
Jr., 1981 Edition, p. 176).
xxx
xxx
xxx
It is clear then that the extrajudicial settlement was for the purpose of payment of taxes and the
distribution of the estate to the heirs. The execution of the extrajudicial settlement necessitated the
notarization of the same. Hence the Contract of Legal Services of March 28, 1988 entered into between
respondent Josefina Pajonar and counsel was presented in evidence for the purpose of showing that the
amount of P60,753.00 was for the notarization of the Extrajudicial Settlement. It follows then that the
notarial fee of P60,753.00 was incurred primarily to settle the estate of the deceased Pedro Pajonar.
Said amount should then be considered an administration expenses actually and necessarily incurred in
the collection of the assets of the estate, payment of debts and distribution of the remainder among
those entitled thereto. Thus, the notarial fee of P60,753 incurred for the Extrajudicial Settlement should
be allowed as a deduction from the gross estate.
3.
Attorney's fees, on the other hand, in order to be deductible from the gross estate must be
essential to the settlement of the estate.

The amount of P50,000.00 was incurred as attorney's fees in the guardianship proceedings in Spec.
Proc. No. 1254. Petitioner contends that said amount are not expenses of the testamentary or intestate
proceedings as the guardianship proceeding was instituted during the lifetime of the decedent when
there was yet no estate to be settled.
Again, this contention must fail.
The guardianship proceeding in this case was necessary for the distribution of the property of the
deceased Pedro Pajonar. As correctly pointed out by respondent CTA, the PNB was appointed guardian
over the assets of the deceased, and that necessarily the assets of the deceased formed part of his gross
estate. . . . prLL
xxx
xxx
xxx
It is clear therefore that the attorney's fees incurred in the guardianship proceeding in Spec. Proc. No.
1254 were essential to the distribution of the property to the persons entitled thereto. Hence, the
attorney's fees incurred in the guardianship proceedings in the amount of P50,000.00 should be allowed
as a deduction from the gross estate of the decedent. 15
The deductions from the gross estate permitted under Section 79 of the Tax Code basically reproduced
the deductions allowed under Commonwealth Act No. 466 (CA 466), otherwise known as the National
Internal Revenue Code of 1939, 16 and which was the first codification of Philippine tax laws. Section
89 (a) (1) (B) of CA 466 also provided for the deduction of the "judicial expenses of the testamentary
or intestate proceedings" for purposes of determining the value of the net estate. Philippine tax laws
were, in turn, based on the federal tax laws of the United States. 17 In accord with established rules of
statutory construction, the decisions of American courts construing the federal tax code are entitled to
great weight in the interpretation of our own tax laws. 18
Judicial expenses are expenses of administration. 19 Administration expenses, as an allowable
deduction from the gross estate of the decedent for purposes of arriving at the value of the net estate,
have been construed by the federal and state courts of the United States to include all expenses
"essential to the collection of the assets, payment of debts or the distribution of the property to the
persons entitled to it." 20 In other words, the expenses must be essential to the proper settlement of the
estate. Expenditures incurred for the individual benefit of the heirs, devisees or legatees are not
deductible. 21 This distinction has been carried over to our jurisdiction. Thus, in Lorenzo v. Posadas 22
the Court construed the phrase "judicial expenses of the testamentary or intestate proceedings" as not
including the compensation paid to a trustee of the decedent's estate when it appeared that such trustee
was appointed for the purpose of managing the decedent's real estate for the benefit of the testamentary
heir. In another case, the Court disallowed the premiums paid on the bond filed by the administrator as
an expense of administration since the giving of a bond is in the nature of a qualification for the office,
and not necessary in the settlement of the estate. 23 Neither may attorney's fees incident to litigation
incurred by the heirs in asserting their respective rights be claimed as a deduction from the gross estate.
24
Coming to the case at bar, the notarial fee paid for the extrajudicial settlement is clearly a deductible
expense since such settlement effected a distribution of Pedro Pajonar's estate to his lawful heirs.
Similarly, the attorney's fees paid to PNB for acting as the guardian of Pedro Pajonar's property during
his lifetime should also be considered as a deductible administration expense. PNB provided a detailed
accounting of decedent's property and gave advice as to the proper settlement of the latter's estate, acts
which contributed towards the collection of decedent's assets and the subsequent settlement of the
estate.
We find that the Court of Appeals did not commit reversible error in affirming the questioned
resolution of the Court of Tax Appeals. cdphil
WHEREFORE, the December 21, 1995 Decision of the Court of Appeals is AFFIRMED. The notarial
fee for the extrajudicial settlement and the attorney's fees in the guardianship proceedings are allowable
deductions from the gross estate of Pedro Pajonar.

SO ORDERED.
Melo, Vitug, Panganiban and Purisima, JJ., concur.
Footnotes
1.
Entitled "Commissioner of Internal Revenue v. Josefina P. Pajonar, as Administratrix of the
Estate of Pedro P. Pajonar, and Court of Tax Appeals." Rollo, 35-46.
2.
Eighth Division composed of J. Jaime M. Lantin, ponente; and JJ. Eduardo G. Montenegro and
Jose C. De la Rama, concurring.
3.
CA Records, 45-53.
4.
Ibid., 37-44.
5.
The CTA made the following computations
Estate of Pedro P. Pajonar
Lagtangon, Siaton, Negros Oriental
Died January 10, 1988
I.
Real Properties
P102,966.59
II.
Personal Properties
a.
Refrigerator P7,500.00
b.
Wall Clock, Esso Gasul,
Tables and Chairs
3,090.00
c.
Beddings, Stereo Cassette,
TV, Betamax 15,700.00
d.
Karaoke, Electric Iron, Fan,
Transformer and Corner Set 7,400.00
e.
Toyota Tamaraw
27,500.00
61,190.00
Additional Personal Properties:
f.
Time Deposit - PNB P200,000.00
g.
Stocks and Bonds - PNB
201,232.37
h.
Money Market
2,300,000.00
i.
Cash Deposit 114,101.83 2,815,334.20
GROSS ESTATE
P2,979,490.79
Less: Deductions:
a.
Funeral expenses
P50,000.00
b.
Commission to Trustee (PNB)
18,335.93
c.
Notarial Fee for the Extrajudicial Settlement 60,753.00
d.
Attorney's Fees in Special
Proceeding No. 1254
for Guardianship
50,000.00
e.
Filing Fees in Special
Proceeding No. 2399 6,374.88
f.
Publication of Notice to
Creditors September
7, 14 and 21, 1988
issues of the Dumaguete
Star Informer 600.00
g.
Certification fee for
Publication on the
Bulletin Board of the
Municipal Building of
Siaton, Negros Oriental
2.00

h.
Certification fee for
Publication in the Capitol
5.00
i.
Certification fee for publication
of Notice to Creditors 5.00 186,075.81
NET ESTATE 2,793,414.98
Estate Tax Due
P1,277,762.39
Less: Estate Tax Paid:
CB Confirmation Receipt Nos.
B 14268064 P2,557.00
B 15517625 1,527,790.98 1,530,347.98
AMOUNT REFUNDABLE
P252,585.59
Rollo, 86-88.
6.
Ibid., 78-79, 81-83.
7.
CA Records, 118-130.
8.
Rollo, 47-56.
9.
Ibid., 35-46.
10.
SEC. 79. Computation of net estate and estate tax. For the purpose of the tax imposed in this
Chapter, the value of the net estate shall be determined:
(a)
In the case of a citizen or resident of the Philippines, by deducting from the value of the
gross estate
(1)
Expenses, losses, indebtedness, and taxes. Such amounts
(A)
For funeral expenses in an amount equal to five per centum of the gross estate but in no
case to exceed P50,000.00;
(B)
For judicial expenses of the testamentary or intestate proceedings;
xxx
xxx
xxx
11.
This refers to the 1977 National Internal Revenue Code, as amended. On the date of decedent's
death (January 10, 1988), the latest amendment to the Tax Code was introduced by Executive Order
No. 273, which became effective on January 1, 1988.
12.
Rollo, 78-79, 81-83.
13.
Estate tax due P1,277,762.39
Less: estate tax paid 04.05.88
[CBCR No. 14268054]
2,557.00

Deficiency estate tax P1,275,205.39

Add: Additions to tax
Interest on deficiency [Sec. 249 (b)]
04.12.88 to 12.19.88
(1,275,205.39 x 20% x 252/365)
176,083.16

Total deficiency tax P1,451,288.55

Less: estate tax paid 12.19.88
[CBCR No. 15517625]
1,527,790.98

Amount refundable P76,502.43

==========
Ibid., 54.
14.
Ibid., 49-51.
15.
Ibid., 43-45.
16.
Approved on June 15, 1939.

17.
Wise & Co. v. Meer, 78 Phil 655 (1947).
18.
Carolina Industries, Inc. v. CMS Stock Brokerage, Inc., 97 SCRA 734 (1980).
19.
Lorenzo v. Posada, 64 Phil 353 (1937).
20.
34A Am Jur 2d, Federal Taxation (1995), sec. 144, 288, citing Union Commerce Bank, trans,
(1963) 39 TC 973, affd & revd on other issues (1964, CA6) 339 F2d 163, 65-1 USTC p 12279, 15
AFTR 2d 1281.
21.
Ibid., sec. 144, 272, citing Bretzfelder, Charles, exr v. Com., (1936, CA2) 86 F2d 713, 36-2
USTC sec. 9548, 18 AFTR 653.
22.
Lorenzo v. Posada, supra.
23.
Sison vs. Teodoro, 100 Phil. 1055 (1957).
24.
Johannes v. Imperial, 43 Phil. 597 (1922).

SECOND DIVISION
[G.R. No. L-29276. May 18, 1978.]
Testate Estate of the Late Felix J. de Guzman. VICTORIANO G. DE GUZMAN, administratorappellee, vs. CRISPINA DE GUZMAN-CARILLO, ARSENIO DE GUZMAN and HONORATA DE
GUZMAN-MENDIOLA, oppositors-appellants.
Emiliano Samson & R. Balderama-Samson for appellants.
Cezar Paralejo for appellee.
SYNOPSIS
Appellee, as the duly appointed administrator of the estate of his late father, disbursed certain amounts
from the income of the estate for the improvement and renovation of the decedent's residential house,
the living expenses of one of the heirs while occupying the family home without paying rent, the
expenses for stenographic notes, unexplained representation expenses, expenses incurred during the
celebration of the first death anniversary of the deceased, the lawyer's subsistence, cost of gift to the
physician who attended to the testator during his last illness, and irrigation fee. The lower court allowed
the said items as legitimate expenses of administration. Appellants objected to the expenditures
allegedly because they were not allowable by the Rules of Court.
The Supreme Court held that all items, with the exception of the living expenses of one of the heirs
while occupying the family home without rent, the cost of stenographic notes, the unexplained
representation expenses, and the expenses incurred during the celebration of the first death anniversary
of the decedent inured to the benefit of all the heirs and were incurred in connection with the care,
management and settlement of the estate, and were, therefore allowable.
Order affirmed with modification
SYLLABUS
1.
EXECUTORS AND ADMINISTRATORS; RIGHTS AND DUTIES. An executor or
administrator is allowed the necessary expenses in the care, management, and settlement of the estate.
He is entitled to possess and manage the decedent's real and personal estate as long as it is necessary
for the payment of the debts and the expenses of administration. He is accountable for the whole
decedent's estate which has come into his possession, with all the interest, profit, and income thereof,
and with the proceeds of so much of such estate as is sold by him, at the price at which it was sold (Sec.
3, Rule 84; Secs. 1 and 7, Rule 85, Rules of Court).
2.
ID.; BOND OF ADMINISTRATOR; CONDITION THEREOF. One of the conditions of the
administrator's bond is that he should render a true and just account of his administration to the court.
The court may examine him upon oath with respect to every matter relating to his accounting "and shall
so examine him as to the correctness of his account before the same is allowed, except when no
objection is made to the allowance of the account and its correctness is satisfactorily established by
competent proof." (Sec. 1[c], Rule 81 and secs. 8 and 9, Rule 85, Rules of Court).
3.
ID.; APPROVAL OF THE ACCOUNT. A hearing is usually held before an administrator's
account is approved, especially if an interested party raises objections to certain items in the accounting
report (Sec. 10, Rule 85).
4.
ID.; ALLOWABLE EXPENSES. Disbursements made by a duly appointed administrator out
of the funds of the estate of a decedent which are necessary for the care, management, and settlement of
the estate and which redounded to the benefit of all the heirs such as expenses to cover (1) the
improvement and necessary repairs of the family residence which was partitioned among the eight
heirs, five of whom consented to the disbursement; (2) the lawyer's subsistence; (3) the cost of the gift
to the physician who attended to the testator during his last illness; and (4) irrigation fees, are
allowable.
5.
ID.; NON-ALLOWABLE EXPENSES. Disbursements made by an administrator out of the
funds of the estate of a decedent which are not in connection with the care, management, and
settlement of the estate and which did not inure to the benefit of all the heirs such as expenses for (1)

the living allowance of an heir as occupant of the family residence without paying rent; (2)
stenographic notes; (3) the celebration of the first death anniversary of the deceased; and (4)
unexplained representation are not allowable.
DECISION
AQUINO, J p:
This case is about the propriety of allowing as administration expenses certain disbursements made by
the administrator of the testate estate of the late Felix J. de Guzman of Gapan, Nueva Ecija.
The deceased testator was survived by eight children named Victorino, Librada, Severino, Margarita,
Josefina, Honorata, Arsenio and Crispina. His will was duly probated. Letters of administration were
issued to his son, Doctor Victorino G. de Guzman, pursuant to the order dated September 17, 1964 of
the Court of First Instance of Nueva Ecija in Special Proceeding No. 1431.
One of the properties left by the decedent was a residential house located in the poblacion. In
conformity with his last will, that house and the lot on which it stands were adjudicated to his eight
children, each one being given a one-eighth proin-diviso share in the project of partition dated March
19, 1966, which was signed by the eight heirs and which was approved in the lower court's order of
April 14, 1967 but without prejudice to the final outcome of the instant accounting incident. cdll
The administrator submitted four accounting reports for the period from June 16, 1964 to September,
1967. Three heirs named Crispina de Guzman-Carillo, Honorata de Guzman-Mendiola and Arsenio de
Guzman, interposed objections to the administrator's disbursements in the total sum of P13,610.48,
broken down as follows:
I.
Expenses for the improvement and renovation of the decedent's residential house:
1.
Construction of fence
P3,082.07
2.
Renovation of bathroom

P1,389.52
3.
Repair of terrace
and interior of house
P5,928.00

P10,399.59
II.
Living expenses of Librada de Guzman while occupying the family home without paying rent:
1.
For house helper

P1,170.00
2.
Light bills

227.41
3.
Waterbills

150.80
4.
Gas, oil, floor wax
and switch nail

54.90
P1,603.11
III.
Other expenses:
1.
Lawyer's subsistence
P 19.30
2.
Gratuity pay in lieu of
medical fee
144.00
3.
For stenographic
notes
100.00
4.
For food served on
decedent's first
death anniversary

166.65
5.
Cost of publication of
death anniversary
of decedent
102.00
6.
Representation
expenses

26.25
P558.20
IV.
Irrigation fee P1,049.58
TOTAL
P13,610.48
It should be noted that the probate court in its order of August 29, 1966 directed the administrator "to
refrain from spending the assets of the estate for reconstructing and remodelling the house of the

deceased and to stop spending (sic) any asset of the estate without first securing authority of the court
to do so" (pp. 26-27, Record on Appeal).
The lower court in its order of April 29, 1968 allowed the said items as legitimate expenses of
administration. From that order, the three oppositors appealed to this Court. Their contention is that the
probate court erred in approving the utilization of the income of the estate (from rice harvests) to defray
those expenditures which allegedly are not allowable under the Rules of Court.
An executor or administrator is allowed the necessary expenses in the care, management, and
settlement of the estate. He is entitled to possess and manage the decedent's real and personal estate as
long as it is necessary for the payment of the debts and the expenses of administration. He is
accountable for the whole decedent's estate which has come into his possession, with all the interest,
profit, and income thereof, and with the proceeds of so much of such estate as is sold by him, at the
price at which it was sold (Sec. 3, Rule 84; Secs. 1 and 7, Rule 85, Rules of Court).
One of the conditions of the administrator's bond is that he should render a true and just account of his
administration to the court. The court may examine him upon oath with respect to every matter relating
to his accounting "and shall so examine him as to the correctness of his account before the same is
allowed, except when no objection is made to the allowance of the account and its correctness is
satisfactorily established by competent proof. The heirs, legatees, distributees, and creditors of the
estate shall have the same privilege as the executor or administrator of being examined on oath on any
matter relating to an administration account." (Sec. 1[c], Rule 81 and secs. 8 and 9, Rule 85, Rules of
Court).
A hearing is usually held before an administrator's account is approved, especially if an interested party
raises objections to certain items in the accounting report (Sec. 10, Rule 85).
At that hearing, the practice is for the administrator to take the witness stand testify under oath on his
accounts and identify the receipts, vouchers and documents evidencing his disbursements which are
offered as exhibits. He may be interrogated by the court and cross-examined by the oppositors's
counsel. The oppositors may present proofs to rebut the administrator's evidence in support of his
accounts. prLL
I.
Expenses for the renovation and improvement of the family residence P10,399.59. As
already shown above, these expenses consisted of disbursements for the repair of the terrace and
interior of the family home, the renovation of the bathroom, and the construction of a fence. The
probate court allowed those expenses because an administrator has the duty to "maintain in tenantable
repair the houses and other structures and fences belonging to the estate, and deliver the same in such
repair to the heirs or devisees" when directed to do so by the court (Sec. 2, Rule 84, Rules of Court).
On the other hand, the oppositors-appellants contend that the trial court erred in allowing those
expenses because the same did not come within the category of necessary expenses of administration
which are understood to be the reasonable and necessary expenses of caring for the property and
managing it until the debts are paid and the estate is partitioned and distributed among the heirs
(Lizarraga Hermanos vs. Abada, 40 Phil. 124).
As clarified in the Lizarraga case, administration expenses should be those which are necessary for the
management of the estate, for protecting it against destruction or deterioration, and, possibly, for the
production of fruits. They are expenses entailed for the preservation and productivity of the estate and
its management for purposes of liquidation, payment of debts, and distribution of the residue among the
persons entitled thereto.
It should be noted that the family residence was partitioned proin diviso among the decedent's eight
children. Each one of them was given a one-eighth share in conformity with the testator's will. Five of
the eight co-owners consented to the use of the funds of the estate for repair and improvement of the
family home. It is obvious that the expenses in question were incurred to preserve the family home and
to maintain the family's social standing in the community.
Obviously, those expenses redounded to the benefit of all the co-owners. They were necessary for the

preservation and use of the family residence. As a result of those expenses, the co-owners, including
the three oppositors, would be able to use the family home in comfort, convenience and security.
We hold that the probate court did not err in approving the use of the income of the estate to defray
those expenses.
II.
Expenses incurred by Librada de Guzman as occupant of the family residence without paying
rent P1,603.11. The probate court allowed the income of the estate to be used for those expenses
on the theory that the occupancy of the house by one heir did not deprive the other seven heirs from
living in it. Those expenses consist of the salaries of the house helper, light and water bills, and the cost
of gas, oil, floor wax and switch nail.
We are of the opinion that those expenses were personal expenses of Librada de Guzman, inuring
mainly to her benefit Those expenses, not being reasonable administration expenses incurred by the
administrator, should not be charged against the income of the estate.
Librada de Guzman, as an heir, is entitled to share in the net income of the estate. She occupied the
house without paying rent. She should use her income for her living expenses while occupying the
family residence.
The trial court erred in approving those expenses in the administrator's accounts. They should be, as
they are hereby, disallowed (See 33 C.J.S 1239-40).
III.
Other expenses P558.20. Among these expenses is the sum of P100 for stenographic
notes which, as admitted by the administrator on page 24 of his brief, should be disallowed. Another
item, "representation expenses" in the sum of P26.25 (2nd accounting), was not explained. It should
likewise be disallowed. LLphil
The probate court erred in allowing as expenses of administration the sum of P268.65 which was
incurred during the celebration of the first death anniversary of the deceased. Those expenses are
disallowed because they have no connection with the care, management and settlement of the
decedent's estate (Nicolas vs. Nicolas, 63 Phil. 332).
The other expenses, namely, P19.30 for the lawyer's subsistence and P144 as the cost of the gift to the
physician who attended to the testator during his last illness, are allowable expenses.
IV.
Irrigation fee P1,049.58. The appellants question the deductibility of that expense on the
ground that it seems to be a duplication of the item of P1,320 as irrigation fee for the same 1966-67
crop-year.
The administrator in his comment filed on February 28, 1978 explained that the item of P1,320
represented the "allotments" for irrigation fees to eight tenants who cultivated the Intan crop, which
allotments were treated as "assumed expenses" deducted as farming expenses from the value of the net
harvests.
The explanation is not quite clear but it was not disputed by the appellants. The fact is that the said sum
P1,049.58 was paid by the administrator to the Pearanda Irrigation System as shown in Official
Receipt No. 356378 dated April 28, 1967. It was included in his accounting as part of the farming
expenses. The among was properly allowed as a legitimate expense of administration.
WHEREFORE, the lower court's order of April 29, 1968 is affirmed with the modifications that the
sum of (a) P1,603.11 as the living expenses of Librada de Guzman, (b) P100 for stenographic notes, (c)
P26.25 as representation expenses, and (d) P263.65 as expenses for the celebration of the first
anniversary of the decedent's death are disallowed in the administrator's accounts. No costs. cdphil
SO ORDERED.
Fernando (Chairman), Barredo, Antonio, Concepcion Jr. and Santos, JJ., concur.

FIRST DIVISION
[G.R. No. 43082. June 18, 1937.]
PABLO LORENZO, as trustee of the estate of Thomas Hanley, deceased, plaintiff-appellant, vs. JUAN
POSADAS, JR., Collector of Internal Revenue, defendant-appellant.
Pablo Lorenzo and Delfin Joven for plaintiff-appellant.
Solicitor-General Hilado for defendant-appellant.
SYLLABUS
1.
INHERITANCE TAX; ACCRUAL OF, DISTINCT FROM THE OBLIGATION TO PAY IT.
The accrual of the inheritance tax is distinct from the obligation to pay the same. Section 1536 as
amended, of the Administrative Code, imposes the tax upon "every transmission by virtue of
inheritance, devise, bequest, gift mortis causa, or advance in anticipation of inheritance, devise, or
bequest." The tax therefore is upon transmission or the transfer or devolution of property of a decedent,
made effective by his death. (61 C. J., p. 1592.)
2.
ID.; MEASURE OF, BY VALUE OF ESTATE. If death is the generating source from which
the power of the state to impose inheritance taxes takes its being and if, upon the death of the decedent,
succession takes place and the right of the state to tax vests instantly, the tax should be measured by the
value of the estate as it stood at the time of the decedent's death, regardless of any subsequent
contingency affecting value of any subsequent increase or decrease in value. (61 C. J., pp. 1692, 1693;
26 R. C. L., 232; Blakemore and Bancroft , Inheritance Taxes, p. 137. See also Knowlton vs. Moore,
178 U. S. 41; 20 Sup. Ct. Rep., 747; 44 Law. ed., 968.)
3.
ID.; ID. "The right of the state to a inheritance tax accrues at the moment of death, and hence
is ordinarily measured as to any beneficiary by the value at that time of such property as passes to him.
Subsequent appreciation or depreciation is immaterial." (Ross, Inheritance Taxation, p. 72.)
4.
ID.; ID. Whatever may be the rule in other jurisdiction, we hold that a transmission by
inheritance is taxable at the time of the predecessor's death, notwithstanding the postponement of the
actual possession or enjoyment of the estate by the beneficiary, and the tax measured by the value of
the property transmitted at that time regardless of its appreciation or depreciation.
5.
ID.; TRUSTS AND TRUSTEES. A trustee, no doubt, is entitled to received a fair
compensation for his services. (Barney vs. Saunders, 16 How., 535; 14 Law. ed., 1047.) But from this it
does not follow that the compensation due him may lawfully be deducted in arriving at the net value of
the estate subject to tax. There is no statute in the Philippines which requires trustees commission to be
deducted in determining the net value of the estate subject to inheritance tax (61 C. J., p. 1705.)
Furthermore, though a testamentary trust has been created, it does not appear that the testator intended
that the duties of his executors and trustees should be separated. (Ibid.; In re Vanneck's Estate, 161 N.
Y. Supp., 893; 175 App. Div., 363 In re Collard's Estate, 161 N. Y. Supp., 455.)
6.
ID.; ID.; ADMINISTRATION EXPENSES. Judicial expenses are expenses of administration
(61 C. J., P. 1705) but, in State vs. Hennepin County Probate Court (112 N. W., 878; 101 Minn., 485), it
was said: ". . . the compensation of a trustee, earned, not in the administration of the estate, but in the
management thereof for the benefit of the legatees or devisees, does not come properly within the class
or reason for exempting administration expenses. . . Services rendered in that behalf have no reference
to closing the estate for the purpose of a distribution thereof to those entitled to it, and are not required
or essential to the perfection of the rights of the heirs or legatees. . . . Trusts . . . of the character of that
here before the court, are created for the benefit of those to whom the property ultimately passes, are of
voluntary creation, and intended for the preservation of the estate. No sound reason is given to support
the contention that such expenses should be taken into consideration in fixing the value of the estate for
the purpose of this tax.
7.
ID.; RETROACTIVE LEGISLATION. It is well-settled that inheritance taxation is governed
by the statute in force at the time of the death of the decedent (26 R. C. L., p. 206; 4 Cooley on
Taxation, 4th ed., p. 3461). The taxpayer cannot foresee and ought not to be required to guess the

outcome of pending measures. Of course, a tax statute may be made retroactive in its operation.
Liability for taxes under retroactive legislation has been "one of the incidents of social life." (Seattle vs.
Kelleher, 195 U. S. 351. 360; 49 Law. ed., 232; 25 Sup. Ct. Rep., 44.)
8.
ID.; ID. But legislative intent that a tax statute should operate retroactively should be
perfectly clear. (Scwab vs. Doyle, 42 Sup. Ct. Rep., 491; Smietanka vs. First Trust & Savings Bank,
257 U. S. 602; Stockdale vs. Insurance Co., 20 Wall., 323; Lunch vs. Turrish, 247 U. S., 221.) "A
statute should be considered as prospective in its operation, whether it enacts, amends, or repeals an
inheritance tax, unless the language of the statute clearly demands or expresses that it shall have a
retroactive effect, . . ." (61 C. J., 1602.)
9.
ID.; ID. Though the last paragraph of section 5 of Regulations No. 65 of the Department of
Finance makes section 3 of Act No. 3606, amending section 1544 of the Revised Administrative Code,
applicable to all estates the inheritance taxes due from which have not been paid, Act No. 3606 itself
contains no provisions indicating legislative intent to give it retroactive effect. No such effect can be
given the statute by this court.
10.
ID.; ID.; PENAL STATUTES. Properly speaking, a statute is penal when it imposes
punishment for an offense committed against the state which, under the Constitution, the executive has
the power to pardon. In common use, however, this sense has been enlarged to include within the term
"penal statutes" all statutes which command or prohibit certain acts, and establish penalties for their
violation, and even those which without expressly prohibiting certain acts, impose a penalty upon their
commission. (59 C. J., P. 1110.)
11.
ID.; ID.; REVENUE LAW. Revenue laws, generally, which impose taxes collected by the
means ordinarily resorted to for the collection of taxes are not classed as penal laws, although there are
authorities to the contrary. (See Sutherland, Statutory Construction, 361; Twine Co. vs. Worthington,
141 U. S. 468; 12 Sup. Ct., 55 Rice vs. U. S., 4 C. C. A., 104; 53 Fed., 910; Com. vs. Standard Oil Co.,
101 Pa. St., 150; State vs. Wheeler, 44 P., 430; 25 Nev., 143.) Article 22 of the Revised Penal Code is
not applicable to the case of bar, and in the absence of clear legislative intent, we cannot give Act No.
3606 a retroactive effect.
12.
ID.; TRUSTS AND TRUSTEES. The word "trust" is not mentioned or used in the will but
the intention to create one is clear. No particular or technical words are required to create a
testamentary trust. (69 C. J., p. 711.) The words "trust" and "trustee", though apt for the purpose, are
not necessary. In fact, the use of these two words is not conclusive on the question that a trust is
created. (69 C. J., p. 714.)
13.
ID.; ID. There is no doubt that the testator intended to create a trust. He ordered in his will
that certain of his properties be kept together undisposed during a fixed period, for a stated purpose.
The probate court certainly exercised sound judgment in appointing a trustee to carry into effect the
provision of the will. (See sec. 582, Code of Civil Procedure.)
14.
ID.; ID.; ERROR IN ENGLISH VERSION OF SUBSECTION (B), SECTION 1543,
REVISED ADMINISTRATIVE CODE. The word "trustee", appearing in subsection (b) of section
1543, should read "fidei-commissary" or "cestui que trust." There was an obvious mistake in translation
from the Spanish to the English version.
DECISION
LAUREL, J p:
On October 4, 1932, the plaintiff, Pablo Lorenzo, in his capacity as trustee of the estate of Thomas
Hanley, deceased, brought this action in the Court of First Instance of Zamboanga against the
defendant, Juan Posadas, Jr., then the Collector of Internal Revenue, for the refund of the amount of
P2,052.74, paid by the plaintiff as inheritance tax on the estate of the deceased, and for the collection of
interest thereon at the rate of 6 per cent per annum, computed from September 15, 1932, the date when
the aforesaid tax was paid under protest. The defendant set up a counterclaim for P1,191.27 alleged to
be interest due on the tax in question and which was not included in the original assessment. From the

decision of the Court of First Instance of Zamboanga dismissing both the plaintiff's complaint and the
defendant's counterclaim, both parties appealed to this court.
It appears that on May 27, 1922, one Thomas Hanley died in Zamboanga, Zamboanga, leaving a will
(Exhibit 5) and considerable amount of real and personal properties. On June 14, 1922, proceedings for
the probate of his will and the settlement and distribution of his estate were begun in the Court of First
Instance of Zamboanga. The will was admitted to probate. Said will provides among other things, as
follows:
"4.
I direct that any money left by me be given to my nephew Matthew Hanley.
"5.
I direct that all real estate owned by me at the time of my death be not sold or otherwise
disposed of for a period of ten (10) years after my death, and that the same be handled and managed by
my executors, and proceeds thereof to be given to my nephew, Matthew Hanley, at Castlemore,
Ballaghaderine, County of Rosecommon, Ireland, and that he be directed that the same be used only for
the education of my brother's children and their descendants.
"6.
I direct that ten (10) years after my death my property be given to the above-mentioned
Matthew Hanley to be disposed of in the way he thinks most advantageous.
xxx
xxx
xxx
"8.
I state that at this time I have one brother living named Malachi Hanley, and that my nephew,
Matthew Hanley, is a son of my brother, Malachi Hanley."
The Court of First Instance of Zamboanga considered it proper for the best interests of the estate to
appoint a trustee to administer the real properties which, under the will, were to pass to Matthew
Hanley ten years after the testator's death. Accordingly, P. J. M. Moore, one of the two executors named
in the will, was, on March 8, 1924, appointed trustee. Moore took his oath of office and gave bond on
March 10, 1924. He acted as trustee until February 29, 1932, when he resigned and the plaintiff herein
was appointed in his stead.
During the incumbency of the plaintiff as trustee, the defendant Collector of Internal Revenue, alleging
that the estate left by the deceased at the time of his death consisted of realty valued at P27,920 and
personality valued at P1,465, and allowing a deduction of P480.81, assessed against the estate an
inheritance tax in the amount of P1,434.24 which, together with the penalties for delinquency in
payment consisting of a 1 per cent monthly interest from July 1, 1931 to the date of payment and a
surcharge of 25 per cent on the tax, amounted to P2,052.74. On march 15, 1932, the defendant filed a
motion in the testamentary proceedings pending before the Court of First Instance of Zamboanga
(Special proceedings No. 302) praying that the trustee, plaintiff herein, be ordered to pay to the
Government the said sum of P2,052.74. The motion was granted. On September 15, 1932, the plaintiff
paid this amount under protest, notifying the defendant at the same time that unless the amount was
promptly refunded suit would be brought for its recovery. The defendant overruled the plaintiff's protest
and refused to refund the said amount or any part thereof. His administrative remedies exhausted,
plaintiff went to court with the result herein above indicated.
In his appeal, plaintiff contends that the lower court erred:
"I.
In holding that the real property of Thomas Hanley, deceased, passed to his instituted heir,
Matthew Hanley, from the moment of the death of the former, and that from that time, the latter became
the owner thereof.
"II.
In holding, in effect, that there was delinquency in the payment of inheritance tax due on the
estate of said deceased.
"III. In holding that the inheritance tax in question be based upon the value of the estate upon the
death of the testator, and not, as it should have been held, upon the value thereof at the expiration of the
period of ten years after which, according to the testator's will, the property could be and was to be
delivered to the instituted heir.
"IV. In not allowing as lawful deductions, in the determination of the net amount of the estate subject
to said tax, the amounts allowed by the court as compensation to the "trustee" and paid to them from

the decedent's estate.

"V.
In not rendering judgment in favor of the plaintiff and in denying his motion for new trial."
The defendant-appellant contradicts the theories of the plaintiff and assigns the following error besides:
"The lower court erred in not ordering the plaintiff to pay to the defendant the sum of P1,191.27,
representing part of the interest at the rate of 1 per cent per month from April 10, 1924, to June 30,
1931, which the plaintiff had failed to pay on the inheritance tax assessed by the defendant against the
estate of Thomas Hanley."
The following are the principal questions to be decided by this court in this appeal: (a) When does the
inheritance tax accrue and when must it be satisfied? (b) Should the inheritance tax be computed on the
basis of the value of the estate at the time of the testator's death, or on its value ten years later? (c) In
determining the net value of the estate subject to tax, is it proper to deduct the compensation due to
trustees? (d) What law governs the case at bar? Should the provisions of Act No. 3606 favorable to the
taxpayer be given retroactive effect? (e) Has there been delinquency in the payment of the inheritance
tax? If so, should the additional interest claimed by the defendant in his appeal be paid by the estate?
Other points of incidental importance, raised by the parties in their briefs, will be touched upon in the
course of this opinion.
(a)
The accrual of the inheritance tax is distinct from the obligation to pay the same. Section 1536
as amended, of the Administrative code, imposes the tax upon "every transmission by virtue of
inheritance, devise, bequest, gift mortis causa, or advance in anticipation of inheritance, devise, or
bequest." The tax therefore is upon transmission or the transfer or devolution of property of a decedent,
made effective by his death. (61 C. J., p. 1592.) It is in reality an excise or privilege tax imposed on the
right to succeed to, receive, or take property by or under a will or the intestacy law, or deed, grant, or
gift, to become operative at or after death. According to article 657 of the Civil Code, "the rights to the
succession of a person are transmitted from the moment of his death." "In other words", said Arellano,
C. J., ". . . the heirs succeed immediately to all of the property of the deceased ancestor. The property
belongs to the heirs at the moment of the death of the ancestor as completely as if the ancestor had
executed and delivered to them a deed for the same before his death." (Bondad vs. Bondad, 34 Phil.,
232. See also, Mijares vs. Nery, 3 Phil., 195; Suiliong & Co., vs. Chio-Taysan, 12 Phil., 13; Lubrico vs.
Arbado, 12 Phil., 391; Inocencio vs. Gat- Pandan, 14 Phil., 491; Aliasas vs. Alcantara, 16 Phil., 489;
Ilustre vs. Alaras Frondosa, 17 Phil., 321; Malahacan vs. Ignacio, 19 Phil., 434; Bowa vs. Briones, 38
Phil., 276; Osorio vs. Osorio & Ynchausti Steamship Co., 41 Phil., 531; Fule vs. Fule, 46 Phil., 317;
Dais vs. Court of First Instance of Capiz, 51 Phil., 396; Baun vs. Heirs of Baun, 53 Phil., 654.)
Plaintiff, however, asserts that while article 657 of the Civil Code is applicable to testate as well as
intestate succession, it operates only in so far as forced heirs are concerned. But the language of Article
657 of the Civil Code is broad and makes no distinction between different classes of heirs. That article
does not speak of forced heirs; it does not even use the word "heir". It speaks of the rights of succession
and of the transmission thereof from the moment of death. The provision of section 625 of the Code of
Civil Procedure regarding the authentication and probate of a will as a necessary condition to effect
transmission of property does not effect the general rule laid down in article 647 of the Civil Code. The
authentication of a will implies its due execution but once probated and allowed the transmission is
effective as of the death of the testator in accordance with article 657 of the Civil Code. Whatever may
be the time when actual transmission of the inheritance takes place, succession takes place in any event
at the moment of the decedent's death. The time when the heirs legally succeed to the inheritance may
differ from the time when the heirs actually received such inheritance. "Poco importa", says Manresa
commenting on article 567 of the Civil Code, "que desde el fallecimiento del causante, hasta que el
heredero o legatario entre en posesion de los bienes de la herencia a del legado, transcurra mucho o
poco tiempo, pues la adquisicion ha de retrotraerse al momento de la muerte, y asi lo ordena el articulo
989, que debe considerarse como complemento del presente." (5 Manresa, 305; see also art. 440, par. 1,
Civil Code.) Thomas Hanley having died on May 27, 1922, the inheritance tax accrued as of that date.

From the fact, however, that Thomas Hanley died on May 27, 1922, it dies not follow that the
obligation to pay the tax arose as of that date. The time for the payment of inheritance tax is clearly
fixed by section 1544 of the Revised Administrative code as amended by Act No. 3031, in relation to
section 1543 of the same code. The two sections follow:
"SEC. 1543. Exemption of certain acquisitions and transmission. The following shall not be taxed:
"(a) The merger of the usufruct in the owner of the naked title.
"(b) The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the
trustees.
"(c) The transmission from the first heir, legatee, or donee in favor of another beneficiary, in
accordance with the desire of the predecessor.
"In the last two cases, if the scale of taxation appropriate to the new beneficiary is greater than that paid
by the first, the former must pay the difference.
"SEC. 1544. When tax to be paid. The Tax fixed in this article shall be paid:
"(a) In the second and third cases of the next preceding section, before entrance into possession of
the property.
"(b) In other cases, within the six months subsequent to the death of the predecessor; but if judicial
testamentary or intestate proceedings shall be instituted prior to the expiration of said period, the
payment shall be made by the executor or administrator before delivering to each beneficiary his share.
"If the tax is not paid within the time hereinbefore prescribed, interest at the rate of twelve per centum
per annum shall be added as part of the tax; and to the tax and interest due and unpaid within ten days
after the date of notice and demand thereof by the Collector, there shall be further added a surcharge of
twenty-five per centum.
"A certified copy of all letters testamentary or of administration shall be furnished the Collector of
Internal Revenue by the Clerk of Court within thirty days after their issuance."
It should be observed in passing that the word "trustee", appearing in subsection (b) of section 1543,
should read "fideicommissary" or "cestui que trust". There was an obvious mistake in translation from
the Spanish to the English version.
The instant case does not fall under subsection (a), but under subsection (b), of section 1544 abovequoted, as there is here no fiduciary heir, first heir, legatee or donee. Under that subsection, the tax
should have been paid before the delivery of the properties in question to P. J. M. Moore as trustee on
March 10, 1924.
(b)
The plaintiff contends that the estate of Thomas Hanley, in so far as the real properties are
concerned, did not and could not legally pass to the instituted heir, Matthew Hanley, until after the
expiration of ten years from the death of the testator on May 27, 1922 and, that the inheritance tax
should be based on the value of the estate in 1932, or ten years after the testator's death. The plaintiff
introduced evidence tending to show that in 1932 the real properties in question had a reasonable value
of only P5,787. This amount added to the value of the personal property left by the deceased, which the
plaintiff admits is P1,465, would generate an inheritance tax which, excluding deductions, interest and
surcharge, would amount only to about P169.52.
If death is the generating source from which the power of the state to impose inheritance taxes its being
and if, upon the death of the decedent, succession takes place and the right of the state to tax vests
instantly, the tax should be measured by the value of the estate as it stood at the time of the decedent's
death, regardless of any subsequent contingency affecting value or any subsequent increase or decrease
in value. (61 C. J., pp. 1692, 1693; 26 R. C. L., p. 232; Blakemore and Bancroft, Inheritance Taxes, p.
137. See also Knowlton vs. Moore, 178 U. S., 41; 20 Sup. Ct. Rep., 747; 44 Law ed., 969.) "The right
of the state to an inheritance tax accrues at the moment of death, and hence is ordinarily measured as to
any beneficiary by the value at that time of such property as passes to him. Subsequent appreciation or
depreciation is immaterial." (Ross, Inheritance Taxation, p. 72.).
Our attention is directed to the statement of the rule in Cyclopedia of Law and Procedure (vol. 37, pp.

1574, 1575) that, in the case of contingent remainders, taxation is postponed until the estate vests in
possession or the contingency is settled. This rule was formerly followed in New York and has been
adopted in Illinois, Minnesota, Massachusetts, Ohio, Pennsylvania and Wisconsin. this rule, however, is
by no means entirely satisfactory either to the estate or to those interested in the property (26 R. C. L.,
p. 231). Realizing, perhaps, the defects of its anterior system, we find upon examination of cases and
authorities that New York has varied and now requires the immediate appraisal of the postponed estate
at its clear market value and the payment forthwith of the tax on it out of the corpus of the estate
transferred. (In re Vanderbilt, 172 N. Y., 69; 69 N. E., 782; In re Hober, 86 N. Y. App. Div., 458; 83 N.
Y. Supp., 769; Estate of Tracy, 179, 179 N. Y., 501; 72 N. Y., 519; Estate of Brez, 172 N. Y., 609; 64; 64
N. E., 958; Estate of Post, 85 App. Div., 611; 82 N. Y. Supp., 1079. Vide also, Saltoun vs. Lord
Advocate, 1 Pater. Sc. App., 970; 3 Macq. H. L., 659; 23 Eng. Rul. Cas., 888.) California adheres to
this new rule (Stats. 1905, sec. 5, p. 343).
But whatever may be the rule in other jurisdiction, we hold that a transmission by inheritance is taxable
at the time of the predecessor's death, notwithstanding the postponement of the actual possession or
enjoyment of the estate by the beneficiary, and the tax measured by the value of the property
transmitted at that time regardless of its appreciation or depreciation.
(c)
Certain items are required by law to be deducted from the appraised gross value in arriving at
the net value of the estate on which the inheritance tax is to be computed (sec. 1539, Revised
Administrative Code). In the case at of only P480.81. This sum represents the expenses and
disbursement of the executors until March 10, 1924, among which were their fees and the proven debts
of the deceased. The plaintiff contends that the compensation and fees of the trustees, which aggregate
P1,187.28 (Exhibits C, AA, EE, PP, HH, JJ, LL, NN, OO)., should also be deducted under section 1539
of the Revised Administrative Code which provides, in part, as follows: "In order to determine the net
sum which must bear the tax, when an inheritance is concerned, there shall be deducted, in case of a
resident, . . . the judicial expenses of the testamentary or intestate proceedings, . . .."
A trustee, no doubt, is entitled to receive a fair compensation for his services (Barney vs. Saunders, 16
How., 535; 14 Law. ed., 1047). But from this it does not follow that the compensation due him may
lawfully be deducted in arriving at the net value of the estate subject to tax. There is no statute in the
Philippines which requires trustees' commissions to be deducted in determining the net value of the
estate subject to inheritance tax (61 C. J., p. 1705). Furthermore, though a testamentary trust has been
created, it does not appear that the testator intended that the duties of his executors and trustees should
be separated. (Ibid.; In re Vanneck's Estate, 161 N. Y. Supp., 893; 175 App. Div., 363; In re Collard's
Estate, 161 N. Y. Supp., 455.) On the contrary, in paragraph 5 of his will, the testator expressed the
desire that his real estate be handled and managed by his executors until the expiration of the period of
ten years therein provided. Judicial expenses are expenses of administration (61 C. J., p. 1705) but, in
State vs. Hennepin County Probate Court (112 N. W., 878; 101 Minn., 485), it was said: " . . . The
compensation of a trustee, earned, not in the administration of the estate, but in the management thereof
for the benefit of the legatees or devisees, does not come properly within the class or reason for
exempting administration expenses. . . . Services rendered in that behalf have no reference to closing
the estate for the purpose of a distribution thereof to those entitled to it and are not required or essential
to the perfection of the rights of the heirs or legatees. . . . Trusts . . . of the character of that here before
the court, are created for the benefit of those to whom the property ultimately passes, are of voluntary
creation, and intended for the preservation of the estate. No sound reason is given to support the
contention that such expenses should be taken into consideration in fixing the value of the estate for the
purpose of this tax."
(d)
The defendant levied and assessed the inheritance tax due from the estate of Thomas Hanley
under the provisions of section 1544 of the Revised Administrative Code, as amended by section 3 of
Act No. 3606. But Act No. 3606 went into effect on January 1, 1930. It, therefore, was not the law in
force when the testator died on May 27, 1922. The law at that time was section 1544 above-mentioned,

as amended by Act No. 3031, which took effect on March 9, 1922.

It is well-settled that inheritance taxation is governed by the statute in force at the time of the death of
the decedent (26 R. C. L., p. 206; 4 Cooley on Taxation, 4th ed., p. 3461). The taxpayer can not foresee
and ought not to be required to guess the outcome of pending measures. Of course, a tax statute may be
made retroactive in its operation. Liability for taxes under retroactive legislation has been "one of the
incidents of social life." (Seattle vs. Kelleher, 195 U.S., 351, 360; 49 Law. ed., 232; 25 Sup. Ct. Rep.,
44.) But legislative intent that a tax statute should operate retroactively should be perfectly clear.
(Scwab vs. Doyle, 42 Sup. Ct., Rep., 491; Smietanka vs. First Trust & Savings Bank, 257 U. S., 602;
Stockdale vs. Insurance Co., 20 Wall., 323 Lunch vs. Turrish, 247 U. S., 221.) "A statute should be
considered as prospective in its operation, whether it enacts, amends, or repeals an inheritance tax,
unless the language of the statute clearly demands or presses that it shall have a retroactive effect, . . .
(61 C. J., p. 1602.) Though the last paragraph of section of Regulations No. 65 of the Department of
Finance makes section 3 of Act No. 3606, amending section 1544 of the Revised Administrative Code,
applicable to all estates the inheritance taxes due from which have not been paid, Act No. 3606 itself
contains no provisions indicating legislative intent to give it retroactive effect. No Such effect can be
given the statute by this court.
The defendant Collector of Internal Revenue maintains, however, that certain provisions of Act No.
3606 are more favorable to the taxpayer than those of Act No. 3031, that said provisions are penal in
nature and, therefore, should operate retroactively in conformity with the provisions of article 22 of the
Revised Penal Code. This is the reason why he applied Act No. 3606 instead of Act No. 3031. Indeed,
under Act No. 3606, (1) the surcharge of 25 per cent is based on the tax only, instead of on both the tax
and the interest, as provided for in Act No. 3031, and (2) the taxpayer is allowed twenty days from
notice and demand by the Collector of Internal Revenue within which to pay the tax, instead of ten
days only as required by the old law.
Properly speaking, a statute is penal when it imposes punishment for an offense committed against the
state which, under the Constitution, the Executive has the power to pardon. In common use, however,
this sense has been enlarged to include within the term "penal statutes" all statutes which command or
prohibit certain acts, and establish penalties for their violation, and even those which, without expressly
prohibiting certain acts, impose a penalty upon their commission (59 C. J., p. 1110). Revenue laws,
generally, which impose taxes collected by the means ordinarily resorted to for the collection of taxes
are not classed as penal laws, although there are authorities to the contrary. (See Sutherland, Statutory
Construction, 361; Twine Co., vs. Worthington, 141 U.S. , 468; 12 Sup. Ct., 55; Rice vs. U. S., 4 C. C.
A., 104; 53 Fed., 910; Com. vs. Standard Oil Co., 101 Pa. St., 150; State vs. Wheeler, 44 P., 430; 25
Nev., 143.) Article 22 of the Revised Penal Code is not applicable to the case at bar, and in the absence
of clear legislative intent, we cannot give Act No. 3606 a retroactive effect.
(e)
The plaintiff correctly states that the liability to pay a tax may arise at a certain time and the tax
may be paid within another given time. As stated by this court, "the mere failure to pay one's tax does
not render one delinquent until and unless the entire period has elapsed within which the taxpayer is
authorized by law to make such payments without being subjected to the payment of penalties for
failure to pay his taxes within the prescribed period." (U. S. vs. Labadan, 26 Phil., 239.)
The defendant maintains that it was the duty of the executor to pay the inheritance tax before the
delivery of the decedent's property to the trustee. Stated otherwise, the defendant contends that delivery
to the trustee was delivery to the cestui que trust, the beneficiary in this case, within the meaning of the
first paragraph of subsection (b) of section 1544 of the Revised Administrative Code. This contention is
well taken and is sustained. The appointment of P. J. M. Moore as trustee was made by the trial court in
conformity with the wishes of the testator as expressed in his will. It is true that the word "trust" is not
mentioned or used in the will but the intention to create one is clear. No particular or technical words
are required to create a testamentary trust (69 C. J., p. 711). The words "trust" and "trustee", though apt
for the purpose, are not necessary. In fact, the use of these two words is not conclusive on the question

that a trust is created (69 C. J., p. 714). "To create a trust by will the testator must indicate in the will
his intention so to do by using language sufficient to separate the legal from the equitable estate, and
with sufficient certainly designate the beneficiaries, their interest in the trust, the purpose or object of
the trust, and the property or subject matter thereof, Stated otherwise, to constitute a valid testamentary
trust there must be a concurrence of three circumstances: (1) Sufficient words to raise a trust; (2) a
definite subject; (3) a certain or ascertained object; statutes in some jurisdictions expressly or in effect
so providing." (69 C. J., pp. 705, 706.) There is no doubt that the testator intended to create a trust. He
ordered in his will that certain of his properties be kept together undisposed during a fixed period, for a
stated purpose. The probate court certainly exercised sound judgment in appointing a trustee to carry
into effect the provisions of the will (see sec. 582, Code of Civil Procedure).
P. J. M. Moore became trustee on March 10, 1924. On that date the trust estate vested in him (sec. 582
in relation to sec. 590, Code of Civil Procedure). The mere fact that the estate of the deceased was
placed in trust did not remove it from the operation of our inheritance tax laws or exempt it from the
payment of the inheritance tax. The corresponding inheritance tax should have been paid on or before
March 10, 1924, to escape the penalties of the law. This is so for the reason already stated that the
delivery of the estate to the trustee was in esse delivery of the same estate to the cestui que trust, the
beneficiary in this case. A trustee is but an instrument or agent for the cestui que trust (Shelton vs.
King, 299 U. S., 90; 33 Sup. Ct. Rep., 689; 57 Law. ed., 1086). When Moore accepted the trust and
took possession of the trust estate he thereby admitted that the estate belonged not to him but to his
cestui que trust (Tolentino vs. Vitug, 39 Phil., 126, cited in 65 C. J., p. 692, n. 63). He did not acquire
any beneficial interest in the estate. He took such legal estate only as the proper execution of the trust
required (65 C. J., p. 528) and, his estate ceased upon the fulfillment of the testator's wishes. The estate
then vested absolutely in the beneficiary (65 C. J., p. 542).
The highest considerations of public policy also justify the conclusion we have reached. Were we to
hold that the payment of the tax could be postponed or delayed by the creation of a trust of the type at
hand, the result would be plainly disastrous. Testators may provide, as Thomas Hanley has provided,
that their estates be not delivered to their beneficiaries until after the lapse of a certain period of time.
In the case at bar, the period is ten years. In other cases, the trust may last for fifty years, or for a longer
period which does not offend the rule against perpetuities. The collection of the tax would then be left
to the will of a private individual. The mere suggestion of this result is a sufficient warning against the
acceptance of the contention of the plaintiff in the case at bar. Taxes are essential to the very existence
of government. (Dobbins vs. Erie County, 16 Pet., 435; 10 Law. ed., 1022; Kirkland vs. Hotchkiss, 100
U. S., 491; 25 Law. ed., 558; Lane County vs. Oregon, 7 Wall, 71; 19 Law. ed., 101; Union Refrigerator
Transit Co., vs. Kentucky, 199 U. S., 194; 26 Sup. Ct., Rep., 36; 50 Law. ed., 150; Charles River
Bridge vs. Warren Bridge, 11 Pet., 420; 9 Law. ed., 773.) The obligation to pay taxes rests not upon the
privileges enjoyed by, or the protection afforded to, a citizen by the government, but upon the necessity
of money for the support of the state (Dobbins vs. Erie County, supra). For this reason, no one is
allowed to object to or resist the payment of taxes solely because no personal benefit to him can be
pointed out. (Thomas vs. Gay, 169 U. S., 264; 18 Sup. Ct. Rep., 340; 43 Law. ed., 740.) While courts
will not enlarge, by construction, the government's power of taxation (Bromley vs. McCaughn, 280 U.
S., 124; 74 Law. ed., 226; 50 Sup. Ct. Rep., 46) they also will not place upon tax laws so loose a
construction as to permit evasions on merely fanciful and insubstantial distinctions. (U. S. vs. Watts, 1
Bond, 580; Fed. Cas. No. 16,653; U. S. vs. Wigglesworth, 2 Story, 369; Fed. Cas. No. 16,690, followed
in Froelich & Kuttner vs. Collector of Customs, 18 Phil., 461, 481; Castle Bros., Wolf & Sons vs.
McCoy, 21 Phil., 300; Muoz & Co. vs. Hord, 12 Phil., 624; Hongkong & Shanghai Banking
Corporation vs. Rafferty, 39 Phil., 145; Luzon Stevedoring Co. vs. Trinidad, 43 Phil., 803.) When
proper, a tax statute should be construed to avoid the possibilities of tax evasion. Construed this way,
the statute, without resulting in injustice to the taxpayer, becomes fair to the government.
That taxes must be collected promptly is a policy deeply entrenched in our tax system. Thus, no court is

allowed to grant injunction to restrain the collection of any internal revenue tax (sec. 1578, Revised
Administrative Code; Sarasola vs. Trinidad, 40 Phil., 252). In the case of Lim Co Chui vs. Posadas (47
Phil., 461), this court had occasion to demonstrate trenchant adherence to this policy of the law. It held
that "the fact that on account of riots directed against the Chinese on October 18, 19, and 20, 1924, they
were prevented from paying their internal revenue taxes on time and by mutual agreement closed their
homes and stores and remained therein, does not authorize the Collector of Internal Revenue to extend
the time prescribed for the payment of the taxes or to accept them without the additional penalty of
twenty five per cent." (Syllabus, No. 3.) ". . . It is of the utmost importance," said the Supreme Court of
the United Stated. ". . . that the modes adopted to enforce the taxes levied should be interfered with as
little as possible. Any delay in the proceedings of the officers, upon whom the duty is devolved of
collecting the taxes, may derange the operations of government, and thereby cause serious detriment to
the public." (Dows vs. Chicago, 11 Wall., 108; 20 Law. ed., 65.66; Churchill and Tait vs. Rafferty, 32
Phil., 580.)
It results that the estate which plaintiff represents has been delinquent in the payment of inheritance tax
and, therefore, liable for the payment of interest and surcharge provided by law in such cases.
The delinquency in payment occurred on March 10, 1924, the date when Moore became trustee. The
interest due should be computed from that date and it is error on the part of the defendant to compute it
one month later. The provision of law requiring the payment of interest in appropriate cases is
mandatory (see and cf. Lim Co Chui vs. Posadas, supra), and neither the Collector of Internal Revenue
nor this court may remit or decrease such interest, no matter how heavily it may burden the taxpayer.
To the tax and interest due and unpaid within ten days after the date of notice and demand thereof by
the Collector of Internal Revenue, a surcharge of twenty-five per centum should be added (sec. 1544,
subsec. (b), par. 2 Revised Administrative Code). Demand was made by the Deputy Collector of
Internal Revenue upon Moore in a communication dated October 16, 1931 (Exhibit 29). The date fixed
for the payment of the tax and interest was November 30, 1931. November 30 being an official holiday,
the tenth day fell on December 1, 1931. As the tax and interest due were not paid on that date, the estate
became liable for the payment of the surcharge.
In view of the foregoing, it becomes unnecessary for us to discuss the fifth error assigned by the
plaintiff in his brief.
We shall now compute the tax, together with the interest and surcharge, due from the estate of Thomas
Hanley in accordance with the conclusion we have reached.
At the time of his death, the deceased left real properties valued at P27,920 and personal properties
worth P1,465, or a total of P29,385. Deducting from this amount the sum of P480.81, representing
allowable deductions under section 1539 of the Revised Administrative Code, we have P28,904.19 as
the net value of the estate subject to inheritance tax.
The primary tax, according to section 1536, subsection (c), of the Revised Administrative Code, should
be imposed at the rate of one per centum upon the first ten thousand pesos and two per centum upon the
amount by which the share of the beneficiary exceeds ten thousand pesos but does not exceed thirty
thousand pesos, plus an additional two hundred per centum. One per centum of ten thousand pesos is
P100. Two per centum of P18,904.19 is P378.08. Adding to these two sums an additional two hundred
per centum, or P956.16, we have as primary tax, correctly computed by the defendant, the sum of
P1,434.24.
To the primary tax thus computed should be added the sums collectible under section 1544 of the
Revised Administrative Code. First should be added P1,465.31 which stands for interest at the rate of
twelve per centum per annum from March 10, 1924, the date of delinquency, to September 15, 1932,
the date of payment under protest, a period covering 8 years, 6 months and 5 days. To the tax and
interest thus computed should be added the sum of P724.88, representing a surcharge of 25 per cent on
both the tax and interest, and also P10, the compromise sum fixed by the defendant (Exh. 29), giving a
grand total of P3,634.43.

As the plaintiff has already paid the sum of P2,052.74, only the sum of P1,581.69 is legally due from
the estate. This last sum is P390.42 more than the amount demanded by the defendant in his
counterclaim. But, as we cannot give the defendant more than what he claims, we must hold that the
plaintiff is liable only in the sum of P1,191.27, the amount stated in the counterclaim.
The judgment of the lower court is accordingly modified, with costs against the plaintiff in both
instances. So ordered.
Avancea, C. J. Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.
VILLA-REAL, J.:
I concur in the result.

THIRD DIVISION
[G.R. No. 123206. March 22, 2000.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF APPEALS, COURT OF
TAX APPEALS and JOSEFINA P. PAJONAR, as Administratrix of the Estate of Pedro P. Pajonar,
respondents.
Esther Ibaez and Pablo M. Bastes, Jr. for petitioner.
Leo B. Diocos for private respondent.
SYNOPSIS
Petitioner assailed the decision of the Court of Appeals which affirmed the Resolution of the Court of
Tax Appeals granting Josefina Pajonar, administratrix of the estate of Pedro Pajonar, a tax refund
representing erroneously paid estate taxes for the year 1988; and deduction of the notarial fee for the
Extrajudicial Settlement and the attorney's fees in the guardianship proceedings. Here in issue is the
allowance of said deductions. cISDHE
Administration expenses, as an allowable deduction from the gross estate of the decedent for purposes
of arriving at the value of the net estate, have been construed to include all expenses essential to the
proper settlement of the estate. The notarial fee paid for the extrajudicial settlement is clearly
deductible expense since such settlement effected the distribution of Pedro Pajonar's estate to his lawful
heirs. Similarly, the attorney's fees paid to PNB for acting as the guardian of Pedro Pajonar's property
during his lifetime should also be considered as a deductible administration expense.
SYLLABUS
1.
TAXATION; NATIONAL INTERNAL REVENUE CODE; ALLOWABLE DEDUCTIONS
FROM THE GROSS ESTATE OF A DECEDENT; DISCUSSED. The deductions from the gross
estate permitted under Section 79 of the Tax Code basically reproduced the deductions allowed under
Commonwealth Act No. 466 (CA 466), otherwise known as the National Internal Revenue Code of
1939, and which was the first codification of Philippine tax laws. Section 89 (a) (1) (B) of CA 466 also
provided for the deduction of the "judicial expenses of the testamentary or intestate proceedings" for
purposes of determining the value of the net estate. Philippine tax laws were, in turn, based on the
federal tax laws of the United States. In accord with established rules of statutory construction, the
decisions of American courts construing the federal tax code are entitled to great weight in the
interpretation of our own tax laws. Judicial expenses are expenses of administration. Administration
expenses, as an allowable deduction from the gross estate of the decedent for purposes of arriving at the
value of the net estate, have been construed by the federal and state courts of the United States to
include all expenses "essential to the collection of the assets, payment of debts or the distribution of the
property to the persons entitled to it." In other words, the expenses must be essential to the proper
settlement of the estate. Expenditures incurred for the individual benefit of the heirs, devisees or
legatees are not deductible.
2.
ID.; ID.; ID.; NOTARIAL FEE FOR THE EXTRAJUDICIAL SETTLEMENT AND
ATTORNEY'S FEES IN GUARDIANSHIP PROCEEDINGS IN CASE AT BAR; UPHELD. The
notarial fee paid for the extrajudicial settlement is clearly a deductible expense since such settlement
effected a distribution of Pedro Pajonar's estate to his lawful heirs. Similarly, the attorney's fees paid to
PNB for acting as the guardian of Pedro Pajonar's property during his lifetime should also be
considered as a deductible administration expense. PNB provided a detailed accounting of decedent's
property and gave advice as to the proper settlement of the latter's estate, acts which contributed
towards the collection of decedent's assets and the subsequent settlement of the estate. HDTSIE
RESOLUTION
GONZAGA-REYES, J p:
Assailed in this petition for review on certiorari is the December 21, 1995 Decision 1 of the Court of
Appeals 2 in CA-G.R. Sp. No. 34399 affirming the June 7, 1994 Resolution of the Court of Tax
Appeals in CTA Case No. 4381 granting private respondent Josefina P. Pajonar, as administratrix of the

estate of Pedro P. Pajonar, a tax refund in the amount of P76,502.42, representing erroneously paid
estate taxes for the year 1988.
Pedro Pajonar, a member of the Philippine Scout, Bataan Contingent, during the second World War,
was a part of the infamous Death March by reason of which he suffered shock and became insane. His
sister Josefina Pajonar became the guardian over his person, while his property was placed under the
guardianship of the Philippine National Bank (PNB) by the Regional Trial Court of Dumaguete City,
Branch 31, in Special Proceedings No. 1254. He died on January 10, 1988. He was survived by his two
brothers Isidro P. Pajonar and Gregorio Pajonar, his sister Josefina Pajonar, nephews Concordio Jandog
and Mario Jandog and niece Conchita Jandog.
On May 11, 1988, the PNB filed an accounting of the decedent's property under guardianship valued at
P3,037,672.09 in Special Proceedings No. 1254. However, the PNB did not file an estate tax return,
instead it advised Pedro Pajonar's heirs to execute an extrajudicial settlement and to pay the taxes on
his estate. On April 5, 1988, pursuant to the assessment by the Bureau of Internal Revenue (BIR), the
estate of Pedro Pajonar paid taxes in the amount of P2,557. prcd
On May 19, 1988, Josefina Pajonar filed a petition with the Regional Trial Court of Dumaguete City
for the issuance in her favor of letters of administration of the estate of her brother. The case was
docketed as Special Proceedings No. 2399. On July 18, 1988, the trial court appointed Josefina Pajonar
as the regular administratrix of Pedro Pajonar's estate.
On December 19, 1988, pursuant to a second assessment by the BIR for deficiency estate tax, the estate
of Pedro Pajonar paid estate tax in the amount of P1,527,790.98. Josefina Pajonar, in her capacity as
administratrix and heir of Pedro Pajonar's estate, filed a protest on January 11, 1989 with the BIR
praying that the estate tax payment in the amount of P1,527,790.98, or at least some portion of it, be
returned to the heirs. 3
However, on August 15, 1989, without waiting for her protest to be resolved by the BIR, Josefina
Pajonar filed a petition for review with the Court of Tax Appeals (CTA), praying for the refund of
P1,527,790.98, or in the alternative, P840,202.06, as erroneously paid estate tax. 4 The case was
docketed as CTA Case No. 4381.
On May 6, 1993, the CTA ordered the Commissioner of Internal Revenue to refund Josefina Pajonar
the amount of P252,585.59, representing erroneously paid estate tax for the year 1988. 5 Among the
deductions from the gross estate allowed by the CTA were the amounts of P60,753 representing the
notarial fee for the Extrajudicial Settlement and the amount of P50,000 as the attorney's fees in Special
Proceedings No. 1254 for guardianship. 6
On June 15, 1993, the Commissioner of Internal Revenue filed a motion for reconsideration 7 of the
CTA's May 6, 1993 decision asserting, among others, that the notarial fee for the Extrajudicial
Settlement and the attorney's fees in the guardianship proceedings are not deductible expenses.
On June 7, 1994, the CTA issued the assailed Resolution 8 ordering the Commissioner of Internal
Revenue to refund Josefina Pajonar, as administratrix of the estate of Pedro Pajonar, the amount of
P76,502.42 representing erroneously paid estate tax for the year 1988. Also, the CTA upheld the
validity of the deduction of the notarial fee for the Extrajudicial Settlement and the attorney's fees in
the guardianship proceedings.
On July 5, 1994, the Commissioner of Internal Revenue filed with the Court of Appeals a petition for
review of the CTA's May 6, 1993 Decision and its June 7, 1994 Resolution, questioning the validity of
the abovementioned deductions. On December 21, 1995, the Court of Appeals denied the
Commissioner's petition. 9
Hence, the present appeal by the Commissioner of Internal Revenue.
The sole issue in this case involves the construction of Section 79 10 of the National Internal Revenue
Code 11 (Tax Code) which provides for the allowable deductions from the gross estate of the decedent.
More particularly, the question is whether the notarial fee paid for the extrajudicial settlement in the
amount of P60,753 and the attorney's fees in the guardianship proceedings in the amount of P50,000

may be allowed as deductions from the gross estate of decedent in order to arrive at the value of the net
estate.
We answer this question in the affirmative, thereby upholding the decisions of the appellate courts.
prLL
In its May 6, 1993 Decision, the Court of Tax Appeals ruled thus:
Respondent maintains that only judicial expenses of the testamentary or intestate proceedings are
allowed as a deduction to the gross estate. The amount of P60,753.00 is quite extraordinary for a mere
notarial fee.
This Court adopts the view under American jurisprudence that expenses incurred in the extrajudicial
settlement of the estate should be allowed as a deduction from the gross estate. "There is no
requirement of formal administration. It is sufficient that the expense be a necessary contribution
toward the settlement of the case." [34 Am. Jur. 2d, p. 765; Nolledo, Bar Reviewer in Taxation, 10th
Ed. (1990), p. 481]
xxx
xxx
xxx
The attorney's fees of P50,000.00, which were already incurred but not yet paid, refers to the
guardianship proceeding filed by PNB, as guardian over the ward of Pedro Pajonar, docketed as Special
Proceeding No. 1254 in the RTC (Branch XXXI) of Dumaguete City. . . .
xxx
xxx
xxx
The guardianship proceeding had been terminated upon delivery of the residuary estate to the heirs
entitled thereto. Thereafter, PNB was discharged of any further responsibility.
Attorney's fees in order to be deductible from the gross estate must be essential to the collection of
assets, payment of debts or the distribution of the property to the persons entitled to it. The services for
which the fees are charged must relate to the proper settlement of the estate. [34 Am. Jur. 2d 767.] In
this case, the guardianship proceeding was necessary for the distribution of the property of the late
Pedro Pajonar to his rightful heirs.
xxx
xxx
xxx
PNB was appointed as guardian over the assets of the late Pedro Pajonar, who, even at the time of his
death, was incompetent by reason of insanity. The expenses incurred in the guardianship proceeding
was but a necessary expense in the settlement of the decedent's estate. Therefore, the attorney's fee
incurred in the guardianship proceedings amounting to P50,000.00 is a reasonable and necessary
business expense deductible from the gross estate of the decedent. 12
Upon a motion for reconsideration filed by the Commissioner of Internal Revenue, the Court of Tax
Appeals modified its previous ruling by reducing the refundable amount to P76,502.43 since it found
that a deficiency interest should be imposed and the compromise penalty excluded. 13 However, the tax
court upheld its previous ruling regarding the legality of the deductions
It is significant to note that the inclusion of the estate tax law in the codification of all our national
internal revenue laws with the enactment of the National Internal Revenue Code in 1939 were copied
from the Federal Law of the United States. [UMALI, Reviewer in Taxation (1985), p. 285] The 1977
Tax Code, promulgated by Presidential Decree No. 1158, effective June 3, 1977, reenacted
substantially all the provisions of the old law on estate and gift taxes, except the sections relating to the
meaning of gross estate and gift. [Ibid, p. 286.]
In the United States, [a]dministrative expenses, executor's commissions and attorney's fees are
considered allowable deductions from the Gross Estate. Administrative expenses are limited to such
expenses as are actually and necessarily incurred in the administration of a decedent's estate.
[PRENTICE-HALL, Federal Taxes Estate and Gift Taxes (1936), p. 120, 533.] Necessary expenses of
administration are such expenses as are entailed for the preservation and productivity of the estate and
for its management for purposes of liquidation, payment of debts and distribution of the residue among
the persons entitled thereto. [Lizarraga Hermanos vs. Abada, 40 Phil. 124.] They must be incurred for
the settlement of the estate as a whole. [34 Am. Jur. 2d, p. 765.] Thus, where there were no substantial

community debts and it was unnecessary to convert community property to cash, the only practical
purpose of administration being the payment of estate taxes, full deduction was allowed for attorney's
fees and miscellaneous expenses charged wholly to decedent's estate. [Ibid., citing Estate of Helis, 26
T.C. 143 (A).]
Petitioner stated in her protest filed with the BIR that "upon the death of the ward, the PNB, which was
still the guardian of the estate, (Annex 'Z'), did not file an estate tax return; however, it advised the heirs
to execute an extrajudicial settlement, to pay taxes and to post a bond equal to the value of the estate,
for which the estate paid P59,341.40 for the premiums. (See Annex 'K')." [p. 17, CTA record.]
Therefore, it would appear from the records of the case that the only practical purpose of settling the
estate by means of an extrajudicial settlement pursuant to Section 1 of Rule 74 of the Rules of Court
was for the payment of taxes and the distribution of the estate to the heirs. A fortiori, since our estate
tax laws are of American origin, the interpretation adopted by American Courts has some persuasive
effect on the interpretation of our own estate tax laws on the subject. LexLib
Anent the contention of respondent that the attorney's fees of P50,000.00 incurred in the guardianship
proceeding should not be deducted from the Gross Estate, We consider the same unmeritorious.
Attorneys' and guardians' fees incurred in a trustee's accounting of a taxable inter vivos trust
attributable to the usual issues involved in such an accounting was held to be proper deductions
because these are expenses incurred in terminating an inter vivos trust that was includible in the
decedent's estate. [Prentice Hall, Federal Taxes on Estate and Gift, p. 120, 861] Attorney's fees are
allowable deductions if incurred for the settlement of the estate. It is noteworthy to point that PNB was
appointed the guardian over the assets of the deceased. Necessarily the assets of the deceased formed
part of his gross estate. Accordingly, all expenses incurred in relation to the estate of the deceased will
be deductible for estate tax purposes provided these are necessary and ordinary expenses for
administration of the settlement of the estate. 14
In upholding the June 7, 1994 Resolution of the Court of Tax Appeals, the Court of Appeals held that:
2.
Although the Tax Code specifies "judicial expenses of the testamentary or intestate
proceedings," there is no reason why expenses incurred in the administration and settlement of an
estate in extrajudicial proceedings should not be allowed. However, deduction is limited to such
administration expenses as are actually and necessarily incurred in the collection of the assets of the
estate, payment of the debts, and distribution of the remainder among those entitled thereto. Such
expenses may include executor's or administrator's fees, attorney's fees, court fees and charges,
appraiser's fees, clerk hire, costs of preserving and distributing the estate and storing or maintaining it,
brokerage fees or commissions for selling or disposing of the estate, and the like. Deductible attorney's
fees are those incurred by the executor or administrator in the settlement of the estate or in defending or
prosecuting claims against or due the estate. (Estate and Gift Taxation in the Philippines, T. P. Matic,
Jr., 1981 Edition, p. 176).
xxx
xxx
xxx
It is clear then that the extrajudicial settlement was for the purpose of payment of taxes and the
distribution of the estate to the heirs. The execution of the extrajudicial settlement necessitated the
notarization of the same. Hence the Contract of Legal Services of March 28, 1988 entered into between
respondent Josefina Pajonar and counsel was presented in evidence for the purpose of showing that the
amount of P60,753.00 was for the notarization of the Extrajudicial Settlement. It follows then that the
notarial fee of P60,753.00 was incurred primarily to settle the estate of the deceased Pedro Pajonar.
Said amount should then be considered an administration expenses actually and necessarily incurred in
the collection of the assets of the estate, payment of debts and distribution of the remainder among
those entitled thereto. Thus, the notarial fee of P60,753 incurred for the Extrajudicial Settlement should
be allowed as a deduction from the gross estate.
3.
Attorney's fees, on the other hand, in order to be deductible from the gross estate must be
essential to the settlement of the estate.

The amount of P50,000.00 was incurred as attorney's fees in the guardianship proceedings in Spec.
Proc. No. 1254. Petitioner contends that said amount are not expenses of the testamentary or intestate
proceedings as the guardianship proceeding was instituted during the lifetime of the decedent when
there was yet no estate to be settled.
Again, this contention must fail.
The guardianship proceeding in this case was necessary for the distribution of the property of the
deceased Pedro Pajonar. As correctly pointed out by respondent CTA, the PNB was appointed guardian
over the assets of the deceased, and that necessarily the assets of the deceased formed part of his gross
estate. . . . prLL
xxx
xxx
xxx
It is clear therefore that the attorney's fees incurred in the guardianship proceeding in Spec. Proc. No.
1254 were essential to the distribution of the property to the persons entitled thereto. Hence, the
attorney's fees incurred in the guardianship proceedings in the amount of P50,000.00 should be allowed
as a deduction from the gross estate of the decedent. 15
The deductions from the gross estate permitted under Section 79 of the Tax Code basically reproduced
the deductions allowed under Commonwealth Act No. 466 (CA 466), otherwise known as the National
Internal Revenue Code of 1939, 16 and which was the first codification of Philippine tax laws. Section
89 (a) (1) (B) of CA 466 also provided for the deduction of the "judicial expenses of the testamentary
or intestate proceedings" for purposes of determining the value of the net estate. Philippine tax laws
were, in turn, based on the federal tax laws of the United States. 17 In accord with established rules of
statutory construction, the decisions of American courts construing the federal tax code are entitled to
great weight in the interpretation of our own tax laws. 18
Judicial expenses are expenses of administration. 19 Administration expenses, as an allowable
deduction from the gross estate of the decedent for purposes of arriving at the value of the net estate,
have been construed by the federal and state courts of the United States to include all expenses
"essential to the collection of the assets, payment of debts or the distribution of the property to the
persons entitled to it." 20 In other words, the expenses must be essential to the proper settlement of the
estate. Expenditures incurred for the individual benefit of the heirs, devisees or legatees are not
deductible. 21 This distinction has been carried over to our jurisdiction. Thus, in Lorenzo v. Posadas 22
the Court construed the phrase "judicial expenses of the testamentary or intestate proceedings" as not
including the compensation paid to a trustee of the decedent's estate when it appeared that such trustee
was appointed for the purpose of managing the decedent's real estate for the benefit of the testamentary
heir. In another case, the Court disallowed the premiums paid on the bond filed by the administrator as
an expense of administration since the giving of a bond is in the nature of a qualification for the office,
and not necessary in the settlement of the estate. 23 Neither may attorney's fees incident to litigation
incurred by the heirs in asserting their respective rights be claimed as a deduction from the gross estate.
24
Coming to the case at bar, the notarial fee paid for the extrajudicial settlement is clearly a deductible
expense since such settlement effected a distribution of Pedro Pajonar's estate to his lawful heirs.
Similarly, the attorney's fees paid to PNB for acting as the guardian of Pedro Pajonar's property during
his lifetime should also be considered as a deductible administration expense. PNB provided a detailed
accounting of decedent's property and gave advice as to the proper settlement of the latter's estate, acts
which contributed towards the collection of decedent's assets and the subsequent settlement of the
estate.
We find that the Court of Appeals did not commit reversible error in affirming the questioned
resolution of the Court of Tax Appeals. cdphil
WHEREFORE, the December 21, 1995 Decision of the Court of Appeals is AFFIRMED. The notarial
fee for the extrajudicial settlement and the attorney's fees in the guardianship proceedings are allowable
deductions from the gross estate of Pedro Pajonar.

SO ORDERED.
Melo, Vitug, Panganiban and Purisima, JJ., concur.
Footnotes
1.
Entitled "Commissioner of Internal Revenue v. Josefina P. Pajonar, as Administratrix of the
Estate of Pedro P. Pajonar, and Court of Tax Appeals." Rollo, 35-46.
2.
Eighth Division composed of J. Jaime M. Lantin, ponente; and JJ. Eduardo G. Montenegro and
Jose C. De la Rama, concurring.
3.
CA Records, 45-53.
4.
Ibid., 37-44.
5.
The CTA made the following computations
Estate of Pedro P. Pajonar
Lagtangon, Siaton, Negros Oriental
Died January 10, 1988
I.
Real Properties
P102,966.59
II.
Personal Properties
a.
Refrigerator P7,500.00
b.
Wall Clock, Esso Gasul,
Tables and Chairs
3,090.00
c.
Beddings, Stereo Cassette,
TV, Betamax 15,700.00
d.
Karaoke, Electric Iron, Fan,
Transformer and Corner Set 7,400.00
e.
Toyota Tamaraw
27,500.00
61,190.00
Additional Personal Properties:
f.
Time Deposit - PNB P200,000.00
g.
Stocks and Bonds - PNB
201,232.37
h.
Money Market
2,300,000.00
i.
Cash Deposit 114,101.83 2,815,334.20
GROSS ESTATE
P2,979,490.79
Less: Deductions:
a.
Funeral expenses
P50,000.00
b.
Commission to Trustee (PNB)
18,335.93
c.
Notarial Fee for the Extrajudicial Settlement 60,753.00
d.
Attorney's Fees in Special
Proceeding No. 1254
for Guardianship
50,000.00
e.
Filing Fees in Special
Proceeding No. 2399 6,374.88
f.
Publication of Notice to
Creditors September
7, 14 and 21, 1988
issues of the Dumaguete
Star Informer 600.00
g.
Certification fee for
Publication on the
Bulletin Board of the
Municipal Building of
Siaton, Negros Oriental
2.00

h.
Certification fee for
Publication in the Capitol
5.00
i.
Certification fee for publication
of Notice to Creditors 5.00 186,075.81
NET ESTATE 2,793,414.98
Estate Tax Due
P1,277,762.39
Less: Estate Tax Paid:
CB Confirmation Receipt Nos.
B 14268064 P2,557.00
B 15517625 1,527,790.98 1,530,347.98
AMOUNT REFUNDABLE
P252,585.59
Rollo, 86-88.
6.
Ibid., 78-79, 81-83.
7.
CA Records, 118-130.
8.
Rollo, 47-56.
9.
Ibid., 35-46.
10.
SEC. 79. Computation of net estate and estate tax. For the purpose of the tax imposed in this
Chapter, the value of the net estate shall be determined:
(a)
In the case of a citizen or resident of the Philippines, by deducting from the value of the
gross estate
(1)
Expenses, losses, indebtedness, and taxes. Such amounts
(A)
For funeral expenses in an amount equal to five per centum of the gross estate but in no
case to exceed P50,000.00;
(B)
For judicial expenses of the testamentary or intestate proceedings;
xxx
xxx
xxx
11.
This refers to the 1977 National Internal Revenue Code, as amended. On the date of decedent's
death (January 10, 1988), the latest amendment to the Tax Code was introduced by Executive Order
No. 273, which became effective on January 1, 1988.
12.
Rollo, 78-79, 81-83.
13.
Estate tax due P1,277,762.39
Less: estate tax paid 04.05.88
[CBCR No. 14268054]
2,557.00

Deficiency estate tax P1,275,205.39

Add: Additions to tax
Interest on deficiency [Sec. 249 (b)]
04.12.88 to 12.19.88
(1,275,205.39 x 20% x 252/365)
176,083.16

Total deficiency tax P1,451,288.55

Less: estate tax paid 12.19.88
[CBCR No. 15517625]
1,527,790.98

Amount refundable P76,502.43

==========
Ibid., 54.
14.
Ibid., 49-51.
15.
Ibid., 43-45.
16.
Approved on June 15, 1939.

17.
Wise & Co. v. Meer, 78 Phil 655 (1947).
18.
Carolina Industries, Inc. v. CMS Stock Brokerage, Inc., 97 SCRA 734 (1980).
19.
Lorenzo v. Posada, 64 Phil 353 (1937).
20.
34A Am Jur 2d, Federal Taxation (1995), sec. 144, 288, citing Union Commerce Bank, trans,
(1963) 39 TC 973, affd & revd on other issues (1964, CA6) 339 F2d 163, 65-1 USTC p 12279, 15
AFTR 2d 1281.
21.
Ibid., sec. 144, 272, citing Bretzfelder, Charles, exr v. Com., (1936, CA2) 86 F2d 713, 36-2
USTC sec. 9548, 18 AFTR 653.
22.
Lorenzo v. Posada, supra.
23.
Sison vs. Teodoro, 100 Phil. 1055 (1957).
24.
Johannes v. Imperial, 43 Phil. 597 (1922).

318 U.S. 176, 63 S.Ct. 545, 87 L.Ed. 690, 43-1 USTC P 10,013, 30 A.F.T.R. 388, 1943 C.B. 1144
Briefs and Other Related Documents
Supreme Court of the United States
SMITH
v.
SHAUGHNESSY, Collector of Internal Revenue.
No. 429.
Argued Jan. 14, 1943.
Decided Feb. 15, 1943.
On Writ of Certiorari to the United States Circuit Court of Appeals for the Second Circuit.
Action by Hurlbut W. Smith against Frank J. Shaughnessy, Collector of Internal Revenue of the United
States for the Twenty-first District of New York, to recover gift taxes collected. To review a judgment
of the Circuit Court of Appeals, 128 F.2d 742, which reversed a judgment for plaintiff, 40 F.Supp. 19,
plaintiff brings certiorari.
Affirmed with leave to apply for modification of mandate.
Mr. Justice ROBERTS, dissenting.
West Headnotes
[1] KeyCite Citing References for this Headnote
220 Internal Revenue
220VII Estate Taxes
220VII(A) In General
220k4140 k. In general. Most Cited Cases
(Formerly 220k981)
220 Internal Revenue KeyCite Citing References for this Headnote
220VIII Gift Taxes
220k4200 k. In general. Most Cited Cases
(Formerly 220k1041)
The gift and estate tax laws are closely related, and the gift tax supplements the estate tax. Revenue Act
1932, 501, 506, 26 U.S.C.A. Int.Rev.Acts, pages 580, 588.
[2] KeyCite Citing References for this Headnote
220 Internal Revenue
220VIII Gift Taxes
220k4200 k. In general. Most Cited Cases
(Formerly 220k1041)

The gift tax was passed not only to prevent estate tax avoidance, but also to prevent income tax
avoidance through reducing yearly income and thereby escaping effect of progressive surtax rates.
Revenue Act 1932, 501, 506, 26 U.S.C.A.Int.Rev.Acts, pages 580, 588.
[3] KeyCite Citing References for this Headnote
220 Internal Revenue
220VII Estate Taxes
220VII(B) Estates of Citizens or Residents
220k4149 Gross Estate, Inclusions and Exclusions
220k4149.10 k. In general. Most Cited Cases
(Formerly 220k4149, 220k992)
220 Internal Revenue KeyCite Citing References for this Headnote
220VIII Gift Taxes
220k4201 k. Constitutional and statutory provisions. Most Cited Cases
(Formerly 220k4203.10, 220k1042)
Some gifts subject to gift taxes may be included for estate tax purposes and some not, so that gift tax
amounts in some instances to a security or form of down payment on estate tax, but is not double
taxation. Revenue Act 1932, 501, 506, 26 U.S.C.A.Int.Rev.Acts, pages 580, 588.
[4] KeyCite Citing References for this Headnote
220 Internal Revenue
220VIII Gift Taxes
220k4200 k. In general. Most Cited Cases
(Formerly 220k1041)
The complexity of a property interest created by a trust cannot serve to defeat a tax.
[5] KeyCite Citing References for this Headnote
220 Internal Revenue
220VIII Gift Taxes
220k4200 k. In general. Most Cited Cases
(Formerly 220k1041)
The gift tax statute referring to property * * * real or personal, tangible or intangible uses the quoted
language as including property, however conceptual or contingent. Revenue Act 1932, 501, 506, 26
U.S.C.A. Int.Rev.Acts, pages 580, 588.
[6] KeyCite Citing References for this Headnote
220 Internal Revenue
220VIII Gift Taxes
220k4200 k. In general. Most Cited Cases
(Formerly 220k1041)

220 Internal Revenue KeyCite Citing References for this Headnote

220VIII Gift Taxes
220k4203.10 Taxable Transfers or Gifts
220k4204 k. Transfers to trusts. Most Cited Cases
(Formerly 220k1043)
The essence of a taxable gift by trust is abandonment of control over property put in trust, and
separable interests transferred are not gifts, to the extent that power remains to revoke the trust or
recapture the property represented, or to modify the arrangement so as to make other disposition of the
property. Revenue Act 1932, 501, 506, 26 U.S.C.A.Int.Rev.Acts, pages 580, 588.
[7] KeyCite Citing References for this Headnote
220 Internal Revenue
220VIII Gift Taxes
220k4200 k. In general. Most Cited Cases
(Formerly 220k1041)
Where trust created by husband provided that income be paid to wife for life, and that upon her death
trust assets should be given to husband, but if he were not living to wife's legatees or intestate
successors, husband lost all economic control as respects the contingent remainder, which constituted
property, and there was a complete gift, which was taxable except for value of husband's
reversionary interest. Revenue Act 1932, 501, 506, 26 U.S.C.A.Int.Rev.Acts, pages 580, 588.
**546 *177 Mr. Ellsworth C. Alvord, of Washington, D.C., for petitioner.
Mr. Arnold Raum, of Washington, D.C., for respondent.
Mr. Justice BLACK delivered the opinion of the Court.
The question here is the extent of the petitioner's liability for a tax under ss 501, 506 of the Revenue
Act of 1932, 47 Stat. 169, 26 U.S.C.A. Int.Rev.Acts, pages 580, 588, which imposes a tax upon every
transfer of property by gift, whether the transfer is in trust or otherwise, whether the gift is direct or
indirect, and whether the property is real or personal, tangible or intangible; * * *.
The petitioner, age 72, made an irrevocable transfer in trust of 3,000 shares of stock worth $571,000.
The trust income was payable to his wife, age 44, for life; upon her death, the stock was to be returned
to the petitioner, if he was living; if he was not living, it was to go to such persons as his wife might
designate by will, or in default of a will *178 by her, to her intestate successors under applicable New
York law. The petitioner, under protest paid a gift tax of $71,674.22, assessed on the total value of the
trust principal, and brought suit for refund in the district court. Holding that the petitioner had, within
the meaning of the Act, executed a completed gift of a life estate to his wife, the court sustained the
Commissioner's assessment on $322,423, the determined value of her life interest; but the remainder
was held not to be completely transferred and hence not subject to the gift tax. 40 F.Supp. 19. The
government appealed and the Circuit Court of Appeals reversed, ordering dismissal of the petitioner's
complaint on the authority of its previous decision in Herzog v. Commissioner, 116 F.2d 591. We
granted certiorari because of alleged conflict with our decisions in Helvering v. Hallock, 309 U.S. 106,
60 S.Ct. 444, 84 L.Ed. 604, 125 A.L.R. 1368, and Estate of Sanford v. Commissioner, 308 U.S. 39, 60
S.Ct. 51, 84 L.Ed. 20. In these decisions, and in Burnet v. Guggenheim, 288 U.S. 280, 53 S.Ct. 369, 77

L.Ed. 748, we have considered the problems raised here in some detail, and it will therefore be
unnecessary to make any elaborate re-survey of the law.
Three interests are involved here: the life estate, the remainder, and the reversion. The taxpayer
concedes that the life estate is subject to the gift tax. The government concedes that the right of
reversion to the donor in case he outlives his wife is an interest having value which can be calculated
by an actuarial device, and that it is immune from the gift tax. The controversy, then, reduces itself to
the question of the taxability of the remainder.
The taxpayer's principal argument here is that under our decision in the Hallock case, the value of the
remainder will be included in the grantor's gross estate for estate tax purposes; and that in the Sanford
case we intimated a general policy against allowing the same property to be taxed both as an estate and
as a gift.
*179 [1] [2] [3] This view, we think, misunderstands our position in the Sanford case. As we said
there, the gift and estate tax laws are closely related and the gift tax serves to supplement the estate
tax.FN1 We said that the taxes are not always mutually exclusive, and called attention to s 322 **547
of the 1924 Act, 26 U.S.C.A. Int.Rev.Acts, page 82, there involved (re-enacted with amendments in s
801 of the 1932 Act, 26 U.S.C.A. Int.Rev.Acts, page 640) which charts the course for granting credits
on estate taxes by reason of previous payment of gift taxes on the same property. The scope of that
provision we need not now determine. It is sufficient to note here that Congress plainly pointed out that
some of the total gifts subject to gift taxes * * * may be included for estate tax purposes and some
not. House Report No. 708, 72d Cong., 1st Sess., p. 45. Under the statute the gift tax amounts in some
instances to a security, a form of down-payment on the estate tax which secures the eventual payment
of the latter; it is in no sense double taxation as the taxpayer suggests.
FN1 The gift tax was passed not only to prevent estate tax avoidance, but also to prevent income tax
avoidance through reducing yearly income and thereby escaping the effect of progressive surtax rates.
House Report No. 708, 72d Cong., 1st Sess., p. 28; Brandeis, J., dissenting in Untermyer v. Anderson,
276 U.S. 440, 450, 48 S.Ct. 353, 356, 72 L.Ed. 645; Stone, J., dissenting in Heiner v. Donnan, 285 U.S.
312, 333, 52 S.Ct. 358, 363, 76 L.Ed. 772.
We conclude that under the present statute, Congress has provided as its plan for integrating the estate
and gift taxes this system of secured payment on gifts which will later be subject to the estate tax.FN2
FN2 It has been suggested that the congressional plan relating the estate and gift taxes may still be
incomplete. See e.g., Griswold, A Plan for the Coordination of the Income, Estate, and Gift Tax
Provisions etc., 56 Harv.L.Rev. 337; Magill, The Federal Gift Tax, 40 Col.L.Rev. 773, 792; Kauper,
The Revenue Act of 1942: Estate and Gift Tax Amendments, 41 Mich.L.Rev. 369, 388; and see
Commissioner v. Prouty, 1 Cir., 115 F.2d 331, 337, 133 A.L.R. 977; Higgins v. Commissioner, 1 Cir.,
129 F.2d 237, 239.
*180 Unencumbered by any notion of policy against subjecting this transaction to both estate and gift
taxes, we turn to the basic question of whether there was a gift of the remainder. The government
argues that for gift tax purposes the taxpayer has abandoned control of the remainder and that it is
therefore taxable, while the taxpayer contends that no realistic value can be placed on the contingent
remainder and that it therefore should not be classed as a gift.

[4] [5] We cannot accept any suggestion that the complexity of a property interest created by a trust
can serve to defeat a tax. For many years Congress has sought vigorously to close tax loopholes against
ingenious trust instruments. FN3 Even though these concepts of property and value may be slippery
and elusive they can not escape taxation so long as they are used in the world of business. The language
of the gift tax statute, property * * * real or personal, tangible or intangible, is broad enough to
include property, however conceptual or contingent. And lest there be any doubt as to the amplitude of
their purpose, the Senate and House Committees, reporting the bill, spelled out their meaning as
follows:
FN3 2 Paul, Federal Estate & Gift Taxation, Chap. 17; Schuyler, Powers of Appointment and
Especially Special Powers: The Estate Taxpayer's Last Stand, 33 Ill.L.Rev. 771; Leaphart, The Use of
the Trust to Escape the Imposition of Federal Income & Estate Taxes, 15 Corn.L.Q. 587.
The terms property, transfer, gift, and indirectly (in s 501) are used in the broadest sense; the
term property reaching every species of right or interest protected by the laws and having an
exchangeable value.'FN4
FN4 Senate Report No. 665, 72d Cong., 1st Sess., p. 39; House Report No. 708, supra, p. 29.
The Treasury regulations, which we think carry out the Act's purpose, made specific provisions for
application of *181 the tax to, and determination of the value of, a remainder * * * subject to an
outstanding life estate. FN5
FN5 Treas.Regulations 79 (1936 Ed.) Arts. 2, 3, 17, 19. Cf. Commissioner of Internal Revenue v.
Marshall, 2 Cir., 125 F.2d 943, 945, 141 A.L.R. 445.
[6] [7] The essence of a gift by trust is the abandonment of control over the property put in trust. The
separable interests transferred are not gifts to the extent that power remains to revoke the trust or
recapture the property represented by any of them, Burnet v. Guggenheim, supra, or to modify the
terms of the arrangement so as to make other disposition of the property, Sanford v. Commissioner,
supra. In the Sanford case the grantor could, by modification of the trust, extinguish the donee's interest
at any instant he chose. In cases such as this, where the grantor has neither the form nor substance of
control and never will have unless he outlives his wife, **548 we must conclude that he has lost all
economic control and that the gift is complete except for the value of his reversionary interest.FN6
FN6 The conclusion reached here is in accord with that of the several Circuit Courts of Appeal which
have considered the problem: Commissioner v. Marshall, 2 Cir., 125 F.2d 943, 141 A.L.R. 445;
Commissioner v. Beck's Estate, 2 Cir., 129 F.2d 243; Commissioner v. McLean, 5 Cir., 127 F.2d 942;
Helvering v. Robinette, 3 Cir., 129 F.2d 832, affirmed by this Court today; Hughes v. Commissioner, 9
Cir., 104 F.2d 144; and see the cases cited in Note (2), supra.
The judgment of the Circuit Court of Appeals is affirmed with leave to the petitioner to apply for
modification of its mandate in order that the value of the petitioner's reversionary interest may be
determined and excluded.

It is so ordered.
Affirmed.
Mr. Justice ROBERTS.
I dissent. I am of opinion that, except for the life estate in the wife, the gift qua the donor was
incomplete and not within the sweep of ss 501 and 506, 26 U.S.C.A. Int.Rev.Acts, pages 580, 588. A
contrary conclusion might well be reached were it not for *182 Helvering v. Hallock, 309 U.S. 106, 60
S.Ct. 444, 84 L.Ed. 604, 125 A.L.R. 1368. But the decisions in Burnet v. Guggenheim, 288 U.S. 280,
53 S.Ct. 369, 77 L.Ed. 748, and Sanford v. Commissioner, 308 U.S. 39, 60 S.Ct. 51, 84 L.Ed. 20, to
which the court adheres, require a reversal in view of the ruling in the Hallock case.
The first of the two cases ruled that a transfer in trust, whereby the grantor reserved a power of
revocation, was not subject to a gift tax, but became so upon the renunciation of the power. The second
held that where the grantor reserved a power to change the beneficiaries, but none to revoke or to make
himself a beneficiary, the transfer was incomplete and not subject to gift tax. At the same term, in
Porter v. Commissioner, 288 U.S. 436, 53 S.Ct. 451, 77 L.Ed. 880, the court held that where a decedent
had given property inter vivos in trust, reserving a power to change the beneficiaries but no power to
revoke or revest the property in himself, the transfer was incomplete until the termination of the
reserved power by the donor's death and hence the corpus was subject to the estate tax.
When these cases were decided, the law, as announced by this court, was that where, in a complete and
final transfer inter vivos, a grantor provided that, in a specified contingency, the corpus should pass to
him, if living, but, if he should be dead, then to others, the gift was complete when made, he retained
nothing which passed from him at his death, prior to the happening of the contingency, and that no part
of the property given was includable in his gross estate for estate tax. McCormick v. Burnet, 283 U.S.
784, 51 S.Ct. 343, 75 L.Ed. 1413; Helvering v. St. Louis Union Trust Co., 296 U.S. 39, 56 S.Ct. 74, 80
L.Ed. 29, 100 A.L.R. 1239; Becker v. St. Louis Union Trust Co., 296 U.S. 48, 56 S.Ct. 78, 80 L.Ed. 35.
So long as this was the law the transfer might properly be the subject of a gift tax for the gift was, as
respects the donor, complete when made.
In 1940 these decisions were overruled and it was held that such a transfer was so incomplete when
made, and the grantor retained such an interest, that the cessation of that interest at death furnished the
occasion for imposing*183 an estate tax. Thus the situation here presented was placed in the same
category as those where the grantor had reserved a power to revoke or a power to change beneficiaries.
By analogy to the Guggenheim and Sanford cases, I suppose the gift would have become complete if
the donor had, in his life, relinquished or conveyed the contingent estate reserved to him.
In the light of this history, the Sanford case requires a holding that the gifts in remainder, after the life
estate, create no gift tax liability. The reasoning of that decision, the authorities, and the legislative
history relied upon, are all at war with the result in this case. There is no need to quote what was there
said. A reading of the decision will demonstrate that, if the principles there announced are here
observed, the gifts in question are incomplete and cannot be the subject of the gift tax.
It will not square with logic to say that where the donor reserves the right to **549 change
beneficiaries, and so delays completion of the gift until his death or prior relinquishment of the right,
the gift is incomplete, but where he reserves a continugent interest to himself the reverse is true,-

particularly so, if the criterion of estate tax liability is important to the decision of the question, as the
Sanford case affirms.
The question is not whether a gift which includes vested and contingent future interests in others than
the donor is taxable as an entirety when made, but whether a reservation of such an interest in the donor
negatives a completion of the gift until such time as that interest is relinquished.
All that is said in the Sanford case about the difficulties of administration and probable inequities of a
contrary decision there, applies here with greater force. Indeed a system of taxation which requires
valuation of the donor's retained interest, in the light of the contingencies involved, and calculation of
the value of the subsequent remainders *184 by resort to higher mathematics beyond the ken of the
taxpayer, exhibits the artificiality of the Government's application of the Act. This is well illustrated in
the companion cases of Robinette and Paumgarten, 318 U.S. 184, 63 S.Ct. 540, 87 L.Ed. 700. Such
results argue strongly against the construction which the court adopts.
U.S. 1943.
SMITH v. SHAUGHNESSY
318 U.S. 176, 63 S.Ct. 545, 87 L.Ed. 690, 43-1 USTC P 10,013, 30 A.F.T.R. 388, 1943 C.B. 1144
Briefs and Other Related Documents (Back to top)
1943 WL 54689 (Appellate Brief) Brief for Petitioner (Jan. 7, 1943)
1942 WL 54112 (Appellate Brief) Brief for the Respondent (Oct. Term 1942)
END OF DOCUMENT

[C.T.A. CASE NO. 1707. February 10, 1969.]

ANGELA PEREZ Y TUASON and ANTONIO PEREZ Y TUASON, through his father and judicial
guardian, ANTONIO PEREZ, petitioner, vs. THE COMMISSIONER OF INTERNAL REVENUE,
respondent.
DECISION
This is an appeal from the decision of respondent, dated September 22, 1965, holding petitioners
Angela Perez y Tuason and Antonio Perez y Tuason (donees) liable for both the donor's and donee's gift
taxes of P40,779.17, P23,733.77 and P27,733.77 inclusive of penalties. cdasia
In 1956, Angela Tuason de Perez, married woman, was living with her children, Angela and Antonio, in
Madrid, Spain. While there, she met a dashing young man named Jose Antonio Campos Boloix with
whom she fell in love; later she abandoned her children in Madrid; and thereafter she travelled around
the world with her new find. While in Manila, where they resided intermittently, the couple stayed at
the Manila Hotel and Hotel Filipinas. (See Exh. E.) While living and travelling with this young man,
Angela Tuason de Perez began lavishing on him her personal and family fortunes. In order to stop the
scandal caused by an illicit love affair and to prevent the dissipation of the family's assets, petitioner
Angela and Antonio Perez y Tuason, represented by their father and judicial guardian, Antonio Perez,
filed a complaint against Angela Tuason de Perez in the Court of First Instance of Rizal (Civil Case No.
Q-2293) on February 11, 1957 and sought to declare her a spendthrift and to enjoin her from
encumbering and/or alienating properties to her paramour. (Exhs. C & D.) Even before the said suit
was filed in Court, Angela Tuason de Perez had already instituted a complaint (Civil Case No. Q-2208)
in the same court to annul her marriage with Antonio Perez. (See Exh. E.)
Due to the intercession of relatives, both party litigants had agreed to settle amicably their disputes and
differences. Angela Tuason de Perez withdrew her case against her husband for annulment of marriage
(see Exh. F) and entered into a compromise agreement with petitioners on May 2, 1957, the pertinent
portions of which reads as follows:
1.
The parties to this case being guided by their Christian principle of family harmony have
decided to arrive at an amicable settlement of the above entitled case.
2.
As a consequence thereof, the parties hereby dismiss with prejudice on all claims and
counterclaims that they have filed against each other herein.
3.
The parties agreed that Antonio Perez shall remain as guardian of their mutual children Angela
and Antonio Perez y Tuason, and the parties shall retain over said children Angela and Antonio Perez y
Tuason the right granted to them by law.
4.
Angela I. Tuason de Perez hereby turn over to her children Angela and Antonio Perez y Tuason
through their father and guardian Antonio Perez the following properties:
(a)
House with its lot. . .
(b)
A house and lot. . .
as settlement in full of this suit, and Antonio Perez hereby agrees to waive any and all claims that may
now have or hereafter may have over the properties existing in the name of Angela I. Tuason de Perez ,
except for the paragraph 5, hereof.
5.
Angela I. Tuason de Perez turns over the above-described properties to her aforesaid children
Angela and Antonio Perez y Tuason free from all liens and encumbrances whatsoever, and Antonio
Perez accepts them on behalf of said children as their father and guardian.
6.
When these properties are turned over to Angela and Antonio Perez y Tuason the same shall be
valued at their fair market value by Messrs. Hoskins and Company. aisadc
7.
Antonio and Angela Perez y Tuason through their father and guardian Antonio Perez, hereby
bind themselves to returns the value of this properties turn over to them as determined by Messrs.
Hoskins and Company to their mother Angela I. Tuason de Perez upon the termination of Trusteeship
Proceedings Q-73, through the Court of First Instance of Quezon City entitled in the Matter of
Trusteeship of Benigno, Angela and Antonio Perez y Tuason.

8.
Till such time as Trusteeship Proceedings Q-73 are terminated Antonio Perez shall be vested
with full power to administer and encumber and/or sale said properties for the benefit of the aforesaid
minors.
xxx
xxx
xxx
(See Exh. G; pp. 41-42, BIR rec.; emphasis supplied.)
Pursuant to paragraph 7 of the Compromise Agreement, Messrs. Hoskins and Co. appraised the
properties in question at P275,000.00. (See Exh. L; pp. 35-40, BIR rec.)
On May 2, 1958, the same parties entered into another contract entitled "Deed of Sales and Cession",
whereby Angela Tuason de Perez, for and in consideration of the sum of P140,000.00, sold to her
children (petitioner herein) three (3) lots situated in the City of Manila (covered by Transfer Certificate
of Title Nos. 17030, 17031 and 17033) and at the same time, she renounced completely and forever all
her rights to the return of the value of the properties mentioned in paragraph 7 of the compromise
agreement.
Upon investigation of the transaction in question by Revenue Examiner Arturo S. P. Guevara of the
Bureau of Internal Revenue, he reported to respondent that the three lots transferred by Angela Tuason
de Perez to her children were worth P174,828.50 and not P140,000.00. Consequently, the difference of
P34,828.50 was added to the value of the other two lots and their improvements worth P275,000.00, or
a total of P309,828.50. The said amount was made the basis of respondent's assessments for donor's
and donee's gift taxes and penalties, computed as follows:
Value of two lots
P278,000.00
Value of three lots
174,828.50

Total P449,828.50
Less: Consideration paid
P140,000.00

Excess to be treated as
donation
P309,828.50

Donor's gift tax

P22,411.14
25% ad valorem penalty
5,602.79
1% int. fr. 5/15/59 to 1/15/64 12,550.24
Compromise-No notice of donation 15.00
Compromise-late filing
200.00

Total P40,779.17
==========
Donee's Tax Angela Perez y Tuason
Donee's gift tax
P15,046.28
25% ad valorem penalty
3,761.57
1% int. fr. 5/15/59 to 1/15/64 8,725.92
Compromise-late filing
200.00

Total P27,733.77
==========
Donee's Tax Antonio Perez y Tuason
(same as Angela's) P27,733.77
==========
(See p. 104, CTA rec.; Exh. 9, p. 81 BIR Rec.)
On November 20, 1963, respondent demanded upon petitioners (donees herein) payment of

P40,779.17, P27,733.77 and P27,733.77 as donor's and donee's gift taxes and penalties on account of
the aforementioned transfers of real properties. (See Exh. 9, p. 84, BIR rec.) On January 15, 1964,
petitioners contested and disputed the said gift tax assessments and requested their withdrawal and
cancellation. (See Exh. 13, p. 92-102, BIR rec.) On September 22, 1965, respondent denied petitioners'
request for cancellation of the said assessments. (See Exh. 14, p. 108, BIR rec.) Hence, this appeal.
cdtech
The principal issue submitted to the Court for resolution is whether or not the real properties transferred
by Angela Tuason de Perez to her children are subject to gift taxes imposed by Section 108 of the
National Internal Revenue Code, in relation to Section 111 of the same Code.
Section 108 and 111 of the National Internal Revenue Code provide as follows:
SECTION 108.
Imposition of tax. (a) There shall be levied, assessed, collected, and paid upon
the transfer by any individual, resident or nonresident, of property by gift, a tax, computed as provided
in section 109.
(b)
The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or
indirect, and whether the property is real or personal, tangible or intangible.
SECTION 111.
Transfer for less than adequate and full consideration. Where property is
transferred for less than an adequate and full consideration in money or money's worth, then the
amount by which the value of the property exceeded the value of the consideration shall, for the
purpose of the tax imposed by this Chapter, be deemed a gift, and shall be included in computing the
amount of gifts made during the calendar year. (Emphasis supplied.)
Petitioners contend that their mother, Angela Tuason de Perez, had no intention of donating the
properties in question and, therefore, the transfer thereof to them are not subject to gift taxes imposed
by Section 108 of the National Internal Revenue Code, in relation to Sections 109 and 110 of the same
Code. Respondent contends, however, that for gift tax purposes donative intent is not an indispensable
requisite in determining a taxable gift under Section 111 of the Revenue Code, supra.
Our gift tax law was bodily lifted from the Federal Gift Tax Law of the United States. (St. Stephen's
Ass'n. v. Coll., CTA 173, May 23, 1959, aff'd in G.R. No. L-15562, May 31, 1961; Pirovano v. Coll.,
G.R. No. L-19865, July 31, 1965.) Consequently, the U.S. Treasury Regulations and the decisions of
the U.S. Supreme Court applying and interpreting the federal gift tax law have a strong persuasive
effect in our jurisdiction.
Section 108 and 111 of our Revenue Code, supra, were lifted and copied from Sections 501 and 503 of
the U.S. Revenue Act of June 6, 1932. Interpreting the said provisions of law, the U.S. Supreme Court
rules that donative intent should be dispensed with in determining a taxable gift when it held:
Sections 501 and 503 are not disparate provisions. Congress directed them to the same purpose, and
they should not be separated in application. Had Congress taxed gifts simplicitor, it would be
appropriate to assume that the term was used in its colloquial sense, and a search for "donative intent"
would be indicated. But Congress intended to use the term "gift" in its broadest and most
comprehensive sense. H. Rep. No. 708, 72nd Cong., 1st Sess., p. 27; S. Rep. No. 665, 72nd Cong. 1st
Sess., p. 39; cf. Smith v. Shaughnessy, 318 U.S. 176, 63 S. Ct. 545; Robinette v. Helvering, 318 U.S. 63
S. Ct. 540. Congress chose not to require an ascertainment of what too often is an elusive state of mind.
For purposes of the gift tax it not only dispensed with the test of "donative intent." It formulated a
much more workable external test, that where "property is transferred for less than an adequate and full
consideration in money or money's worth", the excess in such money value "shall, for the purpose of
the tax imposed by this title, be deemed a gift . . ." And Treasury Regulations have emphasized that
common law considerations were not embodied in the gift tax.
To reinforce the evident desire of Congress to hit all the protean arrangement which the wit of man can
devise that are not business transactions within the meaning of ordinary speech, the Treasury
Regulations make clear that no genuine business transactions comes within the purport of the gift tax
by excluding "in sale, exchange, or other transfer of property made in the ordinary course of business (a

transaction which is bona fide, at arm's length, and free from any donative intent.)" Treas. Reg. 79
(1936 ed.) Art. 8. Thus on finding that a transfer in the circumstances of a particular case is not made
in the ordinary course of business, the transfer becomes subject to the gift tax to the extent that it is not
made "for an adequate and full consideration in money or money's worth." See 2 Paul, Federal Estate
and Gift Taxation (1942) p. 1113. (Commissioner v. Wemyss. 324 U.S. 303, 65 S. Ct. 562 [1945];
emphasis supplied.) LLcd
It is to be noted that, under Section 108 of the National Internal Revenue Code, supra, the gift tax shall
be imposed whether the gift is direct or indirect. In a direct gift, the element of donative intent must be
present in the transfer of the property donated following the common law concept and the provisions of
Article 125 of our Civil Code declaring that a gift or donation is an act of liberality whereby a person
disposes of a thing or right in favor of another, who accepts it. However, the provisions of Section 111
of the National Internal Revenue Code, supra, treating the transfer of property for less than an adequate
and full consideration as a gift, are very broad and comprehensive so as to exclude the element of
donative intent in a taxable gift. The indirect gift may be a sale, exchange, or other transfer or property.
However, Section 111 of the Revenue Code does not cover the ordinary commercial transactions where
there is disparity in consideration because "bad bargains" are made daily in many business enterprises.
It is otherwise with family transaction like the case at bar. Here, there is an ordinary transaction with
respect to the consideration paid, and a gift insofar as the excess value of the property transferred is
concerned.
Where property is therefore transferred for less than an adequate and full consideration in money or
money's worth, donative intent is superfluous inasmuch as the excess of the value of the property over
the value of consideration is deemed a gift (Paul, Federal Estate and Gift Taxation, Vol. II, p. 1111).
A donative intention in making a transfer of property possessing value in excess of value of
consideration given therefor is unnecessary to render transfer subject to federal gift tax. (Commissioner
of Internal Revenue v. Greene, 119 F. 2d 383; 27 AFTR 383; see also Stevenson v. Coll., CTA Case
371, Feb. 28, 1964.)
On the bases of the foregoing discussions we will now determine whether the transfers in question are
subject to gift taxes imposed by the Revenue Code.
The evidence shows that petitioners filed a complaint against their mother, Angela Tuason de Perez,
praying that she be declared a spendthrift; that she turn over her properties to a banking institution for
their administration; that she be enjoined from encumbering and/or alienating her properties; and that
she pay damages. (See Exhs. C and D.) To end the said case, Angela Tuason de Perez (wife and
mother) entered into a compromise agreement with her minor children, Angela and Antonio Perez y
Tuason, represented by their father and judicial guardian, Antonio Perez, whereby she turned over to
them two (2) lots with improvements thereon "as settlement in full of this suit, and Antonio Perez
(husband and father) hereby agrees to waive any and all claims that he may now have or hereafter may
have over the properties existing in the name of Angela I. Tuason de Perez, except for the paragraph 5,
hereof." Under paragraph 7 of the said compromise agreement, the children "bind themselves to return
the value of this (sic) properties. . . to their mother. . . upon termination of Trusteeship Proceedings Q73, through the Court of First Instance of Quezon City entitled in the Matter of Trusteeship of Benigno,
Angela and Antonio Perez y Tuason." (See Exch. G; p. 16, t.s.n.) cda
A year later (1958), Angela Tuason de Perez, for and in consideration of P140,000.00, conveyed to her
children three (3) lots in the City of Manila covered by TCT Nos. 17030, 17031 and 17033 and
renounced completely and forever all her rights to the return of the value of the two lots mentioned in
paragraph 7 of the compromise agreement. (See Exh. B.) In other words, Angela Tuason de Perez, for
and in consideration of the amount of P140,000.00, renounced in favor of her children the right to the
return of P275,000.00 and at the same time transferred to them another three lots. The financial
capacity of the children to pay the said amount is not disputed. (See Exh. 1, pp. 63-65, BIR rec.)
Under Section 111 of the Revenue Code, supra, if the properties herein involved (value of the right

renounced and the three lots) are transferred for less than an adequate and full consideration
(P140,000.00) in money or money's worth, then the amount by which the properties exceeded the value
of the consideration shall be deemed a gift.
The two lots valued
at P275,000.00.
Petitioners claimed that the value of the two lots appraised at P275,000.00 by a realtor, Messrs.
Hoskins and Company, is not their correct value in May, 1958, since Angela Tuason de Perez was still
entitled to their return not earlier than May 3, 1969. It is argued that if she chose to collect a note
valued at P275,000.00 in 1958 but due ten or eleven years later (1969), the said amount would only be
worth P70,585.63 because any lender would normally demand a minimum discount of 12% interest per
annum. Petitioners then concluded that the said amount of P275,000.00 discounted at 12% interest per
annum was actually worth only P70,505.63 in 1958. (See Exh. X, p. 14, t.s.n.) We cannot subscribe to
the theory of petitioners.
Under the compromise agreement dated May 2, 1957, petitioners obligated themselves to return to their
mother the amount of P275,000.00 upon the termination of the trusteeship proceedings without any
provisions regarding the payment of interest. It is true, as alleged by petitioners that it is hard to secure
a loan without paying any interest therefor; but the obligation assumed by herein petitioners is not
subject to the payment of interest and, therefore, it would be improper to read into the agreement
something which has not been stipulated upon by the parties. Moreover, petitioners did not actually pay
interest on the P275,000.00 because under the "Deed of Sale and Cession" dated May 2, 1958, she
renounced completely and forever all her rights to the return of the value of said properties appraised at
P275,000.00.
Petitioners' counsel claimed that Angela Tuason de Perez and her minor children were bitterly litigating
against each other and it would be unlikely that she would not collect interest from them. It is
significant to note that, when Angela Tuason de Perez renounced her right under the "Deed of Sale and
Cession", the suits filed by them against each other (Civil Case Nos. Q-2208 and Q-2293, CFI Rizal)
have already been amicably settled (see Exhs. F & G) and, therefore, it could not be said that there still
existed hatred and animosity between the said parties at the time the renunciation was made. It is true
other cases were filed against Angela Tuason de Perez in court but they cropped up after the amicable
settlement. It can be said, therefore, that the renunciation of the right was dictated by the tie of kinship
existing between the transferor (mother) and the transferees (children).
Consequently, we hold that the correct value of the two (2) lots transferred by Angela Tuason de Perez
to her children in 1958 was P275,000.00 and the said amount is subject to gift taxes.
The three lots valued
at P174,828.50.
Aside from the two (2) lots valued at P275,000.00 which were renounced by Angela Tuason de Perez in
favor of her children, she also transferred to them another three (3) lots in consideration of
P140,000.00. cdt
Petitioners insist that the value in 1958 of the said three (3) lots was only P85,915.00 and not
P174,828.50. The lower amount was arrived at by fixing the value of the properties at 50% of their
market price of P35.00 per square meter or, P17.50 only. Petitioner claim that the expenses, risks and
delay involved in the judicial action to recover the titles to the said lots should be considered in
determining the correct appraised value of the properties in question.
Revenue Examiner Arturo S. P. Guevara ascertained and reported to respondent that the fair market
value of the said lots amounted to P174,828.50. After deducting therefrom the contract price of
P140,000.00, the resulting difference of P34,828.50 was considered a gift under Section 111 of the
Revenue Code. The said examiner reported, among others, as follows:
The price per square meter of the lots sold as per deed of sale and cession was at P28.27 per square
meter. The comparative sale in the vicinity was at P35.00 per square meter which was used in arriving

at the fair market value of said lots. The fair market value of the lots which amounted to P174,828.50
minus the contract price of P140,000.00 resulted into an additional fair market value of P34,828.50
which added to the right ceded or renounced resulted into a total gift made in the amount of
P309,828.50. (Exh 2, p. 79, BIR rec.)
Both parties are agreed that the fair market value of the three lots was P35.00 per square meter. (See pp.
31-32, 40, t.s.n.)
The Deed of Sale and Cession was executed on May 2, 1958 and was approved on May 20, 1958 by the
Juvenile & Domestic Relations Court of Manila in Special Proceedings No. 26228. (See Exh. U.) There
is no indication whatsoever in the said deed that Angela Tuason de Perez would not deliver the titles of
the properties to petitioners. On the contrary, in transactions involving transfer of real properties, the
normal and usual practice is for the vendor to deliver the land titles to the vendee upon payment. It was
only on May 23, 1962, or 4 years later, when petitioners instituted an action in court (Civil Case No.
50452) for the delivery of the land titles (see Exh. Q), alleging in the complaint, among others, the
following:
13.
As a consequence of defendant's failure to comply with their obligations under the Deed of Sale
as well as in consequence of the pretended ignorance of defendant. . . of the existence of said
obligations. . .
xxx
xxx
xxx
16.
By reason of the wanton and fraudulent failure of defendants to comply with their obligations
under the Deed of Sale and Cession, . . . (Emphasis supplied.)
It is clear from the foregoing allegations that, at the time the deed of sale and cession was executed,
Angela Tuason de Perez had voluntarily agreed to deliver the land titles to petitioners. Under the
circumstances, petitioners cannot legally deduct from the contract price the expenses and the value of
the risks and delay involved in the judicial action to compel delivery of the land titles because our gift
tax laws do not provide for said deduction.
It is a cardinal rule in taxation that the "deduction" provisions in the tax statutes are acts of legislative
grace. This rule is found and reflected in the deduction provisions of the National Internal Revenue
Code dealing on income, estate and inheritance, sales, percentage and mining taxes (Sections 30, 89,
184, 185, 186, 189 and 247 of the Revenue Code). As the deduction claimed by petitioners is not
sanctioned by our gift tax laws, the same cannot be authorized by this Court.
Petitioners assail the application of Section 111 of the Revenue Code, supra, and claim that said law
has been impliedly modified by Article 1470 of the new Civil Code which provides:
ART. 1470. Gross inadequacy of price does not affect a contract of sale, except as it may indicate a
defect in the consent, or that the parties really intended a donation or some other act or contract.
(Emphasis supplied.) LLjur
Article 1470 of the new Civil Code provides that gross inadequacy of price does not affect a contract of
sale although it may indicate, among others, that the parties really intended a donation. On the other
hand, Section 111 of the Revenue Code imposes that gift taxes on transfers of properties for less than
an adequate and full consideration in money or money's worth.
We find no conflict or inconsistencies between the two codal provisions. In fact, Section 111 of the Tax
Code covers the situation presented in Article 1470 of the New Civil Code, that is, where the price in
the contract of sale is inadequate, the difference between the value of the property transferred and the
value of the consideration is deemed a gift subject to gift taxes regardless of the presence of absence of
donative intent where the parties to the transaction are closely related by ties of kinship.
But even assuming arguendo, that the two (2) codal provisions are in conflict with each other, still the
provisions of a special law (National Internal Revenue Code) dealing exclusively on tax matters will
prevail over the general law (New Civil Code). (See Phil. Railway Co. v. Coll. L-3859, March 25,
1952; Visayan Electric Co. v. David, 49 O.G. 1385.)
The records show that under respondent's letter of demand dated September 22, 1965, petitioners are

required to pay the donor's gift tax of P40,779.17. (BIR rec., p. 108.) We rule, however, that the
petitioners herein are not subject to the donor's gift tax inasmuch as they do not represent the donor,
Angela Tuason de Perez, who is not a party to this case.
That the Internal Revenue Code makes that gift taxes a lien on the donated property aims merely at
securing their payment, and does not all imply that the donor's tax is legally chargeable to the donee.
(Coll. of Int. Rev. v. Margarita Soriano de Vicua, G. R. Nos. L-8499 and L-8514-15, May 21, 1956;
emphasis supplied.)
It may not be amiss to state that the U.S. Internal Revenue Code of 1954 (Sec. 6324[b] makes the
donee personally liable for the donor's gift tax. Such personal liability exists even if the Commissioner
of Internal Revenue exerted no effort to collect the tax from the donor, failed to established the donor's
insolvency, and even if the right to collect the gift tax from the donor is barred by the statute of
limitations. (See Merten's Law of Federal Gift & Estate Taxation [1959], Vol. 6, Sec. 43.24, pp. 89-93.)
However, our National Internal Revenue Code, in contrast with the U.S. Internal Revenue Code of
1954, does not contain any provision holding the donee personally liable for donor's gift tax.
As to the compromise penalties imposed by respondent for failure to file notice of donation and for late
filing of the donees' gift tax returns, suffice it to state that a valid compromise penalty presupposes the
existence of a binding agreement between respondent and taxpayer to settle extrajudically the violation
of the tax laws. The imposition of the compromise penalty is, therefore, illegal and should be
disregarded unless the taxpayer has consented thereto. (U.S.T. v. Coll., G. R. No. L-11274, Nov. 28,
1958.)
WHEREFORE, the decision of respondent Commissioner of Internal Revenue appealed from is hereby
modified. Petitioners Angela Perez y Tuason and Antonio Perez y Tuason are declared exempt from the
donor's gift tax demanded of them in respondent's letter dated September 22, 1965. However, we
hereby hold that the said petitioners are both subject to the donees' gift taxes and penalties of
P27,533.77 per person, plus 5% surcharge and interest at the rate of 1% per month from January 16,
1964 until fully paid. No costs. LLphil
SO ORDERED.
ESTANISLAO R. ALVAREZ
Associated Judge
WE CONCUR:
ROMAN M. UMALI
Presiding Judge
RAMON L. AVANCEA
Associate Judge

FIRST DIVISION
[G.R. No. 184823. October 6, 2010.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. AICHI FORGING COMPANY OF
ASIA, INC., respondent.
DECISION
DEL CASTILLO, J p:
A taxpayer is entitled to a refund either by authority of a statute expressly granting such right, privilege,
or incentive in his favor, or under the principle of solutio indebiti requiring the return of taxes
erroneously or illegally collected. In both cases, a taxpayer must prove not only his entitlement to a
refund but also his compliance with the procedural due process as non-observance of the prescriptive
periods within which to file the administrative and the judicial claims would result in the denial of his
claim. cTDECH
This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to set aside the July
30, 2008 Decision 1 and the October 6, 2008 Resolution 2 of the Court of Tax Appeals (CTA) En Banc.
Factual Antecedents
Respondent Aichi Forging Company of Asia, Inc., a corporation duly organized and existing under the
laws of the Republic of the Philippines, is engaged in the manufacturing, producing, and processing of
steel and its by-products. 3 It is registered with the Bureau of Internal Revenue (BIR) as a Value-Added
Tax (VAT) entity 4 and its products, "close impression die steel forgings" and "tool and dies," are
registered with the Board of Investments (BOI) as a pioneer status. 5
On September 30, 2004, respondent filed a claim for refund/credit of input VAT for the period July 1,
2002 to September 30, 2002 in the total amount of P3,891,123.82 with the petitioner Commissioner of
Internal Revenue (CIR), through the Department of Finance (DOF) One-Stop Shop Inter-Agency Tax
Credit and Duty Drawback Center. 6 cAaDHT
Proceedings before the Second Division of the CTA
On even date, respondent filed a Petition for Review 7 with the CTA for the refund/credit of the same
input VAT. The case was docketed as CTA Case No. 7065 and was raffled to the Second Division of the
CTA.
In the Petition for Review, respondent alleged that for the period July 1, 2002 to September 30, 2002, it
generated and recorded zero-rated sales in the amount of P131,791,399.00, 8 which was paid pursuant
to Section 106 (A) (2) (a) (1), (2) and (3) of the National Internal Revenue Code of 1997 (NIRC); 9 that
for the said period, it incurred and paid input VAT amounting to P3,912,088.14 from purchases and
importation attributable to its zero-rated sales; 10 and that in its application for refund/credit filed with
the DOF One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center, it only claimed the
amount of P3,891,123.82. 11
In response, petitioner filed his Answer 12 raising the following special and affirmative defenses, to
wit:
4.
Petitioner's alleged claim for refund is subject to administrative investigation by the Bureau;
5.
Petitioner must prove that it paid VAT input taxes for the period in question;
6.
Petitioner must prove that its sales are export sales contemplated under Sections 106(A) (2) (a),
and 108(B) (1) of the Tax Code of 1997;
7.
Petitioner must prove that the claim was filed within the two (2) year period prescribed in
Section 229 of the Tax Code;
8.
In an action for refund, the burden of proof is on the taxpayer to establish its right to refund, and
failure to sustain the burden is fatal to the claim for refund; and
9.
Claims for refund are construed strictly against the claimant for the same partake of the nature
of exemption from taxation. 13
Trial ensued, after which, on January 4, 2008, the Second Division of the CTA rendered a Decision
partially granting respondent's claim for refund/credit. Pertinent portions of the Decision read:

For a VAT registered entity whose sales are zero-rated, to validly claim a refund, Section 112 (A) of the
NIRC of 1997, as amended, provides:
SEC. 112.
Refunds or Tax Credits of Input Tax.
(A)
Zero-rated or Effectively Zero-rated Sales. Any VAT-registered person, whose sales are zerorated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the
sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due
or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not
been applied against output tax: . . .
Pursuant to the above provision, petitioner must comply with the following requisites: (1) the taxpayer
is engaged in sales which are zero-rated or effectively zero-rated; (2) the taxpayer is VAT-registered; (3)
the claim must be filed within two years after the close of the taxable quarter when such sales were
made; and (4) the creditable input tax due or paid must be attributable to such sales, except the
transitional input tax, to the extent that such input tax has not been applied against the output tax.
The Court finds that the first three requirements have been complied [with] by petitioner.
With regard to the first requisite, the evidence presented by petitioner, such as the Sales Invoices
(Exhibits "II" to "II-262," "JJ" to "JJ-431," "KK" to "KK-394" and "LL") shows that it is engaged in
sales which are zero-rated.
The second requisite has likewise been complied with. The Certificate of Registration with OCN
1RC0000148499 (Exhibit "C") with the BIR proves that petitioner is a registered VAT taxpayer.
In compliance with the third requisite, petitioner filed its administrative claim for refund on September
30, 2004 (Exhibit "N") and the present Petition for Review on September 30, 2004, both within the two
(2) year prescriptive period from the close of the taxable quarter when the sales were made, which is
from September 30, 2002.
As regards the fourth requirement, the Court finds that there are some documents and claims of
petitioner that are baseless and have not been satisfactorily substantiated.
xxx
xxx
xxx
In sum, petitioner has sufficiently proved that it is entitled to a refund or issuance of a tax credit
certificate representing unutilized excess input VAT payments for the period July 1, 2002 to September
30, 2002, which are attributable to its zero-rated sales for the same period, but in the reduced amount of
P3,239,119.25, computed as follows:
Amount of Claimed Input VAT
P3,891,123.82
Less:
Exceptions as found by the ICPA
41,020.37

Net Creditable Input VAT

P3,850,103.45
Less:
Output VAT Due
610,984.20
Excess Creditable Input VAT
P3,239,119.25

WHEREFORE, premises considered, the present Petition for Review is PARTIALLY GRANTED.
Accordingly, respondent is hereby ORDERED TO REFUND OR ISSUE A TAX CREDIT
CERTIFICATE in favor of petitioner [in] the reduced amount of THREE MILLION TWO HUNDRED
THIRTY NINE THOUSAND ONE HUNDRED NINETEEN AND 25/100 PESOS (P3,239,119.25),
representing the unutilized input VAT incurred for the months of July to September 2002.
SO ORDERED. 14
Dissatisfied with the above-quoted Decision, petitioner filed a Motion for Partial Reconsideration, 15
insisting that the administrative and the judicial claims were filed beyond the two-year period to claim
a tax refund/credit provided for under Sections 112 (A) and 229 of the NIRC. He reasoned that since
the year 2004 was a leap year, the filing of the claim for tax refund/credit on September 30, 2004 was

beyond the two-year period, which expired on September 29, 2004. 16 He cited as basis Article 13 of
the Civil Code, 17 which provides that when the law speaks of a year, it is equivalent to 365 days. In
addition, petitioner argued that the simultaneous filing of the administrative and the judicial claims
contravenes Sections 112 and 229 of the NIRC. 18 According to the petitioner, a prior filing of an
administrative claim is a "condition precedent" 19 before a judicial claim can be filed. He explained
that the rationale of such requirement rests not only on the doctrine of exhaustion of administrative
remedies but also on the fact that the CTA is an appellate body which exercises the power of judicial
review over administrative actions of the BIR. 20
The Second Division of the CTA, however, denied petitioner's Motion for Partial Reconsideration for
lack of merit. Petitioner thus elevated the matter to the CTA En Banc via a Petition for Review. 21
Ruling of the CTA En Banc
On July 30, 2008, the CTA En Banc affirmed the Second Division's Decision allowing the partial tax
refund/credit in favor of respondent. However, as to the reckoning point for counting the two-year
period, the CTA En Banc ruled:
Petitioner argues that the administrative and judicial claims were filed beyond the period allowed by
law and hence, the honorable Court has no jurisdiction over the same. In addition, petitioner further
contends that respondent's filing of the administrative and judicial [claims] effectively eliminates the
authority of the honorable Court to exercise jurisdiction over the judicial claim.
We are not persuaded.
Section 114 of the 1997 NIRC, and We quote, to wit:
SEC. 114.
Return and Payment of Value-added Tax.
(A)
In General. Every person liable to pay the value-added tax imposed under this Title shall file
a quarterly return of the amount of his gross sales or receipts within twenty-five (25) days following the
close of each taxable quarter prescribed for each taxpayer: Provided, however, That VAT-registered
persons shall pay the value-added tax on a monthly basis.
[x x x x ]
Based on the above-stated provision, a taxpayer has twenty five (25) days from the close of each
taxable quarter within which to file a quarterly return of the amount of his gross sales or receipts. In the
case at bar, the taxable quarter involved was for the period of July 1, 2002 to September 30, 2002.
Applying Section 114 of the 1997 NIRC, respondent has until October 25, 2002 within which to file its
quarterly return for its gross sales or receipts [with] which it complied when it filed its VAT Quarterly
Return on October 20, 2002.
In relation to this, the reckoning of the two-year period provided under Section 229 of the 1997 NIRC
should start from the payment of tax subject claim for refund. As stated above, respondent filed its VAT
Return for the taxable third quarter of 2002 on October 20, 2002. Thus, respondent's administrative and
judicial claims for refund filed on September 30, 2004 were filed on time because AICHI has until
October 20, 2004 within which to file its claim for refund.
In addition, We do not agree with the petitioner's contention that the 1997 NIRC requires the previous
filing of an administrative claim for refund prior to the judicial claim. This should not be the case as the
law does not prohibit the simultaneous filing of the administrative and judicial claims for refund. What
is controlling is that both claims for refund must be filed within the two-year prescriptive period.
In sum, the Court En Banc finds no cogent justification to disturb the findings and conclusion spelled
out in the assailed January 4, 2008 Decision and March 13, 2008 Resolution of the CTA Second
Division. What the instant petition seeks is for the Court En Banc to view and appreciate the evidence
in their own perspective of things, which unfortunately had already been considered and passed upon.
WHEREFORE, the instant Petition for Review is hereby DENIED DUE COURSE and DISMISSED
for lack of merit. Accordingly, the January 4, 2008 Decision and March 13, 2008 Resolution of the
CTA Second Division in CTA Case No. 7065 entitled, "AICHI Forging Company of Asia, Inc.
petitioner vs. Commissioner of Internal Revenue, respondent" are hereby AFFIRMED in toto.

SO ORDERED. 22
Petitioner sought reconsideration but the CTA En Banc denied 23 his Motion for Reconsideration.
Issue
Hence, the present recourse where petitioner interposes the issue of whether respondent's judicial and
administrative claims for tax refund/credit were filed within the two-year prescriptive period provided
in Sections 112 (A) and 229 of the NIRC. 24
Petitioner's Arguments
Petitioner maintains that respondent's administrative and judicial claims for tax refund/credit were filed
in violation of Sections 112 (A) and 229 of the NIRC. 25 He posits that pursuant to Article 13 of the
Civil Code, 26 since the year 2004 was a leap year, the filing of the claim for tax refund/credit on
September 30, 2004 was beyond the two-year period, which expired on September 29, 2004. 27
Petitioner further argues that the CTA En Banc erred in applying Section 114 (A) of the NIRC in
determining the start of the two-year period as the said provision pertains to the compliance
requirements in the payment of VAT. 28 He asserts that it is Section 112, paragraph (A), of the same
Code that should apply because it specifically provides for the period within which a claim for tax
refund/credit should be made. 29
Petitioner likewise puts in issue the fact that the administrative claim with the BIR and the judicial
claim with the CTA were filed on the same day. 30 He opines that the simultaneous filing of the
administrative and the judicial claims contravenes Section 229 of the NIRC, which requires the prior
filing of an administrative claim. 31 He insists that such procedural requirement is based on the
doctrine of exhaustion of administrative remedies and the fact that the CTA is an appellate body
exercising judicial review over administrative actions of the CIR. 32
Respondent's Arguments
For its part, respondent claims that it is entitled to a refund/credit of its unutilized input VAT for the
period July 1, 2002 to September 30, 2002 as a matter of right because it has substantially complied
with all the requirements provided by law. 33 Respondent likewise defends the CTA En Banc in
applying Section 114 (A) of the NIRC in computing the prescriptive period for the claim for tax
refund/credit. Respondent believes that Section 112 (A) of the NIRC must be read together with
Section 114 (A) of the same Code. 34
As to the alleged simultaneous filing of its administrative and judicial claims, respondent contends that
it first filed an administrative claim with the One-Stop Shop Inter-Agency Tax Credit and Duty
Drawback Center of the DOF before it filed a judicial claim with the CTA. 35 To prove this, respondent
points out that its Claimant Information Sheet No. 49702 36 and BIR Form No. 1914 for the third
quarter of 2002, 37 which were filed with the DOF, were attached as Annexes "M" and "N,"
respectively, to the Petition for Review filed with the CTA. 38 Respondent further contends that the
non-observance of the 120-day period given to the CIR to act on the claim for tax refund/credit in
Section 112 (D) is not fatal because what is important is that both claims are filed within the two-year
prescriptive period. 39 In support thereof, respondent cites Commissioner of Internal Revenue v.
Victorias Milling Co., Inc. 40 where it was ruled that "[i]f, however, the [CIR] takes time in deciding
the claim, and the period of two years is about to end, the suit or proceeding must be started in the
[CTA] before the end of the two-year period without awaiting the decision of the [CIR]." 41 Lastly,
respondent argues that even if the period had already lapsed, it may be suspended for reasons of equity
considering that it is not a jurisdictional requirement. 42
Our Ruling
The petition has merit.
Unutilized input VAT must be claimed within two
years after the close of the taxable quarter when
the sales were made
In computing the two-year prescriptive period for claiming a refund/credit of unutilized input VAT, the

Second Division of the CTA applied Section 112 (A) of the NIRC, which states:
SEC. 112.
Refunds or Tax Credits of Input Tax.
(A)
Zero-rated or Effectively Zero-rated Sales Any VAT-registered person, whose sales are zerorated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the
sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due
or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not
been applied against output tax: Provided, however, That in the case of zero-rated sales under Section
106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign currency exchange
proceeds thereof had been duly accounted for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated
or effectively zero-rated sale and also in taxable or exempt sale of goods or properties or services, and
the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of
the transactions, it shall be allocated proportionately on the basis of the volume of sales. (Emphasis
supplied.)
The CTA En Banc, on the other hand, took into consideration Sections 114 and 229 of the NIRC, which
read:
SEC. 114.
Return and Payment of Value-Added Tax.
(A)
In General. Every person liable to pay the value-added tax imposed under this Title shall file
a quarterly return of the amount of his gross sales or receipts within twenty-five (25) days following the
close of each taxable quarter prescribed for each taxpayer: Provided, however, That VAT-registered
persons shall pay the value-added tax on a monthly basis.
Any person, whose registration has been cancelled in accordance with Section 236, shall file a return
and pay the tax due thereon within twenty-five (25) days from the date of cancellation of registration:
Provided, That only one consolidated return shall be filed by the taxpayer for his principal place of
business or head office and all branches.
xxx
xxx
xxx
SEC. 229.
Recovery of tax erroneously or illegally collected.
No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue
tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty
claimed to have been collected without authority, or of any sum alleged to have been excessively or in
any manner wrongfully collected, until a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty or sum
has been paid under protest or duress.
In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date
of payment of the tax or penalty regardless of any supervening cause that may arise after payment:
Provided, however, That the Commissioner may, even without written claim therefor, refund or credit
any tax, where on the face of the return upon which payment was made, such payment appears clearly
to have been erroneously paid. (Emphasis supplied.)
Hence, the CTA En Banc ruled that the reckoning of the two-year period for filing a claim for
refund/credit of unutilized input VAT should start from the date of payment of tax and not from the
close of the taxable quarter when the sales were made. 43
The pivotal question of when to reckon the running of the two-year prescriptive period, however, has
already been resolved in Commissioner of Internal Revenue v. Mirant Pagbilao Corporation, 44 where
we ruled that Section 112 (A) of the NIRC is the applicable provision in determining the start of the
two-year period for claiming a refund/credit of unutilized input VAT, and that Sections 204 (C) and 229
of the NIRC are inapplicable as "both provisions apply only to instances of erroneous payment or
illegal collection of internal revenue taxes." 45 We explained that:
The above proviso [Section 112 (A) of the NIRC] clearly provides in no uncertain terms that unutilized
input VAT payments not otherwise used for any internal revenue tax due the taxpayer must be claimed

within two years reckoned from the close of the taxable quarter when the relevant sales were made
pertaining to the input VAT regardless of whether said tax was paid or not. As the CA aptly puts it,
albeit it erroneously applied the aforequoted Sec. 112 (A), "[P]rescriptive period commences from the
close of the taxable quarter when the sales were made and not from the time the input VAT was paid
nor from the time the official receipt was issued." Thus, when a zero-rated VAT taxpayer pays its input
VAT a year after the pertinent transaction, said taxpayer only has a year to file a claim for refund or tax
credit of the unutilized creditable input VAT. The reckoning frame would always be the end of the
quarter when the pertinent sales or transaction was made, regardless when the input VAT was paid. Be
that as it may, and given that the last creditable input VAT due for the period covering the progress
billing of September 6, 1996 is the third quarter of 1996 ending on September 30, 1996, any claim for
unutilized creditable input VAT refund or tax credit for said quarter prescribed two years after
September 30, 1996 or, to be precise, on September 30, 1998. Consequently, MPC's claim for refund or
tax credit filed on December 10, 1999 had already prescribed.
Reckoning for prescriptive period under
Secs. 204 (C) and 229 of the NIRC inapplicable
To be sure, MPC cannot avail itself of the provisions of either Sec. 204(C) or 229 of the NIRC which,
for the purpose of refund, prescribes a different starting point for the two-year prescriptive limit for the
filing of a claim therefor. Secs. 204(C) and 229 respectively provide:
Sec. 204.
Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes.
The Commissioner may
xxx
xxx
xxx
(c)
Credit or refund taxes erroneously or illegally received or penalties imposed without authority,
refund the value of internal revenue stamps when they are returned in good condition by the purchaser,
and, in his discretion, redeem or change unused stamps that have been rendered unfit for use and refund
their value upon proof of destruction. No credit or refund of taxes or penalties shall be allowed unless
the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years
after the payment of the tax or penalty: Provided, however, That a return filed showing an overpayment
shall be considered as a written claim for credit or refund.
xxx
xxx
xxx
Sec. 229.
Recovery of Tax Erroneously or Illegally Collected. No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have
been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected
without authority, or of any sum alleged to have been excessively or in any manner wrongfully
collected without authority, or of any sum alleged to have been excessively or in any manner
wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but
such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid
under protest or duress.
In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date
of payment of the tax or penalty regardless of any supervening cause that may arise after payment:
Provided, however, That the Commissioner may, even without a written claim therefor, refund or credit
any tax, where on the face of the return upon which payment was made, such payment appears clearly
to have been erroneously paid.
Notably, the above provisions also set a two-year prescriptive period, reckoned from date of payment
of the tax or penalty, for the filing of a claim of refund or tax credit. Notably too, both provisions apply
only to instances of erroneous payment or illegal collection of internal revenue taxes.
MPC's creditable input VAT not erroneously paid
For perspective, under Sec. 105 of the NIRC, creditable input VAT is an indirect tax which can be
shifted or passed on to the buyer, transferee, or lessee of the goods, properties, or services of the
taxpayer. The fact that the subsequent sale or transaction involves a wholly-tax exempt client, resulting

in a zero-rated or effectively zero-rated transaction, does not, standing alone, deprive the taxpayer of its
right to a refund for any unutilized creditable input VAT, albeit the erroneous, illegal, or wrongful
payment angle does not enter the equation.
xxx
xxx
xxx
Considering the foregoing discussion, it is clear that Sec. 112 (A) of the NIRC, providing a two-year
prescriptive period reckoned from the close of the taxable quarter when the relevant sales or
transactions were made pertaining to the creditable input VAT, applies to the instant case, and not to the
other actions which refer to erroneous payment of taxes. 46 (Emphasis supplied.)
In view of the foregoing, we find that the CTA En Banc erroneously applied Sections 114 (A) and 229
of the NIRC in computing the two-year prescriptive period for claiming refund/credit of unutilized
input VAT. To be clear, Section 112 of the NIRC is the pertinent provision for the refund/credit of input
VAT. Thus, the two-year period should be reckoned from the close of the taxable quarter when the sales
were made.
The administrative claim was timely filed
Bearing this in mind, we shall now proceed to determine whether the administrative claim was timely
filed.
Relying on Article 13 of the Civil Code, 47 which provides that a year is equivalent to 365 days, and
taking into account the fact that the year 2004 was a leap year, petitioner submits that the two-year
period to file a claim for tax refund/ credit for the period July 1, 2002 to September 30, 2002 expired on
September 29, 2004. 48
We do not agree.
In Commissioner of Internal Revenue v. Primetown Property Group, Inc., 49 we said that as between
the Civil Code, which provides that a year is equivalent to 365 days, and the Administrative Code of
1987, which states that a year is composed of 12 calendar months, it is the latter that must prevail
following the legal maxim, Lex posteriori derogat priori. 50 Thus:
Both Article 13 of the Civil Code and Section 31, Chapter VIII, Book I of the Administrative Code of
1987 deal with the same subject matter the computation of legal periods. Under the Civil Code, a
year is equivalent to 365 days whether it be a regular year or a leap year. Under the Administrative
Code of 1987, however, a year is composed of 12 calendar months. Needless to state, under the
Administrative Code of 1987, the number of days is irrelevant.
There obviously exists a manifest incompatibility in the manner of computing legal periods under the
Civil Code and the Administrative Code of 1987. For this reason, we hold that Section 31, Chapter
VIII, Book I of the Administrative Code of 1987, being the more recent law, governs the computation
of legal periods. Lex posteriori derogat priori.
Applying Section 31, Chapter VIII, Book I of the Administrative Code of 1987 to this case, the twoyear prescriptive period (reckoned from the time respondent filed its final adjusted return on April 14,
1998) consisted of 24 calendar months, computed as follows:
Year 1 1st calendar month April 15, 1998 to May 14, 1998
2nd calendar month May 15, 1998 to June 14, 1998
3rd calendar month June 15, 1998 to July 14, 1998
4th calendar month July 15, 1998 to August 14, 1998
5th calendar month August 15, 1998 to September 14, 1998
6th calendar month September 15, 1998 to October 14, 1998
7th calendar month October 15, 1998 to November 14, 1998
8th calendar month November 15, 1998 to December 14, 1998
9th calendar month December 15, 1998 to January 14, 1999
10th calendar month January 15, 1999 to February 14, 1999
11th calendar month February 15, 1999 to March 14, 1999
12th calendar month March 15, 1999 to April 14, 1999

Year 2 13th calendar month April 15, 1999 to May 14, 1999
14th calendar month May 15, 1999 to June 14, 1999
15th calendar month June 15, 1999 to July 14, 1999
16th calendar month July 15, 1999 to August 14, 1999
17th calendar month August 15, 1999 to September 14, 1999
18th calendar month September 15, 1999 to October 14, 1999
19th calendar month October 15, 1999 to November 14, 1999
20th calendar month November 15, 1999 to December 14, 1999
21st calendar month December 15, 1999 to January 14, 2000
22nd calendar month January 15, 2000 to February 14, 2000
23rd calendar month February 15, 2000 to March 14, 2000
24th calendar month March 15, 2000 to April 14, 2000
We therefore hold that respondent's petition (filed on April 14, 2000) was filed on the last day of the
24th calendar month from the day respondent filed its final adjusted return. Hence, it was filed within
the reglementary period. 51
Applying this to the present case, the two-year period to file a claim for tax refund/credit for the period
July 1, 2002 to September 30, 2002 expired on September 30, 2004. Hence, respondent's administrative
claim was timely filed.
The filing of the judicial claim was premature
However, notwithstanding the timely filing of the administrative claim, we are constrained to deny
respondent's claim for tax refund/credit for having been filed in violation of Section 112 (D) of the
NIRC, which provides that:
SEC. 112.
Refunds or Tax Credits of Input Tax.
xxx
xxx
xxx
(D)
Period within which Refund or Tax Credit of Input Taxes shall be Made. In proper cases, the
Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within
one hundred twenty (120) days from the date of submission of complete documents in support of the
application filed in accordance with Subsections (A) and (B) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the
Commissioner to act on the application within the period prescribed above, the taxpayer affected may,
within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the
one hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax
Appeals. (Emphasis supplied.)
Section 112 (D) of the NIRC clearly provides that the CIR has "120 days, from the date of the
submission of the complete documents in support of the application [for tax refund/credit]," within
which to grant or deny the claim. In case of full or partial denial by the CIR, the taxpayer's recourse is
to file an appeal before the CTA within 30 days from receipt of the decision of the CIR. However, if
after the 120-day period the CIR fails to act on the application for tax refund/credit, the remedy of the
taxpayer is to appeal the inaction of the CIR to CTA within 30 days.
In this case, the administrative and the judicial claims were simultaneously filed on September 30,
2004. Obviously, respondent did not wait for the decision of the CIR or the lapse of the 120-day period.
For this reason, we find the filing of the judicial claim with the CTA premature.
Respondent's assertion that the non-observance of the 120-day period is not fatal to the filing of a
judicial claim as long as both the administrative and the judicial claims are filed within the two-year
prescriptive period 52 has no legal basis.
There is nothing in Section 112 of the NIRC to support respondent's view. Subsection (A) of the said
provision states that "any VAT-registered person, whose sales are zero-rated or effectively zero-rated
may, within two years after the close of the taxable quarter when the sales were made, apply for the
issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such

sales." The phrase "within two (2) years . . . apply for the issuance of a tax credit certificate or refund"
refers to applications for refund/credit filed with the CIR and not to appeals made to the CTA. This is
apparent in the first paragraph of subsection (D) of the same provision, which states that the CIR has
"120 days from the submission of complete documents in support of the application filed in accordance
with Subsections (A) and (B)" within which to decide on the claim.
In fact, applying the two-year period to judicial claims would render nugatory Section 112 (D) of the
NIRC, which already provides for a specific period within which a taxpayer should appeal the decision
or inaction of the CIR. The second paragraph of Section 112 (D) of the NIRC envisions two scenarios:
(1) when a decision is issued by the CIR before the lapse of the 120-day period; and (2) when no
decision is made after the 120-day period. In both instances, the taxpayer has 30 days within which to
file an appeal with the CTA. As we see it then, the 120-day period is crucial in filing an appeal with the
CTA.
With regard to Commissioner of Internal Revenue v. Victorias Milling, Co., Inc. 53 relied upon by
respondent, we find the same inapplicable as the tax provision involved in that case is Section 306, now
Section 229 of the NIRC. And as already discussed, Section 229 does not apply to refunds/credits of
input VAT, such as the instant case.
In fine, the premature filing of respondent's claim for refund/credit of input VAT before the CTA
warrants a dismissal inasmuch as no jurisdiction was acquired by the CTA.
WHEREFORE, the Petition is hereby GRANTED. The assailed July 30, 2008 Decision and the
October 6, 2008 Resolution of the Court of Tax Appeals are hereby REVERSED and SET ASIDE. The
Court of Tax Appeals Second Division is DIRECTED to dismiss CTA Case No. 7065 for having been
prematurely filed.
SO ORDERED.
Corona, C.J., Velasco, Jr., Leonardo-de Castro and Perez, JJ., concur.
Footnotes
1.
Rollo, pp. 31-A-43; penned by Associate Justice Caesar A. Casanova and concurred in by
Presiding Justice Ernesto D. Acosta and Associate Justices Juanito C. Castaeda, Jr., Lovell R. Bautista,
Erlinda P. Uy, and Olga Palanca-Enriquez.
2.
Id. at 44-45.
3.
Id. at 13.
4.
Id.
5.
Id.
6.
CTA Second Division rollo, pp. 26-27.
7.
Rollo, pp. 79-90.
8.
Id. at 82.
9.
SEC. 106. Value-added Tax on Sale of Goods or Properties.
(A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale,
barter or exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the
gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such
tax to be paid by the seller or transferor.
xxx
xxx
xxx
(2) The following sales by VAT-registered persons shall be subject to zero percent (0%)
rate:
(a) Export Sales. The term 'export sales' means:
(1) The sale and actual shipment of goods from the Philippines to a foreign country,
irrespective of any shipping arrangement that may be agreed upon which may influence or determine
the transfer of ownership of the goods so exported and paid for in acceptable foreign currency or its
equivalent in goods or services, and accounted for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP);

(2) Sale of raw materials or packaging materials to a nonresident buyer for delivery to a
resident local export-oriented enterprise to be used in manufacturing, processing, packing or repacking
in the Philippines of the said buyer's goods and paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
(3) Sale of raw materials or packaging materials to export-oriented enterprise whose
export sales exceed seventy percent (70%) of total annual production;
xxx
xxx
xxx
10.
Rollo, p. 82.
11.
Id. at 82-83.
12.
Id. at 91-94.
13.
Id. at 92.
14.
Id. at 53-54 and 61-62.
15.
Id. at 95-104.
16.
Id. at 98.
17.
Art. 13. When the law speaks of years, months, days or nights, it shall be understood that years
are of three hundred sixty-five days each; months, of thirty days; days, of twenty-four hours; and nights
from sunset to sunrise.
If months are designated by their name, they shall be computed by the number of days
which they respectively have.
In computing a period, the first day shall be excluded, and the last day included.
18.
Rollo, pp. 98-99.
19.
Id. at 101.
20.
Id. at 100-101.
21.
Id. at 105-118.
22.
Id. at 41-43.
23.
Id. at 44-45.
24.
Id. at 19.
25.
Id.
26.
Supra note 17.
27.
Rollo, p. 21.
28.
Id. at 22.
29.
Id.
30.
Id. at 24.
31.
Id.
32.
Id. at 25.
33.
Id. at 161-162.
34.
Id. at 164.
35.
Id. at 166.
36.
CTA Second Division rollo, p. 26.
37.
Id. at 27.
38.
Rollo, p. 166.
39.
Id. at 166.
40.
130 Phil. 12 (1968).
41.
Id. at 16.
42.
Rollo, p. 167.
43.
Id.
44.
G.R. No. 172129, September 12, 2008, 565 SCRA 154.
45.
Id. at 173.
46.
Id. at 171-175.

47.
48.
49.
50.
51.
52.
53.

Supra note 17.

Rollo, p. 21.
G.R. No. 162155, August 28, 2007, 531 SCRA 436.
Id. at 444.
Id. at 444-445.
Rollo, p. 166.
Supra note 40.

EN BANC
[G.R. No. 81311. June 30, 1988.]
KAPATIRAN NG MGA NAGLILINGKOD SA PAMAHALAAN NG PILIPINAS, INC.,
HERMINIGILDO C. DUMLAO, GERONIMO Q. QUADRA, and MARIO C. VILLANUEVA,
petitioners, vs. HON. BIENVENIDO TAN, as Commissioner of Internal Revenue, respondent.
[G.R. No. 81820. June 30, 1988]
KILUSANG MAYO UNO LABOR CENTER (KMU), its officers and affiliated labor federations and
alliances, petitioners, vs. THE EXECUTIVE SECRETARY, SECRETARY OF FINANCE, THE
COMMISSIONER OF INTERNAL REVENUE, and SECRETARY OF BUDGET, respondents.
[G.R. No. 81921. June 30, 1988]
INTEGRATED CUSTOMS BROKERS ASSOCIATION OF THE PHILIPPINES and JESUS B.
BANAL, petitioners, vs. The HON. COMMISSIONER, BUREAU OF INTERNAL REVENUE,
respondent.
[G.R. No. 82152. June 30, 1988]
RICARDO C. VALMONTE, petitioner, vs. THE EXECUTIVE SECRETARY, SECRETARY OF
FINANCE, COMMISSIONER OF INTERNAL REVENUE and SECRETARY OF BUDGET,
respondents.
Franklin S. Farolan for petitioner Kapatiran in G.R. No. 81311.
Jaime C. Opinion for individual petitioner in G.R. No. 81311.
Banzuela Flores, Miralles, Raeses, Sy, Taquio and Associates for petitioners in G.R. No. 81820.
Union of Lawyers and Advocates for Peoples Right collaborating counsel for petitioners in G.R. No.
81820.
Jose C. Leabres and Joselito R. Enriquez for petitioners in G.R. No. 81921.
DECISION
PADILLA, J p:
These four (4) petitions which have been consolidated because of the similarity of the main issues
involved therein, seek to nullify Executive Order No. 273 (EO 273, for short), issued by the President
of the Philippines on 25 July 1987, to take effect on 1 January 1988, and which amended certain
sections of the National Internal Revenue Code and adopted the value-added tax (VAT, for short), for
being unconstitutional in that its enactment is not allegedly within the powers of the President; that the
VAT is oppressive, discriminatory, regressive, and violates the due process and equal protection clauses
and other provisions of the 1987 Constitution.
The Solicitor General prays for the dismissal of the petitions on the ground that the petitioners have
failed to show justification for the exercise of its judicial powers, viz. (1) the existence of an
appropriate case; (2) an interest, personal and substantial, of the party raising the constitutional
questions; (3) the constitutional question should be raised at the earliest opportunity; and (4) the
question of constitutionality is directly and necessarily involved in a justiciable controversy and its
resolution is essential to the protection of the rights of the parties. According to the Solicitor General,
only the third requisite that the constitutional question should be raised at the earliest opportunity
has been complied with. He also questions the legal standing of the petitioners who, he contends, are
merely asking for an advisory opinion from the Court, there being no justiciable controversy for
resolution.
Objections to taxpayer's suit for lack of sufficient personality standing, or interest are, however, in the
main procedural matters. Considering the importance to the public of the cases at bar, and in keeping
with the Court's duty, under the 1987 Constitution, to determine whether or not the other branches of
government have kept themselves within the limits of the Constitution and the laws and that they have
not abused the discretion given to them, the Court has brushed aside technicalities of procedure and has
taken cognizance of these petitions. prLL
But, before resolving the issues raised, a brief look into the tax law in question is in order.

The VAT is a tax levied on a wide range of goods and services. It is a tax on the value, added by every
seller, with aggregate gross annual sales of articles and/or services, exceeding P200,000.00, to his
purchase of goods and services, unless exempt. VAT is computed at the rate of 0% or 10% of the gross
selling price of goods or gross receipts realized from the sale of services.
The VAT is said to have eliminated privilege taxes, multiple rated sales tax on manufacturers and
producers, advance sales tax, and compensating tax on importations. The framers of EO 273 claim that
it is principally aimed to rationalize the system of taxing goods and services; simplify tax
administration; and make the tax system more equitable, to enable the country to attain economic
recovery.
The VAT is not entirely new. It was already in force, in a modified form, before EO 273 was issued. As
pointed out by the Solicitor General, the Philippine sales tax system, prior to the issuance of EO 273,
was essentially a single stage value added tax system computed under the "cost subtraction method" or
"cost deduction method" and was imposed only on original sale, barter or exchange of articles by
manufacturers, producers, or importers. Subsequent sales of such articles were not subject to sales tax.
However, with the issuance of PD 1991 on 31 October 1985, a 3% tax was imposed on a second sale,
which was reduced to 1.5% upon the issuance of PD 2006 on 31 December 1985, to take effect 1
January 1986. Reduced sales taxes were imposed not only on the second sale, but on every subsequent
sale, as well. EO 273 merely increased the VAT on every sale to 10%, unless zero-rated or exempt.
Petitioners first contend that EO 273 is unconstitutional on the ground that the President had no
authority to issue EO 273 on 25 July 1987.
The contention is without merit.
It should be recalled that under Proclamation No. 3, which decreed a Provisional Constitution, sole
legislative authority was vested upon the President. Art. II, sec. 1 of the Provisional Constitution states:
"Sec. 1.
Until a legislature is elected and convened under a new Constitution, the President shall
continue to exercise legislative powers."
On 15 October 1986, the Constitutional Commission of 1986 adopted a new Constitution for the
Republic of the Philippines which was ratified in a plebiscite conducted on 2 February 1987. Article
XVIII, sec. 6 of said Constitution, hereafter referred to as the 1987 Constitution, provides:
"Sec. 6.
The incumbent President shall continue to exercise legislative powers until the first
Congress is convened."
It should be noted that, under both the Provisional and the 1987 Constitutions, the President is vested
with legislative powers until a legislature under a new Constitution is convened. The first Congress,
created and elected under the 1987 Constitution, was convened on 27 July 1987. Hence, the enactment
of EO 273 on 25 July 1987, two (2) days before Congress convened on 27 July 1987, was within the
President's constitutional power and authority to legislate.
Petitioner Valmonte claims, additionally, that Congress was really convened on 30 June 1987 (not 27
July 1987). He contends that the word "convene" is synonymous with "the date when the elected
members of Congress assumed office."
The contention is without merit. The word "convene" which has been interpreted to mean "to call
together, cause to assemble, or convoke," 1 is clearly different from assumption of office by the
individual members of Congress or their taking the oath of office. As an example, we call to mind the
interim National Assembly created under the 1973 Constitution, which had not been "convened" but
some members of the body, more particularly the delegates to the 1971 Constitutional Convention who
had opted to serve therein by voting affirmatively for the approval of said Constitution, had taken their
oath of office. prLL
To uphold the submission of petitioner Valmonte would stretch the definition of the word "convene" a
bit too far. It would also defeat the purpose of the framers of the 1987 Constitution and render
meaningless some other provisions of said Constitution. For example, the provisions of Art. VI, sec. 15,
requiring Congress to convene once every year on the fourth Monday of July for its regular session

would be a contrariety, since Congress would already be deemed to be in session after the individual
members have taken their oath of office. A portion of the provisions of Art. VII, sec. 10, requiring
Congress to convene for the purpose of enacting a law calling for a special election to elect a President
and Vice-President in case a vacancy occurs in said offices, would also be a surplusage. The portion of
Art. VII, sec. 11, third paragraph, requiring Congress to convene, if not in session, to decide a conflict
between the President and the Cabinet as to whether or not the President can re-assume the powers and
duties of his office, would also be redundant. The same is true with that portion of Art. VII, sec. 18,
which requires Congress to convene within twenty-four (24) hours following the declaration of martial
law or the suspension of the privilege of the writ of habeas corpus.
The 1987 Constitution mentions a specific date when the President loses her power to legislate. If the
framers of said Constitution had intended to terminate the exercise of legislative powers by the
President at the beginning of the term of office of the members of Congress, they should have so stated
(but did not) in clear and unequivocal terms. The Court has no power to re-write the Constitution and
give it a meaning different from that intended.
The Court also finds no merit in the petitioners' claim that EO 273 was issued by the President in grave
abuse of discretion amounting to lack or excess of jurisdiction. "Grave abuse of discretion" has been
defined, as follows:
"'Grave abuse of discretion' implies such capricious and whimsical exercise of judgment as is
equivalent to lack of jurisdiction (Abad Santos vs. Province of Tarlac, 38 Off Gaz. 834), or, in other
words, where the power is exercised in an arbitrary or despotic manner by reason of passion or personal
hostility, and it must be so patent and gross as to amount to an evasion of positive duty or to a virtual
refusal to perform the duty enjoined or to act at all in contemplation of law. (Tavera-Luna, Inc. vs.
Nable, 38 Off. Gaz. 62)." 2
Petitioners have failed to show that EO 273 was issued capriciously and whimsically or in an arbitrary
or despotic manner by reason of passion or personal hostility. It appears that a comprehensive study of
the VAT was made before EO 273 was issued. In fact, the merits of the VAT had been extensively
discussed by its framers and other government agencies involved in its implementation, even under the
past administration. As the Solicitor General correctly stated. "The signing of E.O. 273 was merely the
last stage in the exercise of her legislative powers. The legislative process started long before the
signing when the data were gathered, proposals were weighed and the final wordings of the measure
were drafted, revised and finalized. Certainly, it cannot be said that the President made a jump, so to
speak, on the Congress, two days before it convened." 3
Next, the petitioners claim that EO 273 is oppressive, discriminatory, unjust and regressive, in violation
of the provisions of Art. VI, sec. 28(1) of the 1987 Constitution, which states:
"Sec. 28.
(1) The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation."
The petitioners' assertions in this regard are not supported by facts and circumstances to warrant their
conclusions. They have failed to adequately show that the VAT is oppressive, discriminatory or unjust.
Petitioners merely rely upon newspaper articles which are actually hearsay and have no evidentiary
value. To justify the nullification of a law, there must be a clear and unequivocal breach of the
Constitution, not a doubtful and argumentative implication. 4
As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It is uniform. The Court, in
City of Baguio vs. De Leon, 5 said:
". . . In Philippine Trust Company v. Yatco (69 Phil. 420), Justice Laurel, speaking for the Court, stated:
'A tax is considered uniform when it operates with the same force and effect in every place where the
subject may be found.'
"There was no occasion in that case to consider the possible effect on such a constitutional requirement
where there is a classification. The opportunity came in Eastern Theatrical Co. v. Alfonso (83 Phil. 852,
862). Thus: 'Equality and uniformity in taxation means that all taxable articles or kinds of property of

the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable
and natural classifications for purposes of taxation; . . .' About two years later, Justice Tuason, speaking
for this Court in Manila Race Horses Trainers Assn. v. de la Fuente (88 Phil. 60, 65) incorporated the
above excerpt in his opinion and continued; 'Taking everything into account, the differentiation against
which the plaintiffs complain conforms to the practical dictates of justice and equity and is not
discriminatory within the meaning of the Constitution.'
"To satisfy this requirement then, all that is needed as held in another case decided two years later, (Uy
Matias v. City of Cebu, 93 Phil. 300) is that the statute or ordinance in question 'applies equally to all
persons, firms and corporations placed in similar situation.' This Court is on record as accepting the
view in a leading American case (Carmichael v. Southern Coal and Coke Co., 301 US 495) that
'inequalities which result from a singling out of one particular class for taxation or exemption infringe
no constitutional limitation.' (Lutz v. Araneta, 98 Phil. 148, 153)."
The sales tax adopted in EO 273 is applied similarly on all goods and services sold to the public, which
are not exempt, at the constant rate of 0% or 10%. Cdpr
The disputed sales tax is also equitable. It is imposed only on sales of goods or services by persons
engage in business with an aggregate gross annual sales exceeding P200,000.00. Small corner sari-sari
stores are consequently exempt from its application. Likewise exempt from the tax are sales of farm
and marine products, so that the costs of basic food and other necessities, spared as they are from the
incidence of the VAT, are expected to be relatively lower and within the reach of the general public. 6
The Court likewise finds no merit in the contention of the petitioner Integrated Customs Brokers
Association of the Philippines that EO 273, more particularly the new Sec. 103(r) of the National
Internal Revenue Code, unduly discriminates against customs brokers. The contested provision states:
"Sec. 103.
Exempt transactions. The following shall be exempt from the value-added tax:
xxx
xxx
xxx
"(r)
Service performed in the exercise of profession or calling (except customs brokers) subject to
the occupation tax under the Local Tax Code, and professional services performed by registered general
professional partnerships;"
The phrase "except customs brokers" is not meant to discriminate against customs brokers. It was
inserted in Sec. 103(r) to complement the provisions of Sec. 102 of the Code which makes the services
of customs brokers subject to the payment of the VAT and to distinguish customs brokers from other
professionals who are subject to the payment of an occupation tax under the Local Tax Code. Pertinent
provisions of Sec. 102 read:
"Sec. 102.
Value-added tax on sale of services. There shall be levied, assessed and collected, a
value-added tax equivalent to 10% percent of gross receipts derived by any person engaged in the sale
of services. The phrase sale of services' means the performance of all kinds of services for others for a
fee, remuneration or consideration, including those performed or rendered by construction and service
contractors; stock, real estate, commercial, customs and immigration brokers; lessors of personal
property; lessors or distributors of cinematographic films; persons engaged in milling, processing,
manufacturing or repacking goods for others; and similar services regardless of whether or not the
performance thereof calls for the exercise or use of the physical or mental faculties: . . ."
With the insertion of the clarificatory phrase "except customs brokers" in Sec. 103(r), a potential
conflict between the two sections, (Secs. 102 and 103), insofar as customs brokers are concerned, is
averted.
At any rate, the distinction of the customs brokers from the other professionals who are subject to
occupation tax under the Local Tax Code is based upon material differences, in that the activities of
customs brokers (like those of stock, real estate and immigration brokers) partake more of a business,
rather than a profession and were thus subjected to the percentage tax under Sec. 174 of the National
Internal Revenue Code prior to its amendment by EO 273. EO 273 abolished the percentage tax and
replaced it with the VAT. If the petitioner Association did not protest the classification of customs

brokers then, the Court sees no reason why it should protest now.
The Court takes note that EO 273 has been in effect for more than five (5) months now, so that the fears
expressed by the petitioners that the adoption of the VAT will trigger skyrocketing of prices of basic
commodities and services, as well as mass actions and demonstrations against the VAT should by now
be evident. The fact that nothing of the sort has happened shows that the fears and apprehensions of the
petitioners appear to be more imagined than real. It would seem that the VAT is not as bad as we are
made to believe. LibLex
In any event, if petitioners seriously believe that the adoption and continued application of the VAT are
prejudicial to the general welfare or the interests of the majority of the people, they should seek
recourse and relief from the political branches of the government. The Court, following the timehonored doctrine of separation of powers, cannot substitute its judgment for that of the President as to
the wisdom, justice and advisability of the adoption of the VAT. The Court can only look into and
determine whether or not EO 273 was enacted and made effective as law, in the manner required by,
and consistent with, the Constitution, and to make sure that it was not issued in grave abuse of
discretion amounting to lack or excess of jurisdiction; and, in this regard, the Court finds no reason to
impede its application or continued implementation.
WHEREFORE, the petitions are DISMISSED. Without pronouncement as to costs.
SO ORDERED.
Yap, C.J., Fernan, Narvasa, Melencio-Herrera, Cruz, Paras, Feliciano, Gancayco, Bidin, Sarmiento,
Cortes and Grio-Aquino, JJ., concur.
Gutierrez, Jr. and Medialdea, JJ., are on leave.
Footnotes
1.
Application of Lamb, 169 A2d 822, 830, 67 N.J. Super. 29, affd. 170 A2d 34, 34 N.J. 448, citing
18 C.J.S. Convene p. 37.
2.
Alafriz vs. Nable, 72 Phil. 278, 280.
3.
Comment on petition, G.R. No. 82152, p. 18.
4.
Peralta vs. Comelec, L-47771 and others, March 11, 1978, 82 SCRA 30, 55.
5.
134 Phil. 912, 919-920.
6.
EO 273 enumerates in its sec. 102 zero-rated sales and in its sec. 103 transactions exempt from
the VAT.

FIRST DIVISION
[G.R. No. 154028. July 29, 2005.]
PHILIPPINE GEOTHERMAL, INC., petitioner, vs. THE COMMISSIONER OF INTERNAL
REVENUE, respondent.
Poblador Bautista & Reyes for petitioner.
Agnes B. Autenci-Daqui for respondent.
SYLLABUS
1.
TAXATION; TAX EXEMPTION; EXEMPTION OF THE NATIONAL POWER
CORPORATION (NPC) FROM DIRECT AND INDIRECT TAXES, UPHELD BY THE SUPREME
COURT; RATIONALE. In Maceda v. Macaraig, Jr., this Court ruled that Republic Act No. 358
exempts the NPC from all taxes, duties, fees, imposts, charges, and restrictions of the Republic of the
Philippines, and its provinces, cities and municipalities. This exemption is broad enough to include
both direct and indirect taxes the NPC may be required to pay. To limit the exemption granted the NPC
to direct taxes, notwithstanding the general and broad language of the statute, will be to thwart the
legislative intention in giving exemption from all forms of taxes and impositions, without
distinguishing between those that are direct and those that are not. A chronological review of the NPC
laws will show that it has been the lawmakers' intention that the NPC is to be completely tax exempt
from all forms of taxes both direct and indirect. HAIDcE
2.
ID.; TAX REFUND; NATURE THEREOF, CONSTRUED. Tax refunds are in the nature of
tax exemptions, and are to be construed strictissimi juris against the entity claiming the same. Thus, the
burden of proof rests upon the taxpayer to establish by sufficient and competent evidence, its
entitlement to a claim for refund.
3.
ID.; ID.; STATUTORY TAXPAYER AS PROPER PARTY TO SEEK REFUND OF TAX,
JUSTIFIED IN CASE AT BAR. The amount of refund should have been based on the VAT Returns
filed by the taxpayer. Whether NPC had reimbursed petitioner is not the concern of the CTA. It is
solely a matter between petitioner and NPC. For indirect taxes like VAT, the proper party to question or
seek a refund of the tax is the statutory taxpayer, the person on whom the tax is imposed by law and
who paid the same even when he shifts the burden thereof to another. Petitioner has the legal
personality to apply for a refund since it is the one who made the erroneous VAT payments and who
will suffer financially by paying in good faith what it had believed to be its potential VAT liability.
Under the principle of solutio indebiti, the government has to restore to petitioner the sums representing
erroneous payments of taxes. It is of no moment whether NPC had already reimbursed petitioner or not
because in this case, there should have been no VAT paid at all. The Summary of Payments and Official
Receipts issued by a supplier is not a reliable basis for determining the VAT payments of said supplier.
The CTA grossly misappreciated the evidence and erroneously concluded in this case that NPC paid the
VAT. The CTA should have relied on the VAT Returns filed by the taxpayer to determine the actual
amount remitted to the BIR for the purpose of ascertaining the refund due. The presentation of the VAT
Returns is considered sufficient to ascertain the amount of the refund. Thus, upon finding that the
supply of steam to NPC is exempt from VAT, the CTA should have ordered respondent to reimburse
petitioner the full amount of P39,328,775.41 as erroneously paid VAT. aTcIEH
DECISION
QUISUMBING, J p:
The present petition for review on certiorari assails the September 14, 2001 Decision 1 and June 14,
2002 Resolution 2 of the Court of Appeals in CA-G.R. SP No. 54730, which affirmed the April 21,
1999 Decision 3 of the Court of Tax Appeals in C.T.A. Case No. 5541. ScCDET
The facts of the case as found by the Court of Appeals and Court of Tax Appeals are as follows:
Petitioner is a resident foreign corporation licensed by the Securities and Exchange Commission (SEC)
to engage in the exploration, development and exploitation of geothermal energy and resources in the
Philippines. In September 1971, it entered into a service contract with the National Power Corporation

(NPC) to supply steam to the latter.

From September 1995 to February 1996, petitioner billed NPC, Value Added Tax (VAT) computed at
ten percent of the service fee charged on the supply of steam. NPC did not pay the VAT. To avoid any
possible tax deficiency, petitioner remitted VAT equivalent to 1/11 of the fees received from NPC or
P39,328,775.41, broken down as follows:
ExhibitPeriod covered
Payment Date VAT Paid
C
7/95 to 9/95 10/18/95
P8,977,117.26
H
10/95 to 12/951/18/96
11,248,194.31
M
11/95 12/13/95
8,243,090.27
S
1/96 2/19/96
5,213,400.45
W
2/96 3/18/96
5,646,973.12
P39,328,775.41
Petitioner filed an administrative claim for refund with the Bureau of Internal Revenue on July 10,
1996. According to petitioner, the sale of steam to NPC is a VAT-exempt transaction under Sec. 103 of
the Tax Code. 4 Petitioner claimed that Fiscal Incentives Review Board (FIRB) Resolution No. 17-87,
approved by President Aquino pursuant to Executive Order No. 93, 5 expressly exempted NPC from
VAT.
Since respondent failed to act on the claim, on July 2, 1997, petitioner filed a petition to toll the running
of the two-year prescriptive period before the Court of Tax Appeals.
Respondent, in his Answer, 6 averred:
xxx
xxx
xxx
4.
The claim of petitioner Philippine Geothermal Incorporated (PGI for short) for Value-Added
Tax refund has no legal basis.
xxx
xxx
xxx
6.
Fiscal Incentives Review Board (FIRB) Resolution 17-87 specifically restored the tax and duty
exemption privileges of the NPC, including those pertaining to its domestic purchases of petroleum and
petroleum products granted under the terms and conditions of Commonwealth Act 120 as amended,
effective March 10, 1987.
However, the restoration of the tax and duty exemption privileges does not apply to
importations of fuel oil (crude equivalents) and coal, commercially-funded importations (i.e.
importations which include but are not limited to those foreign-based private financial institutions, etc.)
and interest income derived from any source. Such exemption also does not include purchases of goods
and services. Hence, any contracting services of NPC is not qualified for zero-rated VAT (VAT Ruling
250-89, October, 1989).
7.
It is clear from the aforecited FIRB resolution that the tax exemption privilege granted to NPC
does not include purchases of goods and services, such as the supply of steam to NPC.
xxx
xxx
xxx
10.
The subject taxes have been paid and collected in accordance with law and regulation.
11.
In a claim for refund, it is incumbent upon petitioner to show that it is indubitably entitled
thereto. Petitioner's failure to establish the same is fatal to its claim for refund.
12.
The present case is no exception to the basic rule that claims for refund are construed strictly
against claimant for the same partake of the nature of exemption from taxation.
Simply put, the sole issue in this case is whether petitioner's supply of steam to NPC is a VAT-exempt
transaction.
FIRB Resolution No. 17-87 dated June 24, 1987, on which petitioner anchors its claim for tax
exemption, provides as follows:
BE IT RESOLVED, AS IT IS HEREBY RESOLVED, That the tax and duty exemption privileges of
the National Power Corporation, including those pertaining to its domestic purchases of petroleum and
petroleum products, granted under the terms and conditions of Commonwealth Act No. 120 (Creating

the National Power Corporation, defining its powers, objectives and functions, and for other purposes),
as amended, are restored effective March 10, 1987, subject to the following conditions:
1.
The restoration of the tax and duty exemption privileges does not apply to the following:
1.1
Importation of fuel oil (crude equivalent) and coal;
1.2
Commercially-funded importations (i.e., importations which include but are not limited to those
financed by the NPC's own internal funds, domestic borrowings from any source whatsoever,
borrowing from foreign-based private financial institutions, etc.); and
1.3
Interest income derived from any source. 7
This Supreme Court has confirmed this exemption. In Maceda v. Macaraig, Jr., 8 this Court ruled that
Republic Act No. 358 9 exempts the NPC from all taxes, duties, fees, imposts, charges, and restrictions
of the Republic of the Philippines, and its provinces, cities and municipalities. This exemption is broad
enough to include both direct and indirect taxes the NPC may be required to pay. To limit the
exemption granted the NPC to direct taxes, notwithstanding the general and broad language of the
statute, will be to thwart the legislative intention in giving exemption from all forms of taxes and
impositions, without distinguishing between those that are direct and those that are not. HDIaET
A chronological review of the NPC laws will show that it has been the lawmakers' intention that the
NPC is to be completely tax exempt from all forms of taxes both direct and indirect. 10
The ruling dated March 15, 1996, issued to petitioner by Assistant Commissioner Alicia P. Clemeno of
the Bureau of Internal Revenue, likewise confirms this exemption:
In view of the foregoing, this Office is of the opinion as it hereby holds, that the supply of steam by
your client, Philippine Geothermal, Inc. (PGI) to National Power Corporation NPC/NAPOCOR to be
used in generating electricity is exempt from the value-added tax. (BIR Ruling No. 078-95 dated April
26, 1995) 11
On April 21, 1999, the CTA ruled that the supply of steam to NPC by petitioner being a VAT-exempt
transaction, neither petitioner nor NPC is liable to pay VAT. Petitioner, therefore, may rightfully claim
for a refund of the value-added tax paid. The CTA held,
WHEREFORE, in the light of the foregoing, RESPONDENT is hereby ORDERED to REFUND or in
the alternative, ISSUE A TAX CREDIT CERTIFICATE to PETITIONER the sum of P9,012,310.26
representing erroneously paid value added tax. AaCTcI
SO ORDERED. 12
According to the CTA, based on the evidence presented by petitioner, out of the refund claim of
P39,328,775.41, only P9,012,310.26 13 or that pertaining to output tax paid for September 1995 and
the interest on late payment on peso cash call, were not paid by NPC. As to the rest of petitioner's
claim, it appears that the official receipts petitioner issued to NPC included the VAT payable shown in
the Summary of Payments Received from NPC for each production period. HcDATC
Petitioner raised the matter before the Court of Appeals praying that the respondent be ordered to
refund the sum of P39,328,775.41 or issue a tax credit certificate representing erroneous payments of
VAT from September 1995 to February 1996.
The Court of Appeals denied the petition and affirmed the assailed decision of the Court of Tax
Appeals.
Hence this appeal. Petitioner assigns the following errors to the appellate court:
THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN AFFIRMING IN TOTO THE
DECISION OF THE COURT OF TAX APPEALS, BECAUSE:
A).
THE DECISION OF THE COURT OF TAX APPEALS WAS BASED ON A
MISAPPREHENSION OF FACTS, NAMELY, THAT THE NPC PAID P30,316,465.15 AS VAT;
B).
THE PETITIONER HAD ESTABLISHED BY UNDISPUTABLE EVIDENCE THAT IT PAID
THE VAT ON THE SUPPLY OF STEAM TO NPC; ACCORDINGLY, IT IS ENTITLED TO THE
REIMBURSEMENT OF THE FULL AMOUNT OF VAT ERRONEOUSLY PAID. 14
The CTA Decision stated categorically that the supply of steam to NPC is exempt from VAT. However,

it only granted a partial VAT refund of P9,012,310.26, believing that only this amount was not
reimbursed by NPC. The CTA ruled that petitioner was no longer entitled to a refund of the remaining
balance of P30,316,465.15, since it appears that the official receipts petitioner issued to NPC included
the VAT payable shown in the Summary of Payments Received from NPC for each production period.
We disagree with the CTA. In this case, the only issue is the amount of refund to be granted based on
the amount of tax erroneously paid. Tax refunds are in the nature of tax exemptions, and are to be
construed strictissimi juris against the entity claiming the same. 15 Thus, the burden of proof rests upon
the taxpayer to establish by sufficient and competent evidence, its entitlement to a claim for refund. In
the Bureau of Internal Revenue's Ruling dated March 15, 1996, that the supply of steam by petitioner to
NPC is exempt from VAT, petitioner has indubitably established its basis for claiming a refund.
That NPC may have reimbursed petitioner the 10% VAT is not a ground for the denial of the claim for
refund. The CTA overlooked the fact that it was petitioner who paid the VAT out of its own service fee.
The erroneous payments of the VAT were only discontinued when the BIR issued its Ruling No. DA111-96 in favor of petitioner on March 15, 1996. By then, petitioner had already remitted a sizeable
amount of P39,328,775.41 to the Government. The only recourse of petitioner is the complete
restitution of the erroneous payments of taxes. HSTAcI
The amount of refund should have been based on the VAT Returns filed by the taxpayer. Whether NPC
had reimbursed petitioner is not the concern of the CTA. It is solely a matter between petitioner and
NPC. 16 For indirect taxes like VAT, the proper party to question or seek a refund of the tax is the
statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even when he
shifts the burden thereof to another. 17
Petitioner has the legal personality to apply for a refund since it is the one who made the erroneous
VAT payments and who will suffer financially by paying in good faith what it had believed to be its
potential VAT liability.
Under the principle of solutio indebiti, 18 the government has to restore to petitioner the sums
representing erroneous payments of taxes. 19 It is of no moment whether NPC had already reimbursed
petitioner or not because in this case, there should have been no VAT paid at all.
The Summary of Payments and Official Receipts issued by a supplier is not a reliable basis for
determining the VAT payments of said supplier. The CTA grossly misappreciated the evidence and
erroneously concluded in this case that NPC paid the VAT. The CTA should have relied on the VAT
Returns filed by the taxpayer to determine the actual amount remitted to the BIR for the purpose of
ascertaining the refund due. The presentation of the VAT Returns is considered sufficient to ascertain
the amount of the refund. Thus, upon finding that the supply of steam to NPC is exempt from VAT, the
CTA should have ordered respondent to reimburse petitioner the full amount of P39,328,775.41 as
erroneously paid VAT. ASTDCH
WHEREFORE, the petition is hereby GRANTED. Respondent is ORDERED to refund or in the
alternative, issue a Tax Credit Certificate to petitioner in the sum of P39,328,775.41 as erroneously paid
VAT.
SO ORDERED.
Davide, Jr., C.J., Ynares-Santiago, Carpio and Azcuna, JJ., concur.
Footnotes
1.
Rollo, pp. 74-83. Penned by Associate Justice Eloy R. Bello, Jr., with Associate Justices
Eugenio S. Labitoria, and Perlita J. Tria Tirona concurring.
2.
Id. at 85.
3.
Id. at 304-325.
4.
Now Republic Act No. 8424 which provides
Sec. 109. Exempt Transactions. The following shall be exempt from the value-added tax:
xxx
xxx
xxx
(q)
Transactions which are exempt under international agreements to which the

Philippines is a signatory or under special laws, except those under Presidential Decree Nos. 66, 529
and 1590;
xxx
xxx
xxx
5.
WITHDRAWING ALL TAX AND DUTY INCENTIVES, SUBJECT TO CERTAIN
EXCEPTIONS, EXPANDING THE POWERS OF THE FISCAL INCENTIVES REVIEW BOARD
AND FOR OTHER PURPOSES (17 December 1986).
6.
Rollo, pp. 75-76.
7.
Id. at 308-309.
8.
G.R. No. 88291, 8 June 1993, 223 SCRA 217, 223.
9.
SEC. 2. To facilitate payment of its indebtedness, the National Power Corporation shall be
exempt from all taxes, duties, fees, imposts, charges, and restrictions of the Republic of the Philippines,
its provinces, cities and municipalities (Effective 4 June 1949).
10.
Republic Act No. 6395 (10 September 1971) enumerated the details covered by the exemptions
by stating under Sec. 13 that "The Corporation shall be non-profit and shall devote all its returns from
its capital investment, as well as excess revenues from its operation, for expansion . . . the Corporation
is hereby declared exempt from the payment of all taxes, duties, fees, imposts, charges, costs and
service fees in any court or administrative proceedings in which it may be a party, restrictions and
duties to the Republic of the Philippines, its provinces, cities, municipalities and other government
agencies and instrumentalities . . ." Subsequently, Presidential Decree No. 380 (22 January 1974), Sec.
10 made even more specific the details of the exemption of NPC to cover, among others, both direct
and indirect taxes on all petroleum products used in its operation. Presidential Decree No. 938 (27 May
1976), Sec. 13 amended the tax exemption by simplifying the same law in general terms. It succinctly
exempts service fees, including filing fees, appeal bonds, supersedeas bonds, in any court or
administrative proceedings. The use of the phrase "all forms" of taxes demonstrate the intention of the
law to give NPC all the exemption it has been enjoying before. The rationale for this exemption is that
being non-profit, the NPC "shall devote all its return from its capital investment as well as excess
revenues from its operation, for expansion. . ." (Emphasis supplied).
11.
Rollo, p. 154.
12.
Id. at 312.
13.
P9,012,310.11 in some parts of the records.
14.
Rollo, p. 44.
15.
Commissioner of Internal Revenue v. Solidbank Corporation, G.R. No. 148191, 25 November
2003, 416 SCRA 436, 461.
16.
See Commissioner of Internal Revenue v. American Rubber Co., No. L-19667, 29 November
1966, 18 SCRA 842, 853.
17.
See Cebu Portland Cement Co. v. Collector of Internal Revenue, No. L-20563, 29 October
1968, 25 SCRA 789, 797 and Commissioner of Internal Revenue v. American Rubber Co., ibid.
18.
NEW CIVIL CODE, Art. 2154. If something is received when there is no right to demand it,
and it was unduly delivered through mistake, the obligation to return it arises.
19.
National Development Company v. Cebu City, G.R. No. 51593, 5 November 1992, 215 SCRA
382, 396 citing Ramie Textiles, Inc. v. Mathay, Sr., No. L-32364, 30 April 1979, 89 SCRA 586, 592.

[C.T.A. CASE NO. 143. July 31, 1956.]

ALHAMBRA CIGAR & CIGARETTE MANUFACTURING COMPANY, petitioner, vs. THE
COLLECTOR OF INTERNAL REVENUE, respondent.
DECISION
Petitioner Alhambra Cigar and Cigarette Manufacturing Company is a domestic corporation, engaged
in the business of manufacturing cigars and cigarettes. For the years 1949, 1950, 1951, 1952 and 1953,
it filed its income tax returns on the accrual method of accounting and paid the income taxes computed
in accordance therewith. Subsequently, a verification of petitioner's income tax returns for the said
years was conducted by respondent Collector of Internal Revenue, and finding alleged deficiency
income taxes due therefrom, assessed and demanded from petitioner the amounts of P26,369.04,
P42,653.00, P61,308.00, P58,404.00 and P51,826.00, respectively, plus 5% surcharge and 1% monthly
interest on said amounts commencing on January 15, 1956. Hence, this appeal which was submitted for
decision mainly upon a stipulation of facts as follows: casia
1.
That the petitioner herein had filed its income tax returns on the actual basis and on the
following dates:
For the taxable
year 1949,
On March 30, 1950;
For the taxable
year 1950,
On March 6, 1951;
For the taxable
year 1951,
On February 26, 1952;
For the taxable
year 1952,
On March 10, 1953; and
For the taxable
year 1953,
On February 26, 1954.
2.
That the income tax liability of the petitioner for the years 1949 to 1953 had been assessed by
the respondent in the amounts as computed and declared by the petitioner in the respective returns as
follows:
(a)
Assessment No.
A-120966,
for 1949 P114,029.80
(b)
Assessment No.
A-121345,
for 1950 P188,487.00
(c)
Assessment No.
AC-94-52,
for 1951 P343,240.00
(d)
Assessment No.
AC-836,
for 1952 P225,503.00
(e)
Assessment No.
90-AC-00467 for 1953 P221,937.00
which were all paid by the petitioner in due time.
3.
That in a subsequent verification of petitioner's income tax returns for the years 1949 to 1953,
inclusive, which was conducted by a representative of respondent, the following deficiency
assessments based on the figures declared in the returns, were issued against petitioner on November
27, 1954:
(a)
For 1949 (Assessment
No. 90-5C-120966-54-49) P26,369.04
(b)
For 1950 (Assessment
No. 90-5C-121345-54-50) P42,653.00
(c)
For 1951 (Assessment
No. 90-5C-94-54-51) P61,308.00

(d)

For 1952 (Assessment

No. 90-5C-836-54-52)
P58,404.00
(e)
For 1953 (Assessment
No. 90-5C-467-54-53)
P51,826.00
4.
That the said deficiency income tax assessments for the taxable years 1949, 1950, 1951, 1952
and 1953 were arrived at as follows:
1949
Net income as per return
P950,248.34
Add: Disallowances
Director's Fees,
See return
P90,576.98
Salary of Kuenzle
and Streiff,
See return
12,000.00
Bonus of Kuenzle
and Streiff,
See return
50,000.00
Commissions of
Kuenzle and
Streiff, See
returns 51,768.94
Allowance for
loss of A. Muoz
Schedule VI 951.92
Depreciations,
Schedules IV
and V 2,966.48
Local Selling
Expenses, Schedule
III-a 6,088.06
Charges to Sales
Account, Schedule
III-b 4,470.84
Traveling Expenses,
Schedule XI 918.79 219,742.01

Total net profit per investigation
P1,169,990.35

Tax due on the above net income

P140,398.84
Less amount of tax already paid
114,029.80

Deficiency
P26,369.04
=========
1950
Net income as per return
P178,043.06
Add: disallowances:
Directors' Fees,
See return
P90,854.33
Salary of Kuenzle

and Streiff,
See return
12,000.00
Bonus of Kuenzle
and Streiff,
See return
50,000.00
Commissions of
Kuenzle and
Streiff, See return
P54,322.90
Transportation
and Representation,
Schedule II 23,100.00
Repair on Building
Schedule VII 19,931.00
Depreciations,
Schedules IV and V 2,673.42
Local Selling Expenses,
Schedule III-a 5,635.51
Charges to Sales
Account, Schedule III-b
1,036.15
Traveling Expenses,
Schedule XI 2,029.90
266,583.26

Total net income
per investigation
P1,444,626.32

Tax due thereon

P231,140.00
Less Withholding tax already paid
188,487.00

Deficiency
P42,653.00
===========
1951
Net income as per return
P1,254,426.82
Add: disallowances:
Directors' Fees,
See return
P71,669.38
Salary of Kuenzle
and Streiff,
See return
12,000.00
Bonus of Kuenzle
and Streiff,
See return
30,000.00
Commissions of
Kuenzle and
Streiff, See return
45,064.62
Transportation
and Representation,
Schedule II 27,750.00
Allowance for
loss of Macapagal,

Schedule VI 612.37
Fine, Schedule VI
300.00
Depreciations,
Schedule IV and V P3,719.55
Local Selling Expenses,
Schedule II-a 1,097.61
Charges to Sales
Account, Schedule III-b
3,682.54
Traveling Expenses,
Schedule II 3,063.90
218,959.97

Total net income
per investigation
P1,473,386.97

Tax due thereon

P404,548.00
Less amount of tax paid
343,240.00

Deficiency tax
P61,308.00
=========
1952
Net income per return
P833,940.99
Add: disallowances:
Directors' Fees
P58,184.11
Salary of Kuenzle
and Streiff
12,000.00
Bonus of Kuenzle
and Streiff
47,500.00
Commissions of
Kuenzle and
Streiff 28,894.68
Transportation and
Representation,
Schedule II 28,615.14
Allowance for
loss in money
counter, Schedule VI 838.00
Discretionary
Expenses, Schedule VI
6,000.00
Depreciations,
Schedules IV and V 2,692.20
Local Selling
Expenses, Schedule III-a
1,145.31
Charges to Sales
Account, Schedule III-b
4,634.70
Reserve for price
fluctuation
charged to Purchase
Schedule X 18,680.95
208,585.09

Total net income

per investigation
Tax due thereon
Less amount of tax
already paid
Deficiency tax

P1,042,526.08

P283,907.00

225,503.00

P58,404.00
===========

1953
Net income per return
P821,202.51
Add: disallowances:
Directors' Fees
P47,936.60
Salary of Kuenzle
and Streiff
12,000.00
Bonus of Kuenzle
and Streiff
47,500.00
Commissions of
Kuenzle and
Streiff 33,992.58
Transportation
and Representation,
Schedule II 27,576.54
Allowance for
loss in money
counter, Schedule VI 972.00
Depreciation,
Schedule IV 2,167.20
Local Selling
Expenses, Schedule III-a
2,016.98
Charges to Sales
Account, Schedule III-b
4,475.16
Traveling Expenses,
Schedule XI 6,458.83
185,095.89

Total net income
per investigation
P1,006,298.40

Tax due thereon

P273,763.00
Less amount of tax
already paid
221,937.00

Deficiency tax
P51,826.00
===========
5.
That the petitioner had claimed all the abovementioned disallowed items as deductions in its
respective returns.
6.
That the said disallowances were based on the respective grounds contained in the report of
respondent's Supervising Examiner Gregorio Mendoza, copy of which is Annex "A" of the Petition for
Review, and its original, folio 118 of the Bureau of Internal Revenue records of this case, is marked

Exhibit "A" for purposes of this stipulation. LLphil

7.
That the deficiency income tax in question is but a matter of difference of opinion between the
petitioner, on one side, and the respondent, on the other side, whether the deductions which were
disallowed by the respondent and which are enumerated in paragraph 4 of this stipulation, are
deductible or not, and not that the petitioner's income tax returns under consideration are false or
fraudulent.
8.
That the directors' fees, salaries, bonuses, and commission paid to Directors A. P. Kuenzle and
H. A. Streiff for the taxable years 1949, 1950, 1951, 1952 and 1953 are indicated in the financial
statements attached to the petitioner's income tax returns for the said years, as follows:
1949
Directors'
Name Fees Salary Bonus Commission
A.P. Kuenzle P20,585.68 P6,000.00
P25,000.00 P25,884.47
H.A. Streiff 20,585.68
6,000.00
25,000.00
58,884.47
1950
A.P. Kuenzle P20,648.71 P6,000.00
P25,000.00 P27,161.45
H.A. Streiff 20,648.71
6,000.00
25,000.00
27,161.45
1951
A.P. Kuenzle P16,288.43 P6,000.00
P25,000.00 P22,532.31
H.A. Streiff 16,288.43
6,000.00
25,000.00
22,532.31
1952
A.P. Kuenzle P13,223.66 P6,000.00
P23,750.00 P14,447.34
H.A. Streiff 13,223.66
6,000.00
23,750.00
14,447.34
1953
A.P. Kuenzle P10,894.69 P6,000.00
P23,750.00 P16,996.29
H.A. Streiff 10,894.69
6,000.00
23,750.00
16,996.29
9.
That the directors' fees paid to directors W. Eggmann, A. Jung, and E. Rupp for the taxable
years 1949, 1950, 1951, 1952 and 1953 are indicated in the financial statements attached to the
petitioner's income tax returns for the said years, as follows:
DIRECTORS' FEES
W . Eggmann A. Jung
E. Rupp
Total
1949 P16,468.54 P16,468.54 P16,468.54 P49,405.62
1950 16,518.97
16,518.97
16,518.97
49,556.91
1951 13,030.74
13,030.74
13,030.74
39,092.22
1952 10,578.93
10,578.93
10,578.93
31,736.79
1953 8,715.74
8,715.74
8,715.74
26,789.38
10.
That, resuming from paragraphs 8 and 9 of this stipulation, the amounts of
(1)
P90,576.98 for 1949, P90,854.33 for 1950, P71,669.38 for 1951, P58,184.11 for 1952 and
P47,936.00 for 1953, as directors' fees which had been disallowed;
(2)
P12,000.00 for 1949, P12,000.00 for 1950, P12,000.00 for 1951, P12,000.00 for 1952 and
P12,000.00 for 1953, as salaries of Messrs. Kuenzle and Streiff, which had been disallowed;
(3)
P50,000.00 for 1949, P50,000.00 for 1950, P50,000.00 for 1951, P47,500.00 for 1952 and
P47,500.00 for 1953, as bonus of Messrs. Kuenzle and Streiff, which had been disallowed; and
(4)
P51,768.94 for 1949, P54,322.90 for 1950, P45,064.62 for 1951, P28,894.68 for 1952 and
P33,992.58 for 1953, as commission of Messrs. Kuenzle and Streiff, which had been disallowed, are
respectively made up as follows:
Directors'
Salary
Name Fees
Bonus Commissions
1949

A.P. Kuenzle P20,585.68 P6,000.00

P25,000.00 P25,884.47
H.A. Streiff 20,585.68
6,000.00
25,000.00
25,884.47
A. Jung
16,468.54

W. Eggmann 16,468.54

E. Rupp
16,468.54

1950
A.P. Kuenzle P20,648.71 P6,000.00
P25,000.00 P27,161.45
H.A. Streiff 20,648.71
6,000.00
25,000.00
27,161.45
A. Jung
P16,518.97

W. Eggmann 16,518.97

E. Rupp
16,518.97

1951
A.P. Kuenzle P16,288.43 P6,000.00
P25,000.00 P22,532.31
H.A. Streiff 16,288.43
6,000.00
25,000.00
22,532.31
A. Jung
13,030.74

W. Eggmann 13,030.74

E. Rupp
13,030.74

1952
A.P. Kuenzle P13,223.66 P6,000.00
P23,750.00 P14,447.34
H.A. Streiff 13,223.66
6,000.00
23,750.00
14,447.34
A. Jung
10,578.93

E. Eggmann 10,578.93

E. Rupp
10,578.93

1953
A.P. Kuenzle P10,894.69 P6,000.00
P23,750.00 P16,996.29
H.A. Streiff 10,894.69
6,000.00
23,750.00
16,996.29
A. Jung
8,715.74

W. Eggmann 8,715.74

E. Rupp
8,715.74

11.
That all of the salaries, bonuses and commissions paid to Directors W. Eggmann, A. Jung and E.
Rupp for the taxable years 1949, 1950, 1951, 1952 and 1953 had been allowed by the respondent as
deductions (therefore, are not questioned), which are set forth in the financial statements attached to the
petitioner's income tax returns for the said years, as follows:
Salary Bonus Commission
1949
W. Eggmann P15,000.00 P12,000.00 P25,884.47
A. Jung

15,500.00

E. Rupp
12,000.00
12,000.00

1950
W. Eggmann P15,000.00 P20,000.00 P27,161.45
A. Jung

15,000.00

E. Rupp
11,600.00
12,000.00

1951
W. Eggmann P10,375.00 P17,500.00 P22,532.31
A. Jung

13,000.00

E. Rupp
8,730.00
15,000.00

1952
W. Eggmann P12,000.00 P16,650.00 P14,447.34
A. Jung

12,350.00

E. Rupp
9,000.00
14,250.00

1953
W. Eggmann P12,000.00 P16,650.00 P16,996.29
A. Jung

12,350.00

E. Rupp
9,000.00
14,250.00

12.
That the said amounts of directors' fees, salary, bonus and commission paid to Mr. A. P. Kuenzle
and Mr. H. A. Streiff, for the years 1949 to 1953, inclusive, were disallowed by the respondent on the
theory by the respondent that these two individuals were permanently living abroad, as in fact they are.
cdphil
13.
That the petitioner contested the alleged deficiency income taxes assessed by respondent under
letter by petitioner's counsel, dated January 14, 1955, appearing in folios 125 to 142 of the Bureau of
Internal Revenue Records of this case, which is marked as Exhibit "B" for purposes of this stipulation.
14.
That the said protest made by the petitioner was denied by the respondent under the latter's
letter dated April 21, 1955, appearing in folios 147-148 of the Bureau of Internal Revenue records of
the case, which is marked Exhibit "C" for purposes of this stipulation.
15.
That due to the refusal of the petitioner to settle the deficiency income taxes in question, under
the petitioner's contention that such assessments are erroneous, the respondent issued a warrant of
distraint and levy on the property of the petitioner, on April 21, 1955, appearing on folio 149 of the
Bureau of Internal Revenue records of this case, which is marked Exhibit "D" for purposes of this
stipulation.
16.
That by agreement between counsel for both parties, the respondent advised the City Treasurer
of the City of Manila to suspend the execution of the warrant of distraint and levy, under his letter dated
July 20, 1955, appearing on folio 174 of the Bureau of Internal Revenue records of this case, which is
marked Exhibit "B" for purposes of this stipulation.
17.
That the disallowed items for "depreciation" for the taxable years 1949 to 1953 consist of the
depreciation of autos and trucks as well as buildings, totaling P14,218.85. of which the amount of
P8,974.66 is the depreciation of the buildings and the amount of P5,244.19 is the depreciation of the
autos and trucks; and that the petitioner and the respondent hereby agree that, for the years under
consideration, the depreciation of the buildings in the aggregate amount of P8,974.66 be disallowed
and the depreciation of the autos and trucks to be disallowed should be in the aggregate amount of
P1,646.13. The parties will present at the trial of this case a statement of the breakdown of both
amounts indicating the amounts corresponding to each year.
18.
That petitioner hereby agree that the fine of P300.00 be disallowed.
19.
That respondent agrees that deductions for "allowances for loss in money counter" in the
amounts of P838.00 for 1952 and P972.00 for 1953 be allowed.
20.
That the parties reserve to themselves the right to submit additional evidence oral as well as
documentary.
21.
That the officials of the petitioner, who were the recipients of the amounts of P28,100.00 for
1950, P27,243.33 (not P27,750.00 as found by the Bureau of Internal Revenue Examiner Gregorio
Mendoza) for 1951, P28,756.12 (not P23,015.14 as found by the Bureau of Internal Revenue examiner
Gregorio Mendoza) for 1952, and P28,072.51 (not P27,576.54 as found by the Bureau of Internal
Revenue examiner Gregorio Mendoza) for 1953, for "transportation and representation", and the
position they respectively held and the amount paid to them individually are as follows:
Name Position Hold 1950 1951 1952 1953
Bogo, D.,
Supervisor,
Valley Branch

687.10
Eggmann, W., General Manager
P3,000.00
P3,000.00
P3,000.00
P3,000.00
Fernandez, M.,
Sales Supervisor
2,400.00
2,400.00
831.15
Ferrandiz, M., Factory Supervisor 2,400.00
2,400.00
2,400.00
1,292.05

Garcia, R.,
Factory Supervisor 1,200.00
1,000.00
900.00 1,200.00
Huber, J.,
Asst. Manager,
Valley Branch 1,200.00
28.33 613.01 2,000.00
Keller, F.,
Sales Manager
3,000.00
3,000.00
3,000.00
3,000.00
Rodinger, C., Chief, Engineer
3,000.00
3,000.00
3,000.00
3,000.00
Ramp, W.,
Supervisor,
Valley Branch 500.00 500.00

Reupke, J., Factory

Superintendent
3,000.00
3,000.00
3,000.00
2,704.11
Rupp, E.,
Manager,
Valley Branch 3,000.00

Schmid, H., Asst. Accountant

685.48
Roeder, N., Asst. Engineer

970.98 500.00
Streuli, F.,
Supervisor,
Valley Branch 1,200.00
1,000.00
1,200.00
328.77
Sulzer, N.
Chief Accountant
3,000.00
3,000.00
3,000.00
3,000.00
Teucher, W., Factory Accountant
3,000.00
3,000.00
3,000.00
Tomelden, B., Auditor

675.00 900.00 675.00

Wehrli, G., Asst. Sales
Manager
1,200.00
1,240.00
2,940.98
3,000.00

TOTAL
P28,100.00 P27,243.33 P28,756.12 P28,072.51

TOTAL, as per
B.I.R. P18,100.00 P27,750.00 P28,015.14 P27,576.54

Difference

(P596.67)
P740.96
P495.97

22.
That the total amounts declared by the petitioner as deductions, for "traveling expenses",
actually paid to its officials and other employees were: P9,987.02 for 1949, P11,365.54 for 1950,
P11,695.58 for 1951, P5,293.60 for 1952 and P16,998.45 for 1953; of which amounts the following
traveling expenses were allowed and disallowed, as deductions:
Total Amount
Beneficiary Claimed
Allowed
Disallowed
1949
Mrs. J. Reupke
(For passage to
United States) P918.79
None P918.79
1950
Mr. and Mrs. H.
Sulzer (For
passage to
Europe and
return) P3,751.00
P1,875.50
P1,875.50
Mr. and Mrs. H.
Sulzer (For
additional payment
for passage from
Europe to Manila)
308.80 154.40 154.40

1951
Mr. and Mrs. W.
Eggmann and child
(For passage to
Europe and return) P5,106.50
P2,042.60
P3,063.90
1953
Mr. and Mrs. M.
Ferrandiz (For
passage to Europe
and return) P4,897.20
P2,448.60
P2,448.60
Mr. and Mrs. J.
Reupke (For
passage to Europe
and return) P4,939.20
P2,469.60
P2,469.60
Mr. and Mrs. H.
A. Streiff (Onehalf of cost of
passage from
Europe to Manila
and to Europe)
P3,079.65
P1,539.82
P1,539.83
23.
That the amount of P8,974.66, representing depreciation of buildings, which the petitioner and
the respondent have agreed to be disallowed, subject matter of paragraph 17 of this stipulation, is
broken down in respect to the years they correspond as follows:
For 1949
P1,543.42
For 1950
1,548.42
For 1951
1,548.42
For 1952
2,167.20
For 1953
2,167.20

P8,974.66
=========
The amount of P1,646.12 representing depreciation of autos and trucks, which the petitioner and the
respondent have agreed to be disallowed, also subject matter of paragraph 17 of this stipulation,
corresponds to 1951. LLjur
As stated elsewhere in the stipulation of facts, simultaneous with the filing of the petition for review,
petitioner filed a motion to restrain respondent and/or his representatives from executing, or causing the
execution of, the warrant of distraint and levy issued by the latter on April 21, 1955, for the collection
of the alleged deficiency income taxes in question. However, by agreement of the parties, respondent
suspended the execution of the said warrant of distraint and levy. The first question, therefore, is
whether or not respondent's right to collect through summary administrative methods the alleged
deficiency income taxes for the years 1949 to 1953, inclusive, has already prescribed.
There is no dispute that the income tax returns of petitioner for the years in question were filed on the
following dates:
For the taxable year 1949
March 30, 1950
For the taxable year 1950
March 6, 1951
For the taxable year 1951
February 26, 1952
For the taxable year 1952
March 10, 1953
For the taxable year 1953
February 26, 1954.
Under Section 51 (d) of the National Internal Revenue Code, in case of erroneous, false or fraudulent

returns, the collector of Internal Revenue shall, upon the discovery thereof, at any time within three
years after said return is due, or has been made, make a return upon information obtained as provided
for in the said code or by existing law, or require the necessary corrections to be made, and the
assessment made by him thereon shall be paid by such person or corporation immediately upon
notification of the amount of such assessment. The established jurisprudence under this provision of
law is that after three years have elapsed from the date on which income tax returns which have been
found to be false, fraudulent or erroneous may have been made, the Collector of Internal Revenue
cannot make any summary collection thru administrative methods but must do so thru judicial
proceedings. (See Collector of Internal Revenue vs. Villegas, 56 Phil. 554; Collector of Internal
Revenue vs. Haygood, 65 Phil. 520; Philippine Sugar Development Co. vs. Posadas, 68 Phil. 216). This
doctrine has been consistently followed and applied by this Court in several cases, among which are,
Jose Zulueta v. Collector of Internal Revenue, C.T.A. Case No. 62; Jose Yulo vs. J. Antonio Araneta,
C.T.A. Case No. 84; Carmen Cuenco vs. Collector of Internal Revenue, C.T.A. Case No. 113; and
William Li Yao vs. Collector of Internal Revenue, C.T.A. Case No. 30. As the warrant of distraint and
levy was issued on April 21, 1955 on the property of petitioner, it follows that respondent can no longer
collect the alleged deficiency income taxes of the former for the taxable years 1949, 1950 and 1951,
through summary administrative proceedings.
This brings us to the principal question involved in this case, as raised by the pleadings and as
elucidated in the stipulation of facts, whether or not the disallowance by respondent of the items
mentioned therein claimed by petitioner as deductions in its income tax returns for the years 1949 to
1953, inclusive, is legally justified.
At the outset, it will be noted that most of the items in question involve expenses claimed by petitioner
as incurred in carrying on its business and therefore allowable as deductions for income tax purposes.
Under the provisions of Section 30 (a) (1) of the National Internal Revenue Code, a taxpayer is not
allowed to claim expenses as deductions unless the same are ordinary and necessary in the maintenance
and operation of his trade or business. These include a reasonable allowance for salaries or other
compensation for personal services actually rendered and traveling expenses while away from home is
the pursuit of a trade or business. And in a suit for the allowance of items representing business
expenses, the burden of establishing that the same are ordinary and necessary rest upon him in order to
show that he is entitled to the deductions which the Collector of Internal Revenue has disallowed.
"The allowance of deductions is a matter of legislative grace and the burden is upon the taxpayer to
show that the statute sanctions the deductions claimed." (Woolford Realty Co. vs. Rose, 286 U.S. 319;
Brown vs. Helvering, 291 U.S. 193; New Colonial Ice Co. vs. Helvering, 292 U.S. 435; McDonald vs.
Comm. 323 U.S. 51.)
Consequently, for purposes of determining taxable net income, deductions will have to be limited to
amounts which, in accordance with the evidence presented, are no more than ordinary and necessary
expenses of carrying on the business.
In the light of the above, we shall now discuss the different disputed items ad seriatim.
1.
Directors' Fees, Salaries, Bonuses and Commissions of Kuenzle and Streiff for 1949 to 1953,
inclusive, shown and indicated under Paragraph 8 of the Stipulation of Facts: A. P. Kuenzle and Harry
A. Streiff are the non-resident president and vice-president, respectively, of petitioner, a resident
corporation organized and existing under the laws of the Philippines. They are also directors and
Stockholders of petitioner, owning, together with their families, practically all the shares of stock. In
accordance with the by-laws of the corporation they are supposed to perform all duties pertaining to the
general supervision of the officers. In view of their permanent absence from the Philippines, however,
they perform only those duties, which, by their nature, could be done by means of directives.
Consequently, their actual services are largely limited to the statement of the general policies of
petitioner without executive supervision and functional control over the implementation of such
policies and without any means of checking whether the same are put into proper operation. While

regular correspondence is maintained between them and petitioner, they act only on matters that are
brought to their personal attention.
It follows that the evidence before us supports the conclusion that personal services actually rendered
by A. P. Kuenzle and Harry A. Streiff are not as worthless as determined by respondent. A reasonable
allowance therefor, however, would not, in our opinion, exceed P6,000.00 per annum each as has been
determined by petitioner and a bonus not to exceed the amount of their respective salary.
We do not have here any evidence regarding the nature, extent or value of the services of A. P. Kuenzle
and Harry A. Streiff so as to entitle them to further compensation in forms of commissions. Neither is
there any showing as to the basis of apportionment of such commissions, whether the nature and extent
of their services, the amount of their stockholdings, the value of their services, or otherwise. While this
Court should be slow to reject the determination of a corporation as to the reasonableness of the
salaries of its employees, petitioner has not presented any proof that a correct determination would
exceed that of respondent. Since the amounts of commissions given to A. P. Kuenzle and Harry A.
Streiff do not comport with the statutory qualifications of tax deductions, same are therefore disallowed
as determined by respondent.
The same is true with regards to the directors' fees paid to A. P. Kuenzle and Harry A. Streiff during the
years in question. The record of the case does not show the nature or extent of the services rendered by
the board of directors or the individual members thereof, the basis of apportionment, the value of their
services, or the reasonableness of the purported directors' fees. Neither is there any showing that A. P.
Kuenzle or Harry A. Streiff presided over or even attended any of the meetings of the board of directors
and/or of the stockholders. In fact, nowhere and in no wise does the record show of any meeting of the
board of directors during all the years 1949, 1950, 1951, 1952 and 1953.
We believe we do not find it necessary to determine here whether the amounts allegedly representing
directors' fees paid by petitioner to these officers as compensation for their services as directors cannot
be allowed as ordinary and necessary expenses within the purview of Section 30(a)(1) of the National
Internal Revenue Code. However, suffice it to say that these extraordinary and unusual amounts paid
by petitioner to these directors in the guise and form of compensation for their supposed services as
such, without any relation to the measure of their actual services, cannot be regarded as ordinary and
necessary expenses within the meaning of the law. While petitioner argues that as president and vicepresident, respectively, the entire salaries bonuses, commissions and directors' fees paid to a A. P.
Kuenzle and Harry A. Streiff represent compensation for services actually rendered, it should be noted
that for purposes of determining taxable net income, deductions are limited to amounts which are
reasonably commensurate with the personal services actually rendered. And in view of the
circumstance that these individuals practically own all the shares of stock of the corporation, we would
require more convincing proof of the reasonableness of their purported compensation and that proof
must also show that such alleged salaries, bonuses, commissions and directors' fees are not disguised
distributions of profits.
The pretension has heretofore been made that the fact that the operations of petitioner during the years
in question have resulted in substantial gains, as shown by the income tax returns of the corporation for
said years, is eloquent proof that the policies laid down by A. P. Kuenzle and H. A. Streiff have been of
great benefit to petitioner. While it might superficially appear that the total compensation paid to these
non-resident executives, who practically own all of the shares of stock of petitioner, is reasonable in
proportion to corporate earnings, it does not appear that these amounts given to them as compensation
are reasonable in comparison to their actual services. To test salary deductions alone by determining the
ratio of the total compensation of two non-resident officers, owning practically all the shares of stock,
in proportion to earnings, would result in the disregard of the statutory requirement of substantial
relation between individual service and the compensation therefor, and the recognition of a
mathematical gross maximum for two individuals who are in a position to dictate, by reason of
proprietary and official considerations, the fixing of their corporate salaries. There is no evidence of the

prevailing salaries, bonuses, commissions and other fees paid to employees actually and personally
performing similar services in comparable enterprises, the availability or non-availability of others to
fill the offices held by them and the salary policy of petitioner as to all its employees. Neither is there
evidence of how much petitioner would have to pay to get others to do what A. P. Kuenzle and H. A.
Streiff did. Nevertheless, the record of the case shows that there were services performed by them and
as best, we determined the deduction indicated by the evidence.
2.
Directors' Fees paid to W. Eggman, A. Jung and E. Rupp for the years 1949, 1950, 1951, and
1952 and 1953, as shown and indicated in paragraph 9 of the Stipulation of Facts: Petitioner deducted
these amounts among its business expenses but respondent disallowed them on the ground that the
election of W. Eggmann, A. Jung and E. Rupp to the board of directors was null and void per se. After
petitioner has presented its evidence to prove that the ground relied upon by respondent for the
disallowance of the directors' fees has no basis in law or in fact, the latter, however, admitted in his
memorandum that W. Eggmann, A. Jung and E. Rupp are members of the board of directors but argues
for the first time for the disallowance of these deduction on the ground that petitioner has not sustained
the burden of showing that these individuals have rendered actual services commensurate to their fees
as directors. In our opinion, the argument must fail. cdtai
Without in the least attempting to express an opinion whether these amounts exceeded those which, as
a matter of common knowledge, are usually paid to directors for the discharge of their customary
duties, we believe that, after the case has already been submitted for decision, respondent cannot
anymore change his stand and raise for the first time in his memorandum the question as to whether or
not W. Eggmann, A. Jung and E. Rupp have rendered actual services as directors of the corporation.
Otherwise, if we are to permit respondent to switch from one view to another whenever his
convenience suits him, and at this stage of the proceedings after he has already admitted of the
weakness of his ground, would be tantamount to allowing him to place taxpayers in a position where,
in the prosecution of their tax cases, there would be nothing to guide them but the whims and caprices
of his subordinate officers. Respondent relies upon the theory that his assessment is prima facie correct
unless controverted, but having predicated the disallowance of the directors' fees in question solely on
his belief that the election of the recipients as directors is null and void per se, we believe he cannot
now successfully insist that the same should also be disallowed on the alleged ground that petitioner
has not established that W. Eggmann, A. Jung and E. Rupp did not render services reasonably
commensurate with their compensation. More so, after he had already admitted that the basis of his
assessment is groundless and at a stage of the proceedings where petitioner cannot anymore defend
itself. The amounts paid as directors' fees to W. Eggmann, A. Jung and E. Rupp for the years in
question and disallowed by respondent should therefore be allowed.
3.
Local Selling expenses: The next disputed item refers to the selling expenses from 1949 to
1953, inclusive, involving an aggregate amount of P15,983.47 broken down as follows: 1949
P6,039.06, 1950 P5,635.51, 1951 P1,097.61, 1952 P1,145.31 and 1953 P2,016.98.
Respondent disallowed this item on the ground that at the end of every semester, the same is debited to
this account and credited to accounts payable with the explanation "Salesman Liquidation." Inasmuch
as the credits to accounts payable do not represent specific liabilities but in the nature of reserves,
respondent maintains that they are not allowable deductions.
The record shows, thru the testimony of Mr. W. Eggmann, that these disputed amounts are not reserves
but expenses actually incurred by petitioner's salesmen paid to them and made to accrue as of the end
of the year in conformity with sound accounting principles to match income earned with expenses
incurred. It appearing that the expenses in question are actual business expenses which form part of the
normal selling costs, consequently, they are deductible from the gross income for income tax purposes.
4.
Transportation and Representation Allowances: The recipient of the transportation and
representation allowances, who are all members of the staff of petitioner, the position they respectively
held and the amounts paid to them individually are set forth in paragraph 21 of the stipulation of facts.

Petitioner contends that since the allowances in question have been actually disbursed and received by
the respective recipient, it has already incurred a business expense deductible under the income tax law.
On the other hand, respondent maintains, after petitioner has presented its evidence, that in the cases of
C. Reginger, S. Tomelden, M. Fernandez, R. Garcia, J. Reupke, H. Schmid R. Roeder, H. Sulzer and W.
Teucher, the nature of their work is such that their positions do not require traveling or representation
expenses. While he argues that the expenses claimed for these individuals are not reasonable nor
necessary in the pursuit of the business of the corporation and consequently are not deductible,
respondent does not question anymore the reasonableness and necessity of the expenses of the other
recipients. With regard to D. Bogo, W. Eggmann, M. Ferrandiz, J. Huber, F. Koller, W. Remp, E. Rupp,
P. Streuli and G. Wehrli, we shall therefore consider that respondent is satisfied that the two
requirements of the low of "ordinary and necessary" and "trade or business" have been duly fulfilled. It
follows that their respective transportation and representation allowances, as shown in paragraph 21 of
the stipulation of facts, are deductible. Hence, the following discussion will be limited to these
employees whose transportation and representation allowances are disputed by respondent.
As already stated above, even if the expense is incurred in carrying on a trade or business, it must also
be an ordinary and necessary expense proximately related to the trade or business. "Necessary" may
mean merely "appropriate" or "helpful" to the business; but "ordinary" connotes a payment which is
normal in relation to the business of the taxpayer and the circumstances. (See Deputy vs. Du Pont, 308
U.S. 488).
Now, how appropriate and helpful were the expenditures in question in the operation or maintenance of
petitioner's business? While this Court should be slow to override the judgment of petitioner which led
to these payments, as such payments may be assumed to have been required by its business, the record
of the case is silent as to the motivations and requirements which prompted petitioner to conclude that
such disbursements were necessary to the conduct of its business. Neither is there any evidence that the
transportation and representation allowances in question have some reasonably normal relation to the
ordinary conduct of petitioner's business and the circumstances surrounding their payments. We believe
that expenses are not deductible merely because they are incurred in connection with the business of
the taxpayer. As the law requires, the payments must also constitute necessary and ordinary expenses of
carrying on the business. Since petitioner has not sustained the burden of showing that the
transportation and representation allowances paid to C. Reginger, B. Tomelden, M. Fernandez, R.
Garcia, J. Reupke, H. Schmid, R. Roeder, H. Sulzer and W. Teucher during the years in question were
in fact part of its ordinary and necessary expenses, same must, for this reason, be disallowed.
5.
Charges to Sales Account: This item refers to "charges to sales account" from 1949 to 1953,
inclusive, representing a total amount of P18,299.39 broken as follows: 1949 P4,470.84, 1950
P1,035.15, 1951 P3,682.54, 1952 P4,634.70 and 1953 P4,475.16. Respondent disallowed this
item on the ground that the amounts represented by it, are in the nature of reserves like charges to
selling expenses and are not actual expenses incurred. In like manner, the testimony of Mr. W.
Eggmann in this regard, which was never contradicted, is to the effect that these amounts represent
accrual of turnover discounts to petitioner's wholesale customers pertaining to sales made during the
year but only paid at the close of the calendar year. Such being be case, and it appearing that they were
not disallowed by respondent because they are not ordinary and necessary expenses of carrying on the
business of petitioner, we believe that they are deductible for purposes of determining taxable net
income.
6.
Depreciation (1949 to 1953, inclusive: The parties have agreed that the disallowed items for
depreciation for the years in question consist of the depreciation of autos and trucks, as well as
buildings, totaling P14,218.85, of which the amount of P8,974.66 is the depreciation of the buildings
and the sum of P5,244.19 is the depreciation of the autos and trucks. Both parties have also agreed that
the depreciation of the buildings in the said amount of P8,974.66 is to be disallowed and the
depreciation of the autos and trucks to be disallowed should be in the sum of P1,646.13, (par. 17,

Stipulation of Facts). The breakdown of the amount of P8,974.66 in respect to the years they
correspond is as follows: 1949 P1,543.42, 1950 P1,548.42, 1951 P1,548.42, 1952
P2,167.20 and 1953 P2,167.20. The amount of P1,646.12 representing depreciation of autos and
trucks corresponds to 1951. (par. 25, Stipulation of Facts). We shall consider these amounts in the
computation of the entire taxes.
7.
Allowances for losses of Muoz (for 1949 only), Macapagal (for 1951 only) money counter (for
1952 and 1953 only), and fine: With respect to the "allowances for losses in money counter" in the
amounts of P838.00 for 1952 and P972.00 for 1953, respondent has agreed not to question the
deductibility of the same. (par. 19, Stipulation of Facts). The petitioner has agreed also that the item on
fine amounting to P300.00 be disallowed. It is therefore unnecessary to pass upon these items.
Anent the allowance for loss of funds in the custody of Macapagal in 1951, the amount involved is
P612.37 as shown by paragraph B of the petition for review and paragraph 4 of the stipulation of facts.
While petitioner claims that the amount involved is only P261.37, there being no proof presented to this
effect, the sum stated in the stipulation of facts should governed. Respondent contends that this amount
not a deductible item because it can be paid or compensated by the employee concerned. On the other
hand, petitioner insists that it is a deductible item for it was not actually recovered from the employee.
It has already been held that the deduction for losses is forfeited to the extent that the taxpayer could
have mitigated his loss. In the case of Messenger Corp. vs. Smith, 136 F (2d) 172, the taxpayer had
failed to file a claim against its bankrupt debtor, because the estate was believed to be too small to
warrant the action. The loss was denied to the extent that recovery could have been had. For tax
purposes, the court hold, the taxpayer was under duty to file its claim. Without trying to express an
opinion whether the potential recovery factor carries with it an action in court, in the instant case,
petitioner has not shown of any step or steps which it had taken to recover or even mitigate the loss.
And more so, when the person concerned is its own employee.
With regards to the allowance for the loss of Muoz for 1949, it appears that Muoz was petitioner's
salesman stationed in San Fernando, Pampanga. He made a sale on credit in Angeles and later on sent
his driver to collect the money. His driver was held up and robbed of his collection amounting to
P1,903.04. This occurred sometime in November of 1948, but petitioner's management had the matter
investigated only in the early part of 1949. After it was satisfied that Muoz or his driver could not be
entirely blamed for such loss, petitioner borne one-half of the sum of P1,903.04, or P951.92 and the
other half was paid by Muoz. The deductibility of the said amount of P951.92 borne by the
corporation is now the point in controversy between the parties.
Respondent contends that the responsible employee should be the one to shoulder the burden and not
the corporation; and if ever the loss would be allowed, it should have been claimed in 1948, not in
1949. Petitioner claims otherwise.
Under the circumstances surrounding the disappearance of the money in question, petitioner took every
step to mitigate, if not to recover, its loss. While it does not appear that an action was brought for the
recovery thereof, an investigation was conducted by petitioner and the facts brought out therein were
such that the salesman was not entirely to be blamed. Respondent admits that the loss resulted from
robbery, and although the liability of the salesman was found by the corporation to be doubtful,
petitioner was able to reduce its loss by one-half. And on the contention of respondent that the loss
should have been claimed in 1948, it will be noted that the law contemplates the deduction from gross
income of losses only which are fixed by identifiable events. The income tax law is concerned only
with realized losses and it was only in 1949 that petitioner reasonably ascertained the fact of and the
amount of the loss so as to justify its deduction. Before that, the loss was not yet evidenced by a closed
and completed transaction as the possibility of reimbursement was still real and substantial. The said
amount of P951.92 is therefore an allowable deduction in 1949. cdta
8.
Traveling Expenses: The total amounts declared and claimed by petitioner as deductions for
traveling expenses paid to its officials and employees, together with their families, were P9,987.02 for

1949, P11,365.54 for 1950, P11,695.58 for 1951, P5,293.60 for 1952 and P16,998.45 for 1953, (par.
22, Stipulation of Facts). All these total amounts were claimed by petitioner as business expenses, but
respondent disallowed P918.79 for 1949, P2,029.90 for 1950, P3,063.90 for 1951 and P6,458.83 for
1953, on the ground that they are personal in nature, having been incurred as traveling expenses of the
wives of certain employees of the corporation.
As correctly stated by petitioner in its memorandum, the amounts in question represent additional
compensation paid by the corporation to the recipients thereof. Hence, the allowance of these
deductions from gross income does not turn on whether they were incurred in the pursuit of a trade or
business while away from home, but depends on whether they constitute ordinary and necessary
expenses paid or incurred in carrying on the business of petitioner.
It is already well-settled that even though payment is intended to be and is compensation for services
rendered, only such part thereof may be deducted as represents reasonable compensation under all the
circumstances. It is also well-established that the burden of proof of reasonableness is on the taxpayer,
and a claim for salary deduction will be disallowed unless its reasonableness is proved. Thus, amounts
paid by a corporation to its officers having no substantial relation to the measure of their services and
disproportionate to their value, are not in reality payment for service, and cannot be regarded as
"ordinary and necessary expenses" within the meaning of the law; and that such amounts do not
become part of the "ordinary and necessary expenses" merely because the payments are made in
accordance with an agreement between the corporation and its officers. Even if binding upon the
parties, such an agreement does not change the character of the purported compensation or constitute it,
as against the government, an ordinary and necessary expense. (See Botany Worsted Mills vs. U.S., 278
U.S. 282, 73 L Ed. 379, 49 S. Ct. 129 (1929).
In the light of the above, does the record of the case show whether the amounts disallowed by
respondent constitute ordinary and necessary expenses paid or incurred by petitioner in carrying on its
business? While it is true that there is no fixed yardstick by which the question of the reasonableness of
the compensation in any particular case can be measured, petitioner has not presented any evidence
from which this Court can make the necessary inference that the amounts disallowed by respondent
were in fact parts of its ordinary and necessary expenses. The evidence for petitioner shows that the
employment contracts between the corporation and the recipients of the traveling expenses in question,
who are foreigners, provide that the latter are entitled to transportation expense to the Philippines for
themselves and their families, and also for home leave to their respective countries after every few
years in this country, with the traveling expenses for themselves and their families paid by the
corporation, but as stated above, such an agreement does not change the character of the purported
compensation or constitute it, as against the government, an ordinary and necessary expense. The
amounts claimed by petitioner as deductions for traveling expenses under this item must, for this
reason, be therefore disallowed.
9.
Repair of Building, 1950: This item refers to the sum of P19,931.05 representing expenses
for the construction of a new fence around a certain part of petitioner's factory compound in Manila,
which respondent contends as chargeable to capital expenditures. Petitioner charged off the entire
amount as expense during the year in which it was incurred, instead of charging it to capital
expenditures and depreciating its value.
In determining whether an expenditure is a capital one or is chargeable against operating income, it is
necessary to bear in mind the purpose for which the expenditure was made. To repair is to restore to a
sound state or to mend, while a replacement connotes a substitution. A repair is an expenditure for the
purpose of keeping the property in an ordinarily efficient operating condition. It does not add to the
value of the property, nor does it appreciably prolong its life. It merely keeps the property in an
operating condition over its probable useful life for the uses for which it was acquired. Expenditures for
that purpose are distinguishable from those for replacements, alterations, improvements or additions
which prolong the life of the property, increase its value, or make it adaptable to a different use. The

one is a maintenance charge, while the others are additions to capital investment which should not be
applied against current earnings. (See Illinois Merchants Trust Co., Executor, 4 BTA 103; J. Bently
Squier, 13 BTA 1225.)
Theoretically, the expenses chargeable to earnings include the general expenses of keeping up the
organization of the company, and all expenses incurred in operating the works and keeping them in
good condition and repair; whilst expenses chargeable to capital include those which are incurred in the
original construction of the works, and in the subsequent enlargement and improvement thereof.
(Union Pacific R. R. Co. vs. United States, 99 U.S. 402).
Applying these principles to the facts of the case, there is no question that by this expenditure, there
was an original construction of a hallow block fence with iron grills around the compound occupied by
petitioner and in the subsequent improvement thereof. The record of the case is clear that the amount in
question did not merely involve the cost of incidental repairs for the purpose of keeping the property of
the corporation in an ordinarily efficient operating condition, but an addition which prolonged the life
of such property and which materially increased its value. It was not just a maintenance charge or an
expense of keeping up the business of petitioner. We are therefore of the opinion that the sum of
P19,931.05 referred to under this item is a capital expenditure which should not be applied against
current earnings.
10.
Discretionary Expenses of Mr. Eggmann for 1952: Mr. Eggmann is the treasurer and acting
manager of petitioner and in 1952, he was given the sum of P6,000.00 to be spent as in his judgment
will redound to the benefit and interest of the corporation. It appears that the said amount was spent by
him in so many little items that it would be very difficult to classify them. While petitioner claims that
it was actually spent for such purpose, respondent however disallowed the same on the ground that the
former failed to prove that the expenditure constitute an ordinary and necessary business expense of the
corporation. In our opinion, the argument should be sustained.
The giving of discretionary funds to top executives of business enterprises is a common practice in any
industry. However, since in most instance there is a large personal element involved, the necessity of
such expenditure or the direct business benefits to be derived therefrom is a prerequisite to the
allowance of the same as deductible expense. These expenses must be not only necessary but also
ordinary within the accepted and known meanings of these two terms. And the fact that the taxpayer
thinks that the expense is a proper deduction will not control because to be deductible, it must meet the
test laid down by the income tax law.
Without in the least attempting to belittle Mr. Eggman's judgment as to the necessity of such
expenditures because of the substantial difference in opinion as to their value, it will be noticed that
petitioner failed to prove the direct business benefits which reasonably stemmed from the expenditure
of the discretionary fund in question. Petitioner claims that the said amount was spent in connection
with its business but, no evidence to this effect was presented by it. It needs hardly necessary to add
that to be deductible, those expenses must be both ordinary and necessary and incurred in carrying on
the business of the corporation, and the burden of proof is upon petitioner to show the definite
reasonable business purpose behind such expenditures and that the same were reasonably calculated to
accomplish that purpose. We are into unmindful of the fact that, perhaps, because the results flowing
from these expenditures are more or less intangible in nature, it may sometimes be difficult to prove
that the payments constituted ordinary and necessary business expenses, but the record of the case
shows that there was not even a substantial compliance with the requirements of the law. For this
reason, the amount of P6,000.00 representing discretionary expenses of Mr. Eggmann for 1952 should
therefore be disallowed.
11.
Reserve for Price Fluctuation for 1952: The last disputed item refers to reserve for price
fluctuation for 1952, which involved the sum of P18,680.95. The disallowance of this item by
respondent is based on the general proposition that amounts deposited in a reserve to cover contingent
liabilities cannot be deducted until such liabilities become fixed.

It appears that in 1950, petitioner created a "Reserve for Price Fluctuation" but such reserve was not
claimed as a deduction for that year, since no loss chargeable to this account was actually sustained. In
1952 the corporation sustained an actual loss on a sale of raw leaf tobacco and such loss was
chargeable in that year against this reserve which was created for the purpose in 1951. Clearly
therefore, the amount in question represented loss actually sustained by petitioner in 1952 and is in
conformity with the theory of respondent that if the price really fluctuates, the loss will be deducted in
the year it is sustained. Petitioner having claimed the deduction in question for 1952, the year when the
loss was actually sustained, and not for 1951 when the reserve was created, the amount of P18,680.95
should therefore be allowed.
From the foregoing, we are therefore of the opinion and so hold that: (1) the directors' fees and
commissions of A. P. Kuenzle and H. A. Streiff for 1949 to 1953, inclusive, as itemized in paragraph 8
of the stipulation of facts, are totally disallowed but their entire salaries and yearly bonuses not to
exceed the amount of their respective salary rate are allowed; (2) the entire directors' fees of W.
Eggmann, A. Jung and E. Rupp for the years 1949, 1950, 1951, 1952 and 1953, as indicated in
paragraph 9 of the stipulation of facts, are considered as allowable deductions; (3) the local selling
expenses of petitioner from 1949 to 1953, inclusive, involving an aggregate sum of P15,983.47,
appearing in paragraph 4 of the stipulation of facts, are deductible from the gross income; (4) the
transportation and representation allowances paid to C. Reginger, B. Tomelden, M. Fernandez, R.
Garcia, J. Reupke, H. Schmid, R. Roeder, M. Sulzer and W. Teucher during the years 1950, 1951, 1952
and 1953, as set forth in paragraph 21 of the stipulation of facts, are disallowed, while those of D.
Bogo, W. Eggmann, M. Ferrandiz, J. Huber, F. Koller, W. Ramp, E. Rupp, P. Streuli and G. Wahrli are
allowed; (5) the charges to sales account from 1949 to 1953, inclusive, representing a total amount of
P18,299.39, as shown in paragraph 4 of the stipulation of facts, are deductible; (6) the depreciation of
building and that of the autos and trucks to be disallowed are the sums of P8,974.66 and P1,646.13,
respectively, which are broken down in respect to the years they correspond in paragraph 23 of the
stipulation of facts; (7) the allowances for losses in the money counter in the amounts of P838.00 for
1952 and P972.00 for 1953 are allowed, although the fine of P300.00 is disallowed, and with regards to
the allowance for loss of funds in the custody of Macapagal in 1951 in the sum of P612.37, same is not
deductible while that of Muoz for 1949 in the amount of P951.92 is an allowable deductions; (8) the
amounts of P918.79 for 1949, P2,029.90 for 1950, P3,063.90 for 1951 and P6,458.03 for 1953
representing traveling expenses disallowed by respondent are not allowable deductions; (9) the sum of
P19,931.05 representing expenses for the construction of a new fence around petitioner's compound is
a capital expenditure so that it cannot be charged off as expense in 1950; (10) the discretionary
expenses of Mr. Eggmann for 1952 in the amount of P6,000.00 is disallowed; and (11) the reserve for
price fluctuation for 1952 in the amount of P18,680.95 is allowed.
WHEREFORE, the appealed decision is hereby modified in the sense that petitioner Alhambra Cigar a
Cigarette Manufacturing Company should pay respondent Collector of Internal Revenue the sums of
P16,008.30 P27,157.00, P38,888.00, P32,092.00, and P32,108.00, representing deficiency income
taxes for the years 1949, 1950, 1951, 1952 and 1953, respectively, or a total of P146,253.30, computed
as follows: LLpr
1949
Net income as per return
P950,248.34
Add: disallowances
Directors' fees P41,171.36
Bonus of Kuenzle
and Streiff
38,000.00
Commissions of
Kuenzle & Streiff
51,768.94
Depreciation of

buildings
1,543.42
Traveling Expenses 918.79 133,402.51

Total Net Income

P1,083,650.85

Tax due on above

P130,038.10
Tax already paid
114,029.80

Deficiency
P16,008.30
==========
1950
Net Income as per return
P1,178,043.06
Add: disallowances
Directors' Fees
P41,297.42
Bonus of Kuenzle
and Streiff
38,000.00
Commissions of
Kuenzle & Streiff
54,822.90
Depreciation of
buildings
1,548.42
Traveling Expenses 2,029.90
Transportation and
representation
expenses
12,600.00
Repair on buildings 19,931.05
169,729.69

Total Net Income

P1,347,772.75

Tax due on above

P215,644.00
Tax already paid
188,487.00

Deficiency
P27,157.00
===========
1951
Net Income as per return
P1,254,426.82
Add: disallowances
Directors' fees P32,576.86
Bonus of Kuenzle
and Streiff
38,000.00
Commissions of
Kuenzle & Streiff
P45,064.62
Allowances for loss
of Macapagal 612.37
Depreciation of
buildings
1,548.42
Depreciation of autos
and trucks
1,646.12
Traveling Expenses 3,063.90
Transportation and

representation expenses
16,075.00
Fine
300.00 P138,887.29

Total Net Income

P1,393,314.11

Tax due on above

P382,128.00
Tax already paid
343,240.00

Deficiency
P38,888.00
==========
1952
Net Income as per return
P833,940.99
Add: disallowances
Directors' fees P26,447.32
Bonus for Kuenzle
and Streiff
35,500.00
Commissions for
Kuenzle & Streiff
28,894.68
Depreciation of
buildings
2,167.20
Transportation and
representation expenses
15,602.13
Discretionary expenses
6,000.00
114,611.33

Total Net Income
P948,552.32

Tax due on above

P257,595.00
Tax already paid
225,503.00

Deficiency
P32,092.00
==========
1953
Net Income as per return
P821,202.51
Add: disallowances:
Directors' fees P21,789.38
Bonus of Kuenzle
and Streiff
35,500.00
Commissions of
Kuenzle & Streiff
33,992.58
Depreciation of
buildings
2,167.20
Traveling Expenses 6,458.83
Transportation and
representation
expenses
14,764.59
P114,672.58

Total Net Income
P935,875.09

Tax due on above

P254,045.00

Tax already paid

Deficiency

221,937.00

P32,108.00
==========

Summary
1949 P16,008.30
1950 27,157.00
1951 38,888.00
1952 32,092.00
1953 32,108.00

Total deficiency
tax dueP146,253.30
=========
SO ORDERED.
MARIANO NABLE
Presiding Judge
WE CONCUR:
AUGUSTO M. LUCIANO
Associate Judge
ROMAN M. UMALI
Associate Judge

EN BANC
[G.R. No. L-23226. November 28, 1967.]
ALHAMBRA CIGAR & CIGARETTE MANUFACTURING COMPANY, petitioner-appellant, vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent-appellee.
Gamboa & Gamboa for petitioner-appellant.
Solicitor General for respondent-appellee.
SYLLABUS
1.
TAXATION; INCOME TAXES; DEDUCTION OF COMPENSATION OF CORPORATE
OFFICERS; MATERIAL QUESTIONS TO BE DETERMINED. Whenever a controversy arises on
the deductibility, for purposes of income tax, of certain items for alleged compensation officers of a
corporation, it is necessary to determine whether "personal services" have been "actually rendered" by
said officers, and, in the affirmative, what is the "reasonable allowance" therefor.
2.
ID.; ID.; ID.; FACTUAL FINDING OF COURT OF TAX APPEALS GENERALLY BINDING
ON THE SUPREME COURT. The question of whether the amounts disallowed by the
Commissioner of Internal Revenue are reasonable compensation for personal services, is one of fact to
be determined from all the evidence; and a finding thereon by the Court of Tax Appeals is binding on
the Supreme Court, especially where the evidence in its support is more than substantial.
3.
COURT OF TAX APPEALS; INADVISABILITY OF SETTING ASIDE ITS CONCLUSIONS.
As a matter of principle, it is not advisable for the Supreme Court to set aside the conclusion reached
by an agency like the Court of Tax Appeals, which is, by the very nature of its functions, dedicated
exclusively to the study and consideration of tax problems and has necessarily developed an expertise
on the subject, unless there has been an abuse or improvident exercise of its authority.
DECISION
FERNANDO, J p:
This Court, in this petition for the review of a decision of the Court of Tax Appeals is not faced with a
problem of undue complexity. The law governing the matter has been authoritatively expounded in an
opinion by the then Justice, now Chief Justice, Concepcion in Alhambra Cigar v. Collector of Internal
Revenue, 1 a case involving the same parties over a similar question but covering an earlier period of
time. The limits of a power of respondent Commissioner of Internal Revenue to allow deductions from
the gross income "the ordinary and necessary expenses paid or increased during the taxable year in
carrying on any trade or business, including a reasonable allowance for salaries and other compensation
for personal services actually rendered . . ." 2 had thus been authoritatively expounded. What remains
to be decided in this litigation is whether the decision of the Court of Tax Appeals sought to be
reviewed reflected with fidelity the doctrine thus announced or deviated therefrom.
According to the petition for review, Alhambra Cigar & Cigarette Manufacturing Company, petitionerappellant, "is a corporation duly organized and existing under the laws of the Philippines, with
principal office at 31 Tayuman street, Tondo, Manila; and the respondent-appellee is the duly appointed
and qualified Commissioner of Internal Revenue, vested with authority to act as such for the
Government of the Republic of the Philippines, . . . 3
In the petition for review it was contended that the Court of Tax Appeals, in affirming the action taken
by respondent-appellee Commissioner of Internal Revenue, erred "(a) In holding that A. P. Kuenzle and
H. A. Streiff, who were the President and Vice-President, respectively, of the petitioner-appellant, were
entitled to a salary of only P6,000.00 each a year, for 1954, 1955, 1956 and 1957, and a bonus equal to
the reduced bonus of W. Eggmann for each of said years; and disallowing as deductions the portions of
their salary and bonus in excess of said amounts; (b) In disallowing, as deductions, all the directors'
fees and commissions paid by the petitioner-appellant to A. P. Kuenzle and H. A. Streiff; (c) In holding
that the petitioner- appellant is liable for the alleged deficiency income taxes in question." 4
It is indisputable as noted in the brief for petitioner-appellant that the deductions disallowed by
respondent-appellee, Commissioner of Internal Revenue, for the years 1954 to 1957 designated as

salaries, officers; bonus, officers; commissions to managers and directors' fees "relate exclusively to the
compensations paid by the petitioner-appellant in 1954, 1955, 1956 and 1957, to A. P. Kuenzle and H.
A. Streiff who were, during the said years, as they had been in prior years and still are, directors and the
president and vice-president, respectively, of the petitioner-appellant . . ." 5
Under the category of salaries, officers of the fixed annual compensation of A. P. Kuenzle and H. A.
Streiff, in the amount of P15,000.00 each, "the respondent-appellee allowed for each of them a salary
of only P6,000.00 and disallowed the balance of P9,000.00, or a total disallowance of P18,000.00 for
both of them, for each of the years in question." 6 Under that of bonus, officers of the amount under
such category paid to the above gentlemen for the year 1954 of P14,750.00 each, "the respondentappellee allowed each of them a bonus of only P5,850.00, and disallowed the balance of P8,900.00 or a
total disallowance of P17,800.00 for both of them." 7 For the year 1955, the bonus being paid, once
again, amounting to P14,750.00 to each of them, "the respondent-appellee allowed for each of them a
bonus of only P7,000.00, and disallowed the balance of P7,750.00 each, or a total disallowance of
P15,500.00 for both of them." 8 For the year 1956, again the amount, not suffering any change for
each, "the respondent- appellee allowed for each of them a bonus of only P5,500.00 and disallowed the
balance of P9,250.00 each, or a total disallowance of P18,500.00 for both of them." 9 Lastly, for the
year 1957, of a similar amount payable to each in the concept of bonus, "the respondent- appellee
allowed for each of them a bonus of only P6,500.00, and disallowed the balance of P8,250.00 each, or a
total disallowance of P16,500.00 for both of them." 10
As to the deduction in the concept of commissions to managers, the brief for the petitioner appellant
states: "The commissions paid by the petitioner-appellant to A. P. Kuenzle and H. A. Streiff, in the
amount of P13,607.61 each in 1954, or a total of P27,215.22 for both of them; P14,097.62 each in
1955, or a total of P28,195.24 for both of them; P13,180.87 each in 1956, or a total of P26,361.74 for
both of them; and P13,144.29 each in 1957, or a total of P26,288.48 for both of them, were entirely
disallowed by the respondent-appellee." 11
Concerning the directors' fees paid to both officials by petitioner-appellant, it is noted in the brief that
"in the amount of P11,504.71 each in 1954, or a total of P23,009.42 for both of them; P10,693.02 each
in 1955, or a total of P21,386.04 for both of them; P10,360.23 each in 1956, or a total of P20,720.46
for both of them; and P9,716.63 each in 1957, or a total of P19,433.26 for both of them were also
entirely disallowed by the respondent-appellee." 12
In the decision of the respondent Court of Tax Appeals sought to be reviewed, there was an appraisal of
the evidence on which respondent-appellee Commissioner of Internal Revenue based the above
deductions on salaries and bonuses: "The evidence shows that prior to 1954, Messrs. A. P. Kuenzle and
H. A. Streiff, President and Vice- President, respectively, of petitioner corporation, were each paid an
annual salary P6,000.00 and a bonus of about four times as much as the annual salary. In Alhambra
Cigar and Cigarette Manufacturing Company v. Coll. of Int. Rev., C.T.A. No. 143, January 31, 1957
(affd. in G. R. Nos. L-12026 & L-12131, May 29, 1959), this Court held that considering the nature of
the services performed by Messrs. Kuenzle and Streiff, the salary of P6,000.00 paid to each of them
were reasonable and, therefore, deduction is ordinary and necessary business expense. The bonus paid
to each of said officers was however reduced to the amount equivalent to that paid to Mr. W. Eggmann,
the resident Treasurer and Manager of petitioner. Following the decision of the Supreme Court in G. R.
Nos. L-12026 & L-12131, . . ., respondent allowed as deduction P6,000.00 as salary to Messrs.
Kuenzle and Streiff and a bonus equivalent to that paid annually to Mr. Eggmann from 1954 to 1957, as
indicated above." 13
Then the decision of respondent Court of Tax Appeals in affirming what respondent-appellee did
explained why: "Upon the evidence of record, we find no justification to reverse or modify the decision
of respondent with respect to the disallowance of a portion of the salaries and bonuses paid to Messrs.
Kuenzle and Streiff. Petitioner seeks to justify the increase in the salaries of Messrs. Kuenzle and
Streiff on the ground of increased costs of living. The said officers of petitioner are, however, non-

residents of the Philippines." 14

It may be stated in this connection that the brief for petitioner-appellant did not actually dispute the fact
of non- residence of the aforesaid officials. Thus: "A. P. Kuenzle or H. A. Streiff usually came to the
Philippines every two years, and generally stayed from five to eight weeks (t.s.n., pp. 203-204). During
the years in question, H. A. Streiff was in the Philippines from January 27 to March 20, 1954. He was
personally present at the special meeting of the board of directors of the petitioner-appellant on
February 19, 1954 and at the regular meeting on February 27, 1954, the minutes of all of which he
signed as Vice-President (Exhibits Q, Q-1 and Q-2). He was also personally present at the semi-annual
meeting of stockholders of the petitioner-appellant on February 19, 1954, the minutes of which he also
signed as vice-president (Exh. R). A. P. Kuenzle was in the Philippines from February 3 to March 8,
1956 (t.s.n., pp. 204-205). He was personally present at the special meeting of the board of directors on
February 22, and on February 23, 1956, and at the semi- annual general meeting of stockholders on
February 23, 1956, the minutes of all of which he signed as President (Exhs. Q-8, Q-9, and R- 4). H. A.
Streiff came again to the Philippines in 1958, and he personally attended the special meeting of the
board of directors on March 7, 1958, the minutes of which he also signed as Vice-President (Exh. Q16)." 15
There was in the brief of petitioner-appellant stress laid on those work, performed by them, both in and
outside the Philippines. "During their stay in the Philippines, A. P. Kuenzle or H. A. Streiff inspected
the installations of the petitioner-appellant, and discussed with the local management, personnel and
management matters, long- range planning and policies of the company (t.s.n., pp. 205-206). Aside
from these visits of A. P. Kuenzle and H. A. Streiff to the Philippines, there were other personal
consultations between them and the local management. There were about seven staffmembers in the
local management, and each of them went on home leave every four years and for consultations in
Switzerland with the general managers, A. P. Kuenzle and H. A. Streiff. These home leaves each lasted
for six months. In this way, at least one staff member went on home leave every year and for
consultations with the general managers. . . " 16
As to commissions and directors' fees, it is the finding of the Court of Tax Appeals: "In connection with
the commissions paid to Messrs. Kuenzle and Streiff, there is no evidence of any particular service
rendered by them to petitioner to warrant payment of commissions. Counsel for petitioner sought to
prove the various types of services performed by said officers, but the services mentioned are those for
which they have been more than adequately compensated in the form of salaries and bonuses. As
regards the directors' fees, it is admitted that Messrs. Kuenzle and Streiff `usually came to the
Philippines every two years, and generally stayed from five to eight weeks.' (Page 17, Memorandum
for Petitioner). We cannot see any justification for the payment of director's fees of about P10,000.00 to
each of said officers for coming to the Philippines to visit their corporation once in two years. Being
non-resident President and Vice- President of Petitioner corporation of which they are the controlling
stockholders, we are more inclined to believe that said commissions and directors' fees, payment of
which was based on a certain percentage of the annual profits of petitioner, are in the nature of dividend
distributions." 17
Considering how carefully the Court of Tax Appeals considered the matter of the disallowances in the
light of Section 30 of the National Internal Revenue Code, the task for petitioner-appellant in proving
that it erred in holding that A. P. Kuenzle and H. A. Streiff were entitled only to the salary of P6,000.00
each a year, for 1954, 1955, 1956 and 1957, and a bonus equal to the reduced bonus of one of its
officials, a certain W. Eggmann, for each of said years, and in disallowing as deductions of the
directors' fees and commissions paid by it to them, was far from easy Nor could it be said that
petitioner- appellant did succeed in such effort. As mentioned earlier, the previous case of Alhambra
Cigar & Cigarette Manufacturing Company v. The Collector of Internal Revenue, 18 has laid down
the applicable principle of law.
In the language of then Justice, now Chief Justice, Concepcion: "In the light of the tenor of the

foregoing provision, whenever a controversy arises on the deductibility, for purposes of income tax, of
certain items for alleged compensation of officers of the taxpayer, two (2) questions become material,
namely: (a) Have `personal services' been `actually rendered' by said officers? (b) In the affirmative
case, what is the 'reasonable allowance' therefore? When the Collector of Internal Revenue disallowed
the fees, bonuses and commissions aforementioned, and the company appealed therefrom, it became
necessary for the [Court of Tax Appeals] to determine whether said officer had correctly applied section
30 of the Tax Code, and this, in turn, required the consideration of the two (2) questions already
adverted to. In the circumstances surrounding the case, we are of the opinion that the [ Court of Tax
Appeals] has correctly construed and applied said provision." So it is now. This appeal too cannot
prosper.
Even if there were no such previous decision, it would still follow, in the light of the controlling
doctrines, that the Court of Tax Appeals must be sustained. The well written brief for petitionerappellant citing Botany Worsted Mills v. United States, 19 states: "Whether the amounts disallowed by
the respondent-appellee in the respective years were reasonable compensation for personal services, is
a question of fact to be determined from all the evidence." 20 That the question thus involved is
inherently factual, appears to be undeniable. This Court is bound by the finding of facts of the Court of
Tax Appeals, especially so, where as here, the evidence in support thereof is more than substantial, only
questions of law thus being left open to it for determination. 21 Without ignoring the various factors
which petitioner-appellant would have this Court consider in passing upon the determination made by
the Court of Tax Appeals but with full recognition of the fact that the two officials were non- residents,
it cannot be said that it committed the alleged errors, calling for the interposition of the corrective
authority of this Court. Nor as a matter of principle is it advisable for this Court to set aside the
conclusion reached by an agency such as the Court of Tax Appeals which is, by the very nature of its
function, dedicated exclusively to the study and consideration of tax problems and has necessarily
developed an expertise on the subject, unless, as did not happen here, there has been an abuse or
improvident exercise of its authority.
WHEREFORE, the decision of the Court of Tax Appeals is affirmed, with costs against petitionerappellant.
Dizon, Actg. C . J . , Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Castro and Angeles, JJ., concur.
Concepcion, C . J . and Reyes, J.B.L., J., are on official leave of absence.
Footnotes
1.
L-12026, May 29, 1959. .
2.
Section 30 (a) i, National Internal Revenue Code.
3.
Petition for Review.
4.
Ibid, at p. 3.
5.
Brief for the Petitioner-Appellant, p. 7.
6.
Ibid, at p. 9.
7.
Ibid, at p. 9.
8.
Ibid, at pp. 9-10.
9.
Ibid, at p. 10.
10.
Ibid, at p. 10.
11.
Ibid, at p. 10.
12.
Ibid, at p. 11.
13.
Appendix A, Brief for Petitioner-Appellant, pp, 73-74.
14.
Ibid, at p. 76.
15.
Brief for the Petitioner-Appellant, p. 28.
16.
Ibid, at pp. 28-29.
17.
Appendix A, Brief for Petitioner-Appellant, pp. 76-77. There was a denial in the brief of
petitioner-appellant that Kuenzle and Streiff "are the controlling stockholders." Such inaccuracy, even

if admitted, does not call for a reversal of the decision of the Court of Tax Appeals on this particular
point.
18.
L-12026, May 29, 1959.
19.
278 US 282 (1929).
20.
Brief for the Petitioner-Appellant, pp. 35-36.
21.
Sanchez v. Commissioner of Customs (1957) 102 Phil. 37; Castro v. Collector of Internal
Revenue, L-12174, April 26, 1962; Yupangco and Sons v. Commissioner of Customs, L-22259, Jan. 19,
1966; Commissioner v. Priscila Estate Inc., L-18282, May 29, 1964; The Philippines Guaranty v.
Commissioner of Internal Revenue, L-22074, Sept. 6, 1965; Republic v. Razon and Jai Alai Corp., L14762, May 29, 1967; Balbas v. Domingo, L-19804, Oct. 23, 1967.

THIRD DIVISION
[G.R. No. 128315. June 29, 1999.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PASCOR REALTY AND
DEVELOPMENT CORPORATION, ROGELIO A. DIO and VIRGINIA S. DIO, respondents.
The Solicitor General for petitioner.
De Guzman & Celis Law Office for private respondents.
SYNOPSIS
On March 1, 1995, the Commissioner of Internal Revenue (CIR) filed a criminal complaint before the
Department of Justice against respondents alleging evasion of taxes. Private respondents then filed a
request for reconsideration and reinvestigation. The CIR denied said request on the ground that no
formal assessment has been issued. The matter was elevated to the Court of Tax Appeals (CTA). The
CIR moved to dismiss. The CTA denied said motion to dismiss and held that the criminal complaint for
tax evasion was already an assessment. The Court of Appeals affirmed the CTA's denial. Hence, this
petition.
The revenue officers' affidavit attached to the criminal complaint merely contained a computation of
respondents' tax liability. It did not state a demand or a period of payment. It was addressed to the
justice secretary, not to the taxpayers. DHSCEc
As to the respondents' contention that the filing of a criminal complaint must be preceded by an
assessment, the Court ruled that this was incorrect. Section 222 of the NIRC especially states that in
cases of failure to file a return such as this case, proceedings in court may be commenced without an
assessment. A criminal complaint is instituted not to demand payment, but to penalize the taxpayer for
violation of the Tax Code.
SYLLABUS
1.
TAXATION; TAX; ASSESSMENT; CONSTRUED. An assessment must be sent to and
received by a taxpayer, and must demand payment of the taxes described therein within a specific
period. The issuance of an assessment is vital in determining the period of limitation regarding its
proper issuance and the period within which to protest it. Necessarily, the taxpayer must be certain that
a specific document constitutes an assessment. Otherwise, confusion would arise regarding the period
within which to make an assessment or to protest the same, or whether interest and penalty may accrue
thereon. It should also be stressed that the said document is a notice duly sent to the taxpayer. Indeed,
an assessment is deemed made only when the collector of internal revenue releases, mails or sends such
notice to the taxpayer.
2.
ID.; ID.; REVENUE OFFICER'S AFFIDAVIT WITHOUT DEMAND OR PERIOD OF
PAYMENT, NOT AN ASSESSMENT. In the present case, the revenue officers' Affidavit merely
contained a computation of respondents' tax liability. It did not state a demand or a period for payment.
Worse, it was addressed to the Justice Secretary, not to the taxpayers. That the BIR examiners' Joint
Affidavit attached to the Criminal Complaint contained some details of the tax liabilities of private
respondents does not ipso facto make it an assessment. The purpose of the Joint Affidavit was merely
to support and substantiate the Criminal Complaint for tax evasion. Clearly, it was not meant to be a
notice of the tax due and a demand to the private respondents for payment thereof. DaTHAc
3.
ID.; ID.; FALSE OR FRAUDULENT RETURNS; PROCEEDINGS IN COURT MAY BE
COMMENCED WITHOUT ASSESSMENT. Section 222 of the NIRC specifically states that in
cases where a false or fraudulent return is submitted or in cases of failure to file a return such as this
case, proceedings in court may be commenced without an assessment. Furthermore, Section 205 of the
same Code clearly mandates that the civil and criminal aspects of the case may be pursued
simultaneously.
4.
ID.; ID.; ID.; ID.; PROTEST WILL NOT STOP OR SUSPEND CRIMINAL ACTION. In
Ungab v. Cusi, petitioner therein sought the dismissal of the criminal Complaints for being premature,
since his protest to the CTA had not yet been resolved. The Court held that such protests could not stop

or suspend the criminal action which was independent of the resolution of the protest in the CTA. This
was because the commissioner of internal revenue had, in such tax evasion cases, discretion on whether
to issue an assessment or to file a criminal case against the taxpayer or to do both.
5.
ID.; ID.; ASSESSMENT DISTINGUISHED FROM FILING OF COMPLAINT. The
issuance of an assessment must be distinguished from the filing of a complaint. Before an assessment is
issued, there is, by practice, a pre-assessment notice sent to the taxpayer. The taxpayer is then given a
chance to submit position papers and documents to prove that the assessment is unwarranted. If the
commissioner is unsatisfied, an assessment signed by him or her is then sent to the taxpayer informing
the latter specifically and clearly that an assessment has been made against him or her. In contrast, the
criminal charge need not go through all these. The criminal charge is filed directly with the DOJ.
Thereafter, the taxpayer is notified that a criminal case had been filed against him, not that the
commissioner has issued an assessment. It must be stressed that a criminal complaint is instituted not to
demand payment, but to penalize the taxpayer for violation of the Tax Code. SICaDA
DECISION
PANGANIBAN, J p:
An assessment contains not only a computation of tax liabilities, but also a demand for payment within
a prescribed period. It also signals the time when penalties and interests begin to accrue against the
taxpayer. To enable the taxpayer to determine his remedies thereon, due process requires that it must be
served on and received by the taxpayer. Accordingly, an affidavit, which was executed by revenue
officers stating the tax liabilities of a taxpayer and attached to a criminal complaint for tax evasion,
cannot be deemed an assessment that can be questioned before the Court of Tax Appeals. cda
Statement of the Case
Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court praying for
the nullification of the October 30, 1996 Decision 1 of the Court of Appeals 2 in CA-GR SP No. 40853,
which effectively affirmed the January 25, 1996 Resolution 3 of the Court of Tax Appeals 4 in CTA
Case No. 5271. The CTA disposed as follows:
"WHEREFORE, finding [the herein petitioner's] 'Motion to Dismiss' as UNMERITORIOUS, the same
is hereby DENIED. [The CIR] is hereby given a period of thirty (30) days from receipt hereof to file
her answer."
Petitioner also seeks to nullify the February 13, 1997 Resolution 5 of the Court of Appeals denying
reconsideration. cdphil
The Facts
As found by the Court of Appeals, the undisputed facts of the case are as follows:
"It appears that by virtue of Letter of Authority No. 001198, then BIR Commissioner Jose U. Ong
authorized Revenue Officers Thomas T. Que, Sonia T. Estorco and Emmanuel M. Savellano to examine
the books of accounts and other accounting records of Pascor Realty and Development Corporation,
(PRDC) for the years ending 1986, 1987 and 1988. The said examination resulted in a recommendation
for the issuance of an assessment in the amounts of P7,498,434.65 and P3,015,236.35 for the years
1986 and 1987, respectively.
"On March 1, 1995, the Commissioner of Internal Revenue filed a criminal complaint before the
Department of Justice against the PRDC, its President Rogelio A. Dio, and its Treasurer Virginia S.
Dio, alleging evasion of taxes in the total amount of P10,513,671.00. Private respondents PRDC, et al.,
filed an Urgent Request for Reconsideration/Reinvestigation disputing the tax assessment and tax
liability.
"On March 23, 1995, private respondents received a subpoena from the DOJ in connection with the
criminal complaint filed by the Commissioner of Internal Revenue (BIR) against them.
"In a letter dated May 17, 1995, the CIR denied the urgent request for reconsideration/reinvestigation
of the private respondents on the ground that no formal assessment has as yet been issued by the
Commissioner.

"Private respondents then elevated the Decision of the CIR dated May 17, 1995 to the Court of Tax
Appeals on a petition for review docketed as CTA Case No. 5271 on July 21, 1995. On September 6,
1995, the CIR filed a Motion to Dismiss the petition on the ground that the CTA has no jurisdiction
over the subject matter of the petition, as there was no formal assessment issued against the petitioners.
The CTA denied the said motion to dismiss in a Resolution dated January 25, 1996 and ordered the CIR
to file an answer within thirty (30) days from receipt of said resolution. The CIR received the resolution
on January 31, 1996 but did not file an answer nor did she move to reconsider the resolution. dctai
"Instead, the CIR filed this petition on June 7, 1996, alleging as grounds that:
'Respondent Court of Tax Appeals acted with grave abuse of discretion and without jurisdiction in
considering the affidavit/report of the revenue officer and the indorsement of said report to the
secretary of justice as assessment which may be appealed to the Court of Tax Appeals;
Respondent Court of Tax Appeals acted with grave abuse of discretion in considering the denial by
petitioner of private respondents' Motion for Reconsideration as [a] final decision which may be
appealed to the Court of Tax Appeals.'
"In denying the motion to dismiss filed by the CIR, the Court of Tax Appeals stated:
'We agree with petitioners' contentions, that the criminal complaint for tax evasion is the assessment
issued, and that the letter denial of May 17, 1995 is the decision properly appealable to [u]s.
Respondent's ground of denial, therefore, that there was no formal assessment issued, is untenable.
'It is the Court's honest belief, that the criminal case for tax evasion is already an assessment. The
complaint, more particularly, the Joint Affidavit of Revenue Examiners Lagmay and Savellano attached
thereto, contains the details of the assessment like the kind and amount of tax due, and the period
covered.
'Petitioners are right, in claiming that the provisions of Republic Act No. 1125, relating to exclusive
appellate jurisdiction of this Court, do not, make any mention of 'formal assessment.' The law merely
states, that this Court has exclusive appellate jurisdiction over decisions of the Commissioner of
Internal Revenue on disputed assessments, and other matters arising under the National Internal
Revenue Code, other law or part administered by the Bureau of Internal Revenue Code.
'As far as this Court is concerned, the amount and kind of tax due, and the period covered, are sufficient
details needed for an 'assessment'. These details are more than complete, compared to the following
definitions of the term as quoted hereunder. Thus: cda
'Assessment is laying a tax. Johnson City v. Clinchfield R. Co., 43 S.W. (2d) 386, 387, 163 Tenn. 332.
(Words and Phrases, Permanent Edition, Vol. 4, p. 446)
'The word assessment when used in connection with taxation, may have more than one meaning. The
ultimate purpose of an assessment to such a connection is to ascertain the amount that each taxpayer is
to pay. More commonly, the word 'assessment' means the official valuation of a taxpayer's property for
purpose of taxation. State vs. New York, N.H. and H.R. Co. 22 A. 765, 768, 60 Conn. 326, 325. (Ibid.
p. 445)'
'From the above, it can be gleaned that an assessment simply states how much tax is due from a
taxpayer. Thus, based on these definitions, the details of the tax as given in the Joint Affidavit of
respondent's examiners, which was attached to the tax evasion complaint, more than suffice to qualify
as an assessment. Therefore, this assessment having been disputed by petitioners, and there being a
denial of their letter disputing such assessment, this Court unquestionably acquired jurisdiction over the
instant petition for review.'" 6
As earlier observed, the Court of Appeals sustained the CTA and dismissed the petition.
Hence, this recourse to this Court. 7
Ruling of the Court of Appeals
The Court of Appeals held that the tax court committed no grave abuse of discretion in ruling that the
Criminal Complaint for tax evasion filed by the Commissioner of Internal Revenue with the
Department of Justice constituted an "assessment" of the tax due, and that the said assessment could be

the subject of a protest. By definition, an assessment is simply the statement of the details and the
amount of tax due from a taxpayer. Based on this definition, the details of the tax contained in the BIR
examiners' Joint Affidavit, 8 which was attached to the criminal Complaint, constituted an assessment.
Since the assailed Order of the CTA was merely interlocutory and devoid of grave abuse of discretion,
a petition for certiorari did not lie. llcd
Issues
Petitioners submit for the consideration of this Court the following issues:
"(1) Whether or not the criminal complaint for tax evasion can be construed as an assessment.
(2)
Whether or not an assessment is necessary before criminal charges for tax evasion may be
instituted.
(3)
Whether or not the CTA can take cognizance of the case in the absence of an assessment." 9
In the main, the Court will resolve whether the revenue officers' Affidavit-Report, which was attached
to the criminal Complaint filed with the Department of Justice, constituted an assessment that could be
questioned before the Court of Tax Appeals.
The Court's Ruling
The petition is meritorious.
Main Issue: Assessment
Petitioner argues that the filing of the criminal complaint with the Department of Justice cannot in any
way be construed as a formal assessment of private respondents' tax liabilities. This position is based
on Section 205 of the National Internal Revenue Code 10 (NIRC), which provides that remedies for the
collection of deficient taxes may be by either civil or criminal action. Likewise, petitioner cites Section
223(a) of the same Code, which states that in case of failure to file a return, the tax may be assessed or
a proceeding in court may be begun without assessment.
Respondents, on the other hand, maintain that an assessment is not an action or proceeding for the
collection of taxes, but merely a notice that the amount stated therein is due as tax and that the taxpayer
is required to pay the same. Thus, qualifying as an assessment was the BIR examiners' Joint Affidavit,
which contained the details of the supposed taxes due from respondent for taxable years ending 1987
and 1988, and which was attached to the tax evasion Complaint filed with the DOJ. Consequently, the
denial by the BIR of private respondents' request for reinvestigation of the disputed assessment is
properly appealable to the CTA. cda
We agree with petitioner. Neither the NIRC nor the revenue regulations governing the protest of
assessments 11 provide a specific definition or form of an assessment. However, the NIRC defines the
specific functions and effects of an assessment. To consider the affidavit attached to the Complaint as a
proper assessment is to subvert the nature of an assessment and to set a bad precedent that will
prejudice innocent taxpayers.
True, as pointed out by the private respondents, an assessment informs the taxpayer that he or she has
tax liabilities. But not all documents coming from the BIR containing a computation of the tax liability
can be deemed assessments.
To start with, an assessment must be sent to and received by a taxpayer, and must demand payment of
the taxes described therein within a specific period. Thus, the NIRC imposes a 25 percent penalty, in
addition to the tax due, in case the taxpayer fails to pay the deficiency tax within the time prescribed for
its payment in the notice of assessment. Likewise, an interest of 20 percent per annum, or such higher
rate as may be prescribed by rules and regulations, is to be collected from the date prescribed for its
payment until the full payment. 12
The issuance of an assessment is vital in determining the period of limitation regarding its proper
issuance and the period within which to protest it. Section 203 13 of the NIRC provides that internal
revenue taxes must be assessed within three years from the last day within which to file the return.
Section 222, 14 on the other hand, specifies a period of ten years in case a fraudulent return with intent
to evade was submitted or in case of failure to file a return. Also, Section 228 15 of the same law states

that said assessment may be protested only within thirty days from receipt thereof. Necessarily, the
taxpayer must be certain that a specific document constitutes an assessment. Otherwise, confusion
would arise regarding the period within which to make an assessment or to protest the same, or whether
interest and penalty may accrue thereon.
It should also be stressed that the said document is a notice duly sent to the taxpayer. Indeed, an
assessment is deemed made only when the collector of internal revenue releases, mails or sends such
notice to the taxpayer. 16
In the present case, the revenue officers' Affidavit merely contained a computation of respondents' tax
liability. It did not state a demand or a period for payment. Worse, it was addressed to the justice
secretary, not to the taxpayers.
Respondents maintain that an assessment, in relation to taxation, is simply understood to mean:
"A notice to the effect that the amount therein stated is due as tax and a demand for payment thereof."
17
"Fixes the liability of the taxpayer and ascertains the facts and furnishes the data for the proper
presentation of tax rolls." 18
Even these definitions fail to advance private respondents' case. That the BIR examiners' Joint Affidavit
attached to the Criminal Complaint contained some details of the tax liabilities of private respondents
does not ipso facto make it an assessment. The purpose of the Joint Affidavit was merely to support and
substantiate the Criminal Complaint for tax evasion. Clearly, it was not meant to be a notice of the tax
due and a demand to the private respondents for payment thereof. cdasia
The fact that the Complaint itself was specifically directed and sent to the Department of Justice and
not to private respondents shows that the intent of the commissioner was to file a criminal complaint
for tax evasion, not to issue an assessment. Although the revenue officers recommended the issuance of
an assessment, the commissioner opted instead to file a criminal case for tax evasion. What private
respondents received was a notice from the DOJ that a criminal case for tax evasion had been filed
against them, not a notice that the Bureau of Internal Revenue had made an assessment.
In addition, what private respondents sent to the commissioner was a motion for a reconsideration of
the tax evasion charges filed, not of an assessment, as shown thus:
"This is to request for reconsideration of the tax evasion charges against my client, PASCOR Realty
and Development Corporation and for the same to be referred to the Appellate Division in order to give
my client the opportunity of a fair and objective hearing." 19
Additional Issues: Assessment Not
Necessary Before Filing of
Criminal Complaint
Private respondents maintain that the filing of a criminal complaint must be preceded by an assessment.
This is incorrect, because Section 222 of the NIRC specifically states that in cases where a false or
fraudulent return is submitted or in cases of failure to file a return such as this case, proceedings in
court may be commenced without an assessment. Furthermore, Section 205 of the same Code clearly
mandates that the civil and criminal aspects of the case may be pursued simultaneously. In Ungab v.
Cusi, 20 petitioner therein sought the dismissal of the criminal Complaints for being premature, since
his protest to the CTA had not yet been resolved. The Court held that such protests could not stop or
suspend the criminal action which was independent of the resolution of the protest in the CTA. This
was because the commissioner of internal revenue had, in such tax evasion cases, discretion on whether
to issue an assessment or to file a criminal case against the taxpayer or to do both.
Private respondents insist that Section 222 should be read in relation to Section 255 of the NIRC, 21
which penalizes failure to file a return. They add that a tax assessment should precede a criminal
indictment. We disagree. To reiterate, said Section 222 states that an assessment is not necessary before
a criminal charge can be filed. This is the general rule. Private respondents failed to show that they are
entitled to an exception. Moreover, the criminal charge need only be supported by a prima facie

showing of failure to file a required return. This fact need not be proven by an assessment.
The issuance of an assessment must be distinguished from the filing of a complaint. Before an
assessment is issued, there is, by practice, a pre-assessment notice sent to the taxpayer. The taxpayer is
then given a chance to submit position papers and documents to prove that the assessment is
unwarranted. If the commissioner is unsatisfied, an assessment signed by him or her is then sent to the
taxpayer informing the latter specifically and clearly that an assessment has been made against him or
her. In contrast, the criminal charge need not go through all these. The criminal charge is filed directly
with the DOJ. Thereafter, the taxpayer is notified that a criminal case had been filed against him, not
that the commissioner has issued an assessment. It must be stressed that a criminal complaint is
instituted not to demand payment, but to penalize the taxpayer for violation of the Tax Code.
WHEREFORE, the petition is hereby GRANTED. The assailed Decision is REVERSED and SET
ASIDE. CTA Case No. 5271 is likewise DISMISSED. No costs.
SO ORDERED.
Vitug, Purisima and Gonzaga-Reyes, JJ., concur.
Romero, J., is abroad on official business.
Footnotes
1.
Rollo, pp. 37-41.
2.
Fifteenth Division, composed of J. Salome A. Montoya, chairman and ponente; and JJ. Godardo
A. Jacinto and Maximiano C. Asuncion, members, concurring.
3.
Rollo, pp. 56-62.
4.
Composed of Ernesto D. Acosta, presiding judge; and Ramon O. De Veyra and Manuel K.
Gruba, associate judges.
5.
Rollo, p. 42.
6.
Assailed Decision, pp. 1-4; Rollo, pp. 37-40.
7.
The case was deemed submitted for resolution on October 5, 1998, upon receipt by this Court of
the petitioner's Memorandum. Respondents' Memorandum was received earlier on September 29, 1998.
8.
Annex "C" and "C-1" of respondent's Comment; Rollo, pp. 100-101.
9.
Memorandum for Petitioner, p. 4; Rollo, p. 225.
10.
"Sec. 205. Remedies for the Collection of Delinquent Taxes. The civil remedies for the
collection of internal revenue, fees, or charges, and increment thereto resulting from delinquency shall
be:
(a)
By distraint of goods, chattels, or effects, and other personal property of
whatever character, including stocks and other securities, debts, credits, bank accounts, and interest in
and rights to personal property, and by levy upon real property and interest in or rights to real property;
and
(b)
By civil or criminal action.
Either of these remedies or both simultaneously may be pursued in the discretion of the
authorities charged with the collection of such taxes: Provided, however, That the remedies of distraint
and levy shall not be availed of where the amount of tax involved is not more than One hundred pesos
(P100).
The judgment in the criminal case shall not only impose the penalty but shall also order
payment of the taxes subject of the criminal case as finally decided by the Commissioner.
The Bureau of Internal Revenue shall advance the amounts needed to defray costs of
collection by means of civil or criminal action, including the preservation or transportation of personal
property distrained and the advertisement and sale thereof, as well as of real property and
improvements thereon."
11.
Revenue Regulation 12-85.
12.
Section 249(b).
13.
"SEC. 203. Period of Limitation Upon Assessment and Collection. Except as provided in

Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed
by law for the filing of the return, and no proceeding in court without assessment for the collection of
such taxes shall be begun after the expiration of such period: Provided, That in a case where a return is
filed beyond the period prescribed by law, the three (3)-year period shall be counted from the day the
return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the
filing thereof shall be considered as filed on such last day."
14.
"Sec. 222.
Exceptions as to Period of Limitation of Assessment and Collection of Taxes.
(a)
In the case of a false or fraudulent return with intent to evade tax or of the failure
to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be
filed without assessment, at any time within ten (10) years after the discovery of that falsity, fraud or
omission: Provided, That in a fraud assessment which has become final and executory, the fact of fraud
shall be judicially taken cognizance of in civil or criminal action for the collection thereof.
(b)
If before the expiration of the time prescribed in Section 203 for the assessment
of the tax, both Commissioner and the taxpayer have agreed in writing to its assessment after such
time, the tax may be assessed within the period agreed upon. The period so agreed upon may be
extended by subsequent written agreement made before the expiration of the period previously agreed
upon.
(c)
Any internal revenue tax which has been assessed within the period of limitation
as prescribed in paragraph (a) hereof may be collected by distraint or levy or by a proceeding in a court
within five (5) years following the assessment of the tax.
(d)
Any internal revenue tax, which has been assessed within the period agreed upon
as provided in paragraph (b) hereinabove, may be collected by distraint or levy or by a proceeding in
court within the period agreed upon writing before the expiration of the five (5)-year period. The period
so agreed upon may be extended by subsequent written agreements made before the expiration of the
period previously agreed upon.
(e)
Provided, however, That nothing in the immediately preceding Section and
paragraph (a) hereof shall be construed to authorize the examination and investigation or inquiry into
any tax return filed in accordance with the provisions of any tax amnesty law or decree."
15.
"SEC. 228. Protesting of Assessment. When the Commissioner or his duly authorized
representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his
findings: Provided, however, That a preassessment notice shall not be required in the following cases:
(a)
When the finding for any deficiency tax is the result of mathematical error in the
computation of the tax as appearing on the face of the return; or
(b)
When a discrepancy has been determined between the tax withheld and the
amount actually remitted by the withholding agent; or
(c)
When a taxpayer who opted to claim a refund or tax credit of excess creditable
withholding tax for a taxable period was determined to have carried over and automatically applied the
same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the
succeeding taxable year; or
(d)
When the excise tax due on excisable articles has not been paid; or
(e)
When an article locally purchased or imported by an exempt person, such as, but
not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or
transferred to non-exempt persons.
The taxpayer shall be informed in writing of the law and the facts on which the
assessment is made; otherwise, the assessment shall be void.
Within a period to be prescribed by implementing rules and regulations, the taxpayer
shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his
duly authorized representative shall issue an assessment based on his findings."
16.
Basilan Estates v. Commissioner of Internal Revenue, 21 SCRA 17, September 5, 1967.

17.
Citing Philippine Law Dictionary, 2nd ed., p. 49.
18.
Citing Black's Law Dictionary, 5th ed., p. 107.
19.
Urgent Request for Reconsideration, p. 1; rollo, p. 110.
20.
97 SCRA 877, May 30, 1980.
21.
"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 correct and accurate any information, who willfully fails to pay such tax, make
such return, keep such record, or supply correct and accurate information, or withhold or remit taxes
withheld, or refund excess taxes withheld on compensation, 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 one (1) year but not more than ten (10) years.
Any person who attempts to make it appear for any reason that he or another has in fact
filed a return or statement, or actually files a return or statement and subsequently withdraws the same
return or statement after securing the official receiving seal or stamp of receipt of an internal revenue
office wherein the same was actually filed shall, upon conviction therefor, be punished by a fine of not
less than Ten thousand pesos (P10,000) but not more than Twenty thousand (P20,000) and suffer
imprisonment of not less than one (1) year but not more than three (3) years."

FIRST DIVISION
[G.R. No. 159694. January 27, 2006.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. AZUCENA T. REYES, respondent.
[G.R. No. 163581. January 27, 2006.]
AZUCENA T. REYES, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
PANGANIBAN, C.J p:
Under the present provisions of the Tax Code and pursuant to elementary due process, taxpayers must
be informed in writing of the law and the facts upon which a tax assessment is based; otherwise, the
assessment is void. Being invalid, the assessment cannot in turn be used as a basis for the perfection of
a tax compromise. cDCaTH
The Case
Before us are two consolidated 1 Petitions for Review 2 filed under Rule 45 of the Rules of Court,
assailing the August 8, 2003 Decision 3 of the Court of Appeals (CA) in CA-G.R. SP No. 71392. The
dispositive portion of the assailed Decision reads as follows:
"WHEREFORE, the petition is GRANTED. The assailed decision of the Court of Tax Appeals is
ANNULLED and SET ASIDE without prejudice to the action of the National Evaluation Board on the
proposed compromise settlement of the Maria C. Tancinco estate's tax liability." 4
The Facts
The CA narrated the facts as follows:
"On July 8, 1993, Maria C. Tancinco (or 'decedent') died, leaving a 1,292 square-meter residential lot
and an old house thereon (or 'subject property') located at 4931 Pasay Road, Dasmarias Village,
Makati City.
"On the basis of a sworn information-for-reward filed on February 17, 1997 by a certain Raymond
Abad (or 'Abad'), Revenue District Office No. 50 (South Makati) conducted an investigation on the
decedent's estate (or 'estate'). Subsequently, it issued a Return Verification Order. But without the
required preliminary findings being submitted, it issued Letter of Authority No. 132963 for the regular
investigation of the estate tax case. Azucena T. Reyes (or '[Reyes]'), one of the decedent's heirs,
received the Letter of Authority on March 14, 1997. HIaAED
"On February 12, 1998, the Chief, Assessment Division, Bureau of Internal Revenue (or 'BIR'), issued
a preliminary assessment notice against the estate in the amount of P14,580,618.67. On May 10, 1998,
the heirs of the decedent (or 'heirs') received a final estate tax assessment notice and a demand letter,
both dated April 22, 1998, for the amount of P14,912,205.47, inclusive of surcharge and interest.
"On June 1, 1998, a certain Felix M. Sumbillo (or 'Sumbillo') protested the assessment [o]n behalf of
the heirs on the ground that the subject property had already been sold by the decedent sometime in
1990.
"On November 12, 1998, the Commissioner of Internal Revenue (or '[CIR]') issued a preliminary
collection letter to [Reyes], followed by a Final Notice Before Seizure dated December 4, 1998.
"On January 5, 1999, a Warrant of Distraint and/or Levy was served upon the estate, followed on
February 11, 1999 by Notices of Levy on Real Property and Tax Lien against it.
"On March 2, 1999, [Reyes] protested the notice of levy. However, on March 11, 1999, the heirs
proposed a compromise settlement of P1,000,000.00.
"In a letter to [the CIR] dated January 27, 2000, [Reyes] proposed to pay 50% of the basic tax due,
citing the heirs' inability to pay the tax assessment. On March 20, 2000, [the CIR] rejected [Reyes's]
offer, pointing out that since the estate tax is a charge on the estate and not on the heirs, the latter's
financial incapacity is immaterial as, in fact, the gross value of the estate amounting to P32,420,360.00
is more than sufficient to settle the tax liability. Thus, [the CIR] demanded payment of the amount of
P18,034,382.13 on or before April 15, 2000[;] otherwise, the notice of sale of the subject property
would be published. EASIHa

"On April 11, 2000, [Reyes] again wrote to [the CIR], this time proposing to pay 100% of the basic tax
due in the amount of P5,313,891.00. She reiterated the proposal in a letter dated May 18, 2000.
"As the estate failed to pay its tax liability within the April 15, 2000 deadline, the Chief, Collection
Enforcement Division, BIR, notified [Reyes] on June 6, 2000 that the subject property would be sold at
public auction on August 8, 2000.
"On June 13, 2000, [Reyes] filed a protest with the BIR Appellate Division. Assailing the scheduled
auction sale, she asserted that . . . the assessment, letter of demand[,] and the whole tax proceedings
against the estate are void ab initio. She offered to file the corresponding estate tax return and pay the
correct amount of tax without surcharge [or] interest.
"Without acting on [Reyes's] protest and offer, [the CIR] instructed the Collection Enforcement
Division to proceed with the August 8, 2000 auction sale. Consequently, on June 28, 2000, [Reyes]
filed a [P]etition for [R]eview with the Court of Tax Appeals (or 'CTA'), docketed as CTA Case No.
6124.
"On July 17, 2000, [Reyes] filed a Motion for the Issuance of a Writ of Preliminary Injunction or Status
Quo Order, which was granted by the CTA on July 26, 2000. Upon [Reyes's] filing of a surety bond in
the amount of P27,000,000.00, the CTA issued a [R]esolution dated August 16, 2000 ordering [the
CIR] to desist and refrain from proceeding with the auction sale of the subject property or from issuing
a [W]arrant of [D]istraint or [G]arnishment of [B]ank [A]ccount[,] pending determination of the case
and/or unless a contrary order is issued.
"[The CIR] filed a [M]otion to [D]ismiss the petition on the grounds (i) that the CTA no longer has
jurisdiction over the case[,] because the assessment against the estate is already final and executory;
and (ii) that the petition was filed out of time. In a [R]esolution dated November 23, 2000, the CTA
denied [the CIR's] motion. DTIcSH
"During the pendency of the [P]etition for [R]eview with the CTA, however, the BIR issued Revenue
Regulation (or 'RR') No. 6-2000 and Revenue Memorandum Order (or 'RMO') No. 42-2000 offering
certain taxpayers with delinquent accounts and disputed assessments an opportunity to compromise
their tax liability.
"On November 25, 2000, [Reyes] filed an application with the BIR for the compromise settlement (or
'compromise') of the assessment against the estate pursuant to Sec. 204(A) of the Tax Code, as
implemented by RR No. 6-2000 and RMO No. 42-2000.
"On December 26, 2000, [Reyes] filed an Ex-Parte Motion for Postponement of the hearing before the
CTA scheduled on January 9, 2001, citing her pending application for compromise with the BIR. The
motion was granted and the hearing was reset to February 6, 2001.
"On January 29, 2001, [Reyes] moved for postponement of the hearing set on February 6, 2001, this
time on the ground that she had already paid the compromise amount of P1,062,778.20 but was still
awaiting approval of the National Evaluation Board (or 'NEB'). The CTA granted the motion and reset
the hearing to February 27, 2001.
"On February 19, 2001, [Reyes] filed a Motion to Declare Application for the Settlement of Disputed
Assessment as a Perfected Compromise. In said motion, she alleged that [the CIR] had not yet signed
the compromise[,] because of procedural red tape requiring the initials of four Deputy Commissioners
on relevant documents before the compromise is signed by the [CIR]. [Reyes] posited that the absence
of the requisite initials and signature[s] on said documents does not vitiate the perfected compromise.
ICAcHE
"Commenting on the motion, [the CIR] countered that[,] without the approval of the NEB, [Reyes's]
application for compromise with the BIR cannot be considered a perfected or consummated
compromise.
"On March 9, 2001, the CTA denied [Reyes's] motion, prompting her to file a Motion for
Reconsideration Ad Cautelam. In a [R]esolution dated April 10, 2001, the CTA denied the [M]otion for
[R]econsideration with the suggestion that[,] for an orderly presentation of her case and to prevent

piecemeal resolutions of different issues, [Reyes] should file a [S]upplemental [P]etition for
[R]eview[,] setting forth the new issue of whether there was already a perfected compromise.
"On May 2, 2001, [Reyes] filed a Supplemental Petition for Review with the CTA, followed on June 4,
2001 by its Amplificatory Arguments (for the Supplemental Petition for Review), raising the following
issues:
'1.
Whether or not an offer to compromise by the [CIR], with the acquiescence by the Secretary of
Finance, of a tax liability pending in court, that was accepted and paid by the taxpayer, is a perfected
and consummated compromise.
'2.
Whether this compromise is covered by the provisions of Section 204 of the Tax Code (CTRP)
that requires approval by the BIR [NEB].'
"Answering the Supplemental Petition, [the CIR] averred that an application for compromise of a tax
liability under RR No. 6-2000 and RMO No. 42-2000 requires the evaluation and approval of either the
NEB or the Regional Evaluation Board (or 'REB'), as the case may be.
"On June 14, 2001, [Reyes] filed a Motion for Judgment on the Pleadings; the motion was granted on
July 11, 2001. After submission of memoranda, the case was submitted for [D]ecision. CDAHaE
"On June 19, 2002, the CTA rendered a [D]ecision, the decretal portion of which pertinently reads:
'WHEREFORE, in view of all the foregoing, the instant [P]etition for [R]eview is hereby DENIED.
Accordingly, [Reyes] is hereby ORDERED to PAY deficiency estate tax in the amount of Nineteen
Million Five Hundred Twenty Four Thousand Nine Hundred Nine and 78/100 (P19,524,909.78),
computed as follows:
xxx
xxx
xxx
'[Reyes] is likewise ORDERED to PAY 20% delinquency interest on deficiency estate tax due of
P17,934,382.13 from January 11, 2001 until full payment thereof pursuant to Section 249(c) of the Tax
Code, as amended.'
"In arriving at its decision, the CTA ratiocinated that there can only be a perfected and consummated
compromise of the estate's tax liability[,] if the NEB has approved [Reye's] application for compromise
in accordance with RR No. 6-2000, as implemented by RMO No. 42-2000.
"Anent the validity of the assessment notice and letter of demand against the estate, the CTA stated that
'at the time the questioned assessment notice and letter of demand were issued, the heirs knew very
well the law and the facts on which the same were based.' It also observed that the petition was not
filed within the 30-day reglementary period provided under Sec. 11 of Rep. Act No. 1125 and Sec. 228
of the Tax Code." 5
Ruling of the Court of Appeals
In partly granting the Petition, the CA said that Section 228 of the Tax Code and RR 12-99 were
mandatory and unequivocal in their requirement. The assessment notice and the demand letter should
have stated the facts and the law on which they were based; otherwise, they were deemed void. 6 The
appellate court held that while administrative agencies, like the BIR, were not bound by procedural
requirements, they were still required by law and equity to observe substantive due process. The reason
behind this requirement, said the CA, was to ensure that taxpayers would be duly apprised of and
could effectively protest the basis of tax assessments against them. 7 Since the assessment and the
demand were void, the proceedings emanating from them were likewise void, and any order emanating
from them could never attain finality. AECcTS
The appellate court added, however, that it was premature to declare as perfected and consummated the
compromise of the estate's tax liability. It explained that, where the basic tax assessed exceeded P1
million, or where the settlement offer was less than the prescribed minimum rates, the National
Evaluation Board's (NEB) prior evaluation and approval were the conditio sine qua non to the
perfection and consummation of any compromise. 8 Besides, the CA pointed out, Section 204(A) of the
Tax Code applied to all compromises, whether government-initiated or not. 9 Where the law did not
distinguish, courts too should not distinguish.

Hence, this Petition. 10

The Issues
In G.R. No. 159694, petitioner raises the following issues for the Court's consideration:
"I.
Whether petitioner's assessment against the estate is valid.
"II.
Whether respondent can validly argue that she, as well as the other heirs, was not aware of the facts and
the law on which the assessment in question is based, after she had opted to propose several
compromises on the estate tax due, and even prematurely acting on such proposal by paying 20% of the
basic estate tax due." 11
The foregoing issues can be simplified as follows: first, whether the assessment against the estate is
valid; and, second, whether the compromise entered into is also valid. CTAIHc
The Court's Ruling
The Petition is unmeritorious.
First Issue:
Validity of the Assessment Against the Estate
The second paragraph of Section 228 of the Tax Code 12 is clear and mandatory. It provides as follows:
"Sec. 228.
Protesting of Assessment.
xxx
xxx
xxx
"The taxpayers shall be informed in writing of the law and the facts on which the assessment is made:
otherwise, the assessment shall be void."
In the present case, Reyes was not informed in writing of the law and the facts on which the assessment
of estate taxes had been made. She was merely notified of the findings by the CIR, who had simply
relied upon the provisions of former Section 229 13 prior to its amendment by Republic Act (RA) No.
8424, otherwise known as the Tax Reform Act of 1997.
First, RA 8424 has already amended the provision of Section 229 on protesting an assessment. The old
requirement of merely notifying the taxpayer of the CIR's findings was changed in 1998 to informing
the taxpayer of not only the law, but also of the facts on which an assessment would be made;
otherwise, the assessment itself would be invalid. aEcTDI
It was on February 12, 1998, that a preliminary assessment notice was issued against the estate. On
April 22, 1998, the final estate tax assessment notice, as well as demand letter, was also issued. During
those dates, RA 8424 was already in effect. The notice required under the old law was no longer
sufficient under the new law.
To be simply informed in writing of the investigation being conducted and of the recommendation for
the assessment of the estate taxes due is nothing but a perfunctory discharge of the tax function of
correctly assessing a taxpayer. The act cannot be taken to mean that Reyes already knew the law and
the facts on which the assessment was based. It does not at all conform to the compulsory requirement
under Section 228. Moreover, the Letter of Authority received by respondent on March 14, 1997 was
for the sheer purpose of investigation and was not even the requisite notice under the law.
The procedure for protesting an assessment under the Tax Code is found in Chapter III of Title VIII,
which deals with remedies. Being procedural in nature, can its provision then be applied retroactively?
The answer is yes.
The general rule is that statutes are prospective. However, statutes that are remedial, or that do not
create new or take away vested rights, do not fall under the general rule against the retroactive
operation of statutes. 14 Clearly, Section 228 provides for the procedure in case an assessment is
protested. The provision does not create new or take away vested rights. In both instances, it can surely
be applied retroactively. Moreover, RA 8424 does not state, either expressly or by necessary
implication, that pending actions are excepted from the operation of Section 228, or that applying it to
pending proceedings would impair vested rights. aHADTC

Second, the non-retroactive application of Revenue Regulation (RR) No. 12-99 is of no moment,
considering that it merely implements the law.
A tax regulation is promulgated by the finance secretary to implement the provisions of the Tax Code.
15 While it is desirable for the government authority or administrative agency to have one immediately
issued after a law is passed, the absence of the regulation does not automatically mean that the law
itself would become inoperative.
At the time the pre-assessment notice was issued to Reyes, RA 8424 already stated that the taxpayer
must be informed of both the law and facts on which the assessment was based. Thus, the CIR should
have required the assessment officers of the Bureau of Internal Revenue (BIR) to follow the clear
mandate of the new law. The old regulation governing the issuance of estate tax assessment notices ran
afoul of the rule that tax regulations old as they were should be in harmony with, and not
supplant or modify, the law. 16
It may be argued that the Tax Code provisions are not self-executory. It would be too wide a stretch of
the imagination, though, to still issue a regulation that would simply require tax officials to inform the
taxpayer, in any manner, of the law and the facts on which an assessment was based. That requirement
is neither difficult to make nor its desired results hard to achieve.
Moreover, an administrative rule interpretive of a statute, and not declarative of certain rights and
corresponding obligations, is given retroactive effect as of the date of the effectivity of the statute. 17
RR 12-99 is one such rule. Being interpretive of the provisions of the Tax Code, even if it was issued
only on September 6, 1999, this regulation was to retroact to January 1, 1998 a date prior to the
issuance of the preliminary assessment notice and demand letter.
Third, neither Section 229 nor RR 12-85 can prevail over Section 228 of the Tax Code.
No doubt, Section 228 has replaced Section 229. The provision on protesting an assessment has been
amended. Furthermore, in case of discrepancy between the law as amended and its implementing but
old regulation, the former necessarily prevails. 18 Thus, between Section 228 of the Tax Code and the
pertinent provisions of RR 12-85, the latter cannot stand because it cannot go beyond the provision of
the law. The law must still be followed, even though the existing tax regulation at that time provided
for a different procedure. The regulation then simply provided that notice be sent to the respondent in
the form prescribed, and that no consequence would ensue for failure to comply with that form.
DHACES
Fourth, petitioner violated the cardinal rule in administrative law that the taxpayer be accorded due
process. Not only was the law here disregarded, but no valid notice was sent, either. A void assessment
bears no valid fruit.
The law imposes a substantive, not merely a formal, requirement. To proceed heedlessly with tax
collection without first establishing a valid assessment is evidently violative of the cardinal principle in
administrative investigations: that taxpayers should be able to present their case and adduce supporting
evidence. 19 In the instant case, respondent has not been informed of the basis of the estate tax liability.
Without complying with the unequivocal mandate of first informing the taxpayer of the government's
claim, there can be no deprivation of property, because no effective protest can be made. 20 The
haphazard shot at slapping an assessment, supposedly based on estate taxation's general provisions that
are expected to be known by the taxpayer, is utter chicanery.
Even a cursory review of the preliminary assessment notice, as well as the demand letter sent, reveals
the lack of basis for not to mention the insufficiency of the gross figures and details of the
itemized deductions indicated in the notice and the letter. This Court cannot countenance an assessment
based on estimates that appear to have been arbitrarily or capriciously arrived at. Although taxes are the
lifeblood of the government, their assessment and collection "should be made in accordance with law
as any arbitrariness will negate the very reason for government itself." 21
Fifth, the rule against estoppel does not apply. Although the government cannot be estopped by the
negligence or omission of its agents, the obligatory provision on protesting a tax assessment cannot be

rendered nugatory by a mere act of the CIR.

Tax laws are civil in nature. 22 Under our Civil Code, acts executed against the mandatory provisions
of law are void, except when the law itself authorizes the validity of those acts. 23 Failure to comply
with Section 228 does not only render the assessment void, but also finds no validation in any provision
in the Tax Code. We cannot condone errant or enterprising tax officials, as they are expected to be
vigilant and law-abiding. IDaCcS
Second Issue:
Validity of Compromise
It would be premature for this Court to declare that the compromise on the estate tax liability has been
perfected and consummated, considering the earlier determination that the assessment against the estate
was void. Nothing has been settled or finalized. Under Section 204(A) of the Tax Code, where the basic
tax involved exceeds one million pesos or the settlement offered is less than the prescribed minimum
rates, the compromise shall be subject to the approval of the NEB composed of the petitioner and four
deputy commissioners.
Finally, as correctly held by the appellate court, this provision applies to all compromises, whether
government-initiated or not. Ubi lex non distinguit, nec nos distinguere debemos. Where the law does
not distinguish, we should not distinguish.
WHEREFORE, the Petition is hereby DENIED and the assailed Decision AFFIRMED. No
pronouncement as to costs.
SO ORDERED.
Ynares-Santiago, Austria-Martinez, Callejo, Sr. and Chico-Nazario, JJ., concur.
Footnotes
1.
The June 21, 2004 Resolution ordering the consolidation of G.R. No. 163581 with G.R. No.
159694 had been issued before the petitioner in the former case filed a Petition for Review. (G.R. No.
163581; rollo, p. 5.)
Afterwards, per Resolution dated August 16, 2004, this Court denied the Petition for
Review in G.R. No. 163581 for failure to comply with the requirements in Rules 46 and 56 of the 1997
Rules of Civil Procedure. Lacking was an affidavit of service of copies on the CA and on the
respondent, and a duplicate original or a certified true copy of the assailed Decision and Resolution.
(G.R. No. 163581; rollo, pp. 80-81.)
Ultimately, per Resolution dated December 6, 2004, this Court denied with finality
petitioner's Motion for Reconsideration in G.R. No. 163581 of the August 16, 2004 Resolution. (G.R.
No. 163581; rollo, unnumbered after p. 105.)
2.
G.R. No. 159694, rollo, pp. 8-40; G.R. No. 163581, rollo, pp. 7-20.
3.
Eighth Division. Penned by Justice Edgardo P. Cruz, with the concurrence of Justices Conrado
M. Vasquez Jr. (chair) and Noel G. Tijam (member).
4.
CA Decision, p. 14; G.R. No. 159694; rollo, p. 56. Uppercase and boldface copied verbatim.
5.
Id., pp. 1-7 & 43-49. Uppercase and italics copied.
6.
Id., pp. 9 & 51.
7.
Id., pp. 10 & 52.
8.
Id., pp. 11 & 53.
9.
Id., pp. 14 & 56.
10.
This case was deemed submitted for decision on August 30, 2004, upon this Court's receipt in
G.R. No. 159694 of Petitioner's Memorandum, signed by Assistant Solicitor General Vida G. San
Vicente and Associate Solicitor Sherri Lynn S. Cheng. Respondent's Memorandum, signed by Atty.
Reynoso B. Floreza, was received by this Court on July 28, 2004.
11.
G.R. No. 159694. Petitioner's Memorandum, pp. 12-13; rollo, pp. 259-260. Original in
uppercase.
12.
The Tax Code referred to is Republic Act (RA) No. 8424, as amended.

13.

The National Internal Revenue Code of 1977 provides:

"SECTION 229. Protesting of assessment. When the Commissioner of Internal
Revenue or his duly authorized representative finds that proper taxes should be assessed, he shall first
notify the taxpayer of his findings. Within a period to be prescribed by implementing regulations, the
taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner
shall issue an assessment based on his findings.
"Such assessment may be protested administratively by filing a request for
reconsideration or reinvestigation in such form and manner as may be prescribed by implementing
regulation within thirty (30) days from receipt of the assessment; otherwise, the assessment shall
become final and unappealable.
"If the protest is denied in whole or in part, the individual, association or corporation
adversely affected by the decision on the protest may appeal to the Court of Tax Appeals within thirty
(30) days from receipt of the said decision; otherwise, the decision shall become final, executory and
demandable."
14.
Agpalo, Statutory Construction (4th ed., 1998), p. 373.
15.
244 of the Tax Code.
16.
Aban, Law of Basic Taxation in the Philippines (2001), p. 149.
17.
Agpalo, Statutory Construction, id., p. 375. See also Adamson Ozanom Educational Institution,
Inc. v. Adamson University Faculty and Employees Association, 179 SCRA 279, November 9, 1989.
18.
Philippine Petroleum Corp. v. Municipality of Pililla, Rizal, 198 SCRA 82, 88, June 3, 1991,
citing Shell Philippines, Inc. v. Central Bank of the Philippines, 162 SCRA 628, 634, June 27, 1988.
19.
Ang Tibay v. Court of Industrial Relations, 69 Phil. 635, February 27, 1940.
20.
See Ang Ping v. CA, 369 Phil. 607, July 15, 1999.
21.
Marcos II v. CA, 273 SCRA 47, 57, June 5, 1997, per Torres Jr., J.
22.
Aban, Law of Basic Taxation in the Philippines, id., p. 143.
23.
Art. 5 of the Civil Code.

FIRST DIVISION
[G.R. No. 155541. January 27, 2004.]
ESTATE OF THE LATE JULIANA DIEZ VDA. DE GABRIEL, petitioner, vs. COMMISSIONER OF
INTERNAL REVENUE, respondent.
Magno & Associates for petitioner.
The Solicitor General for respondent.
SYNOPSIS
Philippine Trust Company (Philtrust) managed the business affairs of Juliana Vda. De Gabriel during
her lifetime. Two days after her death, Philtrust filed her income tax return for 1978. Philtrust was not
appointed administrator of her estate. In the meantime, in 1982 the Bureau of Internal Revenue
conducted an investigation on the decedent's tax liability and found a deficiency income tax for the
year 1977. Not knowing that Juliana Vda. Gabriel had actually passed away the BIR sent its tax
assessment notice addressed to the decedent "c/o Philippine Trust Company, Sta. Cruz, Manila" which
was the address stated in her 1978 Income Tax Return. Philtrust made no response. In 1984, the BIR
issued warrants of distraint and levi to enforce collection of the decedent's deficiency income tax
liability, this time the service was made upon her heir. The BIR, then, filed a motion for allowance of
claim upon the estate of the decedent. The petitioner herein opposed the claim of BIR on the ground
that there was no proper service of assessment and the filing of the claim had already prescribed. The
court sustained the claims of the petitioner. The respondent appealed to the Court of Appeals, which
rendered a decision in its favor. Hence, the case was appealed to the Supreme Court. IEAacT
The Supreme Court granted the petition. After Juliana Vda. De Gabriel's death, Philtrust had absolutely
no legal relationship to her estate. There was therefore no assessment served on the Estate as to the
alleged underpayment of tax. Absent this assessment, no proceedings could be initiated in court for
collection of said tax, and the respondent's claim for collection, filed with the probate court in 1984,
was barred for having been made beyond the five-year prescriptive period set by law.
SYLLABUS
1.
CIVIL LAW; AGENCY; AUTOMATICALLY TERMINATED UPON THE DEATH OF
AGENT OR PRINCIPAL; PRESENT IN CASE AT BAR. Under Article 1919 (3) of the Civil Code,
death of the agent or principal automatically terminates the agency. In this instance, the death of the
decedent on April 3, 1979 automatically severed the legal relationship between her and Philtrust, and
such could not be revived by the mere fact that Philtrust continued to act as her agent when, on April 5,
1979, it filed her Income Tax Return for the year 1978. Since the relationship between Philtrust and the
decedent was automatically severed at the moment of the Taxpayer's death, none of Philtrust's acts or
omissions could bind the estate of the Taxpayer. Service on Philtrust of the demand letter and
Assessment Notice No. NARD-78-82-00501 was improperly done. ATHCDa
2.
TAXATION; NATIONAL INTERNAL REVENUE CODE; ESTATE TAX; NOTICE OF
DEATH; REQUIRED TO BE FILED TO THE COMMISSIONER OF INTERNAL REVENUE BY
THE EXECUTOR, ADMINISTRATOR OR LEGAL HEIRS OF THE DECEDENT; NOT
APPLICABLE IN CASE AT BAR. Sec. 104. Notice of death to be filed. In all cases of transfers
subject to tax or where, though exempt from tax, the gross value of the estate exceeds three thousand
pesos, the executor, administrator, or any of the legal heirs, as the case may be, within two months after
the decedent's death, or within a like period after qualifying as such executor or administrator, shall
give written notice thereof to the Commissioner of Internal Revenue. The foregoing provision falls in
Title III, Chapter I of the National Internal Revenue Code of 1977, or the chapter on Estate Tax, and
pertains to "all cases of transfers subject to tax" or where the "gross value of the estate exceeds three
thousand pesos." It has absolutely no applicability to a case for deficiency income tax, such as the case
at bar. It further lacks applicability since Philtrust was never the executor, administrator of the
decedent's estate, and, as such, never had the legal obligation, based on the above provision, to inform
respondent of her death. TEcCHD

3.
ID.; ID.; ID.; EFFECT OF FAILURE THEREOF. Although the administrator of the estate
may have been remiss in his legal obligation to inform respondent of the decedent's death, the
consequences thereof, as provided in Section 119 of the National Internal Revenue Code of 1977,
merely refer to the imposition of certain penal sanctions on the administrator. These do not include the
indefinite tolling of the prescriptive period for making deficiency tax assessments, or the waiver of the
notice requirement for such assessments. ITDSAE
4.
ID.; ID.; TAX ASSESSMENT; COULD BE GIVEN EFFECT ONLY WHEN NOTICE IS
RELEASED, MAILED OR SENT TO THE TAXPAYER. Since there was never any valid notice of
this assessment, it could not have become final, executory and incontestable, and, for failure to make
the assessment within the five-year period provided in Section 318 of the National Internal Revenue
Code of 1977, respondent's claim against the petitioner Estate is barred. Said Section 318 reads: Sec.
318. Period of limitation upon assessment and collection. Except as provided in the succeeding
section, internal revenue taxes shall be assessed within five years after the return was filed, and no
proceeding in court without assessment for the collection of such taxes shall be begun after the
expiration of such period. For the purpose of this section, a return filed before the last day prescribed
by law for the filing thereof shall be considered as filed on such last day: Provided, That this limitation
shall not apply to cases already investigated prior to the approval of this Code. Respondent argues that
an assessment is deemed made for the purpose of giving effect to such assessment when the notice is
released, mailed or sent to the taxpayer to effectuate the assessment, and there is no legal requirement
that the taxpayer actually received said notice within the five-year period. It must be noted, however,
that the foregoing rule requires that the notice be sent to the taxpayer, and not merely to a disinterested
party. Although there is no specific requirement that the taxpayer should receive the notice within the
said period, due process requires at the very least that such notice actually be received. In
Commissioner of Internal Revenue v. Pascor Realty and Development Corporation, we had occasion to
say: An assessment contains not only a computation of tax liabilities, but also a demand for payment
within a prescribed period. It also signals the time when penalties and interests begin to accrue against
the taxpayer. To enable the taxpayer to determine his remedies thereon, due process requires that it
must be served on and received by the taxpayer. TIEHSA
DECISION
YNARES-SANTIAGO, J p:
This petition for review on certiorari assails the decision of the Court of Appeals in CA-G.R. CV No.
09107, dated September 30, 2002, 1 which reversed the November 19, 1995 Order of Regional Trial
Court of Manila, Branch XXXVIII, in Sp. Proc. No. R-82-6994, entitled "Testate Estate of Juliana Diez
Vda. De Gabriel". The petition was filed by the Estate of the Late Juliana Diez Vda. De Gabriel,
represented by Prudential Bank as its duly appointed and qualified Administrator. aETAHD
As correctly summarized by the Court of Appeals, the relevant facts are as follows:
During the lifetime of the decedent, Juliana Vda. De Gabriel, her business affairs were managed by the
Philippine Trust Company (Philtrust). The decedent died on April 3, 1979. Two days after her death,
Philtrust, through its Trust Officer, Atty. Antonio M. Nuyles, filed her Income Tax Return for 1978. The
return did not indicate that the decedent had died.
On May 22, 1979, Philtrust also filed a verified petition for appointment as Special Administrator with
the Regional Trial Court of Manila, Branch XXXVIII, docketed as Sp. Proc. No. R-82-6994. The court
a quo appointed one of the heirs as Special Administrator. Philtrust's motion for reconsideration was
denied by the probate court.
On January 26, 1981, the court a quo issued an Order relieving Mr. Diez of his appointment, and
appointed Antonio Lantin to take over as Special Administrator. Subsequently, on July 30, 1981, Mr.
Lantin was also relieved of his appointment, and Atty. Vicente Onosa was appointed in his stead.
In the meantime, the Bureau of Internal Revenue conducted an administrative investigation on the
decedent's tax liability and found a deficiency income tax for the year 1977 in the amount of

P318,233.93. Thus, on November 18, 1982, the BIR sent by registered mail a demand letter and
Assessment Notice No. NARD-78-82-00501 addressed to the decedent "c/o Philippine Trust Company,
Sta. Cruz, Manila" which was the address stated in her 1978 Income Tax Return. No response was
made by Philtrust. The BIR was not informed that the decedent had actually passed away.
In an Order dated September 5, 1983, the court a quo appointed Antonio Ambrosio as the
Commissioner and Auditor Tax Consultant of the Estate of the decedent.
On June 18, 1984, respondent Commissioner of Internal Revenue issued warrants of distraint and levy
to enforce collection of the decedent's deficiency income tax liability, which were served upon her heir,
Francisco Gabriel. On November 22, 1984, respondent filed a "Motion for Allowance of Claim and for
an Order of Payment of Taxes" with the court a quo. On January 7, 1985, Mr. Ambrosio filed a letter of
protest with the Litigation Division of the BIR, which was not acted upon because the assessment
notice had allegedly become final, executory and incontestable.
On May 16, 1985, petitioner, the Estate of the decedent, through Mr. Ambrosio, filed a formal
opposition to the BIR's Motion for Allowance of Claim based on the ground that there was no proper
service of the assessment and that the filing of the aforesaid claim had already prescribed. The BIR
filed its Reply, contending that service to Philippine Trust Company was sufficient service, and that the
filing of the claim against the Estate on November 22, 1984 was within the five-year prescriptive
period for assessment and collection of taxes under Section 318 of the 1977 National Internal Revenue
Code (NIRC).
On November 19, 1985, the court a quo issued an Order denying respondent's claim against the Estate,
2 after finding that there was no notice of its tax assessment on the proper party. 3
On July 2, 1986, respondent filed an appeal with the Court of Appeals, docketed as CA-G.R. CV No.
09107, 4 assailing the Order of the probate court dated November 19, 1985. It was claimed that
Philtrust, in filing the decedent's 1978 income tax return on April 5, 1979, two days after the taxpayer's
death, had "constituted itself as the administrator of the estate of the deceased at least insofar as said
return is concerned." 5 Citing Basilan Estate Inc. v. Commissioner of Internal Revenue, 6 respondent
argued that the legal requirement of notice with respect to tax assessments 7 requires merely that the
Commissioner of Internal Revenue release, mail and send the notice of the assessment to the taxpayer
at the address stated in the return filed, but not that the taxpayer actually receive said assessment within
the five-year prescriptive period. 8 Claiming that Philtrust had been remiss in not notifying respondent
of the decedent's death, respondent therefore argued that the deficiency tax assessment had already
become final, executory and incontestable, and that petitioner Estate was liable therefor. EaICAD
On September 30, 2002, the Court of Appeals rendered a decision in favor of the respondent. Although
acknowledging that the bond of agency between Philtrust and the decedent was severed upon the
latter's death, it was ruled that the administrator of the Estate had failed in its legal duty to inform
respondent of the decedent's death, pursuant to Section 104 of the National Internal Revenue Code of
1977. Consequently, the BIR's service to Philtrust of the demand letter and Notice of Assessment was
binding upon the Estate, and, upon the lapse of the statutory thirty-day period to question this claim, the
assessment became final, executory and incontestable. The dispositive portion of said decision reads:
WHEREFORE, finding merit in the appeal, the appealed decision is REVERSED AND SET ASIDE.
Another one is entered ordering the Administrator of the Estate to pay the Commissioner of Internal
Revenue the following:
a.
The amount of P318,223.93, representing the deficiency income tax liability for the year 1978,
plus 20% interest per annum from November 2, 1982 up to November 2, 1985 and in addition thereto
10% surcharge on the basic tax of P169,155.34 pursuant to Section 51(e)(2) and (3) of the Tax Code as
amended by PD 69 and 1705; and
b.
The costs of the suit.
SO ORDERED. 9
Hence, the instant petition, raising the following issues:

1.
Whether or not the Court of Appeals erred in holding that the service of deficiency tax
assessment against Juliana Diez Vda. de Gabriel through the Philippine Trust Company was a valid
service in order to bind the Estate;
2.
Whether or not the Court of Appeals erred in holding that the deficiency tax assessment and
final demand was already final, executory and incontestable.
Petitioner Estate denies that Philtrust had any legal personality to represent the decedent after her death.
As such, petitioner argues that there was no proper notice of the assessment which, therefore, never
became final, executory and incontestable. 10 Petitioner further contends that respondent's failure to
file its claim against the Estate within the proper period prescribed by the Rules of Court is a fatal error,
which forever bars its claim against the Estate. 11
Respondent, on the other hand, claims that because Philtrust filed the decedent's income tax return
subsequent to her death, Philtrust was the de facto administrator of her Estate. 12 Consequently, when
the Assessment Notice and demand letter dated November 18, 1982 were sent to Philtrust, there was
proper service on the Estate. 13 Respondent further asserts that Philtrust had the legal obligation to
inform petitioner of the decedent's death, which requirement is found in Section 104 of the NIRC of
1977. 14 Since Philtrust did not, respondent contends that petitioner Estate should not be allowed to
profit from this omission. 15 Respondent further argues that Philtrust's failure to protest the
aforementioned assessment within the 30-day period provided in Section 319-A of the NIRC of 1977
meant that the assessment had already become final, executory and incontestable. 16
The resolution of this case hinges on the legal relationship between Philtrust and the decedent, and, by
extension, between Philtrust and petitioner Estate. Subsumed under this primary issue is the sub-issue
of whether or not service on Philtrust of the demand letter and Assessment Notice No. NARD-78-8200501 was valid service on petitioner, and the issue of whether Philtrust's inaction thereon could bind
petitioner. If both sub-issues are answered in the affirmative, respondent's contention as to the finality
of Assessment Notice No. NARD-78-82-00501 must be answered in the affirmative. This is because
Section 319-A of the NIRC of 1977 provides a clear 30-day period within which to protest an
assessment. Failure to file such a protest within said period means that the assessment ipso jure
becomes final and unappealable, as a consequence of which legal proceedings may then be initiated for
collection thereof. CAaSHI
We find in favor of the petitioner.
The first point to be considered is that the relationship between the decedent and Philtrust was one of
agency, which is a personal relationship between agent and principal. Under Article 1919 (3) of the
Civil Code, death of the agent or principal automatically terminates the agency. In this instance, the
death of the decedent on April 3, 1979 automatically severed the legal relationship between her and
Philtrust, and such could not be revived by the mere fact that Philtrust continued to act as her agent
when, on April 5, 1979, it filed her Income Tax Return for the year 1978.
Since the relationship between Philtrust and the decedent was automatically severed at the moment of
the Taxpayer's death, none of Philtrust's acts or omissions could bind the estate of the Taxpayer. Service
on Philtrust of the demand letter and Assessment Notice No. NARD-78-82-00501 was improperly
done.
It must be noted that Philtrust was never appointed as the administrator of the Estate of the decedent,
and, indeed, that the court a quo twice rejected Philtrust's motion to be thus appointed. As of November
18, 1982, the date of the demand letter and Assessment Notice, the legal relationship between the
decedent and Philtrust had already been non-existent for three years.
Respondent claims that Section 104 of the National Internal Revenue Code of 1977 imposed the legal
obligation on Philtrust to inform respondent of the decedent's death. The said Section reads:
SEC. 104.
Notice of death to be filed. In all cases of transfers subject to tax or where, though
exempt from tax, the gross value of the estate exceeds three thousand pesos, the executor,
administrator, or any of the legal heirs, as the case may be, within two months after the decedent's

death, or within a like period after qualifying as such executor or administrator, shall give written
notice thereof to the Commissioner of Internal Revenue.
The foregoing provision falls in Title III, Chapter I of the National Internal Revenue Code of 1977, or
the chapter on Estate Tax, and pertains to "all cases of transfers subject to tax" or where the "gross
value of the estate exceeds three thousand pesos". It has absolutely no applicability to a case for
deficiency income tax, such as the case at bar. It further lacks applicability since Philtrust was never the
executor, administrator of the decedent's estate, and, as such, never had the legal obligation, based on
the above provision, to inform respondent of her death.
Although the administrator of the estate may have been remiss in his legal obligation to inform
respondent of the decedent's death, the consequences thereof, as provided in Section 119 of the
National Internal Revenue Code of 1977, merely refer to the imposition of certain penal sanctions on
the administrator. These do not include the indefinite tolling of the prescriptive period for making
deficiency tax assessments, or the waiver of the notice requirement for such assessments.
Thus, as of November 18, 1982, the date of the demand letter and Assessment Notice No. NARD-7882-00501, there was absolutely no legal obligation on the part of Philtrust to either (1) respond to the
demand letter and assessment notice, (2) inform respondent of the decedent's death, or (3) inform
petitioner that it had received said demand letter and assessment notice. This lack of legal obligation
was implicitly recognized by the Court of Appeals, which, in fact, rendered its assailed decision on
grounds of "equity." 17
Since there was never any valid notice of this assessment, it could not have become final, executory
and incontestable, and, for failure to make the assessment within the five-year period provided in
Section 318 of the National Internal Revenue Code of 1977, respondent's claim against the petitioner
Estate is barred. Said Section 18 reads: HcaDIA
SEC. 318.
Period of limitation upon assessment and collection. Except as provided in the
succeeding section, internal revenue taxes shall be assessed within five years after the return was filed,
and no proceeding in court without assessment for the collection of such taxes shall be begun after the
expiration of such period. For the purpose of this section, a return filed before the last day prescribed
by law for the filing thereof shall be considered as filed on such last day: Provided, That this limitation
shall not apply to cases already investigated prior to the approval of this Code.
Respondent argues that an assessment is deemed made for the purpose of giving effect to such
assessment when the notice is released, mailed or sent to the taxpayer to effectuate the assessment, and
there is no legal requirement that the taxpayer actually receive said notice within the five-year period.
18 It must be noted, however, that the foregoing rule requires that the notice be sent to the taxpayer,
and not merely to a disinterested party. Although there is no specific requirement that the taxpayer
should receive the notice within the said period, due process requires at the very least that such notice
actually be received. In Commissioner of Internal Revenue v. Pascor Realty and Development
Corporation, 19 we had occasion to say:
An assessment contains not only a computation of tax liabilities, but also a demand for payment within
a prescribed period. It also signals the time when penalties and interests begin to accrue against the
taxpayer. To enable the taxpayer to determine his remedies thereon, due process requires that it must be
served on and received by the taxpayer.
In Republic v. De le Rama, 20 we clarified that, when an estate is under administration, notice must be
sent to the administrator of the estate, since it is the said administrator, as representative of the estate,
who has the legal obligation to pay and discharge all debts of the estate and to perform all orders of the
court. In that case, legal notice of the assessment was sent to two heirs, neither one of whom had any
authority to represent the estate. We said:
The notice was not sent to the taxpayer for the purpose of giving effect to the assessment, and said
notice could not produce any effect. In the case of Bautista and Corrales Tan v. Collector of Internal
Revenue . . . this Court had occasion to state that "the assessment is deemed made when the notice to

this effect is released, mailed or sent to the taxpayer for the purpose of giving effect to said
assessment." It appearing that the person liable for the payment of the tax did not receive the
assessment, the assessment could not become final and executory. (Citations omitted, emphasis
supplied.)
In this case, the assessment was served not even on an heir of the Estate, but on a completely
disinterested third party. This improper service was clearly not binding on the petitioner.
By arguing that (1) the demand letter and assessment notice were served on Philtrust, (2) Philtrust was
remiss in its obligation to respond to the demand letter and assessment notice, (3) Philtrust was remiss
in its obligation to inform respondent of the decedent's death, and (4) the assessment notice is therefore
binding on the Estate, respondent is arguing in circles. The most crucial point to be remembered is that
Philtrust had absolutely no legal relationship to the deceased, or to her Estate. There was therefore no
assessment served on the Estate as to the alleged underpayment of tax. Absent this assessment, no
proceedings could be initiated in court for the collection of said tax, 21 and respondent's claim for
collection, filed with the probate court only on November 22, 1984, was barred for having been made
beyond the five-year prescriptive period set by law.
WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals in CA-G.R. CV No.
09107, dated September 30, 2002, is REVERSED and SET ASIDE. The Order of the Regional Trial
Court of Manila, Branch XXXVIII, in Sp. Proc. No. R-82-6994, dated November 19, 1985, which
denied the claim of the Bureau of Internal Revenue against the Estate of Juliana Diez Vda. De Gabriel
for the deficiency income tax of the decedent for the year 1977 in the amount of P318,223.93, is
AFFIRMED. SDECAI
No pronouncement as to costs.
SO ORDERED.
Davide, Jr., C.J., Panganiban and Carpio, JJ., concur.
Azcuna, J., is on official leave.
Footnotes
1.
Rollo, pp. 111-117; penned by Associate Justice Portia Alio-Hormachuelos; concurred in by
Associate Justices Elvi John S. Asuncion and Juan Q. Enriquez, Jr.
2.
Id., pp. 27-29.
3.
Id., p. 29.
4.
Id., pp. 49-65.
5.
Id., p. 57.
6.
G.R. No. L-22492, 5 September 1967, 21 SCRA 17.
7.
National Internal Revenue Code of 1977, sec. 104.
8.
Rollo, p. 57.
9.
Id., pp. 116-117.
10.
Id., p. 19.
11.
Id., p. 21.
12.
Id., p. 146.
13.
Id.
14.
Id.
15.
Id.
16.
Id., pp. 149-150.
17.
Id., p. 115.
18.
Collector of Internal Revenue v. Bautista, G.R. Nos. L-12250 & L-12259, 27 May 1959, cited in
Basilan Estate Inc. v. Commissioner of Internal Revenue and Court of Tax Appeals, 128 Phil. 19
(1967).
19.
368 Phil. 714 (1999).
20.
124 Phil. 1493 (1966).

21.

National Internal Revenue Code of 1977, sec. 318.

EN BANC
[G.R. No. L-22492. September 5, 1967.]
BASILAN ESTATES, INC., petitioner, vs. THE COMMISSIONER OF INTERNAL REVENUE and
THE COURT OF TAX APPEALS, respondents.
Felix A. Gulfin and Antonio S. Alano for petitioner.
The Solicitor General for respondents.
SYLLABUS
1.
NOTICE OF ASSESSMENT, WHEN DEEMED MADE. Under Section 331 of the Tax
Code requiring 5 years within which to assess deficiency taxes, the assessment is deemed made when
notice to this effect is released, mailed or sent by the Collector of Internal Revenue to the taxpayer, and
it is not required that the notice be received by the taxpayer within the aforementioned 5-year period
(Collector of Internal Revenue vs. Bautista, L-12250 & L-12259, May 27, 1959)
2.
ID.; DEPRECIATION; DEFINITION. Depreciation is the gradual diminution in the useful
value of tangible property resulting from wear and tear and normal obsolescence. The term is also
applied to amortization of the value of intangible assets, the use of which in the trade or business is
definitely limited in duration (Jose Aranas, Annotation and Jurisprudence on the National Internal
Revenue Code, as Amended, 2nd Ed., Vol. 1, p. 263).
3.
ID.; ID.; WHEN DEPRECIATION COMMENCES. Depreciation commences with the
acquisition of the property and its owner is not bound to see his property gradually waste, without
making provision out of earnings for its replacement. It is entitled to see that from earnings the value of
the property invested is kept unimpaired, so that at the end of any given term of years, the original
investment remains as it was in the beginning. It is not only the right of a company to make such a
provision, but it is its duty to its bond and stockholders, and, in the case of a public service corporation,
at least, its plain duty to the public (Knoxville vs. Knoxville Water Co., 212 U.S. 1, 53 L. Ed. 371).
Accordingly, the law permits the taxpayer to recover gradually his capital investment in wasting assets
free from income tax (Detroit Edison Co. vs. Commissioner, 131 F 2d. 619). Precisely, Section 30(f)
(1) of the Tax Code allows a deduction from gross income for depreciation but limits the recovery to
the capital invested in the asset being depreciated.
4.
ID.; BASIS OF DEPRECIATION. The income tax law does not authorize the depreciation of
an asset beyond its acquisition cost. Hence, a deduction over and above such cost cannot be claimed
and allowed. The reason is that deduction from gross income are privileges (Palmer vs. State
Commission of Revenue & Taxation, 156 Kan. 690, 135 P. 2d. 899), not matters of right (Southern
Weaving Co. vs. Query, 206 SC 307, 34 SE 2d. 51). They are not created by implication but upon clear
expression in the law (Gutierrez vs. Collector of Internal Revenue, L-19537, May 20, 1965). Moreover,
the recovery, free of income tax, of an amount more than the invested capital in an asset will transgress
the underlying purpose of a depreciation allowance. For then what the taxpayer would recover will be,
not only the acquisition cost, but also some profit. Recovery in due time through depreciation of
investment made is the philosophy behind depreciation allowance; the idea of profit on the investment
made has never been the underlying reason for the allowance of a deduction for depreciation.
5.
ID.; TRAVELING EXPENSES; PERIOD WITHIN WHICH TO KEEP SUPPORTING
PAPERS; CASE AT BAR. Under Section 337 of the National Internal Revenue Code, receipts and
papers supporting traveling expenses need be kept by the taxpayer for a period of five years from the
last entry.
6.
ID.; SURTAX ON UNREASONABLY ACCUMULATED PROFITS; TEST TO DETERMINE
REASONABLENESS ACCUMULATION OF PROFITS. Persuasive jurisprudence on the matter
such as those in the United States from where our tax law was deprived (Collector of Internal Revenue
vs. Binalbagan Estate, Inc., L-12752, Jan. 30, 1965), has it that: "In order to determine whether profits
were accumulated for the reasonable needs of the business or to avoid the surtax upon shareholders, the
controlling intention of the taxpayer is that which is manifested at the time of the accumulation, not

subsequently declared intentions which are merely the products of afterthought (Jacob Mertens, Jr., The
Law of Federal Income Taxation, Vol. 7, Cumulative Supplement, p. 213). In determining whether
accumulations of earnings or profits in a particular year are within the reasonable needs of a
corporation, it is necessary to take unto account prior accumulations, since accumulations prior to the
year involved may have been sufficient to cover the business needs and additional accumulations
during the year involved would not reasonably be necessary. (Ibid, p. 202).
DECISION
BENGZON, J.P., J p:
A Philippine corporation engaged in coconut industry, Basilan Estate, Inc. with principal offices in
Basilan City, filed on March 24, 1954 its income tax returns for 1953 and paid an income tax of
P8,028. On February 26, 1959, the Commissioner of Internal Revenue, per examiner's report of
February 19, 1959, assessed Basilan Estates, Inc., a deficiency income tax of P3,912 for 1953 and
P86,867.85 as 25% surtax on unreasonably accumulated profits as of 1953 pursuant to Section 25 of
the Tax Code. On non-payment of the assessed amount, a warrant of distraint and levy was issued but
the same was not executed because Basilan Estate, Inc. succeeded in getting the Deputy Commissioner
of Internal Revenue to order the Director of the district in Zamboanga City to hold execution and
maintain constructive embargo instead. Because of its refusal to waive the period of prescription, the
corporation's request for reinvestigation was not given due course, and on December 2, 1960, notice
was served the corporation that the warrant of distraint and levy would be executed.
On December 20, 1960, Basilan Estate, Inc. filed before the Court of Tax Appeals a petition for review
of the Commissioner's assessment, alleging prescription of the period of assessment and collection;
error in disallowing claimed depreciations, travelling and miscellaneous expenses and error in finding
the existence of unreasonably accumulated profits and the imposition of 25% surtax thereon. On
October 31, 1963, the Court of Tax Appeals found that there was no prescription and affirmed the
deficiency assessment in toto.
On February 21, 1964, the case was appealed to Us by the taxpayer, upon the following issues:
1.
Has the Commissioner's right to collect deficiency income tax prescribed?
2.
Was the disallowance of items claimed as deductible proper?
3.
Have there been unreasonably accumulated profits? If so, should the 25% surtax be imposed on
the balance of the entire surplus from 1947-1953, or only for 1953?
4.
Is the petitioner exempt from the penalty tax under Republic Act 1823 amending Section 25 of
the Tax Code?
PRESCRIPTION
There is no dispute that the assessment of the deficiency tax was made on February 26, 1959; but the
petitioner claims that it never received notice of such assessment or if it did, it received the notice
beyond the five-year prescriptive period. To show prescription, the annotation on the notice (Exhibit
10, No. 52 ACR, p. 54-A of the BIR records) "No accompanying letter 11/25/" is advanced as
indicative of the fact that receipt of the notice was after March 24, 1959, the last date of the five year
period within which to assess deficiency tax, since the original returns were filed on March 24, 1954.
Although the evidence is not clear on this point, We cannot accept this interpretation of the petitioner,
considering the presence of circumstances that lead Us to presume regularity in the performance of
official functions. The notice of assessment shows the assessment to have been made on February 26,
1959, well within the five-year period. On the right side of the notice is also stamped "Feb. 26, 1959"
denoting the date of release, according to Bureau of Internal Revenue practice. The Commissioner
himself in his letter (Exh. H, p. 84 of BIR records) answering petitioner's request to lift the warrant of
distraint and levy, asserts that notice had been sent to petitioner. In the letter of the Regional Director
forwarding the case to the Chief of the Investigation Division which the latter received on March 10,
1959 (p. 71 of the BIR records), notice of assessment was said to have been sent to petitioner.
Subsequently, the Chief of the Investigation Division indorsed on March 18, 1959 (p. 24 of the BIR

records) the case to the Chief of the Law Division. There it was alleged that notice was already sent to
petitioner on February 26, 1959. These circumstances pointing to official performance of duty must
necessarily prevail over petitioner's contrary interpretation. Besides, even granting that notice had been
received by the petitioner late, as alleged, under Section 331 of the Tax Code requiring five years
within which to assess deficiency taxes, the assessment is deemed made when notice to this effect is
released, mailed or sent by the Collector to the taxpayer and it is not required that the notice be
received by the taxpayer within the aforementioned five-year period. 1
ASSESSMENT
The questioned assessment is as follows:
Net Income per return
P40,142.90
Add: Overclaimed depreciation P10,500.49
Mis. expenses disallowed
6,759.17
Officer's travelling expenses
disallowed
2,300.40
19,560.06
_________ _________
Net Income per
Investigation
P59,702.96
_________
20% tax on P59,702.96
11,940.00
Less: Tax already assessed
8,028.00
________
Deficiency income tax
P3,912.00
Add Additional tax of 25% on
P347,507.01
86,876.75
_________
Tax Due & Collectible
P90,788.75
=========
The Commissioner disallowed:
Overclaimed depreciation
P10,500.49
Miscellaneous expenses
6,759.17
Officer's travelling expenses
2,300.40
DEDUCTIONS
A.
Depreciation. Basilan Estates, Inc. claimed deductions for the depreciation of its assets up to
1949 on the basis of their acquisition cost. As of January 1, 1950 it changed the depreciable value of
said assets by increasing it to conform with the increase in cost for their replacement. Accordingly,
from 1950 to 1953 it deducted from gross income the value of depreciation computed on the
reappraised value.
In 1953, the year involved in this case, taxpayer claimed the following depreciation deduction:
Reappraised assets P47,342.53
New assets consisting of hospital building
and equipment
3,910.45
__________
Total depreciation
P51,252.98
__________
Upon investigation and examination of taxpayer's books and papers, the Commissioner of Internal
Revenue found that the reappraised assets depreciated in 1953 were the same ones upon which
depreciation was claimed in 1952. And for the year 1952, the Commissioner had already determined,
with taxpayer's concurrence, the depreciation allowable on said assets to be P36,842.04, computed on

their acquisition cost at rates fixed by the taxpayer. Hence, the Commissioner pegged the deductible
depreciation for 1953 on the same old assets at P36,842.04 and disallowed the excess thereof in the
amount of P10,500.49.
The question for resolution therefore is whether depreciation shall be determined on the acquisition
cost or on the reappraised value of the assets.
Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and
tear and normal obsolescence. The term is also applied to amortization of the value of intangible assets,
the use of which in the trade or business is definitely limited in duration. 2 Depreciation commences
with the acquisition of the property and its owner is not bound to see his property gradually waste,
without making provision out of earnings for its replacement. It is entitled to see that from earnings the
value of the property invested is kept unimpaired, so that at the end of any given term of years, the
original investment remains as it was in the beginning. It is not only the right of a company to make
such a provision, but it is its duty to its bond and stockholders, and, in the case of a public service
corporation, at least, its plain duty to the public. 3 Accordingly, the law permits the taxpayer to recover
gradually his capital investment in wasting assets free from income tax. 4 Precisely, Section 30 (f) (1)
which states:
"(1) In general. A reasonable allowance for deterioration of property arising out of its use or
employment in the business or trade, or out of its not being used: Provided, that when the allowance
authorized under this subsection shall equal the capital invested by the taxpayer . . . no further
allowance shall be made. . . ."
allows a deduction from gross income for depreciation but limits the recovery to the capital invested in
the asset being depreciated.
The income tax law does not authorize the depreciation of an asset beyond its acquisition cost. Hence, a
deduction over and above such cost cannot be claimed and allowed. The reason is that deductions from
gross income are privileges, 5 not matters of right. 6 They are not created by implication but upon clear
expression in the law. 7
Moreover, the recovery, free of income tax, of an amount more than the invested capital in an asset will
transgress the underlying purpose of a depreciation allowance. For then what the taxpayer would
recover will be, not only the acquisition cost, but also some profit. Recovery in due time thru
depreciation of investment made is the philosophy behind depreciation allowance; the idea of profit on
the investment made has never been the underlying reason for the allowance of a deduction for
depreciation.
Accordingly, the claim for depreciation beyond P36,842.04 or in the amount of P10,500.49 has no
justification in the law. The determination, therefore, of the Commissioner of Internal Revenue
disallowing said amount, affirmed by the Court of Tax Appeals, is sustained.
B.
Expenses. The next item involves disallowed expenses incurred in 1953, broken as follows:
Miscellaneous expenses
P6,759.17
Officer's travelling expenses 2,300.40
_________
Total P9,059.57
_________
These were disallowed on the ground that the nature of these expenses could not be satisfactorily
explained nor could the same be supported by appropriate papers.
Felix Gulfin, petitioner's accountant, explained the P6,759.17 as actual expenses credited to the account
of the president of the corporation incurred in the interest of the corporation during the president's trip
to Manila (pp. 33-34 of TSN of Dec. 5, 1962); he stated that the P2,300.40 was the president's
travelling expenses to and from Manila; as to the vouchers and receipts of these, he said the same were
made but got burned during the Basilan fire on March 30, 1962 (p. 40 of same TSN). Petitioner further
argues that when it sent its records to Manila in February, 1959, the papers in support of these

miscellaneous and travelling expenses were not included for the reason that by February 9, 1959, when
the Bureau of Internal Revenue decided to investigate, petitioner had no more obligation to keep the
same since five years had lapsed from the time these expenses were incurred (p. 41 of same TSN). On
this ground, the petitioner may be sustained for under Section 337 of the Tax Code, receipts and papers
supporting such expenses need be kept by the taxpayer for a period of five years from the last entry. At
the time of the investigation, said five years had lapsed. Taxpayer's stand on this issue is therefore
sustained.
UNREASONABLY ACCUMULATED PROFITS
Section 25 of the Tax Code which imposes a surtax on profits unreasonably accumulated, provides:
"SEC 25.
Additional tax on corporations improperly accumulating profits or suplus (a)
Imposition of Tax. If any corporation, except banks, insurance companies, or personal holding
companies, whether domestic or foreign, is formed or availed of for the purpose of preventing the
imposition of the tax upon its shareholders or members or the shareholders or members of another
corporation, through the medium of permitting its gains and profits to accumulate instead of being
divided or distributed, there is levied and assessed against such corporation, for each taxable year, a tax
equal to twenty-five per centum of the undistributed portion of its accumulated profits or surplus which
shall be in addition to the tax imposed by section twenty-four, and shall be computed, collected and
paid in the same manner and subject to the same provisions of law including penalties, as that tax."
The Commissioner found that in violation of the abovequoted section, petitioner had unreasonably
accumulated profits as of 1953 in the amount of P347,507.01, based on the following circumstances
(Examiner's Report, pp. 62-68 of BIR records):
1.
Strong financial position of the petitioner as of December 31, 1953. Assets were P388,617.00
while the liabilities amounted to only P61,117.31 or a ratio of 6:1.
2.
As of 1953, the corporation had considerable capital adequate to meet the reasonable needs of
the business amounting to P327,499.69 (assets less liabilities).
3.
The P200,000 reserved for electrification of drier and mechanization and the P50,000 reserved
for malaria control were reverted to its surplus in 1953.
4.
Withdrawal of shareholders of large sums of money as personal loans.
5.
Investment of undistributed earnings in assets having no proximate connection with the
business as hospital building and equipment worth P59,794.72.
6.
In 1953, with an increase of surplus amounting to P677,232.01, the capital stock was increased
to P500,000 although there was no need for such increase.
Petitioner tried to show that in considering the surplus, the examiner did not take into account the
possible expenses for cultivation, labor, fertilization, drainage, irrigation, repair, etc. (pp. 235-237 of
TSN of Dec. 7, 1962). As aptly answered by the examiner himself, however, they were already
included as part of the working capital (pp. 237-238 of TSN of Dec. 7, 1962).
In the unreasonable accumulation of P347,507.01 are included P200,000 for electrification of driers
and mechanization and P50,000 for malaria control which were reserved way back in 1948 (p. 67 of the
BIR records) but reverted to the general fund only in 1953. If there were any plans for these amounts to
be used in further expansion through projects, it did not appear in the records as was properly indicated
in 1948 when such amounts were reserved. Thus, while in 1948 it was already clear that the money was
intended to go to future projects, in 1953 upon reversion to the general fund, no such intention was
shown. Such reversion therefore gave occasion for the Government to consider the same for tax
purposes. The P250,000 reverted to the general fund was sought to be explained as later used
elsewhere: "part of it in the Hilano Industries, Inc. in building the factory site and buildings to house
technical men . . . part of it was spent in the facilities for the waterworks system and for
industrialization of the coconut industry" (p. 117 of TSN of Dec. 6, 1962). This is not sufficient
explanation. Persuasive jurisprudence on the matter such as those in the United States from where our
tax law was derived, 8 has it that "In order to determine whether profits were accumulated for the

reasonable needs of the business or to avoid the surtax upon shareholders, the controlling intention of
the taxpayer is that which is manifested at the time of the accumulation, not subsequently declared
intentions which are merely the products of afterthought. 9 The reversion here was made because the
reserved amount was not enough for the projects intended, without any intent to channel the same to
some particular future projects in mind.
Petitioner argues that since it has P560,717.44 as its expenses for the year 1953, a surplus of
P347,507.01 is not unreasonably accumulated. As rightly contended by the Government, there is no
need to have such a large amount at the beginning of the following year because during the year,
current assets are converted into cash and with the income realized from the business as the year goes,
these expenses may well be taken care of (pp. 238 of TSN of Dec. 7, 1962). Thus, it is erroneous to say
that the taxpayer is entitled to retain enough liquid net assets in amounts approximately equal to current
operating needs for the year to cover "cost of goods sold and operating expenses" for "it excludes
proper consideration of funds generated by the collection of notes receivable as trade accounts during
the course of the year. 10 In fact, just because the total accumulations are less than 70% of the annual
operating expenses of the year, it does not mean that the accumulations are reasonable as a matter of
law." 11
Petitioner tried to show that investments were made with Basilan Coconut Producers Cooperative
Association and Basilan Hospital (pp. 103-105 of TSN of Dec. 6, 1962) totalling P59,794.72 as of
December 31, 1953. This shows all the more the unreasonable accumulation. As of December 31, 1953
already P59,794.72 was spent yet as of that date there was still a surplus of P347,507.01.
Petitioner questions why the examiner covered the period from 1948-1953 when the taxable year on
review was 1953. The surplus of P347,507.01 was taken by the examiner from the balance sheet of
petitioner for 1953. To check the figure arrived at, the examiner traced the accumulation process from
1947 until 1953, and petitioner's figure stood out to be correct. There was no error in the process
applied, for previous accumulations should be considered in determining unreasonable accumulations
for the year concerned. "In determining whether accumulations of earnings or profits in a particular
year are within the reasonable needs of a corporation, it is necessary to take into account prior
accumulations, since accumulations prior to the year involved may have been sufficient to cover the
business needs and additional accumulations during the year involved would not reasonably be
necessary. 12
Another factor that stands put to show unreasonable accumulation is the fact that large amounts were
withdraw by or advanced to the stockholders. For the year 1953 alone these totalled P197,229.26. Yet
the surplus of P347,507.01 was left as of December 31, 1953. We find unacceptable petitioner's
explanation that these were advances made in furtherance of the business purposes of the petitioner. As
correctly held by the Court of Tax Appeals, while certain expenses of the corporation were credited
against these amounts, the unspent balance was retained by the stockholders without refunding them to
petitioner at the end of each year. These advances were in fact indirect loans to the stockholders
indicating the unreasonable accumulation of surplus beyond the needs of the business.
ALLEGED EXEMPTION
Petitioner wishes to avail of the exempting proviso in Sec. 25 of the Internal Revenue Code as amended
by R.A. 1823, approved June 27, 1957, whereby accumulated profits or surplus if invested in any
dollar-producing or dollar-earning industry or in the purchase of bonds issued by the Central Bank may
not be subject to the 25% surtax. We have but to point out that the unreasonable accumulation was in
1953. The exemption was by virtue of Republic Act 1823 which amended Sec. 25 only on June 22,
1957 more than three years after the period covered by the assessment.
In resume, Basilan Estates Inc. is liable for the payment of deficiency income tax and surtax for the
year 1953 in the amount of P88,977.42, computed as follows:
Net income per returnP40,142.90
Add: Overclaimed depreciation
10,500.49

_________
Net income per finding
P50,643.39
__________
20% tax on P50,643.39
10,128.67
Less: tax already assessed 8,028.00
_________
Deficiency income tax
2,100 67
Add: 25% surtax on P347,507.01 86,876.75
_________
Total tax due and collectible 88,977.42
_________
WHEREFORE, the judgment appealed from is modified to the extent that petitioner is allowed its
deductions for travelling and miscellaneous expenses, but affirmed insofar as the petitioner is liable for
P2,100.67 as 25% deficiency income tax for 1953 and P86,876.75 as 25% surtax on the unreasonably
accumulated profit of P347,507.01. No costs. So ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Ruiz Castro, Angeles and
Fernando, JJ., concur.
Footnotes
1.
Collector of Internal Revenue vs. Bautista, L-12250 & L-12259, May 27, 1959.
2.
Jose Araas, Annotations and Jurisprudence on the National Internal Revenue Code, as
Amended, Second Ed., Vol. 1, p. 263.
3.
Knoxville vs. Knoxville Water Co., 212 U.S. 1, 53 L. ed. 371.
4.
Detroit Edison Co. vs. Commissioner, 131 F (2d) 619 (CCA 6th, 1942), Aff'd 319 U.S. 98, 87 L.
ed. 1286, 63 S.Ct. 902.
5.
Palmer vs. State Commission of Revenue & Taxation, 156 Kan. 690, 135 P. 2d. 899.
6.
Southern Weaving Co. vs. Query, 206 SC 307, 34 SE 2d 51.
7.
See Gutierrez vs. Collector of Internal Revenue, L-19537, May 20, 1965.
8.
Collector of Internal Revenue vs. Binalbagan Estate, Inc., L- 12752, Jan. 30, 1965.
9.
Jacob Mertens, Jr., The Law of Federal Income Taxation, Vol. 7, Cumulative Supplement, p.
213.
10.
Ibid., p. 229.
11.
Ibid., p. 222.
12.
Ibid., p. 202.

THIRD DIVISION
[G.R. No. 168498. April 24, 2007.]
RIZAL COMMERCIAL BANKING CORPORATION, petitioner, vs. COMMISSIONER OF
INTERNAL REVENUE, respondent.
RESOLUTION
YNARES-SANTIAGO, J p:
For resolution is petitioner's Motion for Reconsideration of our Decision 1 dated June 16, 2006
affirming the Decision of the Court of Tax Appeals En Banc dated June 7, 2005 in C.T.A. EB No. 50,
which affirmed the Resolutions of the Court of Tax Appeals Second Division dated May 3, 2004 and
November 5, 2004 in C.T.A. Case No. 6475, denying petitioner's Petition for Relief from Judgment and
Motion for Reconsideration, respectively.
Petitioner reiterates its claim that its former counsel's failure to file petition for review with the Court of
Tax Appeals within the period set by Section 228 of the National Internal Revenue Code of 1997
(NIRC) was excusable and raised the following issues for resolution: STcDIE
A.
THE DENIAL OF PETITIONER'S PETITION FOR RELIEF FROM JUDGMENT WILL RESULT IN
THE DENIAL OF SUBSTANTIVE JUSTICE TO PETITIONER, CONTRARY TO ESTABLISHED
DECISIONS OF THIS HONORABLE COURT BECAUSE THE ASSESSMENT SOUGHT TO BE
CANCELLED HAS ALREADY PRESCRIBED A FACT NOT DENIED BY THE RESPONDENT
IN ITS ANSWER.
B.
CONTRARY TO THIS HONORABLE COURT'S DECISION, AND FOLLOWING THE LASCONA
DECISION, AS WELL AS THE 2005 REVISED RULES OF THE COURT OF TAX APPEALS,
PETITIONER TIMELY FILED ITS PETITION FOR REVIEW BEFORE THE COURT OF TAX
APPEALS; THUS, THE COURT OF TAX APPEALS HAD JURISDICTION OVER THE CASE.
C.
CONSIDERING THAT THE SUBJECT ASSESSMENT INVOLVES AN INDUSTRY ISSUE, THAT
IS, A DEFICIENCY ASSESSMENT FOR DOCUMENTARY STAMP TAX ON SPECIAL SAVINGS
ACCOUNTS AND GROSS ONSHORE TAX, PETITIONER IN THE INTEREST OF
SUBSTANTIVE JUSTICE AND UNIFORMITY OF TAXATION, SHOULD BE ALLOWED TO
FULLY LITIGATE THE ISSUE BEFORE THE COURT OF TAX APPEALS. 2
Petitioner's motion for reconsideration is denied for lack of merit.
Other than the issue of prescription, which is raised herein for the first time, the issues presented are a
mere rehash of petitioner's previous arguments, all of which have been considered and found without
merit in our Decision dated June 16, 2006. HDacIT
Petitioner maintains that its counsel's neglect in not filing the petition for review within the
reglementary period was excusable. It alleges that the counsel's secretary misplaced the Resolution
hence the counsel was not aware of its issuance and that it had become final and executory.
We are not persuaded.
In our Decision, we held that:
Relief cannot be granted on the flimsy excuse that the failure to appeal was due to the neglect of
petitioner's counsel. Otherwise, all that a losing party would do to salvage his case would be to invoke
neglect or mistake of his counsel as a ground for reversing or setting aside the adverse judgment,
thereby putting no end to litigation.
Negligence to be "excusable" must be one which ordinary diligence and prudence could not have
guarded against and by reason of which the rights of an aggrieved party have probably been impaired.
Petitioner's former counsel's omission could hardly be characterized as excusable, much less
unavoidable.
The Court has repeatedly admonished lawyers to adopt a system whereby they can always receive

promptly judicial notices and pleadings intended for them. Apparently, petitioner's counsel was not
only remiss in complying with this admonition but he also failed to check periodically, as an act of
prudence and diligence, the status of the pending case before the CTA Second Division. The fact that
counsel allegedly had not renewed the employment of his secretary, thereby making the latter no longer
attentive or focused on her work, did not relieve him of his responsibilities to his client. It is a problem
personal to him which should not in any manner interfere with his professional commitments. 3
Petitioner also argues that, in the interest of substantial justice, the instant case should be re-opened
considering that it was allegedly not accorded its day in court when the Court of Tax Appeals dismissed
its petition for review for late filing. It claims that rules of procedure are intended to help secure, not
override, substantial justice.
Petitioner's arguments fail to persuade us.
As correctly observed by the Court of Tax Appeals in its Decision dated June 7, 2005:
If indeed there was negligence, this is obviously on the part of petitioner's own counsel whose prudence
in handling the case fell short of that required under the circumstances. He was well aware of the
motion filed by the respondent for the Court to resolve first the issue of this Court's jurisdiction on July
15, 2003, that a hearing was conducted thereon on August 15, 2003 where both counsels were present
and at said hearing the motion was submitted for resolution. Petitioner's counsel apparently did not
show enthusiasm in the case he was handling as he should have been vigilant of the outcome of said
motion and be prepared for the necessary action to take whatever the outcome may have been. Such
kind of negligence cannot support petitioner's claim for relief from judgment. HTAIcD
Besides, 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. 4 Also,
petitioner's 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 Government's
right to assess. 5
The Court of Tax Appeals is a court of special jurisdiction and can only take cognizance of such
matters as are clearly within its jurisdiction. Section 7 of Republic Act (R.A.) No. 9282, amending R.A.
No. 1125, otherwise known as the Law Creating the Court of Tax Appeals, provides:
Sec. 7. Jurisdiction. The CTA shall exercise:
(a)
Exclusive appellate jurisdiction to review by appeal, as herein provided:
(1)
Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters
arising under the National Internal Revenue or other laws administered by the Bureau of Internal
Revenue;
(2)
Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters
arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal
Revenue, where the National Internal Revenue Code provides a specific period of action, in which case
the inaction shall be deemed a denial;
Also, Section 3, Rule 4 and Section 3(a), Rule 8 of the Revised Rules of the Court of Tax Appeals 6
state:
RULE 4
Jurisdiction of the Court
xxx
xxx
xxx
SECTION 3. Cases Within the Jurisdiction of the Court in Divisions. The Court in Divisions shall
exercise:
(a)
Exclusive original or appellate jurisdiction to review by appeal the following: EcaDCI
(1)
Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments,

refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters
arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal
Revenue;
(2)
Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters
arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal
Revenue, where the National Internal Revenue Code or other applicable law provides a specific period
for action: Provided, that in case of disputed assessments, the inaction of the Commissioner of Internal
Revenue within the one hundred eighty day-period under Section 228 of the National Internal Revenue
Code shall be deemed a denial for purposes of allowing the taxpayer to appeal his case to the Court and
does not necessarily constitute a formal decision of the Commissioner of Internal Revenue on the tax
case; Provided, further, that should the taxpayer opt to await the final decision of the Commissioner of
Internal Revenue on the disputed assessments beyond the one hundred eighty day-period
abovementioned, the taxpayer may appeal such final decision to the Court under Section 3(a), Rule 8 of
these Rules; and Provided, still further, that in the case of claims for refund of taxes erroneously or
illegally collected, the taxpayer must file a petition for review with the Court prior to the expiration of
the two-year period under Section 229 of the National Internal Revenue Code;
xxx
xxx
xxx
RULE 8
Procedure in Civil Cases
xxx
xxx
xxx
SECTION 3. Who May Appeal; Period to File Petition. (a) A party adversely affected by a decision,
ruling or the inaction of the Commissioner of Internal Revenue on disputed assessments or claims for
refund of internal revenue taxes, or by a decision or ruling of the Commissioner of Customs, the
Secretary of Finance, the Secretary of Trade and Industry, the Secretary of Agriculture, or a Regional
Trial Court in the exercise of its original jurisdiction may appeal to the Court by petition for review
filed within thirty days after receipt of a copy of such decision or ruling, or expiration of the period
fixed by law for the Commissioner of Internal Revenue to act on the disputed assessments. In case of
inaction of the Commissioner of Internal Revenue on claims for refund of internal revenue taxes
erroneously or illegally collected, the taxpayer must file a petition for review within the two-year
period prescribed by law from payment or collection of the taxes. (n)
From the foregoing, it is clear that the jurisdiction of the Court of Tax Appeals has been expanded to
include not only decisions or rulings but inaction as well of the Commissioner of Internal Revenue. The
decisions, rulings or inaction of the Commissioner are necessary in order to vest the Court of Tax
Appeals with jurisdiction to entertain the appeal, provided it is filed within 30 days after the receipt of
such decision or ruling, or within 30 days after the expiration of the 180-day period fixed by law for the
Commissioner to act on the disputed assessments. This 30-day period within which to file an appeal is
jurisdictional and failure to comply therewith would bar the appeal and deprive the Court of Tax
Appeals of its jurisdiction to entertain and determine the correctness of the assessments. Such period is
not merely directory but mandatory and it is beyond the power of the courts to extend the same. 7
In case the Commissioner failed to act on the disputed assessment within the 180-day period from date
of submission of documents, a taxpayer can either: 1) file a petition for review with the Court of Tax
Appeals within 30 days after the expiration of the 180-day period; or 2) await the final decision of the
Commissioner on the disputed assessments and appeal such final decision to the Court of Tax Appeals
within 30 days after receipt of a copy of such decision. However, these options are mutually exclusive,
and resort to one bars the application of the other. SDcITH
In the instant case, the Commissioner failed to act on the disputed assessment within 180 days from
date of submission of documents. Thus, petitioner opted to file a petition for review before the Court of
Tax Appeals. Unfortunately, the petition for review was filed out of time, i.e., it was filed more than 30

days after the lapse of the 180-day period. Consequently, it was dismissed by the Court of Tax Appeals
for late filing. Petitioner did not file a motion for reconsideration or make an appeal; hence, the
disputed assessment became final, demandable and executory.
Based on the foregoing, petitioner can not now claim that the disputed assessment is not yet final as it
remained unacted upon by the Commissioner; that it can still await the final decision of the
Commissioner and thereafter appeal the same to the Court of Tax Appeals. This legal maneuver cannot
be countenanced. After availing the first option, i.e., filing a petition for review which was however
filed out of time, petitioner can not successfully resort to the second option, i.e., awaiting the final
decision of the Commissioner and appealing the same to the Court of Tax Appeals, on the pretext that
there is yet no final decision on the disputed assessment because of the Commissioner's inaction.
Lastly, we note that petitioner is raising the issue of prescription for the first time in the instant motion
for reconsideration. Although the same was raised in the petition for review, it was dismissed for late
filing. No motion for reconsideration was filed hence the disputed assessment became final,
demandable and executory. Thereafter, petitioner filed with the Court of Tax Appeals a petition for
relief from judgment. However, it failed to raise the issue of prescription therein. After its petition for
relief from judgment was denied by the Court of Tax Appeals for lack of merit, petitioner filed a
petition for review before this Court without raising the issue of prescription. It is only in the instant
motion for reconsideration that petitioner raised the issue of prescription which is not allowed. The rule
is well-settled that points of law, theories, issues and arguments not adequately brought to the attention
of the lower court need not be considered by the reviewing court as they cannot be raised for the first
time on appeal, 8 much more in a motion for reconsideration as in this case, because this would be
offensive to the basic rules of fair play, justice and due process. 9 This last ditch effort to shift to a new
theory and raise a new matter in the hope of a favorable result is a pernicious practice that has
consistently been rejected. AaIDHS
WHEREFORE, in view of the foregoing, petitioner's motion for reconsideration is DENIED.
SO ORDERED.
Austria-Martinez, Callejo, Sr., Chico-Nazario and Nachura, JJ., concur.
Footnotes
1.
Rollo, pp. 181-188.
2.
Id. at 206-207.
3.
Id. at 185-186.
4.
Commissioner of Internal Revenue v. Hantex Trading Co., Inc., G.R. No. 136975, March 31,
2005, 454 SCRA 301, 329.
5.
Benjamin B. Aban, Law of Basic Taxation in the Philippines, Revised Edition (1997), p. 247.
6.
A.M. No. 05-11-07-CTA, took effect on December 15, 2005.
7.
Chan Kian v. Court of Tax Appeals, 105 Phil. 904, 906 (1959).
8.
Multi-Realty Development Corporation v. Makati Tuscany Condominium Corporation, G.R.
No. 146726, June 16, 2006, 491 SCRA 9, 23.
9.
Sta. Rosa Realty Development Corporation v. Amante, G.R. No. 112526, March 16, 2005, 453
SCRA 432, 478.

FIRST DIVISION
[G.R. No. L-9996. October 15, 1957.]
EUFEMIA EVANGELISTA, MANUELA EVANGELISTA and FRANCISCA EVANGELISTA,
petitioners, vs. THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX
APPEALS, respondents.
Santiago F. Alidio and Angel S. Dakila, Jr. for petitioner.
Solicitor General Ambrosio Padilla, Assistant Solicitor General Esmeraldo Umali and Solicitor
Felicisimo R. Rosete for the respondents.
SYLLABUS
1.
TAXATION; TAX ON CORPORATIONS INCLUDES ORGANIZATION WHICH ARE NOT
NECESSARY PARTNERSHIP. "Corporations" strictly speaking are distinct and different from
"partnership". When our Internal Revenue Code includes "partnership" among the entities subject to the
tax on "corporations", it must be allude to organization which are not necessarily "partnership" in the
technical sense of the term.
2.
ID.; DULY REGISTERED GENERAL PARTNERSHIP ARE EXEMPTED FROM THE TAX
UPON CORPORATIONS. Section 24 of the Internal Revenue Code exempts from the tax imposed
upon corporations "duly registered general partnership", which constitute precisely one of the most
typical form of partnership in this jurisdiction.
3.
ID.; CORPORATION INCLUDES PARTNERSHIP NO MATTER HOW ORGANIZED. As
defined in section 84 (b) of the Internal Revenue Code "the term corporation includes partnership, no
matter how created or organized." This qualifying expression clearly indicates that a joint venture need
not be undertaken in any of the standards form, or conformity with the usual requirements of the law on
partnerships, in order that one could be deemed constituted for the purposes of the tax on corporations.
4.
ID.; CORPORATIONS INCLUDES "JOINT ACCOUNT" AND ASSOCIATIONS WITHOUT
LEGAL PERSONALITY. Pursuant to Section 84 (b) of the Internal Revenue Code, the term
"corporations" includes, among the others, "joint accounts (cuenta en participacion)" and
"associations", none of which has a legal personality of its own independent of that of its members. For
purposes of the tax on corporations, our National Internal Revenue Code includes these partnership.
with the exception only of duly registered general partnership. within the purview of the term
"corporations." Held: That the petitioners in the case at bar, who are engaged in real estate transactions
for monetary gain and divide the same among themselves, constitute a partnership, so far as the said
Code is concerned, and are subject to the income tax for the corporation.
5.
ID.; CORPORATION; PARTNERSHIP WITHOUT LEGAL PERSONALITY SUBJECT TO
RESIDENCE TAX ON CORPORATION. The pertinent part of the provision of Section 2 of
Commonwealth Act No. 465 which says: "The term corporation as used in this Act includes joint-stock
company, partnership, joint account (cuentas en participacion), association or insurance company, no
matter how created or organized." is analogous to that of Section 24 and 84 (b) of our Internal Revenue
Code which was approved the day immediately after the approval of said Commonwealth Act No. 565.
Apparently, the terms "corporation" and "Partnership" are used both statutes with substantially the
same meaning, Held: That the petitioners are subject to the residence tax corporations.
DECISION
CONCEPCION, J p:
This is a petition, filed by Eufemia Evangelista, Manuela Evangelista and Francisca Evangelista, for
review of a decision of the Court of Tax Appeals, the dispositive part of which reads:
"FOR ALL THE FOREGOING, we hold that the petitioners are liable for the income tax, real estate
dealer's tax and the residence tax for the years 1945 to 1949, inclusive, in accordance with the
respondent's assessment for the same in the total amount of P6,878.34, which is hereby affirmed and
the petition for review filed by petitioners is hereby dismissed with costs against petitioners."
It appears from the stipulation submitted by the parties:

"1.
That the petitioners borrowed from their father the sum of P59,140.00 which amount together
with their personal monies was used by them for the purpose of buying real properties;
"2.
That on February 2, 1943 they bought from Mrs. Josefina Florentino a lot with an area of
3,713.40 sq. m. including improvements thereon for the sum of P100,000.00; this property has an
assessed value of P57,517.00 as of 1948;
"3.
That on April 3, 1944 they purchased from Mrs. Josefa Oppus 21 parcels of land with an
aggregate area of 3,718.40 sq. m. including improvements thereon for P18,000.00; this property has an
assessed value of P8,255.00 as of 1948;
"4.
That on April 23, 1944 they purchased from the Insular Investments, Inc., a lot of 4,358 sq. m.
including improvements thereon for P108,825.00. This property has an assessed value of P4,983.00 as
of 1943;
"5.
That on April 28, 1944 they bought from Mrs. Valentin Afable a lot of 8,371 sq. m. including
improvements thereon for P237,234.14. This property has an assessed value of P59,140.00 as of 1948;
"6.
That in a document dated August 16, 1945, they appointed their brother Simeon Evangelista to
'manage their properties with full power to lease; to collect and receive rents; to issue receipts therefor;
in default of such payment, to bring suits against the defaulting tenant; to sign all letters, contracts, etc.,
for and in their behalf, and to endorse and deposit all notes and checks for them;
"7.
That after having bought the above-mentioned real properties, the petitioners had the same
rented or leased to various tenants;
"8.
That from the month of March, 1945 up to and including December, 1945, the total amount
collected as rents on their real properties was P9,599.00 while the expenses amounted to P3,650.00
thereby leaving them a net rental income of P5,948.33;
"9.
That in 1946, they realized a gross rental income in the sum of P24,786.30, out of which
amount was deducted the sum of P16,288.27 for expenses thereby leaving them a net rental income of
P7,498.13;
"10. That in 1948 they realized a gross rental income of P17,453.00 out of the which amount was
deducted the sum of P4,837.65 as expenses, thereby leaving them a net rental income of P12,615.35."
It further appears that on September 24, 1954, respondent Collector of Internal Revenue demanded the
payment of income tax on corporations, real estate dealer's fixed tax and corporation residence tax for
the years 1945-1949, computed, according to the assessments made by said officer, as follows:
INCOME TAXES
1945...........................................................P614.84
1946...........................................................1,144.71
1947..............................................................910.34
1948...........................................................1,912.30
1949...........................................................1,575.90
_______________
Total including surcharge and compromise P6,157.09
REAL ESTATE DEALER'S FIXED TAX
1946.................................................................P37.50
1947.................................................................150.00
1948.................................................................150.00
1949.................................................................150.00
____________
Total including penalty
P527.50
RESIDENCE TAXES OF CORPORATION
1945................................................................P38.75
1946..................................................................38.75
1947..................................................................38.75

1948..................................................................38.75
1949..................................................................38.75
______________
Total including surcharge
P193.75
TOTAL TAXES DUEP6,878.34
Said letter of demand and the corresponding assessments were delivered to petitioners on December 3,
1954, whereupon they instituted the present case in the Court of Tax Appeals, with a prayer that "the
decision of the respondent contained in his letter of demand dated September 24, 1954" be reversed,
and that they be absolved from the payment of the taxes in question, with costs against the respondent.
After appropriate proceedings, the Court of Tax Appeals rendered the above-mentioned decision for the
respondent, and, a petition for reconsideration and new trial having been subsequently denied, the case
is now before Us for review at the instance of the petitioners.
The issue in this case is whether petitioners are subject to the tax on corporations provided for in
section 24 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue Code, as
well as to the residence tax for corporations and the real estate dealers' fixed tax. With respect to the tax
on corporations, the issue hinges on the meaning of the terms "corporation" and "partnership", as used
in sections 24 and 84 of said Code, the pertinent parts of which read:
"SEC. 24.
Rate of tax on corporations. There shall be levied, assessed, collected, and paid
annually upon the total net income received in the preceding taxable year from all sources by every
corporation organized in, or existing under the laws of the Philippines, no matter how created or
organized but not including duly registered general co-partnerships (compaias colectivas), a tax upon
such income equal to the sum of the following: . . . ."
"Sec. 84(b). The term 'corporation' includes partnerships, no matter how created or organized, jointstock companies, joint accounts (cuentas en participacion), associations or insurance companies, but
does not include duly registered general copartnerships (compaias colectivas)."
Article 1767 of the Civil Code of the Philippines provides:
"By the contract of partnership two or more persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the profits among themselves."
Pursuant to this article, the essential elements of a partnership are two, namely: (a) an agreement to
contribute money, property or industry to a common fund; and (b) intent to divide the profits among the
contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly,
petitioners have agreed to, and did, contribute money and property to a common fund. Hence, the issue
narrows down to their intent in acting as they did. Upon consideration of all the facts and circumstances
surrounding the case, we are fully satisfied that their purpose was to engage in real estate transactions
for monetary gain and then divide the same among themselves, because:
1.
Said common fund was not something they found already in existence. It was not a property
inherited by them pro indiviso. They created it purposely. What is more they jointly borrowed a
substantial portion thereof in order to establish said common fund.
2.
They invested the same, not merely in one transaction, but in a series of transactions. On
February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots for
P18,000.000. This was soon followed, on April 23, 1944, by the acquisition of another real estate for
P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for P237,234.14. The number of
lots (24) acquired and transactions undertaken, as well as the brief interregnum between each,
particularly the last three purchases, is strongly indicative of a pattern or common design that was not
limited to the conservation and preservation of the aforementioned common fund or even of the
property acquired by petitioners in February, 1943. In other words, one cannot but perceive a character
of habituality peculiar to business transactions engaged in for purposes of gain.
3.
The aforesaid lots were not devoted to residential purposes, or to other personal uses, of
petitioners herein. The properties were leased separately to several persons, who, from 1945 to 1948

inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still being so let,
for petitioners do not even suggest that there has been any change in the utilization thereof.
4.
Since August, 1945, the properties have been under the management of one person, namely,
Simeon Evangelista, with full power to lease, to collect rents, to issue receipts, to bring suits, to sign
letters and contracts, and to indorse and deposit notes and checks. Thus, the affairs relative to said
properties have been handled as if the same belonged to a corporation or business enterprise operated
for profit.
5.
The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen
(15) years, since the first property was acquired, and over twelve (12) years, since Simeon Evangelista
became the manager.
6.
Petitioners have not testified or introduced any evidence, either on their purpose in creating the
set up already adverted to, or on the causes for its continued existence. They did not even try to offer an
explanation therefor.
Although, taken singly, they might not suffice to establish the intent necessary to constitute a
partnership, the collective effect of these circumstances is such as to leave no room for doubt on the
existence of said intent in petitioners herein. Only one or two of the aforementioned circumstances
were present in the cases cited by petitioners herein, and, hence, those cases are not in point.
Petitioners insist, however, that they are mere co-owners, not copartners, for, in consequence of the acts
performed by them, a legal entity, with a personality independent of that of its members, did not come
into existence, and some of the characteristics of partnerships are lacking in the case at bar. This
pretense was correctly rejected by the Court of Tax Appeals.
To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking, are
distinct and different from "partnerships". When our Internal Revenue Code includes "partnerships"
among the entities subject to the tax on "corporations", said Code must allude, therefore, to
organizations which are not necessarily "partnerships", in the technical sense of the term. Thus, for
instance, section 24 of said Code exempts from the aforementioned tax "duly registered general
partnerships", which constitute precisely one of the most typical forms of partnerships in this
jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term corporation includes
partnerships, no matter how created or organized." This qualifying expression clearly indicates that a
joint venture need not be undertaken in any of the standard forms, or in conformity with the usual
requirements of the law on partnerships, in order that one could be deemed constituted for purposes of
the tax on corporations. Again, pursuant to said section 84(b), the term "corporation" includes, among
other, "joint accounts, (cuentas en participacion)" and "associations", none of which has a legal
personality of its own, independent of that of its members. Accordingly, the lawmaker could not have
regarded that personality as a condition essential to the existence of the partnerships therein referred to.
In fact, as above stated, "duly registered general copartner ships" which are possessed of the
aforementioned personality have been expressly excluded by law (sections 24 and 84 [b]) from the
connotation of the term "corporation." It may not be amiss to add that petitioners' allegation to the
effect that their liability in connection with the leasing of the lots above referred to, under the
management of one person even if true, on which we express no opinion tends to increase the
similarity between the nature of their venture and that of corporations, and is, therefore, an additional
argument in favor of the imposition of said tax on corporations.
Under the Internal Revenue Laws of the United States, "corporations" are taxed differently from
"partnerships". By specific provision of said laws, such "corporations" include "associations, jointstock companies and insurance companies." However, the term "association" is not used in the
aforementioned laws
". . . in any narrow or technical sense. It includes any organization, created for the transaction of
designated affairs, or the attainment of some object, which, like a corporation, continues
notwithstanding that its members or participants change, and the affairs of which, like corporate affairs,

are conducted by a single individual, a committee, a board, or some other group, acting in a
representative capacity. It is immaterial whether such organization is created by an agreement, a
declaration of trust, a statute, or otherwise. It includes a voluntary association, a joint-stock corporation
or company, a 'business' trusts a 'Massachusetts' trust, a 'common law' trust, and 'investment' trust
(whether of the fixed or the management type), an interinsurance exchange operating through an
attorney in fact, a partnership association, and any other type of organization (by whatever name
known) which is not, within the meaning of the Code, a trust or an estate, or a partnership." (7A
Merten's Law of Federal Income Taxation, p. 788; italics ours.)
Similarly, the American Law.
". . . provides its own concept of a partnership. Under the term 'partnership' it includes not only a
partnership as known at common law but, as well, a syndicate, group, pool, joint venture, or other
unincorporated organization which carries on any business, financial operation, or venture, and which
is not, within the meaning of the Code, a trust, estate, or a corporation. . . .." (7A Merten's Law of
Federal Income Taxation, p. 789; italics ours.)
"The term 'partnership' includes a syndicate, group, pool, joint venture or other unincorporated
organization, through or by means of which any business, financial operation, or venture is carried on, .
. .." (8 Merten's Law of Federal Income Taxation, p. 562 Note 63; italics ours.)
For purposes of the tax on corporations, our National Internal Revenue Code, includes these
partnerships with the exception only of duly registered general copartnerships within the purview
of the term "corporation." It is, therefore, clear to our mind that petitioners herein constitute a
partnership, insofar as said Code is concerned, and are subject to the income tax for corporations.
As regards the residence tax for corporations, section 2 of Commonwealth Act No. 465 provides in
part:
"Entities liable to residence tax. Every corporation, no matter how created or organized, whether
domestic or resident foreign, engaged in or doing business in the Philippines shall pay an annual
residence tax of five pesos and an annual additional tax which, in no case, shall exceed one thousand
pesos, in accordance with the following schedule: . . .
"The term 'corporation' as used in this Act includes joint-stock company, partnership, joint account
(cuentas en participacion), association or insurance company, no matter how created or organized."
(italics ours.)
Considering that the pertinent part of this provision is analogous to that of sections 24 and 84(b) of our
National Internal Revenue Code (Commonwealth Act No. 466), and that the latter was approved on
June 15, 1939, the day immediately after the approval of said Commonwealth Act No. 465 (June 14,
1939), it is apparent that the terms "corporation" and "partnership" are used in both statutes with
substantially the same meaning. Consequently, petitioners are subject, also, to the residence tax for
corporations.
Lastly, the records show that petitioners have habitually engaged in leasing the properties above
mentioned for a period of over twelve years, and that the yearly gross rentals of said properties from
1945 to 1948 ranged from P9,599 to P17,453. Thus, they are subject to the tax provided in section 193
(q) of our National Internal Revenue Code, for "real estate dealers," inasmuch as, pursuant to section
194(s) thereof:
"'Real estate dealer' includes any person engaged in the business of buying, selling, exchanging,
leasing, or renting property or his own account as principal and holding himself out as a full or parttime dealer in real estate or as an owner of rental property or properties rented or offered to rent for an
aggregate amount of three thousand pesos or more a year. . . .." (Italics ours.)
Wherefore, the appealed decision of the Court of Tax Appeals is hereby affirmed with costs against the
petitioners herein. It is so ordered.
Paras, C. J., Bengzon, Padilla, Reyes, A., Reyes, J. B. L., Endencia and Felix, JJ., concur.
Separate Opinions

BAUTISTA ANGELO, J., concurring:

I agree with the opinion that petitioners have actually contributed money to a common fund with
express purpose of engaging in real estate business for profit. The series of transactions which they had
undertaken attest to this. This appears in the following portion of of the decision:
"2.
They invested the same, not merely in one transaction, but in a series of transactions. On
February 2, 1943, they bought a lot for P100,000. On April 3, 1944, they purchased 21 lots for
P18,000. This was soon followed on April 23, 1944, by the acquisition of another real estate for
P108,825. Five (5) days later (April 28, 1944), they got a fourth lot for P237,234.14. The number of
lots (24) acquired and transactions undertaken, as well as the brief interregnum between each,
particularly the last three purchases, is strongly indicative of a pattern or common design that was not
limited to the conservation and preservation of the afore-mentioned common fund or even of the
property acquired by petitioner in February, 1943. In other words, one cannot but perceive a character
of habituality peculiar to business transactions engaged in for purposes of gain."
I wish however to make the following observation: Article 1769 of the new Civil Code lays down the
rule for determining when a transaction should be deemed a partnership or a co-ownership. Said article
paragraphs 2 and 3, provides:
"(2) Co-ownership or co-possession does not of itself establish a partnership, whether such coowners or co-possessors do or do not share any profits made by the use of the property;
"(3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons
sharing them have a joint or common right or interest in any property from which the returns are
derived;"
From the above it appears that the fact that those who agree to form a co-ownership share or do not
share any profits made by the use of the property held in common does not convert their venture into a
partnership Or the sharing of the gross returns does not of itself establish a partnership whether or not
the persons sharing therein have a joint or common right or interest in the property. This only means
that, aside from the circumstance of profit, the presence of other elements constituting partnership is
necessary, such as the clear intent to form a partnership, the existence of a juridical personality different
from that of the individual partners, and the freedom to transfer or assign any interest in the property by
one with the consent of the others (Padilla, Civil Code of the Philippines Annotated, Vol. I, 1953 ed.,
pp. 635-636).
It is evident that an isolated transaction whereby two or more persons contribute funds to buy certain
real estate for profit in the absence of other circumstances showing a contrary intention cannot be
considered a partnership.
"Persons who contribute property or funds for a common enterprise and agree to share the gross returns
of that enterprise in proportion to their contribution, but who severally retain the title to their respective
contribution, are not thereby rendered partners. They have no common stock or capital, and no
community of interest as principal proprietors in the business itself which the proceeds derived."
(Elements of the law of Partnership by Floyd R. Mechem, 2n Ed., section 83, p. 74.)
"A joint purchase of land, by two, does not constitute a copartnership in respect thereto; nor does an
agreement to share the profits and losses on the sale of land create a partnership; the parties are only
tenants in common." (Clark vs. Sideway, 142 U. S. 682, 12 S. Ct. 327, 35 L. Ed., 1157.)
"Where plaintiff, his brother, and another agreed to become owners of a single tract of realty, holding as
tenants in common, and to divide the profits of disposing of it, the brother and the other not being
entitled to share in plaintiff's commissions, no partnership existed as between the three parties,
whatever their relation may have been as to third parties." (Magee vs. Magee, 123 N. E. 673, 233 Mass.
341.)
"In order to constitute a partnership inter sese there must be: (a) An intent to form the same; (b)
generally a participating in both profits and losses; (c) and such a community of interest, as far as third
persons are concerned as enables each party to make contract, manage the business, and dispose of the

whole property." (Municipal Paving Co. vs. Herring, 150 P. 1067, 50 Ill. 470.)
"The common ownership of property does not itself create a partnership between the owners, though
they may use it for purpose of making gains; and they may, without becoming partners, agree among
themselves as to the management and use of such property and the application of the proceeds
therefrom." (Spurlock vs. Wilson, 142 S. W. 363, 160 No. App. 14.)
This is impliedly recognized in the following portion of the decision: "Although, taken singly, they
might not suffice to establish the intent necessary to constitute a partnership, the collective effect of
these circumstances (referring to the series of transactions) such as to leave no room for doubt on the
existence of said intent in petitioners herein."

SECOND DIVISION
[G.R. Nos. L-41919-24. May 30, 1980.]
QUIRICO P. UNGAB, petitioner, vs. HON. VICENTE N. CUSI, JR., in his capacity as Judge of the
Court of First Instance, Branch 1, 16TH Judicial District, Davao City, THE COMMISSIONER OF
INTERNAL REVENUE, and JESUS N. ACEBES, in his capacity as State Prosecutor, respondents.
DECISION
CONCEPCION, JR., J p:
Petition for certiorari and prohibition with preliminary injunction and restraining order to annul and set
aside the informations filed in Criminal Case Nos. 1960, 1961, 1962, 1963, 1964, and 1965 of the
Court of First Instance of Davao, all entitled: "People of the Philippines, plaintiff, versus Quirico
Ungab, accused;" and to restrain the respondent Judge from further proceeding with the hearing and
trial of the said cases. cdasia
It is not disputed that sometime in July, 1974, BIR Examiner Ben Garcia examined the income tax
returns filed by the herein petitioner, Quirico P. Ungab, for the calendar year ending December 31,
1973. In the course of his examination, he discovered that the petitioner failed to report his income
derived from sales of banana saplings. As a result, the BIR District Revenue Officer at Davao City sent
a "Notice of Taxpayer" to the petitioner informing him that there is due from him (petitioner) the
amount of P104,980.81, representing income, business tax and forest charges for the year 1973 and
inviting petitioner to an informal conference where the petitioner, duly assisted by counsel, may present
his objections to the findings of the BIR Examiner. 1 Upon receipt of the notice, the petitioner wrote
the BIR District Revenue Officer protesting the assessment, claiming that he was only a dealer or agent
on commission basis in the banana sapling business and that his income, as reported in his income tax
returns for the said year, was accurately stated. BIR Examiner Ben Garcia, however, was fully
convinced that the petitioner had filed a fraudulent income tax return so that he submitted a "Fraud
Referral Report," to the Tax Fraud Unit of the Bureau of Internal Revenue. After examining the records
of the case, the Special Investigation Division of the Bureau of Internal Revenue found sufficient proof
that the herein petitioner is guilty of tax evasion for the taxable year 1973 and recommended his
prosecution:
(1)
For having filed a false or fraudulent income tax return for 1973 with intent to evade his just
taxes due the government under Section 45 in relation to Section 72 of the National Internal Revenue
Code;
(2)
For failure to pay a fixed annual tax of P50.00 a year in 1973 and 1974, or a total of unpaid
fixed taxes of P100.00 plus penalties of P75.00 or a total of P175.00, in accordance with Section 183 of
the National Internal Revenue Code;
(3)
For failure to pay the 7% percentage tax, as a producer of banana poles or saplings, on the total
sales of P129,580.35 to the Davao Fruit Corporation, depriving thereby the government of its due
revenue in the amount of P15,872.59, inclusive of surcharge. 2
In a second indorsement to the Chief of the Prosecution Division, dated December 12, 1974, the
Commissioner of Internal Revenue approved the prosecution of the petitioner. 3
Thereafter, State Prosecutor Jesus Acebes, who had been designated to assist all Provincial and City
Fiscals throughout the Philippines in the investigation and prosecution, if the evidence warrants, of all
violations of the National Internal Revenue Code, as amended, and other related laws, in
Administrative Order No. 116 dated December 5, 1974, and to whom the case was assigned, conducted
a preliminary investigation of the case, and finding probable cause, filed six (6) informations against
the petitioner with the Court of First Instance of Davao City, to wit:
(1)
Criminal Case No. 1960 Violation of Sec. 45, in relation to Sec. 72 of the National Internal
Revenue Code, for filing a fraudulent income tax return for the calendar year ending December 31,
1973; 4
(2)
Criminal Case No. 1961 Violation of Sec. 182 (a), in relation to Secs. 178, 186, and 208 of

the National Internal Revenue Code, for engaging in business as producer of saplings, from January,
1973 to December, 1973, without first paying the annual fixed or privilege tax thereof; 5
(3)
Criminal Case No. 1962 Violation of Sec. 183 (a), in relation to Secs. 186 and 209 of the
National Internal Revenue Code, for failure to render a true and complete return on the gross quarterly
sales, receipts and earnings in his business as producer of banana saplings and to pay the percentage tax
due thereon, for the quarter ending December 31, 1973; 6
(4)
Criminal Case No. 1963 Violation of Sec. 183 (a), in relation to Secs. 186 and 209 of the
National Internal Revenue Code, for failure to render a true and complete return on the gross quarterly
sales receipts and earnings in his business as producer of saplings, and to pay the percentage tax due
thereon, for the quarter ending on March 31, 1973; 7
(5)
Criminal Case No. 1964 Violation of Sec. 183 (a), in relation to Secs. 186 and 209 of the
National Internal Revenue Code, for failure to render a true and complete return on the gross quarterly
sales, receipts and earnings in his business as producer of banana saplings for the quarter ending on
June 30, 1973, and to pay the percentage tax due thereon; 8
(6)
Criminal Case No. 1965 Violation of Sec. 183 (a), in relation to Secs. 186 and 209 of the
National Internal Revenue Code, for failure to render a true and complete return on the gross quarterly
sales, receipts and earnings as producer of banana saplings, for the quarter ending on September 30,
1973, and to pay the percentage tax due thereon. 9
On September 16, 1975, the petitioner filed a motion to quash the informations upon the grounds that:
(1) the informations are null and void for want of authority on the part of the State Prosecutor to initiate
and prosecute the said cages; and (2) the trial court has no jurisdiction to take cognizance of the aboveentitled cases in view of his pending protest against the assessment made by the BIR Examiner. 10
However, the trial court denied the motion on October 22, 1975. 11 Whereupon, the petitioner filed the
instant recourse. As prayed for, a temporary restraining order was issued by the Court, ordering the
respondent Judge from further proceeding with the trial and hearing of Criminal Case Nos. 1960, 1961,
1962, 1963, 1964, and 1965 of the Court of First Instance of Davao, all entitled: "People of the
Philippines, plaintiff, versus Quirico Ungab, accused.
The petitioner seeks the annulment of the informations filed against him on the ground that the
respondent State Prosecutor is allegedly without authority to do so. The petitioner argues that while the
respondent State Prosecutor may initiate the investigation of and prosecute crimes and violations of
penal laws when duly authorized, certain requisites, enumerated by this Court in its decision in the case
of Estrella vs. Orendain, 12 should be observed before such authority may be exercised; otherwise, the
provisions of the Charter of Davao City on the functions and powers of the City Fiscal will be
meaningless because according to said charter he has charge of the prosecution of all crimes committed
within his jurisdiction; and since "appropriate circumstances are not extant to warrant the intervention
of the State Prosecution to initiate the investigation, sign the informations and prosecute these cases,
said informations are null and void." The ruling adverted to by the petitioner reads, as follows: cdphil
"In view of all the foregoing considerations, it is the ruling of this Court that under Sections 1679 and
1686 of the Revised Administrative Code, in any instance where a provincial or city fiscal fails, refuses
or is unable, for any reason, to investigate or prosecute a case and, in the opinion of the Secretary of
Justice it is advisable in the public interest to take a different course of action, the Secretary of Justice
may either appoint as acting provincial or city fiscal, to handle the investigation or prosecution
exclusively and only of such case, any practicing attorney or some competent officer of the Department
of Justice or office of any city or provincial fiscal, with complete authority to act therein in all respects
as if he were the provincial or city fiscal himself, or appoint any lawyer in the government service,
temporarily to assist such city of provincial fiscal in the discharge of his duties, with the same complete
authority to act in dependently of and for such city or provincial fiscal, provided that no such
appointment may be made without first hearing the fiscal concerned and never after the corresponding
information has already been filed with the court by the corresponding city or provincial fiscal without

the conformity of the latter, except when it can be patently shown to the court having cognizance of the
case that said fiscal is intent on prejudicing the interests of justice. The same sphere of authority is true
with the prosecutor directed and authorized under Section 3 of Republic Act 3783, as amended and/or
inserted by Republic Act 5184. The observation in Salcedo vs. Liwag, supra, regarding the nature of the
power of the Secretary of Justice over fiscals as being purely over administrative matters only was not
really necessary, as indicated in the above relation of the facts and discussion of the legal issues of said
case, for the resolution thereof. In any event, to any extent that the opinion therein may be inconsistent
herewith, the same is hereby modified."
The contention is without merit. Contrary to the petitioner's claim, the rule therein established had not
been violated. The respondent State Prosecutor, although believing that he can proceed independently
of the City Fiscal in the investigation and prosecution of these cases, first sought permission from the
City Fiscal of Davao City before he started the preliminary investigation of these cases, and the City
Fiscal, after being shown Administrative Order No. 116, dated December 5, 1974, designating the said
State Prosecutor to assist all Provincial and City fiscals throughout the Philippines in the investigation
and prosecution of all violations of the National Internal Revenue Code, as amended, and other related
laws, graciously allowed the respondent State Prosecutor to conduct the investigation of said cases, and
in fact, said investigation was conducted in the office of the City Fiscal. 13
The petitioner also claims that the filing of the informations was precipitate and premature since the
Commissioner of Internal Revenue has not yet resolved his protests against the assessment of the
Revenue District Officer; and that he was denied recourse to the Court of Tax Appeals.
The contention is without merit. What is involved here is not the collection of taxes where the
assessment of the Commissioner of Internal Revenue may be reviewed by the Court of Tax Appeals,
but a criminal prosecution for violations of the National Internal Revenue Code which is within the
cognizance of courts of first instance. While there can be no civil action to enforce collection before the
assessment procedures provided in the Code have been followed, there is no requirement for the precise
computation and assessment of the tax before there can be a criminal prosecution under the Code.
"The contention is made, and is here rejected, that an assessment of the deficiency tax due is necessary
before the taxpayer can be prosecuted criminally for the charges preferred. The crime is complete when
the violator has, as in this case, knowingly and willfully filed fraudulent returns with intent to evade
and defeat a part or all of the tax." 14
"An assessment of a deficiency is not necessary to a criminal prosecution for willful attempt to defeat
and evade the income tax. A crime is complete when the violator has knowingly and willfully filed a
fraudulent return with intent to evade and defeat the tax. The perpetration of the crime is grounded
upon knowledge on the part of the taxpayer that he has made an inaccurate return, and the
government's failure to discover the error and promptly to assess has no connections with the
commission of the crime." 15
Besides, it has been ruled that a petition for reconsideration of an assessment may affect the suspension
of the prescriptive period for the collection of taxes, but not the prescriptive period of a criminal action
for violation of law. 16 Obviously, the protest of the petitioner against the assessment of the District
Revenue Officer cannot stop his prosecution for violation of the National Internal Revenue Code.
Accordingly, the respondent Judge did not abuse his discretion in denying the motion to quash filed by
the petitioner. LLjur
WHEREFORE, the petition should be, as it is hereby dismissed. The temporary restraining order
heretofore issued is hereby set aside. With costs against the petitioner.
SO ORDERED.
Barredo, Aquino, Abad Santos and De Castro, JJ ., concur.
Footnotes
1.
Rollo, p. 134.
2.
Id., pp. 136; 140.

3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.

Id., p. 141.
Id., p. 11.
Id., p. 13.
Id., p. 15.
Id., p. 17.
Id., p. 19.
Id., p. 21.
Id., p. 23.
Id., p. 40.
G.R. No. L-19611, February 27, 1971; 37 SCRA 640.
Rollo, p. 35.
Guzik vs. U.S., 54 F2d 618.
Merten's Law of Federal Income Taxation, Vol. 10, Sec. 55A.05, p. 21.
People vs. Ching Lak alias Ang You Chu, L-10609, May 23, 1958.

SECOND DIVISION
[G.R. No. 178087. May 5, 2010.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. KUDOS METAL CORPORATION,
respondent.
DECISION
DEL CASTILLO, J p:
The prescriptive period on when to assess taxes benefits both the government and the taxpayer. 1
Exceptions extending the period to assess must, therefore, be strictly construed. aCHDST
This Petition for Review on Certiorari seeks to set aside the Decision 2 dated March 30, 2007 of the
Court of Tax Appeals (CTA) affirming the cancellation of the assessment notices for having been issued
beyond the prescriptive period and the Resolution 3 dated May 18, 2007 denying the motion for
reconsideration.
Factual Antecedents
On April 15, 1999, respondent Kudos Metal Corporation filed its Annual Income Tax Return (ITR) for
the taxable year 1998.
Pursuant to a Letter of Authority dated September 7, 1999, the Bureau of Internal Revenue (BIR)
served upon respondent three Notices of Presentation of Records. Respondent failed to comply with
these notices, hence, the BIR issued a Subpoena Duces Tecum dated September 21, 2006, receipt of
which was acknowledged by respondent's President, Mr. Chan Ching Bio, in a letter dated October 20,
2000.
A review and audit of respondent's records then ensued.
On December 10, 2001, Nelia Pasco (Pasco), respondent's accountant, executed a Waiver of the
Defense of Prescription, 4 which was notarized on January 22, 2002, received by the BIR Enforcement
Service on January 31, 2002 and by the BIR Tax Fraud Division on February 4, 2002, and accepted by
the Assistant Commissioner of the Enforcement Service, Percival T. Salazar (Salazar). DACTSa
This was followed by a second Waiver of Defense of Prescription 5 executed by Pasco on February 18,
2003, notarized on February 19, 2003, received by the BIR Tax Fraud Division on February 28, 2003
and accepted by Assistant Commissioner Salazar.
On August 25, 2003, the BIR issued a Preliminary Assessment Notice for the taxable year 1998 against
the respondent. This was followed by a Formal Letter of Demand with Assessment Notices for taxable
year 1998, dated September 26, 2003 which was received by respondent on November 12, 2003.
Respondent challenged the assessments by filing its "Protest on Various Tax Assessments" on
December 3, 2003 and its "Legal Arguments and Documents in Support of Protests against Various
Assessments" on February 2, 2004.
On June 22, 2004, the BIR rendered a final Decision 6 on the matter, requesting the immediate
payment of the following tax liabilities:
Kind of Tax Amount
Income Tax P9,693,897.85
VAT 13,962,460.90
EWT 1,712,336.76
Withholding Tax-Compensation
247,353.24
Penalties
8,000.00

Total P25,624,048.76
============
Ruling of the Court of Tax Appeals, Second Division
Believing that the government's right to assess taxes had prescribed, respondent filed on August 27,
2004 a Petition for Review 7 with the CTA. Petitioner in turn filed his Answer. 8 cCAIaD
On April 11, 2005, respondent filed an "Urgent Motion for Preferential Resolution of the Issue on

Prescription." 9
On October 4, 2005, the CTA Second Division issued a Resolution 10 canceling the assessment notices
issued against respondent for having been issued beyond the prescriptive period. It found the first
Waiver of the Statute of Limitations incomplete and defective for failure to comply with the provisions
of Revenue Memorandum Order (RMO) No. 20-90. Thus:
First, the Assistant Commissioner is not the revenue official authorized to sign the waiver, as the tax
case involves more than P1,000,000.00. In this regard, only the Commissioner is authorized to enter
into agreement with the petitioner in extending the period of assessment;
Secondly, the waiver failed to indicate the date of acceptance. Such date of acceptance is necessary to
determine whether the acceptance was made within the prescriptive period;
Third, the fact of receipt by the taxpayer of his file copy was not indicated on the original copy. The
requirement to furnish the taxpayer with a copy of the waiver is not only to give notice of the existence
of the document but also of the acceptance by the BIR and the perfection of the agreement.
The subject waiver is therefore incomplete and defective. As such, the three-year prescriptive period
was not tolled or extended and continued to run. . . . 11 HAIaEc
Petitioner moved for reconsideration but the CTA Second Division denied the motion in a Resolution
12 dated April 18, 2006.
Ruling of the Court of Tax Appeals, En Banc
On appeal, the CTA En Banc affirmed the cancellation of the assessment notices. Although it ruled that
the Assistant Commissioner was authorized to sign the waiver pursuant to Revenue Delegation
Authority Order (RDAO) No. 05-01, it found that the first waiver was still invalid based on the second
and third grounds stated by the CTA Second Division. Pertinent portions of the Decision read as
follows:
While the Court En Banc agrees with the second and third grounds for invalidating the first waiver, it
finds that the Assistant Commissioner of the Enforcement Service is authorized to sign the waiver
pursuant to RDAO No. 05-01, which provides in part as follows:
A.
For National Office cases
Designated Revenue Official
1.
Assistant Commissioner (ACIR), For tax fraud and policy
Enforcement Service cases
2.
ACIR, Large Taxpayers Service
For large taxpayers cases
other than those cases falling
under Subsection B hereof CSIHDA
3.
ACIR, Legal Service For cases pending
verification and awaiting
resolution of certain legal
issues prior to prescription
and for issuance/compliance
of Subpoena Duces Tecum
4.
ACIR, Assessment Service (AS)
For cases which are pending
in or subject to review or
approval by the ACIR, AS
Based on the foregoing, the Assistant Commissioner, Enforcement Service is authorized to sign waivers
in tax fraud cases. A perusal of the records reveals that the investigation of the subject deficiency taxes
in this case was conducted by the National Investigation Division of the BIR, which was formerly
named the Tax Fraud Division. Thus, the subject assessment is a tax fraud case.
Nevertheless, the first waiver is still invalid based on the second and third grounds stated by the Court
in Division. Hence, it did not extend the prescriptive period to assess.
Moreover, assuming arguendo that the first waiver is valid, the second waiver is invalid for violating

Section 222(b) of the 1997 Tax Code which mandates that the period agreed upon in a waiver of the
statute can still be extended by subsequent written agreement, provided that it is executed prior to the
expiration of the first period agreed upon. As previously discussed, the exceptions to the law on
prescription must be strictly construed. cEAIHa
In the case at bar, the period agreed upon in the subject first waiver expired on December 31, 2002. The
second waiver in the instant case which was supposed to extend the period to assess to December 31,
2003 was executed on February 18, 2003 and was notarized on February 19, 2003. Clearly, the second
waiver was executed after the expiration of the first period agreed upon. Consequently, the same could
not have tolled the 3-year prescriptive period to assess. 13
Petitioner sought reconsideration but the same was unavailing.
Issue
Hence, the present recourse where petitioner interposes that:
THE COURT OF TAX APPEALS EN BANC ERRED IN RULING THAT THE GOVERNMENT'S
RIGHT TO ASSESS UNPAID TAXES OF RESPONDENT PRESCRIBED. 14
Petitioner's Arguments
Petitioner argues that the government's right to assess taxes is not barred by prescription as the two
waivers executed by respondent, through its accountant, effectively tolled or extended the period within
which the assessment can be made. In disputing the conclusion of the CTA that the waivers are invalid,
petitioner claims that respondent is estopped from adopting a position contrary to what it has
previously taken. Petitioner insists that by acquiescing to the audit during the period specified in the
waivers, respondent led the government to believe that the "delay" in the process would not be utilized
against it. Thus, respondent may no longer repudiate the validity of the waivers and raise the issue of
prescription. CSHEAI
Respondent's Arguments
Respondent maintains that prescription had set in due to the invalidity of the waivers executed by
Pasco, who executed the same without any written authority from it, in clear violation of RDAO No. 501. As to the doctrine of estoppel by acquiescence relied upon by petitioner, respondent counters that
the principle of equity comes into play only when the law is doubtful, which is not present in the instant
case.
Our Ruling
The petition is bereft of merit.
Section 203 15 of the National Internal Revenue Code of 1997 (NIRC) mandates the government to
assess internal revenue taxes within three years from the last day prescribed by law for the filing of the
tax return or the actual date of filing of such return, whichever comes later. Hence, an assessment
notice issued after the three-year prescriptive period is no longer valid and effective. Exceptions
however are provided under Section 222 16 of the NIRC.
The waivers executed by respondent's
accountant did not extend the period
within which the assessment can be
made
Petitioner does not deny that the assessment notices were issued beyond the three-year prescriptive
period, but claims that the period was extended by the two waivers executed by respondent's
accountant. TECcHA
We do not agree.
Section 222 (b) of the NIRC provides that the period to assess and collect taxes may only be extended
upon a written agreement between the CIR and the taxpayer executed before the expiration of the threeyear period. RMO 20-90 17 issued on April 4, 1990 and RDAO 05-01 18 issued on August 2, 2001 lay
down the procedure for the proper execution of the waiver, to wit:
1.
The waiver must be in the proper form prescribed by RMO 20-90. The phrase "but not after

________ 19 ___", which indicates the expiry date of the period agreed upon to assess/collect the tax
after the regular three-year period of prescription, should be filled up.
2.
The waiver must be signed by the taxpayer himself or his duly authorized representative. In the
case of a corporation, the waiver must be signed by any of its responsible officials. In case the authority
is delegated by the taxpayer to a representative, such delegation should be in writing and duly
notarized.
3.
The waiver should be duly notarized.
4.
The CIR or the revenue official authorized by him must sign the waiver indicating that the BIR
has accepted and agreed to the waiver. The date of such acceptance by the BIR should be indicated.
However, before signing the waiver, the CIR or the revenue official authorized by him must make sure
that the waiver is in the prescribed form, duly notarized, and executed by the taxpayer or his duly
authorized representative. HaTAEc
5.
Both the date of execution by the taxpayer and date of acceptance by the Bureau should be
before the expiration of the period of prescription or before the lapse of the period agreed upon in case
a subsequent agreement is executed.
6.
The waiver must be executed in three copies, the original copy to be attached to the docket of
the case, the second copy for the taxpayer and the third copy for the Office accepting the waiver. The
fact of receipt by the taxpayer of his/her file copy must be indicated in the original copy to show that
the taxpayer was notified of the acceptance of the BIR and the perfection of the agreement. 19
A perusal of the waivers executed by respondent's accountant reveals the following infirmities:
1.
The waivers were executed without the notarized written authority of Pasco to sign the waiver
in behalf of respondent.
2.
The waivers failed to indicate the date of acceptance.
3.
The fact of receipt by the respondent of its file copy was not indicated in the original copies of
the waivers. CHTcSE
Due to the defects in the waivers, the period to assess or collect taxes was not extended. Consequently,
the assessments were issued by the BIR beyond the three-year period and are void.
Estoppel does not apply in this case
We find no merit in petitioner's claim that respondent is now estopped from claiming prescription since
by executing the waivers, it was the one which asked for additional time to submit the required
documents.
In Collector of Internal Revenue v. Suyoc Consolidated Mining Company, 20 the doctrine of estoppel
prevented the taxpayer from raising the defense of prescription against the efforts of the government to
collect the assessed tax. However, it must be stressed that in the said case, estoppel was applied as an
exception to the statute of limitations on collection of taxes and not on the assessment of taxes, as the
BIR was able to make an assessment within the prescribed period. More important, there was a finding
that the taxpayer made several requests or positive acts to convince the government to postpone the
collection of taxes, viz.:
It appears that the first assessment made against respondent based on its second final return filed on
November 28, 1946 was made on February 11, 1947. Upon receipt of this assessment respondent
requested for at least one year within which to pay the amount assessed although it reserved its right to
question the correctness of the assessment before actual payment. Petitioner granted an extension of
only three months. When it failed to pay the tax within the period extended, petitioner sent respondent
a letter on November 28, 1950 demanding payment of the tax as assessed, and upon receipt of the letter
respondent asked for a reinvestigation and reconsideration of the assessment. When this request was
denied, respondent again requested for a reconsideration on April 25, 1952, which was denied on May
6, 1953, which denial was appealed to the Conference Staff. The appeal was heard by the Conference
Staff from September 2, 1953 to July 16, 1955, and as a result of these various negotiations, the
assessment was finally reduced on July 26, 1955. This is the ruling which is now being questioned after

a protracted negotiation on the ground that the collection of the tax has already prescribed. AHaDSI
It is obvious from the foregoing that petitioner refrained from collecting the tax by distraint or levy or
by proceeding in court within the 5-year period from the filing of the second amended final return due
to the several requests of respondent for extension to which petitioner yielded to give it every
opportunity to prove its claim regarding the correctness of the assessment. Because of such requests,
several reinvestigations were made and a hearing was even held by the Conference Staff organized in
the collection office to consider claims of such nature which, as the record shows, lasted for several
months. After inducing petitioner to delay collection as he in fact did, it is most unfair for respondent to
now take advantage of such desistance to elude his deficiency income tax liability to the prejudice of
the Government invoking the technical ground of prescription.
While we may agree with the Court of Tax Appeals that a mere request for reexamination or
reinvestigation may not have the effect of suspending the running of the period of limitation for in such
case there is need of a written agreement to extend the period between the Collector and the taxpayer,
there are cases however where a taxpayer may be prevented from setting up the defense of prescription
even if he has not previously waived it in writing as when by his repeated requests or positive acts the
Government has been, for good reasons, persuaded to postpone collection to make him feel that the
demand was not unreasonable or that no harassment or injustice is meant by the Government. And
when such situation comes to pass there are authorities that hold, based on weighty reasons, that such
an attitude or behavior should not be countenanced if only to protect the interest of the Government.
IcTCHD
This case has no precedent in this jurisdiction for it is the first time that such has risen, but there are
several precedents that may be invoked in American jurisprudence. As Mr. Justice Cardozo has said:
"The applicable principle is fundamental and unquestioned. 'He who prevents a thing from being done
may not avail himself of the nonperformance which he has himself occasioned, for the law says to him
in effect "this is your own act, and therefore you are not damnified.'" "(R. H. Stearns Co. vs. U.S., 78 L.
ed., 647). Or, as was aptly said, "The tax could have been collected, but the government withheld action
at the specific request of the plaintiff. The plaintiff is now estopped and should not be permitted to raise
the defense of the Statute of Limitations." [Newport Co. vs. U.S., (DC-WIS), 34 F. Supp. 588]. 21
Conversely, in this case, the assessments were issued beyond the prescribed period. Also, there is no
showing that respondent made any request to persuade the BIR to postpone the issuance of the
assessments.
The doctrine of estoppel cannot be applied in this case as an exception to the statute of limitations on
the assessment of taxes considering that there is a detailed procedure for the proper execution of the
waiver, which the BIR must strictly follow. As we have often said, the doctrine of estoppel is predicated
on, and has its origin in, equity which, broadly defined, is justice according to natural law and right. 22
As such, the doctrine of estoppel cannot give validity to an act that is prohibited by law or one that is
against public policy. 23 It should be resorted to solely as a means of preventing injustice and should
not be permitted to defeat the administration of the law, or to accomplish a wrong or secure an undue
advantage, or to extend beyond them requirements of the transactions in which they originate. 24
Simply put, the doctrine of estoppel must be sparingly applied. DcAEIS
Moreover, the BIR cannot hide behind the doctrine of estoppel to cover its failure to comply with RMO
20-90 and RDAO 05-01, which the BIR itself issued. As stated earlier, the BIR failed to verify whether
a notarized written authority was given by the respondent to its accountant, and to indicate the date of
acceptance and the receipt by the respondent of the waivers. Having caused the defects in the waivers,
the BIR must bear the consequence. It cannot shift the blame to the taxpayer. To stress, a waiver of the
statute of limitations, being a derogation of the taxpayer's right to security against prolonged and
unscrupulous investigations, must be carefully and strictly construed. 25
As to the alleged delay of the respondent to furnish the BIR of the required documents, this cannot be
taken against respondent. Neither can the BIR use this as an excuse for issuing the assessments beyond

the three-year period because with or without the required documents, the CIR has the power to make
assessments based on the best evidence obtainable. 26
WHEREFORE, the petition is DENIED. The assailed Decision dated March 30, 2007 and Resolution
dated May 18, 2007 of the Court of Tax Appeals are hereby AFFIRMED.
SO ORDERED. EcTaSC
Carpio, Brion, Abad and Perez, JJ., concur.
Footnotes
1.
Republic of the Phils. v. Ablaza, 108 Phil. 1105, 1108 (1960).
2.
Rollo, pp. 31-45; penned by Associate Justice Lovell R. Bautista and concurred in by Associate
Justices Juanito C. Castaeda, Jr., Erlinda P. Uy, Caesar A. Casanova and Olga Palanca-Enriquez.
Presiding Justice Ernesto D. Acosta was on leave.
3.
Id. at 46-50; penned by Associate Justice Lovell R. Bautista and concurred in by Presiding
Justice Ernesto D. Acosta and Associate Justices Juanito C. Castaeda, Jr., Erlinda P. Uy, Caesar A.
Casanova and Olga Palanca-Enriquez.
4.
Records, pp. 227-228.
5.
Id. at 229-230.
6.
Id. at 18-21.
7.
Id. at 1-17.
8.
Id. at 161-165.
9.
Id. at 219-226.
10.
Id. at 259-266.
11.
Id. at 265.
12.
Id. at 294-296.
13.
Rollo, pp. 42-43.
14.
Id. at 17.
15.
SEC. 203. Period of Limitation Upon Assessment and Collection. Except as provided in
Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed
by law for the filing of the return, and no proceeding in court without assessment for the collection of
such taxes shall be begun after the expiration of such period: Provided, That in a case where a return is
filed beyond the period prescribed by law, the three (3)-year period shall be counted from the day the
return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the
filing thereof shall be considered as filed on such last day.
16.
SEC. 222. Exceptions as to period of limitation of assessment and collection of taxes.
(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return,
the tax may be assessed, or a proceeding in court for the collection of such tax may be filed without
assessment, at any time within ten (10) years after the discovery of the falsity, fraud, or omission:
Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be
judicially taken cognizance of in the civil or criminal action for the collection thereof.
(b) If before the expiration of the time prescribed in Section 203 for the assessment of the tax,
both the Commissioner and the taxpayer have agreed in writing to its assessment after such time, the
tax may be assessed within the period agreed upon. The period so agreed upon may be extended by
subsequent written agreement made before the expiration of the period previously agreed upon.
(c) Any internal revenue tax which has been assessed within the period of limitation as
prescribed in paragraph (a) hereof may be collected by distraint or levy or by a proceeding in court
within five (5) years following the assessment of the tax.
(d) Any internal revenue tax, which has been assessed within the period agreed upon as
provided in paragraph (b) hereinabove, may be collected by distraint or levy or by a proceeding in court
within the period agreed upon in writing before the expiration of the five (5)-year period. The period so
agreed upon may be extended by subsequent written agreements made before the expiration of the

period previously agreed upon.

(e) Provided, however, That nothing in the immediately preceding Section and paragraph (a)
hereof shall be construed to authorize the examination and investigation or inquiry into any tax return
filed in accordance with the provisions of any tax amnesty law or decree.
17.
In the execution of said waiver, the following procedures should be followed:
1. The waiver must be in the form identified hereof. This form may be reproduced by the Office
concerned but there should be no deviation from such form. The phrase "but not after _______ 19 ___"
should be filled up. This indicates the expiry date of the period agreed upon to assess/collect the tax
after the regular three-year period of prescription. The period agreed upon shall constitute the time
within which to effect the assessment/collection of the tax in addition to the ordinary prescriptive
period.
2. The waiver shall be signed by the taxpayer himself or his duly authorized representative. In
the case of a corporation, the waiver must be signed by any of its responsible officials.
Soon after the waiver is signed by the taxpayer, the Commissioner of Internal Revenue or the
revenue official authorized by him, as hereinafter provided, shall sign the waiver indicating that the
Bureau has accepted and agreed to the waiver. The date of such acceptance by the Bureau should be
indicated. Both the date of execution by the taxpayer and date of acceptance by the Bureau should be
before the expiration of the period of prescription or before the lapse of the period agreed upon in case
a subsequent agreement is executed.
3. The following revenue officials are authorized to sign the waiver.
A. In the National Office
1.
ACIRs for Collection, Special
For tax cases involving
Operations National Assessment,
not more than P500,000.00
Excise and Legal on tax cases
pending before their respective
offices. In the absence of the
ACIR, the Head Executive
Assistant may sign the waiver.
3.
CommissionerFor tax cases involving more
than P1M
xxx
xxx
xxx
4. The waiver must be executed in three (3) copies, the original copy to be attached to the
docket of the case, the second copy for the taxpayer and the third copy for the Office accepting the
waiver. The fact of receipt by the taxpayer of his/her file copy shall be indicated in the original copy.
5. The foregoing procedures shall be strictly followed. Any revenue official found not to have
complied with this Order resulting in prescription of the right to assess/collect shall be administratively
dealt with.
18.
I. Revenue Officials Authorized to Sign the Waiver
The following revenue officials are authorized to sign and accept the Waiver of the
Defense of Prescription Under the Statute of Limitations (Annex A) prescribed in Sections 203, 222
and other related provisions of the National Internal Revenue Code of 1997:
A. For National Office cases
Designated Revenue Official
1.
Assistant Commissioner (ACIR),
For tax fraud and policy
Enforcement Service
cases
xxx
xxx
xxx
In order to prevent undue delay in the execution and acceptance of the waiver, the
assistant heads of the concerned offices are likewise authorized to sign the same under meritorious
circumstances in the absence of the abovementioned officials.

The authorized revenue official shall ensure that the waiver is duly accomplished and
signed by the taxpayer or his authorized representative before affixing his signature to signify
acceptance of the same. In case the authority is delegated by the taxpayer to a representative, the
concerned revenue official shall see to it that such delegation is in writing and duly notarized. The
"WAIVER" should not be accepted by the concerned BIR office and official unless duly notarized.
II. Repealing Clause
All other issuances and/or portions thereof inconsistent herewith are hereby repealed and
amended accordingly.
19.
Philippine Journalists, Inc. v. Commissioner of Internal Revenue, 488 Phil. 218, 235 (2004).
20.
104 Phil. 819 (1958).
21.
Id. at 822-824.
22.
La Naval Drug Corporation v. Court of Appeals, G.R. No. 103200, August 31, 1994, 236 SCRA
78, 87.
23.
Ouano v. Court of Appeals, 446 Phil. 690, 708 (2003).
24.
C & S Fishfarm Corporation v. Court of Appeals, 442 Phil. 279, 290 (2002).
25.
Philippine Journalists, Inc. v. Commissioner of Internal Revenue, supra note 19 at 231-232.
26.
SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional
Requirements for Tax Administration and Enforcement.
xxx
xxx
xxx
(b) Failure to Submit Required Returns, Statements, Reports and other Documents. When a
report required by law as a basis for the assessment of any national internal revenue tax shall not be
forthcoming within the time fixed by law or rules and regulations or when there is reason to believe
that any such report is false, incomplete or erroneous, the Commissioner shall assess the proper tax on
the best evidence obtainable.
In case a person fails to file a required return or other document at the time prescribed by
law, or willfully or otherwise files a false or fraudulent return or other document, the Commissioner
shall make or amend the return from his own knowledge and from such information as he can obtain
through testimony or otherwise, which shall be prima facie correct and sufficient for all legal purposes.

EN BANC
[G.R. No. L-21609. September 29, 1966.]
REPUBLIC OF THE PHILIPPINES, plaintiff-appellant, vs. KER & COMPANY, LTD., defendantappellant.
Solicitor General for plaintiff-appellant.
Leido, Andrada, Perez & Associates for defendant-appellant.
SYLLABUS
1.
SUMMONS; SERVICE UPON A DOMESTIC CORPORATION; SUMMONS SERVED ON
COUNSEL VALID; CASE AT BAR. Section 13, Rule 7 (Now Section 13, Rule 14) of the Rules of
Court provides that service of summons upon a domestic corporation may be made on its agent. In the
case at bar, when defendant corporation's counsel in the administrative stages of the present tax case
received the summons, they were still acting for and in behalf of defendant in connection with its tax
liability involved in the case. Perforce, they were the taxpayer's agent, and under the aforecited rule
service upon them is sufficient.
2.
ID.; ID.; EFFECT OF VOLUNTARY SUBMISSION TO JURISDICTION OF COURT; CASE
AT BAR. In interposing, in its motion to dismiss, prescription of plaintiff's cause of action,
defendant availed of an affirmative defense on the basis of which it prayed the court to resolve
controversy in its favor. For the court to validly decide the said plea, it necessarily had to acquire
jurisdiction upon the latter's person, which, being the proponent of the affirmative defense, should be
deemed to have abandoned its special appearance and voluntarily submitted itself to the jurisdiction of
the court.
3.
ID.; ID.; ID.; DEFECTS OF SUMMONS CURED BY FILING OF ANSWER. Defects of
summons are cured by voluntary appearance and by the filing of an answer to the complaint. (Ramos
vs. Maalac, et al., 89 Phil., 270). A defendant cannot be permitted to speculate upon the judgment of
the court by objecting to the court's jurisdiction over its person if the judgment is adverse to it, and
acceding to jurisdiction over its person if and when the judgment sustains its defenses.
4.
TAXATION; DEFICIENCY INCOME TAX; PRESCRIPTION OF ACTION; DEGREE OF
PROOF REQUIRED TO ESTABLISH FRAUD; CASE AT BAR. Fraud is a question of fact
(Gutierrez vs. Court of Tax Appeals, G.R. Nos. L-9738 and L- 9771, May 31, 1957) which must be
alleged and proved (Section 12, Rule 15 [now Section 5, Rule 8], Rules of Court). It is a serious charge
and, to be sustained it must be supported by clear and convincing proof (Collector of Internal Revenue
vs. Benipayo, G.R. No. L-13656, January 31, 1962). In the instant case the filing by the taxpayer of a
false return was neither alleged in the complaint nor proved in court. Hence, the lower court correctly
resolve the issue of prescription without touching upon fraudulence of the return.
5.
ID.; ID.; ID.; WAIVER OF RIGHT TO OBJECT TO THE SETTING UP OF DEFENSE OF
PRESCRIPTION; CASE AT BAR. The assessment for deficiency income tax for 1947 has become
final and executory, and, therefore, defendant may not any more raise defenses which go into the merits
of the assessment, i.e., prescription of the Commissioner's right to assess the tax. (Republic of the
Philippines vs. Albert, G. R. No. L- 12996, December 28, 1961; Republic of the Philippines vs. Lim
Tian Teng Sons & Co., Inc., G. R. No. L-21731, March 31, 1966.) However, defendant raised the
defense of prescription in the proceedings below and the Republic of the Philippines instead of
questioning the right of the defendant to raise such defense, litigated on it and submitted the issue for
resolution of the court. By its actuation, the Republic of the Philippines should be considered to have
waived its right to object to the setting up of such defense.
6.
ID.; ID.; ID.; SUSPENSION OF THE RUNNING OF PRESCRIPTIVE PERIOD; EFFECT OF
PENDENCY OF APPEALS; CASE AT BAR. Under Section 333 of the Tax Code the running of the
prescriptive period to collect deficiency taxes shall be suspended for the period during which the
Commissioner of Internal Revenue is prohibited from beginning a distraint and levy or instituting a
proceeding in court, and for sixty days thereafter. In the case at bar, the pendency of the taxpayer's

appeal in the Court of Tax Appeals and in the Supreme Court had the effect of temporarily staying the
hands of the said Commissioner. If the taxpayer's stand that the pendency of the appeal did not stop the
running of the period because the Court of Tax Appeals did not have jurisdiction over the case is
upheld, taxpayers would be encouraged to delay the payment of taxes in the hope of ultimately
avoiding the same. Under the circumstances, the running of the prescriptive period was suspended.
7.
ID.; ID.; FROM WHAT PERIOD DELINQUENCY STARTS TO ACCRUE; CASE AT BAR.
The letter of assessment shows that the deficiency income tax for 1948 and 1949 became due on
March 15, 1953 and that for 1950 accrued on February 15, 1954. Since the tax in question remained
unpaid, delinquency interest accrued and became due starting from said due dates.
DECISION
BENGZON, J.P., J.:
Ker & Co., Ltd., a domestic corporation, filed its income tax returns for the years 1947, 1948, 1949 and
1950 on the following dates:
Year Date Filed
1947 April 12, 1948
1948 April 30, 1949
1949 May 15, 1950
1950 May 9, 1951
It amended its income tax returns for 1948 and 1949 on May 11, 1949 and June 30, 1950, respectively.
In 1953 the Bureau of Internal Revenue examined and audited Ker & Co., Ltd.'s returns and books of
accounts and subsequently issued the following assessments for deficiency income tax:
Year Amount
Date Assessed
1947 P42,342.30 July 25, 1953
1948 18,651.87
Feb. 16, 1953
1949 139.67 Feb. 16, 1953
1950 12,813.30
Feb. 16, 1953
due and payable on dates indicated in the accompanying notices of assessment. The assessments for
1948 and 1950 carried the surcharge of 50% authorized under Section 72 of the Tax Code for the filing
of fraudulent returns.
Upon request of Ker and Co., Ltd., through Atty. Jose Leido, its counsel, the Bureau of Internal
Revenue reduced the assessments for the year 1947 from P42,342.30 to P27,026.28 and for the year
1950 from P12,813.00 to P8,542.00, imposed the 50% surcharge for the year 1947 and eliminated the
same surcharge from the assessment for the year 1950. The assessments for years 1948 and 1949
remained the same.
On March 1, 1956 Ker & Co., Ltd., filed with the Court of Tax Appeals a petition for review with
preliminary injunction. No preliminary injunction was issued, for said court dismissed the appeal for
having been instituted beyond the 30-day period provided for in Section 11 of Republic Act 1125. We
affirmed the order of dismissal in L-12396. 1
On March 15, 1962, the Bureau of Internal Revenue demanded payment of the aforesaid assessments
together with a surcharge of 5% of late payment and interest at the rate of 1% monthly. Ker & Co.,
Ltd., refused to pay, instead in its letters dated March 28, 1962 and April 10, 1962 it set up the defense
of prescription of the Commissioner's right to collect the tax. Subsequently, the Republic of the
Philippines filed on March 27, 1962 a complaint with the Court of First Instance of Manila seeking
collection of the aforesaid deficiency income tax for the years 1947, 1948, 1949 and 1950. The
complaint did not allege fraud in the filing of any of the income tax returns for the years involved, nor
did it pray for the payment of the corresponding 50% surcharge, but it prayed for the payment of 5%
surcharge for late payment and interest of 1% per month without however specifying from what date
interest started to accrue.
Summons was served not on the defendant taxpayer but upon Messrs. Leido and Associates, its counsel

in the proceedings before the Bureau of Internal Revenue and the Court of Tax Appeals.
On April 14, 1962 Ker & Co., Ltd. through its counsel, Leido, Andrada, Perez & Associates, moved for
the dismissal of the complaint on the ground that the court did not acquire jurisdiction over the person
of the defendant and that plaintiff's cause of action has prescribed. This motion was denied and
defendant filed a motion for reconsideration. Resolution on said motion, however, was deferred until
trial of the case on the merits.
On May 18, 1962, Ker & Co., Ltd. filed its answer to the complaint interposing therein the defense set
up in its motion to dismiss of April 14, 1962.
On September 18, 1962 the Republic of the Philippines amended its complaint, in answer to which Ker
& Co., Ltd. adopted the same answer which it had filed on May 18, 1962.
On January 30, 1963 the Court of First Instance rendered judgment, the dispositive portion of which
states:
"WHEREFORE, this Court dismisses the claim for the collection of deficiency income taxes for 1947,
but orders defendant taxpayer to pay the deficiency income taxes for 1948, 1949 and 1950, in the
amounts of P18,651.87, P139.67 and P8,542.00, respectively, plus 5% surcharge thereon on each
amount and interest of 1% a month computed from March 27, 1962 until full payment thereof is made,
plus the costs of suit."
On February 20, 1963 the Republic of the Philippines filed a motion for reconsideration contending
that the right of the Commissioner of Internal Revenue to collect the deficiency assessment for 1947
has not prescribed by a lapse of merely five years and three months, because the taxpayer's income tax
return was fraudulent in which case prescription sets in ten years from October 31, 1951, the date of
discovery of the fraud, pursuant to Section 332(a) of the Tax Code; and that the payment of
delinquency interest of 1% per month should commence from the date it fell due as indicated in the
assessment notices instead of on the date the complaint was filed.
On March 6, 1963 Ker & Co., Ltd. also filed a motion for reconsideration reiterating its assertion that
the Court of First Instance did not acquire jurisdiction over its person, and maintaining that since the
complaint was filed nine years, one month and eleven days after the deficiency assessments for 1948,
1949 and 1950 were made and since the filing of its petition for review in the Court of Tax Appeals did
not stop the running of the period of limitations, the right of the Commissioner of Internal Revenue to
collect the tax in question has prescribed.
The two motions for reconsideration having been denied, both parties appealed directly to this Court.
The issues in this case are:
1.
Did the Court of First Instance acquire jurisdiction over the person of defendant Ker & Co.,
Ltd.?
2.
Did the right of the Commissioner of Internal Revenue to assess deficiency income tax for the
year 1947 prescribe?
3.
Did the filing of a petition for review by the taxpayer in the Court of Tax Appeals suspend the
running of the statute of limitations to collect the deficiency income tax for the years 1948, 1949 and
1950?
4.
When did the delinquency interest on the deficiency income tax for the year 1948, 1949 and
1950 accrue?
First Issue
Ker & Co., Ltd. maintains that the court a quo did not acquire jurisdiction over its person inasmuch as
summons was not served upon it but upon Messrs. Leido and Associates who do not come under any of
the class of person upon whom summons should be served as enumerated in Section 13, Rule 7 of the
Rules of Court, 2 which reads:
"SEC. 13.
Service upon private domestic corporations or partnership. If the defendant is a
corporation formed under the laws of the Philippines or a partnership duly registered, service may be
made on the president, manager, secretary, cashier, agent, or any of its directors."

Messrs. Leido and Associates acted as counsel for Ker & Co., Ltd. when this tax case was in its
administrative stage. The same counsel represented Ker & Co., Ltd. when it appealed said case to the
Court of Tax Appeals and later to this Court. Subsequently, when the Deputy Commissioner of Internal
Revenue, by letter dated March 15, 1962, demanded the payment of the deficiency income tax in
question, it was Messrs. Leido, Andrada, Perez & Associates who replied in behalf of Ker & Co., Ltd.
in two letters, dated March 28, 1962 and April 10, 1962, both after the complaint in this case was filed.
At least therefore on April 2, 1962 when Messrs. Leido and Associates received the summons, they
were still acting for and in behalf of Ker & Co., Ltd. in connection with its tax liability involved in this
case. Perforce, they were the taxpayer's agent when summons was served. Under Section 13 of Rule 7,
aforequoted, service upon the agent of a corporation is sufficient.
We observe that the motion to dismiss filed on April 14, 1962, aside from disputing the lower court's
jurisdiction over defendant's person, prayed for dismissal of the complaint on the ground that plaintiff's
cause of action has prescribed. By interposing such second ground in its motion to dismiss, Ker & Co.,
Ltd. availed of an affirmative defense on the basis of which it prayed the court to resolve controversy in
its favor. For the court to validly decide the said plea of defendant Ker & Co., Ltd., it necessarily had to
acquire jurisdiction upon the latter's person, who, being the proponent of the affirmative defense,
should be deemed to have abandoned its special appearance and voluntarily submitted itself to the
jurisdiction of the court. 3
Voluntary appearance cures defects of summons, if any. 4 Such defect, if any, was further cured when
defendant filed its answer to the complaint. 5 A defendant can not be permitted to speculate upon the
judgment of the court by objecting to the court's jurisdiction over its person if the judgment is adverse
to it, and acceding to jurisdiction over its person if and when the judgment sustains its defenses.
Second Issue
Ker & Co., Ltd. contends that under Section 331 of the Tax Code the right of the Commissioner of
Internal Revenue to assess against it a deficiency income tax for the year 1947 has prescribed because
the assessment was issued on July 25, 1953 after a lapse of five years, three months and thirteen days
from the date (April 12, 1948) it filed its income tax return. On the other hand, the Republic of the
Philippines insists that the taxpayer's income tax return was fraudulent, therefore the Commissioner of
Internal Revenue may assess the tax within ten years from discovery of the fraud on October 31, 1951
pursuant to Section 332 (a) of the Tax Code.
The stand of the Republic of the Philippines hinges on whether or not the taxpayer's tax return for 1947
was fraudulent.
The court a quo, confining itself to determining whether or not the assessment of the tax for 1947 was
issued within the five-year period provided for in Section 331 of the Tax Code, ruled that the right of
the Commissioner of Internal Revenue to assess the tax has prescribed. Said the lower court:
"The Court resolved the second issue in the negative, because Sec. 331 of the Revenue Code explicitly
provides, in mandatory terms, that 'Internal Revenue taxes shall be assessed within 5 years after the
return was filed, and no proceedings in court without assessment, for the collection of such taxes, shall
be begun after expiration of such period.' The attempt by the Commissioner of Internal Revenue to
make an assessment of July 25, 1953, on the basis of a return filed on April 12, 1948, is an exercise of
authority against the aforequoted explicit and mandatory limitations of statutory law. Settled in our
system is the rule that acts committed against the provisions of mandatory or prohibitory laws shall be
void (Art. 5 New civil Code) . . ."
Said court resolved the issue without touching upon fraudulence of the return. The reason is that the
complaint alleged no fraud, nor did the plaintiff present evidence to prove fraud.
In reply to the lower court's conclusion, the Republic of the Philippines maintains in its brief that Ker &
Co., Ltd. filed a false return and since the fraud penalty of 50% surcharge was imposed in the
deficiency income tax assessment, which has become final and executory, the finding of the
Commissioner of Internal Revenue as to the existence of the fraud has also become final and need not

be proved. This contention suffers from a flaw in that it fails to consider the well-settled principle that
fraud is a question of fact 6 which must be alleged and proved. 7 Fraud is a serious charge and, to be
sustained, it must be supported by clear and convincing proof. 8 Accordingly, fraud should have been
alleged and proved in the lower court. On these premises We therefore sustain the ruling of the lower
court upon the point of prescription.
It would be worth mentioning that since the assessment for deficiency income tax for 1947 has become
final and executory, Ker & Co., Ltd. may not any more raise defenses which go into the merits of the
assessment, i. e., prescription of the Commissioner's right to assess the tax. Such was our ruling in
previous cases. 9 In this case however, Ker & Co., Ltd. raised the defense of prescription in the
proceedings below and the Republic of the Philippines, instead of questioning the right of the defendant
to raise such defense, litigated on it and submitted the issue for resolution of the court. By its actuation,
the Republic of the Philippines should be considered to have waived its right to object to the setting up
of such defense.
Third Issue
Ker & Co., Ltd. impresses upon Us that since the Republic of the Philippines filed the complaint for the
collection of the deficiency income tax for the years 1948, 1949 and 1950 only on March 27, 1962, or
nine years, one month and eleven days from February 16, 1953, the date the tax was assessed, the right
to collect the same has prescribed pursuant to Section 332(c) of the Tax Code. The Republic of the
Philippines however contends that the running of the prescriptive period was interrupted by the filing
of the taxpayer's petition for review in the Court of Tax Appeals on March 1, 1956.
If the period during which the case was pending in the Court of Tax Appeals and in the Supreme Court
were not counted in reckoning the prescriptive period, less than five years would have elapsed, hence,
the right to collect the tax has not prescribed.
The taxpayer counters that the filing of the petition for review in the Court of Tax Appeals could not
have stopped the running of the prescriptive period to collect because said court did not have
jurisdiction over the case, the appeal having been interposed beyond the 30-day period set forth in
Section 11 of Republic Act 1125. Precisely, it adds, the Tax Court dismissed the appeal for lack of
jurisdiction and said dismissal was affirmed by the Supreme Court in L-12396 aforementioned.
Under Section 333 of the Tax Code, quoted hereunder:
"SEC. 333. Suspension of running of statute. The running of the statute of limitations provided in
Section 331 or three hundred thirty-two on the making of assessments and the beginning of distraint or
levy or a proceeding in court for collection, in respect of any deficiency, shall be suspended for the
period during which the Collector of Internal Revenue is prohibited from making the assessment or
beginning distraint or levy or a proceeding in court, and for sixty days thereafter."
the running of the prescriptive period to collect the tax shall be suspended for the period during which
the Commissioner of Internal Revenue is prohibited from beginning a distraint and levy or instituting a
proceeding in court, and for sixty days thereafter.
Did the pendency of the taxpayer's appeal in the Court of Tax Appeals and in the Supreme Court have
the effect of legally preventing the Commissioner of Internal Revenue from instituting an action in the
Court of First Instance for the collection of the tax? Our view is that it did.
From March 1, 1956 when Ker & Co., Ltd. filed a petition for review in the Court of Tax Appeals
contesting the legality of the assessments in question, until the termination of its appeal in the Supreme
Court, the Commissioner of Internal Revenue was prevented, as recognized in this Court's ruling in
Ledesma, et al. vs. Court of Tax Appeals, 10 from filing an ordinary action in the Court of First
Instance to collect the tax. Besides, to do so would be to violate the judicial policy of avoiding
multiplicity of suits and the rule on lis pendens. 11
It would be interesting to note that when the Commissioner of Internal Revenue issued the final
deficiency assessments on January 5, 1954, he had already lost, by prescription, the right to collect the
tax (except that for 1950) by the summary method of warrant of distraint and levy. Ker & Co., Ltd.

immediately thereafter requested suspension of the collection of the tax without penalty incident to late
payment pending the filing of a memorandum in support of its views. As requested, no tax was
collected. On May 22, 1954 the projected memorandum was filed, but as of that date the
Commissioner's right to collect by warrant of distraint and levy the deficiency tax for 1950 had already
prescribed. So much so, that on March 1, 1956 when Ker & Co., Ltd. filed a petition for review in the
Court of Tax Appeals, the Commissioner of Internal Revenue had but one remedy left to collect the tax,
that is, by judicial actions. 12 However, as stated, an independent ordinary action in the Court of First
Instance was not available to the Commissioner pursuant to Our ruling in Ledesma, et al. vs. Court of
Tax Appeals, supra, in view of the pendency of the taxpayer's petition for review in the Court of Tax
Appeals. Precisely he urgently filed a motion to dismiss the taxpayer's petition for review with a view
to terminating therein the proceedings in the shortest possible time in order that he could file a
collection case in the Court of First Instance before his right to do so is cut off by the passage of time.
As moved, the Tax Court dismissed the case and Ker & Co., Ltd. appealed to the Supreme Court. By
the time the Supreme Court affirmed the order of dismissal of the Court of Tax Appeals in L-12396 on
January 31, 1962 more than five years had elapsed since the final assessments were made on January 5,
1954. Thereafter, the Commissioner of Internal Revenue demanded extrajudicially the payment of the
deficiency tax in question and in reply the taxpayer, by its letter dated March 28, 1962, advised the
Commissioner of Internal Revenue that the right to collect the tax has prescribed pursuant to Section
332(c) of the Tax Code.
Thus, did the taxpayer produce the effect of temporarily staying the hands of the Commissioner of
Internal Revenue simply through a choice of remedy. And, if We were to sustain the taxpayer's stand,
We would be encouraging taxpayers to delay the payment of taxes in the hope of ultimately avoiding
the same.
Under the circumstances, the Commissioner of Internal Revenue was in effect prohibited from
collecting the tax in question. This being so, the provisions of Section 333 of the Tax Code will apply.
Fourth Issue
The Republic of the Philippines maintains that the delinquency interest on the deficiency income tax
for 1948, 1949 and 1950 accrued and should commence from the date of the assessments as shown in
the assessment notices, pursuant to Section 51 (e) of the Tax Code, instead of from the date the
complaint was filed as determined in the decision appealed from.
Section 51 (e) of the Tax Code states:
"SEC. 51 (e). Surcharge and interest in case of delinquency. To any sum or sums due and unpaid
after the dates prescribed in subsections (b), (c) and (d) for the payment of the same, there shall be
added the sum of five per centum on the amount of tax unpaid and interest at the rate of one per centum
a month upon said tax from the time the came became due, except from the estates of insane, deceased,
or insolvent persons." (Emphasis supplied)
Exhibit "F" the letter of assessment shows that the deficiency income tax for 1948 and 1949
became due on March 15, 1953 and that for 1950 accrued on February 15, 1954 in accordance with
Section 51 (d) of the Tax Code. Since the tax in question remained unpaid, delinquency interest accrued
and became due starting from said due dates. The decision appealed from should therefore be modified
accordingly.
WHEREFORE, the decision appealed from is affirmed with the modification that the delinquency
interest at the rate of 1% per month shall be computed from March 15, 1953 for the deficiency income
tax for 1948 and 1949 and from February 15, 1954 for the deficiency income tax for 1950. With costs
against Ker & Co., Ltd. So ordered.
Concepcion, C.J., Reyes J.B.L., Barrera, Dizon, Regala, Makalintal, Zaldivar, Sanchez and Castro, JJ.,
concur.
Footnotes
1.
Ker & Company, Ltd. vs. The Court of Tax Appeals and The Collector of Internal Revenue,

promulgated on January 31, 1962.

2.
Now Section 13, Rule 14.
3.
Flores vs. Zurbito, 37, Phil. 746; Menghra vs. Tarachand end Rewachand, 67 Phil. 286.
4.
Infante vs. Toledo and Santiong, 44 Phil. 834, 840.
5.
Ramos vs. Maalac, et al., 89 Phil. 270.
6.
Gutierrez vs. Court of Tax Appeals 101 Phil., 713.
7.
Section 12, Rule 15 (now Section 5, Rule 8), Rules of Court.
8.
Collector of Internal Revenue vs. Benipayo, L-13656, January 31, 1962.
9.
Republic of the Philippines vs. Albert, L-12996, December 28, 1961; Republic of the
Philippines vs. Lim Tian Teng Sons & Co., Inc., L-21731 March 31, 1966.
10.
102 Phil., 931.
11.
Par. (d), Section 1, Rule 8, now Par. (g), Section 1, Rule 16, Rules of Court.
12.
See Sec. 316 Tax Code.

SECOND DIVISION
[G.R. No. 139736. October 17, 2005.]
BANK OF THE PHILIPPINE ISLANDS, petitioner, vs. COMMISSIONER OF INTERNAL
REVENUE, respondent.
DECISION
CHICO-NAZARIO, J p:
This Petition for Review on Certiorari, under Rule 45 of the 1997 Rules of Civil Procedure, assails the
Decision of the Court of Appeals in CA-G.R. SP No. 51271, dated 11 August 1999, 1 which reversed
and set aside the Decision of the Court of Tax Appeals (CTA), dated 02 February 1999, 2 and which
reinstated Assessment No. FAS-5-85-89-002054 requiring petitioner Bank of the Philippine Islands
(BPI) to pay the amount of P28,020.00 as deficiency documentary stamp tax (DST) for the taxable year
1985, inclusive of the compromise penalty. STDEcA
There is hardly any controversy as to the factual antecedents of this Petition.
Petitioner BPI is a commercial banking corporation organized and existing under the laws of the
Philippines. On two separate occasions, particularly on 06 June 1985 and 14 June 1985, it sold United
States (US) $500,000.00 to the Central Bank of the Philippines (Central Bank), for the total sales
amount of US$1,000,000.00.
On 10 October 1989, the Bureau of Internal Revenue (BIR) issued Assessment No. FAS-5-85-89002054, 3 finding petitioner BPI liable for deficiency DST on its afore-mentioned sales of foreign bills
of exchange to the Central Bank, computed as follows
1985 Deficiency Documentary Stamp Tax
Foreign Bills of Exchange P18,480,000.00

Tax Due Thereon:

P18,480,000.00 x P0.30 (Sec. 182 NIRC). 27,720.00

P200.00
Add: Suggested compromise penalty300.00
TOTAL AMOUNT DUE AND COLLECTIBLE P28,020.00

Petitioner BPI received the Assessment, together with the attached Assessment Notice, 4 on 20 October
1989.
Petitioner BPI, through its counsel, protested the Assessment in a letter dated 16 November 1989, and
filed with the BIR on 17 November 1989. The said protest letter is reproduced in full below
November 16, 1989
The Commissioner of Internal Revenue
Quezon City
Attention of: Mr. Pedro C. Aguillon
Asst. Commissioner for Collection
Sir:
On behalf of our client, Bank of the Philippine Islands (BPI), we have the honor to protest your
assessment against it for deficiency documentary stamp tax for the year 1985 in the amount of
P28,020.00, arising from its sale to the Central Bank of U.S. $500,000.00 on June 6, 1985 and another
U.S. $500,000.00 on June 14, 1985. CASaEc
1.
Under established market practice, the documentary stamp tax on telegraphic transfers or sales
of foreign exchange is paid by the buyer. Thus, when BPI sells to any party, the cost of documentary
stamp tax is added to the total price or charge to the buyer and the seller affixes the corresponding
documentary stamp on the document. Similarly, when the Central Bank sells foreign exchange to BPI,
it charges BPI for the cost of the documentary stamp on the transaction.

2.
In the two transactions subject of your assessment, no documentary stamps were affixed
because the buyer, Central Bank of the Philippines, was exempt from such tax. And while it is true that
under P.D. 1994, a proviso was added to sec. 222 (now sec. 186) of the Tax Code "that whenever one
party to a taxable document enjoys exemption from the tax herein imposed, the other party thereto who
is not exempt shall be the one directly liable for the tax," this proviso (and the other amendments of
P.D. 1994) took effect only on January 1, 1986, according to sec. 49 of P.D. 1994. Hence, the liability
for the documentary stamp tax could not be shifted to the seller.
In view of the foregoing, we request that the assessment be revoked and cancelled.
Very truly yours,
PADILLA LAW OFFICE
By:
(signed)
SABINO PADILLA, JR. 5
Petitioner BPI did not receive any immediate reply to its protest letter. However, on 15 October 1992,
the BIR issued a Warrant of Distraint and/or Levy 6 against petitioner BPI for the assessed deficiency
DST for taxable year 1985, in the amount of P27,720.00 (excluding the compromise penalty of
P300.00). It served the Warrant on petitioner BPI only on 23 October 1992. 7
Then again, petitioner BPI did not hear from the BIR until 11 September 1997, when its counsel
received a letter, dated 13 August 1997, signed by then BIR Commissioner Liwayway Vinzons-Chato,
denying its "request for reconsideration," and addressing the points raised by petitioner BPI in its
protest letter, dated 16 November 1989, thus
In reply, please be informed that after a thorough and careful study of the facts of the case as well as the
law and jurisprudence pertinent thereto, this Office finds the above argument to be legally untenable. It
is admitted that while industry practice or market convention has the force of law between the members
of a particular industry, it is not binding with the BIR since it is not a party thereto. The same should,
therefore, not be allowed to prejudice the Bureau of its lawful task of collecting revenues necessary to
defray the expenses of the government. (Art. 11 in relation to Art. 1306 of the New Civil Code.)
TcEDHa
Moreover, let it be stated that even before the amendment of Sec. 222 (now Sec. 173) of the Tax Code,
as amended, the same was already interpreted to hold that the other party who is not exempt from the
payment of documentary stamp tax liable from the tax. This interpretation was further strengthened by
the following BIR Rulings which in substance state:
1.
BIR Unnumbered Ruling dated May 30, 1977
". . . Documentary stamp taxes are payable by either person, signing, issuing, accepting, or transferring
the instrument, document or paper. It is now settled that where one party to the instrument is exempt
from said taxes, the other party who is not exempt should be liable."
2.
BIR Ruling No. 144-84 dated September 3, 1984
". . . Thus, where one party to the contract is exempt from said tax, the other party, who is not exempt,
shall be liable therefore. Accordingly, since A.J.L. Construction Corporation, the other party to the
contract and the one assuming the payment of the expenses incidental to the registration in the vendee's
name of the property sold, is not exempt from said tax, then it is the one liable therefore, pursuant to
Sec. 245 (now Sec. 196), in relation to Sec. 222 (now Sec. 173), both of the Tax Code of 1977, as
amended."
Premised on all the foregoing considerations, your request for reconsideration is hereby DENIED. 8
Upon receipt of the above-cited letter from the BIR, petitioner BPI proceeded to file a Petition for
Review with the CTA on 10 October 1997; 9 to which respondent BIR Commissioner, represented by
the Office of the Solicitor General, filed an Answer on 08 December 1997. 10
Petitioner BPI raised in its Petition for Review before the CTA, in addition to the arguments presented
in its protest letter, dated 16 November 1989, the defense of prescription of the right of respondent BIR

Commissioner to enforce collection of the assessed amount. It alleged that respondent BIR
Commissioner only had three years to collect on Assessment No. FAS-5-85-89-002054, but she waited
for seven years and nine months to deny the protest. In her Answer and subsequent Memorandum,
respondent BIR Commissioner merely reiterated her position, as stated in her letter to petitioner BPI,
dated 13 August 1997, which denied the latter's protest; and remained silent as to the expiration of the
prescriptive period for collection of the assessed deficiency DST.
After due trial, the CTA rendered a Decision on 02 February 1999, in which it identified two primary
issues in the controversy between petitioner BPI and respondent BIR Commissioner: (1) whether or not
the right of respondent BIR Commissioner to collect from petitioner BPI the alleged deficiency DST
for taxable year 1985 had prescribed; and (2) whether or not the sales of US$1,000,000.00 on 06 June
1985 and 14 June 1985 by petitioner BPI to the Central Bank were subject to DST. EHSIcT
The CTA answered the first issue in the negative and held that the statute of limitations for respondent
BIR Commissioner to collect on the Assessment had not yet prescribed. In resolving the issue of
prescription, the CTA reasoned that
In the case of Commissioner of Internal Revenue vs. Wyeth Suaco Laboratories, Inc., G.R. No. 76281,
September 30, 1991, 202 SCRA 125, the Supreme Court laid to rest the first issue. It categorically ruled
that a "protest" is to be treated as request for reinvestigation or reconsideration and a mere request for
reexamination or reinvestigation tolls the prescriptive period of the Commissioner to collect on an
assessment. . .
xxx
xxx
xxx
In the case at bar, there being no dispute that petitioner filed its protest on the subject assessment on
November 17, 1989, there can be no conclusion other than that said protest stopped the running of the
prescriptive period of the Commissioner to collect.
Section 320 (now 223) of the Tax Code, clearly states that a request for reinvestigation which is granted
by the Commissioner, shall suspend the prescriptive period to collect. The underscored portion above
does not mean that the Commissioner will cancel the subject assessment but should be construed as
when the same was entertained by the Commissioner by not issuing any warrant of distraint or levy on
the properties of the taxpayer or any action prejudicial to the latter unless and until the request for
reinvestigation is finally given due course. Taking into consideration this provision of law and the
aforementioned ruling of the Supreme Court in Wyeth Suaco which specifically and categorically states
that a protest could be considered as a request for reinvestigation, We rule that prescription has not set
in against the government. 11
The CTA had likewise resolved the second issue in the negative. Referring to its own decision in an
earlier case, Consolidated Bank & Trust Co. v. The Commissioner of Internal Revenue, 12 the CTA
reached the conclusion that the sales of foreign currency by petitioner BPI to the Central Bank in
taxable year 1985 were not subject to DST
From the abovementioned decision of this Court, it can be gleaned that the Central Bank, during the
period June 11, 1984 to March 9, 1987 enjoyed tax exemption privilege, including the payment of
documentary stamp tax (DST) pursuant to Resolution No. 35-85 dated May 3, 1985 of the Fiscal
Incentive Review Board. As such, the Central Bank, as buyer of the foreign currency, is exempt from
paying the documentary stamp tax for the period above-mentioned. This Court further expounded that
said tax exemption of the Central Bank was modified beginning January 1, 1986 when Presidential
Decree (P.D.) 1994 took effect. Under this decree, the liability for DST on sales of foreign currency to
the Central Bank is shifted to the seller. ScEaAD
Applying the above decision to the case at bar, petitioner cannot be held liable for DST on its 1985
sales of foreign currencies to the Central Bank, as the latter who is the purchaser of the subject
currencies is the one liable thereof. However, since the Central Bank is exempt from all taxes during
1985 by virtue of Resolution No. 35-85 of the Fiscal Incentive Review Board dated March 3, 1985,
neither the petitioner nor the Central Bank is liable for the payment of the documentary stamp tax for

the former's 1985 sales of foreign currencies to the latter. This aforecited case of Consolidated Bank vs.
Commissioner of Internal Revenue was affirmed by the Court of Appeals in its decision dated March
31, 1995, CA-GR Sp. No. 35930. Said decision was in turn affirmed by the Supreme Court in its
resolution denying the petition filed by Consolidated Bank dated November 20, 1995 with the Supreme
Court under Entry of Judgment dated March 1, 1996. 13
In sum, the CTA decided that the statute of limitations for respondent BIR Commissioner to collect on
Assessment No. FAS-5-85-89-002054 had not yet prescribed; nonetheless, it still ordered the
cancellation of the said Assessment because the sales of foreign currency by petitioner BPI to the
Central Bank in taxable year 1985 were tax-exempt.
Herein respondent BIR Commissioner appealed the Decision of the CTA to the Court of Appeals. In its
Decision dated 11 August 1999, 14 the Court of Appeals sustained the finding of the CTA on the first
issue, that the running of the prescriptive period for collection on Assessment No. FAS-5-85-89-002054
was suspended when herein petitioner BPI filed a protest on 17 November 1989 and, therefore, the
prescriptive period for collection on the Assessment had not yet lapsed. In the same Decision, however,
the Court of Appeals reversed the CTA on the second issue and basically adopted the position of the
respondent BIR Commissioner that the sales of foreign currency by petitioner BPI to the Central Bank
in taxable year 1985 were subject to DST. The Court of Appeals, thus, ordered the reinstatement of
Assessment No. FAS-5-85-89-002054 which required petitioner BPI to pay the amount of P28,020.00
as deficiency DST for taxable year 1985, inclusive of the compromise penalty.
Comes now petitioner BPI before this Court in this Petition for Review on Certiorari, seeking
resolution of the same two legal issues raised and discussed in the courts below, to reiterate: (1)
whether or not the right of respondent BIR Commissioner to collect from petitioner BPI the alleged
deficiency DST for taxable year 1985 had prescribed; and (2) whether or not the sales of
US$1,000,000.00 on 06 June 1985 and 14 June 1985 by petitioner BPI to the Central Bank were
subject to DST. AaCTID
I
The efforts of respondent Commissioner to collect on
Assessment No. FAS-5-85-89-002054 were already barred by
prescription.
Anent the question of prescription, this Court disagrees in the Decisions of the CTA and the Court of
Appeals, and herein determines the statute of limitations on collection of the deficiency DST in
Assessment No. FAS-5-85-89-002054 had already prescribed.
The period for the BIR to assess and collect an internal revenue tax is limited to three years by Section
203 of the Tax Code of 1977, as amended, 15 which provides that
SEC. 203.
Period of limitation upon assessment and collection. Except as provided in the
succeeding section, internal revenue taxes shall be assessed within three years after the last day
prescribed by law for the filing of the return, and no proceeding in court without assessment for the
collection of such taxes shall be begun after the expiration of such period: Provided, That in a case
where a return is filed beyond the period prescribed by law, the three-year period shall be counted from
the day the return was filed. For the purposes of this section, a return filed before the last day
prescribed by law for the filing thereof shall be considered as filed on such last day. 16
The three-year period of limitations on the assessment and collection of national internal revenue taxes
set by Section 203 of the Tax Code of 1977, as amended, can be affected, adjusted, or suspended, in
accordance with the following provisions of the same Code
SEC. 223. Exceptions as to period of limitation of assessment and collection of taxes. (a) In the
case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be
assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at
any time within ten years after the discovery of the falsity, fraud, or omission: Provided, That in a fraud
assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance

of in the civil or criminal action for the collection thereof.

(b)
If before the expiration of the time prescribed in the preceding section for the assessment of the
tax, both the Commissioner and the taxpayer have agreed in writing to its assessment after such time
the tax may be assessed within the period agreed upon. The period so agreed upon may be extended by
subsequent written agreement made before the expiration of the period previously agreed upon.
(c)
Any internal revenue tax which has been assessed within the period of limitation aboveprescribed may be collected by distraint or levy or by a proceeding in court within three years
following the assessment of the tax. DAHEaT
(d)
Any internal revenue tax which has been assessed within the period agreed upon as provided in
paragraph (b) hereinabove may be collected by distraint or levy or by a proceeding in court within the
period agreed upon in writing before the expiration of the three-year period. The period so agreed upon
may be extended by subsequent written agreements made before the expiration of the period previously
agreed upon.
(e)
Provided, however, That nothing in the immediately preceding section and paragraph (a) hereof
shall be construed to authorize the examination and investigation or inquiry into any tax returns filed in
accordance with the provisions of any tax amnesty law or decree. 17
SEC. 224.
Suspension of running of statute. The running of the statute of limitation provided in
Section[s] 203 and 223 on the making of assessment and the beginning of distraint or levy or a
proceeding in court for collection, in respect of any deficiency, shall be suspended for the period during
which the Commissioner is prohibited from making the assessment or beginning distraint or levy or a
proceeding in court and for sixty days thereafter; when the taxpayer requests for a reinvestigation
which is granted by the Commissioner; when the taxpayer cannot be located in the address given by
him in the return filed upon which a tax is being assessed or collected: Provided, That, if the taxpayer
informs the Commissioner of any change in address, the running of the statute of limitations will not be
suspended; when the warrant of distraint and levy is duly served upon the taxpayer, his authorized
representative, or a member of his household with sufficient discretion, and no property could be
located; and when the taxpayer is out of the Philippines. 18
As enunciated in these statutory provisions, the BIR has three years, counted from the date of actual
filing of the return or from the last date prescribed by law for the filing of such return, whichever
comes later, to assess a national internal revenue tax or to begin a court proceeding for the collection
thereof without an assessment. In case of a false or fraudulent return with intent to evade tax or the
failure to file any return at all, the prescriptive period for assessment of the tax due shall be 10 years
from discovery by the BIR of the falsity, fraud, or omission. When the BIR validly issues an
assessment, within either the three-year or ten-year period, whichever is appropriate, then the BIR has
another three years 19 after the assessment within which to collect the national internal revenue tax due
thereon by distraint, levy, and/or court proceeding. The assessment of the tax is deemed made and the
three-year period for collection of the assessed tax begins to run on the date the assessment notice had
been released, mailed or sent by the BIR to the taxpayer. 20
In the present Petition, there is no controversy on the timeliness of the issuance of the Assessment, only
on the prescription of the period to collect the deficiency DST following its Assessment. While
Assessment No. FAS-5-85-89-002054 and its corresponding Assessment Notice were both dated 10
October 1989 and were received by petitioner BPI on 20 October 1989, there was no showing as to
when the said Assessment and Assessment Notice were released, mailed or sent by the BIR. Still, it can
be granted that the latest date the BIR could have released, mailed or sent the Assessment and
Assessment Notice to petitioner BPI was on the same date they were received by the latter, on 20
October 1989. Counting the three-year prescriptive period, for a total of 1,095 days, 21 from 20
October 1989, then the BIR only had until 19 October 1992 within which to collect the assessed
deficiency DST. HDATSI
The earliest attempt of the BIR to collect on Assessment No. FAS-5-85-89-002054 was its issuance and

service of a Warrant of Distraint and/or Levy on petitioner BPI. Although the Warrant was issued on 15
October 1992, previous to the expiration of the period for collection on 19 October 1992, the same was
served on petitioner BPI only on 23 October 1992.
Under Section 223(c) of the Tax Code of 1977, as amended, it is not essential that the Warrant of
Distraint and/or Levy be fully executed so that it can suspend the running of the statute of limitations
on the collection of the tax. It is enough that the proceedings have validly began or commenced and
that their execution has not been suspended by reason of the voluntary desistance of the respondent
BIR Commissioner. Existing jurisprudence establishes that distraint and levy proceedings are validly
begun or commenced by the issuance of the Warrant and service thereof on the taxpayer. 22 It is only
logical to require that the Warrant of Distraint and/or Levy be, at the very least, served upon the
taxpayer in order to suspend the running of the prescriptive period for collection of an assessed tax,
because it may only be upon the service of the Warrant that the taxpayer is informed of the denial by
the BIR of any pending protest of the said taxpayer, and the resolute intention of the BIR to collect the
tax assessed.
If the service of the Warrant of Distraint and/or Levy on petitioner BPI on 23 October 1992 was already
beyond the prescriptive period for collection of the deficiency DST, which had expired on 19 October
1992, then what more the letter of respondent BIR Commissioner, dated 13 August 1997 and received
by the counsel of the petitioner BPI only on 11 September 1997, denying the protest of petitioner BPI
and requesting payment of the deficiency DST? Even later and more unequivocally barred by
prescription on collection was the demand made by respondent BIR Commissioner for payment of the
deficiency DST in her Answer to the Petition for Review of petitioner BPI before the CTA, filed on 08
December 1997. 23
II
There is no valid ground for the suspension of the
running of the prescriptive period for collection of the
assessed DST under the Tax Code of 1977, as amended.
In their Decisions, both the CTA and the Court of Appeals found that the filing by petitioner BPI of a
protest letter suspended the running of the prescriptive period for collecting the assessed DST. This
Court, however, takes the opposing view, and, based on the succeeding discussion, concludes that there
is no valid ground for suspending the running of the prescriptive period for collection of the deficiency
DST assessed against petitioner BPI.
A.
The statute of limitations on assessment and collection of taxes is for the protection of the
taxpayer and, thus, shall be construed liberally in his favor.
Though the statute of limitations on assessment and collection of national internal revenue taxes
benefits both the Government and the taxpayer, it principally intends to afford protection to the
taxpayer against unreasonable investigation. The indefinite extension of the period for assessment is
unreasonable because it deprives the said taxpayer of the assurance that he will no longer be subjected
to further investigation for taxes after the expiration of a reasonable period of time. 24 As aptly
explained in Republic of the Philippines v. Ablaza 25
The law prescribing a limitation of actions for the collection of the income tax is beneficial both to the
Government and to its citizens; to the Government because tax officers would be obliged to act
promptly in the making of assessment, and to citizens because after the lapse of the period of
prescription citizens would have a feeling of security against unscrupulous tax agents who will always
find an excuse to inspect the books of taxpayers, not to determine the latter's real liability, but to take
advantage of every opportunity to molest peaceful, law-abiding citizens. Without such a legal defense
taxpayers would furthermore be under obligation to always keep their books and keep them open for
inspection subject to harassment by unscrupulous tax agents. The law on prescription being a remedial
measure should be interpreted in a way conducive to bringing about the beneficent purpose of affording
protection to the taxpayer within the contemplation of the Commission which recommend the approval

of the law. ESTCDA

In order to provide even better protection to the taxpayer against unreasonable investigation, the Tax
Code of 1977, as amended, identifies specifically in Sections 223 and 224 26 thereof the circumstances
when the prescriptive periods for assessing and collecting taxes could be suspended or interrupted.
To give effect to the legislative intent, these provisions on the statute of limitations on assessment and
collection of taxes shall be construed and applied liberally in favor of the taxpayer and strictly against
the Government.
B.
The statute of limitations on assessment and collection of national internal revenue taxes may be
waived, subject to certain conditions, under paragraphs (b) and (d) of Section 223 of the Tax Code of
1977, as amended, respectively. Petitioner BPI, however, did not execute any such waiver in the case at
bar.
According to paragraphs (b) and (d) of Section 223 of the Tax Code of 1977, as amended, the
prescriptive periods for assessment and collection of national internal revenue taxes, respectively, could
be waived by agreement, to wit
SEC. 223. Exceptions as to period of limitation of assessment and collection of taxes.
xxx
xxx
xxx
(b)
If before the expiration of the time prescribed in the preceding section for the assessment of the
tax, both the Commissioner and the taxpayer have agreed in writing to its assessment after such time
the tax may be assessed within the period agreed upon. The period so agreed upon may be extended by
subsequent written agreement made before the expiration of the period previously agreed upon.
xxx
xxx
xxx
(d)
Any internal revenue tax which has been assessed within the period agreed upon as provided in
paragraph (b) hereinabove may be collected by distraint or levy or by a proceeding in court within the
period agreed upon in writing before the expiration of the three-year period. The period so agreed upon
may be extended by subsequent written agreements made before the expiration of the period previously
agreed upon. 27
The agreements so described in the afore-quoted provisions are often referred to as waivers of the
statute of limitations. The waiver of the statute of limitations, whether on assessment or collection,
should not be construed as a waiver of the right to invoke the defense of prescription but, rather, an
agreement between the taxpayer and the BIR to extend the period to a date certain, within which the
latter could still assess or collect taxes due. The waiver does not mean that the taxpayer relinquishes the
right to invoke prescription unequivocally. 28
A valid waiver of the statute of limitations under paragraphs (b) and (d) of Section 223 of the Tax Code
of 1977, as amended, must be: (1) in writing; (2) agreed to by both the Commissioner and the taxpayer;
(3) before the expiration of the ordinary prescriptive periods for assessment and collection; and (4) for
a definite period beyond the ordinary prescriptive periods for assessment and collection. The period
agreed upon can still be extended by subsequent written agreement, provided that it is executed prior to
the expiration of the first period agreed upon. The BIR had issued Revenue Memorandum Order
(RMO) No. 20-90 on 04 April 1990 to lay down an even more detailed procedure for the proper
execution of such a waiver. RMO No. 20-90 mandates that the procedure for execution of the waiver
shall be strictly followed, and any revenue official who fails to comply therewith resulting in the
prescription of the right to assess and collect shall be administratively dealt with. ITCcAD
This Court had consistently ruled in a number of cases that a request for reconsideration or
reinvestigation by the taxpayer, without a valid waiver of the prescriptive periods for the assessment
and collection of tax, as required by the Tax Code and implementing rules, will not suspend the running
thereof. 29
In the Petition at bar, petitioner BPI executed no such waiver of the statute of limitations on the
collection of the deficiency DST per Assessment No. FAS-5-85-89-002054. In fact, an internal
memorandum of the Chief of the Legislative, Ruling & Research Division of the BIR to her counterpart

in the Collection Enforcement Division, dated 15 October 1992, expressly noted that, "The taxpayer
fails to execute a Waiver of the Statute of Limitations extending the period of collection of the said tax
up to December 31, 1993 pending reconsideration of its protest. . ." 30 Without a valid waiver, the
statute of limitations on collection by the BIR of the deficiency DST could not have been suspended
under paragraph (d) of Section 223 of the Tax Code of 1977, as amended.
C.
The protest filed by petitioner BPI did not constitute a request for reinvestigation, granted by
the respondent BIR Commissioner, which could have suspended the running of the statute of
limitations on collection of the assessed deficiency DST under Section 224 of the Tax Code of 1977, as
amended.
The Tax Code of 1977, as amended, also recognizes instances when the running of the statute of
limitations on the assessment and collection of national internal revenue taxes could be suspended,
even in the absence of a waiver, under Section 224 thereof, which reads
SEC. 224.
Suspension of running of statute. The running of the statute of limitation provided in
Section[s] 203 and 223 on the making of assessment and the beginning of distraint or levy or a
proceeding in court for collection, in respect of any deficiency, shall be suspended for the period during
which the Commissioner is prohibited from making the assessment or beginning distraint or levy or a
proceeding in court and for sixty days thereafter; when the taxpayer requests for a reinvestigation
which is granted by the Commissioner; when the taxpayer cannot be located in the address given by
him in the return filed upon which a tax is being assessed or collected: Provided, That, if the taxpayer
informs the Commissioner of any change in address, the running of the statute of limitations will not be
suspended; when the warrant of distraint and levy is duly served upon the taxpayer, his authorized
representative, or a member of his household with sufficient discretion, and no property could be
located; and when the taxpayer is out of the Philippines. 31
Of particular importance to the present case is one of the circumstances enumerated in Section 224 of
the Tax Code of 1977, as amended, wherein the running of the statute of limitations on assessment and
collection of taxes is considered suspended "when the taxpayer requests for a reinvestigation which is
granted by the Commissioner." cHAaCE
This Court gives credence to the argument of petitioner BPI that there is a distinction between a request
for reconsideration and a request for reinvestigation. Revenue Regulations (RR) No. 12-85, issued on
27 November 1985 by the Secretary of Finance, upon the recommendation of the BIR Commissioner,
governs the procedure for protesting an assessment and distinguishes between the two types of protest,
as follows
PROTEST TO ASSESSMENT
SEC. 6.
Protest. The taxpayer may protest administratively an assessment by filing a written
request for reconsideration or reinvestigation. . .
xxx
xxx
xxx
For the purpose of the protest herein
(a)
Request for reconsideration. refers to a plea for a re-evaluation of an assessment on the basis
of existing records without need of additional evidence. It may involve both a question of fact or of law
or both.
(b)
Request for reinvestigation. refers to a plea for re-evaluation of an assessment on the basis of
newly-discovered or additional evidence that a taxpayer intends to present in the reinvestigation. It may
also involve a question of fact or law or both.
With the issuance of RR No. 12-85 on 27 November 1985 providing the above-quoted distinctions
between a request for reconsideration and a request for reinvestigation, the two types of protest can no
longer be used interchangeably and their differences so lightly brushed aside. It bears to emphasize that
under Section 224 of the Tax Code of 1977, as amended, the running of the prescriptive period for
collection of taxes can only be suspended by a request for reinvestigation, not a request for
reconsideration. Undoubtedly, a reinvestigation, which entails the reception and evaluation of

additional evidence, will take more time than a reconsideration of a tax assessment, which will be
limited to the evidence already at hand; this justifies why the former can suspend the running of the
statute of limitations on collection of the assessed tax, while the latter can not.
The protest letter of petitioner BPI, dated 16 November 1989 and filed with the BIR the next day, on 17
November 1989, did not specifically request for either a reconsideration or reinvestigation. A close
review of the contents thereof would reveal, however, that it protested Assessment No. FAS-5-85-89002054 based on a question of law, in particular, whether or not petitioner BPI was liable for DST on
its sales of foreign currency to the Central Bank in taxable year 1985. The same protest letter did not
raise any question of fact; neither did it offer to present any new evidence. In its own letter to petitioner
BPI, dated 10 September 1992, the BIR itself referred to the protest of petitioner BPI as a request for
reconsideration. 32 These considerations would lead this Court to deduce that the protest letter of
petitioner BPI was in the nature of a request for reconsideration, rather than a request for
reinvestigation and, consequently, Section 224 of the Tax Code of 1977, as amended, on the suspension
of the running of the statute of limitations should not apply. caIACE
Even if, for the sake of argument, this Court glosses over the distinction between a request for
reconsideration and a request for reinvestigation, and considers the protest of petitioner BPI as a
request for reinvestigation, the filing thereof could not have suspended at once the running of the
statute of limitations. Article 224 of the Tax Code of 1977, as amended, very plainly requires that the
request for reinvestigation had been granted by the BIR Commissioner to suspend the running of the
prescriptive periods for assessment and collection.
That the BIR Commissioner must first grant the request for reinvestigation as a requirement for
suspension of the statute of limitations is even supported by existing jurisprudence.
In the case of Republic of the Philippines v. Gancayco, 33 taxpayer Gancayco requested for a thorough
reinvestigation of the assessment against him and placed at the disposal of the Collector of Internal
Revenue all the evidences he had for such purpose; yet, the Collector ignored the request, and the
records and documents were not at all examined. Considering the given facts, this Court pronounced
that
. . .The act of requesting a reinvestigation alone does not suspend the period. The request should first be
granted, in order to effect suspension. (Collector vs. Suyoc Consolidated, supra; also Republic vs.
Ablaza, supra). Moreover, the Collector gave appellee until April 1, 1949, within which to submit his
evidence, which the latter did one day before. There were no impediments on the part of the Collector
to file the collection case from April 1, 1949. . . . 34
In Republic of the Philippines v. Acebedo, 35 this Court similarly found that
. . . [T]he defendant, after receiving the assessment notice of September 24, 1949, asked for a
reinvestigation thereof on October 11, 1949 (Exh. A). There is no evidence that this request was
considered or acted upon. In fact, on October 23, 1950 the then Collector of Internal Revenue issued a
warrant of distraint and levy for the full amount of the assessment (Exh. D), but there was no follow-up
of this warrant. Consequently, the request for reinvestigation did not suspend the running of the period
for filing an action for collection.
The burden of proof that the taxpayer's request for reinvestigation had been actually granted shall be on
respondent BIR Commissioner. The grant may be expressed in communications with the taxpayer or
implied from the actions of the respondent BIR Commissioner or his authorized BIR representatives in
response to the request for reinvestigation.
In Querol v. Collector of Internal Revenue, 36 the BIR, after receiving the protest letters of taxpayer
Querol, sent a tax examiner to San Fernando, Pampanga, to conduct the reinvestigation; as a result of
which, the original assessment against taxpayer Querol was revised by permitting him to deduct
reasonable depreciation. In another case, Republic of the Philippines v. Lopez, 37 taxpayer Lopez filed
a total of four petitions for reconsideration and reinvestigation. The first petition was denied by the
BIR. The second and third petitions were granted by the BIR and after each reinvestigation, the

assessed amount was reduced. The fourth petition was again denied and, thereafter, the BIR filed a
collection suit against taxpayer Lopez. When the taxpayers spouses Sison, in Commissioner of Internal
Revenue v. Sison, 38 contested the assessment against them and asked for a reinvestigation, the BIR
ordered the reinvestigation resulting in the issuance of an amended assessment. Lastly, in Republic of
the Philippines v. Oquias, 39 the BIR granted taxpayer Oquias's request for reinvestigation and duly
notified him of the date when such reinvestigation would be held; only, neither taxpayer Oquias nor his
counsel appeared on the given date. DTEIaC
In all these cases, the request for reinvestigation of the assessment filed by the taxpayer was evidently
granted and actual reinvestigation was conducted by the BIR, which eventually resulted in the issuance
of an amended assessment. On the basis of these facts, this Court ruled in the same cases that the period
between the request for reinvestigation and the revised assessment should be subtracted from the total
prescriptive period for the assessment of the tax; and, once the assessment had been reconsidered at the
taxpayer's instance, the period for collection should begin to run from the date of the reconsidered or
modified assessment. 40
The rulings of the foregoing cases do not apply to the present Petition because: (1) the protest filed by
petitioner BPI was a request for reconsideration, not a reinvestigation, of the assessment against it; and
(2) even granting that the protest of petitioner BPI was a request for reinvestigation, there was no
showing that it was granted by respondent BIR Commissioner and that actual reinvestigation had been
conducted.
Going back to the administrative records of the present case, it would seem that the BIR, after receiving
a copy of the protest letter of petitioner BPI on 17 November 1989, did not attempt to communicate at
all with the latter until 10 September 1992, less than a month before the prescriptive period for
collection on Assessment No. FAS-5-85-89-002054 was due to expire. There were internal
communications, mostly indorsements of the docket of the case from one BIR division to another; but
these hardly fall within the same sort of acts in the previously discussed cases that satisfactorily
demonstrated the grant of the taxpayer's request for reinvestigation. Petitioner BPI, in the meantime,
was left in the dark as to the status of its protest in the absence of any word from the BIR. Besides, in
its letter to petitioner BPI, dated 10 September 1992, the BIR unwittingly admitted that it had not yet
acted on the protest of the former
This refers to your protest against and/or request for reconsideration of the assessment/s of this Office
against you involving the amount of P28,020.00 under FAS-5-85-89-002054 dated October 23, 1989 as
deficiency documentary stamp tax inclusive of compromise penalty for the year 1985.
In this connection, it is requested that the enclosed waiver of the statute of limitations extending the
period of collection of the said tax/es to December 31, 1993 be executed by you as a condition
precedent of our giving due course to your protest. . . 41
When the BIR stated in its letter, dated 10 September 1992, that the waiver of the statute of limitations
on collection was a condition precedent to its giving due course to the request for reconsideration of
petitioner BPI, then it was understood that the grant of such request for reconsideration was being held
off until compliance with the given condition. When petitioner BPI failed to comply with the condition
precedent, which was the execution of the waiver, the logical inference would be that the request was
not granted and was not given due course at all. cCSTHA
III
The suspension of the statute of limitations on collection of the
assessed deficiency DST from petitioner BPI does not find
support in jurisprudence.
It is the position of respondent BIR Commissioner, affirmed by the CTA and the Court of Appeals, that
the three-year prescriptive period for collecting on Assessment No. FAS-5-85-89-002054 had not yet
prescribed, because the said prescriptive period was suspended, invoking the case of Commissioner of
Internal Revenue v. Wyeth Suaco Laboratories, Inc. 42 It was in this case in which this Court ruled that

the prescriptive period provided by law to make a collection is interrupted once a taxpayer requests for
reinvestigation or reconsideration of the assessment.
Petitioner BPI, on the other hand, is requesting this Court to revisit the Wyeth Suaco case contending
that it had unjustifiably expanded the grounds for suspending the prescriptive period for collection of
national internal revenue taxes.
This Court finds that although there is no compelling reason to abandon its decision in the Wyeth Suaco
case, the said case cannot be applied to the particular facts of the Petition at bar.
A.
The only exception to the statute of limitations on collection of taxes, other than those already
provided in the Tax Code, was recognized in the Suyoc case.
As had been previously discussed herein, the statute of limitations on assessment and collection of
national internal revenue taxes may be suspended if the taxpayer executes a valid waiver thereof, as
provided in paragraphs (b) and (d) of Section 223 of the Tax Code of 1977, as amended; and in specific
instances enumerated in Section 224 of the same Code, which include a request for reinvestigation
granted by the BIR Commissioner. Outside of these statutory provisions, however, this Court also
recognized one other exception to the statute of limitations on collection of taxes in the case of
Collector of Internal Revenue v. Suyoc Consolidated Mining Co. 43
In the said case, the Collector of Internal Revenue issued an assessment against taxpayer Suyoc
Consolidated Mining Co. on 11 February 1947 for deficiency income tax for the taxable year 1941.
Taxpayer Suyoc requested for at least a year within which to pay the amount assessed, but at the same
time, reserving its right to question the correctness of the assessment before actual payment. The
Collector granted taxpayer Suyoc an extension of only three months to pay the assessed tax. When
taxpayer Suyoc failed to pay the assessed tax within the extended period, the Collector sent it a demand
letter, dated 28 November 1950. Upon receipt of the demand letter, taxpayer Suyoc asked for a
reinvestigation and reconsideration of the assessment, but the Collector denied the request. Taxpayer
Suyoc reiterated its request for reconsideration on 25 April 1952, which was denied again by the
Collector on 06 May 1953. Taxpayer Suyoc then appealed the denial to the Conference Staff. The
Conference Staff heard the appeal from 02 September 1952 to 16 July 1955, and the negotiations
resulted in the reduction of the assessment on 26 July 1955. It was the collection of the reduced
assessment that was questioned before this Court for being enforced beyond the prescriptive period. 44
In resolving the issue on prescription, this Court ratiocinated thus
It is obvious from the foregoing that petitioner refrained from collecting the tax by distraint or levy or
by proceeding in court within the 5-year period from the filing of the second amended final return due
to the several requests of respondent for extension to which petitioner yielded to give it every
opportunity to prove its claim regarding the correctness of the assessment. Because of such requests,
several reinvestigations were made and a hearing was even held by the Conference Staff organized in
the collection office to consider claims of such nature which, as the record shows, lasted for several
months. After inducing petitioner to delay collection as he in fact did, it is most unfair for respondent to
now take advantage of such desistance to elude his deficiency income tax liability to the prejudice of
the Government invoking the technical ground of prescription. ACETID
While we may agree with the Court of Tax Appeals that a mere request for reexamination or
reinvestigation may not have the effect of suspending the running of the period of limitation for in such
case there is need of a written agreement to extend the period between the Collector and the taxpayer,
there are cases however where a taxpayer may be prevented from setting up the defense of prescription
even if he has not previously waived it in writing as when by his repeated requests or positive acts the
Government has been, for good reasons, persuaded to postpone collection to make him feel that the
demand was not unreasonable or that no harassment or injustice is meant by the Government. And
when such situation comes to pass there are authorities that hold, based on weighty reasons, that such
an attitude or behavior should not be countenanced if only to protect the interest of the Government. 45
By the principle of estoppel, taxpayer Suyoc was not allowed to raise the defense of prescription

against the efforts of the Government to collect the tax assessed against it. This Court adopted the
following principle from American jurisprudence: "He who prevents a thing from being done may not
avail himself of the nonperformance which he has himself occasioned, for the law says to him in effect
'this is your own act, and therefore you are not damnified.'" 46
In the Suyoc case, this Court expressly conceded that a mere request for reconsideration or
reinvestigation of an assessment may not suspend the running of the statute of limitations. It affirmed
the need for a waiver of the prescriptive period in order to effect suspension thereof. However, even
without such waiver, the taxpayer may be estopped from raising the defense of prescription because by
his repeated requests or positive acts, he had induced Government authorities to delay collection of the
assessed tax.
Based on the foregoing, petitioner BPI contends that the declaration made in the later case of Wyeth
Suaco, that the statute of limitations on collection is suspended once the taxpayer files a request for
reconsideration or reinvestigation, runs counter to the ruling made by this Court in the Suyoc case.
B.
Although this Court is not compelled to abandon its decision in the Wyeth Suaco case, it finds
that Wyeth Suaco is not applicable to the Petition at bar because of the distinct facts involved herein.
In the case of Wyeth Suaco, taxpayer Wyeth Suaco was assessed for failing to remit withholding taxes
on royalties and dividend declarations, as well as, for deficiency sales tax. The BIR issued two
assessments, dated 16 December 1974 and 17 December 1974, both received by taxpayer Wyeth Suaco
on 19 December 1974. Taxpayer Wyeth Suaco, through its tax consultant, SGV & Co., sent to the BIR
two letters, dated 17 January 1975 and 08 February 1975, protesting the assessments and requesting
their cancellation or withdrawal on the ground that said assessments lacked factual or legal basis. On
12 September 1975, the BIR Commissioner advised taxpayer Wyeth Suaco to avail itself of the
compromise settlement being offered under Letter of Instruction No. 308. Taxpayer Wyeth Suaco
manifested its conformity to paying a compromise amount, but subject to certain conditions; though,
apparently, the said compromise amount was never paid. On 10 December 1979, the BIR
Commissioner rendered a decision reducing the assessment for deficiency withholding tax against
taxpayer Wyeth Suaco, but maintaining the assessment for deficiency sales tax. It was at this point
when taxpayer Wyeth Suaco brought its case before the CTA to enjoin the BIR from enforcing the
assessments by reason of prescription. Although the CTA decided in favor of taxpayer Wyeth Suaco, it
was reversed by this Court when the case was brought before it on appeal. According to the decision of
this Court
Settled is the rule that the prescriptive period provided by law to make a collection by distraint or levy
or by a proceeding in court is interrupted once a taxpayer requests for reinvestigation or reconsideration
of the assessment. . .
xxx
xxx
xxx
Although the protest letters prepared by SGV & Co. in behalf of private respondent did not
categorically state or use the words "reinvestigation" and "reconsideration," the same are to be treated
as letters of reinvestigation and reconsideration. . . aSIHcT
These letters of Wyeth Suaco interrupted the running of the five-year prescriptive period to collect the
deficiency taxes. The Bureau of Internal Revenue, after having reviewed the records of Wyeth Suaco,
in accordance with its request for reinvestigation, rendered a final assessment. . . It was only upon
receipt by Wyeth Suaco of this final assessment that the five-year prescriptive period started to run
again. 47
The foremost criticism of petitioner BPI of the Wyeth Suaco decision is directed at the statement made
therein that, "settled is the rule that the prescriptive period provided by law to make a collection by
distraint or levy or by a proceeding in court is interrupted once a taxpayer requests for reinvestigation
or reconsideration of the assessment." 48 It would seem that both petitioner BPI and respondent BIR
Commissioner, as well as, the CTA and Court of Appeals, take the statement to mean that the filing
alone of the request for reconsideration or reinvestigation can already interrupt or suspend the running

of the prescriptive period on collection. This Court therefore takes this opportunity to clarify and
qualify this statement made in the Wyeth Suaco case. While it is true that, by itself, such statement
would appear to be a generalization of the exceptions to the statute of limitations on collection, it is
best interpreted in consideration of the particular facts of the Wyeth Suaco case and previous
jurisprudence.
The Wyeth Suaco case cannot be in conflict with the Suyoc case because there are substantial
differences in the factual backgrounds of the two cases. The Suyoc case refers to a situation where
there were repeated requests or positive acts performed by the taxpayer that convinced the BIR to delay
collection of the assessed tax. This Court pronounced therein that the repeated requests or positive acts
of the taxpayer prevented or estopped it from setting up the defense of prescription against the
Government when the latter attempted to collect the assessed tax. In the Wyeth Suaco case, taxpayer
Wyeth Suaco filed a request for reinvestigation, which was apparently granted by the BIR and,
consequently, the prescriptive period was indeed suspended as provided under Section 224 of the Tax
Code of 1977, as amended. 49
To reiterate, Section 224 of the Tax Code of 1977, as amended, identifies specific circumstances when
the statute of limitations on assessment and collection may be interrupted or suspended, among which
is a request for reinvestigation that is granted by the BIR Commissioner. The act of filing a request for
reinvestigation alone does not suspend the period; such request must be granted. 50 The grant need not
be express, but may be implied from the acts of the BIR Commissioner or authorized BIR officials in
response to the request for reinvestigation. 51
This Court found in the Wyeth Suaco case that the BIR actually conducted a reinvestigation, in
accordance with the request of the taxpayer Wyeth Suaco, which resulted in the reduction of the
assessment originally issued against it. Taxpayer Wyeth Suaco was also aware that its request for
reinvestigation was granted, as written by its Finance Manager in a letter dated 01 July 1975, addressed
to the Chief of the Tax Accounts Division, wherein he admitted that, "[a]s we understand, the matter is
now undergoing review and consideration by your Manufacturing Audit Division. . ." The statute of
limitations on collection, then, started to run only upon the issuance and release of the reduced
assessment. cTEICD
The Wyeth Suaco case, therefore, is correct in declaring that the prescriptive period for collection is
interrupted or suspended when the taxpayer files a request for reinvestigation, provided that, as
clarified and qualified herein, such request is granted by the BIR Commissioner.
Thus, this Court finds no compelling reason to abandon its decision in the Wyeth Suaco case. It also
now rules that the said case is not applicable to the Petition at bar because of the distinct facts involved
herein. As already heretofore determined by this Court, the protest filed by petitioner BPI was a request
for reconsideration, which merely required a review of existing evidence and the legal basis for the
assessment. Respondent BIR Commissioner did not require, neither did petitioner BPI offer, additional
evidence on the matter. After petitioner BPI filed its request for reconsideration, there was no other
communication between it and respondent BIR Commissioner or any of the authorized representatives
of the latter. There was no showing that petitioner BPI was informed or aware that its request for
reconsideration was granted or acted upon by the BIR.
IV
Conclusion
To summarize all the foregoing discussion, this Court lays down the following rules on the exceptions
to the statute of limitations on collection.
The statute of limitations on collection may only be interrupted or suspended by a valid waiver
executed in accordance with paragraph (d) of Section 223 of the Tax Code of 1977, as amended, and
the existence of the circumstances enumerated in Section 224 of the same Code, which include a
request for reinvestigation granted by the BIR Commissioner.
Even when the request for reconsideration or reinvestigation is not accompanied by a valid waiver or

there is no request for reinvestigation that had been granted by the BIR Commissioner, the taxpayer
may still be held in estoppel and be prevented from setting up the defense of prescription of the statute
of limitations on collection when, by his own repeated requests or positive acts, the Government had
been, for good reasons, persuaded to postpone collection to make the taxpayer feel that the demand is
not unreasonable or that no harassment or injustice is meant by the Government, as laid down by this
Court in the Suyoc case.
Applying the given rules to the present Petition, this Court finds that
(a)
The statute of limitations for collection of the deficiency DST in Assessment No. FAS-5-85-89002054, issued against petitioner BPI, had already expired; and
(b)
None of the conditions and requirements for exception from the statute of limitations on
collection exists herein: Petitioner BPI did not execute any waiver of the prescriptive period on
collection as mandated by paragraph (d) of Section 223 of the Tax Code of 1977, as amended; the
protest filed by petitioner BPI was a request for reconsideration, not a request for reinvestigation that
was granted by respondent BIR Commissioner which could have suspended the prescriptive period for
collection under Section 224 of the Tax Code of 1977, as amended; and, petitioner BPI, other than
filing a request for reconsideration of Assessment No. FAS-5-85-89-002054, did not make repeated
requests or performed positive acts that could have persuaded the respondent BIR Commissioner to
delay collection, and that would have prevented or estopped petitioner BPI from setting up the defense
of prescription against collection of the tax assessed, as required in the Suyoc case. CSEHcT
This is a simple case wherein respondent BIR Commissioner and other BIR officials failed to act
promptly in resolving and denying the request for reconsideration filed by petitioner BPI and in
enforcing collection on the assessment. They presented no reason or explanation as to why it took them
almost eight years to address the protest of petitioner BPI. The statute on limitations imposed by the
Tax Code precisely intends to protect the taxpayer from such prolonged and unreasonable assessment
and investigation by the BIR.
Considering that the right of the respondent BIR Commissioner to collect from petitioner BPI the
deficiency DST in Assessment No. FAS-5-85-89-002054 had already prescribed, then, there is no more
need for this Court to make a determination on the validity and correctness of the said Assessment for
the latter would only be unenforceable.
WHEREFORE, based on the foregoing, the instant Petition is GRANTED. The Decision of the Court
of Appeals in CA-G.R. SP No. 51271, dated 11 August 1999, which reinstated Assessment No. FAS-585-89-002054 requiring petitioner BPI to pay the amount of P28,020.00 as deficiency documentary
stamp tax for the taxable year 1985, inclusive of the compromise penalty, is REVERSED and SET
ASIDE. Assessment No. FAS-5-85-89-002054 is hereby ordered CANCELED. EHCcIT
SO ORDERED.
Puno, Austria-Martinez, Callejo, Sr. and Tinga, JJ., concur.
Footnotes
1.
Penned by Associate Justice Artemio G. Tuquero with Associate Justices Eubulo G. Verzola and
Elvi John S. Asuncion, concurring; Rollo, pp. 66-73.
2.
Penned by Presiding Judge Ernesto D. Acosta with Associate Judges Ramon O. De Veyra and
Amancio Q. Saga, concurring; Id., pp. 83-93.
3.
CTA Rollo, p. 32.
4.
Id., p. 33.
5.
Id., p. 34.
6.
BIR Records, p. 28.
7.
Id., pp. 28-29.
8.
CTA Rollo, pp. 35-36.
9.
Id., pp. 1-4.
10.
Id., pp. 21-25.

11.
Rollo, pp. 88-90.
12.
CTA Case No. 4647, 21 November 1994.
13.
Rollo, pp. 91-93.
14.
Ibid.
15.
Batas Pambansa Blg. 700 (approved on 05 April 1984) amended the Tax Code of 1977 by
shortening the period of limitations on assessment and collection of national internal revenue taxes
from the original five years to three years. The shorter three-year prescriptive period shall apply to
assessments made on or after 05 April 1984 covering taxable years beginning 01 January 1984.
16.
Now Section 203 of the Tax Code of 1997, as amended.
17.
Presently, Section 222 of the Tax Code of 1997, as amended, which reads
SEC. 222. Exceptions as to period of limitation of assessment and collection of taxes.
(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the
tax may be assessed, or a proceeding in court for the collection of such tax may be filed without
assessment, at any time within ten (10) years after the discovery of the falsity, fraud, or omission:
Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be
judicially taken cognizance of in the civil or criminal action for the collection thereof.
(b)
If before the expiration of the time prescribed in Section [203] for the assessment
of the tax, both the Commissioner and the taxpayer have agreed in writing to its assessment after such
time, the tax may be assessed within the period agreed upon. The period so agreed upon may be
extended by subsequent written agreement made before the expiration of the period previously agreed
upon.
(c)
Any internal revenue tax which has been assessed within the period of limitation
as prescribed in paragraph (a) hereof may be collected by distraint or levy or by a proceeding in court
within five (5) years following the assessment of the tax.
(d)
Any internal revenue tax, which has been assessed within the period agreed upon
as provided in paragraph (b) hereinabove, may be collected by distraint or levy or by a proceeding in
court within the period agreed upon in writing before the expiration of the five (5)-year period. The
period so agreed upon may be extended by subsequent written agreements made before the expiration
of the period previously agreed upon.
(e)
Provided, however, That nothing in the immediately preceding Section and
paragraph (a) hereof shall be construed to authorize the examination and investigation or inquiry into
any tax return filed in accordance with the provisions of any tax amnesty law or decree.
18.
Reproduced as Section 223 of the Tax Code of 1997, as amended.
19.
Now a five-year period, under Section 222(c) of the Tax Code of 1997, as amended, supra, note
17.
20.
Basilan Estates, Inc. v. Commissioner of Internal Revenue, 128 Phil 19 (1967).
21.
According to Article 13 of the Civil Code of the Philippines, when the law speaks of years, it
shall be understood that the years are of 365 days each.
22.
Republic v. Hizon, G.R. No. 130430, 13 December 1999, 320 SCRA 574; Advertising
Associates, Inc. v. Court of Appeals, G.R. No. L-59758, 26 December 1984, 133 SCRA 765; Palanca,
et al. v. Commissioner of Internal Revenue, 114 Phil 203 (1962).
23.
A judicial action for the collection of a tax may be initiated by the filing of a complaint with the
proper regular trial court; or where the assessment is appealed to the CTA, by filing an answer to the
taxpayer's petition for review wherein payment of the tax is prayed for. (Philippine National Oil
Company v. Court of Appeals, G.R. No. 109976, 26 April 2005; Fernandez Hermanos, Inc. v.
Commissioner of Internal Revenue, G.R. No. L-21551, 30 September 1969, 29 SCRA 552; Palanca, et
al. v. Commissioner of Internal Revenue, Ibid.)
24.
Philippine Journalists, Inc. v. Commissioner of Internal Revenue, G.R. No. 162852, 16
December 2004, 447 SCRA 214.

25.
108 Phil 1105, 1108 (1960).
26.
Currently Sections 222 and 223 of the Tax Code of 1997, as amended.
27.
Supra, note 17.
28.
Philippine Journalists, Inc. v. Commissioner of Internal Revenue, supra, note 24.
29.
Ibid.; Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 115712, 25 February
1999, 303 SCRA 614; Cordero v. Conda, 124 Phil 926 (1966); Collector of Internal Revenue v. Pineda,
112 Phil 321 (1961); Collector of Internal Revenue v. Solano, G.R. No. L-11475, 31 July 1958.
30.
BIR Records, p. 27.
31.
Section 223 of the Tax Code of 1997, as amended, at present.
32.
BIR Records, p. 26.
33.
120 Phil 376 (1964).
34.
Id., p. 382.
35.
131 Phil 469, 472 (1968).
36.
116 Phil 615 (1962).
37.
117 Phil 575 (1963).
38.
117 Phil 892 (1963).
39.
144 Phil 492 (1970).
40.
Republic of the Philippines v. Oquias, ibid.; Commissioner of Internal Revenue v. Sison, supra,
note 38; Republic of the Philippines v. Lopez, supra, note 37; Querol v. Collector of Internal Revenue,
supra, note 36.
41.
BIR Records, p. 26.
42.
G.R. No. 76281, 30 September 1991, 202 SCRA 125.
43.
104 Phil 819 (1958).
44.
Collector of Internal Revenue v. Suyoc Consolidated Mining Co., Ibid.
45.
Id., pp. 822-823.
46.
Id., p. 823, quoting from R.H. Stearns Co. v. U.S., 78 L. ed., 647.
47.
Commissioner of Internal Revenue v. Wyeth Suaco Laboratories, Inc., supra, note 42, pp. 131,
133-134.
48.
Ibid.
49.
See the discussions in Part II-C of the present Decision on Section 224 of the Tax Code of 1977,
as amended, and related jurisprudence.
50.
Republic v. Gancayco, supra, note 33; Republic v. Acebedo, supra, note 35.
51.
Also see the list of jurisprudence discussed in Part II-C of the present Decision, namely, Querol
v. Collector of Internal Revenue, supra, note 36; Republic of the Philippines v. Lopez, supra, note 37;
Commissioner of Internal Revenue v. Sison, supra, note 38; Republic of the Philippines v. Oquias,
supra, note 39.

SECOND DIVISION
[G.R. No. 130430. December 13, 1999.]
REPUBLIC OF THE PHILIPPINES, represented by the Commissioner of the Bureau of Internal
Revenue (BIR), petitioner, vs. SALUD V. HIZON, respondent.
The Solicitor General for petitioner.
Eliseo P. Pitargue for private respondent.
SYNOPSIS
Petitioner Bureau of Internal Revenue (BIR) issued a deficiency income tax assessment of
P1,113,359.68 covering the fiscal year 1981-1982 against respondent. As the assessments remained
uncontested, petitioner, on January 12, 1989, served warrants of distraint and levy to collect the tax
deficiency. However, for reasons not known, it did not proceed to dispose of the attached properties.
Three years later, respondent wrote the BIR requesting a reconsideration of her tax deficiency
assessment. The BIR denied the request. The BIR filed a civil case with the Regional Trial Court of
Pampanga to collect the tax deficiency. The complaint was signed by the Chief of the Legal Division,
BIR Region 4, and verified by the Bureau's Regional Director in Pampanga. Respondent moved to
dismiss the case on the grounds that the complaint was not filed upon the authority of the BIR
Commissioner as required by Section 221 of the National Internal Revenue Code (NIRC) and the
action had already prescribed. The trial court granted the motion to dismiss the complaint. Hence, the
present petition. The issues are: (1) whether or not the institution of the civil case without the approval
of the Commissioner was in violation of Section 221 of the National Internal Revenue Code; and (2)
whether or not petitioner's request for reinvestigation on November 3, 1992 effectively suspended the
running of the period of prescription. DAaEIc
The Supreme Court dismissed the petition. The Court ruled that the complaint for the collection of
taxes was filed without the authority of the Commissioner of Internal Revenue as provided for by the
NIRC. Although Section 7 of the present National Internal Revenue Code authorizes the BIR
Commissioner to delegate the powers vested in him under the pertinent provisions of the Code to any
subordinate official with the rank of Division Chief or higher, none of the exceptions therein provided
relates to the Commissioner's power to approve the filing of tax collection cases. On the issue of
prescription, the Court ruled that the action had already prescribed. Even assuming that respondent first
learned of the deficiency assessment on January 12, 1989, her request for reconsideration was
nonetheless late since she made it more than 30 days thereafter. Hence, her request for reconsideration
did not suspend the running of the prescriptive period provided under Section 223(c) of the NIRC. And
although the Commissioner acted on her request by eventually denying it on August 11, 1994, this was
of no moment and did not detract from the fact that the assessment has long been demandable. The
ruling, however, is without prejudice to the disposition of the properties covered by the warrants of
distraint and levy which petitioner served on respondent, as such would be a mere continuation of the
summary remedy it had timely begun.
SYLLABUS
1.
TAXATION; NATIONAL INTERNAL REVENUE CODE; PETITIONER'S COMPLAINT
FOR COLLECTION OF TAXES WAS NOT FILED UPON AUTHORITY OF THE BUREAU OF
INTERNAL REVENUE COMMISSIONER AS REQUIRED BY SECTION 221 THEREOF.
Revenue Administrative Order No. 10-95 specifically authorizes the Litigation and Prosecution Section
of the Legal Division of regional district offices to institute the necessary civil and criminal actions for
tax collection. As the complaint filed in this case was signed by the BIR's Chief of Legal Division for
Region 4 and verified by the Regional Director, there was, therefore, compliance with the law.
However, the lower court refused to recognize RAO No. 10-95 and, by implication, RAO No. 5-83. It
held: "[M]emorand[a], circulars and orders emanating from bureaus and agencies whether in the purely
public or quasi-public corporations are mere guidelines for the internal functioning of the said offices.
They are not laws which courts can take judicial notice of. As such, they have no binding effect upon

the courts for such memorand[a] and circulars are not the official acts of the legislative, executive and
judicial departments of the Philippines . . . " This is erroneous. The rule is that as long as administrative
issuances relate solely to carrying into effect the provisions of the law, they are valid and have the force
of law. The governing statutory provision in this case is 4(d) of the NIRC which provides: "Specific
provisions to be contained in regulations. The regulations of the Bureau of Internal Revenue shall,
among other things, contain provisions specifying, prescribing or defining: . . . (d) The conditions to be
observed by revenue officers, provincial fiscals and other officials respecting the institution and
conduct of legal actions and proceedings." RAO Nos. 5-83 and 10-95 are in harmony with this
statutory mandate. As amended by R.A. No. 8424, the NIRC is now even more categorical. Sec. 7 of
the present Code authorizes the BIR Commissioner to delegate the powers vested in him under the
pertinent provisions of the Code to any subordinate official with the rank equivalent to a division chief
or higher, except the following: "(a) The power to recommend the promulgation of rules and
regulations by the Secretary of Finance; (b) The power to issue rulings of first impression or to reverse,
revoke or modify any existing ruling of the Bureau; (c) The power to compromise or abate under
204(A) and (B) of this Code, any tax deficiency: Provided, however, that assessments issued by the
Regional Offices involving basic deficiency taxes of five hundred thousand pesos (P500,000.00) or
less, and minor criminal violations as may be determined by rules and regulations to be promulgated by
the Secretary of Finance, upon the recommendation of the Commissioner, discovered by regional and
district officials, may be compromised by a regional evaluation board which shall be composed of the
Regional Director as Chairman, the Assistant Regional Director, heads of the Legal, Assessment and
Collection Divisions and the Revenue District Officer having jurisdiction over the taxpayer, as
members; and (d) The power to assign or reassign internal revenue officers to establishments where
articles subject to excise tax are produced or kept. None of the exceptions relates to the Commissioner's
power to approve the filing of tax collection cases." aHECST
2.
ID.; ID.; ACTION FOR THE COLLECTION OF TAXES AGAINST RESPONDENT HAS
ALREADY PRESCRIBED; SINCE RESPONDENT'S REQUEST FOR RECONSIDERATION WAS
FILED LATE, MAKING THE ASSESSMENT FINAL, UNAPPEALABLE AND DEMANDABLE, IT
DID NOT SUSPEND THE RUNNING OF THE PRESCRIPTIVE PERIOD PROVIDED UNDER
SECTION 223 OF THE NATIONAL INTERNAL REVENUE CODE. Petitioner argues that, in
accordance with this provision, respondent's request for reinvestigation of her tax deficiency
assessment on November 3, 1992 effectively suspended the running of the period of prescription such
that the government could still file a case for tax collection. The contention has no merit. Sec. 229 of
the Code mandates that a request for reconsideration must be made within 30 days from the taxpayer's
receipt of the tax deficiency assessment, otherwise the assessment becomes final, unappealable and,
therefore, demandable. The notice of assessment for respondent's tax deficiency was issued by
petitioner on July 18, 1986. On the other hand, respondent made her request for reconsideration thereof
only on November 3, 1992, without stating when she received the notice of tax assessment. She
explained that she was constrained to ask for a reconsideration in order to avoid the harassment of BIR
collectors. In all likelihood, she must have been referring to the distraint and levy of her properties by
petitioner's agents which took place on January 12, 1989. Even assuming that she first learned of the
deficiency assessment on this date, her request for reconsideration was nonetheless filed late since she
made it more than 30 days thereafter. Hence, her request for reconsideration did not suspend the
running of the prescriptive period provided under 223(c). Although the Commissioner acted on her
request by eventually denying it on August 11, 1994, this is of no moment and does not detract from the
fact that the assessment had long become demandable.
DECISION
MENDOZA, J p:
This is a petition for review of the decision 1 of the Regional Trial Court, Branch 44, San Fernando,
Pampanga, dismissing the suit filed by the Bureau of Internal Revenue for collection of tax. prLL

The facts are as follows:

On July 18, 1986, the BIR issued to respondent Salud V. Hizon a deficiency income tax assessment of
P1,113,359.68 covering the fiscal year 1981-1982. Respondent not having contested the assessment,
petitioner, on January 12, 1989, served warrants of distraint and levy to collect the tax deficiency.
However, for reasons not known, it did not proceed to dispose of the attached properties.
More than three years later, or on November 3, 1992, respondent wrote the BIR requesting a
reconsideration of her tax deficiency assessment. The BIR, in a letter dated August 11, 1994, denied the
request. On January 1, 1997, it filed a case with the Regional Trial Court, Branch 44, San Fernando,
Pampanga to collect the tax deficiency. The complaint was signed by Norberto Salud, Chief of the
Legal Division, BIR Region 4, and verified by Amancio Saga, the Bureau's Regional Director in
Pampanga.
Respondent moved to dismiss the case on two grounds: (1) that the complaint was not filed upon
authority of the BIR Commissioner as required by 221 2 of the National Internal Revenue Code, and
(2) that the action had already prescribed. Over petitioner's objection, the trial court, on August 28,
1997, granted the motion and dismissed the complaint. Hence, this petition. Petitioner raises the
following issues: 3
I.
WHETHER OR NOT THE INSTITUTION OF THE CIVIL CASE FOR COLLECTION OF
TAXES WAS WITHOUT THE APPROVAL OF THE COMMISSIONER IN VIOLATION OF
SECTION 221 OF THE NATIONAL INTERNAL REVENUE CODE.
II.
WHETHER OR NOT THE ACTION FOR COLLECTION OF TAXES FILED AGAINST
RESPONDENT HAD ALREADY BEEN BARRED BY THE STATUTE OF LIMITATIONS.
First. In sustaining respondent's contention that petitioner's complaint was filed without the authority of
the BIR Commissioner, the trial court stated: 4
There is no question that the National Internal Revenue Code explicitly provides that in the matter of
filing cases in Court, civil or criminal, for the collection of taxes, etc., the approval of the commissioner
must first be secured . . . . [A]n action will not prosper in the absence of the commissioner's approval.
Thus, in the instant case, the absence of the approval of the commissioner in the institution of the action
is fatal to the cause of the plaintiff . . . .
The trial court arrived at this conclusion because the complaint filed by the BIR was not signed by then
Commissioner Liwayway Chato. cda
Sec. 221 of the NIRC provides:
Form and mode of proceeding in actions arising under this Code. Civil and criminal actions and
proceedings instituted in behalf of the Government under the authority of this Code or other law
enforced by the Bureau of Internal Revenue shall be brought in the name of the Government of the
Philippines and shall be conducted by the provincial or city fiscal, or the Solicitor General, or by the
legal officers of the Bureau of Internal Revenue deputized by the Secretary of Justice, but no civil and
criminal actions for the recovery of taxes or the enforcement of any fine, penalty or forfeiture under
this Code shall be begun without the approval of the Commissioner. (Emphasis supplied)
To implement this provision Revenue Administrative Order No. 5-83 of the BIR provides in pertinent
portions:
The following civil and criminal cases are to be handled by Special Attorneys and Special Counsels
assigned in the Legal Branches of Revenue Regions:
xxx
xxx
xxx
II.
Civil Cases
1.
Complaints for collection on cases falling within the jurisdiction of the Region . . . .
In all the abovementioned cases, the Regional Director is authorized to sign all pleadings filed in
connection therewith which, otherwise, requires the signature of the Commissioner.
xxx
xxx
xxx
Revenue Administrative Order No. 10-95 specifically authorizes the Litigation and Prosecution Section

of the Legal Division of regional district offices to institute the necessary civil and criminal actions for
tax collection. As the complaint filed in this case was signed by the BIR's Chief of Legal Division for
Region 4 and verified by the Regional Director, there was, therefore, compliance with the law.
However, the lower court refused to recognize RAO No. 10-95 and, by implication, RAO No. 5-83. It
held:
[M]emorand[a], circulars and orders emanating from bureaus and agencies whether in the purely public
or quasi-public corporations are mere guidelines for the internal functioning of the said offices. They
are not laws which courts can take judicial notice of. As such, they have no binding effect upon the
courts for such memorand[a] and circulars are not the official acts of the legislative, executive and
judicial departments of the Philippines . . . . 5
This is erroneous. The rule is that as long as administrative issuances relate solely to carrying into
effect the provisions of the law, they are valid and have the force of law. 6 The governing statutory
provision in this case is 4(d) of the NIRC which provides:
Specific provisions to be contained in regulations. The regulations of the Bureau of Internal
Revenue shall, among other things, contain provisions specifying, prescribing or defining:
xxx
xxx
xxx
(d)
The conditions to be observed by revenue officers, provincial fiscals and other officials
respecting the institution and conduct of legal actions and proceedings.
RAO Nos. 5-83 and 10-95 are in harmony with this statutory mandate.
As amended by R.A. No. 8424, the NIRC is now even more categorical. Sec. 7 of the present Code
authorizes the BIR Commissioner to delegate the powers vested in him under the pertinent provisions
of the Code to any subordinate official with the rank equivalent to a division chief or higher, except the
following:
(a)
The power to recommend the promulgation of rules and regulations by the Secretary of
Finance;
(b)
The power to issue rulings of first impression or to reverse, revoke or modify any existing
ruling of the Bureau;
(c)
The power to compromise or abate under 204(A) and (B) of this Code, any tax deficiency:
Provided, however, that assessments issued by the Regional Offices involving basic deficiency taxes of
five hundred thousand pesos (P500,000.00) or less, and minor criminal violations as may be
determined by rules and regulations to be promulgated by the Secretary of Finance, upon the
recommendation of the Commissioner, discovered by regional and district officials, may be
compromised by a regional evaluation board which shall be composed of the Regional Director as
Chairman, the Assistant Regional Director, heads of the Legal, Assessment and Collection Divisions
and the Revenue District Officer having jurisdiction over the taxpayer, as members; and
(d)
The power to assign or reassign internal revenue officers to establishments where articles
subject to excise tax are produced or kept.
None of the exceptions relates to the Commissioner's power to approve the filing of tax collection
cases.
Second. With regard to the issue that the case filed by petitioner for the collection of respondent's tax
deficiency is barred by prescription, 223(c) of the NIRC provides:
Any internal revenue tax which has been assessed within the period of limitation above-prescribed may
be collected by distraint or levy or by a proceeding in court within three years 7 following the
assessment of the tax.
The running of the three-year prescriptive period is suspended 8
for the period during which the Commissioner is prohibited from making the assessment or beginning
distraint or levy or a proceeding in court and for sixty days thereafter; when the taxpayer requests for a
reinvestigation which is granted by the Commissioner; when the taxpayer cannot be located in the
address given by him in the return filed upon which the tax is being assessed or collected; provided,

that, if the taxpayer informs the Commissioner of any change in address, the running of the statute of
limitations will not be suspended; when the warrant of distraint or levy is duly served upon the
taxpayer, his authorized representative or a member of his household with sufficient discretion, and no
property could be located; and when the taxpayer is out of the Philippines. cdasia
Petitioner argues that, in accordance with this provision, respondent's request for reinvestigation of her
tax deficiency assessment on November 3, 1992 effectively suspended the running of the period of
prescription such that the government could still file a case for tax collection. 9
The contention has no merit. Sec. 229 10 of the Code mandates that a request for reconsideration must
be made within 30 days from the taxpayer's receipt of the tax deficiency assessment, otherwise the
assessment becomes final, unappealable and, therefore, demandable. 11 The notice of assessment for
respondent's tax deficiency was issued by petitioner on July 18, 1986. On the other hand, respondent
made her request for reconsideration thereof only on November 3, 1992, without stating when she
received the notice of tax assessment. She explained that she was constrained to ask for a
reconsideration in order to avoid the harassment of BIR collectors. 12 In all likelihood, she must have
been referring to the distraint and levy of her properties by petitioner's agents which took place on
January 12, 1989. Even assuming that she first learned of the deficiency assessment on this date, her
request for reconsideration was nonetheless filed late since she made it more than 30 days thereafter.
Hence, her request for reconsideration did not suspend the running of the prescriptive period provided
under 223(c). Although the Commissioner acted on her request by eventually denying it on August 11,
1994, this is of no moment and does not detract from the fact that the assessment had long become
demandable.
Nonetheless, it is contended that the running of the prescriptive period under 223(c) was suspended
when the BIR timely served the warrants of distraint and levy on respondent on January 12, 1989. 13
Petitioner cites for this purpose our ruling in Advertising Associates Inc. v. Court of Appeals. 14
Because of the suspension, it is argued that the BIR could still avail of the other remedy under 223(c)
of filing a case in court for collection of the tax deficiency, as the BIR in fact did on January 1, 1997.
Petitioner's reliance on the Court's ruling in Advertising Associates Inc. v. Court of Appeals is
misplaced. What the Court stated in that case and, indeed, in the earlier case of Palanca v.
Commissioner of Internal Revenue, 15 is that the timely service of a warrant of distraint or levy
suspends the running of the period to collect the tax deficiency in the sense that the disposition of the
attached properties might well take time to accomplish, extending even after the lapse of the statutory
period for collection. In those cases, the BIR did not file any collection case but merely relied on the
summary remedy of distraint and levy to collect the tax deficiency. The importance of this fact was not
lost on the Court. Thus, in Advertising Associates, it was held: 16 "It should be noted that the
Commissioner did not institute any judicial proceeding to collect the tax. He relied on the warrants of
distraint and levy to interrupt the running of the statute of limitations."
Moreover, if, as petitioner in effect says, the prescriptive period was suspended twice, i.e., when the
warrants of distraint and levy were served on respondent on January 12, 1989 and then when
respondent made her request for reinvestigation of the tax deficiency assessment on November 3, 1992,
the three-year prescriptive period must have commenced running again sometime after the service of
the warrants of distraint and levy. Petitioner, however, does not state when or why this took place and,
indeed, there appears to be no reason for such. It is noteworthy that petitioner raised this point before
the lower court apparently as an alternative theory, which, however, is untenable.
For the foregoing reasons, we hold that petitioner's contention that the action in this case had not
prescribed when filed has no merit. Our holding, however, is without prejudice to the disposition of the
properties covered by the warrants of distraint and levy which petitioner served on respondent, as such
would be a mere continuation of the summary remedy it had timely begun. Although considerable time
has passed since then, as held in Advertising Associates Inc. v. Court of Appeals 17 and Palanca v.
Commissioner of Internal Revenue, 18 the enforcement of tax collection through summary proceedings

may be carried out beyond the statutory period considering that such remedy was seasonably availed
of. LibLex
WHEREFORE, the petition is DENIED.
Bellosillo, Quisumbing, Buena and De Leon, Jr., JJ., concur.
Footnotes
1.
Per Judge Patrocinio R. Corpuz.
2.
Now 220, as amended by Republic Act No. 8424.
3.
Petition, p. 7; Rollo, p. 13.
4.
Petition, Annex A, p. 3; Rollo, p. 37.
5.
Petition, Annex A, p. 3; Rollo, p. 37.
6.
United States v. Tupasi Molina, 29 Phil. 119 (1914); Teoxon v. Members of the Board of
Administrators, 144 Phil. 592 (1970); Cena v. Civil Service Commission, 211 SCRA 179 (1992).
7.
As amended by R.A. No. 8424, the period, under 222 of the present Code, has been extended
to five years.
8.
224, now 223 of the NIRC, as amended by R.A. No. 8424.
9.
Petition, p. 20; Rollo, p. 27.
10.
228 of the NIRC, as amended by R.A. No. 8424.
11.
Republic v. Court of Appeals, 149 SCRA 351 (1987).
12.
Comment, p. 4; Rollo, p. 143.
13.
Comment, Annex A, p. 2; Rollo, p. 149.
14.
133 SCRA 765 (1984).
15.
114 Phil. 203 (1962).
16.
Supra, note 14 at 771.
17.
Supra, note 14.
18.
Supra, note 15.

EN BANC
[G.R. No. L-22356. July 21, 1967.]
REPUBLIC OF THE PHILIPPINES, plaintiff-appellant, vs. PEDRO B. PATANAO, defendantappellee.
Solicitor General Arturo A. Alafriz, Solicitor A. B. Afurong and L.O. Gal-lang for appellant.
Tranquilino O. Calo, Jr. for appellee.
SYLLABUS
1.
TAXATION LAW; CIVIL LIABILITY UNDER REVISED PENAL, CODE AND UNDER
INCOME TAX LAW DISTINGUISHED. Under the Penal Code the civil liability is incurred by
reason of the offender's criminal act. Stated differently, the criminal liability gives birth to the civil
obligation such that generally, if one is not criminally liable under the Penal Code, he cannot become
civilly liable thereunder. The situation under the income tax law is the exact opposite. Civil liability to
pay taxes arises from the fact, for instance, that one has engaged himself in business, and not because
of any criminal act committed by him. The criminal liability arises upon failure of the debtor to satisfy
his civil obligation. The incongruity of the factual premises and foundation principles of the two cases
is one of the reasons for not imposing civil indemnity on the criminal infractor of the income tax law.
Another reason, of course, is found in the fact that while Section 73 of the National Internal Revenue
Code has provided the imposition of the penalty of imprisonment or fine, or both, for refusal or neglect
to pay income tax or to make a return thereof, it failed to provide the collection of said tax in criminal
proceedings.
2.
ID.; CIVIL REMEDIES FOR COLLECTION OF INCOME TAX. The only civil remedies
provided for the collection of income tax, in Chapters I and II, Title IX of the Code and Section 316
thereof, are distraint of goods, chattels, etc. or by judicial action, which remedies are generally
exclusive in the absence of a contrary intent from the legislator. (People vs. Arnault, 92 Phil., 252;
People vs. Tierra, 64 Off. Gaz., [9] 1972).
3.
ID., ACQUITTAL OF TAXPAYER IN CRIMINAL CASE DOES NOT EXONERATE HIM
FROM LIABILITY TO PAY TAXES. Since the civil liability is not deemed included in the criminal
action, acquittal of the taxpayer in the criminal proceeding does not necessarily entail exoneration from
his liability to pay the taxes. The acquittal in a criminal case cannot operate to discharge defendant
from the duty of paying the taxes which the law requires to be paid, since that duty is imposed by
statute prior to and independently of any attempts by the taxpayer to evade payment. Said obligation is
not a consequence of the felonious acts charged in the criminal proceeding nor is it a mere civil liability
arising from a crime that could be wiped out by the judicial declaration of non-existence of the criminal
acts charged. (Castro vs. The Collector of Internal Revenue, 62 Off. Gaz., [12], 1935).
4.
ID.; PRESCRIPTION OF ACTION; CASE AT BAR. Appellant contends that the applicable
law in the case at bar is Section 332(a) of the Tax Code under which a proceeding in court for the
collection of the tax may be commenced without assessment at any time within 10 years from the
discovery of the falsity, fraud or omission. Held: The complaint filed on December 7, 1962, alleges that
the fraud in the appellee's income tax return for 1951, was discovered on February 14, 1958. By filing a
motion to dismiss, appellee hypothetically admitted this allegation as all the other averments in the
complaint were so admitted. Hence Section 332(a) and not Section 331 of the National Internal
Revenue Code should determine whether or not the cause of action of deficiency income tax and
residence tax for 1951 has prescribed. Applying the provisions of Section 332(a), appellant's action
instituted in court on December 7, 1962 has not prescribed.
DECISION
ANGELES, J p:
This is an appeal from an order of the Court of First Instance of Agusan in Civil Case No. 925,
dismissing plaintiff's complaint so far as concerns the collection of deficiency income taxes for the
years 1951, 1953 and 1954 and additional residence taxes for 1951 and 1952, and requiring the

defendant to file his answer with respect to deficiency income tax for 1955 and residence taxes for
1953-1955.
In the complaint filed by the Republic of the Philippines, through the Solicitor General, against Pedro
B. Patanao, it is alleged that defendant was the holder of an ordinary timber license with concession at
Esperanza, Agusan, and as such was engaged in the business of producing logs and lumber for sale
during the years 1951-1955; that defendant failed to file income tax returns for 1953 and 1954, and
although he filed income tax returns for 1951, 1952 and 1955, the same were false and fraudulent
because he did not report substantial income earned by him from his business; that in an examination
conducted by the Bureau of Internal Revenue on defendant's income and expenses for 1951-1955, it
was ascertained that the sum of P79,892.75, representing deficiency income taxes and additional
residence taxes for the aforesaid years, is due from defendant; that on February 14, 1958, plaintiff,
through the Deputy Commissioner of Internal Revenue, sent a letter of demand with enclosed income
tax assessment to the defendant requiring him to pay the said amount; that notwithstanding repeated
demands the defendant refused, failed and neglected to pay said taxes; and that the assessment for the
payment of the taxes in question has become final, executory and demandable, because it was not
contested before the Court of Tax Appeals in accordance with the provisions of section 11 of Republic
Act No. 1125.
Defendant moved to dismiss the complaint on two grounds, namely: (1) that the action is barred by
prior judgment, defendant having been acquitted in criminal cases Nos. 2089 and 2090 of the same
court, which were prosecutions for failure to file income tax returns and for non-payment of income
taxes; and (2) that the action has prescribed.
After considering the motion to dismiss, the opposition thereto and the rejoinder to the opposition, the
lower court entered the order appealed from, holding that the only cause of action left to the plaintiff in
its complaint is the collection of the income tax due for the taxable year 1955 and the residence tax
(Class B) for 1953, 1954 and 1955. A motion to reconsider said order was denied, whereupon plaintiff
interposed the instant appeal, which was brought directly to this Court, the questions involved being
purely legal.
The conclusion of the trial court, that the present action is barred by prior judgment, is anchored on the
following rationale:
"There is no question that the defendant herein has been accused in Criminal Cases Nos. 2089 and
2090 of this Court for not filing his income tax returns and for non-payment of income taxes for the
years 1953 and 1954. In both cases, he was acquitted. The rule in this jurisdiction is that the accused
once acquitted is exempt from both criminal and civil responsibility because when a criminal action is
instituted, civil action arising from the same offense is impliedly instituted unless the offended party
expressly waives the civil action or reserves the right to file it separately. In the criminal cases
abovementioned wherein the defendant was completely exonerated, there was no waiver or reservation
to file a separate civil case so that the failure to obtain conviction on a charge of non-payment of
income taxes is fatal to any civil action to collect the payment of said taxes."
Plaintiff-appellant assails the ruling as erroneous. Defendant-appellee on his part urges that it should be
maintained.
In applying the principle underlying the civil liability of an offender under the Penal Code to a case
involving the collection of taxes, the court a quo fell into error. The two cases are circumscribed by
factual premises which are diametrically opposed to each other, and are founded on entirely different
philosophies. Under the Penal Code the civil liability is incurred by reason of the offender's criminal
act. Stated differently, the criminal liability gives birth to the civil obligation such that generally, if one
is not criminally liable under the Penal Code, he cannot become civilly liable thereunder. The situation
under the income tax law is the exact opposite. Civil liability to pay taxes arises from the fact, for
instance, that one has engaged himself in business, and not because of any criminal act committed by
him. The criminal liability arises upon failure of the debtor to satisfy his civil obligation. The

incongruity of the factual premises and foundation principles of the two cases is one of the reasons for
not imposing civil indemnity on the criminal infractor of the income tax law. Another reason, of course,
is found in the fact that while section 73 of the National Internal Revenue Code has provided the
imposition of the penalty of imprisonment or fine, or both, for refusal or neglect to pay income tax or to
make a return thereof, it failed to provide the collection of said tax in criminal proceedings. The only
civil remedies provided for the collection of income tax, in Chapters I and II, Title IX of the Code and
section 316 thereof, are distraint of goods, chattels, etc. or by judicial action, which remedies are
generally exclusive in the absence of a contrary intent from the legislator. (People vs. Arnault, 92 Phil.
252, November 20, 1952, People vs. Tierra, 64 Off. Gaz., [9] 1972) Considering that the Government
cannot seek satisfaction of the taxpayer's civil liability in a criminal proceeding under the tax law or,
otherwise stated, since the said civil liability is not deemed included in the criminal action, acquittal of
the taxpayer in the criminal proceeding does not necessarily entail exoneration from his liability to pay
the taxes. It is error to hold, as the lower court has held that judgment in the criminal cases Nos. 2089
and 2090 bars the action in the present case. The acquittal in the said criminal cases cannot operate to
discharge defendant-appellee from the duty of paying the taxes which the law requires to be paid, since
that duty is imposed by statute prior to and independently of any attempts by the taxpayer to evade
payment. Said obligation is not a consequence of the felonious acts charged in the criminal proceeding
nor is it a mere civil liability arising from crime that could be wiped out by the judicial declaration of
non-existence of the criminal acts charged. (Castro vs. The Collector of Internal Revenue, G.R. No. L12174, April 20, 1962).
Regarding prescription of action, the lower court held that the cause of action on the deficiency income
tax and residence tax for 1951 is barred because appellee's income tax return for 1951 was assessed by
the Bureau of Internal Revenue only on February 14, 1958, or beyond the five-year period of limitation
for assessment as provided in section 331 of the National Internal Revenue Code. Appellant contends
that the applicable law is section 332 (a) of the same Code under which a proceeding in court for the
collection of the tax may be commenced without assessment at any time within 10 years from the
discovery of the falsity, fraud or omission.
The complaint filed on December 7, 1962, alleges that the fraud in the appellee's income tax return for
1951, was discovered on February 14, 1958. By filing a motion to dismiss, appellee hypothetically
admitted this allegation as all the other averments in the complaint were so admitted. Hence, section
332(a) and not section 331 of the National Internal Revenue Code should determine whether or not the
cause of action of deficiency income tax and residence tax for 1951 has prescribed. Applying the
provisions of section 332(a), the appellant's action instituted in court on December 7, 1962 has not
prescribed.
Wherefore, the order appealed from is hereby set aside. Let the records of this case be remanded to the
court of origin for further proceedings. No pronouncement as to costs.
Reyes, J .B.L., Makalintal, Bengzon, J .P., Zaldivar, Sanchez, Castro, and Fernando, JJ ., concur.
Concepcion, C .J . and Dizon, J ., are on official leave of absence.

EN BANC
[G.R. No. L-11527. November 25, 1958.]
THE COLLECTOR OF INTERNAL REVENUE, petitioner, vs. SUYOC CONSOLIDATED MINING
COMPANY, ET AL., respondents.
Solicitor General Ambrosio Padilla and Solicitor Sumilang V. Bernardo for petitioner.
Ohnick, Velilla & Balongkita for respondents.
SYLLABUS
1.
INCOME TAX; COLLECTION; PERIOD OF LIMITATION; REEXAMINATION OR
REINVESTIGATION OF ASSESSMENT DOES NOT SUSPEND PERIOD OF LIMITATION;
EXCEPTIONS. A mere request for reexamination or reinvestigation of assessment may not suspend
the running of the period of limitation for in such a case there is need of a written agreement to extend
the period between the Collector and the taxpayer. There are cases, however, where a taxpayer may be
prevented from setting up the defense of prescription even if he has not previously waived it in writing
as when by his repeated requests or positive acts the Government has been, for good reasons, persuaded
to postpone collection to make himself feel that the demand was not unreasonable or that no
harassment or injustice is meant by the Government. And when such situation comes to pass there are
authorities that hold, based on weighty reasons, that such an attitude or behavior should not be
countenanced if only to protect the interest of the Government.
2.
ID.; ID.; ID.; GOVERNMENT'S ACTION WITHHELD AT TAXPAYER'S REQUEST;
ESTOPPEL. He who prevents a thing from being done may not avail himself of the nonperformance which he has himself occasioned, for the law says to him in effect "this is your own act
and therefore you are not damnified." (R.H. Stearns Co. vs. U.S. 78 L Ed. 6647). Or, as was aptly said,
"The tax could have been collected, but the government withheld action at the specific request of the
plaintiff. The plaintiff is now estopped and should not be permitted to raise the defense of the statute of
limitations." (Newpoint Co. vs. U.S. (Dc-wis), 34 Off. Supp. 588.)
DECISION
BAUTISTA ANGELO, J p:
Suyoc Consolidated Mining Company, a mining corporation operating before the war, was unable to
file in 1942 its income tax return for the year 1941 due to the last war. After liberation, Congress
enacted Commonwealth Act No. 722 which extended the filing of tax returns for 1941 up to December
31, 1945. Its records having been lost or destroyed, the company requested the Collector of Internal
Revenue to grant it an extension of time to file its return, which was granted until February 15, 1946,
and the company was authorized to file its return for 1941 on the basis of the best evidence obtainable.
The company filed three income tax returns for the calendar year ending December 31, 1941. On
February 12, 1946, it filed a tentative return as it had not yet completely reconstructed its records. On
November 28, 1946, it filed a second final return on the basis of the records it has been able to
reconstruct at that time. On February 6, 1947, it filed its third amended final return on the basis of the
available records which to that date it had been able to reconstruct.
On the basis of the second final return filed by the company on November 28, 1946, the Collector
assessed against it the sum of P28,289.96 as income tax for 1941, plus P1,414.50 as 5 per cent
surcharge and P3,394.80 as 1 per cent monthly interest from March 1, 1946 to February 28, 1947, or a
total of P33,099.26. The assessment was made on February 11, 1947. On February 21, 1947, the
company asked for an extension of at least one year from February 28, 1947 within which to pay the
amount assessed, reserving its right to question the correctness of the assessment. The Collector
granted an extension of only three months from March 20, 1947.
The company failed to pay the tax within the period granted to it and so the Collector sent to it a letter
on November 28, 1950 demanding payment of the tax due as assessed, plus surcharge and interest up to
December 31, 1950. On April 6, 1951, the company asked for a reconsideration and reinvestigation of
the assessment, which was granted, the case being assigned to another examiner, but the Collector

made another assessment against the company in the sum of P33,829.66. This new assessment was
made on March 7, 1952. On April 18, 1952, the Collector revised this last assessment and required the
company to pay the sum of P28,289.96 as income tax, P1,414.50 as surcharge, P20,934.57 as interest
up to April 30, 1952 and P40 as compromise.
After several other negotiations conducted at the request of respondent, including an appeal to the
Conference Staff created to act on such matters in the Bureau of Internal Revenue, the assessment was
finally reduced by the Collector to P24,438.96, without surcharge and interest, and of this new
assessment the company was notified on July 28, 1955. Within the reglementary period, the company
filed with the Court of Tax Appeals a petition for review of this assessment made on July 26, 1955 on
the main ground that the right of the Government to collect the tax has already prescribed. After the
case was heard, the court rendered its decision upholding this defense and, accordingly, it set aside the
ruling of the Collector of Internal Revenue. The Collector interposed the present petition for review.
Under the law, an internal revenue tax shall be assessed within five years after the return is filed by the
taxpayer and no proceeding in court for its collection shall be begun after the expiration of such period
(Section 331, National Internal Revenue Code). The law also provides that where an assessment of
internal revenue tax is made within the above period, such tax may be collected by distraint or levy or
by a proceeding in court but only if the same is begun (1) within five years after assessment or (2)
within the period that may be agreed upon in writing between the Collector and the taxpayer before the
expiration of the 5-year period [Section 332 (c), Idem.].
It appears that the first assessment made against respondent based on its second final return filed on
November 28, 1946 was made on February 11, 1947. Upon receipt of this assessment respondent
requested for at least one year within which to pay the amount assessed although it reserved its right to
question the correctness of the assessment before actual payment. Petitioner granted an extension of
only three months. When it failed to pay the tax within the period extended, petitioner sent respondent
a letter on November 28, 1950 demanding payment of the tax as assessed, and upon receipt of the letter
respondent asked for a reinvestigation and reconsideration of the assessment. When this request was
denied, respondent again requested for a reconsideration on April 25, 1952, which was denied on May
6, 1953, which denial was appealed to the Conference Staff. The appeal was heard by the Conference
Staff from September 2, 1953 to July 16, 1955, and as a result of these various negotiations, the
assessment was finally reduced on July 26, 1955. This is the ruling which is now being questioned after
a protracted negotiation on the ground that the collection of the tax has already prescribed.
It is obvious from the foregoing that petitioner refrained from collecting the tax by distraint or levy or
by proceeding in court within the 5-year period from the filing of the second amended final return due
to the several requests of respondent for extension to which petitioner yielded to give it every
opportunity to prove its claim regarding the correctness of the assessment. Because of such requests,
several reinvestigations were made and a hearing was even held by the Conference Staff organized in
the collection office to consider claims of such nature which, as the record shows, lasted for several
months. After inducing petitioner to delay collection as he in fact did, it is most unfair for respondent to
now take advantage of such desistance to elude his deficiency income tax liability to the prejudice of
the Government invoking the technical ground of prescription.
While we may agree with the Court of Tax Appeals that a mere request for reexamination or
reinvestigation may not have the effect of suspending the running of the period of limitation for in such
case there is need of a written agreement to extend the period between the Collector and the taxpayer,
there are cases however where a taxpayer may be prevented from setting up the defense of prescription
even if he has not previously waived it in writing as when by his repeated requests or positive acts the
Government has been, for good reasons, persuaded to postpone collection to make him feel that the
demand was not unreasonable or that no harassment or injustice is meant by the Government. And
when such situation comes to pass there are authorities that hold, based on weighty reasons, that such
an attitude or behavior should not be countenanced if only to protect the interest of the Government.

This case has no precedent in this jurisdiction for it is the first time that such has risen, but there are
several precedents that may be invoked in American jurisprudence. As Mr. Justice Cardozo has said:
"The applicable principle is fundamental and unquestioned. 'He who prevents a thing from being done
may not avail himself of the nonperformance which he has himself occasioned, for the law says to him
in effect "this is your own act, and therefore you are not damnified."' "(R. H. Stearns Co. vs. U.S., 78 L.
ed., 647). Or, as was aptly said, "The tax could have been collected, but the government withheld action
at the specific request of the plaintiff. The plaintiff is now estopped and should not be permitted to raise
the defense of the Statute of Limitations." [Newport Co. vs. U.S., (DC-WIS), 34 F. Supp. 588].
The following authorities cited in the brief of the Solicitor General are in point:
"The petitioner makes the point that by the Revenue Act of May 29, 1928 (chap. 852, 40 Stat. at L. 791,
875, sec. 609, U.S.C. title 26, sec. 2609), a credit against a liability in respect of any taxable year shall
be 'void' if it has been made against a liability barred by limitation. The aim of that provision, as we
view it, was to invalidate such a credit if made by the Commissioner of his own motion without the
taxpayer's approval or with approval falling short of inducement or request. Cf. Stange vs. United
States, 282 U. S. 270, 75 L. ed. 335, 51 S. Ct. 145, supra; Revenue Act of 1928, sec. 506 (b) (c), chap.
852, 45 Stat. at L. 791, 870, 871, U.S.C. title 26, sec. 1062a. If nothing more than this appeared, there
was to be no exercise in invitum of governmental power. But the aim of the statute suggests a restraint
upon its meaning. To know whether liability has been barred by limitation it will not do to refer to the
flight of time alone. The limitation may have been postponed by force of a simple waiver, which must
then be made in adherence to the statutory forms, or so we now assume. It may have been postponed by
deliberate persuasion to withhold official action. We think it an unreasonable construction that would
view the prohibition of the statute as overriding the doctrine of estoppel (Randon vs. Tobey, 11 How.
493, 519, 13 L. ed. 784, 795) and invalidating a credit made at the taxpayer's request. Here at the time
of the request, the liability was still alive, unaffected as yet by any statutory bar. The request in its fair
meaning reached forward into the future and prayed for the postponement of collection till the audits
for later years had been completed in the usual course. This having been done, the suspended collection
might be effected by credit or by distraint or by other methods prescribed by law. Congress surely did
not mean that a credit was to be void if made by the Government in response to such prayer.
"The applicable principle is fundamental and unquestioned. 'He who prevents a thing from being done
may not avail himself of the nonperformance which he has himself occasioned, for the law says to him
in effect "this is your own act, and therefore you are not damnified,"' Dolan vs. Rogers, 149 N. Y. 489,
491, 44 N.E. 167, and Imperator Realty Co. vs. Tull, 228 N. Y. 447, 457, 127 N.E. 263, quoting West
vs. Blakeway, 2 Mann. & G. 729, 751, 133, Eng. Reprint, 940, 949. Sometimes the resulting disability
has been characterized as an estoppel, sometimes as a waiver. The label counts for little. Enough for
present purposes that the disability has its roots in a principle more nearly ultimate than either waiver
or estoppel, the principle that no one shall be permitted to found any claim upon his own inequity or
take advantage of his own wrong. Imperator Realty Co. vs. Tull, 228 N.Y. 447, 127 N.E. 263, supra. A
suit may not be built on an omission induced by him who sues. Swain vs. Seamens, 9 Wall. 254, 274,
19 L. ed. 554, 560; United States vs. Peck, 102 U.S. 64, 26 L. ed. 46; Thomson vs. Poor, 147 N.Y. 402,
42 N.E. 13; New Zealand Shipping Co. vs. Societe des Ateliers (1919) A. C. 1, 6-H. L.; 2 Williston,
Contr. sec. 689. (R. H. Stearns Co. vs. U.S., supra; Emphasis supplied.)
". . . It is admitted that these assessments were timely made in August 1923. Upon the making of the
assessment the Commissioner sought to make collection, which likewise was at a time when the statute
had not run on collection, but the authorized representative of the Lattimores strenuously objected to
the collection and urged the Commissioner to withhold collection, pending adjustment of the
controversy between them and the Commissioner. The Commissioner yielded to their request and
postponed collection until August 19, 1926, which was after the statute had run on collection. In the
meantime, further claims for refund and protests were filed, conferences were held and consideration
was given to the settlement of the controversy, and the matter was not finally disposed of until 1926,

when the statute had run on collection. The procedure carried out was that requested by plaintiffs, and
they cannot now be heard to say that the collection was not timely. R. H. Stearns Company vs. United
States, 291 U.S. 54, 54 S. Ct. 325, 78 L. Ed. 647. (Lattimore vs. U.S., 12 F. Supp. 895, 91.)
Wherefore, the decision appealed from is reversed. The decision of the Collector of Internal Revenue
rendered on July 26, 1955 is hereby affirmed. No costs.
Paras, C.J., Bengzon, Labrador, Concepcion, Reyes, J.B.L. and Endencia, JJ., concur.
Separate Opinions
MONTEMAYOR, J., dissenting:
As stated in the majority opinion, the respondent Suyoc Consolidated Mining Company was unable to
file in 1942 its income tax return for the year 1941, because of the last war. Acting upon an extension
granted by Commonwealth Act 722 and by the Collector of Internal Revenue, it finally filed the first
income tax -return (tentative) on February 12, 1946. For purposes of reference I am listing below in
chronological order, the dates which are material and relevant for purposes of computation of the
period of prescription.
February 12, 1946
Respondent filed its "tentative return"
November 28, 1946 Respondent filed its "final return".
February 6, 1947
Respondent filed its amended final return".
February 11, 1947
Notice of 1st assessment (Based on the
final return sent to the respondent)
(Amount of assessment P33,099.26).
February 14, 1947
Receipt of respondent of said assessment
February 21, 1947
Respondent asked for extension of time
(one year) to pay the assessment, but
reserving right to question its validity.
He was given only three months from
March 20, 1957.
November 28, 1950 Petitioner demanded payment of tax
assessed.
April 6, 1951 Respondent asked for reconsideration and
reinvestigation of the assessment.
March 7, 1952Notice of 2nd assessment (Based-on the
amended final return) was sent to
respondent. (Amount -P33,289.96).
April 18, 1952Petitioner revised the assessment made on
March 7, 1952 (Now it is P50,697.03)
July 26, 1955 Petitioner reduced the assessment of April
18, 1952 after various negotiations.
(Now it is P24,438.96)
It will be noticed that petitioner Collector made his first assessment based on the final return submitted
by Suyoc on November 28, 1946, on February 11, 1947. The assessment was in the amount of
P33,099.26. Suyoc asked for an extension of time of one year within which to make payment, at the
same time reserving its right to question the validity of the assessment, but it was granted only three
months from March 20, 1947, that is to say, up to June 20, 1947. After said deadline, the Collector
should immediately have demanded payment or resorted to the administrative remedy of distraint and
levy, but strange to say, the Collector did not act and allowed more than three years to pass (from June
20, 1947 to November 28, 1950). It was only on November 28, 1950 that the Collector demanded
payment on the basis of his assessment. On April 6, 1951, Suyoc asked for reconsideration and
reinvestigation. After about a year, that is, on March 7, 1952, the Collector made a second assessment
of P33,829.66, which was larger than his first assessment by about P800. Then on April 18, 1952, the

Collector made a revised third assessment of P28,289.96 as income tax, P1,414.50 as surcharge,
P20,934.57 as interest up to April 30, 1952, and P40.00 as compromise, which all added up to the
staggering amount of P50,679.03, far different from and much larger than the first and second
assessment by almost P17,000. After several negotiations, including appeal to the conference staff
created to act on such matters in the Bureau of Internal Revenue, the assessment was finally reduced on
July 26, 1955 to only P24,438.96, without surcharge, without interest and without any amount as
compromise. It is this last assessment which Suyoc appealed to the Court of Tax Appeals.
For purposes of reference, I am reproducing the pertinent sections of the National Internal Revenue
Code:
"SEC. 331. Period of limitation upon assessment and collection. Except as provided in the
succeeding section, internal revenue taxes shall be assessed within five years after the return was filed,
and no proceeding in court without assessment for the collection of such taxes shall be begun after the
expiration of such period. For the purposes of this section a return filed before the last day prescribed
by law for the filing thereof shall be considered as filed on such last day; Provided, that this limitation
shall not apply to cases already investigated prior to the approval of this Code."
"SEC. 332. Exceptions as to period of limitation of assessment and collection of taxes. . . .
(c)
Where the assessment of any internal-revenue tax has been made within the period of limitation
above prescribed such tax may be collected by destraint or levy or by a proceeding in court, but only if
begun (1) within five years after the assessment of the tax, or (2) prior to the expiration of any period
for collection agreed upon in writing by the Collector of Internal Revenue and the taxpayer before the
expiration of such five-year period. The period so agreed upon may be extended by subsequent
agreements in writing made before the expiration of the period previously agreed upon.
"SEC. 333. Suspension of running of statute. The running of the statute of limitations provided in
section three hundred thirty-one or three hundred thirty-two on the making of assessments and the
beginning of distraint or levy or a proceeding in court for collection, in respect of any deficiency, shall
be suspended for the period during which the Collector of Internal Revenue is prohibited from making
the assessment or beginning distraint or levy or a proceeding in court, and for sixty days thereafter."
To me, the best argument against the contention of the Collector, and the ruling contained in the
majority opinion that the right of the Collector to collect the tax assessed by it has not prescribed, and
that the petition or petitions filed by Suyoc for investigation and revision of the assessment extended
the period of prescription, is the well written and reasoned decision (Resolution) of the Court of Tax
Appeals, through Judge Roman M. Umali to which I agree. I am reproducing with approval the
pertinent portions of said decision:
"Petitioner filed the instant petition for review on the grounds that certain losses were improperly
disallowed by respondent as deductions from its gross income, and that the right of the Government to
collect the tax, if any is due, has prescribed. When this case was called for hearing counsel for
petitioner asked that the question of prescription be first resolved before hearing the case on the
question involving the correctness of the assessment. The sole issue raised at this time for resolution of
this Court is, therefore, confined to the question of prescription.
"Upon the evidence submitted and admitted by the parties, it appears that the last and final assessment
made by respondent covering the income tax due from petitioner for the year 1941 was made on July
26, 1955, more than five years from the date the 'amended return' was filed on November 28. 1946, or
from the date the amended final return' was filed on February 6, 1947. The right of respondent to assess
the tax has, therefore, prescribed pursuant to Section 331 of the National Internal Revenue Code which
requires that the assessment be made within five years from the date the return was filed.
"Even granting that the first assessment made on February 11, 1947, is the one to be considered in
determining whether or not the assessment was made within the statutory period it follows that it must
have to be considered also as the starting point from which the period within which the right to collect
should be computed. Accordingly, on the theory that the assessment in this case was made within five

years from the date the return was filed, the right of the Government to collect the tax assessed has
prescribed, respondent having failed at any time from February 14, 1947 up to the time the instant
petition for review was filed on September 19, 1955, a period of more than 8 years, to institute
appropriate proceedings, judicially or otherwise, for the collection of the tax. (See Sec. 332 [c],
National Internal Revenue Code.)
"From whatever angle the case is viewed, we find that the right of the Government to collect the
income tax assessed against petitioner for the year 1941 has prescribed. But it is insisted that the
requests of petitioner for reconsideration of the assessment, and while the same were pending
consideration by respondent, had the effect of suspending the running of the statute of limitations. The
statute of limitations upon assessment and collection of national internal revenue taxes provided in
Sections 331 and 332 of the Revenue Code may be suspended only 'for the period during which the
Collector of Internal Revenue is prohibited from making the assessment or beginning destraint or levy
or a proceeding in court, and sixty day thereafter.' (Sec. 333, Revenue Code.) Nowhere does the law
recognize that a simple request for reconsideration of an assessment, unaccompanied by any positive
indication that the taxpayer is waiving his right to assert the defense of prescription, has the effect of
suspending the running of the statute of limitations.
"That a request for re-examination or reconsideration of an assessment does not suspend the running of
the statute of limitations seems to be the prevailing opinion in the Bureau of Internal Revenue. This
may be inferred from the fact that General Circular No. V-182 dated January 17, 1955 had to be
promulgated.
Paragraph 6 of said circular provides:
"6.
Within thirty (30) days from the receipt of the deficiency tax assessment notice, the taxpayer
may request reinvestigation or re-examination of the assessment, subject to the following requirements
prescribed in paragraph 3 of Department Order No. 213:
'(a)
The taxpayer shall put the specific grounds of his protest in writing and under oath,
accompanied by such additional documents and evidence supporting his protest;
(b)
He shall pay one-half (1/2) of the total assessment and file a bond to guarantee the payment of
the balance together with the penalties that shall have accrued at the time of final payment; and
'(c)
He shall sign a statement that he is waiving the periods of prescription involved in the
assessment and collection of the deficiency tax in question.' (Emphasis supplied.)
"If a simple request for reinvestigation or re-examination of an assessment suspends the running of the
statute of limitations, as alleged by respondent, there is no necessity for the requirement that a taxpayer
must sign a statement that he is waiving the periods of prescription' as a condition for the granting of
the request for reinvestigation or re-examination. General Circular No. V-182 obviously in line with
Section 332(c) of the Revenue Code which provides that the waiver of the taxpayer must be contained
in an agreement in writing extending the five year period of limitation upon the right of the respondent
to collect internal revenue taxes.
"FOR THE FOREGOING CONSIDERATIONS We are of the opinion that the right of the Government
to collect from petitioner the sum of P24,433.96 as income tax for the year 1941 has prescribed.
Accordingly, the decision appealed from is hereby set aside, without pronouncement as to costs."
I fully agree with the Court of Tax Appeals that whether we consider February 11, 1947 or July 26,
1955, as the date of the assessment, the right of the Collector, either to make collection within five
years from February 11, 1947 or to make assessment within five years from February 6, 1947, has
prescribed. I do not believe that a mere petition for revision or reinvestigation can be regarded as an
agreement of the taxpayer to extend the period of prescription. The very law clearly so states. Section
333 says that the running of the statute of limitations provided in Sections 331 and 332 shall be
suspended only when the Collector is prohibited from making the assessment or beginning the distraint.
No such prohibition or inability to make assessment or begin the distraint is claimed for the Collector.
And Section 332 (c) says that the period for collection may be extended only by express agreement in

writing by the taxpayer and the Collector. Evidently, nothing short of such express written agreement to
extend will suspend the running of the period.
It will be observed that Suyoc made only one petition for extension, that is, for one year within which
to pay the assessment, but reserving its right to question the validity thereof. It was given only three
months. Thereafter, it never asked for any other extension. True, it asked for revision and
reconsideration of the different assessments made by the Collector, but this in no way can be regarded
as an express agreement to extend the period; and the Collector was well aware of the fact that a mere
petition to amend, modify, revise or revive the assessment or reinvestigate the case cannot extend the
period of prescription, as evidenced by the very General Circular No. V-182, promulgated for the
guidance of the Bureau of Internal Revenue. Said circular among other things provides that in order
that there be an extension of the period of prescription and presumably, for the protection of the
Government, the taxpayer must sign a statement that he is waiving the period of prescription involved
in the collection of the tax.
The trouble with the actuations of the Collector in this case is that he would appear to have unduly
delayed definite and affirmative action on the assessment and collection, as shown by the wide gaps
first, a period of more than three years from February 14, 1947, when Suyoc received notice of the first
assessment (extended by the Collector to June 20, 1947) to November 28, 1950, when the Collector
demanded payment; then another period of about two years from November 28, 1950 to March 7, 1952
when he made the second assessment.
Not only was there undue delay on the part of the Collector, but his actuations would seem to have
been characterized by indecision and uncertainty. First, he made an assessment in the amount of
P33,099.26. Then he increased this to P33,829.66. Then on April 18, 1952, he again increased this
assessment to P50,678.03, until on July 26, 1955, this sum of over P50,000 was reduced to P24,438.96,
without surcharge, without interest and without any amount as compromise. Why all this difference or
differences in the amounts of the assessment?
One could well imagine and understand that a first assessment more or less hastily prepared may be
revised within a reasonable time, say a few months or even a year, either increasing it or decreasing it.
But when the Collector over a period of more than eight years kept changing his assessment, increasing
the same by substantial amounts and then decreasing the same substantially, and at the same time
utterly forgetting the period of prescription set by the law and also forgetting to protect the interest of
the Government by requiring the taxpayer to agree expressly and in writing to extend the period of such
prescription; and equally important, forgetting and failing up to the present time to institute
proceedings, administrative by distraint and levy or judicial by court action, to collect, the Government
has no one to blame but itself and its officials, certainly not the taxpayer who did nothing but ask for
revision of the assessment to obtain a correct figure while it finally got but too late, after a wait of over
eight years.
The majority opinion places much reliance on the case of R. H. Stearns Company vs. U.S., 291 U.S.,
54, and makes extensive quotation therefrom. After reading said case I agree with counsel for Suyoc
that it is not applicable, for the reason that in that case, the taxpayer signed two waivers of the period of
limitation; that although the second waiver was not signed by the Commissioner, nevertheless, the
taxpayer on several occasions had requested him to withhold collection. Naturally, the United States
Supreme Court was constrained to hold that when the taxpayer not only signed waivers but had
deliberately asked and persuaded the Commissioner to postpone collection, he cannot invoke the
benefit of prescription to the running of which he has contributed. Our law expressly and clearly
provides that in order to suspend the period of prescription or to extend it, the taxpayer and the
Collector must sign an agreement to that effect. Nothing short of this will effect said extension or
suspension of the period of limitation. Mere petitions for revision or reinvestigation by the taxpayer
cannot suspend the running of the period of prescription. The taxpayer may make as many requests for
revision or examination as he wishes, but the Collector need not act upon them to the prejudice of the

Government; and even if he does act upon said petitions, he should always keep an eye on the running
of the period, on the dead line, so that for the protection of the Government, he could enforce collection
before it is too late.
Prescription in the assessment and in the collection of taxes is provided by the Legislature for the
benefit of both the Government and taxpayer; for the Government for the purpose of expediting the
collection of taxes, so that the agency charged with the assessment and collection may not tarry too
long or indefinitely to the prejudice of the interests of the Government which needs said taxes to run it;
and for the taxpayer so that within a reasonable time after filing his return, he may know the amount of
the assessment which he is required to pay, whether or not such assessment is well founded and
reasonable so that he may either pay the amount of the assessment or contest its validity in court, either
by filing an action for the refund, if already paid, under the old law, or appeal the disputed assessment
to the Court of Tax Appeals under the present law creating the Tax Court. It would surely be prejudicial
to the interest of the taxpayer for the Government collecting agency to unduly delay the assessment and
the collection because by the time that the collecting agency finally gets around to making the
assessment or making the collection, the taxpayer may then have lost his papers and books to support
his claim and contest that of the Government, and what is more, the tax is in the meantime
accumulating interest which the taxpayer eventually has to pay.
In connection with this extension of the period of prescription or limitation for the Government to
collect taxes, it will be noticed from Section 332 (c) of the Internal Revenue Code that even if the
taxpayer and the Collector agree to extend the period of limitation, said period has to be specific or
fixed, and if said period of extension is to be further extended, another agreement has to be made again
specifying the period of said further extension. From all this, it is evident that to extend the period of
limitation or prescription, an express agreement in writing to that effect, signed by the Collector and the
taxpayer is necessary. Naturally, a mere petition by the taxpayer for revision or re-examination of the
assessment cannot and will not automatically extend the period of limitation. However, under the
theory espoused by the majority, let the taxpayer just ask, not for an extension of the time to pay or the
Government to collect, but for a mere re-examination or revision of the assessment, and to, and behold,
all the carefully prepared provisions of the tax law about prescription and statutory limitation are laid
aside, and the collecting agency of the Government may then postpone and delay the collection
indefinitely, until such time as it is good and ready to resume proceedings from where it left off, and if
the taxpayer complains of the delay or invokes prescription, he is instantly met with and silenced by the
doctrine of estoppel. I believe that is not what the law and the Legislature contemplated.
To me, this matter of the extension of the period of limitation is quite clear, but assuming for a moment
that there were any doubt about it, then we have the time honored and well settled rule of statutory
construction that tax laws should be interpreted liberally in favor of the taxpayer and strictly against the
Government, except in the matter of tax exemptions, in which case the rule is reversed. In the case of
Manila Railroad Co. vs. Collector of Customs, 52 Phil. 952, this Tribunal said:
". . . It is the general rule in the interpretation of statutes levying taxes or duties not to extend their
provisions beyond the clear import of the language used. In every case of doubt, such statutes are
construed most strongly against the Government and in favor of the citizen, because burdens are not to
be imposed, nor presumed to be imposed, beyond what the statutes expressly and clearly import. (U. S.
vs. Wigglesworth [1842], 2 Story, 369; Froehlich & Kuttner vs. Collector of Customs [1911], 18 Phil.,
461.)"
Years ago, the Supreme Court of the United States, through Chief Justice Marshall, in the case of
McCulloch vs. The State of Maryland, 4 Law Ed. 579, said that the power to tax is the power to
destroy. Evidently, to moderate this awesome and dangerous taxing power of the Legislature, and in
order to temper the rigor of tax laws, this sound and salutary rule of liberal construction of tax laws in
favor of the taxpayer has been evolved and laid down.
For the foregoing reasons, I dissent.

Padilla, J., concurs.

EN BANC
[G.R. No. L-20477. March 29, 1968.]
REPUBLIC OF THE PHILIPPINES, plaintiff-appellant, vs. FELIX B. ACEBEDO, defendant-appellee.
Solicitor General for plaintiff-appellant.
Angel C . Facundo for defendant-appellee.
SYLLABUS
1.
TAXATION; PRESCRIPTION; REQUEST FOR REINVESTIGATION. Where the
defendant after receiving the assessment notice asked for a reinvestigation, and there is no evidence
that this request was considered or acted upon; and on the other hand, the then Acting Collector of
Internal Revenue issued a warrant of distraint and levy for the full amount of the assessment, and there
was no follow-up of this warrant; the request for reinvestigation did not suspend the running of the
period for filing an action for collection.
2.
ID.; ID.; WAIVER OF STATUTES OF LIMITATIONS. The delay in collection could not be
attributed to the defendant at all. His requests had been unheeded until then, and there was nothing to
impede enforcement of the tax liability by any of the means provided by law. By Oct. 4, 1955, more
than five years had elapsed since the assessment in question was made, and hence, prescription had
already set in, making subsequent events in connection with the said assessment entirely immaterial.
The written waiver of the statute signed by the defendant could no longer revive the right of action, for
under the law such waiver must be executed within the original five-year period within which suit
could be commenced.
DECISION
MAKALINTAL, J p:
This is a suit for collection of deficiency income tax for the year 1948 in the amount of P5,962.83. The
corresponding notice of assessment was issued on September 24, 1949. The complaint was filed on
December 27, 1961. After the defendant filed his answer but before trial started he moved to dismiss on
the ground of prescription. The court received evidence on the motion, and on September 1, 1962
issued an order finding the same meritorious and hence dismissing the complaint. The case is before us
on appeal by the plaintiff from the order of dismissal.
The statute of limitations which governs this case is Section 332, subsection (c), of the National
Internal Revenue Code, which reads:
"SEC. 332. Exemptions as to period of limitation of assessment and collection of taxes.
"xxx
xxx
xxx
"(c) Where the assessment of any internal-revenue tax has been made with the period of limitation
above prescribed such tax may be collected by distraint or levy or by a proceeding in court, but only if
begun (1) within five years after the assessment of the tax, or (2) prior to the expiration of any period
for collection agreed upon in writing by the Collector of Internal Revenue and the taxpayer before the
expiration of such five-year period. The period so agreed upon may be extended by subsequent
agreements in writing made before the expiration of the period previously agreed upon."
The present suit was not begun within five years after the assessment of the tax, which was in 1949.
Was it, however, begun prior to the expiration of any period for collection agreed upon in writing by
the Commissioner of Internal Revenue and the defendant before the expiration of such five-year
period? The only evidence of such written agreement, in the form of a "waiver of the statute of
limitations" signed by the defendant, is Exhibit U (also Exh. 4), dated December 17, 1959. But this
waiver was ineffective because it was executed beyond the original five-year limitation.
The plaintiff contends that the period of prescription was suspended by the defendant's various requests
for reinvestigation or reconsideration of the tax assessment. The trial court rejected this contention,
saying that a mere request for reinvestigation or reconsideration of an assessment does not have the
effect of such suspension. The ruling is logical, otherwise there would be no point to the legal
requirement that the extension of the original period be agreed upon in writing.

To be sure, this legal provision, according to some decisions of this Court, does not rule out a situation
where the taxpayer may be in estoppel to claim prescription. Thus we said in Commissioner of Internal
Revenue vs. Consolidated Mining Co., L-11527, Nov. 25, 1958:
". . . There are cases however where a taxpayer may be prevented from setting up the defense of
prescription even if he has not previously waived it in writing as when by his repeated requests or
positive acts the Government has been, for good reasons, persuaded to postpone collection to make him
feel that the demand was not unreasonable or that no harassment or injustice is meant by the
Government." (Emphasis supplied.)
Likewise, when a taxpayer asks for a reinvestigation of the tax assessment issued to him and such
reinvestigation is made, on the basis of which the Government makes another assessment, the five-year
period within which an action for collection may be commenced should be counted from this last
assessment. (Republic vs. Lopez, L-18007, March 30, 1963; Commissioner vs. Sison, et al., L-13739,
April 30, 1963.)
In the case at bar the defendant, after receiving the assessment notice of September 24, 1949, asked for
a reinvestigation thereof on October 11, 1949 (Exh. A). There is no evidence that this request was
considered or acted upon. In fact, on October 23, 1950 the then Collector of Internal Revenue issued a
warrant of distraint and levy for the full amount of the assessment (Exh. D), but there was no follow-up
of this warrant. Consequently, the request for reinvestigation did not suspend the running of the period
for filing an action for collection.
The next communication of record is a letter signed for the defendant by one Troadio Concha and dated
October 6, 1951, again requesting a reinvestigation of his tax liability (Exh. B). Nothing come of this
request either. Then on February 9, 1954, the defendant's lawyers wrote the Collector of Internal
Revenue informing him that the books of their client were ready at their office for examination (Exh.
C). The reply was dated more than a year later, or on October 4, 1955, when the Collector bestirred
himself for the first time in connection with the reinvestigation sought, and required that the defendant
specify his objections to the assessment and execute "the enclosed forms for waiver of the statute of
limitations." (Exh. E). The last part of the letter was a warning that unless the waiver "was
accomplished and submitted within 10 days the collection of the deficiency taxes would be enforced by
means of the remedies provided for by law."
It will be noted that up to October 4, 1955 the delay in collection could not be attributed to the
defendant at all. His requests in fact had been unheeded until then, and there was nothing to impede
enforcement of the tax liability by any of the means provided by law. By October 4, 1955, more than
five years had elapsed since the assessment in question was made, and hence prescription had already
set in, making subsequent events in connection with the said assessment entirely immaterial. Even the
written waiver of the statute signed by the defendant on December 17, 1959 could no longer revive the
right of action, for under the law such waiver must be executed within the original five-year period
within which suit could be commenced.
The order appealed from is affirmed, without pronouncement as to costs.
Reyes, J.B.L., Actg. C . J ., Dizon, Bengzon, J.P., Zaldivar, Sanchez, Angeles and Fernando, JJ .,
concur.
Castro, J ., did not take part.

FIRST DIVISION
[G.R. No. 167146. October 31, 2006.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PHILIPPINE GLOBAL
COMMUNICATION, INC., respondent.
DECISION
CHICO-NAZARIO, J p:
This is a Petition for Review on Certiorari, under Rule 45 of the Rules of Court, seeking to set aside the
en banc Decision of the Court of Tax Appeals (CTA) in CTA EB No. 37 dated 22 February 2005, 1
ordering the petitioner to withdraw and cancel Assessment Notice No. 000688-80-7333 issued against
respondent Philippine Global Communication, Inc. for its 1990 income tax deficiency. The CTA, in its
assailed en banc Decision, affirmed the Decision of the First Division of the CTA dated 9 June 2004 2
and its Resolution dated 22 September 2004 in C.T.A. Case No. 6568. ITHADC
Respondent, a corporation engaged in telecommunications, filed its Annual Income Tax Return for
taxable year 1990 on 15 April 1991. On 13 April 1992, the Commissioner of Internal Revenue (CIR)
issued Letter of Authority No. 0002307, authorizing the appropriate Bureau of Internal Revenue (BIR)
officials to examine the books of account and other accounting records of respondent, in connection
with the investigation of respondent's 1990 income tax liability. On 22 April 1992, the BIR sent a letter
to respondent requesting the latter to present for examination certain records and documents, but
respondent failed to present any document. On 21 April 1994, respondent received a Preliminary
Assessment Notice dated 13 April 1994 for deficiency income tax in the amount of P118,271,672.00,
inclusive of surcharge, interest, and compromise penalty, arising from deductions that were disallowed
for failure to pay the withholding tax and interest expenses that were likewise disallowed. On the
following day, 22 April 1994, respondent received a Formal Assessment Notice with Assessment
Notice No. 000688-80-7333, dated 14 April 1994, for deficiency income tax in the total amount of
P118,271,672.00. 3
On 6 May 1994, respondent, through its counsel Ponce Enrile Cayetano Reyes and Manalastas Law
Offices, filed a formal protest letter against Assessment Notice No. 000688-80-7333. Respondent filed
another protest letter on 23 May 1994, through another counsel Siguion Reyna Montecillo & Ongsiako
Law Offices. In both letters, respondent requested for the cancellation of the tax assessment, which
they alleged was invalid for lack of factual and legal basis. 4
On 16 October 2002, more than eight years after the assessment was presumably issued, the Ponce
Enrile Cayetano Reyes and Manalastas Law Offices received from the CIR a Final Decision dated 8
October 2002 denying the respondent's protest against Assessment Notice No. 000688-80-7333, and
affirming the said assessment in toto. 5
On 15 November 2002, respondent filed a Petition for Review with the CTA. After due notice and
hearing, the CTA rendered a Decision in favor of respondent on 9 June 2004. 6 The CTA ruled on the
primary issue of prescription and found it unnecessary to decide the issues on the validity and propriety
of the assessment. It decided that the protest letters filed by the respondent cannot constitute a request
for reinvestigation, hence, they cannot toll the running of the prescriptive period to collect the assessed
deficiency income tax. 7 Thus, since more than three years had lapsed from the time Assessment Notice
No. 000688-80-7333 was issued in 1994, the CIR's right to collect the same has prescribed in
conformity with Section 269 of the National Internal Revenue Code of 1977 8 (Tax Code of 1977). The
dispositive portion of this decision reads: cCDAHE
WHEREFORE, premises considered, judgment is hereby rendered in favor of the petitioner.
Accordingly, respondent's Final Decision dated October 8, 2002 is hereby REVERSED and SET
ASIDE and respondent is hereby ORDERED to WITHDRAW and CANCEL Assessment Notice No.
000688-80-7333 issued against the petitioner for its 1990 income tax deficiency because respondent's
right to collect the same has prescribed. 9
The CIR moved for reconsideration of the aforesaid Decision but was denied by the CTA in a

Resolution dated 22 September 2004. 10 Thereafter, the CIR filed a Petition for Review with the CTA
en banc, questioning the aforesaid Decision and Resolution. In its en banc Decision, the CTA affirmed
the Decision and Resolution in CTA Case No. 6568. The dispositive part reads:
WHEREFORE, premises considered, the Petition for Review is hereby DISMISSED for lack of merit.
Accordingly, the assailed Decision and Resolution in CTA Case No. 6568 are hereby AFFIRMED in
toto. 11
Hence, this Petition for Review on Certiorari raising the following grounds:
THE COURT OF TAX APPEALS, SITTING EN BANC, COMMITTED REVERSIBLE ERROR IN
AFFIRMING THE ASSAILED DECISION AND RESOLUTION IN CTA CASE NO. 6568
DECLARING THAT THE RIGHT OF THE GOVERNMENT TO COLLECT THE DEFICIENCY
INCOME TAX FROM RESPONDENT FOR THE YEAR 1990 HAS PRESCRIBED
A.
THE PRESCRIPTIVE PERIOD WAS INTERRUPTED WHEN RESPONDENT FILED TWO
LETTERS OF PROTEST DISPUTING IN DETAIL THE DEFICIENCY ASSESSMENT IN
QUESTION AND REQUESTING THE CANCELLATION OF SAID ASSESSMENT. THE TWO
LETTERS OF PROTEST ARE, BY NATURE, REQUESTS FOR REINVESTIGATION OF THE
DISPUTED ASSESSMENT. IASTDE
B.
THE REQUESTS FOR REINVESTIGATION OF RESPONDENT WERE GRANTED BY
THE BUREAU OF INTERNAL REVENUE. 12
This Court finds no merit in this Petition.
The main issue in this case is whether or not CIR's right to collect respondent's alleged deficiency
income tax is barred by prescription under Section 269(c) of the Tax Code of 1977, which reads:
Section 269. Exceptions as to the period of limitation of assessment and collection of taxes. . . .
xxx
xxx
xxx
c.
Any internal revenue tax which has been assessed within the period of limitation aboveprescribed may be collected by distraint or levy or by a proceeding in court within three years
following the assessment of the tax.
The law prescribed a period of three years from the date the return was actually filed or from the last
date prescribed by law for the filing of such return, whichever came later, within which the BIR may
assess a national internal revenue tax. 13 However, the law increased the prescriptive period to assess
or to begin a court proceeding for the collection without an assessment to ten years when a false or
fraudulent return was filed with the intent of evading the tax or when no return was filed at all. 14 In
such cases, the ten-year period began to run only from the date of discovery by the BIR of the falsity,
fraud or omission.
If the BIR issued this assessment within the three-year period or the ten-year period, whichever was
applicable, the law provided another three years after the assessment for the collection of the tax due
thereon through the administrative process of distraint and/or levy or through judicial proceedings. 15
The three-year period for collection of the assessed tax began to run on the date the assessment notice
had been released, mailed or sent by the BIR. 16
The assessment, in this case, was presumably issued on 14 April 1994 since the respondent did not
dispute the CIR's claim. Therefore, the BIR had until 13 April 1997. However, as there was no Warrant
of Distraint and/or Levy served on the respondents nor any judicial proceedings initiated by the BIR,
the earliest attempt of the BIR to collect the tax due based on this assessment was when it filed its
Answer in CTA Case No. 6568 on 9 January 2003, which was several years beyond the three-year
prescriptive period. Thus, the CIR is now prescribed from collecting the assessed tax. SAHIDc
The provisions on prescription in the assessment and collection of national internal revenue taxes
became law upon the recommendation of the tax commissioner of the Philippines. The report submitted
by the tax commission clearly states that these provisions on prescription should be enacted to benefit
and protect taxpayers:
Under the former law, the right of the Government to collect the tax does not prescribe. However, in

fairness to the taxpayer, the Government should be estopped from collecting the tax where it failed to
make the necessary investigation and assessment within 5 years after the filing of the return and where
it failed to collect the tax within 5 years from the date of assessment thereof. Just as the government is
interested in the stability of its collections, so also are the taxpayers entitled to an assurance that they
will not be subjected to further investigation for tax purposes after the expiration of a reasonable period
of time. (Vol. II, Report of the Tax Commission of the Philippines, pp. 321-322). 17
In a number of cases, this Court has also clarified that the statute of limitations on the collection of
taxes should benefit both the Government and the taxpayers. In these cases, the Court further illustrated
the harmful effects that the delay in the assessment and collection of taxes inflicts upon taxpayers. In
Collector of Internal Revenue v. Suyoc Consolidated Mining Company, 18 Justice Montemayor, in his
dissenting opinion, identified the potential loss to the taxpayer if the assessment and collection of taxes
are not promptly made.
Prescription in the assessment and in the collection of taxes is provided by the Legislature for the
benefit of both the Government and the taxpayer; for the Government for the purpose of expediting the
collection of taxes, so that the agency charged with the assessment and collection may not tarry too
long or indefinitely to the prejudice of the interests of the Government, which needs taxes to run it; and
for the taxpayer so that within a reasonable time after filing his return, he may know the amount of the
assessment he is required to pay, whether or not such assessment is well founded and reasonable so that
he may either pay the amount of the assessment or contest its validity in court . . . . It would surely be
prejudicial to the interest of the taxpayer for the Government collecting agency to unduly delay the
assessment and the collection because by the time the collecting agency finally gets around to making
the assessment or making the collection, the taxpayer may then have lost his papers and books to
support his claim and contest that of the Government, and what is more, the tax is in the meantime
accumulating interest which the taxpayer eventually has to pay. SIcEHD
In Republic of the Philippines v. Ablaza, 19 this Court emphatically explained that the statute of
limitations of actions for the collection of taxes is justified by the need to protect law-abiding citizens
from possible harassment:
The law prescribing a limitation of actions for the collection of the income tax is beneficial both to the
Government and to its citizens; to the Government because tax officers would be obliged to act
promptly in the making of assessment, and to citizens because after the lapse of the period of
prescription citizens would have a feeling of security against unscrupulous tax agents who will always
find an excuse to inspect the books of taxpayers, not to determine the latter's real liability, but to take
advantage of every opportunity to molest, peaceful, law-abiding citizens. Without such legal defense
taxpayers would furthermore be under obligation to always keep their books and keep them open for
inspection subject to harassment by unscrupulous tax agents. The law on prescription being a remedial
measure should be interpreted in a way conducive to bringing about the beneficient purpose of
affording protection to the taxpayer within the contemplation of the Commission which recommended
the approval of the law.
And again in the recent case Bank of the Philippine Islands v. Commissioner of Internal Revenue, 20
this Court, in confirming these earlier rulings, pronounced that:
Though the statute of limitations on assessment and collection of national internal revenue taxes
benefits both the Government and the taxpayer, it principally intends to afford protection to the
taxpayer against unreasonable investigation. The indefinite extension of the period for assessment is
unreasonable because it deprives the said taxpayer of the assurance that he will no longer be subjected
to further investigation for taxes after the expiration of a reasonable period of time.
Thus, in Commissioner of Internal Revenue v. B.F. Goodrich, 21 this Court affirmed that the law on
prescription should be liberally construed in order to protect taxpayers and that, as a corollary, the
exceptions to the law on prescription should be strictly construed. aCTHDA
The Tax Code of 1977, as amended, provides instances when the running of the statute of limitations on

the assessment and collection of national internal revenue taxes could be suspended, even in the
absence of a waiver, under Section 271 thereof which reads:
Section 224. Suspension of running of statute. The running of the statute of limitation provided in
Sections 268 and 269 on the making of assessments and the beginning of distraint or levy or a
proceeding in court for collection in respect of any deficiency, shall be suspended for the period during
which the Commissioner is prohibited from making the assessment or beginning distraint or levy or a
proceeding in court and for sixty days thereafter; when the taxpayer requests for a reinvestigation
which is granted by the Commissioner; when the taxpayer cannot be located in the address given by
him in the return filed upon which a tax is being assessed or collected . . . . (Emphasis supplied.)
Among the exceptions provided by the aforecited section, and invoked by the CIR as a ground for this
petition, is the instance when the taxpayer requests for a reinvestigation which is granted by the
Commissioner. However, this exception does not apply to this case since the respondent never
requested for a reinvestigation. More importantly, the CIR could not have conducted a reinvestigation
where, as admitted by the CIR in its Petition, the respondent refused to submit any new evidence.
Revenue Regulations No. 12-85, the Procedure Governing Administrative Protests of Assessment of the
Bureau of Internal Revenue, issued on 27 November 1985, defines the two types of protest, the request
for reconsideration and the request for reinvestigation, and distinguishes one from the other in this
manner:
Section 6.
Protest. The taxpayer may protest administratively an assessment by filing a written
request for reconsideration or reinvestigation specifying the following particulars:
xxx
xxx
xxx
For the purpose of protest herein
(a)
Request for reconsideration refers to a plea for a re-evaluation of an assessment on the basis
of existing records without need of additional evidence. It may involve both a question of fact or of law
or both. DACTSH
(b)
Request for reinvestigation refers to a plea for re-evaluation of an assessment on the basis of
newly-discovered evidence or additional evidence that a taxpayer intends to present in the
investigation. It may also involve a question of fact or law or both.
The main difference between these two types of protests lies in the records or evidence to be examined
by internal revenue officers, whether these are existing records or newly discovered or additional
evidence. A re-evaluation of existing records which results from a request for reconsideration does not
toll the running of the prescription period for the collection of an assessed tax. Section 271 distinctly
limits the suspension of the running of the statute of limitations to instances when reinvestigation is
requested by a taxpayer and is granted by the CIR. The Court provided a clear-cut rationale in the case
of Bank of the Philippine Islands v. Commissioner of Internal Revenue 22 explaining why a request for
reinvestigation, and not a request for reconsideration, interrupts the running of the statute of limitations
on the collection of the assessed tax:
Undoubtedly, a reinvestigation, which entails the reception and evaluation of additional evidence, will
take more time than a reconsideration of a tax assessment, which will be limited to the evidence already
at hand; this justifies why the former can suspend the running of the statute of limitations on collection
of the assessed tax, while the latter cannot.
In the present case, the separate letters of protest dated 6 May 1994 and 23 May 1994 are requests for
reconsideration. The CIR's allegation that there was a request for reinvestigation is inconceivable since
respondent consistently and categorically refused to submit new evidence and cooperate in any
reinvestigation proceedings. This much was admitted in the Decision dated 8 October 2002 issued by
then CIR Guillermo Payarno, Jr.
In the said conference-hearing, Revenue Officer Alameda basically testified that Philcom, despite
repeated demands, failed to submit documentary evidences in support of its claimed deductible
expenses. Hence, except for the item of interest expense which was disallowed for being not ordinary

and necessary, the rest of the claimed expenses were disallowed for non-withholding. In the same
token, Revenue Officer Escober testified that upon his assignment to conduct the re-investigation, he
immediately requested the taxpayer to present various accounting records for the year 1990, in addition
to other documents in relation to the disallowed items (p. 171). This was followed by other requests for
submission of documents (pp. 199 &217) but these were not heeded by the taxpayer. Essentially, he
stated that Philcom did not cooperate in his reinvestigation of the case. aESICD
In response to the testimonies of the Revenue Officers, Philcom thru Atty. Consunji, emphasized that it
was denied due process because of the issuance of the Pre-Assessment Notice and the Assessment
Notice on successive dates. . . . Counsel for the taxpayer even questioned the propriety of the
conference-hearing inasmuch as the only question to resolved (sic) is the legality of the issuance of the
assessment. On the disallowed items, Philcom thru counsel manifested that it has no intention to
present documents and/or evidences allegedly because of the pending legal question on the validity of
the assessment. 23
Prior to the issuance of Revenue Regulations No. 12-85, which distinguishes a request for
reconsideration and a request for reinvestigation, there have been cases wherein these two terms were
used interchangeably. But upon closer examination, these cases all involved a reinvestigation that was
requested by the taxpayer and granted by the BIR.
In Collector of Internal Revenue v. Suyoc Consolidated Mining Company, 24 the Court weighed the
considerable time spent by the BIR to actually conduct the reinvestigations requested by the taxpayer in
deciding that the prescription period was suspended during this time.
Because of such requests, several reinvestigations were made and a hearing was even held by the
Conference Staff organized in the collection office to consider claims of such nature which, as the
record shows, lasted for several months. After inducing petitioner to delay collection as he in fact did, it
is most unfair for respondent to now take advantage of such desistance to elude his deficiency income
tax liability to the prejudice of the Government invoking the technical ground of prescription.
Although the Court used the term "requests for reconsideration" in reference to the letters sent by the
taxpayer in the case of Querol v. Collector of Internal Revenue, 25 it took into account the
reinvestigation conducted soon after these letters were received and the revised assessment that resulted
from the reinvestigations. cIADTC
It is true that the Collector revised the original assessment on February 9, 1955; and appellant avers that
this revision was invalid in that it was not made within the five-year prescriptive period provided by
law (Collector vs. Pineda, 112 Phil. 321). But that fact is that the revised assessment was merely a
result of petitioner Querol's requests for reconsideration of the original assessment, contained in his
letters of December 14, 1951 and May 25, 1953. The records of the Bureau of Internal Revenue show
that after receiving the letters, the Bureau conducted a reinvestigation of petitioner's tax liabilities, and,
in fact, sent a tax examiner to San Fernando, La Union, for that purpose; that because of the examiner's
report, the Bureau revised the original assessment, . . . . In other words, the reconsideration was granted
in part, and the original assessment was altered. Consequently, the period between the petition for
reconsideration and the revised assessment should be subtracted from the total prescriptive period
(Republic vs. Ablaza, 108 Phil 1105).
The Court, in Republic v. Lopez, 26 even gave a detailed accounting of the time the BIR spent for each
reinvestigation in order to deduct it from the five-year period set at that time in the statute of
limitations:
It is now a settled ruled in our jurisdiction that the five-year prescriptive period fixed by Section 332(c)
of the Internal Revenue Code within which the Government may sue to collect an assessed tax is to be
computed from the last revised assessment resulting from a reinvestigation asked for by the taxpayer
and (2) that where a taxpayer demands a reinvestigation, the time employed in reinvestigating should
be deducted from the total period of limitation.
xxx
xxx
xxx

The first reinvestigation was granted, and a reduced assessment issued on 29 May 1954, from which
date the Government had five years for bringing an action to collect. IcTaAH
The second reinvestigation was asked on 16 January 1956, and lasted until it was decided on 22 April
1960, or a period of 4 years, 3 months, and 6 days, during which the limitation period was interrupted.
The Court reiterated the ruling in Republic v. Lopez in the case of Commissioner of Internal Revenue v.
Sison, 27 "that where a taxpayer demands a reinvestigation, the time employed in reinvestigating
should be deducted from the total period of limitation." Finally, in Republic v. Arcache, 28 the Court
enumerated the reasons why the taxpayer is barred from invoking the defense of prescription, one of
which was that, "In the first place, it appears obvious that the delay in the collection of his 1946 tax
liability was due to his own repeated requests for reinvestigation and similarly repeated requests for
extension of time to pay."
In this case, the BIR admitted that there was no new or additional evidence presented. Considering that
the BIR issued its Preliminary Assessment Notice on 13 April 1994 and its Formal Assessment Notice
on 14 April 1994, just one day before the three-year prescription period for issuing the assessment
expired on 15 April 1994, it had ample time to make a factually and legally well-founded assessment.
Added to the fact that the Final Decision that the CIR issued on 8 October 2002 merely affirmed its
earlier findings, whatever examination that the BIR may have conducted cannot possibly outlast the
entire three-year prescriptive period provided by law to collect the assessed tax, not to mention the
eight years it actually took the BIR to decide the respondent's protest. The factual and legal issues
involved in the assessment are relatively simple, that is, whether certain income tax deductions should
be disallowed, mostly for failure to pay withholding taxes. Thus, there is no reason to suspend the
running of the statute of limitations in this case. aSITDC
The distinction between a request for reconsideration and a request for reinvestigation is significant. It
bears repetition that a request for reconsideration, unlike a request for reinvestigation, cannot suspend
the statute of limitations on the collection of an assessed tax. If both types of protest can effectively
interrupt the running of the statute of limitations, an erroneous assessment may never prescribe. If the
taxpayer fails to file a protest, then the erroneous assessment would become final and unappealable. 29
On the other hand, if the taxpayer does file the protest on a patently erroneous assessment, the statute of
limitations would automatically be suspended and the tax thereon may be collected long after it was
assessed. Meanwhile the interest on the deficiencies and the surcharges continue to accumulate. And
for an unrestricted number of years, the taxpayers remain uncertain and are burdened with the costs of
preserving their books and records. This is the predicament that the law on the statute of limitations
seeks to prevent.
The Court, in sustaining for the first time the suspension of the running of the statute of limitations in
cases where the taxpayer requested for a reinvestigation, gave this justification:
A taxpayer may be prevented from setting up the defense of prescription even if he has not previously
waived it in writing as when by his repeated requests or positive acts the Government has been, for
good reasons, persuaded to postpone collection to make him feel that the demand was not unreasonable
or that no harassment or injustice is meant by the Government.
xxx
xxx
xxx
This case has no precedent in this jurisdiction for it is the first time that such has risen, but there are
several precedents that may be invoked in American jurisprudence. As Mr. Justice Cardozo has said:
"The applicable principle is fundamental and unquestioned. 'He who prevents a thing from being done
may not avail himself of the nonperformance which he himself occasioned, for the law says to him in
effect "this is your own act, and therefore you are not damnified."' (R.H. Stearns Co. v. U.S., 78 L. ed.,
647). (Emphasis supplied.) 30
This rationale is not applicable to the present case where the respondent did nothing to prevent the BIR
from collecting the tax. It did not present to the BIR any new evidence for its re-evaluation. At the
earliest opportunity, respondent insisted that the assessment was invalid and made clear to the BIR its

refusal to produce documents that the BIR requested. On the other hand, the BIR also communicated to
the respondent its unwavering stance that its assessment is correct. Given that both parties were at a
deadlock, the next logical step would have been for the BIR to issue a Decision denying the
respondent's protest and to initiate proceedings for the collection of the assessed tax and, thus, allow
the respondent, should it so choose, to contest the assessment before the CTA. Postponing the
collection for eight long years could not possibly make the taxpayer feel that the demand was not
unreasonable or that no harassment or injustice is meant by the Government. There was no legal, or
even a moral, obligation preventing the CIR from collecting the assessed tax. In a similar case, Cordero
v. Conda, 31 the Court did not suspend the running of the prescription period where the acts of the
taxpayer did not prevent the government from collecting the tax. TIDcEH
The government also urges that partial payment is "acknowledgement of the tax obligation", hence a
"waiver on the defense of prescription." But partial payment would not prevent the government from
suing the taxpayer. Because, by such act of payment, the government is not thereby "persuaded to
postpone collection to make him feel that the demand was not unreasonable or that no harassment or
injustice is meant." Which, as stated in Collector v. Suyoc Consolidated Mining Co., et al., L-11527,
November 25, 1958, is the underlying reason behind the rule that prescriptive period is arrested by the
taxpayer's request for reexamination or reinvestigation even if "he has not previously waived it
[prescription] in writing."
The Court reminds us, in the case of Commissioner of Internal Revenue v. Algue, Inc., 32 of the need
to balance the conflicting interests of the government and the taxpayers.
Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance.
On the other hand, such collection should be made in accordance with law as any arbitrariness will
negate the very reason for government itself. It is therefore necessary to reconcile the apparently
conflicting interest of the authorities and the taxpayers so that the real purpose of taxation, which is the
promotion of common good, may be achieved.
Thus, the three-year statute of limitations on the collection of an assessed tax provided under Section
269(c) of the Tax Code of 1977, a law enacted to protect the interests of the taxpayer, must be given
effect. In providing for exceptions to such rule in Section 271, the law strictly limits the suspension of
the running of the prescription period to, among other instances, protests wherein the taxpayer requests
for a reinvestigation. In this case, where the taxpayer merely filed two protest letters requesting for a
reconsideration, and where the BIR could not have conducted a reinvestigation because no new or
additional evidence was submitted, the running of statute of limitations cannot be interrupted. The tax
which is the subject of the Decision issued by the CIR on 8 October 2002 affirming the Formal
Assessment issued on 14 April 1994 can no longer be the subject of any proceeding for its collection.
Consequently, the right of the government to collect the alleged deficiency tax is barred by
prescription. ECTHIA
IN VIEW OF THE FOREGOING, the instant Petition is DENIED. The assailed en banc Decision of
the CTA in CTA EB No. 37 dated 22 February 2005, cancelling Assessment Notice No. 000688-807333 issued against Philippine Global Communication, Inc. for its 1990 income tax deficiency for the
reason that it is barred by prescription, is hereby AFFIRMED. No costs.
SO ORDERED.
Panganiban, C.J., Ynares-Santiago, Austria-Martinez and Callejo, Sr., JJ., concur.
Footnotes
1.
Penned by Associate Justice Juanito C. Castaeda, Jr. with Presiding Justice Ernesto D. Acosta,
Associate Justice Erlinda P. Uy, Associate Justice Lovell R. Bautista, Associate Justice Olga PalancaEnriquez and Associate Justice Caesar A. Casanova, concurring. Rollo, pp. 29-36.
2.
Id. at 37-45.
3.
Id. at 37-38.
4.
Id. at 38.

5.
Id. at 38.
6.
Id. at 37-45.
7.
Id. at 44.
8.
The CTA inadvertently referred to this provision as Section 223, which is the section where this
provision falls under the present tax code, the National Internal Revenue Code of 1997. However, in
the Tax Code of 1977, as amended, which was the law applicable to this case, this provision was under
Section 269, which reads:
Section 269. Exceptions as to the period of limitation of assessment and collection of
taxes. . . .
xxx
xxx
xxx
c.
Any internal revenue tax which has been assessed within the period of limitation
above-prescribed may be collected by distraint or levy or by a proceeding in court within three years
following the assessment of the tax.
9.
Rollo, p. 45.
10.
Id. at 47-53.
11.
Id. at 35.
12.
Id. at 15.
13.
Section 268. Period of limitation upon assessment and collection. Except as provided in the
succeeding section, internal revenue taxes shall be assessed within three years after the last day
prescribed by law for the filing of the return, and no proceeding in court without assessment for the
collection of such taxes shall be begun after the expiration of such period: Provided, That in a case
where a return is filed beyond the period prescribed by law, the three-year period shall be counted from
the day the return was filed. For the purposes of this section, a return filed before the last day
prescribed by law for the filing thereof shall be considered as filed on such last day.
14.
Section 269. Exceptions as to period of limitations of assessment and collection of taxes. (a)
In the case of a false or fraudulent return with intent to evade or of failure to file a return, the tax may
be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at
any time within ten years after the discovery of the falsity, fraud or omission . . . .
15.
Section 269. Exceptions as to the period of limitation of assessment and collection of taxes. .
..
xxx
xxx
xxx
(c)
Any internal revenue tax which has been assessed within the period of limitation
above-prescribed may be collected by distraint or levy or by a proceeding in court within three years
following the assessment of the tax.
16.
Bank of the Philippine Islands v. Commissioner of Internal Revenue, G.R. No. 139736, 17
October 2005, 473 SCRA 205, 223.
17.
Republic of the Philippines v. Ablaza, 108 Phil. 1105, 1107-1108 (1960).
18.
104 Phil. 819, 833-834 (1958).
19.
108 Phil. 1105, 1108 (1960).
20.
G.R. No. 139736, 17 October 2005, 473 SCRA 205, 225.
21.
363 Phil. 169, 178 (1999).
22.
G.R. No. 139736, 17 October 2005, 473 SCRA 205, 230-231.
23.
Rollo, p. 104
24.
104 Phil. 819, 822-823 (1958).
25.
116 Phil. 615, 618-619 (1962).
26.
117 Phil. 575, 578 (1963).
27.
117 Phil. 892, 895 (1963).
28.
119 Phil. 604, 610 (1964).
29.
Revenue Regulations No. 12-85 provides that:

Section 7. When to File Protest A protest must be filed within thirty (30) days from
receipt of the assessment.
Section 9. Finality of Assessments If a taxpayer who receives an assessment from the
Bureau of Internal Revenue fails to file a protest within the period prescribed in Section 7 of these
regulations, the said assessment shall become final and unappealable and the taxpayer is thereby
precluded from disputing the assessment.
30.
Collector of Internal Revenue v. Suyoc Consolidated Mining Company, 104 Phil. 819, 823
(1958).
31.
124 Phil. 927, 932 (1966).
32.
G.R. No. L-18896, 17 February 1988, 158 SCRA 9, 11.

THIRD DIVISION
[G.R. No. 120082. September 11, 1996.]
MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY, petitioner, vs. HON. FERDINAND J.
MARCOS, in his capacity as the Presiding Judge of the Regional Trial Court, Branch 20, Cebu City,
THE CITY OF CEBU, represented by its Mayor, HON. TOMAS R. OSMEA, and EUSTAQUIO B.
CESA, respondents.
The Solicitor General for petitioner.
The Office of the City Attorney for City of Cebu.
SYLLABUS
1.
POLITICAL LAW; GOVERNMENT; POWER OF TAXATION; CONSTRUED. As a
general rule, the power to tax is an incident of sovereignty and is unlimited in its range, acknowledging
in its very nature no limits, so that security against its abuse is to be found only in the responsibility of
the legislature which imposes the tax on the constituency who are to pay it. Nevertheless, effective
limitations thereon may be imposed by the people through their Constitution. Our Constitution, for
instance, provides that the rule of taxation shall be uniform and equitable and Congress shall evolve a
progressive system of taxation. So potent indeed is the power that it was once opined that "the power to
tax involves the power to destroy." Verily, taxation is a destructive power which interferes with the
personal and property rights of the people and takes from them a portion of their property for the
support of the government. Accordingly, tax statutes must be construed strictly against the government
and liberally in favor of the taxpayer. But since taxes are what we pay for civilized society, or are the
lifeblood of the nation, the law frowns against exemptions from taxation and statutes granting the
exemptions are thus construed strictissimi juris against the taxpayer and liberally in favor of the taxing
authority. A claim of exemption from tax payments must be clearly shown and based on language in the
law too plain to be mistaken. Elsewise stated, taxation is the rule, exemption therefrom is the exception.
However, if the grantee of the exemption is a political subdivision or instrumentality, the rigid rule of
construction does not apply because the practical effect of the exemption is merely to reduce the
amount of money that has to be handled by the government in the course of its operation.
2.
ID., ID.; ID.; MAY BE EXERCISED BY THE LOCAL LEGISLATIVE BODIES. The
power to tax is primarily vested in the Congress; however, in our jurisdictions, it may be exercised by
local legislative bodies, no longer merely by virtue of a valid delegation as before, but pursuant to
direct authority conferred by Section 5, Article X of the Constitution. Under the latter, the exercise of
the power may be subject to such guidelines and limitations as the Congress may provide which,
however, must be consistent with the basic policy of local autonomy. The LGC, enacted pursuant to
Section 3, Article X of the Constitution, provides for the exercise by local government units of their
power to tax, the scope thereof or its limitations, and the exemptions from taxation. Section 133 of the
LGC prescribes the common limitations on the taxing powers of local government units.
3.
ID.; ID .; ID.; EXEMPTION FROM PAYMENT OF TAX MAY BE WITHDRAWN AT THE
PLEASURE OF THE TAXING AUTHORITY; EXCEPTION. There can be no question that under
Section 14 of R.A. No. 6958 the petitioner is exempt from the payment of realty taxes imposed by the
National Government or any of its political subdivisions, agencies, and instrumentalities. Nevertheless,
since taxation is the rule and exemption therefrom the exception, the exemption may thus be withdrawn
at the pleasure of the taxing authority. The only exception to this rule is where the exemption was
granted to private parties based on material consideration of a mutual nature, which then becomes
contractual and is thus covered by the non-impairment claim of the Constitution.
4.
ID.; LOCAL GOVERNMENT CODE; SEC. 234 PROVIDES FOR THE EXEMPTION FROM
THE PAYMENT OF REAL PROPERTY TAX; BASIS THEREOF. Section 234 of the LGC
provides for the exemptions from payment of real property taxes and withdraws previous exemptions
therefrom granted to natural and juridical persons, including government-owned and controlled
corporations, except as provided therein. These exemptions are based on the ownership, character, and

use of the property. Thus: (a) Ownership Exemptions. Exemptions from real property taxes on the basis
of ownership are real properties owned by: (i) the Republic, (ii) a province, (iii) a city, (iv) a
municipality, (v) a barangay, (vi) registered cooperatives. (b) character exemptions. Exempted from
real property taxes on the basis of their character are: (i) charitable institutions, (ii) houses and temples
of prayer like churches, parsonages or convents appurtenant thereto, mosques, and (iii) non-profit or
religious cemeteries. (c) Usage exemptions. Exempted from real property taxes on the basis of the
actual, direct and exclusive use to which they are devoted are: (i) all lands, buildings and improvements
which are actually, directly and exclusively used for religious, charitable or educational purposes; (ii)
all machineries and equipment actually, directly and exclusively used by local water districts or by
government-owned or controlled corporations engaged in the supply and distribution of water and/or
generation and transmission of electric power; and (iii) all machinery and equipment used for pollution
control and environmental protection. To help provide a healthy environment in the midst of the
modernization of the country, all machinery and equipment for pollution control and environmental
protection may not be taxed by local governments. 2. Other Exemptions Withdrawn. All other
exemptions previously granted to natural or juridical persons including government-owned or
controlled corporations are withdrawn upon effectivity of the Code.
5.
ID.; REPUBLIC OF THE PHILIPPINES AS DISTINGUISHED FROM NATIONAL
GOVERNMENT. The terms "Republic of the Philippines" and "National Government" are not
interchangeable. The former is broader and synonymous with "Government of the Republic of the
Philippines" which the Administrative Code of 1987 defines as the "corporate governmental entity
through which the functions of government are exercised throughout the Philippines, including, save as
the contrary appears from the context, the various arms through which political authority is made
effective in the Philippines, whether pertaining to the autonomous regions, the provincial, city,
municipal or barangay subdivisions or other forms of local government." (Section 2[1], Introductory
Provisions, Administrative Code of 1987.) These "autonomous regions, provincial, city, municipal or
barangay subdivisions" are the political subdivisions. (Section 1, Article X, 1987 Constitution.) On the
other hand, "National Government" refers "to the entire machinery of the central government, as
distinguished from the different forms of local government." (Section 2[2], Introductory Provisions,
Administrative Code of 1987. The National Government then is composed of the three great
departments: the executive, the legislative and the judicial.
6.
ID.; GOVERNMENT; AGENCY AS DISTINGUISHED FROM INSTRUMENTALITY. An
"agency" of the Government refers to "any of the various units of the Government, including a
department, bureau, office, instrumentality, or government-owned or controlled corporation, or a local
government or a distinct unit therein," while an "instrumentality" refers to "any agency of the National
Government, not integrated within the department framework, vested with special functions or
jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and
enjoying operational autonomy, usually, through a charter. This term includes regulatory agencies,
chartered institutions and government-owned and controlled corporations."
DECISION
DAVIDE, JR., J p:
For review under Rule 45 of the Rules of Court on a pure question of law are the decision of 22 March
1995 1 of the Regional Trial Court (RTC) of Cebu City, Branch 20, dismissing the petition for
declaratory relief in Civil Case No. CEB-16900, entitled "Mactan Cebu International Airport Authority
vs. City of Cebu," and its order of 4 May 1995 2 denying the motion to reconsider the decision.
We resolved to give due course to this petition for it raises issues dwelling on the scope of the taxing
power of local government units and the limits of tax exemption privileges of government-owned and
controlled corporations.
The uncontradicted factual antecedents are summarized in the instant petition as follows:
Petitioner Mactan Cebu International Airport Authority (MCIAA) was created by virtue of Republic

Act No. 6958, mandated to "principally undertake the economical, efficient and effective control,
management and supervision of the Mactan International Airport in the Province of Cebu and the
Lahug Airport in Cebu City, . . . and such other airports as may be established in the Province of Cebu .
. ." (Sec. 3, RA 6958). It is also mandated to:
a)
encourage, promote and develop international and domestic air traffic in the Central Visayas
and Mindanao regions as a means of making the regions centers of international trade and tourism, and
accelerating the development of the means of transportation and communication in the country; and,
b)
upgrade the services and facilities of the airports and to formulate internationally acceptable
standards of airport accommodation and service.
Since the time of its creation, petitioner MCIAA enjoyed the privilege of exemption from payment of
realty taxes in accordance with Section 14 of its Charter:
Sec. 14.
Tax Exemptions. The Authority shall be exempt from realty taxes imposed by the
National Government or any of its political subdivisions, agencies and instrumentalities . . ..
On October 11, 1994, however, Mr. Eustaquio B. Cesa, Officer-in-Charge, Office of the Treasurer of
the City of Cebu, demanded payment for realty taxes on several parcels of land belonging to the
petitioner (Lot Nos. 913-G, 743, 88 SWO, 948-A, 989-A, 474, 109(931), I-M, 918, 919, 913-F, 941,
942, 947, 77 Psd., 746 and 991-A), located at Barrio Apas and Barrio Kasambagan, Lahug, Cebu City,
in the total amount of P2,229,078.79.
Petitioner objected to such demand for payment as baseless and unjustified, claiming in its favor the
aforecited Section 14 of RA 6958 which exempts it from payment of realty taxes. It was also asserted
that it is an instrumentality of the government performing governmental functions, citing Section 133
of the Local Government Code of 1991 which puts limitations on the taxing powers of local
government units:
Section 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:
a)
...
xxx
xxx
xxx
o)
Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities, and local government units. (italics supplied)
Respondent City refused to cancel and set aside petitioner's realty tax account, insisting that the
MCIAA is a government-controlled corporation whose tax exemption privilege has been withdrawn by
virtue of Sections 193 and 234 of the Local Government Code that took effect on January 1, 1992:
Section 193. Withdrawal of Tax Exemption Privilege. Unless otherwise provided in this Code, tax
exemptions or incentives granted to, or presently enjoyed by all persons whether natural or juridical,
including government-owned or controlled corporations, except local water districts, cooperatives duly
registered under RA No. 6938, non-stock and non-profit hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this Code. (italics supplied)
xxx
xxx
xxx
Section 234. Exemptions from Real Property Taxes. . . .
(a)
...
xxx
xxx
xxx
(e)
...
Except as provided herein, any exemption from payment of real property tax previously granted to, or
presently enjoyed by all persons, whether natural or juridical, including government-owned or
controlled corporations are hereby withdrawn upon the effectivity of this Code.
As the City of Cebu was about to issue a warrant of levy against the properties of petitioner, the latter
was compelled to pay its tax account "under protest" and thereafter filed a Petition for Declaratory
Relief with the Regional Trial Court of Cebu, Branch 20, on December 29, 1994. MCIAA basically

contended that the taxing powers of local government units do not extend to the levy of taxes or fees of
any kind on an instrumentality of the national government. Petitioner insisted that while it is indeed a
government-owned corporation, it nonetheless stands on the same footing as an agency or
instrumentality of the national government by the very nature of its powers and functions.
Respondent City, however, asserted that MCIAA is not an instrumentality of the government but
merely a government-owned corporation performing proprietary functions. As such, all exemptions
previously granted to it were deemed withdrawn by operation of law, as provided under Sections 193
and 234 of the Local Government Code when it took effect on January 1, 1992. 3
The petition for declaratory relief was docketed as Civil Case No. CEB-16900.
In its decision of 22 March 1995, 4 the trial court dismissed the petition in light of its findings, to wit:
A close reading of the New Local Government Code of 1991 or RA 7160 provides the express
cancellation and withdrawal of exemption of taxes by government-owned and controlled corporation
per Sections after the effectivity of said Code on January 1, 1992, to wit: [proceeds to quote Sections
193 and 234]
Petitioners claimed that its real properties assessed by respondent City Government of Cebu are
exempted from paying realty taxes in view of the exemption granted under RA 6958 to pay the same
(citing Section 14 of RA 6958).
However, RA 7160 expressly provides that "All general and special laws, acts, city charters, decrees
[sic], executive orders, proclamations and administrative regulations, or part or parts thereof which are
inconsistent with any of the provisions of this Code are hereby repealed or modified accordingly." (/f/,
Section 534, RA 7160).
With that repealing clause in RA 7160, it is safe to infer and state that the tax exemption provided for in
RA 6958 creating petitioner had been expressly repealed by the provisions of the New Local
Government Code of 1991.
So that petitioner in this case has to pay the assessed realty tax of its properties effective after January
1, 1992 until the present.
This Court's ruling finds expression to give impetus and meaning to the overall objectives of the New
Local Government Code of 1991, RA 7160. "It is hereby declared the policy of the State that the
territorial and political subdivisions of the State shall enjoy genuine and meaningful local autonomy to
enable them to attain their fullest development as self-reliant communities and make them more
effective partners in the attainment of national goals. Toward this end, the State shall provide for a
more responsive and accountable local government structure instituted through a system of
decentralization whereby local government units shall be given more powers, authority,
responsibilities, and resources. The process of decentralization shall proceed from the national
government to the local government units. . . ." 5
Its motion for reconsideration having been denied by the trial court in its 4 May 1995 order, the
petitioner filed the instant petition based on the following assignment of errors:
I.
RESPONDENT JUDGE ERRED IN FAILING TO RULE THAT THE PETITIONER IS
VESTED WITH GOVERNMENT POWERS AND FUNCTIONS WHICH PLACE IT IN THE SAME
CATEGORY AS AN INSTRUMENTALITY OR AGENCY OF THE GOVERNMENT.
II.
RESPONDENT JUDGE ERRED IN RULING THAT PETITIONER IS LIABLE TO PAY
REAL PROPERTY TAXES TO THE CITY OF CEBU.
Anent the first assigned error, the petitioner asserts that although it is a government-owned or
controlled corporation, it is mandated to perform functions in the same category as an instrumentality
of Government. An instrumentality of Government is one created to perform governmental functions
primarily to promote certain aspects of the economic life of the people. 6 Considering its task "not
merely to efficiently operate and manage the Mactan-Cebu International Airport, but more importantly,
to carry out the Government policies of promoting and developing the Central Visayas and Mindanao
regions as centers of international trade and tourism, and accelerating the development of the means of

transportation and communication in the country," 7 and that it is an attached agency of the Department
of Transportation and Communication (DOTC), 8 the petitioner "may stand in [sic] the same footing as
an agency or instrumentality of the national government." Hence, its tax exemption privilege under
Section 14 of its Charter "cannot be considered withdrawn with the passage of the Local Government
Code of 1991 (hereinafter LGC) because Section 133 thereof specifically states that the 'taxing powers
of local government units shall not extend to the levy of taxes or fees or charges of any kind on the
national government, its agencies and instrumentalities.'"
As to the second assigned error, the petitioner contends that being an instrumentality of the National
Government, respondent City of Cebu has no power nor authority to impose realty taxes upon it in
accordance with the aforesaid Section 133 of the LGC, as explained in Basco vs. Philippine
Amusement and Gaming Corporation: 9
Local governments have no power to tax instrumentalities of the National Government. PAGCOR is a
government owned or controlled corporation with an original charter, PD 1869. All of its shares of
stock are owned by the National Government. . . .
PAGCOR has a dual role, to operate and regulate gambling casinos. The latter role is governmental,
which places it in the category of an agency or instrumentality of the Government. Being an
instrumentality of the Government, PAGCOR should be and actually is exempt from local taxes.
Otherwise, its operation might be burdened, impeded or subjected to control by a mere Local
government. cdtai
The states have no power by taxation or otherwise, to retard, impede, burden or in any manner control
the operation of constitutional laws enacted by Congress to carry into execution the powers vested in
the federal government (McCulloch v. Maryland, 4 Wheat 316, 4 L Ed. 579)
This doctrine emanates from the "supremacy" of the National Government over local governments.
"Justice Holmes, speaking for the Supreme Court, made reference to the entire absence of power on the
part of the States to touch, in that way (taxation) at least, the instrumentalities of the United States
(Johnson v. Maryland, 254 USA 51) and it can be agreed that no state or political subdivision can
regulate a federal instrumentality in such a way as to prevent it from consummating its federal
responsibilities, or even to seriously burden it in the accomplishment of them." (Antieau, Modern
Constitutional Law, Vol. 2, p. 140)
Otherwise, mere creatures of the State can defeat National policies thru extermination of what local
authorities may perceive to be undesirable activities or enterprise using the power to tax as "a tool for
regulation" (U.S. v. Sanchez, 340 US 42). The power to tax which was called by Justice Marshall as the
"power to destroy" (Mc Culloch v. Maryland, supra) cannot be allowed to defeat an instrumentality or
creation of the very entity which has the inherent power to wield it. (italics supplied)
It then concludes that the respondent Judge "cannot therefore correctly say that the questioned
provisions of the Code do not contain any distinction between a government corporation performing
governmental functions as against one performing merely proprietary ones such that the exemption
privilege withdrawn under the said Code would apply to all government corporations." For it is clear
from Section 133, in relation to Section 234, of the LGC that the legislature meant to exclude
instrumentalities of the national government from the taxing powers of the local government units.
cdasia
In its comment, respondent City of Cebu alleges that as a local government unit and a political
subdivision, it has the power to impose, levy, assess, and collect taxes within its jurisdiction. Such
power is guaranteed by the Constitution 10 and enhanced further by the LGC. While it may be true that
under its Charter the petitioner was exempt from the payment of realty taxes, 11 this exemption was
withdrawn by Section 234 of the LGC. In response to the petitioner's claim that such exemption was
not repealed because being an instrumentality of the National Government, Section 133 of the LGC
prohibits local government units from imposing taxes, fees, or charges of any kind on it, respondent
City of Cebu points out that the petitioner is likewise a government-owned corporation, and Section

234 thereof does not distinguish between government-owned or controlled corporations performing
governmental and purely proprietary functions. Respondent City of Cebu urges this Court to apply by
analogy its ruling that the Manila International Airport Authority is a government-owned corporation,
12 and to reject the application of Basco because it was "promulgated . . . before the enactment and the
signing into law of R.A. No. 7160," and was not, therefore, decided "in the light of the spirit and
intention of the framers of" the said law.
As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range,
acknowledging in its very nature no limits, so that security against its abuse is to be found only in the
responsibility of the legislature which imposes the tax on the constituency who are to pay it.
Nevertheless, effective limitations thereon may be imposed by the people through their Constitutions.
13 Our Constitution, for instance, provides that the rule of taxation shall be uniform and equitable and
Congress shall evolve a progressive system of taxation. 14 So potent indeed is the power that it was
once opined that "the power to tax involves the power to destroy." 15 Verily, taxation is a destructive
power which interferes with the personal and property rights of the people and takes from them a
portion of their property for the support of the government. Accordingly, tax statutes must be construed
strictly against the government and liberally in favor of the taxpayer. 16 But since taxes are what we
pay for civilized society, 17 or are the lifeblood of the nation, the law frowns against exemptions from
taxation and statutes granting tax exemptions are thus construed strictissimi juris against the taxpayer
and liberally in favor of the taxing authority. 18 A claim of exemption from tax payments must be
clearly shown and based on language in the law too plain to be mistaken. 19 Elsewise stated, taxation is
the rule, exemption therefrom is the exception. 20 However, if the grantee of the exemption is a
political subdivision or instrumentality, the rigid rule of construction does not apply because the
practical effect of the exemption is merely to reduce the amount of money that has to be handled by the
government in the course of its operations. 21
The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be exercised
by local legislative bodies, no longer merely by virtue of a valid delegation as before, but pursuant to
direct authority conferred by Section 5, Article X of the Constitution. 22 Under the latter, the exercise
of the power may be subject to such guidelines and limitations as the Congress may provide which,
however, must be consistent with the basic policy of local autonomy.
There can be no question that under Section 14 of R.A. No. 6958 the petitioner is exempt from the
payment of realty taxes imposed by the National Government or any of its political subdivisions,
agencies, and instrumentalities. Nevertheless, since taxation is the rule and exemption therefrom the
exception, the exemption may thus be withdrawn at the pleasure of the taxing authority. The only
exception to this rule is where the exemption was granted to private parties based on material
consideration of a mutual nature, which then becomes contractual and is thus covered by the nonimpairment clause of the Constitution. 23
The LGC, enacted pursuant to Section 3, Article X of the Constitution, provides for the exercise by
local government units of their power to tax, the scope thereof or its limitations, and the exemptions
from taxation.
Section 133 of the LGC prescribes the common limitations on the taxing powers of local government
units as follows:
SEC. 133.
Common Limitations on the Taxing Power 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:
(a)
Income tax, except when levied on banks and other financial institutions;
(b)
Documentary stamp tax;
(c)
Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa, except as
otherwise provided herein;
(d)
Customs duties, registration fees of vessel and wharfage on wharves, tonnage dues, and all other

kinds of customs fees, charges and dues except wharfage on wharves constructed and maintained by
the local government unit concerned;
(e)
Taxes, fees and charges and other impositions upon goods carried into or out of, or passing
through, the territorial jurisdictions of local government units in the guise of charges for wharfage, tolls
for bridges or otherwise, or other taxes, fees or charges in any form whatsoever upon such goods or
merchandise;
(f)
Taxes, fees or charges on agricultural and aquatic products when sold by marginal farmers or
fishermen;
(g)
Taxes on business enterprises certified to by the Board of Investments as pioneer or non-pioneer
for a period of six (6) and four (4) years, respectively from the date of registration;
(h)
Excise taxes on articles enumerated under the National Internal Revenue Code, as amended, and
taxes, fees or charges on petroleum products;
(i)
Percentage or value-added tax (VAT) on sales, barters or exchanges or similar transactions on
goods or services except as otherwise provided herein;
(j)
Taxes on the gross receipts of transportation contractors and persons engaged in the
transportation of passengers or freight by hire and common carriers by air, land or water, except as
provided in this Code;
(k)
Taxes on premiums paid by way of reinsurance or retrocession;
(l)
Taxes, fees or charges for the registration of motor vehicles and for the issuance of all kinds of
licenses or permits for the driving thereof, except, tricycles;
(m)
Taxes, fees, or other charges on Philippine products actually exported, except as otherwise
provided herein;
(n)
Taxes, fees, or charges, on Countryside and Barangay Business Enterprises and cooperatives
duly registered under R.A. No. 6810 and Republic Act Numbered Sixty-nine hundred thirty-eight (R.A.
No. 6938) otherwise known as the "Cooperatives Code of the 'Philippines' respectively; and
(o)
TAXES, FEES OR CHARGES OF ANY KIND ON THE NATIONAL GOVERNMENT, ITS
AGENCIES AND INSTRUMENTALITIES, AND LOCAL GOVERNMENT UNITS. (italics supplied)
Needless to say, the last item (item o) is pertinent to this case. The "taxes, fees or charges" referred to
are "of any kind"; hence, they include all of these, unless otherwise provided by the LGC. The term
"taxes" is well understood so as to need no further elaboration, especially in light of the above
enumeration. The term "fees" means charges fixed by law or ordinance for the regulation or inspection
of business or activity, 24 while "charges" are pecuniary liabilities such as rents or fees against persons
or property. 25
Among the "taxes" enumerated in the LGC is real property tax, which is governed by Section 232. It
reads as follows:
SEC. 232.
Power to Levy Real Property Tax. A province or city or a municipality within the
Metropolitan Manila Area may levy an annual ad valorem tax on real property such as land, building,
machinery, and other improvements not hereafter specifically exempted.
Section 234 of the LGC provides for the exemptions from payment of real property taxes and
withdraws previous exemptions therefrom granted to natural and juridical persons, including
government-owned and controlled corporations, except as provided therein. It provides:
SEC. 234.
Exemptions from Real Property Tax. The following are exempted from payment of
the real property tax:
(a)
Real property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof had been granted, for consideration or otherwise, to a taxable
person;
(b)
Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, nonprofit or religious cemeteries and all lands, buildings and improvements actually, directly, and
exclusively used for religious, charitable or educational purposes;

(c)
All machineries and equipment that are actually, directly and exclusively used by local water
districts and government-owned or controlled corporations engaged in the supply and distribution of
water and/or generation and transmission of electric power;
(d)
All real property owned by duly registered cooperatives as provided for under R.A. No. 6938;
and
(e)
Machinery and equipment used for pollution control and environmental protection.
Except as provided herein, any exemption from payment of real property tax previously granted to, or
presently enjoyed by, all persons, whether natural or juridical, including all government-owned or
controlled corporations are hereby withdrawn upon the effectivity of this Code.
These exemptions are based on the ownership, character, and use of the property. Thus:
(a)
Ownership Exemptions. Exemptions from real property taxes on the basis of ownership are real
properties owned by: (i) the Republic, (ii) a province, (iii) a city, (iv) a municipality, (v) a barangay, and
(vi) registered cooperatives.
(b)
Character Exemptions. Exempted from real property taxes on the basis of their character are: (i)
charitable institutions, (ii) houses and temples of prayer like churches, parsonages or convents
appurtenant thereto, mosques, and (iii) non-profit or religious cemeteries.
(c)
Usage exemptions. Exempted from real property taxes on the basis of the actual, direct and
exclusive use to which they are devoted are: (i) all lands, buildings and improvements which are
actually directly and exclusively used for religious, charitable or educational purposes; (ii) all
machineries and equipment actually, directly and exclusively used by local water districts or by
government-owned or controlled corporations engaged in the supply and distribution of water and/or
generation and transmission of electric power; and (iii) all machinery and equipment used for pollution
control and environmental protection.
To help provide a healthy environment in the midst of the modernization of the country, all machinery
and equipment for pollution control and environmental protection may not be taxed by local
governments.
2.
Other Exemptions Withdrawn. All other exemptions previously granted to natural or juridical
persons including government-owned or controlled corporations are withdrawn upon the effectivity of
the Code. 26
Section 193 of the LGC is the general provision on withdrawal of tax exemption privileges. It provides:
SEC. 193.
Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this Code, tax
exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical,
including government-owned or controlled corporations, except local water districts, cooperatives duly
registered under R.A. 6938, non-stock and non-profit hospitals and educational institutions, are hereby
withdrawn upon the effectivity of this Code.
On the other hand, the LGC authorizes local government units to grant tax exemption privileges. Thus,
Section 192 thereof provides:
SEC. 192.
Authority to Grant Tax Exemption Privileges. Local government units may, through
ordinances duly approved, grant tax exemptions, incentives or reliefs under such terms and conditions
as they may deem necessary.
The foregoing sections of the LGC speak of: (a) the limitations on the taxing powers of local
government units and the exceptions to such limitations; and (b) the rule on tax exemptions and the
exceptions thereto. The use of exceptions or provisos in these sections, as shown by the following
clauses:
(1)
"unless otherwise provided herein" in the opening paragraph of Section 133;
(2)
"Unless otherwise provided in this Code" in Section 193;
(3)
"not hereafter specifically exempted" in Section 232; and
(4)
"Except as provided herein" in the last paragraph of Section 234
initially hampers a ready understanding of the sections. Note, too, that the aforementioned clause in

Section 133 seems to be inaccurately worded. Instead of the clause "unless otherwise provided herein,"
with the "herein" to mean, of course, the section, it should have used the clause "unless otherwise
provided in this Code." The former results in absurdity since the section itself enumerates what are
beyond the taxing powers of local government units and, where exceptions were intended, the
exceptions are explicitly indicated in the next. For instance, in item (a) which excepts income taxes
"when levied on banks and other financial institutions"; item (d) which excepts "wharfage on wharves
constructed and maintained by the local government unit concerned"; and item (1) which excepts taxes,
fees and charges for the registration and issuance of licenses or permits for the driving of "tricycles." It
may also be observed that within the body itself of the section, there are exceptions which can be found
only in other parts of the LGC, but the section interchangeably uses therein the clause, "except as
otherwise provided herein" as in items (c) and (i), or the clause "except as provided in this Code" in
item (j). These clauses would be obviously unnecessary or mere surplusages if the opening clause of
the section were "Unless otherwise provided in this Code" instead of "Unless otherwise provided
herein." In any event, even if the latter is used, since under Section 232 local government units have the
power to levy real property tax, except those exempted therefrom under Section 234, then Section 232
must be deemed to qualify Section 133.
Thus, reading together Sections 133, 232, and 234 of the LGC, we conclude that as a general rule, as
laid down in Section 133, the taxing powers of local government units cannot extend to the levy of,
inter alia, "taxes, fees and charges of any kind on the National Government, its agencies and
instrumentalities, and local government units"; however, pursuant to Section 232, provinces, cities, and
municipalities in the Metropolitan Manila Area may impose the real property tax except on, inter alia,
"real property owned by the Republic of the Philippines or any of its political subdivisions except when
the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person," as
provided in item (a) of the first paragraph of Section 234.
As to tax exemptions or incentives granted to or presently enjoyed by natural or juridical persons,
including government-owned and controlled corporations, Section 193 of the LGC prescribes the
general rule, viz., they are withdrawn upon the effectivity of the LGC, except those granted to local
water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals
and educational institutions, and unless otherwise provided in the LGC. The latter proviso could refer
to Section 234 which enumerates the properties exempt from real property tax. But the last paragraph
of Section 234 further qualifies the retention of the exemption insofar as real property taxes are
concerned by limiting the retention only to those enumerated therein; all others not included in the
enumeration lost the privilege upon the effectivity of the LGC. Moreover, even as to real property
owned by the Republic of the Philippines or any of its political subdivisions covered by item (a) of the
first paragraph of Section 234, the exemption is withdrawn if the beneficial use of such property has
been granted to a taxable person for consideration or otherwise.
Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of the LGC,
exemptions from payment of real property taxes granted to natural or juridical persons, including
government-owned or controlled corporations, except as provided in the said section, and the petitioner
is, undoubtedly, a government-owned corporation, it necessarily follows that its exemption from such
tax granted it in Section 14 of its Charter, R.A. No. 6958, has been withdrawn. Any claim to the
contrary can only be justified if the petitioner can seek refuge under any of the exceptions provided in
Section 234, but not under Section 133, as it now asserts, since, as shown above, the said section is
qualified by Sections 232 and 234. LLphil
In short, the petitioner can no longer invoke the general rule in Section 133 that the taxing powers of
the local government units cannot extend to the levy of:
(o)
taxes, fees or charges of any kind on the National Government, its agencies or instrumentalities,
and local government units.
It must show that the parcels of land in question, which are real property, are any one of those

enumerated in Section 234, either by virtue of ownership, character, or use of the property. Most likely,
it could only be the first, but not under any explicit provision of the said section, for none exists. In
light of the petitioner's theory that it is an "instrumentality of the Government," it could only be within
the first item of the first paragraph of the section by expanding the scope of the term "Republic of the
Philippines" to embrace its "instrumentalities" and "agencies." For expediency, we quote:
(a)
real property owned by the Republic of the Philippines, or any of its political subdivisions
except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable
person.
This view does not persuade us. In the first place, the petitioner's claim that it is an instrumentality of
the Government is based on Section 133(o), which expressly mentions the word "instrumentalities";
and, in the second place, it fails to consider the fact that the legislature used the phrase "National
Government, its agencies and instrumentalities" in Section 133(o), but only the phrase "Republic of the
Philippines or any of its political subdivisions" in Section 234(a).
The terms "Republic of the Philippines" and "National Government" are not interchangeable. The
former is broader and synonymous with "Government of the Republic of the Philippines" which the
Administrative Code of 1987 defines as the "corporate governmental entity through which the
functions of government are exercised throughout the Philippines, including, save as the contrary
appears from the context, the various arms through which political authority is made affective in the
Philippines, whether pertaining to the autonomous regions, the provincial, city, municipal or barangay
subdivisions or other forms of local government." 27 These "autonomous regions, provincial, city,
municipal or barangay subdivisions" are the political subdivisions. 28
On the other hand, "National Government" refers "to the entire machinery of the central government, as
distinguished from the different forms of local governments." 29 The National Government then is
composed of the three great departments: the executive, the legislative and the judicial. 30
An "agency" of the Government refers to "any of the various units of the Government, including a
department, bureau, office, instrumentality, or government-owned or controlled corporation, or a local
government or a distinct unit therein;" 31 while an "instrumentality" refers to "any agency of the
National Government, not integrated within the department framework, vested with special functions or
jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and
enjoying operational autonomy, usually through a charter. This term includes regulatory agencies,
chartered institutions and government-owned and controlled corporations." 32
If Section 234(a) intended to extend the exception therein to the withdrawal of the exemption from
payment of real property taxes under the last sentence of the said section to the agencies and
instrumentalities of the National Government mentioned in Section 133(o), then it should have restated
the wording of the latter. Yet, it did not. Moreover, that Congress did not wish to expand the scope of
the exemption in Section 234(a) to include real property owned by other instrumentalities or agencies
of the government including government-owned and controlled corporations is further borne out by the
fact that the source of this exemption is Section 40(a) of P.D. No. 464, otherwise known as The Real
Property Tax Code, which reads:
SEC. 40.
Exemptions from Real Property Tax. The exemption shall be as follows:
(a)
Real property owned by the Republic of the Philippines or any of its political subdivisions and
any government-owned or controlled corporation so exempt by its charter: Provided, however, That
this exemption shall not apply to real property of the above-mentioned entities the beneficial use of
which has been granted, for consideration or otherwise, to a taxable person.
Note that as reproduced in Section 234(a), the phrase "and any government-owned or controlled
corporation so exempt by its charter" was excluded. The justification for this restricted exemption in
Section 234(a) seems obvious: to limit further tax exemption privileges, especially in light of the
general provision on withdrawal of tax exemption privileges in Section 193 and the special provision
on withdrawal of exemption from payment of real property taxes in the last paragraph of Section 234.

These policy considerations are consistent with the State policy to ensure autonomy to local
governments 33 and the objective of the LGC that they enjoy genuine and meaningful local autonomy
to enable them to attain their fullest development as self-reliant communities and make them effective
partners in the attainment of national goals. 34 The power to tax is the most effective instrument to
raise needed revenues to finance and support myriad activities of local government units for the
delivery of basic services essential to the promotion of the general welfare and the enhancement of
peace, progress, and prosperity of the people. It may also be relevant to recall that the original reasons
for the withdrawal of tax exemption privileges granted to government-owned and controlled
corporations and all other units of government were that such privilege resulted in serious tax base
erosion and distortions in the tax treatment of similarly situated enterprises, and there was a need for
these entities to share in the requirements of development, fiscal or otherwise, by paying the taxes and
other charges due from them. 35
The crucial issues then to be addressed are: (a) whether the parcels of land in question belong to the
Republic of the Philippines whose beneficial use has been granted to the petitioner, and (b) whether the
petitioner is a "taxable person."
Section 15 of the petitioner's Charter provides:
Sec. 15.
Transfer of Existing Facilities and Intangible Assets. All existing public airport
facilities, runways, lands, buildings and other properties, movable or immovable, belonging to or
presently administered by the airports, and all assets, powers, rights, interests and privileges relating on
airport works or air operations, including all equipment which are necessary for the operations of air
navigation, aerodrome control towers, crash, fire, and rescue facilities are hereby transferred to the
Authority: Provided, however, that the operations control of all equipment necessary for the operation
of radio aids to air navigation, airways communication, the approach control office, and the area
control center shall be retained by the Air Transportation Office. No equipment, however, shall be
removed by the Air Transportation Office from Mactan without the concurrence of the Authority. The
Authority may assist in the maintenance of the Air Transportation Office equipment.
The "airports" referred to are the "Lahug Air Port" in Cebu City and the "Mactan International Airport
in the Province of Cebu," 36 which belonged to the Republic of the Philippines, then under the Air
Transportation Office (ATO). 37
It may be reasonable to assume that the term "lands" refer to "lands" in Cebu City then administered by
the Lahug Air Port and included the parcels of land the respondent City of Cebu seeks to levy on for
real property taxes. This section involves a "transfer" of the "lands," among other things, to the
petitioner and not just the transfer of the beneficial use thereof, with the ownership being retained by
the Republic of the Philippines.
This "transfer" is actually an absolute conveyance of the ownership thereof because the petitioner's
authorized capital stock consists of, inter alia, "the value of such real estate owned and/or administered
by the airports." 38 Hence, the petitioner is now the owner of the land in question and the exception in
Section 234(c) of the LGC is inapplicable.
Moreover, the petitioner cannot claim that it was never a "taxable person" under its Charter. It was only
exempted from the payment of real property taxes. The grant of the privilege only in respect of this tax
is conclusive proof of the legislative intent to make it a taxable person subject to all taxes, except real
property tax.
Finally, even if the petitioner was originally not a taxable person for purposes of real property tax, in
light of the foregoing disquisitions, it had already become, even if it be conceded to be an "agency" or
"instrumentality" of the Government, a taxable person for such purpose in view of the withdrawal in
the last paragraph of Section 234 of exemptions from the payment of real property taxes, which, as
earlier adverted to, applies to the petitioner.
Accordingly, the position taken by the petitioner is untenable. Reliance on Basco vs. Philippine
Amusement and Gaming Corporation 39 is unavailing since it was decided before the effectivity of the

LGC. Besides, nothing can prevent Congress from decreeing that even instrumentalities or agencies of
the Government performing governmental functions may be subject to tax. Where it is done precisely
to fulfill a constitutional mandate and national policy, no one can doubt its wisdom.
WHEREFORE, the instant petition is DENIED. The challenged decision and order of the Regional
Trial Court of Cebu, Branch 20, in Civil Case No. CEB-16900 are AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
Narvasa, C .J., Melo, Francisco and Panganiban, JJ ., concur.
Footnotes
1.
Rollo, 2729. Per Judge Ferdinand J. Marcos.
2.
Id., 3031.
3.
Rollo, 1013.
4.
Supra note 1.
5.
Rollo, 2829.
6.
Citing Gonzales vs. Hechanova, 118 Phil. 1065 [1963].
7.
Citing Section 3, R.A. No. 6958.
8.
Citing Section 2, Id.
9.
197 SCRA 52 [1991].
10.
Section 5, Article X, 1987 Constitution.
11.
Section 14, R.A. No. 6958.
12.
Manila International Airport Authority (MIAA) vs. Commission on Audit, 238 SCRA 714
[1994].
13.
COOLEY on Constitutional Law, 4th ed. [1931], 62.
14.
Section 28(1), Article VI, 1987 Constitution.
15.
Chief Justice Marshall in McCulloch vs. Maryland, 4 Wheat, 316, 4 L ed. 579, 607. Later
Justice Holmes brushed this aside by declaring in Panhandle Oil Co. vs. Mississippi (277 U.S. 218) that
"the power to tax is not the power to destroy while this Court sits." Justice Frankfurter in Graves vs.
New York (306 U.S. 466) also remarked that Justice Marshall's statement was a "mere flourish of
rhetoric" and a product of the "intellectual fashion of the times" to indulge in "a free case of absolutes."
(See SINCO, Philippine Political Law [1954], 577578).
16.
AGPALO, RUBEN E., Statutory Construction [1990 ed.], 216. See also SANDS, DALLAS C.,
Statutes and Statutory Construction, vol. 3 [1974] 179.
17.
Justice Holmes in his dissent in Compania General vs. Collector of Internal Revenue, 275 U.S.
87, 100 [1927].
18.
AGPALO, op. cit., 217; SANDS, op. cit., 207.
19.
SINCO, op. cit., 587.
20.
SANDS, op. cit., 207.
21.
Maceda vs. Macaraig, Jr. 197 SCRA 771, 799 [1991], citing 2 COOLEY on the Law on
Taxation, 4th ed. [1927], 1414, and SANDS, op. cit., 207.
22.
CRUZ, ISAGANI A., Constitutional Law [1991], 84.
23.
Id., 9192; SINCO, op. cit., 587.
24.
Section 131(l), Local Government Code of 1991.
25.
Section 131(g), Id.
26.
PIMENTEL, AQUILINO JR., The Local Government Code of 1991 The Key to National
Development [1933], 329.
27.
Section 2(1), Introductory Provisions, Administrative Code of 1987.
28.
Section 1, Article X, 1987 Constitution.
29.
Section 2(2), Introductory Provisions, Administrative Code of 1987.
30.
Bacani vs. National Coconut Corporation, 100 Phil. 468, 472 [1956].

31.
32.
33.
34.
35.
36.
37.
38.
39

Section 2(4), Introductory Provisions, Administrative Code of 1987.

Section 2(10), Id., Id.
Section 25, Article II, and Section 2, Article X, Constitution.
Section 2(a), Local Government Code of 1991.
P.D. No. 1931.
Section 3, R.A. No. 6958.
Section 18, Id.
Section 9(b), Id.
Supra note 9.

THIRD DIVISION
[G.R. No. 127708. March 25, 1999.]
CITY GOVERNMENT OF SAN PABLO, LAGUNA, CITY TREASURER OF SAN PABLO,
LAGUNA, and THE SANGGUNIANG PANGLUNSOD OF SAN PABLO, LAGUNA, petitioners, vs.
HONORABLE BIENVENIDO V. REYES, in his capacity as Presiding Judge, Regional Trial Court,
Branch 29, San Pablo City and the MANILA ELECTRIC COMPANY, respondents.
Eleno M. Mendoza, Jr. for petitioners.
Quiason Makalintal Barot Torres & Ibarra for private respondent.
SYNOPSIS
This is a petition for review under Rule 45 of the Revised Rules of Court assailing the decision of the
Regional Trial Court of San Pablo City declaring the imposition of franchise tax under Section 2.09
Article D of Ordinance No. 56, otherwise known as the Revenue Code of the City of San Pablo as
ineffective and void insofar as private respondent is concerned for being violative of Act No. 3648,
Republic Act No. 2340 and PD 551. The RTC also granted private respondent's claim for refund of
franchise taxes paid under protest.
Petitioners' position was that RA 7160, The Local Government Code of 1991 (LGC), expressly
repealed Act No. 3648; RA No. 2340 and PD 551, and that pursuant to the provisions of Sections 137
and 193 of the Local Government Code, the province or city now has the power to impose a franchise
tax on a business enjoying a franchise. On the other hand, private respondent invoked the nonimpairment clause of the Constitution to justify its exemption from local tax.
The Supreme Court reversed and set aside the decision of the trial court. Petitioners correctly relied on
the provisions of Sections 137 and 193 of the LGC to support their position that private respondent's
exemption has been withdrawn. The explicit language of Section 137 which authorizes the province to
impose franchise tax "notwithstanding any exemption granted by any law or other special law" is all
encompassing and clear. The franchise tax is imposable despite any exemption enjoyed under special
laws. Moreover, Section 193 buttresses the withdrawal of extant tax exemption privileges. Thus, in the
absence of any provision of the Code to the contrary, and which the Court found no other provision in
point, private respondent's tax exemption privileges under existing law was clearly intended to be
withdrawn. Reading together Sections 137 and 193 of the LGC, the Court concluded that under the
LGC, the local government unit may now impose a local tax at a rate not exceeding 50% of 1% of the
gross annual receipts for the preceding calendar year based on the incoming receipts realized within its
territorial jurisdiction.
Private respondent's invocation of the non-impairment clause of the Constitution was unavailing. Under
the 1935, the 1973 and the 1987 Constitutions, no franchise or right shall be granted except under the
condition that it shall be subject to amendment, alteration or repeal by the National Assembly when the
public interest so requires. With or without the reservation clause, franchises are subject to alterations
through a reasonable exercise of the police power. They are also subject to alteration by the power to
tax, which like police power cannot be contracted away.
SYLLABUS
1.
POLITICAL LAW; LOCAL GOVERNMENT; LOCAL GOVERNMENT CODE; SECTION
534(f) THEREOF; PARTAKES OF THE NATURE OF GENERAL REPEALING CLAUSE.
Section 534(f), the repealing clause of the LGC, provides that all general and special laws, acts, city
charters, decrees, executive orders, proclamations and administrative regulations or parts thereof which
are inconsistent with any of the provisions of the Code are hereby repealed or modified accordingly.
This clause partakes of the nature of a general repealing clause. It is certainly not an express repealing
clause because it fails to designate the specific act or acts identified by number or title, that are
intended to be repealed. TDESCa
2.
ID.; ID.; ID.; SECTIONS 137 AND 193 THEREOF; TAX EXEMPTION PRIVILEGES
CONSIDERED WITHDRAWN UPON EFFECTIVITY THEREOF; EXCEPTIONS; TAX

EXEMPTIONS ENJOYED BY MERALCO CONSIDERED WITHDRAWN; CASE AT BAR. It is

our view that petitioners correctly rely on the provisions of Sections 137 and 193 of the LGC to support
their position that MERALCO's tax exemption has been withdrawn. The explicit language of Section
137 which authorizes the province to impose franchise tax "notwithstanding any exemption granted by
any law or other special law" is well-encompassing and clear. The franchise tax is imposable despite
any exemption enjoyed under special laws. Section 193 buttresses the withdrawal of extant tax
exemption privileges. By stating that unless otherwise provided in this Code, tax exemptions or
incentives granted to or presently enjoyed by all persons whether natural or juridical, including
government-owned or controlled corporations except 1) local water districts, 2) cooperatives duly
registered under R.A. 6938, 3) non-stock and non-profit hospitals and educational institutions, are
withdrawn upon the effectivity of this code, the obvious import is to limit the exemptions to the three
enumerated entities. It is a basic precept of statutory construction that the express mention of one
person, thing, act or consequence excludes all others as expressed in the familiar maxim expressio
unius est exclusio alterius. In the absence of any provision of the Code to the contrary, and we find no
other provision in point, any existing tax exemption or incentive enjoyed by MERALCO under existing
law was clearly intended to be withdrawn.
3.
ID.; ID.; ID.; ID.; LOCAL GOVERNMENT UNIT ALLOWED TO IMPOSE A LOCAL TAX
AT A RATE NOT EXCEEDING 50% OF 1% OF THE GROSS ANNUAL RECEIPTS. Reading
together Sections 137 and 193 of the LGC, we conclude that under the LGC the local government unit
may now impose a local tax at a rate not exceeding 50% of 1% of the gross annual receipts for the
preceding calendar year based on the incoming receipts realized within its territorial jurisdiction. The
legislative purpose to withdraw tax privileges enjoyed under existing law or charter is clearly
manifested by the language used in Sections 137 and 193 categorically withdrawing such exemption
subject only to the exceptions enumerated. Since it would be not only tedious and impractical to
attempt to enumerate all the existing statutes providing for special tax exemptions or privileges, the
LGC provided for an express, albeit general, withdrawal of such exemptions or privileges. No more
unequivocal language could have been used.
4.
ID.; ID.; ID.; ID.; PHRASE "SHALL BE IN LIEU OF ALL TAXES" FOUND IN SPECIAL
FRANCHISES HAVE TO GIVE WAY TO THE PEREMPTORY LANGUAGE THEREOF
WITHDRAWING TAX EXEMPTION PRIVILEGES. It is true that the phrase "in lieu of all taxes"
found in special franchises has been held in several cases to exempt the franchise holder from payment
of tax on its corporate franchise imposed by the Internal Revenue Code, as the charter is in the nature
of a private contract and the exemption is part of the inducement for the acceptance of the franchise,
and that the imposition of another franchise tax by the local authority would constitute an impairment
of contract between the government and the corporation. But these "magic words" contained in the
phrase "shall be in lieu of all taxes" have to give way to the peremptory language of the LGC
specifically providing for the withdrawal of such exemption privileges. Accordingly in Mactan Cebu
International Airport Authority vs. Marcos, this Court held that Section 193 of the LGC prescribes the
general rule, viz., the tax exemptions or incentives granted to or presently enjoyed by natural or
juridical persons are withdrawn upon the effectivity of the LGC except with respect to those entities
expressly enumerated. In the same vein, We must hold that the express withdrawal upon effectivity of
the LGC of all exemptions only as provided therein, can no longer be invoked by Meralco to disclaim
liability for the local tax.
5.
CONSTITUTIONAL LAW; BILL OF RIGHTS; NON-IMPAIRMENT CLAUSE; CANNOT
BE INVOKED TO UPHOLD MERALCO'S EXEMPTION FROM LOCAL TAX; FRANCHISES
SUBJECT TO ALTERATION THROUGH REASONABLE EXERCISE OF THE POLICE POWER
AND THE POWER TO TAX. Private respondent's invocation of the non-impairment clause of the
Constitution is accordingly unavailing. The LGC was enacted in pursuance of the constitutional policy
to ensure autonomy to local governments and to enable them to attain fullest development as self-

reliant communities. There is further basis for the conclusion that the non-impairment of contract
clause cannot be invoked to uphold Meralco's exemption from the local tax. Escudero Electric Co. was
originally given the legislative franchise under Act 3648 to operate an electric light and power system
in the City of San Pablo and nearby municipalities. The term of the franchise under Act No. 3648 is a
period of fifty years from the Act's approval in 1929. The said law provided that the franchise is
granted upon the condition that it shall be subject to amendment, or repeal by the Congress of the
United States. Under the 1935, the 1973 and the 1987 Constitutions, no franchise or right shall be
granted except under the condition that it shall be subject to amendment, alteration or repeal by the
National Assembly when the public interest so requires. With or without the reservation clause,
franchises are subject to alterations through a reasonable exercise of the police power; they are also
subject to alteration by the power to tax, which like police power cannot be contracted away. TaDAIS
6.
STATUTORY CONSTRUCTION; IN INTERPRETING STATUTORY PROVISIONS ON
MUNICIPAL FISCAL POWERS, DOUBTS SHOULD BE RESOLVED IN FAVOR OF MUNICIPAL
CORPORATIONS. The power to tax is primarily vested in Congress. However, in our jurisdiction,
it may be exercised by local legislative bodies, no longer merely by virtue of a valid delegation as
before, but pursuant to direct authority conferred by Section 5, Article X of the Constitution. The
important legal effect of Section 5 is that henceforth, in interpreting statutory provisions on municipal
fiscal powers, doubts will have to be resolved in favor of municipal corporations.
7.
ID.; GENERAL LAW; CANNOT BE CONSTRUED TO HAVE REPEALED A SPECIAL
LAW BY MERE IMPLICATION UNLESS INTENT TO REPEAL IS MANIFEST. We are mindful
of the established rule that repeals by implication are not favored as laws are presumed to be passed
with deliberation and full knowledge of all laws existing on the subject. A general law cannot be
construed to have repealed a special law by mere implication unless the intent to repeal or alter is
manifest and it must be convincingly demonstrated that the two laws are so clearly repugnant and
patently inconsistent that they cannot co-exist. ITADaE
DECISION
GONZAGA-REYES, J p:
This is a petition under Rule 45 of the Rules of Court to review on a pure question of law the decision
of the Regional Trial Court (RTC) of San Pablo City, Branch 29 in Civil Case No. SP-4459(96),
entitled "Manila Electric Company vs. City of San Pablo, Laguna, City Treasurer of San Pablo Laguna,
and the Sangguniang Panglunsod of San Pablo City, Laguna." The RTC declared the imposition of a
franchise tax under Section 2.09, Article D of Ordinance No. 56 otherwise known as the Revenue Code
of the City of San Pablo as ineffective and void insofar as the respondent MERALCO is concerned for
being violative of Act No. 3648, Republic Act No. 2340 and PD 551. The RTC also granted
MERALCO'S claim for refund of franchise taxes paid under protest.
The following antecedent facts are undisputed:
Act No. 3648 granted the Escudero Electric Service Company a legislative franchise to maintain and
operate an electric light and power system in the City of San Pablo and nearby municipalities. Section
10 of Act No. 3648 provides:
". . . In consideration of the franchise and rights hereby granted, the grantee shall pay unto the
municipal treasury of each municipality in which it is supplying electric current to the public under this
franchise, a tax equal to two percentum of the gross earnings from electric current sold or supplied
under this franchise in each said municipality. Said tax shall be due and payable quarterly and shall be
in lieu of any and all taxes of any kind, nature or description levied, established or collected by any
authority whatsoever, municipal, provincial or insular, now or in the future, on its poles, wires,
insulators, switches, transformers, and structures, installations, conductors, and accessories placed in
and over and under all public property, including public streets and highways, provincial roads, bridges
and public squares, and on its franchise, rights, privileges, receipts, revenues and profits from which
taxes the grantee is hereby expressly exempted."

Escudero's franchise was transferred to the plaintiff (herein respondent) MERALCO under Republic
Act No. 2340.
Presidential Decree No. 551 was enacted on September 11, 1974. Section 1 thereof provides the
following:
"SECTION 1. Any provision of law or local ordinance to the contrary notwithstanding, the franchise
tax payable by all grantees of franchise to generate, distribute and sell electric current for light, heat
and power shall be two percent (2%) of their gross receipts received from the sale of electric current
and from transactions incident to the generation, distribution and sale of electric current.
Such franchise tax shall be payable to the Commissioner of Internal Revenue or his duly authorized
representative on or before the twentieth day of the month following the end of each calendar quarter or
month as may be provided in the respective franchise or pertinent municipal regulation and shall, any
provision of the Local Tax Code or any other law to the contrary notwithstanding, be in lieu of all taxes
and assessments of whatever nature imposed by any national or local authority on earnings, receipts,
income and privilege of generation, distribution and sale of electric current."
Republic Act No. 7160, otherwise known as the "Local Government Code of 1991" (hereinafter
referred to as LGC) took effect on January 1, 1992. The said Code authorizes the province/city to
impose a tax on business enjoying a franchise at a rate not exceeding fifty percent (50%) of one percent
(1%) of the gross annual receipts for the preceding calendar year realized within its jurisdiction.
On October 5, 1992, the Sangguniang Panglunsod of San Pablo City enacted Ordinance No. 56,
otherwise known as the Revenue Code of the City of San Pablo. The said Ordinance took effect on
October 30, 1992. 1
Section 2.09, Article D of said Ordinance provides:
"SECTION 2.09.
Franchise Tax. There is hereby imposed a tax on business enjoying a
franchise, at a rate of fifty percent (50%) of one percent (1%) of the gross annual receipts, which shall
include both cash sales and sales on account realized during the preceding calendar year within the
city."
Pursuant to the above-quoted Section 2.09, the petitioner City Treasurer sent to private respondent a
letter demanding payment of the aforesaid franchise tax. From 1994 to 1996, private respondent paid
"under protest" a total amount of P1,857,711.67. 2
The private respondent subsequently filed this action before the Regional Trial Court to declare
Ordinance No. 56 null and void insofar as it imposes the franchise tax upon private respondent
MERALCO 3 and to claim for a refund of the taxes paid.
The Court ruled in favor of MERALCO and upheld its argument that the LGC did not expressly or
impliedly repeal the tax exemption/incentive enjoyed by it under its charter. The dispositive portion of
the decision reads:
"WHEREFORE, the imposition of a franchise tax under Sec. 2.09, Article D of Ordinance No. 56
otherwise known as the Revenue Code of the City of San Pablo, is declared ineffective and null and
void insofar as the plaintiff MERALCO is concerned for being violative of Republic Act No. 2340, PD
551, and Republic Act No. 7160 and the defendants are ordered to refund to the plaintiff the amount of
ONE MILLION EIGHT HUNDRED FIFTY SEVEN THOUSAND SEVEN HUNDRED ELEVEN &
67/100 (P1,857,711.67) and such other amounts as may have been paid by the plaintiff under said
Revenue Ordinance No. 56 after the filing of the complaint. 4
SO ORDERED."
Its motion for reconsideration having been denied by the trial court, 5 the petitioners filed the instant
petition with this Court raising pure questions of law based on the following grounds:
I.
RESPONDENT JUDGE GRAVELY ERRED IN HOLDING THAT ACT NO. 3648,
REPUBLIC ACT NO. 2340 AND PRESIDENTIAL DECREE NO. 551, AS AMENDED, INSOFAR
AS THEY GRANT TAX INCENTIVES, PRIVILEGES AND IMMUNITIES TO PRIVATE
RESPONDENT, HAVE NOT BEEN REPEALED BY REPUBLIC ACT NO. 7160.

II.
RESPONDENT JUDGE GRAVELY ERRED IN RULING THAT SECTION 193 OF
REPUBLIC ACT NO. 7160 HAS NOT WITHDRAWN THE TAX INCENTIVES, PRIVILEGES AND
IMMUNITIES BEING ENJOYED BY THE PRIVATE RESPONDENT UNDER ACT NO. 3648.
REPUBLIC ACT NO. 2340 AND PRESIDENTIAL DECREE NO. 551, AS AMENDED.
III.
RESPONDENT JUDGE GRAVELY ERRED IN HOLDING THAT THE FRANCHISE TAX IN
QUESTION CONSTITUTES AN IMPAIRMENT OF THE CONTRACT BETWEEN THE
GOVERNMENT AND THE PRIVATE RESPONDENT.
Petitioners' position is that RA 7160 (LGC) expressly repealed Act No. 3648, Republic Act No. 2340
and Presidential Decree 551 and that pursuant to the provisions of Sections 137 and 193 of the LGC,
the province or city now has the power to impose a franchise tax on a business enjoying a franchise.
Petitioners rely on the ruling in the case of Mactan Cebu International Airport Authority vs. Marcos 6
where the Supreme Court held that the exemption from real property tax granted to Mactan Cebu
International Airport Authority under its charter has been withdrawn upon the effectivity of the LGC.
In addition, the petitioners cite in their Memorandum dated December 8, 1997 an administrative
interpretation made by the Bureau of Local Government Finance of the Department of Finance in its
3rd indorsement dated February 15, 1994 to the effect that the earlier ruling of the Department of
Finance that holders of franchise which contain the phrase "in lieu of all taxes" proviso are exempt
from the payment of any kind of tax is no longer applicable upon the effectivity of the LGC in view of
the withdrawal of tax exemption privileges as provided in Sections 193 and 234 thereof.
We resolve to reverse the court a quo.
The pivotal issue is whether the City of San Pablo may impose a local franchise tax pursuant to the
LGC upon the Manila Electric Company which pays a tax equal to two percent of its gross receipts in
lieu of all taxes and assessments of whatever nature imposed by any national or local authority on
savings or income.
It is necessary to reproduce the pertinent provisions of the LGC.
SECTION 137.
Franchise Tax. Notwithstanding any exemption granted by any law or other
special law, the province may impose a tax on business enjoying a franchise, at a rate not exceeding
fifty percent 50% of one percent 1% of the gross annual receipts for the preceding calendar year based
on the incoming receipts, or realized, within its territorial jurisdiction. . . ."
SECTION 151.
Scope of Taxing Powers. Except as otherwise provided in this Code, the city,
may levy the taxes, fees, and charges which the province or municipality may impose: Provided,
however, That the taxes, fees and charges levied and collected by highly urbanized and independent
component cities shall accrue to them and distributed in accordance with the provisions of this Code.
The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or
municipality by not more than fifty percent (50%) except the rates of professional and amusement
taxes.
SECTION 193.
Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this
Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or
juridical, including government-owned or controlled corporations, except local water districts,
cooperatives duly registered under R.A. 6938, non-stock and non-profit hospitals and educational
institutions, are hereby withdrawn upon the effectivity of this Code.
SECTION 534(f).
Repealing Clause. All general and special laws, acts, city charters, decrees,
executive orders, proclamations and administrative regulations, or part or parts thereof which are
inconsistent with any of the provisions of this code are hereby repealed or modified accordingly.
Section 534(f), the repealing clause of the LGC, provides that all general and special laws, acts, city
charters, decrees, executive orders, proclamations and administrative regulations or parts thereof which
are inconsistent with any of the provisions of the Code are hereby repealed or modified accordingly.
This clause partakes of the nature of a general repealing clause 7. It is certainly not an express
repealing clause because it fails to designate the specific act or acts identified by number or title, that

are intended to be repealed. 8

Was there an implied repeal by Republic Act No. 7160 of the MERALCO franchise insofar as the latter
imposes a 2% tax "in lieu of all taxes and assessments of whatever nature"?
We rule affirmatively.
We are mindful of the established rule that repeals by implication are not favored as laws are presumed
to be passed with deliberation and full knowledge of all laws existing on the subject. A general law
cannot be construed to have repealed a special law by mere implication unless the intent to repeal or
alter is manifest 9 and it must be convincingly demonstrated that the two laws are so clearly repugnant
and patently inconsistent that they cannot co-exist. 10
It is our view that petitioners correctly rely on the provisions of Sections 137 and 193 of the LGC to
support their position that MERALCO's tax exemption has been withdrawn. The explicit language of
Section 137 which authorizes the province to impose franchise tax "notwithstanding any exemption
granted by any law or other special law" is all-encompassing and clear. The franchise tax is imposable
despite any exemption enjoyed under special laws.
Section 193 buttresses the withdrawal of extant tax exemption privileges. By stating that unless
otherwise provided in this Code, tax exemptions or incentives granted to or presently enjoyed by all
persons whether natural or juridical, including government-owned or controlled corporations except 1)
local water districts, 2) cooperatives duly registered under R.A. 6938, (3) non-stock and non-profit
hospitals and educational institutions, are withdrawn upon the effectivity of this code, the obvious
import is to limit the exemptions to the three enumerated entities. It is a basic precept of statutory
construction that the express mention of one person, thing, act, or consequence excludes all others as
expressed in the familiar maxim expressio unius est exclusio alterius. 11 In the absence of any
provision of the Code to the contrary, and we find no other provision in point, any existing tax
exemption or incentive enjoyed by MERALCO under existing law was clearly intended to be
withdrawn.
Reading together Sections 137 and 193 of the LGC, we conclude that under the LGC the local
government unit may now impose a local tax at a rate not exceeding 50% of 1% of the gross annual
receipts for the preceding calendar year based on the incoming receipts realized within its territorial
jurisdiction. The legislative purpose to withdraw tax privileges enjoyed under existing law or charter is
clearly manifested by the language used in Sections 137 and 193 categorically withdrawing such
exemption subject only to the exceptions enumerated. Since it would be not only tedious and
impractical to attempt to enumerate all the existing statutes providing for special tax exemptions or
privileges, the LGC provided for an express, albeit general, withdrawal of such exemptions or
privileges. No more unequivocal language could have been used.
It is true that the phrase "in lieu of all taxes" found in special franchises has been held in several cases
to exempt the franchise holder from payment of tax on its corporate franchise imposed by the Internal
Revenue Code, as the charter is in the nature of a private contract and the exemption is part of the
inducement for the acceptance of the franchise, and that the imposition of another franchise tax by the
local authority would constitute an impairment of contract between the government and the
corporation. 12 But these "magic words" contained in the phrase "shall be in lieu of all taxes" 13 have
to give way to the peremptory language of the LGC specifically providing for the withdrawal of such
exemption privileges.
Accordingly in Mactan Cebu International Airport Authority vs. Marcos, 14 this Court held that Section
193 of the LGC prescribes the general rule, viz., the tax exemptions or incentives granted to or
presently enjoyed by natural or juridical persons are withdrawn upon the effectivity of the LGC except
with respect to those entities expressly enumerated. In the same vein, We must hold that the express
withdrawal upon effectivity of the LGC of all exemptions except only as provided therein, can no
longer be invoked by Meralco to disclaim liability for the local tax.
Private respondents further argue that the "in lieu of" provision contained in PD 551, Act No. 3648 and

RA 2340 does not partake of the nature of an exemption, but is a "commutative tax". This contention
was raised but was not upheld in Cagayan Electric Power and Light Co. Inc. vs. Commissioner of
Internal Revenue 15 wherein the Supreme Court stated:
". . . Congress could impair petitioner's legislative franchise by making it liable for income tax from
which heretofore it was exempted by virtue of the exemption provided for in section 3 of its
franchise . . .
. . . Republic Act No. 5431, in amending section 24 of the Tax Code by subjecting to income tax all
corporate taxpayers not expressly exempted therein and in section 27 of the Code, had the effect of
withdrawing petitioner's exemption from income tax . . .".
Private respondent's invocation of the non-impairment clause of the Constitution is accordingly
unavailing. The LGC was enacted in pursuance of the constitutional policy to ensure autonomy to local
governments 16 and to enable them to attain fullest development as self-reliant communities. 17 Thus
in Mactan Cebu International Airport Authority vs. Marcos, supra, this Court pointed out, in upholding
the withdrawal of the real estate tax exemption previously enjoyed by the Mactan Cebu International
Airport Authority, as follows:
"Note that as reproduced in Section 234(a) the phrase "and any government-owned or controlled
corporation so exempt by its charter" was excluded. The justification for this restricted exemption in
Section 234(a) seems obvious: to limit further tax exemption privileges, especially in light of the
general provision on withdrawal of tax exemption privileges in Section 193 and the special provision
on withdrawal of exemption from payment of real property taxes in the last paragraph of Section 234.
These policy considerations are consistent with the State policy to ensure autonomy to local
governments and the objective of the LGC that they enjoy genuine and meaningful local autonomy to
enable them to attain their fullest development as self-reliant communities and make them effective
partners in the attainment of national goals. The power to tax is the most effective instrument to raise
needed revenues to finance and support myriad activities of local government units for the delivery of
basic services essential to the promotion of the general welfare and the enhancement of peace,
progress, and prosperity of the people. It may also be relevant to recall that the original reasons for the
withdrawal of tax exemption privileges granted to government-owned or controlled corporations and
all other units of government were that such privilege resulted in serious tax base erosion and
distortions in the tax treatment of similarly situated enterprises, and there was a need for these entities
to share in the requirements of development, fiscal or otherwise, by paying the taxes and other charges
due from them." 18
The Court therein concluded that:
"nothing can prevent Congress from decreeing that even instrumentalities or agencies of the
Government performing governmental functions may be subject to tax. Where it is done precisely to
fulfill a constitutional mandate and national policy, no one can doubt its wisdom" 19
The power to tax is primarily vested in Congress. However, in our jurisdiction, it may be exercised by
local legislative bodies, no longer merely by virtue of a valid delegation as before, but pursuant to
direct authority conferred by Section 5, Article X of the Constitution. 20 Thus Article X, Section 5 of
the Constitution reads:
"SECTION 5. Each Local Government unit shall have the power to create its own sources of revenue
and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may
provide, consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue
exclusively to the Local Governments."
The important legal effect of Section 5 is that henceforth, in interpreting statutory provisions on
municipal fiscal powers, doubts will have to resolved in favor of municipal corporations. 21 cdasia
There is further basis for the conclusion that the non-impairment of contract clause cannot be invoked
to uphold Meralco's exemption from the local tax. Escudero Electric Co. was originally given the
legislative franchise under Act 3648 to operate an electric light and power system in the City of San

Pablo and nearby municipalities. The term of the franchise under Act No. 3648 is a period of fifty years
from the Act's approval in 1929. The said law provided that the franchise is granted upon the condition
that it shall be subject to amendment, or repeal by the Congress of the United States. 22 Under the
1935, 23 the 1973 24 and the 1987 25 Constitutions, no franchise or right shall be granted except under
the condition that it shall be subject to amendment, alteration or repeal by the National Assembly when
the public interest so requires. With or without the reservation clause, franchises are subject to
alterations through a reasonable exercise of the police power; they are also subject to alteration by the
power to tax, which like police power cannot be contracted away. 26
Finally, while the matter is not of controlling significance, the Court notes that whereas the original
Escudero franchise exempted the franchise holder from all taxes levied or collected "now or in the
future" 27 this phrase is noticeably omitted in the counterpart provision of P.D. 551; that said omission
is intended not to foreclose future taxes may reasonably be deduced by statutory construction.
WHEREFORE, the instant petition is GRANTED. The decision of the Regional Trial Court of San
Pablo City, appealed from is hereby reversed and set aside, and the complaint of MERALCO is hereby
DISMISSED.
No pronouncement as to costs. cdt
SO ORDERED.
Romero, Vitug, Panganiban and Purisima, JJ., concur.
Footnotes
1.
Petition for Review, p. 3.
2.
Ibid., p. 4 and Respondent's Memorandum, p. 3.
3.
Petition for Review, p. 4 and Respondent's Memorandum, p. 4.
4.
Ibid.
5.
Order of January 10, 1996, p. 41, Rollo.
6.
261 SCRA 667, [1996].
7.
Ty vs. Trampe, 250 SCRA 500 at 512 [1995].
8.
Mecano vs. Commission on Audit, 216 SCRA 500 at 504 [1992]; Berces, Sr. vs. Guingona, Jr.,
241 SCRA 539 at 544 [1995].
9.
Laguna Lake Development Authority vs. Court of Appeals, 251 SCRA 42 at 56 [1995].
10.
Villegas vs. Subido, 41 SCRA 190 at 197 [1971], Mecano vs. Commission on Audit, Supra.
11.
Commissioner of Customs vs. Court of Tax Appeals, 224 SCRA 665 at pp. 669-670, [1993].
12.
Cotabato Light and Power Co. vs. City of Cotabato, 32 SCRA 231; Commissioner of Internal
Revenue vs. Lingayen Gulf Electric Power Co., 164 SCRA 27 at 34 [1988]; Province of Misamis
Oriental vs. Cagayan Electric Power and Light Co., Inc., 181 SCRA 38 at 43 [1990].
13.
Province of Misamis Oriental vs. Cagayan Electric Power and Light Co., Inc., Supra, at p. 42.
14.
Supra.
15.
138 SCRA 629 at p. 631.
16.
Section 25, Art. II and 2, Art. X Constitution.
17.
2(a) Local Government Code of 1991.
18.
Mactan Cebu International Airport Authority vs. Marcos, p. 690.
19.
Ibid., p. 692.
20.
Isagani A. Cruz, Constitutional Law, (1991) at p. 84.
21.
Bernas, The Constitution of the Philippines, 1st ed. p. 381.
22.
Act No. 3648, 12.
23.
Article XIV, 8.
24.
Article XIV, 5.
25.
Article XII, 11.
26.
Bernas, Supra, p. 341.
27.
10, Act No. 3648.

THIRD DIVISION
[G.R. No. 126232. November 27, 1998.]
THE PROVINCE OF BULACAN, ROBERTO M. PAGDANGANAN, FLORENCE CHAVES, and
MANUEL DJ SIAYNGCO in their capacity as PROVINCIAL GOVERNOR, PROVINCIAL
TREASURER, PROVINCIAL LEGAL ADVISER, respectively, petitioners, vs. THE HONORABLE
COURT OF APPEALS (FORMER SPECIAL 12TH DIVISION), REPUBLIC CEMENT
CORPORATION, respondents.
SYLLABUS
1.
REMEDIAL LAW; CIVIL PROCEDURE; APPEAL BY CERTIORARI UNDER RULE 45;
CONSIDERED PROPERLY FILED IN CASE AT BAR; EXISTENCE AND AVAILABILITY OF THE
RIGHT OF APPEAL ARE ANTITHETICAL TO AVAILMENT OF PETITION FOR CERTIORARI
UNDER RULE 65. Petitioners' argument is misleading. While it is true that the remedy against a
final order is an appeal, and not a petition for certiorari, the petition referred to is a petition for
certiorari under Rule 65. As stated in Martinez, the party aggrieved does not have the option to
substitute the special civil action of certiorari under Rule 65 for the remedy of appeal. The existence
and availability of the right of appeal are antithetical to the availment of the special civil action of
certiorari. Republic Cement did not, however, file a petition for certiorari under Rule 65, but an appeal
by certiorari under Rule 45. Even law students know that certiorari under Rule 45 is a mode of appeal,
an appeal from the Regional Trial Court being taken in either of two ways (a) by writ of error
(involving questions of fact and law) and (b) by certiorari (limited only to issues of law), with an
appeal by certiorari being brought to the Supreme Court, there being no provision of law for taking
appeals by certiorari to the Court of Appeals. It is thus clearly apparent that Republic Cement correctly
contested the trial court's order of dismissal by filing an appeal by certiorari under Rule 45. cdasia
2.
ID.; ID.; ID.; SUPREME COURT HAS THE OPTION TO REFER PETITION TO THE
COURT OF APPEALS WHEN FACTUAL ISSUES ARE ERRONEOUSLY RAISED. Petitioners
fault the Court for referring Republic Cement's petition to the Court of Appeals, claiming that the same
should have been dismissed pursuant to Circular 2-90. Petitioners conveniently overlook the other
provisions of Circular 2-90, specifically 4b) thereof, which provides: b) Raising factual issues in appeal
by certiorari. Although submission of issues of fact in an appeal by certiorari taken to the Supreme
Court from the regional trial court is ordinarily proscribed, the Supreme Court nonetheless retains the
option, in the exercise of its sound discretion and considering the attendant circumstances, either itself
to take cognizance of and decide such issues or to refer them to the Court of Appeals for determination.
As can be clearly adduced from the foregoing, when an appeal by certiorari under Rule 45 erroneously
raises factual issues, the Court has the option to refer the petition to the Court of Appeals. The exercise
by the Court of this option may not now be questioned by petitioners. aEAcHI
3.
ID.; ID.; ID.; TRIAL COURT'S ORDER IN CASE AT BAR NEVER BECAME FINAL AND
EXECUTORY WHEN PETITION WAS FILED BY PRIVATE RESPONDENT. As the trial court's
order was properly appealed by Republic Cement, the trial court's May 13, 1994 order never became
final and executory, rendering petitioner's third assignment of error moot and academic.
4.
ID.; COURTS; JURISDICTION; PARTY WHO INVOKES THE JURISDICTION OF THE
COURT IS ESTOPPED FROM ASSAILING THE SAME AFTER FAILING TO OBTAIN
AFFIRMATIVE RELIEF. Petitioners are barred by the doctrine of estoppel from contesting the
authority of the Court of Appeals to decide the instant case, as this Court has consistently held that "(a)
party cannot invoke the jurisdiction of a court to secure affirmative relief against his opponent and after
obtaining or failing to obtain such relief, repudiate or question that same jurisdiction." The Supreme
Court frowns upon the undesirable practice of a party submitting his case for decision and then
accepting the judgment, only if favorable, and attacking it for lack of jurisdiction when adverse.
5.
LEGAL ETHICS; ATTORNEYS; NO SPECIAL AUTHORITY REQUIRED TO BIND
CLIENT ON MATTERS OF ORDINARY JUDICIAL PROCEDURE. It is a well-settled rule that

all proceedings in court to enforce a remedy, to bring a claim, demand, cause of action or subject matter
of a suit to hearing, trial, determination, judgment and execution are within the exclusive control of the
attorney. With respect to such matters of ordinary judicial procedure, the attorney needs no special
authority to bind his client. Such questions as what action or pleading to file, where and when to file it,
what are its formal requirements, what should be the theory of the case, what defenses to raise, how
may the claim or defense be proved, when to rest the case, as well as those affecting the competency of
a witness, the sufficiency, relevancy, materiality or immateriality of certain evidence and the burden of
proof are within the authority of the attorney to decide. Whatever decision an attorney makes on any of
these procedural questions, even if it adversely affects a client's case, will generally bind a client.
TIDcEH
6.
POLITICAL LAW; PUBLIC CORPORATIONS; LOCAL GOVERNMENT; AGREEMENT
AND MODUS VIVENDI LIMITING THE ISSUES FOR RESOLUTION OF THE COURT SIGNED
BY COUNSEL OF THE PROVINCE IS BINDING EVEN IF THE SANGGUNIAN HAD NOT
AUTHORIZED THE SAME. While it is true that the Provincial Governor can enter into contract
and obligate the province only upon authority of the sangguniang panlalawigan, the same is
inapplicable to the case at bar. The agreement and modus vivendi may have been signed by petitioner
Roberto Pagdanganan, as Governor of the Province of Bulacan, without authorization from the
sangguniang panlalawigan, but it was also signed by Manuel Siayngco, the Provincial Legal Officer, in
his capacity as such, and as counsel of petitioners. The agreement and modus vivendi signed by
petitioners' counsel is binding upon petitioners, even if the Sanggunian had not authorized the same,
limitation of issues being a procedural question falling within the exclusive authority of the attorney to
decide.
7.
TAXATION; LOCAL TAXATION; PROVINCE NOT AUTHORIZED TO LEVY EXCISE
TAX ON ARTICLES ALREADY TAXED BY THE NIRC. The Court of Appeals erred in ruling
that a province can impose only the taxes specifically mentioned under the Local Government Code. As
correctly pointed out by petitioners, Section 186 allows a province to levy taxes other than those
specifically enumerated under the Code, subject to the conditions specified therein. This finding,
nevertheless, affords cold comfort to petitioners as they are still prohibited from imposing taxes on
stones, sand, gravel, earth and other quarry resources extracted from private lands. The tax imposed by
the Province of Bulacan is an excise tax, being a tax upon the performance, carrying on, or exercise of
an activity. The Local Government Code provides: Section 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: . . . (h) Excise taxes on articles enumerated under the National Internal Revenue Code, as
amended, and taxes, fees or charges on petroleum products; . . . A province may not, levy excise taxes
on articles already taxed by the National Internal Revenue Code.
8.
ID.; ID.; PROVINCE NOT AUTHORIZED TO IMPOSE TAX ON STONES, SAND,
GRAVEL, EARTH AND OTHER QUARRY RESOURCES EXTRACTED FROM PRIVATE LAND;
ASSESSMENT OF TAX IN CASE AT BAR, CONSIDERED ULTRA VIRES. Section 151 of the
National Internal Revenue Code levies a tax on all quarry resources, regardless of origin, whether
extracted from public or private land. Thus, a province may not ordinarily impose taxes on stones,
sand, gravel, earth and other quarry resources, as the same are already taxed under the National Internal
Revenue Code. The province can, however, impose a tax on stones, sand, gravel, earth and other quarry
resources extracted from public land because it is expressly empowered to do so under the Local
Government Code. As to stones, sand, gravel, earth and other quarry resources extracted from private
land, however, it may not do so, because of the limitation provided by Section 133 of the Code in
relation to Section 151 of the National Internal Revenue Code. Given the above disquisition, petitioners
cannot claim that the appellate court unjustly deprived them of the power to create their sources of
revenue, their assessment of taxes against Republic Cement being ultra vires traversing as it does the

limitations set by the Local Government Code. IDCcEa

9.
ID.; ID.; PROVINCIAL ORDINANCE NO. 3 OF BULACAN PROVINCE; COURT
QUESTIONING THE ASSESSMENT OF TAX ON THE BASIS OF SAID ORDINANCE, NOT A
COLLATERAL ATTACK ON THE ORDINANCE ITSELF. Contrary to petitioners' claim, the
legality of the ordinance was never questioned by the Court of Appeals. Rather, what the appellate
court questioned was petitioners' assessment of taxes on Republic Cement on the basis of Provincial
Ordinance No. 3, not the ordinance itself.
10.
ID.; ID.; ID.; REGALIAN DOCTRINE MAY NOT BE INVOKED BY THE PROVINCE TO
EXTEND COVERAGE THEREOF; TAX STATUTES MUST BE CONSTRUED STRICTISSIMI
JURIS AGAINST THE GOVERNMENT. Section 21 of Provincial Ordinance No. 3 is practically
only a reproduction of Section 138 of the Local Government Code. A cursory reading of both would
show that both refer to ordinary sand, stones, gravel, earth and other quarry resources extracted from
public lands. Even if we disregard the limitation set by Section 133 of the Local Government Code,
petitioners may not impose taxes on stones, sand, gravel, earth and other quarry resources extracted
from private lands on the basis of Section 21 of Provincial Ordinance No. 3 as the latter clearly applies
only to quarry resources extracted from public lands. Petitioners may not invoke the Regalian doctrine
to extend the coverage of their ordinance to quarry resources extracted from private lands, for taxes,
being burdens, are not to be presumed beyond what the applicable statute expressly and clearly
declares, tax statutes being construed strictissimi juris against the government. SDAaTC
DECISION
ROMERO, J p:
Before us is a petition for certiorari seeking the reversal of the decision of the Court of Appeals dated
September 27, 1995 declaring petitioner without authority to levy taxes on stones, sand, gravel, earth
and other quarry resources extracted from private lands, as well as the August 26, 1996 resolution of
the appellate court denying its motion for reconsideration.
The facts are as follows: cdll
On June 26, 1992, the Sangguniang Panlalawigan of Bulacan passed Provincial Ordinance No. 3,
known as "An Ordinance Enacting the Revenue Code of the Bulacan Province," which was to take
effect on July 1, 1992. Section 21 of the ordinance provides as follows:
Section 21. Imposition of Tax. There is hereby levied and collected a tax of 10% of the fair
market value in the locality per cubic meter of ordinary stones, sand, gravel, earth and other quarry
resources, such, but not limited to marble, granite, volcanic cinders, basalt, tuff and rock phosphate,
extracted from public lands or from beds of seas, lakes, rivers, streams, creeks and other public waters
within its territorial jurisdiction. (Emphasis ours)
Pursuant thereto, the Provincial Treasurer of Bulacan, in a letter dated November 11, 1993, assessed
private respondent Republic Cement Corporation (hereafter Republic Cement) P2,524,692.13 for
extracting limestone, shale and silica from several parcels of private land in the province during the
third quarter of 1992 until the second quarter of 1993. Believing that the province, on the basis of
above-said ordinance, had no authority to impose taxes on quarry resources extracted from private
lands, Republic Cement formally contested the same on December 23, 1993. The same was, however,
denied by the Provincial Treasurer on January 17, 1994. Republic Cement, consequently filed a petition
for declaratory relief with the Regional Trial Court of Bulacan on February 14, 1994. The province
filed a motion to dismiss Republic Cement's petition, which was granted by the trial court on May 13,
1993, which ruled that declaratory relief was improper, allegedly because a breach of the ordinance had
been committed by Republic Cement.
On July 11, 1994, Republic Cement filed a petition for certiorari with the Supreme Court seeking to
reverse the trial court's dismissal of their petition. The Court, in a resolution dated July 27, 1994,
referred the same to the Court of Appeals, where it was docketed as CA G.R. SP No. 34915. The
appellate court required petitioners to file a comment, which they did on September 7, 1994.

In the interim, the Province of Bulacan issued a warrant of levy against Republic Cement, allegedly
because of its unpaid tax liabilities. Negotiations between Republic Cement and petitioners resulted in
an agreement and modus vivendi on December 12, 1994, whereby Republic Cement agreed to pay
under protest P1,262,346.00, 50% of the tax assessed by petitioner, in exchange for the lifting of the
warrant of levy. Furthermore, Republic Cement and petitioners agreed to limit the issue for resolution
by the Court of Appeals to the question as to whether or not the provincial government could impose
and/or assess taxes on quarry resources extracted by Republic Cement from private lands pursuant to
Section 21 of Provincial Ordinance No. 3. This agreement and modus vivendi were embodied in a joint
manifestation and motion signed by Governor Roberto Pagdanganan, on behalf of the Province of
Bulacan, by Provincial Treasurer Florence Chavez, and by Provincial Legal Officer Manuel Siayngco,
as petitioners' counsel and filed with the Court of Appeals on December 13, 1994. In a resolution dated
December 29, 1994, the appellate court approved the same and limited the issue to be resolved to the
question of whether or not the provincial government could impose taxes on stones, sand, gravel, earth
and other quarry resources extracted from private lands.
After due trial, the Court of Appeals, on September 27, 1995, rendered the following judgment:
WHEREFORE, judgment is hereby rendered declaring the Province of Bulacan under its Provincial
Ordinance No. 3 entitled "An Ordinance Enacting The Revenue Code of Bulacan Province" to be
without legal authority to impose and assess taxes on quarry resources extracted by RCC from private
lands, hence the interpretation of Respondent Treasurer of Chapter II, Article D, Section 21 of the
Ordinance, and the assessment made by the Province of Bulacan against RCC is null and void.
Petitioners' motion for reconsideration, as well as their supplemental motion for reconsideration, was
denied by the appellate court on August 26, 1996, hence this appeal.
Petitioners claim that the Court of Appeals erred in:
1.
NOT HAVING OUTRIGHTLY DISMISSED THE SUBJECT PETITION ON THE GROUND
THAT THE SAME IS NOT THE APPROPRIATE REMEDY FROM THE TRIAL COURT'S GRANT
OF THE PRIVATE RESPONDENTS' (HEREIN PETITIONER) MOTION TO DISMISS;
2.
NOT DISMISSING THE SUBJECT PETITION FOR BEING VIOLATIVE OF CIRCULAR 290 ISSUED BY THE SUPREME COURT;
3.
NOT DISMISSING THE PETITION FOR REVIEW ON THE GROUND THAT THE TRIAL
COURT'S ORDER OF MAY 13, 1994 HAD LONG BECOME FINAL AND EXECUTORY;
4.
GOING BEYOND THE PARAMETERS OF ITS APPELLATE JURISDICTION IN
RENDERING THE SEPTEMBER 27, 1995 DECISION;
5.
HOLDING THAT PRIVATE RESPONDENT (HEREIN PETITIONER) ARE ESTOPPED
FROM RAISING THE PROCEDURAL ISSUE IN THE MOTION FOR RECONSIDERATION;
6.
THE INTERPRETATION OF SECTION 134 OF THE LOCAL GOVERNMENT CODE AS
STATED IN THE SECOND TO THE LAST PARAGRAPH OF PAGE 5 OF ITS SEPTEMBER 27,
1995 DECISION;
7.
SUSTAINING THE ALLEGATIONS OF HEREIN RESPONDENT WHICH UNJUSTLY
DEPRIVED PETITIONER THE POWER TO CREATE ITS OWN SOURCES OF REVENUE;
8.
DECLARING THAT THE ASSESSMENT MADE BY THE PROVINCE OF BULACAN
AGAINST RCC AS NULL AND VOID WHICH IN EFFECT IS A COLLATERAL ATTACK ON
PROVINCIAL ORDINANCE NO. 3; AND
9.
FAILING TO CONSIDER THE REGALIAN DOCTRINE IN FAVOR OF THE LOCAL
GOVERNMENT.
The issues raised by petitioners are devoid of merit. The number and diversity of errors raised by
appellants impel us, however, to discuss the points raised seriatim.
In their first assignment of error, petitioners contend that instead of filing a petition for certiorari with
the Supreme Court, Republic Cement should have appealed from the order of the trial court dismissing
their petition. Citing Martinez vs. CA, 1 they allege that a motion to dismiss is a final order, the remedy

against which is not a petition for certiorari, but an appeal, regardless of the questions sought to be
raised on appeal, whether of fact or of law, whether involving jurisdiction or grave abuse of discretion
of the trial court.
Petitioners' argument is misleading. While it is true that the remedy against a final order is an appeal,
and not a petition for certiorari, the petition referred to is a petition for certiorari under Rule 65. As
stated in Martinez, the party aggrieved does not have the option to substitute the special civil action of
certiorari under Rule 65 for the remedy of appeal. The existence and availability of the right of appeal
are antithetical to the availment of the special civil action of certiorari.
Republic Cement did not, however, file a petition for certiorari under Rule 65, but an appeal by
certiorari under Rule 45. Even law students know that certiorari under Rule 45 is a mode of appeal, an
appeal from the Regional Trial Court being taken in either of two ways (a) by writ of error (involving
questions of fact and law) and (b) by certiorari (limited only to issues of law), with an appeal by
certiorari being brought to the Supreme Court, there being no provision of law for taking appeals by
certiorari to the Court of Appeals. 2 It is thus clearly apparent that Republic Cement correctly contested
the trial court's order of dismissal by filing an appeal by certiorari under Rule 45. In fact, petitioners, in
their second assignment of error, admit that a petition for review on certiorari under Rule 45 is
available to a party aggrieved by an order granting a motion to dismiss. 3 They claim, however, that
Republic Cement could not avail of the same allegedly because the latter raised issues of fact, which is
prohibited, Rule 45 providing that "(t)he petition shall raise only questions of law which must be
distinctly set forth." 4 In this respect, petitioners claim that Republic Cement's petition should have
been dismissed by the appellate court, Circular 2-90 providing:
4.
Erroneous Appeals. An appeal taken to either the Supreme Court or the Court of Appeals by
the wrong or inappropriate mode shall be dismissed. cdrep
xxx
xxx
xxx
d)
No transfer of appeals erroneously taken. No transfers of appeals erroneously taken to the
Supreme Court or to the Court of Appeals to whichever of these Tribunals has appropriate appellate
jurisdiction will be allowed; continued ignorance or wilful disregard of the law on appeals will not be
tolerated.
Petitioners even fault the Court for referring Republic Cement's petition to the Court of Appeals,
claiming that the same should have been dismissed pursuant to Circular 2-90. Petitioners conveniently
overlook the other provisions of Circular 2-90, specifically 4b) thereof, which provides:
b)
Raising factual issues in appeal by certiorari. Although submission of issues of fact in an
appeal by certiorari taken to the Supreme Court from the regional trial court is ordinarily proscribed,
the Supreme Court nonetheless retains option, in exercise of its sound discretion and considering the
attendant circumstances, either itself to take cognizance of and decide such issues or to refer them to
the Court of Appeals for determination.
As can be clearly adduced from the foregoing, when an appeal by certiorari under Rule 45 erroneously
raises factual issues, the Court has the option to refer the petition to the Court of Appeals. The exercise
by the Court of this option may not now be questioned by petitioners.
As the trial court's order was properly appealed by Republic Cement, the trial court's May 13, 1994
order never became final and executory, rendering petitioner's third assignment of error moot and
academic.
Petitioners' fourth and fifth assignment of errors are likewise without merit. Petitioners assert that the
Court of Appeals could only rule on the propriety of the trial court's dismissal of Republic Cement's
petition for declaratory relief, allegedly because that was the sole relief sought by the latter in its
petition for certiorari. Petitioners claim that the appellate court overstepped its jurisdiction when it
declared null and void the assessment made by the Province of Bulacan against Republic Cement.
Petitioners gloss over the fact that, during the proceedings before the Court of Appeals, they entered
into an agreement and modus vivendi whereby they limited the issue for resolution to the question as to

whether or not the provincial government could impose and/or assess taxes on stones, sand, gravel,
earth and other quarry resources extracted by Republic Cement from private lands. This agreement and
modus vivendi were approved by the appellate court on December 29, 1994. All throughout the
proceedings, petitioners never questioned the authority of the Court of Appeals to decide this issue, an
issue which it brought itself within the purview of the appellate court. Only when an adverse decision
was rendered by the Court of Appeals did petitioners question the jurisdiction of the former.
Petitioners are barred by the doctrine of estoppel from contesting the authority of the Court of Appeals
to decide the instant case, as this Court has consistently held that "(a) party cannot invoke the
jurisdiction of a court to secure affirmative relief against his opponent and after obtaining or failing to
obtain such relief, repudiate or question that same jurisdiction." 5 The Supreme Court frowns upon the
undesirable practice of a party submitting his case for decision and then accepting the judgment, only if
favorable, and attacking it for lack of jurisdiction when adverse. 6
In a desperate attempt to ward off defeat, petitioners now repudiate the above-mentioned agreement
and modus vivendi, claiming that the same was not binding on the Province of Bulacan, not having
been authorized by the Sangguniang Panlalawigan of Bulacan. While it is true that the Provincial
Governor can enter into contract and obligate the province only upon authority of the sangguniang
panlalawigan, 7 the same is inapplicable to the case at bar. The agreement and modus vivendi may have
been signed by petitioner Roberto Pagdanganan, as Governor of the Province of Bulacan, without
authorization from the sangguniang panlalawigan, but it was also signed by Manuel Siayngco, the
Provincial Legal Officer, in his capacity as such, and as counsel of petitioners.
It is a well-settled rule that all proceedings in court to enforce a remedy, to bring a claim, demand,
cause of action or subject matter of a suit to hearing, trial, determination, judgment and execution are
within the exclusive control of the attorney. 8 With respect to such matters of ordinary judicial
procedure, the attorney needs no special authority to bind his client. 9 Such questions as what action or
pleading to file, where and when to file it, what are its formal requirements, what should be the theory
of the case, what defenses to raise, how may the claim or defense be proved, when to rest the case, as
well as those affecting the competency of a witness, the sufficiency, relevancy, materiality or
immateriality of certain evidence and the burden of proof are within the authority of the attorney to
decide. 10 Whatever decision an attorney makes on any of these procedural questions, even if it
adversely affects a client's case, will generally bind a client. The agreement and modus vivendi signed
by petitioners' counsel is binding upon petitioners, even if the Sanggunian had not authorized the same,
limitation of issues being a procedural question falling within the exclusive authority of the attorney to
decide.
In any case, the remaining issues raised by petitioner are likewise devoid of merit, a province having no
authority to impose taxes on stones, sand, gravel, earth and other quarry resources extracted from
private lands. The pertinent provisions of the Local Government Code are as follows:
Sec. 134.
Scope of Taxing Powers. Except as otherwise provided in this Code, the province
may levy only the taxes, fees, and charges as provided in this Article.
Sec. 138.
Tax on Sand, Gravel and Other Quarry Resources. The province may levy and collect
not more than ten percent (10%) of fair market value in the locality per cubic meter of ordinary stones,
sand, gravel, earth, and other quarry resources, as defined under the National Internal Revenue Code, as
amended, extracted from public lands or from the beds of seas, lakes, rivers, streams, creeks, and other
public waters within its territorial jurisdiction.
xxx
xxx
xxx (Emphasis supplied)
The appellate court, on the basis of Section 134, ruled that a province was empowered to impose taxes
only on sand, gravel, and other quarry resources extracted from public lands, its authority to tax being
limited by said provision only to those taxes, fees and charges provided in Article One, Chapter 2, Title
One of Book II of the Local Government Code. 11 On the other hand, petitioners claim that Sections
129 12 and 186 13 of the Local Government Code authorizes the province to impose taxes other than

those specifically enumerated under the Local Government Code.

The Court of Appeals erred in ruling that a province can impose only the taxes specifically mentioned
under the Local Government Code. As correctly pointed out by petitioners, Section 186 allows a
province to levy taxes other than those specifically enumerated under the Code, subject to the
conditions specified therein.
This finding, nevertheless, affords cold comfort to petitioners as they are still prohibited from imposing
taxes on stones, sand, gravel, earth and other quarry resources extracted from private lands. The tax
imposed by the Province of Bulacan is an excise tax, being a tax upon the performance, carrying on, or
exercise of an activity. 14 The Local Government Code provides:
Section 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
xxx
xxx
(h)
Excise taxes on articles enumerated under the National Internal Revenue Code, as amended, and
taxes, fees or charges on petroleum products;
xxx
xxx
xxx
A province may not, therefore, levy excise taxes on articles already taxed by the National Internal
Revenue Code. Unfortunately for petitioners, the National Internal Revenue Code provides:
Section 151. Mineral Products.
(A)
Rates of Tax. There shall be levied, assessed and collected on minerals, mineral products and
quarry resources, excise tax as follows:
xxx
xxx
xxx
(2)
On all nonmetallic minerals and quarry resources, a tax of two percent (2%) based on the actual
market value of the gross output thereof at the time of removal, in case of those locally extracted or
produced; or the values used by the Bureau of Customs in determining tariff and customs duties, net of
excise tax and value-added tax, in the case of importation.
xxx
xxx
xxx
(B)
[Definition of Terms]. For purposes of this Section, the term
xxx
xxx
xxx
(4)
Quarry resources shall mean any common stone or other common mineral substances as the
Director of the Bureau of Mines and Geo-Sciences may declare to be quarry resources such as, but not
restricted to, marl, marble, granite, volcanic cinders, basalt, tuff and rock phosphate; Provided, That
they contain no metal or metals or other valuable minerals in economically workable quantities. cdll
It is clearly apparent from the above provision that the National Internal Revenue Code levies a tax on
all quarry resources, regardless of origin, whether extracted from public or private land. Thus, a
province may not ordinarily impose taxes on stones, sand, gravel, earth and other quarry resources, as
the same are already taxed under the National Internal Revenue Code. The province can, however,
impose a tax on stones, sand, gravel, earth and other quarry resources extracted from public land
because it is expressly empowered to do so under the Local Government Code. As to stones, sand,
gravel, earth and other quarry resources extracted from private land, however, it may not do so, because
of the limitation provided by Section 133 of the Code in relation to Section 151 of the National Internal
Revenue Code.
Given the above disquisition, petitioners cannot claim that the appellate court unjustly deprived them of
the power to create their sources of revenue, their assessment of taxes against Republic Cement being
ultra vires, traversing as it does the limitations set by the Local Government Code.
Petitioners likewise aver that the appellate court's declaration of nullity of its assessment against
Republic Cement is a collateral attack on Provincial Ordinance No. 3, which is prohibited by public
policy. 15 Contrary to petitioners' claim, the legality of the ordinance was never questioned by the
Court of Appeals. Rather, what the appellate court questioned was petitioners' assessment of taxes on

Republic Cement on the basis of Provincial Ordinance No. 3, not the ordinance itself.
Furthermore, Section 21 of Provincial Ordinance No. 3 is practically only a reproduction of Section
138 of the Local Government Code. A cursory reading of both would show that both refer to ordinary
sand, stone, gravel, earth and other quarry resources extracted from public lands. Even if we disregard
the limitation set by Section 133 of the Local Government Code, petitioners may not impose taxes on
stones, sand, gravel, earth and other quarry resources extracted from private lands on the basis of
Section 21 of Provincial Ordinance No. 3 as the latter clearly applies only to quarry resources extracted
from public lands. Petitioners may not invoke the Regalian doctrine to extend the coverage of their
ordinance to quarry resources extracted from private lands, for taxes, being burdens, are not to be
presumed beyond what the applicable statute expressly and clearly declares, tax statutes being
construed strictissimi juris against the government. 16
WHEREFORE, premises considered, the instant petition is DISMISSED for lack of merit and the
decision of the Court of Appeals is hereby AFFIRMED in toto. Costs against petitioner.
SO ORDERED.
Narvasa, C .J ., Kapunan, Purisima and Pardo, JJ ., concur.
Footnotes
1.
237 SCRA 575 (1994) citing Bell Carpets vs. CA, 185 SCRA 35 (1990).
2.
Del Pozo vs. Penaco, 167 SCRA 577 (1988).
3.
Petition for Certiorari, p. 6.
4.
Section 1, Rule 45, Rules of Court.
5.
Lee vs. Presiding Judge, 145 SCRA 408 (1986).
6.
Zamboanga Electric Cooperative, Inc. vs. Buat, 243 SCRA 47 (1995).
7.
LOCAL GOVERNMENT CODE, Section 465.
8.
Belendres vs. Lopez Sugar Central Mill Co., 97 Phil. 100 (1955).
9.
See Sec. 23, Rule 138, Rules of Court.
10.
AGPALO, LEGAL ETHICS, 5th ed., p. 249.
11.
LOCAL GOVERNMENT CODE, Sections 135-141.
12.
Section 129. Power to Create Sources of Revenue. Each local government unit shall exercise
its power to create its own sources of revenue and to levy taxes, fees, and charges subject to the
provisions herein, consistent with the basic policy of local autonomy. Such taxes, fees, and charges
shall accrue exclusively to the local government units.
13.
Section 186. Power To Levy Other Taxes, Fees or Charges. Local government units may
exercise the power to levy taxes, fees or charges on any base or subject not otherwise specifically
enumerated herein or taxed under the provisions of the National Internal Revenue Code, as amended,
or other applicable laws: Provided, That the taxes, fees, or charges shall not be unjust, excessive,
oppressive, confiscatory or contrary to declared national policy: Provided, further, That the ordinance
levying such taxes, fees or charges shall not be enacted without any prior public hearing conducted for
the purpose.
14.
Cordero vs. Conda, 18 SCRA 341 (1966).
15.
See San Miguel Brewery vs. Magno, 21 SCRA 292 (1967).
16.
Republic vs. IAC, 196 SCRA 335 (1991).

THIRD DIVISION
[G.R. No. 52019. August 19, 1988.]
ILOILO BOTTLERS, INC., plaintiff-appellee, vs. CITY OF ILOILO, defendant-appellant.
Efrain B. Treas for plaintiff-appellee.
Diosdado Garingalao for defendant-appellant.
SYLLABUS
1.
TAXATION; MUNICIPAL LICENSE TAX; IMPOSED ON MANUFACTURERS ENGAGED
IN THE SEPARATE SELLING OF ITS PRODUCTS. It is well recognized that the right to
manufacture implies the right to sell/distribute the manufactured products. Hence, for tax purposes, a
manufacturer does not necessarily become engaged in the separate business of selling simply because it
sells the products it manufactures. In certain cases, however, a manufacturer may also be considered as
engaged in the separate business of selling its products, in which case, it could be subjected to
municipal license tax.
2.
ID.; ID.; ID.; CONDITIONS FOR THE IMPOSITION OF EXCISE TAX. The tax imposed
under Ordinance No. 5 is an excise tax. It is a tax on the privilege of distributing, manufacturing or
bottling softdrinks. Being an excise tax, it can be levied by the taxing authority only when the acts,
privileges or businesses are done or performed within the jurisdiction of said authority. Specifically, the
situs of the act of distributing, bottling or manufacturing softdrinks must be within city limits, before an
entity engaged in any of the activities may be taxed. In the case at bar, sales were made by Iloilo
Bottlers, Inc. in Iloilo City. Thus, We have no option but to declare the company liable under the tax
ordinance.
DECISION
CORTES, J p:
The fundamental issue in this appeal is whether the Iloilo Bottlers, Inc., which had its bottling plant in
Pavia, Iloilo, but which sold softdrinks in Iloilo City, is liable under Iloilo City tax Ordinance No. 5,
series of 1960, as amended, which imposes a municipal license tax on distributors of softdrinks.
On July 12, 1972, Iloilo Bottlers, Inc. filed a complaint docketed as Civil Case No. 9046 with the Court
of First Instance of Iloilo praying for the recovery of the sum of P3,329.20, which amount allegedly
constituted payments of municipal license taxes under Ordinance No. 5 series of 1960, as amended,
that the company paid under protest. LLpr
On November 15, 1972, the parties submitted a partial stipulation of facts, the material portions of
which state:
xxx
xxx
xxx
2.
That plaintiff is engaged in the business of bottling softdrinks under the trade name of Pepsi
Cola and 7-up and selling the same to its customers, with a bottling plant situated at Barrio Ungca,
Municipality of Pavia, Iloilo, Philippines and which is outside the jurisdiction of defendant;
3.
That defendant enacted an ordinance on January 11, 1960 known as Ordinance No. 5, Series of
1960 which ordinance was successively amended by Ordinance No. 28, Series of 1960; Ordinance No.
15, Series of 1964; and Ordinance No. 45, Series of 1964; which provides as follows:
Section 1. Any person, firm or corporation engaged in the distribution, manufacture or bottling of
coca-cola, pepsi cola, tru-orange, seven-up and other soft drinks within the jurisdiction of the City of
Iloilo, shall pay a municipal license tax of ten (P0.10) centavos for every case of twenty-four bottles;
PROVIDED, HOWEVER, that soft drinks sold to the public at not more than five (P0.05) centavos per
bottle shall pay a tax of one and one half (P0.015) (centavos) per case of twenty four bottles.
Section 1-A For purposes of this Ordinance, all deliveries and or dispatches emanating or made at
the plant and all goods or stocks taken out of the plant for distribution, sale or exchange irrespective
(of) where it would take place shall be covered by the operation of this Ordinance.
4.
That prior to September, 1966, Santiago Syjuco Inc., owned and operated a bottling plant at
Muelle Loney Street, Iloilo City, which was doing business under the name of Seven-up Bottling

Company of the Philippines and bottled the soft-drinks Pepsi-Cola and 7-up; however sometime on
September 14, 1966, Santiago Syjuco, Inc., informed all its employees that it (was) closing its Iloilo
Plant due to financial losses and in fact closed the same and later sold the plant to the plaintiff Iloilo
Bottlers, Inc.
5.
That thereafter, plaintiff operated the said plant by bottling the soft drinks Pepsi-Cola and 7-up;
however, sometime in July 1968, plaintiff closed said bottling plant at Muelle Loney, Iloilo City, end
transferred its bottling operations to its new plant in Barrio Ungca, Municipality of Pavia, Province of
Iloilo, and which is outside the jurisdiction of the City of Iloilo;
6.
That from the time of (the) enactment (of the ordinance), the Seven Up Bottling Company of
the Philippines under Santiago Syjuco, Inc., had been religiously paying the defendant City of Iloilo the
above-mentioned municipal license tax due therefrom for bottler because its bottling plant was then
still situated at Muelle Loney St., Iloilo City; but the plaintiff stopped paying the municipal license tax
(after) October 21, 1968 (when) it transferred its plant to Barrio Ungca, Municipality of Pavia, Iloilo
which is outside the jurisdiction of the City of Iloilo;
7.
That sometime on July 31, 1969, the defendant demanded from the plaintiff the payment of the
municipal license tax under the above-mentioned ordinance, a xerox copy of the said letter is attached
to the complaint as Annex "A" and made an integral part hereof by reference.
8.
That plaintiff explained in a letter to the defendant that it could not anymore be liable to pay the
municipal license fee because its bottling plant (was) not anymore inside the City of Iloilo, and that
moreover, since it itself (sold) its own products to its (customers) directly, it could not be considered as
a distributor in line with the doctrines enunciated by the Supreme Court in the cases of City of Manila
vs. Bugsuk Lumber Co., L-8255, July 11, 1957; Manila Trading & Supply Co., Inc. vs. City of Manila
L-12156, April 29, 1959; Central Azucarera de Don Pedro vs. City of Manila, et al., G.R. No. L7679,
September 29, 1955; Cebu Portland Cement vs. City of Manila and City Treasurer of Manila, L-1 4229,
July 26, 1960. A xerox copy of the said letter is attached as Annex "B" to the complaint and made an
integral part hereof by reference. As a result of the said letter of the plaintiff, the defendant did not
anymore press the plaintiff to pay the said municipal license tax;
9.
That sometime on January 25, 1972, the defendant demanded from the plaintiff compliance
with the said ordinance for 1972 in view of the fact that it was engaged in distribution of the softdrinks
in the City of Iloilo, and it further demanded from the plaintiff payment of back taxes from the time it
transferred its bottling plant to the Municipality of Pavia, Iloilo;
10.
That the plaintiff demurred to the said demand of the defendant raising as its jurisdiction the
reason that its bottling plant is situated outside the City of Iloilo and as bottler could not be considered
as distributor under the said ordinance although it sells its project directly to the consumer, in line with
the jurisprudence enunciated by the Supreme Court but due to insistence of the defendant, the plaintiff
paid on April 20, 1972, the first quarter payment of the municipal license tax in the sum of P3,329.20,
under protest, and thereafter has been paying defendant every quarter under protest;
11.
That on June 15, 1972, the defendant informed the plaintiff, that it must pay all the taxes due
since July, 1968 up to the last, quarter of 1971, otherwise it shall be constrained to cancel the operation
of the business of the plaintiff, and because of this threat, and so as not to occasion disruption of its
business operation, the plaintiff under protest agreed to the payment of the back taxes, on staggered
basis, which was acceded to by the defendant;
12.
That as computed by the plaintiff the following are its softdrinks sold in Iloilo City since it
transferred its bottling plant from the City of Iloilo to Barrio Ungca, Pavia, Iloilo in July 1968, to wit:
No. of Cases sold
SEVENPEPSI TOTAL
TAX
UP
COLA
DUE
1968
Jul. to Dec. 39,340 49,060 88,400 P8,840
1969
Jan. to Dec. 81,240 87,660 168,900
16,890

1970
1971

Jan. to Dec. 79,389 89,211 168,600

16,600
Jan. to Dec. 80,670 88,480 169,150
16,915
______
______
______
_____
TOTAL
280,639
314,411
595,050
P 59,505
13.
That the plaintiff does not maintain any store or commercial establishment in the City of Iloilo
from which it distributes its products, but by means of a fleet of delivery trucks, plaintiff distributes its
products from its bottling plant at Barrio Ungca, Municipality of Pavia, Iloilo, directly to its customers
in the different towns of the Province of Iloilo as well as the City of Iloilo:
14.
That the plaintiff is already paying the National Government a percentage Tax of 7% as
manufacturer's sales tax on all the softdrinks it manufactures as follows:
O.R. No. 4683995

January,
1972 Sales P17,222.90
O.R. No. 5614767

February
"
"
17,024.81
O.R. No. 5614870

March "
"
17,589.19
O.R. No. 5614891

April "
"
18,726.77
O.R. No. 5614897

May "
"
16,710.99
O.R. No. 5614935

June "
"
14,791.20
O.R. No. 5614967

July "
"
13,952.00
O.R. No. 5614973

August"
"
15,726.16
O.R. No. 5614999

September
"
"
19,159.54
and is also paying the municipal license tax to the municipality of Pavia, Iloilo in the amount of
P10,000.00 every year, plus a municipal license tax for engaging in its business to the municipality of
Pavia in its amount of P2,000.00 every year.
xxx
xxx
xxx
[Rollo, p. 10 (Record on Appeal, pp. 25-31).]
On the basis of the above stipulations, the court a quo rendered on January 26, 1973 a decision in favor
of Iloilo Bottlers, Inc. declaring the Corporation not liable under the ordinance, and directing the City
of Iloilo to pay the sum of P3,329.20. The decision was amended in an Order dated March 15, 1973, so
as to include the amounts paid by the company after the filing of the complaint. The City of Iloilo
appealed to the Court of Appeals which certified the case to this Court. LLjur
The tax ordinance imposes a tax on persons, firms, and corporations engaged in the business of:
1.
distribution of softdrinks
2.
manufacture of softdrinks, and
3.
bottling of softdrinks
within the territorial jurisdiction of the City of Iloilo.
There is no question that after it transferred its plant to Pavia, Iloilo province, Iloilo Bottlers, Inc. no
longer manufactured/bottled its softdrinks within Iloilo City. Thus, it cannot be taxed as one falling
under the second or the third type of business. The resolution of this case therefore hinges on whether
the company may be considered engaged in the distribution of softdrinks in Iloilo City, even after it had
transferred its bottling plant to Pavia, so as to be within the purview of the ordinance.
Iloilo Bottlers, Inc. disclaims liability on two grounds: First, it contends that since it is not engaged in
the independent business of distributing softdrinks, but that its activity of selling is merely an incident
to, or is a necessary consequence of its main or principal business of bottling, then it is NOT liable
under the city tax ordinance. Second, it claims that only manufacturers or bottlers having their plants
inside the territorial jurisdiction of the city are covered by the ordinance.
The second ground is manifestly devoid of merit. It is clear from the ordinance that three types of
activities are covered: (1) distribution, (2) manufacture and (3) bottling of softdrinks. A person engaged
in any or all of these activities is subject to the tax. cdll
The first ground, however, merits serious consideration.
This Court has always recognized that the right to manufacture implies the right to sell/distribute the

manufactured products [See Central Azucarera de Don Pedro v. City of Manila and Sarmiento, 97 Phil.
627 (1955); Caltex (Philippines), Inc. v. City of Manila and Cudiamat, G.R. No. L-22764, July 28,
1969, 28 SCRA 840, 843.] Hence, for tax purposes, a manufacturer does not necessarily become
engaged in the separate business of selling simply because it sells the products it manufactures. In
certain cases, however, a manufacturer may also be considered as engaged in the separate business of
selling its products.
To determine whether an entity engaged in the principal business of manufacturing, is likewise engaged
in the separate business of selling, its marketing system or sales operations must be looked into.
In several cases [See Central Azucarera de Don Pedro v. City of Manila and Sarmiento, supra; Cebu
Portland Cement Co. v. City of Manila and the City Treasurer, 108 Phil. 1063 (1960); Caltex
(Philippines), Inc. v. City of Manila and Cudiamat, supra], this Court had occasion to distinguish two
marketing systems:
Under the first system, the manufacturer enters into sales transactions and invoices the sales at its main
office where purchase orders are received and approved before delivery orders are sent to the
company's warehouses, where in turn actual deliveries are made. No warehouse sales are made; nor are
separate stores maintained where products may be sold independently from the main office. The
warehouses only serve as storage sites and delivery points of the products earlier sold at the main
office. Cdpr
Under the second system, sales transactions are entered into and perfected at stores or warehouses
maintained by the company. Any one who desires to purchase the product may go to the store or
warehouse and there purchase the merchandise The stores and warehouses serve as selling centers.
Entities operating under the first system are NOT considered engaged in the separate business of
selling or dealing in their products, independent of their manufacturing business. Entities operating
under the second system are considered engaged in the separate business of selling.
In the case at bar, the company distributed its softdrinks by means of a fleet of delivery trucks which
went directly to customers in the different places in Iloilo province. Sales transactions with customers
were entered into and sales were perfected and consummated by route salesmen. Truck sales were
made independently of transactions in the main office. The delivery trucks were not used solely for the
purpose of delivering softdrinks previously sold at Pavia. They served as selling units. They were what
were called, until recently, "rolling stores". The delivery trucks were therefore much the same as the
stores and warehouses under the second marketing system Iloilo Bottlers, Inc. thus falls under the
second category above. That is, the corporation was engaged in the separate business of selling or
distributing soft-drinks, independently of its business of bottling them.
The tax imposed under Ordinance No. 5 is an excise tax. It is a tax on the privilege of distributing,
manufacturing or bottling softdrinks Being an excise tax, it can be levied by the taxing authority only
when the acts, privileges or businesses are done or performed within the jurisdiction of said authority
[Commissioner of Internal Revenue v. British Overseas Airways Corp. and Court of Appeals, G.R. Nos.
65773-74, April 30, 1987, 149 SCRA 395, 410.] Specifically, the situs of the act of distributing,
bottling or manufacturing softdrinks must be within city limits, before an entity engaged in any of the
activities may be taxed in Iloilo City. cdrep
As stated above, sales were made by Iloilo Bottlers, Inc. in Iloilo City. Thus, We have no option but to
declare the company liable under the tax ordinance.
With the foregoing discussion, it becomes unnecessary to discuss the other issues raised by the parties.
WHEREFORE, the appealed decision is hereby REVERSED. The complaint in Civil Case No. 9046 is
ordered DISMISSED. No Costs.
SO ORDERED.
Fernan, C.J., Feliciano and Bidin, JJ., concur.
Gutierrez, Jr ., J., took no part.

FIRST DIVISION
[G.R. No. L-37684. September 10, 1975.]
ARABAY, INC., petitioner, vs. THE COURT OF FIRST INSTANCE OF ZAMBOANGA DEL
NORTE, BRANCH II, THE CITY OF DIPOLOG and EMILIO L. TAGAILO, in his capacity as City
Treasurer of the City of Dipolog, et al., respondents.
Dominguez Law Office for petitioner.
Assistant City Fiscal Arquipo L. Adriatico for respondents.
SYNOPSIS
Petitioner, a distributor of gas, oil and other petroleum products, filed with the Court of First Instance
of Zamboanga del Norte a complaint against the City of Dipolog contesting the validity of Ordinance
No. 19, amending Section 1 of Ordinance No. 53, series of 1964 enacted by the Municipal Council of
Dipolog on the ground that the same imposed a sales tax which is beyond the power of the municipality
to levy under Section 2 of R.A. 2264, otherwise known as the Local Autonomy Act of 1959.
Petitioner's complaint for the annulment of this tax ordinances as well as its prayer for the refund of the
taxes it paid thereunder were dismissed on the grounds that petitioner failed to present evidence that the
tax provision in question imposed a sales tax, and the tax prescribed therein was, moreover, not a
specific tax on the products themselves but on the privilege of selling them. Hence, this petition for
review.
The Supreme Court held the questioned section of Ordinance No. 53 of the Municipal Council of
Dipolog levied a sales tax and that a refund by the city of the sum collected under the void provisions
of the ordinance, enacted while it was still a municipality, is proper except for the amount levied on
petitioner's gasoline sales.
Judgment a quo set aside.
SYLLABUS
1.
MUNICIPAL TAXATION; LOCAL AUTONOMY ACT MUNICIPALITIES WITHOUT
POWER TO ENACT AN ORDINANCE IMPOSING A SALES TAX. It is settled rule in this
jurisdiction that for purposes of Section 2 of the Local Autonomy Act of 1959 (R.A. 2264), a municipal
tax ordinance which prescribes a set ratio between the amount of the tax and the volume of sales of the
taxpayer imposes a sales tax and is null and void for being beyond the power of a municipality to enact.
2.
ID.; ID.; ID.; ORDINANCE NO. 19, AMENDING SEC. 1 OF ORDINANCE 53 ENACTED
BY THE MUNICIPAL COUNCIL OF DIPOLOG VOID. The questioned section of Ordinance No.
53 of the Municipal Council of Dipolog levies a sales tax, not only because the character of the
ordinance as a sales tax ordinance was admitted by the parties, but as well because the volume of sales
which the owner or supplier of the itemized products generates every month. The ordinance in question
therefore exacts a tax based on sales and the municipality of Dipolog was not authorized to enact such
an ordinance under the Local Autonomy Act.
3.
ID.; ID.; ID.; PAYMENT MADE THEREUNDER TO BE REFUNDED EXCEPT FOR THE
TAX LEVIED ON GASOLINE SALES. The obligation of the City of Dipolog to refund the sum
collected under the void provisions of an ordinance enacted while it was still a municipality, is not open
to doubt. The right of petitioner to a refund of the local sales taxes it had paid under the questioned
ordinance may not, however, include those levied on its gasoline sales for the relevant proviso of Sec. 2
of the Local Autonomy Act states:". . . Provided, that municipalities and municipal districts shall, in no
case, impose any percentage tax, except gasoline, under the provisions of the National Internal
Revenue Code. . . ."
4.
ID.; ID.; ID.; TAX ON SALES OF GASOLINE EXCLUDED FROM PROHIBITION;
PROVISO OF SEC. 2 OF R.A. 2264 INTERPRETED. Under the proviso of Section 2 of R.A.
2264, two courses of action in the exercise of their taxing powers are denied to municipalities and
municipal districts, to wit, (1) to levy any sales tax in whatever form; and (2) to levy any tax on articles
subject to specific tax under the National Internal Revenue Code. These two prohibitions overlap in the

sense that while the first clause of the proviso forbids the levying of sales taxes of whatever form or
guise, the second clause forbids the levying of "taxes" without any distinction as to the kind of tax, i.e.,
whether percentage tax, sales tax, specific tax or license tax, although this latter prohibition applies
only to a limited class of articles, viz., those subject to the specific tax under the Tax Code. A
reasonable and practical interpretation of the terms of the proviso results in the conclusion that
Congress, in excluding gasoline from the general disability imposed on municipalities and municipal
districts to exact any kind of taxes on articles subject to specific tax under the Tax Code, deliberately
and intentionally meant to put it within the power of such local governments to impose whatever type
or form of taxes the latter may deem proper to levy on gasoline, including a sales tax or one in that
form. There is after all no clearly demonstrable and convincing reason why the law would allow
municipal imposition of taxes on gasoline and yet withhold such power if the imposition is in the form
of a sales tax, when it was a known fact at the time of the enactment of Local Autonomy Act in 1950
that gasoline is of no profitable use to the companies which own it unless turned over to the consuming
public which, perforce, must pay for the right obtain that commodity.
DECISION
CASTRO, J p:
Before us is a petition for review of the decision of the Court of First Instance of Zamboanga del Norte,
Branch II, dismissing the complaint of the herein petitioner Arabay, Inc. for annulment of a tax
ordinance of the Municipal Council of Dipolog, Zamboanga del Norte, and for refund of the taxes it
had paid thereunder.
On December 17, 1965 the Municipal Council of Dipolog enacted Ordinance No. 19 amending Section
1 of ordinance No. 53, series of 1964. As thus amended the said Section 1 reads as follows:
"Section 1.
There shall be charged for the selling and distribution of refined and manufactured
mineral oils, motor and diesel fuels, and petroleum based on the monthly allocation actually delivered
and distributed and intended for sale, in any manner whatsoever, by the Company or supplier to any
person, firm, entity, or corporation, whether as dealer of such refined and manufactured mineral oils,
motor and diesel fuels, and petroleum or as operator of any station thereof, the following tax payable
monthly:
Gasoline
P0.01 per liter
Lubricating oils
P0.01 per liter
Diesel Fuel oils
1/4 centavo per liter
Petroleum or P0.05 per gallon can
kerosene
or
P.02 per half gallon tin.
Provided, however, that retail seller of not more than 5 gallon cans or its equivalent shall be exempted
from the provisions of this ordinance.
"Section 2.
This Ordinance shall take effect on January 1, 1966."
On June 21, 1969 Republic Act No. 5520 was approved. It provided for the creation of the City of
Dipolog from the then existing territorial jurisdiction of the Municipality of Dipolog, to take effect on
January 1, 1970.
On July 28, 1971 the Arabay, Inc., a distributor of gas, oil and other petroleum products, filed with the
Court of First Instance of Zamboanga del Norte a complaint against the City of Dipolog contesting the
validity of the above-mentioned Section 1 of Ordinance No. 53 on the ground that the same imposed a
sales tax which is beyond the power of a municipality to levy under Section 2 of Republic Act No.
2264, otherwise known as the Local Autonomy Act of 1959. Said Section 2 provides:
"SEC. 2.
Taxation. Any provision of law to the contrary notwithstanding, all chartered cities,
municipalities and municipal districts shall have authority to impose municipal license taxes or fees
upon persons engaged in any occupation or business, or exercising privileges in chartered cities,
municipalities or municipal districts by requiring them to secure licenses at rates fixed by the municipal

board or city council of the city, the municipal council of the municipality, or the municipal district
council of the municipal district; to collect fees and charges for service rendered by the city,
municipality or municipal district; to regulate and impose reasonable fees for services rendered in
connection with any business, profession or occupation being conducted within the city, municipality
or municipal district and otherwise to levy for public purposes, just and uniform taxes, licenses or fees:
Provided, That municipalities and municipal districts shall, in no case, impose any percentage tax on
sales or other taxes in any form based thereon nor impose taxes on articles subject to specific tax,
except, gasoline, under the provisions of the National Internal Revenue Code: Provided, however, That
no city, municipality or municipal district may levy or impose any of the following: . . ." (emphasis
supplied)
On August 30, 1972 the Arabay, Inc. filed a supplemental complaint which prayed, among others, for a
refund of the taxes it had paid under the ordinance in question.
On October 30, 1972 the parties entered into a stipulation of facts which, inter alia, states:
"2.
That plaintiff, pursuant to the above ordinance, paid sales taxes for the sale of Diesel fuel oils,
lubricating oils, petroleum, kerosene and other related petroleum products, to the defendant City of
Dipolog, from December, 1969 to July, 1972 in the total amount of FIVE THOUSAND FOUR
HUNDRED PESOS (P5,400.00). A schedule of the payments made by plaintiff is hereto attached as
Annex 'A' and is made an integral part hereof. However, the payments made from April, 1972 to July,
1972, in the total amount of P69.80 have been refunded by defendant City of Dipolog to plaintiff.
"WHEREFORE, on the basis of the foregoing stipulation of facts and of the Memorandum of
Arguments to be submitted by the parties, the latter, through, their respective counsels, hereby submit
the case for the determination of this Honor."
On January 16, 1973 the court a quo rendered judgment upholding the validity of the questioned
provision of Ordinance No. 53, as amended, essentially on the grounds that the Arabay, Inc. failed to
present evidence that the tax provision in question imposed a sales tax, and the tax prescribed therein
was, moreover, not a specific tax on the products themselves but on the privilege of selling them.
The basic issues in the case at bar are: (1) whether or not the questioned tax provision imposes a sales
tax; and (2) if it imposes a sales tax, whether the Arabay, Inc. is entitled to a tax refund, considering
that Dipolog is now a city.
1.
It is settled rule in this jurisdiction that for purposes of Section 2 of the Local Autonomy Act,
supra, a municipal tax ordinance which prescribes a set ratio between the amount of the tax and the
volume of sales of the taxpayer imposes a sales tax and is null and void for being beyond the power of
a municipality to enact. 1
In our view, the questioned section of Ordinance No. 53 of the Municipal Council of Dipolog levies a
sales tax, not only because the character of the ordinance as a sales tax ordinance was admitted by the
parties below, but as well because the phraseology of the said provision reveals in clear terms the
intention to impose a tax on the sale of oil, gasoline and other petroleum products. Thus, the ordinance
provides: "There shall be charged for the selling and distribution of refined and manufactured oils . . .
based on the monthly allocation actually delivered and distributed and intended for sale by the
Company or supplier to any person . . . whether as dealer . . . or as operator of any station . . . the
following tax payable monthly: . . ." It is quite evident from these terms that the amount of the tax that
may be collected is directly dependent upon or bears a direct relationship to the volume of sales which
the owner or supplier of the itemized products generates every month. The ordinance in question
therefore exacts a tax based on sales; it follows that the Municipality of Dipolog was not authorized to
enact such an ordinance under the local Autonomy Act.
2.
The obligation of the City of Dipolog to refund the sum collected under the void provisions of
an ordinance enacted while it was still a municipality, is not open to doubt. In San Miguel Corporation
vs. The Municipal Council of Mandaue, Cebu, supra, the Court ordered take return to the taxpayer of
the sums paid under an ordinance enacted under circumstances similar to the case at bar, and rejected

the argument that the municipality of Mandaue had in the meantime been converted into a city. The
Court said:
"Respondent however claim that with the conversion of Mandaue into a city pursuant to Republic Act
No. 5519, which was approved on June 21, 1969, the issue has already become moot, since the
prohibition contained in section 2 of Republic Act 2264 applies only to municipalities and not to
chartered cities. The same contention has been rejected in City of Naga v. Court of Appeals, and Laoag
Producers' Cooperative Marketing Association, Inc. vs. Municipality of Laoag, supra where We ruled
that the legality of an ordinance depends upon the power of the municipality at the time of the
enactment of the challenged ordinance. Since the municipality of Mandaue had no authority to enact
the said ordinance, the subsequent approval of Republic Act No. 5519 which became effective on June
21, 1969, did not remove the original infirmity of the ordinance. Indeed there is no provision in the
aforecited statute which invests a curative effect upon the ordinances of the municipality which when
enacted were beyond its statutory authority."
The right of the Arabay, Inc. to a refund of the local sales taxes it had paid under the questioned
ordinance may not, however, include those levied on its gasoline sales. The relevant proviso of Section
2 of the Local Autonomy Act states:
". . . Provided, That municipalities and municipal districts shall, in no case, impose any percentage tax
on sales or other taxes on articles subject to specific tax, except gasoline, under the provisions of the
National Internal Revenue Code:
. . ." (Italics supplied)
Under the foregoing proviso of Section 2 of R.A. 2264, two courses of action in the exercise of their
taxing powers are denied to municipalities and municipal districts, to wit, (1) to levy any sales tax in
whatever form; and (2) to levy any tax on articles subject to specific tax under the National Internal
Revenue Code. It is not difficult to see that these two prohibitions overlap in the sense that while the
first clause of the said proviso forbids the levying of sales taxes of whatever form or guise, the second
clause of the same proviso forbids the levying of "taxes" without any distinction as to the kind of tax,
i.e.' whether percentage tax, sales tax, specific tax or license tax, although this latter prohibition applies
only to a limited class articles, viz., those subject to the specific tax under the Tax Code.
Such an overlap would probably carry or connote no legal significance but for the exclusion of
gasoline from the prohibition contained in the second clause of the mentioned proviso. For, with the
exemption of gasoline from the coverage of the same, it becomes relevant to determine the effect which
such exclusion has on the previous prohibition against the levying of the sales tax.
In our opinion, a reasonable and practical interpretation of the terms of the proviso in question results
in the conclusion that Congress, in excluding gasoline from the general disability imposed on
municipalities and municipal districts to exact any kind of taxes on articles subject to specific tax under
the Tax Code, deliberately and intentionally meant to put it within the power of such local governments
to impose whatever type or form of taxes the latter may deem proper to levy on gasoline, including a
sales tax or one in that form. There is after all no clearly demonstrable and convincing reason why the
law would allow municipal imposition of taxes on gasoline and yet withhold such power if the
imposition is in the form of a sales tax, when it was a known fact at the time of the enactment of the
Local Autonomy Act in 1959 and this still is true to this day that gasoline is of no profitable use
to the companies which own it unless turned over to the consuming public which, perforce, must pay
for the right to obtain that commodity.
ACCORDINGLY, the judgment a quo is set aside. The City of Dipolog is hereby ordered to refund to
the Arabay, Inc. the taxes the latter has paid under Section 1 of Ordinance No. 53, series of 1964, as
amended, deducting therefrom the amount representing the taxes paid by the Abaray, Inc. on its
gasoline sales. No costs.
Teehankee, Makasiar, Muoz Palma and Martin, JJ., concur.
Esguerra, J., is on official leave.

Footnotes
1.
San Miguel Corporation vs. Municipal Council of Mandaue, Cebu, L-30761, July 11, 1973, 52
SCRA 43; Laoag Producers' Coop. Mktg. Assn. vs. Municipality of Laoag, Ilocos Norte, L-27498, Feb.
24, 1971, 37 SCRA 594; Cebu Portland Cement Co. vs. Municipality of Naga, Cebu, L-20496, Feb. 26,
1972, 43 SCRA 275; Marinduque Iron Mines Agents, Inc. vs. Municipality of Hinabangan, Samar, L18924, June 30, 1964, 11 SCRA 416. Where the taxpayer's volume of business sales is considered
solely for purposes of classification, the ordinance is not rendered invalid as imposing a sales or
specific tax. See Northern Philippines Tobacco Corp. vs. Municipality of Agoo, La Union, L-26447,
January 30, 1970; Cebu Portland Cement Co. vs. Municipality of Naga, Cebu, L-20496, Feb. 26, 1972,
43 SCRA 275.

EN BANC
[G.R. No. L-40296. November 21, 1984.]
ALLIED THREAD CO., INC., and KER & COMPANY, LTD., petitioners, vs. HON. CITY MAYOR
OF MANILA, HON. CITY TREASURER OF MANILA, HON. LORENZO RELOVA, in his capacity
as Presiding Judge, Branch II, CFI of Manila, respondents.
Antonio A. Nieva for petitioners.
Santiago F. Alidio, S.M. Artiaga, Jr. and Jose A. Perella for respondents.
SYLLABUS
1.
ADMINISTRATIVE LAW; TAXATION; LOCAL TAX CODE AS AMENDED BY
PRESIDENTIAL DECREE NO. 426; VALIDITY OF ORDINANCE; SUBSEQUENT
AMENDMENTS THERETO DO NOT INVALIDATE NOR MOVE THE EFFECTIVITY DATE OF A
LOCAL TAX ORDINANCE; CASE AT BAR. Ordinance No. 7516 was enacted by the Municipal
Board of Manila on June 12. 1974 and approved by the City Mayor on June 15. 1974. Fifteen (15) days
thereafter, or on July 1, 1974. the said ordinance became effective pursuant to Sec. 42 of the Local Tax
Code. It is clear therefore that Ordinance No. 7516 has fully conformed with P.D. No. 426 and Local
Tax Regulation No. 1-74 which require that "a local tax ordinance intended to take effect on July 1,
1974 should be enacted by the Local Chief Executive not later than June 15, 1974." The subsequent
amendments to the basic ordinance did not in any way invalidate it nor move the date of its effectivity.
To hold otherwise would limit the power of the defunct Municipal Board of Manila to amend an
existing ordinance as exigencies require.
2.
ID.; ID.; ID.; MODES OF APPRISING PUBLIC OF NEW LOCAL TAX ORDINANCE;
CASE AT BAR. We are persuaded that there was substantial compliance of the law on publication.
Section 43 of the Local Tax Code provides two modes of apprising the public of a new ordinance,
either, (a) by means of publication in a newspaper of general circulation or, (b) by means of posting of
copies thereof in the local legislative hall or premises and two other conspicuous places within the
territorial jurisdiction of the local government. Respondents, having complied with the second mode of
notice. We are of the opinion that there is no legal infirmity to the validity of Ordinance No. 7516 as
amended.
3.
ID.; ID.; ID.; EXCISE TAX; TAXABILITY UNDER QUESTIONED ORDINANCE
DEPENDS UPON THE PLACE WHERE SALE TRANSACTION IS PERFECTED. Finally,
petitioner Allied Thread Co., Inc. claims exclusion from Ordinance No. 7516 as amended on the
ground that it does not maintain an office or branch office in the City of Manila, where the subject
Ordinance only applies. This contention is devoid of merit. Allied Thread Co., Inc. admits that it does
business in the City of Manila through a broker or agent, Ker & Company, Ltd. Doing business in the
City of Manila is all that is required to fall within the coverage of the Ordinance. It should be noted that
Ordinance No. 7516 as amended imposes a business tax on manufacturers, importers or producers
doing business in the City of Manila. The tax imposition here is upon the performance of an act,
enjoyment of a privilege, or the engaging in an occupation, and hence is in the nature of an excise tax.
The power to levy an excise upon the performance of an act or the engaging in an occupation does not
depend upon the domicile of the person subject to the excise, nor upon the physical location of the
property and in connection with the act or occupation taxed, but depends upon the place in which the
act is performed or occupation engaged in. Thus, the gauge for taxability under the said Ordinance No.
7516 as amended does not depend on the location of the office, but attaches upon the place where the
respective sale transaction(s) is perfected and consummated. (See Koppel (Phil.) vs. Yatco, 77 Phil. 496
[1946]) Since Allied Thread Co., Inc. sells its products in the City of Manila through its broker, Ker &
Company, Ltd., it cannot escape the tax liability imposed by Ordinance No. 7516 as amended.
DECISION
ABAD SANTOS, J p:
This is a Petition for Review challenging the decision of the then Court of First Instance of Manila

presided by then Judge, now Justice Lorenzo Relova, which upheld the validity of Manila Ordinance
No. 7516, as amended by Ordinance Nos. 7544, 7545 and 7556, and adjudging petitioner Allied Thread
Co., Inc. taxable thereunder considering that its products are sold in Manila.
On June 12, 1974, the Municipal Board of the City of Manila enacted Ordinance No. 7516 imposing on
manufacturers, importers or producers, doing business in the City of Manila, business taxes based on
gross sales on a graduated basis. The Mayor approved the said Ordinance on June 15, 1974. In due
time, the same ordinance underwent a series of amendments, to wit: on June 19, 1974, by Ordinance
No. 7544 approved by the Mayor on the same date; Ordinance No. 7545 enacted by the Municipal
Board on June 20, 1974 and approved by the Mayor on June 27, 1974; and Ordinance No. 7556,
enacted by the Municipal Board on July 20, 1974 and approved by the Mayor on July 29, 1974. LLjur
Ordinance No. 7516 as amended, reads as follows:
"Sec. 1.
Business Tax. There is hereby imposed on the following business in the City of
Manila an annual tax collectible quarterly except on those for which fixed taxes are already provided
for as follows:
A.
On manufacturers, importers, or producers of any article of commerce of whatever kind or
nature, including brewers, distilled spirits and/or wines in accordance with the following schedule:
xxx
xxx
xxx
"PROVIDED HOWEVER, that for purposes of collection of this tax, manufacturers and producers
maintaining or operating branch or sales offices elsewhere shall record the sale in the branch or sales
office making the sale and the tax thereon shall accrue to the City of Manila if the branch of sales office
is in Manila. In cases where there is no such branch or sales office in the city, the sale shall be duly
recorded in the principal office along with the sales made in the principal office. Sixty percent of all
sales recorded in the principal office shall be taxable by the City of Manila if the principal office is in
Manila, while the remaining forty percent shall be deemed as sales made in the factory and shall be
taxable by the local government where the factory is located.
"In cases where a manufacturer or producer has factories in Manila and in different localities, the forty
per cent sales allocation mentioned in the preceding paragraph shall be appropriated among the City of
Manila and the localities where the factories are situated in proportion to their respective volumes of
production during the period for which the tax is due."
The records show that petitioner Allied Thread Co., Inc. is engaged in the business of manufacturing
sewing thread and yarn under duly registered marks and labels. It operates its factory and maintains an
office in Pasig, Rizal. In order to sell its products in Manila and in other parts of the Philippines,
petitioner Allied Thread Co., Inc. engaged the services of a sales broker, Ker & Company, Ltd. (copetitioner herein), the latter deriving commissions from every sale made for its principal. cdasia
Having been affected by the aforementioned Ordinance, being manufacturers and sales brokers, on July
22, 1974, Allied Thread Co., Inc. and Ker & Co., Ltd. filed with the defunct Court of First Instance of
Manila, a petition for Declaratory Relief, contending that Ordinance No. 7516, as amended, is not valid
nor enforceable as the same is contrary to Section 54 of Presidential Decree No. 426, as clarified by
Local Tax Regulation No. 1-74 dated April 8, 1974 of the Department of Finance, reading as follows:
"J.
GENERAL PROVISIONS
1.
All existing tax ordinance of provinces, cities, municipalities and barrios shall be deemed ipso
facto nullified on June 30, 1974.
2.
The local boards or councils should enact their respective tax ordinances pursuant to the
provisions of the Local Tax Code, as amended by P.D. 426, to take effect not earlier than July 1, 1974.
3.
Pursuant to the provisions of Section 42 of the Code, as amended by Section 18 of the said
Decree, a local tax ordinance shall go into effect on the 15th day after approved by the local chief
executives in accordance with Section 41 of the Code.
4.
In view hereof, and considering the provisions of Section 54 of the Code, regarding the accrual
of taxes a local tax ordinance intended to take effect on July 1, 1974 should be enacted by the Local

Chief Executive not later than June 15, 1974." (Emphasis supplied)
Otherwise stated, petitioners assert that due to the series of amendments to Ordinance No. 7516, the
same Ordinance fell short of the deadline set by Sec. 54 of P.D. No. 426 that "for an ordinance intended
to take effect on July 1, 1974, it must be enacted on or before June 15, 1974." Necessarily, so it is
asserted, the said Ordinance No. 7516 as amended, is not valid nor enforceable.
Petitioners further contend that the questioned Ordinance did not comply with the necessary
publication requirement in a newspaper of general circulation as mandated by Sec. 43 of the Local Tax
Code. Petitioner Allied Thread Co., Inc. also claims that it should not be subjected to the said
Ordinance No. 7516 as amended, because it does not operate or maintain a branch office in Manila and
that its principal office and factory are located in Pasig, Rizal.
We agree with the decision of the then Court of First Instance of Manila, upholding the validity of
Ordinance No. 7516 as amended, and finding petitioner Allied Thread Co., Inc. the proper subject
thereto.
There is no dispute that Ordinance No. 7516 was enacted by the Municipal Board of Manila on June
12, 1974 and approved by the City Mayor on June 15, 1974. Fifteen (15) days thereafter, or on July 1,
1974, the said ordinance became effective pursuant to Sec. 42 of the Local Tax Code. It is clear
therefore that Ordinance No. 7516 has fully conformed with P.D. No. 426 and Local Tax Regulation
No. 1-74 which require that "a local tax ordinance intended to take effect on July 1, 1974 should be
enacted by the Local Chief Executive not later than June 15, 1974". The subsequent amendments to the
basic ordinance did not in any way invalidate it nor move the date of its effectivity. To hold otherwise
would limit the power of the defunct Municipal Board of Manila to amend an existing ordinance as
exigencies require.
Petitioners complain that they were not fully apprised of the enactment of Ordinance No. 7516 for the
same was not duly published in a newspaper of general circulation. Respondents argue however, that
copies of Ordinance No. 7516 and its amendments were posted in public buildings, government offices,
and public places in lieu of publication in newspaper of general circulation.
We are persuaded that there was substantial compliance of the law on publication. Section 43 of the
Local Tax Code provides two modes of apprising the public of a new ordinance, either, (a) by means of
publication in a newspaper of general circulation or, (b) by means of posting of copies thereof in the
local legislative hall or premises and two other conspicuous places within the territorial jurisdiction of
the local government. Respondents, having complied with the second mode of notice, We are of the
opinion that there is no legal infirmity to the validity of Ordinance No. 7516 as amended.
Finally, petitioner Allied Thread Co., Inc. claims exclusion from Ordinance No. 7515 as amended on
the ground that it does not maintain an office or branch office in the City of Manila, where the subject
Ordinance only applies. This contention is devoid of merit. Allied Thread Co., Inc. admits that it does
business in the City of Manila through a broker or agent, Ker & Company, Ltd. Doing business in the
City of Manila is all that is required to fall within the coverage of the Ordinance.
It should be noted that Ordinance No. 7516 as amended imposes a business tax on manufacturers,
importers or producers doing business in the City of Manila. The tax imposition here is upon the
performance of an act, enjoyment of a privilege, or the engaging in an occupation, and hence is in the
nature of an excise tax. LLjur
The power to levy an excise upon the performance of an act or the engaging in an occupation does not
depend upon the domicile of the person subject to the excise, nor upon the physical location of the
property and in connection with the act or occupation taxed, but depends upon the place in which the
act is performed or occupation engaged in.
Thus, the gauge for taxability under the said Ordinance No. 7516 as amended does not depend on the
location of the office, but attaches upon the place where the respective sale transaction(s) is perfected
and consummated. (See Koppel (Phil) vs. Yatco, 77 Phil. 496 [1946].) Since Allied Thread Co., Inc.
sells its products in the City of Manila through its broker, Ker & Company, Ltd., it cannot escape the

tax liability imposed by Ordinance No. 7516 as amended.

WHEREFORE, the petition is hereby dismissed for lack of merit, Costs against the petitioners.
SO ORDERED.
Fernando, C .J ., Makasiar, Aquino, Concepcion, Jr., Melencio-Herrera, Plana, Escolin, Gutierrez, Jr.,
De la Fuente and Cuevas, JJ ., concur.
Teehankee and Relova, JJ ., took no part.

FIRST DIVISION
[G.R. No. 154092. July 14, 2005.]
MOBIL PHILIPPINES, INC., petitioner, vs. THE CITY TREASURER OF MAKATI and the CHIEF
OF THE LICENSE DIVISION OF THE CITY OF MAKATI, respondents.
Siguion Reyna Montecillo & Ongsiako for petitioner.
The City Attorney for respondents.
SYLLABUS
1.
TAXATION; LOCAL TAXATION; BUSINESS TAX DISTINGUISHED FROM INCOME
TAX. Business taxes imposed in the exercise of police power for regulatory purposes are paid for
the privilege of carrying on a business in the year the tax was paid. It is paid at the beginning of the
year as a fee to allow the business to operate for the rest of the year. It is deemed a prerequisite to the
conduct of business. Income tax, on the other hand, is a tax on all yearly profits arising from property,
professions, trades or offices, or as a tax on a person's income, emoluments, profits and the like. It is
tax on income, whether net or gross realized in one taxable year. It is due on or before the 15th day of
the 4th month following the close of the taxpayer's taxable year and is generally regarded as an excise
tax, levied upon the right of a person or entity to receive income or profits. EaIDAT
2.
ID.; ID.; ID.; TRIAL COURT ERRED IN HOLDING THAT THE PAYMENTS MADE BY
PETITIONER CORPORATION IN 1998 ARE PAYMENTS FOR BUSINESS TAX INCURRED IN
1997 WHICH ONLY ACCRUED IN JANUARY 1998; REASON FOR CONFUSION IS SECTION
3A.04 OF THE MAKATI REVENUE CODE WHERE IT PROVIDES THAT BUSINESS TAX, LIKE
THE INCOME TAX, IS COMPUTED ON THE PREVIOUS YEAR'S FIGURES. The trial court
erred when it said that the payments made by petitioner in 1998 are payments for business tax incurred
in 1997 which only accrued in January 1998. Likewise, it erred when it ruled that petitioner was still
liable for business taxes based on its gross income/revenue for January to August 1998. Under Section
3A.04 of the Makati Revenue Code, it appears that the business tax, like income tax, is computed based
on the previous year's figures. This is the reason for the confusion. A newly-started business is already
liable for business taxes (i.e., license fees) at the start of the quarter when it commences operations. In
computing the amount of tax due for the first quarter of operations, the business' capital investment is
used as the basis. For the subsequent quarters of the first year, the tax is based on the gross
sales/receipts for the previous quarter. In the following year(s), the business is then taxed based on the
gross sales or receipts of the previous year. The business taxes paid in the year 1998 is for the privilege
of engaging in business for the same year, and not for having engaged in business for 1997.
3.
ID.; ID.; ID.; RESPONDENTS ERRONEOUSLY TREATED THE ASSESSMENT AND
COLLECTION OF BUSINESS TAX AS IF IT WERE INCOME TAX, BY RENDERING AN
ADDITIONAL ASSESSMENT FOR THE REVENUE GENERATED IN THE YEAR 1998. Upon
its transfer, petitioner was apparently subjected to Sec. 3A.11 par. (g) which states: . . . (g) Retirement
of business. . . . For purposes thereof, termination shall mean that business operation are stopped
completely. . . . (2) If it is found that the retirement or termination of the business is legitimate, [a]nd
the tax due therefrom be less than the tax due for the current year based on the gross sales or receipts,
the difference in the amount of the tax shall be paid before the business is considered officially retired
or terminated. Based on this foregoing provision, on the year an establishment retires or terminates its
business within the municipality, it would be required to pay the difference in the amount if the tax
collected, based on the previous year's gross sales or receipts, is less than the actual tax due based on
the current year's gross sales or receipts. For the year 1998, petitioner paid a total of P2,262,122.48 to
the City Treasurer of Makati as business taxes for the year 1998. The amount of tax as computed based
on petitioner's gross sales for 1998 is only P1,331,638.84. Since the amount paid is more than the
amount computed based on petitioner's actual gross sales for 1998, petitioner upon its retirement is not
liable for additional taxes to the City of Makati. Thus, we find that the respondent erroneously treated
the assessment and collection of business tax as if it were income tax, by rendering an additional

assessment of P1,331,638.84 for the revenue generated for the year 1998. CAHTIS
DECISION
QUISUMBING, J p:
This petition for review on certiorari seeks the reversal of the Decision 1 dated November 22, 2001 of
the Regional Trial Court of Pasig City, Branch 268, in Civil Case No. 67599, subsequently affirmed in
an Order 2 dated May 15, 2002. EaISDC
Petitioner is a domestic corporation engaged in the manufacturing, importing, exporting and
wholesaling of petroleum products, while respondents are the local government officials of the City of
Makati charged with the implementation of the Revenue Code of the City of Makati, as well as the
collection and assessment of business taxes, license fees and permit fees within said city. 3
Prior to September 1998, petitioner's principal office was at the National Development Company
Building, in 116 Tordesillas St., Salcedo Village, Makati City. On August 20, 1998, petitioner filed an
application with the City Treasurer of Makati for the retirement of its business within the City of
Makati as it moved its principal place of business to Pasig City. 4
In its application, petitioner declared its gross sales/receipts as follows:
Gross Sales Receipts for Calendar Year 1997
P453,799,493.29
Gross Sales Receipts for Calendar Year 1998
267,952,766.67 5
January to August
Upon evaluation of petitioner's application, then OIC of the License Division, Ms. Jesusa E. Cuneta,
issued to petitioner, a billing slip 6 assessing the following taxes against petitioner: CcaASE
For the 4th Quarter of 1998 (based on 1997 gross sales)
As Manufacturer
P14,439.54
As Wholesaler550,778.58
Garbage Fee 1,250.00
Sub-Total
P566,468.12
For the Gross Sales made in 1998
As Manufacture
P40,008.33
As Wholesaler1,291,630.51
Sub-Total
1,331,638.84

TOTAL ASSESSED BUSINESS TAXES P1,898,106.96 7

On September 11, 1998, petitioner paid the assessed amount of P1,898,106.96 under protest. The City
Treasurer issued therefor Official Receipt No. 9065025C 8 and approved the petitioner's application for
retirement of business from Makati to Pasig City. DTESIA
On July 21, 1999, petitioner filed a claim for P1,331,638.84 refund. 9 On August 11, 1999, petitioner
received a letter 10 denying the claim for refund on the ground that petitioner was merely transferring
and not retiring its business, and that the gross sales realized while petitioner still maintained office in
Makati from January 1 to August 31, 1998 should be taxed in the City of Makati. 11
Petitioner subsequently filed a petition with the Regional Trial Court of Pasig City, Branch 268,
seeking the refund of business taxes erroneously collected by the City of Makati.
In its Decision, the trial court ruled as follows:
In summary, the pertinent law provides that a person or entity doing business in the Municipality shall
be subject to business tax. The tax shall be fixed by the quarter. The initial tax for the quarter in which a
business starts to operate shall be two and one-half percent (2 1/2%) of one percent (1%) of its capital
investment. Thereafter, the tax shall be computed based on the gross sales or receipts of the preceding
quarter. In the succeeding calendar year, regardless of when the business started to operate, the tax shall
be based on the gross sales or receipts for the preceding calendar year. That tax shall accrue on the first
day of January of each year and payment shall be made within the first 20 days of January or of each
subsequent quarter as the case may be. TaIHEA

Considering therefore that the business tax accrues only on the first day of January as provided in Sec.
3A.07 and becomes payable within the first 20 days thereof or of each subsequent quarter, the
payments made by Mobil in the year 1998 are therefore payments for the business tax for 1997 which
accrued in January of 1998 and became payable within the first 20 days of January or of each
subsequent quarter. Thus, upon retirement in August 1998, the taxes for said year which should accrue
in January 1999 [become] immediately payable before the application for retirement can be approved
(Ibid, (g), Sec. 3A.08). The assessment of the Chief of the License Division of Makati is therefore with
legal basis and does not constitute double taxation.
WHEREFORE, premises considered, the instant petition for refund is hereby DENIED and the case is
dismissed for lack of merit.
SO ORDERED. 12
Petitioner filed a Motion for Reconsideration 13 which was denied in an Order dated May 15, 2002,
hence this appeal.
Before us, petitioner alleges now that,
THE TRIAL COURT ERRED IN HOLDING THAT PETITIONER'S BUSINESS TAX PAYMENTS
MADE IN 1998 ARE ACTUALLY PAYMENTS FOR BUSINESS TAXES IN 1997. THIS
CONCLUSION IS CONTROVERTED BY MAKATI CITY'S REVENUE CODE, AND, IN FACT,
CONSTITUTES DOUBLE TAXATION. 14
Simply stated, the issue is: Are the business taxes paid by petitioner in 1998, business taxes for 1997 or
1998?
According to petitioner, the 1997 gross sales/revenue is merely the basis for the amount of business
taxes due for the privilege of carrying on a business in the year when the tax was paid. SATDHE
For their part, respondents argue that since local taxes, which include business taxes, are paid either
within the first twenty days of January of each year or of each subsequent quarter, as the case may be,
what the taxpayer actually pays during the recorded calendar year is actually its business tax for the
preceding year.
Prefatorily, it is necessary to distinguish between a business tax vis--vis an income tax.
Business taxes imposed in the exercise of police power for regulatory purposes are paid for the
privilege of carrying on a business in the year the tax was paid. It is paid at the beginning of the year as
a fee to allow the business to operate for the rest of the year. It is deemed a prerequisite to the conduct
of business.
Income tax, on the other hand, is a tax on all yearly profits arising from property, professions, trades or
offices, or as a tax on a person's income, emoluments, profits and the like. It is tax on income, whether
net or gross realized in one taxable year. 15 It is due on or before the 15th day of the 4th month
following the close of the taxpayer's taxable year and is generally regarded as an excise tax, levied
upon the right of a person or entity to receive income or profits.
The trial court erred when it said that the payments made by petitioner in 1998 are payments for
business tax incurred in 1997 which only accrued in January 1998. Likewise, it erred when it ruled that
petitioner was still liable for business taxes based on its gross income/revenue for January to August
1998.
Section 3A.04 of the Makati City Revenue Code states:
Sec. 3A.04. Computation of tax for newly-started business. In the case of newly-started business
under Sec. 3A.02, (a), (b), (c), (d), (e), (f), (g), (h), (i), (j), (k), (l), and (m) above, the tax shall be fixed
by the quarter. The initial tax of the quarter in which the business starts to operate shall be two and one
half percent (2 1/2 %) of one percent (1%) of the capital investment.
In the succeeding quarter or quarters, in cases where the business opens before the last quarter of the
year, the tax shall be based on the gross sales or receipt for the preceding quarter at one-half (1/2) of the
rates fixed therefor by the pertinent schedule in Section 3A.02, (a), (b), (c), (d), (e), (f), (g), (h), (i), (j),
(k), (l), and (m). EHASaD

In the succeeding calendar year, regardless of when the business started to operate, the tax shall be
based on the gross sales or receipts for the preceding calendar year, or any fraction thereof as provided
in the same pertinent schedules. 16
Under the Makati Revenue Code, it appears that the business tax, like income tax, is computed based
on the previous year's figures. This is the reason for the confusion. A newly-started business is already
liable for business taxes (i.e. license fees) at the start of the quarter when it commences operations. In
computing the amount of tax due for the first quarter of operations, the business' capital investment is
used as the basis. For the subsequent quarters of the first year, the tax is based on the gross
sales/receipts for the previous quarter. In the following year(s), the business is then taxed based on the
gross sales or receipts of the previous year. The business taxes paid in the year 1998 is for the privilege
of engaging in business for the same year, and not for having engaged in business for 1997.
Upon its transfer, petitioner was apparently subjected to Sec. 3A.11 par. (g) which states:
xxx
xxx
xxx
(g)
Retirement of business.
xxx
xxx
xxx
For purposes thereof, termination shall mean that business operation are stopped completely.
xxx
xxx
xxx
(2)
If it is found that the retirement or termination of the business is legitimate, [a]nd the tax due
therefrom be less than the tax due for the current year based on the gross sales or receipts, the
difference in the amount of the tax shall be paid before the business is considered officially retired or
terminated. 17
Based on this foregoing provision, on the year an establishment retires or terminates its business within
the municipality, it would be required to pay the difference in the amount if the tax collected, based on
the previous year's gross sales or receipts, is less than the actual tax due based on the current year's
gross sales or receipts. aDcHIC
For the year 1998, petitioner paid a total of P2,262,122.48 to the City Treasurer of Makati 18 as
business taxes for the year 1998. The amount of tax as computed based on petitioner's gross sales for
1998 is only P1,331,638.84. Since the amount paid is more than the amount computed based on
petitioner's actual gross sales for 1998, petitioner upon its retirement is not liable for additional taxes to
the City of Makati. Thus, we find that the respondent erroneously treated the assessment and collection
of business tax as if it were income tax, by rendering an additional assessment of P1,331,638.84 for the
revenue generated for the year 1998. TaSEHC
WHEREFORE, the assailed Decision is hereby REVERSED and respondents City Treasurer and Chief
of the License Division of Makati City are ordered to REFUND to petitioner business taxes paid in the
amount of P1,331,638.84. Costs against respondents.
SO ORDERED.
Davide, Jr., C.J., Ynares-Santiago, Carpio and Azcuna, JJ., concur.
Footnotes
1.
Rollo, pp. 49-55. Penned by Judge Amelia C. Manalastas.
2.
Id. at 64-65.
3.
Id. at 9.
4.
Id. at 10.
5.
Id. at 44.
6.
Id. at 40.
7.
Supra, note 5.
8.
Id. at 42.
9.
Id. at 43-47.
10.
Id. at 48.
11.
Id. at 11-12.

12.
Id. at 54-55.
13.
Id. at 56-63.
14.
Id. at 13.
15.
Teodoro and De Leon, THE LAW ON INCOME TAXATION, p. 6 (11th ed. 2001) citing 61
C.J.S. 1559 and 27 Am Jur. 308.
16.
Rollo, p. 14.
17.
Id. at 52-54.
18.
P1,695,654.36 for the first to the third quarter of 1998 plus the assessed amount of P566,468.12
for the fourth quarter of 1998, paid on September 11, 1998.

FIRST DIVISION
[G.R. No. 137621. February 6, 2002.]
HAGONOY MARKET VENDOR ASSOCIATION, petitioner, vs. MUNICIPALITY OF HAGONOY,
BULACAN, respondent.
Emerico B. Lomibao for petitioner.
Joselito H.J. Reyes for private respondent.
SYNOPSIS
On October 1, 1996, the Sangguniang Bayan of Hagonoy, Bulacan enacted Ordinance No. 28
increasing the stall rentals of the market vendors in Hagonoy. Members of petitioner association
participated in several public hearings conducted by the Sanggunian Bayan. The ordinance was
approved by the Acting Mayor on October 7, 1996. Copies of the ordinance were given to the
Municipal Treasurer and posted in three public places in lieu of publication as there was no newspaper
of local circulation in the municipality. On December 8, 1997, petitioner's president appealed to the
Secretary of Justice. The appeal was dismissed for being filed out of time. Petitioner appealed to the
Court of Appeals. The appeal was dismissed for failure to attach certified true copies of the assailed
resolutions of the Secretary of Justice. On motion for reconsideration, petitioner explained that it
exerted due diligence to get copies of the resolutions but failed to do so on account of typhoon
"Loleng." The motion was denied. Hence, the present recourse. DTSIEc
The appellate court should have tempered its strict application of procedural rules in view of the
fortuitous event and considering that litigation is not a game of technicalities.
Pursuant to the provisions of Section 187 of the 1991 Local Government Code, an appeal questioning
the constitutionality or legality of a tax ordinance must be filed within thirty (30) days from its
effectivity to the Secretary of Justice. In the case at bar, the filing of the appeal more than a year after
the effectivity of the ordinance is barred for being filed late and was rightly dismissed by the Justice
Secretary. Petition dismissed.
SYLLABUS
1.
REMEDIAL LAW; APPEAL; CERTIFIED COPIES OF ASSAILED RESOLUTION MUST
BE ATTACHED TO PETITION; FAILURE TO ATTACH RESOLUTION ON GROUND OF
FORTUITOUS EVENT IN CASE AT BAR. We find that the Court of Appeals erred in dismissing
petitioner's appeal on the ground that it was formally deficient. It is clear from the records that the
petitioner exerted due diligence to get the copies of its appealed Resolutions certified by the
Department of Justice, but failed to do so on account of typhoon "Loleng." Under the circumstances,
respondent appellate court should have tempered its strict application of procedural rules in view of the
fortuitous event considering that litigation is not a game of technicalities.
2.
ADMINISTRATIVE LAW; LOCAL GOVERNMENT CODE; TAX ORDINANCE; 30-DAY
PERIOD OF APPEAL TIME-BARRED IN CASE AT BAR. We hold that the petition should be
dismissed as the appeal of the petitioner with the Secretary of Justice is already time-barred. The
applicable law is Section 187 of the 1991 Local Government Code. The aforecited law requires that an
appeal of a tax ordinance or revenue measure should be made to the Secretary of Justice within thirty
(30) days from effectivity of the ordinance and even during its pendency, the effectivity of the assailed
ordinance shall not be suspended. In the case at bar, Municipal Ordinance No. 28 took effect in October
1996. Petitioner filed its appeal only in December 1997, more than a year after the effectivity of the
ordinance in 1996. Clearly, the Secretary of Justice correctly dismissed it for being time-barred. At this
point, it is apropos to state that the time frame fixed by law for parties to avail of their legal remedies
before competent courts is not a "mere technicality" that can be easily brushed aside. The periods stated
in Section 187 of the Local Government Code are mandatory. Ordinance No. 28 is a revenue measure
adopted by the municipality of Hagonoy to fix and collect public market stall rentals. Being its
lifeblood, collection of revenues by the government is of paramount importance. The funds for the
operation of its agencies and provision of basic services to its inhabitants are largely derived from its

revenues and collections. Thus, it is essential that the validity of revenue measures is not left uncertain
for a considerable length of time. Hence, the law provided a time limit for an aggrieved party to assail
the legality of revenue measures and tax ordinances. cCHITA
3.
ID.; ID.; ID.; PUBLIC HEARING PRESENT IN CASE AT BAR. Petitioner's bold assertion
that there was no public hearing conducted prior to the passage of Kautusan Blg. 28 is belied by its own
evidence. In petitioner's two (2) communications with the Secretary of Justice, it enumerated the
various objections raised by its members before the passage of the ordinance in several meetings called
by the Sanggunian for the purpose. These show beyond doubt that petitioner was aware of the proposed
increase and in fact participated in the public hearings therefor. The respondent municipality likewise
submitted the Minutes and Report of the public hearings conducted by the Sangguniang Bayan's
Committee on Appropriations and Market on February 6, July 15 and August 19, all in 1996, for the
proposed increase in the stall rentals. Petitioner cannot gripe that there was practically no public
hearing conducted as its objections to the proposed measure were not considered by the Sangguniang
Bayan. To be sure, public hearings are conducted by legislative bodies to allow interested parties to
ventilate their views on a proposed law or ordinance. These views, however, are not binding on the
legislative body and it is not compelled by law to adopt the same. Sanggunian members are elected by
the people to make laws that will promote the general interest of their constituents. They are mandated
to use their discretion and best judgment in serving the people. Parties who participate in public
hearings to give their opinions on a proposed ordinance should not expect that their views would be
patronized by their lawmakers.
4.
ID.; ID:, ID.; PUBLICATION OR POSTING; COMPLIED WITH IN CASE AT BAR. On
the issue of publication or posting, Section 188 of the Local Government Code provides that . . .
municipalities where there are no newspapers of local circulation, the same may be posted in at least
two (2) conspicuous and publicly accessible places." The records is bereft of any evidence to prove
petitioner's negative allegation that the subject ordinance was not posted as required by law. In contrast,
the respondent Sangguniang Bayan of the Municipality of Hagonoy, Bulacan, presented evidence
which clearly shows that the procedure for the enactment of the assailed ordinance was complied with.
Municipal Ordinance No. 28 was enacted by the Sanggunian Bayan of Hagonoy on October 1, 1996.
Then Acting Municipal Mayor Maria Garcia Santos approved the Ordinance on October 7, 1996. After
its approval, copies of the Ordinance were given to the Municipal Treasurer on the same day. On
November 9, 1996, the Ordinance was approved by the Sangguniang Panlalawigan. The Ordinance was
posted during the period from November 4-25, 1996 in three (3) public places, viz: in front of the
municipal building, at the bulletin board of the Sta. Ana Parish Church and on the front door of the
Office of the Market Master in the public market. Posting was validly made in lieu of publication as
there was no newspaper of local circulation in the municipality of Hagonoy. This fact was known to
and admitted by petitioner. Thus, petitioner's ambiguous and unsupported claim that it was only
"sometime in November 1997" that the Provincial Board approved Municipal Ordinance No. 28 and so
the posting could not have been made in November 1996 was sufficiently disproved by the positive
evidence of respondent municipality. Given the foregoing circumstances, petitioner cannot validly
claim lack of knowledge of the approved ordinance. The filing of its appeal a year after the effectivity
of the subject ordinance is fatal to its cause. HECaTD
5.
ID.; ID.; ID.; NO LIMIT OF PERCENTAGE INCREASE TO TAX RATES. Finally, even on
the substantive points raised, the petition must fail. Section 6 c.04 of the 1993 Municipal Revenue
Code and Section 191 of the Local Government Code limiting the percentage of increase that can be
imposed apply to tax rates, not rentals. Neither can it be said that the rates were not uniformly imposed
or that the public markets included in the Ordinance were unreasonably determined or classified. To be
sure, the Ordinance covered the three (3) concrete public markets: the two-storey Bagong Palengke, the
burnt but reconstructed Lumang Palengke and the more recent Lumang Palengke with wet market.
However, the Palengkeng Bagong Munisipyo or Gabaldon was excluded from the increase in rentals as

it is only a makeshift, dilapidated place, with no doors or protection for security, intended for transient
peddlers who used to sell their goods along the sidewalk.
DECISION
PUNO, J p:
Laws are of two (2) kinds: substantive and procedural. Substantive laws, insofar as their provisions are
unambiguous, are rigorously applied to resolve legal issues on the merits. In contrast, courts generally
frown upon an uncompromising application of procedural laws so as not to subvert substantial justice.
Nonetheless, it is not totally uncommon for courts to decide cases based on a rigid application of the
so-called technical rules of procedure as these rules exist for the orderly administration of justice.
Interestingly, the case at bar singularly illustrates both instances, i.e., when procedural rules are
unbendingly applied and when their rigid application may be relaxed. cda
This is a petition for review of the Resolution 1 of the Court of Appeals, dated February 15, 1999,
dismissing the appeal of petitioner Hagonoy Market Vendor Association from the Resolutions of the
Secretary of Justice for being formally deficient.
The facts: On October 1, 1996, the Sangguniang Bayan of Hagonoy, Bulacan, enacted an ordinance,
Kautusan Blg. 28, 2 which increased the stall rentals of the market vendors in Hagonoy. Article 3
provided that it shall take effect upon approval. The subject ordinance was posted from November 425, 1996. 3
In the last week of November, 1997, the petitioner's members were personally given copies of the
approved Ordinance and were informed that it shall be enforced in January, 1998. On December 8,
1997, the petitioner's President filed an appeal with the Secretary of Justice assailing the
constitutionality of the tax ordinance. Petitioner claimed it was unaware of the posting of the ordinance.
Respondent opposed the appeal. It contended that the ordinance took effect on October 6, 1996 and that
the ordinance, as approved, was posted as required by law. Hence, it was pointed out that petitioner's
appeal, made over a year later, was already time-barred.
The Secretary of Justice dismissed the appeal on the ground that it was filed out of time, i.e., beyond
thirty (30) days from the effectivity of the Ordinance on October 1, 1996, as prescribed under Section
187 of the 1991 Local Government Code. Citing the case of Taada vs. Tuvera, 4 the Secretary of
Justice held that the date of effectivity of the subject ordinance retroacted to the date of its approval in
October 1996, after the required publication or posting has been complied with, pursuant to Section 3
of said ordinance. 5
After its motion for reconsideration was denied, petitioner appealed to the Court of Appeals. Petitioner
did not assail the finding of the Secretary of Justice that their appeal was filed beyond the reglementary
period. Instead, it urged that the Secretary of Justice should have overlooked this "mere technicality"
and ruled on its petition on the merits. Unfortunately, its petition for review was dismissed by the Court
of Appeals for being formally deficient as it was not accompanied by certified true copies of the
assailed Resolutions of the Secretary of Justice. 6
Undaunted, the petitioner moved for reconsideration but it was denied. 7
Hence, this appeal, where petitioner contends that:
I
THE HONORABLE COURT OF APPEALS, WITH DUE RESPECT, ERRED IN ITS STRICT,
RIGID AND TECHNICAL ADHERENCE TO SECTION 6, RULE 43 OF THE 1997 RULES OF
COURT AND THIS, IN EFFECT, FRUSTRATED THE VALID LEGAL ISSUES RAISED BY THE
PETITIONER THAT ORDINANCE (KAUTUSAN) NO. 28 WAS NOT VALIDLY ENACTED, IS
CONTRARY TO LAW AND IS UNCONSTITUTIONAL, TANTAMOUNT TO AN ILLEGAL
EXACTION IF ENFORCED RETROACTIVELY FROM THE DATE OF ITS APPROVAL ON
OCTOBER 1, 1996.
II
THE HONORABLE COURT OF APPEALS, WITH DUE RESPECT, ERRED IN DENYING THE

MOTION FOR RECONSIDERATION NOTWITHSTANDING PETITIONER'S EXPLANATION

THAT ITS FAILURE TO SECURE THE CERTIFIED TRUE COPIES OF THE RESOLUTIONS OF
THE DEPARTMENT OF JUSTICE WAS DUE TO THE INTERVENTION OF AN ACT OF GOD
TYPHOON "LOLENG," AND THAT THE ACTUAL COPIES RECEIVED BY THE PETITIONER
MAY BE CONSIDERED AS SUBSTANTIAL COMPLIANCE WITH THE RULES.
III
PETITIONER WILL SUFFER IRREPARABLE DAMAGE IF ORDINANCE/KAUTUSAN NO. 28
BE NOT DECLARED NULL AND VOID AND IS ALLOWED TO BE ENFORCED
RETROACTIVELY FROM OCTOBER 1, 1996, CONTRARY TO THE GENERAL RULE, ARTICLE
4 OF THE CIVIL CODE, THAT NO LAW SHALL HAVE RETROACTIVE EFFECT.
The first and second assigned errors impugn the dismissal by the Court of Appeals of its petition for
review for petitioner's failure to attach certified true copies of the assailed Resolutions of the Secretary
of Justice. The petitioner insists that it had good reasons for its failure to comply with the rule and the
Court of Appeals erred in refusing to accept its explanation.
We agree.
In its Motion for Reconsideration before the Court of Appeals, 8 the petitioner satisfactorily explained
the circumstances relative to its failure to attach to its appeal certified true copies of the assailed
Resolutions of the Secretary of Justice, thus:
". . . (D)uring the preparation of the petition on October 21, 1998, it was raining very hard due to
(t)yphoon "Loleng." When the petition was completed, copy was served on the Department of Justice at
about (sic) past 4:00 p.m. of October 21, 1998, with (the) instruction to have the Resolutions of the
Department of Justice be stamped as "certified true copies. However, due to bad weather, the person in
charge (at the Department of Justice) was no longer available to certify to (sic) the Resolutions.
"The following day, October 22, 1998, was declared a non-working holiday because of (t)yphoon
"Loleng." Thus, petitioner was again unable to have the Resolutions of the Department of Justice
stamped "certified true copies." In the morning of October 23, 1998, due to time constraint(s), herein
counsel served a copy by personal service on (r)espondent's lawyer at (sic) Malolos, Bulacan, despite
the flooded roads and heavy rains. However, as the herein counsel went back to Manila, (official
business in) government offices were suspended in the afternoon and the personnel of the Department
of Justice tasked with issuing or stamping, "certified true copies" of their Resolutions were no longer
available.
"To avoid being time-barred in the filing of the (p)etition, the same was filed with the Court of Appeals
"as is."
We find that the Court of Appeals erred in dismissing petitioner's appeal on the ground that it was
formally deficient. It is clear from the records that the petitioner exerted due diligence to get the copies
of its appealed Resolutions certified by the Department of Justice, but failed to do so on account of
typhoon "Loleng." Under the circumstances, respondent appellate court should have tempered its strict
application of procedural rules in view of the fortuitous event considering that litigation is not a game
of technicalities. 9
Nonetheless, we hold that the petition should be dismissed as the appeal of the petitioner with the
Secretary of Justice is already time-barred. The applicable law is Section 187 of the 1991 Local
Government Code which provides:
"SEC. 187. Procedure for Approval and Effectivity of Tax Ordinances and Revenue Measures;
Mandatory Public Hearings. The procedure for the approval of local tax ordinances and revenue
measures shall be in accordance with the provisions of this Code: Provided, That public hearings shall
be conducted for the purpose prior to the enactment thereof. Provided, further, That any question on the
constitutionality or legality of tax ordinances or revenue measures may be raised on appeal within
thirty (30) days from the effectivity thereof to the Secretary of Justice who shall render a decision
within sixty (60) days from the receipt of the appeal: Provided, however, That such appeal shall not

have the effect of suspending the effectivity of the ordinance and accrual and payment of the tax, fee or
charge levied therein: Provided, finally, That within thirty (30) days after receipt of the decision or the
lapse of the sixty-day period without the Secretary of Justice acting upon the appeal, the aggrieved
party may file appropriate proceedings.
The aforecited law requires that an appeal of a tax ordinance or revenue measure should be made to the
Secretary of Justice within thirty (30) days from effectivity of the ordinance and even during its
pendency, the effectivity of the assailed ordinance shall not be suspended. In the case at bar, Municipal
Ordinance No. 28 took effect in October 1996. Petitioner filed its appeal only in December 1997, more
than a year after the effectivity of the ordinance in 1996. Clearly, the Secretary of Justice correctly
dismissed it for being time barred. At this point, it is apropos to state that the timeframe fixed by law
for parties to avail of their legal remedies before competent courts is not a "mere technicality" that can
be easily brushed aside. The periods stated in Section 187 of the Local Government Code are
mandatory. 10 Ordinance No. 28 is a revenue measure adopted by the municipality of Hagonoy to fix
and collect public market stall rentals. Being its lifeblood, collection of revenues by the government is
of paramount importance. The funds for the operation of its agencies and provision of basic services to
its inhabitants are largely derived from its revenues and collections. Thus, it is essential that the validity
of revenue measures is not left uncertain for a considerable length of time. 11 Hence, the law provided
a time limit for an aggrieved party to assail the legality of revenue measures and tax ordinances.
In a last ditch effort to justify its failure to file a timely appeal with the Secretary of Justice, the
petitioner contends that its period to appeal should be counted not from the time the ordinance took
effect in 1996 but from the time its members were personally given copies of the approved ordinance in
November 1997. It insists that it was unaware of the approval and effectivity of the subject ordinance in
1996 on two (2) grounds: first, no public hearing was conducted prior to the passage of the ordinance
and, second, the approved ordinance was not posted.
We do not agree.
Petitioner's bold assertion that there was no public hearing conducted prior to the passage of Kautusan
Blg. 28 is belied by its own evidence. In petitioner's two (2) communications with the Secretary of
Justice, 12 it enumerated the various objections raised by its members before the passage of the
ordinance in several meetings called by the Sanggunian for the purpose. These show beyond doubt that
petitioner was aware of the proposed increase and in fact participated in the public hearings therefor.
The respondent municipality likewise submitted the Minutes and Report of the public hearings
conducted by the Sangguniang Bayan's Committee on Appropriations and Market on February 6, July
15 and August 19, all in 1996, for the proposed increase in the stall rentals. 13
Petitioner cannot gripe that there was practically no public hearing conducted as its objections to the
proposed measure were not considered by the Sangguniang Bayan. To be sure, public hearings are
conducted by legislative bodies to allow interested parties to ventilate their views on a proposed law or
ordinance. These views, however, are not binding on the legislative body and it is not compelled by law
to adopt the same. Sanggunian members are elected by the people to make laws that will promote the
general interest of their constituents. They are mandated to use their discretion and best judgment in
serving the people. Parties who participate in public hearings to give their opinions on a proposed
ordinance should not expect that their views would be patronized by their lawmakers.
On the issue of publication or posting, Section 188 of the Local Government Code provides:
"Section 188. Publication of Tax Ordinance and Revenue Measures. Within ten (10) days after their
approval, certified true copies of all provincial, city, and municipal tax ordinances or revenue measures
shall be published in full for three (3) consecutive days in a newspaper of local circulation; Provided,
however, That in provinces, cities and municipalities where there are no newspapers of local
circulation, the same may be posted in at least two (2) conspicuous and publicly accessible places."
(italics supplied)
The records is bereft of any evidence to prove petitioner's negative allegation that the subject ordinance

was not posted as required by law. In contrast, the respondent Sangguniang Bayan of the Municipality
of Hagonoy, Bulacan, presented evidence which clearly shows that the procedure for the enactment of
the assailed ordinance was complied with. Municipal Ordinance No. 28 was enacted by the
Sangguniang Bayan of Hagonoy on October 1, 1996. Then Acting Municipal Mayor Maria Garcia
Santos approved the Ordinance on October 7, 1996. After its approval, copies of the Ordinance were
given to the Municipal Treasurer on the same day. On November 9, 1996, the Ordinance was approved
by the Sangguniang Panlalawigan. The Ordinance was posted during the period from November 4-25,
1996 in three (3) public places, viz: in front of the municipal building, at the bulletin board of the Sta.
Ana Parish Church and on the front door of the Office of the Market Master in the public market. 14
Posting was validly made in lieu of publication as there was no newspaper of local circulation in the
municipality of Hagonoy. This fact was known to and admitted by petitioner. Thus, petitioner's
ambiguous and unsupported claim that it was only "sometime in November 1997" that the Provincial
Board approved Municipal Ordinance No. 28 and so the posting could not have been made in
November 1996 15 was sufficiently disproved by the positive evidence of respondent municipality.
Given the foregoing circumstances, petitioner cannot validly claim lack of knowledge of the approved
ordinance. The filing of its appeal a year after the effectivity of the subject ordinance is fatal to its
cause.
Finally, even on the substantive points raised, the petition must fail. Section 6c.04 of the 1993
Municipal Revenue Code and Section 191 of the Local Government Code limiting the percentage of
increase that can be imposed apply to tax rates, not rentals. Neither can it be said that the rates were not
uniformly imposed or that the public markets included in the Ordinance were unreasonably determined
or classified. To be sure, the Ordinance covered the three (3) concrete public markets: the two-storey
Bagong Palengke, the burnt but reconstructed Lumang Palengke and the more recent Lumang Palengke
with wet market. However, the Palengkeng Bagong Munisipyo or Gabaldon was excluded from the
increase in rentals as it is only a makeshift, dilapidated place, with no doors or protection for security,
intended for transient peddlers who used to sell their goods along the sidewalk. 16
IN VIEW WHEREOF, the petition is DISMISSED for lack of merit. No pronouncement as to costs.
AaEcDS
SO ORDERED.
Davide, Jr., C.J., Kapunan, Pardo and Ynares-Santiago, JJ., concur.
Footnotes
1.
Per Justice Cancio C. Garcia and concurred in by Justices Conrado M. Vasquez, Jr. and Teodoro
P. Regino; Rollo, pp. 25-26.
2.
Annex "E," Petition; Rollo, pp. 35-36; The ordinance was signed by Councilor Felix V. Ople,
Tagapangulo ng Sanggunian and Dr. Maria Garcia Santos as Pangulo Punong Bayan.
3.
Per Certification of Sanggunian Secretary Ma. Perpetua R. Santos; Rollo, at p. 49.
4.
146 SCRA 448, 452-454 (1986).
5.
Resolution, dated February 25, 1998; Rollo, pp. 27-29.
6.
Resolution, dated December 17, 1998; Rollo, pp. 22-23.
7.
Resolution, dated February 15, 1999; Rollo, pp. 25-26.
8.
Rollo, pp. 11-12.
9.
Government Service Insurance System vs. Court of Appeals, 266 SCRA 187(1997).
10.
Reyes, et al., vs. Court of Appeals, et al., 320 SCRA 486 (1999), citing Agpalo, Statutory
Construction, 1995 edition, p. 266.
11.
Commissioner of Internal Revenue vs. Algue, Inc., 158 SCRA 9 (1998).
12.
Pagtutol sa Kautusan Blg. 28, C.A. Rollo, p. 18; Paghahabol, CA Rollo, pp. 29-30.
13.
Rollo, pp. 82-95.
14.
Certification of Sanggunian Secretary Ma. Perpetua R. Santos; Rollo, p. 49; Affidavits of
municipal employee Ruperto dela Cruz and Municipal Councilor Cruz; Rollo, pp. 99-100.

15.
16.

See Reply; Rollo, at p. 54.

As shown in pictures attached to respondent's Memorandum; Rollo, pp. 117-118.

FIRST DIVISION
[G.R. No. 19297. January 26, 1923.]
ARMY & NAVY CLUB, MANILA, plaintiff-appellant, vs. WENCESLAO TRINIDAD, Collector of
Internal Revenue, defendant-appellee.
J.A. Wolfson for appellant.
City Fiscal Revilla for appellee.
SYLLABUS
1.
TAXATION; VALUATION OF REALTY. Real estate is to be valued for purposes of taxation
at its fair market value or, as it is called in the Charter of the City of Manila, its "cash value."
2.
ID.; ID.; FAIR MARKET VALUE, MEANING. By "fair market value" or "cash value" is
meant the amount of money which a purchaser willing but not obliged to but the property would pay to
an owner willing but not obliged to sell it, taking into consideration all uses to which the property is
adapted and might in reason be applied. The criterion established by the statute and by the decisions
contemplates a hypothetical sale. Hence, the buyers need not be actual and existing purchasers.
3.
ID.; ID.; ID. What a thing has cost is no infallible criterion of its market value.
4.
ID.; ID.; ID.; PROFITS. Where evidence of values is not reality obtained, the actual profits
made on the property may be considered.
5.
ID.; ID.; APPRAISEMENT BY ASSESSORS. Assessors, in fixing the value of property,
have to consider all the circumstances and elements of value, and must exercise a prudent discretion in
reaching conclusions. Courts, therefore, will not presume to interfere with the intelligent exercise of the
judgment of men specially trained in appraising property. Where the judicial mind is left in doubt, it is
a sound rule to leave the assessment undisturbed.
6.
ID.; ID.; ID.; ARMY AND NAVY CLUB OF MANILA. Held: That the action of the city
assessor of Manila in assessing the land on which the Army and Navy Club of Manila is situated at P20
a square the club paid the city for the land, will not be interfered with.
DECISION
MALCOLM, J p:
The question at issue in this case is whether the land on which the Army and Navy Club of Manila is
situated should be assessed at P4.04 a square meter, the amount which the club paid the City of Manila
for the land, or whether it should be assessed at P20 a square meter, the amount at which the city
assessor and collector valued the land. It is said to be a test case.
By a contract entered into on December 29, 1908, the City of Manila sold to the Army and Navy Club
of Manila 12,665.46 square meters and land located in the New Luneta, recently filled, for P4.04 a
square meter. It was agreed between the parties "that the above described premises, together with the
improvements which may be made there upon, shall be exempt from taxation for a period of ten years
following the date when the city engineer of the City of Manila shall make his certificate declaring that
said premises are ready for building purposes." It was further agreed, "that the party of the first part
shall have that right at its option to repurchase said described premises for public purposes only, at any
time after fifty years from the fulfilling of the terms of this contract and the conveyance of said
described premises by the first party or its successors to the second party or its successors, upon the
payment to the second party or its successors of the purchase price herein before set forth, plus the then
value of the improvements thereon, and when such value shall be ascertained and the whole amount
paid to the party of the second part or its successors, the second party agrees to reconvey the said
described premises with all the appurtenances thereunto belonging to the first party."
The final deed from the City of Manila was executed on September 20, 1918. It called for 12,705.30
square meters, and contained, among others, the clauses in the original document above quoted.
Taxes on the property, according to the aforesaid instruments, became payable for the first time in the
year 1920. The city assessor and collector thereupon assessed the land at P20 per square meter. The
Army and Navy Club paid the tax under protest. Subsequently, there followed the instant action. In the

lower court, after trial, judgment was rendered dismissing the complaint.
With this brief statement of the case and of the facts before us, the same issue which was set forth in
the beginning of the opinion reasserts itself for resolution.
It is a general rule that real estate is to be valued for purpose of taxation at its fair market value or, as it
is called in the Charter of the City of Manila, its " cash value." By "fair market value" or " cash value:
is meant the amount of money which a purchaser willing but not obliged the property would pay to an
owner willing but not obliged to sell it, taking into consideration all uses to which the property is
adapted and might in reason be applied. The criterion established by the statute and by the decisions
contemplates a hypothetical sale. Hence, the buyers need not be actual and existing purchasers. What a
thing has cost is no infallible criterion of its market value. (26 R. C. L., 365; Turnley vs. City of
Elizabeth [1908], 76 N. J. L., 42; Central Railroad Company vs. State Board of Assessors [1886], 49 N.
J. L., 1; Administrative Code, sec. 2483.)
Where evidence of values is not readily obtainable, the actual profits made on the property may be
considered. But in the case of exceptional property, not designed to yield a rental or income or to be
used for commercial purpose, but wholly or mainly for personal use, benefit, and gratification, the rule
that the rental or income of property is a proper criterion in ascertaining its value for taxation does not
apply. In fact, there exists no rigid rule for the valuation of property, which is affected by a multitude of
circumstances which no rule could foresee or provide for.( New Orleans Cotton Exchange vs. Board of
Assessors [1885], 37 La. Ann., 423.)
Up to this point, we stated facts and law to which both parties would agree. But having followed the
road thus far, the plaintiff and the defendant part company.
The principal thesis of the appellant is this: The land of the Army and Navy Club here in question has
no sales value other than P4.04 per square meter. In fact the land cannot be sold, in view of the clauses
in the deed giving the City of Manila the right to repurchase at P4.04, and restricting the use of the land
to club purposes. This is undeniably a strong position.
The principal basis for the decision of the trial judge, now taken over to support the contention of the
Government, is this: It cannot be deduced from the stipulation, authorizing the City of Manila to
purchase the land on which the Army and Club is located after the expiration of fifty years at the price
which the club paid for the land, that the value of the land was to remain stationary and invariable
throughout the fifty years. This, likewise, is a strong position.
To what has been said by counsel for the appellant and by the city fiscal, little can be added. The
authorities are not helpful. Deductive reasoning leads either to the bald proposition announced by the
appellant or to the bald proposition announced by the appellee.
After thoughtful consideration of the case, the members of the court have come to agree with the
judgment rendered by the trial court. They are the opinion that the views announced by the trial judge
and again advanced by the Government, are the more reasonable, everything considered. They cannot
believe that it was the intention to permit the Army and Navy Club to pay taxes on its land at the
purchase value throughout all the fifty years, while surrounding property in Ermita and on the Cavite
Boulevard must pay much more.
In addition, there are two other factors of some importance which can be mentioned. In the first place,
it cannot be presumed that the Government, in this instance, the City of Manila, would set up one
standard of taxation for one person and another standard for other persons. The city authorities must
have had in mind that conceding to the Army and Navy Club exemption from taxation for ten years was
the limit of municipal consideration.
In the next place, assessors, in fixing the value of property, have consider all the circumstances and
elements of value, and must exercise a prudent discretion in reaching conclusions. Courts, therefore,
will not presume to interfere with the intelligent exercise of the judgment of men specially trained in
appraising property. Where. as the Supreme Court of Louisiana says, the judicial mind is left in doubt,
it is a sound rule to leave the assessment undisturbed. (Viuda e Hijos de Pedro P. Roxas vs.

Rafferty[1918], 37 Phil., 957; New Orleans Cotton Exchange vs. Board of Assessors, supra.)
Frankly admitting, therefore, that appellant has made out a strong case, we are nevertheless constrained
to affirm the judgment, without special finding as to costs in either instance. So ordered.
Araullo, C.J., Street, Avancea, Villamor, Johns, and Romualdez, JJ., concur.

SECOND DIVISION
[G.R. No. 178030. December 15, 2010.]
PHILIPPINE FISHERIES DEVELOPMENT AUTHORITY (PFDA), petitioner, vs. CENTRAL
BOARD OF ASSESSMENT APPEALS, LOCAL BOARD OF ASSESSMENT APPEALS OF
LUCENA CITY, CITY OF LUCENA, LUCENA CITY ASSESSOR AND LUCENA CITY
TREASURER, respondents.
DECISION
CARPIO, J p:
The Case
This petition for review 1 assails the 9 May 2007 Decision 2 of the Court of Tax Appeals in C.T.A. EB
No. 193, affirming the 5 October 2005 Decision of the Central Board of Assessment Appeals (CBAA)
in CBAA Case No. L-33. The CBAA dismissed the appeal of petitioner Philippine Fisheries
Development Authority (PFDA) from the Decision of the Local Board of Assessment Appeals (LBAA)
of Lucena City, ordering PFDA to pay the real property taxes imposed by the City Government of
Lucena on the Lucena Fishing Port Complex. aAHISE
The Facts
The facts as found by the CBAA are as follows:
The records show that the Lucena Fishing Port Complex (LFPC) is one of the fishery infrastructure
projects undertaken by the National Government under the Nationwide Fish Port-Package. Located at
Barangay Dalahican, Lucena City, the fish port was constructed on a reclaimed land with an area of 8.7
hectares more or less, at a total cost of PHP296,764,618.77 financed through a loan (L/A PH-25 and
51) from the Overseas Economic Cooperation Fund (OECF) of Japan, dated November 9, 1978 and
May 31, 1978, respectively.
The Philippine Fisheries Development Authority (PFDA) was created by virtue of P.D. 977 as amended
by E.O. 772, with functions and powers to (m)anage, operate, and develop the Navotas Fishing Port
Complex and such other fishing port complexes that may be established by the Authority. Pursuant
thereto, Petitioner-Appellant PFDA took over the management and operation of LFPC in February
1992.
On October 26, 1999, in a letter addressed to PFDA, the City Government of Lucena demanded
payment of realty taxes on the LFPC property for the period from 1993 to 1999 in the total amount of
P39,397,880.00. This was received by PFDA on November 24, 1999.
On October 17, 2000 another demand letter was sent by the Government of Lucena City on the same
LFPC property, this time in the amount of P45,660,080.00 covering the period from 1993 to 2000.
On December 18, 2000 Petitioner-Appellant filed its Appeal before the Local Board of Assessment
Appeals of Lucena City, which was dismissed for lack of merit. On November 6, 2001 PetitionerAppellant filed its motion for reconsideration; this was denied by the Appellee Local Board on
December 10, 2001. 3 acSECT
PFDA appealed to the CBAA. In its Decision dated 5 October 2005, the CBAA dismissed the appeal
for lack of merit. The CBAA ruled:
Ownership of LFPC however has, before hand, been handed over to the PFDA, as provided for under
Sec. 11 of P.D. No. 977, as amended, and declared under the MCIAA case [Mactan Cebu International
Airport Authority v. Marcos, G.R. No. 120082, 11 September 1996, 261 SCRA 667]. The allegations
therefore that PFDA is not the beneficial user of LFPC and not a taxable person are rendered moot and
academic by such ownership of PFDA over LFPC.
xxx
xxx
xxx
PFDA's Charter, P.D. 977, provided for exemption from income tax under Par. 2, Sec. 10 thereof: "(t)he
Authority shall be exempted from the payment of income tax". Nothing was said however about
PFDA's exemption from payment of real property tax: PFDA therefore was not to lay claim for realty
tax exemption on its Fishing Port Complexes. Reading Sec. 40 of P.D. 464 and Sec. 234 of R.A. 7160

however, provided such ground: LFPC is owned by the Republic of the Philippines, PFDA is only
tasked to manage, operate, and develop the same. Hence, LFPC is exempted from payment of realty
tax.
xxx
xxx
xxx
The ownership of LFPC as passed on by the Republic of the Philippines to PFDA is bourne by Direct
evidence: P.D. 977, as amended (supra). Therefore, Petitioner-Appellant's claim for realty tax
exemption on LFPC is untenable. SCaTAc
WHEREFORE, for all of the foregoing, the herein Appeal is hereby dismissed for lack of merit.
SO ORDERED. 4
PFDA moved for reconsideration, which the CBAA denied in its Resolution dated 7 June 2006. 5 On
appeal, the Court of Tax Appeals denied PFDA's petition for review and affirmed the 5 October 2005
Decision of the CBAA.
Hence, this petition for review.
The Ruling of the Court of Tax Appeals
The Court of Tax Appeals held that PFDA is a government-owned or controlled corporation, and is
therefore subject to the real property tax imposed by local government units pursuant to Section 232 in
relation to Sections 193 and 234 of the Local Government Code. Furthermore, the Court of Tax
Appeals ruled that PFDA failed to prove that it is exempt from real property tax pursuant to Section
234 of the Local Government Code or any of its provisions.
The Issue
The sole issue raised in this petition is whether PFDA is liable for the real property tax assessed on the
Lucena Fishing Port Complex.
The Ruling of the Court
The petition is meritorious. IaCHTS
In ruling that PFDA is not exempt from paying real property tax, the Court of Tax Appeals cited
Sections 193, 232, and 234 of the Local Government Code which read:
Section 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this Code, tax
exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical,
including government-owned or -controlled corporations, except local water districts, cooperatives duly
registered under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this Code.
Section 232. Power to Levy Real Property Tax. A province or city or a municipality within the
Metropolitan Manila Area may levy an annual ad valorem tax on real property such as land, building,
machinery, and other improvement not hereinafter specifically exempted.
Section 234. Exemptions from Real Property Tax. The following are exempted from payment of
the real property tax:
(a)
Real property owned by the Republic of the Philippines or any of its political subdivision except
when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person;
(b)
Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques,
nonprofit or religious cemeteries and all lands, buildings and improvements actually, directly, and
exclusively used for religious, charitable or educational purposes; CaASIc
(c)
All machineries and equipment that are actually, directly and exclusively used by local water
districts and government-owned or -controlled corporations engaged in the supply and distribution of
water and/or generation and transmission of electric power;
(d)
All real property owned by duly registered cooperatives as provided for under R.A. No. 6938;
and
(e)
Machinery and equipment used for pollution control and environmental protection.
Except as provided herein, any exemption from payment of real property tax previously granted to, or
presently enjoyed by, all persons, whether natural or juridical, including all government-owned or

-controlled corporations are hereby withdrawn upon the effectivity of this Code.
The Court of Tax Appeals held that as a government-owned or controlled corporation, PFDA is subject
to real property tax imposed by local government units having jurisdiction over its real properties
pursuant to Section 232 of the Local Government Code. According to the Court of Tax Appeals,
Section 193 of the Local Government Code withdrew all tax exemptions granted to government-owned
or controlled corporations. Furthermore, Section 234 of the Local Government Code explicitly provides
that any exemption from payment of real property tax granted to government-owned or controlled
corporations have already been withdrawn upon the effectivity of the Local Government Code.
aSTAHD
The ruling of the Court of Tax Appeals is anchored on the wrong premise that the PFDA is a
government-owned or controlled corporation. On the contrary, this Court has already ruled that the
PFDA is a government instrumentality and not a government-owned or controlled corporation.
In the 2007 case of Philippine Fisheries Development Authority v. Court of Appeals, 6 the Court
resolved the issue of whether the PFDA is a government-owned or controlled corporation or an
instrumentality of the national government. In that case, the City of Iloilo assessed real property taxes
on the Iloilo Fishing Port Complex (IFPC), which was managed and operated by PFDA. The Court
held that PFDA is an instrumentality of the government and is thus exempt from the payment of real
property tax, thus:
The Court rules that the Authority [PFDA] is not a GOCC but an instrumentality of the national
government which is generally exempt from payment of real property tax. However, said exemption
does not apply to the portions of the IFPC which the Authority leased to private entities. With respect to
these properties, the Authority is liable to pay property tax. Nonetheless, the IFPC, being a property of
public dominion cannot be sold at public auction to satisfy the tax delinquency.
xxx
xxx
xxx
Indeed, the Authority is not a GOCC but an instrumentality of the government. The Authority has a
capital stock but it is not divided into shares of stocks. Also, it has no stockholders or voting shares.
Hence it is not a stock corporation. Neither is it a non-stock corporation because it has no members.
AcICTS
The Authority is actually a national government instrumentality which is defined as an agency of the
national government, not integrated within the department framework, vested with special functions or
jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and
enjoying operational autonomy, usually through a charter. When the law vests in a government
instrumentality corporate powers, the instrumentality does not become a corporation. Unless the
government instrumentality is organized as a stock or non-stock corporation, it remains a government
instrumentality exercising not only governmental but also corporate powers. 7 (Emphasis supplied)
This ruling was affirmed by the Court in a subsequent PFDA case involving the Navotas Fishing Port
Complex, which is also managed and operated by the PFDA. In consonance with the previous ruling,
the Court held in the subsequent PFDA case that the PFDA is a government instrumentality not subject
to real property tax except those portions of the Navotas Fishing Port Complex that were leased to
taxable or private persons and entities for their beneficial use. 8
Similarly, we hold that as a government instrumentality, the PFDA is exempt from real property tax
imposed on the Lucena Fishing Port Complex, except those portions which are leased to private
persons or entities. aADSIc
The exercise of the taxing power of local government units is subject to the limitations enumerated in
Section 133 of the Local Government Code. 9 Under Section 133 (o) 10 of the Local Government
Code, local government units have no power to tax instrumentalities of the national government like
the PFDA. Thus, PFDA is not liable to pay real property tax assessed by the Office of the City
Treasurer of Lucena City on the Lucena Fishing Port Complex, except those portions which are leased
to private persons or entities.

Besides, the Lucena Fishing Port Complex is a property of public dominion intended for public use,
and is therefore exempt from real property tax under Section 234 (a) 11 of the Local Government Code.
Properties of public dominion are owned by the State or the Republic of the Philippines. 12 Thus,
Article 420 of the Civil Code provides:
Art. 420.
The following things are property of public dominion:
(1)
Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores, roadsteads, and others of similar character;
(2)
Those which belong to the State, without being for public use, and are intended for some public
service or for the development of the national wealth. (Emphasis supplied)
The Lucena Fishing Port Complex, which is one of the major infrastructure projects undertaken by the
National Government under the Nationwide Fishing Ports Package, is devoted for public use and falls
within the term "ports." The Lucena Fishing Port Complex "serves as PFDA's commitment to
continuously provide post-harvest infrastructure support to the fishing industry, especially in areas
where productivity among the various players in the fishing industry need to be enhanced." 13 As
property of public dominion, the Lucena Fishing Port Complex is owned by the Republic of the
Philippines and thus exempt from real estate tax. DaHSIT
WHEREFORE, we GRANT the petition. We SET ASIDE the Decision dated 9 May 2007 of the Court
of Tax Appeals in C.T.A. EB No. 193. We DECLARE the Lucena Fishing Port Complex EXEMPT
from real property tax imposed by the City of Lucena. We declare VOID all the real property tax
assessments issued by the City of Lucena on the Lucena Fishing Port Complex managed by Philippine
Fisheries Development Authority, EXCEPT for the portions that the Philippine Fisheries Development
Authority has leased to private parties.
SO ORDERED.
Nachura, Peralta, Abad and Mendoza, JJ., concur.
Footnotes
1.
Under Rule 45 of the 1997 Rules of Civil Procedure.
2.
Rollo, pp. 65-90. Penned by Associate Justice Juanito C. Castaeda, Jr., with Presiding Justice
Ernesto D. Acosta and Associate Justices Lovell R. Bautista, Erlinda P. Uy, Caesar A. Casanova, and
Olga Palanca-Enriquez, concurring.
3.
Id. at 215-216.
4.
CTA rollo, pp. 60-62.
5.
Id. at 68-71.
6.
G.R. No. 169836, 31 July 2007, 528 SCRA 706.
7.
Id. at 710, 712-714.
8.
Philippine Fisheries Development Authority v. Court of Appeals, G.R. No. 150301, 2 October
2007, 534 SCRA 490.
9.
Manila International Airport Authority v. City of Pasay, G.R. No. 163072, 2 April 2009, 583
SCRA 234.
10.
Section 133 (o) of the Local Government Code reads:
SECTION 133. Common Limitations on the Taxing Powers of the 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
xxx
xxx
(o) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities, and local government units.
11.
Section 234. Exemptions from Real Property Tax. The following are exempted from
payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political
subdivision except when the beneficial use thereof has been granted, for consideration or otherwise, to

a taxable person;
12.
Manila International Airport Authority v. Court of Appeals, G.R. No. 155650, 20 July 2006, 495
SCRA 591, 644.
13.
Lucena Fish Port Complex, <http://www.pfda.da.gov.ph/lfpc.html> (visited 13 December
2010).

SECOND DIVISION
[G.R. No. 171470. January 30, 2009.]
NATIONAL POWER CORPORATION, petitioner, vs. CENTRAL BOARD OF ASSESSMENT
APPEALS (CBAA), LOCAL BOARD OF ASSESSMENT APPEALS (LBAA) OF LA UNION,
PROVINCIAL TREASURER, LA UNION and MUNICIPAL ASSESSOR OF BAUANG, LA UNION,
respondents.
DECISION
BRION, J p:
What are the real property tax implications of a Build-Operate-Transfer (BOT) agreement between a
government-owned and controlled corporation (GOCC) that enjoys tax exemption and a private
corporation? Specifically, under the terms of the BOT Agreement, can the GOCC be deemed the actual,
direct, and exclusive user of machineries and equipment for tax exemption purposes? If not, can it pass
on its tax-exempt status to its BOT partner, a private corporation, through the BOT agreement?
ACTIHa
The National Power Corporation (NAPOCOR) claims in this case that the machineries and equipment
used in a project covered by a BOT agreement, to which it is a party, should be accorded the taxexempt status it enjoys. The Local Board of Assessment Appeals of the Province of La Union (LBAA),
the Central Board of Assessment Appeals (CBAA) and the Court of Tax Appeals (CTA) were one in
rejecting NAPOCOR's claim.
The present petition for review on certiorari filed under Rule 45 of the Rules of Court by NAPOCOR
challenges this uniform ruling and seeks the reversal of the CTA's Decision dated February 13, 2006 in
the consolidated cases of NAPOCOR v. CBAA, et al. 1 and Bauang Private Power Corp. v.
Sangguniang Panlalawigan ng La Union, et al., 2 and of the denial of the motion for reconsideration
that followed. ITSCED
THE ANTECEDENTS
On January 11, 1993, First Private Power Corporation (FPPC) entered into a BOT agreement with
NAPOCOR for the construction of the 215 Megawatt Bauang Diesel Power Plant in Payocpoc,
Bauang, La Union. The BOT Agreement provided, via an Accession Undertaking, for the creation of
the Bauang Private Power Corporation (BPPC) that will own, manage and operate the power
plant/station, and assume and perform FPPC's obligations under the BOT agreement. For a fee, 3 BPPC
will convert NAPOCOR's supplied diesel fuel into electricity and deliver the product to NAPOCOR.
2009jur
The pertinent provisions of the BOT agreement, as they relate to the submitted issues in the present
case, read:
2.03 NAPOCOR shall make available the Site to CONTRACTOR for the purpose of building and
operating the Power Station at no cost to CONTRACTOR for the period commencing on the Effective
Date and ending on the Transfer Date and NAPOCOR shall be responsible for the payment of all real
estate taxes and assessments, rates, and other charges in respect of the Site and the buildings and
improvements thereon. HDCTAc
xxx
xxx
xxx
2.08 From the date hereof until the Transfer Date, CONTRACTOR shall, directly or indirectly, own
the Power Station and all the fixtures, fittings, machinery, and equipment on the Site or used in
connection with the Power Station which have been supplied by it or at its cost and it shall operate and
manage the Power Station for the purpose of converting fuel of NAPOCOR into electricity.
2.09 Until the Transfer Date, NAPOCOR shall, at its own cost, supply and deliver all Fuel for the
Power Station and shall take all electricity generated by the Power Station at the request of NAPOCOR
which shall pay to CONTRACTOR fees as provided in Clause 11.
xxx
xxx
xxx
2.11 On the Transfer Date, the Power Station shall be transferred by the CONTRACTOR to

NAPOCOR without payment of any compensation. TaDAIS

The Officer-in-Charge of the Municipal Assessor's Office of Bauang, La Union initially issued
Declaration of Real Property Nos. 25016 and 25022 to 25029 declaring BPPC's machineries and
equipment as tax-exempt. On the initiative of the Bauang Vice Mayor, the municipality questioned
before the Regional Director of the Bureau of Local Government Finance (BLGF) the declared tax
exemption; later, the issue was elevated to the Deputy Executive Director and Officer-in-Charge of the
BLGF, Department of Finance, who ruled that BPPC's machineries and equipments are subject to real
property tax and directed the Assessors' Office to take appropriate action.
The Provincial/Municipal Assessors thereupon issued Revised Tax Declaration Nos. 30026 to 30033
and 30337, and cancelled the earlier issued Declarations of Real Property. The Municipal Assessor of
Bauang then issued a Notice of Assessment and Tax Bill to BPPC assessing/taxing the machineries and
equipments in the total sum of P288,582,848.00 for the 1995-1998 period, sans interest of two percent
(2%) on the unpaid amounts. BPPC's Vice-President and Plant Manager received the Notice of
Assessment and Tax Bill on August 7, 1998. CITcSH
On October 5, 1998, NAPOCOR filed a petition (styled In Re Petition to Declare Exempt the Revised
and Retroactive to 1995 Tax Declaration Nos. 30026 to 30033 and 30037) with the LBAA. The petition
asked that, retroactive to 1995, the machineries covered by the tax declarations be exempt from real
property tax under Section 234 (c) of Republic Act No. 7160 (the Local Government Code or LGC);
and, that these properties be dropped from the assessment roll pursuant to Section 206 of the LGC.
Section 234 (c) of the LGC provides: 4
Section 234. Exemptions from Real Property Tax. The following are exempted from the payment
of real property tax:
xxx
xxx
xxx
(c)
All machineries and equipment that are actually, directly and exclusively used by local water
districts and government-owned or -controlled corporations engaged in the supply and distribution of
water and/or generation and transmission of electric power; cHSTEA
xxx
xxx
xxx.
The LBAA denied NAPOCOR's petition for exemption in a Decision dated October 26, 2001. It ruled
that the exemption provided by Section 234 (c) of the LGC applies only when a government-owned or
controlled corporation like NAPOCOR owns and/or actually uses machineries and equipment for the
generation and transmission of electric power; in this case, NAPOCOR does not own and does not even
actually and directly use the machineries. It is the BPPC, a non-government entity, which owns,
maintains, and operates the machineries and equipment; using these, it generates electricity and then
sells this to NAPOCOR. Additionally, it ruled that the liability for the payment of the real estate taxes is
determined by law and not by the agreement of the parties; hence, the provision in the BOT Agreement
whereby NAPOCOR assumed responsibility for the payment of all real estate taxes and assessments,
rates, and other charges, in relation with the site, buildings, and improvements in the BOT project, is an
arrangement between the parties that cannot be the basis in identifying who is liable to the government
for the real estate tax. CHcETA
NAPOCOR appealed the LBAA ruling to the CBAA. BPPC moved to intervene on the ground that it
has a direct interest in the outcome of the litigation. 5 The CBAA subsequently dismissed the appeal
based on its finding that the BPPC, and not NAPOCOR, is the actual, direct and exclusive user of the
equipment and machineries; thus, the exemption under Section 234 (c) does not apply. The CBAA
ruled:
Sec. 234 (c), R.A. 7160 (supra), is clear and unambiguous: "there is no room for construction."
(citations omitted)
xxx
xxx
xxx
Actual use, according to Sec. 199 (b) of R.A. 7160, "refers to the purpose for which the property is
principally or predominantly utilized by the person in possession thereof." In Velez v. Locsin, 55 SCRA

152: "The word 'use' means to employ for the attainment of some purpose or end." In the "Operation of
the Power Station" (Clause 8.01 of the BOT Agreement), CONTRACTOR shall, at its own cost, be
responsible for the management, operation, maintenance and repair of the Power Station during the Cooperation period . . . ." Said Co-operation period is fifteen (15) years, after which the Power Station
will be turned over or transferred to NAPOCOR. Does this determine when NAPOCOR should take
over the actual, direct and exclusive use of the Power Station? That is fifteen (15) years therefrom?
cDTSHE
It has been established that BPPC manufactures or generates the power which is sold to NAPOCOR
and NAPOCOR distributes said power to the consumers. In other words, the relationship between
BPPC and NAPOCOR is one of manufacturer or seller and exclusive distributor or buyer. The general
perception is that the exclusive distributor or buyer of goods has nothing to do with the manufacturing
thereof but as exclusive distributor the latter has the right to acquire all the goods to be sold to the
exclusion of all others.
In terms of the definitions under Sec. 199 (b) and that offered by Respondents-Appellees (supra), the
machineries and equipment are principally or predominantly utilized by BPPC. In terms of the Velez
vs. Locsin case (supra), BPPC employs the machineries and equipment to attain its purpose of
generating power to be sold to NAPOCOR and collect payment therefrom to compensate for its
investment. The BOT Agreement is not a contract for nothing. aCTcDH
The following definitions are given by Black's Law Dictionary, Third Edition:
"Actually is opposed to seemingly, pretendedly, or feignedly, as actually engaged in farming means
really, truly in fact."
"Directly. In a direct way without anything intervening; not by secondary, but by direct means."
"Exclusively. Apart from all others; without admission of others to participation; in a manner to
exclude."
Indeed BPPC does not use said machineries and equipment pretendedly or feignedly but truly and
factually hence, "actually". BPPC uses them without anything intervening hence, directly. BPPC uses
the same machineries and equipment apart from all others hence, exclusively. This is the fact against
the fact there is no argument. This same fact will also deny NAPOCOR's claim to a ten (10%)
assessment level provided for under Sec. 218 of R.A. 7160 (supra) as to the requirement thereto is
simply the same as that in realty tax exemption. The BPPC is a private entity, not a Government Owned
or Controlled Corporation (GOCC), hence, not entitled to a 10% assessment level. CEDHTa
NAPOCOR then filed with the CTA a petition for review, docketed as CTA E.B. No. 51, to challenge
the CBAA decision. BPPC filed its own petition for review of the CBAA decision with the CTA which
was docketed as CTA E.B. No. 58. The two petitions were subsequently consolidated.
THE APPEALED CTA RULING
The CTA rendered on February 13, 2006 a decision dismissing the consolidated petitions. It ruled on
two issues: (1) whether BPPC seasonably filed its protest against the assessment; and (2) whether the
machineries and equipments are actually, directly, and exclusively used by NAPOCOR in the
generation and transmission of electric power, and are therefore not subject to tax. DAaHET
On the first issue, the CTA applied Section 226 of the LGC which provides the remedy from an
assessment as follows:
SEC. 226.
Local Board of Assessment Appeals. Any owner or person having legal interest in the
property who is not satisfied with the action of the provincial, city or municipal assessor in the
assessment of his property may, within sixty (60) days from the date of receipt of the written notice of
assessment, appeal to the Board of Assessment Appeals in the province or city by filing a petition under
oath in the form prescribed for the purpose, together with copies of tax declarations and such affidavits
or documents submitted in support of the appeal.
It found that BPPC never filed an appeal to contest or question the assessment; instead, it was
NAPOCOR that filed the purported appeal a petition for exemption of the machineries and

equipment. The CTA, however, said that NAPOCOR is not the proper party, and the purported appeal
did not substantially comply with the requisites of the law.
According to the CTA, NAPOCOR is not the registered owner of the machineries and equipment.
These are registered in BPPC's name as further confirmed by Section 2.08 of the BOT Agreement. 6
Thus, the CTA declared that until the transfer date of the power station, NAPOCOR does not own any
of the machineries and equipment, and therefore has no legal right, title, or interest over these
properties. Thus, the CTA concluded that NAPOCOR has no cause of action and no legal personality to
question the assessment. As the respondent local government units claim, NAPOCOR is an interloper
in the issue of BPPC's real estate tax liabilities. ACEIac
The CTA additionally found that BPPC's subsequent attempt to question the assessment via a motion
for intervention with the CBAA failed to follow the correct process prescribed by the Rules Governing
Appeals to the CBAA; 7 its appeal was not accompanied by an appeal bond.
Also, the CTA found NAPOCOR's petition to be an inappropriate remedy, as it is not the appeal
contemplated by law; NAPOCOR was in fact asserting an exemption on the basis of the provisions of
the BOT Agreement. An exemption is an evidentiary matter for the assessors, not for the LBAA, to
decide pursuant to Section 206 of the LGC; 8 NAPOCOR cannot simply bypass the authority granted
to concerned administrative agencies, as these available administrative remedies must first be
exhausted. DEScaT
On the more substantive second issue, the CTA saw it clear from the BOT Agreement that BPPC owns
and uses the machineries and equipment in the power station, thus directly addressing and disproving
NAPOCOR's "actual, direct, and exclusive use" argument. It noted that under the BOT Agreement,
NAPOCOR shall have a right over the machineries and equipments only after their transfer at the end
of the 15-year co-operation period. "By the nature of the agreement and work of BPPC, the
[machineries] are actually, directly, and exclusively used by it in the conversion of bunker fuel to
electricity for [NAPOCOR] for a fee", the CTA said.
Section 234 (c) of the LGC, according to the CTA, is clear. The exemption under the law does not
apply because BPPC is not a GOCC it is an independent power corporation currently operating and
maintaining the power plant pursuant to the BOT Agreement. The BOT agreement cannot likewise be
the basis for the claimed exemption; tax exemption cannot be agreed upon by mere contract between
the parties (BPPC and NAPOCOR), as it must be expressly granted by the Constitution, statute, or
franchise. A tax exemption, if and when granted, is also not transferrable, as it is a personal privilege
and it must be strictly construed, the CTA said in closing. IESAac
THE SEPARATE APPEALS
Thereupon, NAPOCOR and BPPC sought separate reviews of the CTA decision with us.
G.R. No. 173811
BPPC filed on September 11, 2006 its petition separately from NAPOCOR. The BPPC petition was
docketed as G.R. No. 173811 and was raffled to the First Division of the Court.
The First Division denied BPPC's petition in its Resolution dated October 4, 2006 on the reasoning that
BPPC failed to sufficiently show that the CTA committed any reversible error in the challenged
decision and resolution as to warrant the exercise of the Court's discretionary appellate jurisdiction.
BPPC moved to reconsider the denial of its petition, but the Third Division (after the Court's
reorganization) denied the motion for reconsideration with finality after finding no substantial
arguments to warrant reconsideration. The resolution denying BPPC's petition for review had become
final and executory and was thus recorded in the Book of Entries of Judgment on April 3, 2007.
DHIcET
G.R. No. 171470 The Present Case
The NAPOCOR petition now pending with us was filed on April 6, 2006 and was docketed as G.R. No.
171470. We required the respondents to comment on the petition in our Resolution of May 3, 2006. The
respondents filed the required comments. NAPOCOR subsequently filed its Reply.

NAPOCOR cited the following as grounds for its petition:

I.
THE CTA ERRED ON A QUESTION OF LAW IN NOT RULING THAT PETITIONER IS THE
ACTUAL, DIRECT, AND EXCLUSIVE USER OF THE BAUANG DIESEL POWER PLANT.
II.
THE CTA ERRED ON A QUESTION OF LAW IN DISREGARDING THAT THE REAL PROPERTY
TAX EXEMPTION IS RETAINED UNDER R.A. NO. 7160. SECATH
III.
THE CTA ERRED ON A QUESTION OF LAW IN RULING THAT PETITIONER MUST BE
ENGAGED IN BOTH GENERATION AND TRANSMISSION OF POWER BEFORE THE
EXEMPTION UNDER SECTION 234(C) OF R.A. NO. 7160 CAN APPLY.
IV.
THE CTA ERRED ON A QUESTION OF LAW IN NOT CONSTRUING THE EXEMPTIONS
UNDER R.A. NO. 7160 IN HARMONY WITH PETITIONER'S CHARTER AND THE BOT LAW.
V.
ASSUMING THE 215 MW BAUANG DIESEL POWER PLANT IS TAXABLE, THE SAME
SHOULD BE CLASSIFIED AS "SPECIAL" FOR REAL PROPERTY TAX PURPOSES SUBJECT
TO A 10% ASSESSMENT LEVEL, AND NOT AS COMMERCIAL/INDUSTRIAL PROPERTIES
SUBJECT TO AN 80% ASSESSMENT RATE. SAEHaC
In the interim and in light of the sale at public auction of the machineries and equipments, NAPOCOR
filed a Supplemental Petition based on the following grounds:
I.
THE CTA ERRED ON A QUESTION OF LAW IN DISMISSING PETITIONER'S APPEAL
BECAUSE THE LATTER IS A GOVERNMENT INSTRUMENTALITY WHOSE FOREIGN AND
DOMESTIC INDEBTEDNESS ARE GUARANTEED BY THE NATIONAL GOVERNMENT, IS
THE BENEFICIAL OWNER OF THE SUBJECT POWER PLANT AND [IS] THUS EXEMPT
FROM THE PAYMENT OF REAL PROPERTY TAXES.
II.
THE CTA ERRED ON A QUESTION OF LAW IN DISMISSING PETITIONER'S APPEAL
BECAUSE THIS LED TO THE SALE OF THE BAUANG POWER PLANT TO THE PROVINCIAL
GOVERNMENT OF LA UNION, THUS SERIOUSLY VIOLATING PETITIONER'S STATUTORY
MANDATE TO CARRY OUT THE TOTAL ELECTRIFICATION OF THE COUNTRY. ISADET
To support its claim that it is entitled to tax exemption as the actual, direct, and exclusive user of the
machineries and equipment, NAPOCOR argues that:
a.
the BOT agreement is a financing agreement where it (NAPOCOR) is the beneficial owner and
the actual, direct, and exclusive user of the power plant, while BPPC is the lender/creditor that retains
the plant's legal ownership until it is fully paid; the power plant is a NAPOCOR project and BPPC is
just the financier-contractor, and any BPPC activity is made on NAPOCOR's behalf as a contractor for
NAPOCOR; in this way, NAPOCOR takes advantage of BPPC's financial resources and technical
expertise to secure a continuous supply of electric power. ScCIaA
b.
its payment of energy fees, fixed operating fees, and other infrastructure fees to BPPC is not
inconsistent with its (NAPOCOR's) beneficial ownership and actual, direct, and exclusive use of the
power plant, since the collection of the fees is the repayment scheme prescribed by Section 6 9 of
Republic Act No. 6957, 10 as amended by Republic Act No. 7718 (BOT Law, as amended); its
amortizations over the 15-year co-operation period constitute full payment for the power plant that
would warrant the transfer of ownership without payment of additional compensation; finally, that
Republic Act No. 9136 or the Electric Power Industry Reform Act of 2001 has booked the power plant
as NAPOCOR's asset for privatization purposes.
c.
its tax exemption should apply to a BOT project, citing the conditions that gave rise to the BOT

law and its own mandate to provide electricity nationwide; BOT projects are really government
projects where the private sector participates to provide the heavy initial financial requirements; and
that Congress specifically considered NAPOCOR's situation in granting tax exemption to machineries
and equipment used in power generation and distribution. EcAHDT
d.
in the interpretation of Section 234 (c) of the LGC, related statutes must be considered and the
task of the courts is to harmonize all these laws, if possible; specifically, Section 234 (c) of the LGC
was enacted to clarify or restore NAPOCOR's real property tax exemption so that NAPOCOR can
perform its public function of supplying electricity to the entire country at affordable rates, while the
BOT law was enacted, among others, to authorize NAPOCOR to enter into BOT contracts with the
private sector so that NAPOCOR can carry out its mandate; the tax exemption under Section 234 (c) of
the LGC must be given effect as the only legal and cogent way of harmonizing it with NAPOCOR's
Charter and the BOT law.
NAPOCOR concludes that the CTA's ruling clearly defeats the spirit behind its creation, the enactment
of the BOT Law, and the tax exemption provision under the LGC.
THE COURT'S RULING
We find the petition devoid of merit. Like the Court's First Division (later, Third Division) in G.R. No.
173811, we find that NAPOCOR failed to sufficiently show that the CTA committed any reversible
error in its ruling. STDEcA
NAPOCOR's basis for its claimed exemption Section 234 (c) of the LGC is clear and not at all
ambiguous in its terms. Exempt from real property taxation are: (a) all machineries and equipment; (b)
[that are] actually, directly, and exclusively used by; (c) [local water districts and] government-owned
or controlled corporations engaged in the [supply and distribution of water and/or] generation and
transmission of electric power.
We note, in the first place, that the present case is not the first occasion where NAPOCOR claimed real
property tax exemption for a contract partner under Sec. 234 (c) of the LGC. In FELS Energy, Inc. v.
The Province of Batangas 11 (that was consolidated with NAPOCOR v. Local Board of Assessment
Appeals of Batangas, et al.), 12 the Province of Batangas assessed real property taxes against FELS
Energy, Inc. the owner of a barge used in generating electricity under an agreement with
NAPOCOR. Their agreement provided that NAPOCOR shall pay all of FELS' real estate taxes and
assessments. We concluded in that case that we could not recognize the tax exemption claimed, since
NAPOCOR was not the actual, direct and exclusive user of the barge as required by Sec. 234 (c). In
making this ruling, we cited the required standard of construction applicable to tax exemptions and
said: aTIAES
Time and again, the Supreme Court has stated that taxation is the rule and exemption is the exception.
The law does not look with favor on tax exemptions and the entity that would seek to be thus privileged
must justify it by words too plain to be mistaken and too categorical to be misinterpreted. Thus,
applying the rule of strict construction of laws granting tax exemptions, and the rule that doubts should
be resolved in favor of provincial corporations, we hold that FELS is considered a taxable entity.
The mere undertaking of petitioner NPC under Section 10.1 of the Agreement, that it shall be
responsible for the payment of all real estate taxes and assessments, does not justify the exemption. The
privilege granted to petitioner NPC cannot be extended to FELS. The covenant is between FELS and
NPC and does not bind a third person not privy thereto, in this case, the Province of Batangas.
We also recognized this strictissimi juris standard in NAPOCOR v. City of Cabanatuan. 13 Under this
standard, the claimant must show beyond doubt, with clear and convincing evidence, the factual basis
for the claim. Thus, the real issue in a tax exemption case such as the present case is whether
NAPOCOR was able to convincingly show the factual basis for its claimed exception. CSTDEH
The records show that NAPOCOR, no less, admits BPPC's ownership of the machineries and
equipment in the power plant. 14 Likewise, the provisions of the BOT agreement cited above clearly
show BPPC's ownership. Thus, ownership is not a disputed issue.

Rather than ownership, NAPOCOR's use of the machineries and equipment is the critical issue, since
its claim under Sec. 234 (c) of the LGC is premised on actual, direct and exclusive use. To support this
claim, NAPOCOR characterizes the BOT Agreement as a mere financing agreement where BPPC is the
financier, while it (NAPOCOR) is the actual user of the properties.
As in the fact of ownership, NAPOCOR's assertion is belied by the documented arrangements between
the contracting parties, viewed particularly from the prism of the BOT law. cHSIDa
The underlying concept behind a BOT agreement is defined and described in the BOT law as follows:
Build-operate-and-transfer A contractual arrangement whereby the project proponent undertakes the
construction, including financing, of a given infrastructure facility, and the operation and maintenance
thereof. The project proponent operates the facility over a fixed term during which it is allowed to
charge facility users appropriate tolls, fees, rentals, and charges not exceeding those proposed in its bid
or as negotiated and incorporated in the contract to enable the project proponent to recover its
investment, and operating and maintenance expenses in the project. The project proponent transfers the
facility to the government agency or local government unit concerned at the end of the fixed term
which shall not exceed fifty (50) years . . . .
Under this concept, it is the project proponent who constructs the project at its own cost and
subsequently operates and manages it. The proponent secures the return on its investments from those
using the project's facilities through appropriate tolls, fees, rentals, and charges not exceeding those
proposed in its bid or as negotiated. At the end of the fixed term agreed upon, the project proponent
transfers the ownership of the facility to the government agency. Thus, the government is able to put up
projects and provide immediate services without the burden of the heavy expenditures that a project
start up requires. EHDCAI
A reading of the provisions of the parties' BOT Agreement shows that it fully conforms to this concept.
By its express terms, BPPC has complete ownership both legal and beneficial of the project,
including the machineries and equipment used, subject only to the transfer of these properties without
cost to NAPOCOR after the lapse of the period agreed upon. As agreed upon, BPPC provided the funds
for the construction of the power plant, including the machineries and equipment needed for power
generation; thereafter, it actually operated and still operates the power plant, uses its machineries and
equipment, and receives payment for these activities and the electricity generated under a defined
compensation scheme. Notably, BPPC as owner-user is responsible for any defect in the
machineries and equipment. 15
As envisioned in the BOT law, the parties' agreement assumes that within the agreed BOT period,
BPPC the investor-private corporation shall recover its investment and earn profits through the
agreed compensation scheme; thereafter, it shall transfer the whole project, including machineries and
equipment, to NAPOCOR without additional cost or compensation. The latter, for its part, derives
benefit from the project through the fulfillment of its mandate of delivering electricity to consumers at
the soonest possible time, without immediately shouldering the huge financial requirements that the
project would entail if it were to undertake the project on its own. Its obligation, in exchange, is to
shoulder specific operating costs under a compensation scheme that includes the purchase of all the
electricity that BPPC generates. CEIHcT
That some kind of "financing" arrangement is contemplated in the sense that the private sector
proponent shall initially shoulder the heavy cost of constructing the project's buildings and structures
and of purchasing the needed machineries and equipment is undeniable. The arrangement, however,
goes beyond the simple provision of funds, since the private sector proponent not only constructs and
buys the necessary assets to put up the project, but operates and manages it as well during an agreed
period that would allow it to recover its basic costs and earn profits. In other words, the private sector
proponent goes into business for itself, assuming risks and incurring costs for its account. If it receives
support from the government at all during the agreed period, these are pre-agreed items of assistance
geared to ensure that the BOT agreement's objectives both for the project proponent and for the

government are achieved. In this sense, a BOT arrangement is sui generis and is different from the
usual financing arrangements where funds are advanced to a borrower who uses the funds to establish a
project that it owns, subject only to a collateral security arrangement to guard against the nonpayment
of the loan. It is different, too, from an arrangement where a government agency borrows funds to put a
project from a private sector-lender who is thereafter commissioned to run the project for the
government agency. In the latter case, the government agency is the owner of the project from the
beginning, and the lender-operator is merely its agent in running the project. EDcIAC
If the BOT Agreement under consideration departs at all from the concept of a BOT project as defined
by law, it is only in the way BPPC's cost recovery is achieved; instead of selling to facility users or to
the general public at large, the generated electricity is purchased by NAPOCOR which then resells it to
power distribution companies. This deviation, however, is dictated, more than anything else, by the
structure and usages of the power industry and does not change the BOT nature of the transaction
between the parties.
Consistent with the BOT concept and as implemented, BPPC the owner-manager-operator of the
project is the actual user of its machineries and equipment. BPPC's ownership and use of the
machineries and equipment are actual, direct, and immediate, while NAPOCOR's is contingent and, at
this stage of the BOT Agreement, not sufficient to support its claim for tax exemption. Thus, the CTA
committed no reversible error in denying NAPOCOR's claim for tax exemption. EHSAaD
For these same reasons, we reject NAPOCOR's argument that the machineries and equipment must be
subjected to a lower assessment level. NAPOCOR cites as support Section 216 of the LGC which
provides:
Section 216. Special Classes of Real Property. All lands, buildings, and other improvements
thereon actually, directly and exclusively used for hospitals, cultural, or scientific purposes, and those
owned and used by local water districts, and government-owned or controlled corporations rendering
essential public services in the supply and distribution of water and/or generation and transmission of
electric power shall be classified as special.
in relation with Section 218 (d) of the LGC which provides:
Section 218. Assessment Levels. The assessment levels to be applied to the fair market value of
real property to determine its assessed value shall be fixed by ordinances of the Sangguniang
Panlalawigan, Sangguniang Panlungsod or Sangguniang Bayan of a municipality within the
Metropolitan Manila Area, at the rates not exceeding the following: THEcAS
xxx
xxx
xxx
(d)
On Special Classes: The assessment levels for all lands buildings, machineries and other
improvements;
Actual Use Assessment Level
Cultural
15%
Scientific
15%
Hospital
15%
Local water districts 10%
Government-owned or
10%
controlled corporations
engaged in the supply
and distribution of water
and/or generation and
transmission of electric
power HScaCT
Since the basis for the application of the claimed differential treatment or assessment level is the same
as the claimed tax exemption, the lower tribunals correctly found that there is no basis to apply the
lower assessment level of 10%.

As our last point, we note that a real concern for NAPOCOR in this case is its assumption under the
BOT agreement of BPPC's real property tax liability (which in itself is a recognition that BPPC's real
properties are not really tax exempt). NAPOCOR argues that if no tax exemption will be recognized,
the responsibility it assumed carries practical implications that are very difficult to ignore. In fact,
NAPOCOR's supplemental petition is anchored on these practical implications the alleged detriment
to the public interest that will result if the levy, sale, and transfer of the machineries and equipment
were to be completed. NAPOCOR's reference is to the fact that the machineries and equipment have
been sold in public auction and the buyer the respondent Province will consolidate its ownership
over these properties on February 1, 2009. SDEITC
We fully recognize these concerns. However, these considerations are not relevant to our disposition of
the issues in this case. We are faced here with the application of clear provisions of law and settled
jurisprudence to a case that, to our mind, should not be treated differently solely because of non-legal
or practical considerations. Significantly, local government real property taxation also has
constitutional underpinnings, based on Section 5 of Article X of the Constitution, 16 that we cannot
simply ignore. In FELS Energy, Inc. v. The Province of Batangas, 17 earlier cited, we said:
The power to tax is an incident of sovereignty and is unlimited in its magnitude, acknowledging in its
very nature no perimeter so that security against its abuse is to be found only in the responsibility of the
legislature which imposes the tax on the constituency who are to pay for it. The right of local
government units to collect taxes due must always be upheld to avoid severe tax erosion. This
consideration is consistent with the State policy to guarantee the autonomy of local governments and
the objective of the Local Government Code that they enjoy genuine and meaningful local autonomy to
empower them to achieve their fullest development as self-reliant communities and make them
effective partners in the attainment of national goals. TADCSE
In conclusion, we reiterate that the power to tax is the most potent instrument to raise the needed
revenues to finance and support myriad activities of the local government units for the delivery of basic
services essential to the promotion of the general welfare and the enhancement of peace, progress, and
prosperity of the people. [Emphasis supplied.]
This ruling reminds us of the other side of the coin in terms of concerns and protection of interests. La
Union, as a local government unit, has no less than its own constitutional interests to protect in
pursuing this case. These are interests that this Court must also be sensitive to and has taken into
account in this Decision.
We close with the observation that our role in addressing the concerns and the interests at stake is not
all-encompassing. The Judiciary can only resolve the current dispute through our reading and
interpretation of the law. The other branches of government which act on policy and which execute
these policies, including NAPOCOR itself and the respondent local government unit, are more in the
position to act in tackling feared practical consequences. This ruling on the law can be their
springboard for action. CacEIS
In light of these conclusions and observations, we need not discuss the other issues raised.
WHEREFORE, premises considered, we DENY NAPOCOR's petition for lack of merit. We AFFIRM
the appealed decision of the Court of Tax Appeals. Costs against NAPOCOR.
SO ORDERED.
Quisumbing, Corona, * Carpio Morales and Tinga, JJ., concur.
Footnotes
1.
Docketed as CTA E.B. No. 51. cCTESa
2.
Docketed as CTA E.B. No. 58.
3.
11. Fees
11.01 In respect of each Month from the Completion Date until and including the Month in
which the Transfer Date falls, NAPOCOR shall pay to BPPC Capacity Fees and Energy Fees calculated
as provided in the Eighth Schedule.

4.

The full text of Section 234 of the LGC reads as follows:

SEC. 234.
Exemptions from Real Property Tax. The following are exempted from
payment of the real property tax: SCaTAc
(a)
Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for consideration or otherwise, to
a taxable person;
(b)
Charitable institutions, churches, parsonages or convents appurtenant thereto,
mosques, nonprofit or religious cemeteries and all lands, buildings, and improvements actually,
directly, and exclusively used for religious, charitable or educational purposes;
(c)
All machineries and equipment that are actually, directly and exclusively used by
local water districts and government-owned or -controlled corporations engaged in the supply and
distribution of water and/or generation and transmission of electric power; TcCEDS
(d)
All real property owned by duly registered cooperatives as provided for under R.
A. No. 6938; and
(e)
Machinery and equipment used for pollution control and environmental
protection.
Except as provided herein, any exemption from payment of real property tax previously granted
to, or presently enjoyed by, all persons, whether natural or juridical, including all government-owned or
-controlled corporations are hereby withdrawn upon the effectivity of this Code. DcCASI
5.
Rollo, pp. 194-195.
6.
Cited in p. 3.
7.
Rule IV, Section 7.
8.
SEC. 206. Proof of Exemption of Real Property from Taxation. Every person by or for
whom real property is declared, who shall claim tax exemption for such property under this Title shall
file with the provincial, city or municipal assessor within thirty (30) days from the date of the
declaration of real property sufficient documentary evidence in support of such claim including
corporate charters, title of ownership, articles of incorporation, bylaws, contracts, affidavits,
certifications and mortgage deeds, and similar documents. THAECc
If the required evidence is not submitted within the period herein prescribed, the property shall
be listed as taxable in the assessment roll. However, if the property shall be proven to be tax exempt,
the same shall be dropped from the assessment roll.
9.
SEC. 6. Repayment Scheme. For the financing, construction, operation and maintenance of
any infrastructure project undertaken through the build-operate-and-transfer arrangement or any of its
variations pursuant to the provisions of this Act, the project proponent shall be repaid by authorizing it
to charge and collect reasonable tolls, fees, and rentals for the use of the project facility not exceeding
those incorporated in the contract and, where applicable, the proponent may likewise be repaid in the
form of a share in the revenue of the project or other non-monetary payments, such as, but not limited
to, the grant of a portion or percentage of the reclaimed land, subject to the constitutional requirements
with respect to the ownership of land: Provided, That for negotiated contracts, and for projects which
have been granted a natural monopoly or where the public has no access to alternative facilities, the
appropriate government regulatory bodies, shall approve the tolls, fees, rentals, and charges based on a
reasonable rate of return: Provided, further, That the imposition and collection of tolls, fees, rentals, and
charges shall be for a fixed term as proposed in the bid and incorporated in the contract but in no case
shall this term exceed fifty (50) years: Provided, furthermore, That the tolls, fees, rentals, and charges
may be subject to adjustment during the life of the contract, based on a predetermined formula using
official price indices and included in the instructions to bidders and in the contract: Provided, also, That
all tolls, fees, rentals, and charges and adjustments thereof shall take into account the reasonableness of
said rates to the end-users of private sector-built infrastructure: Provided, finally, That during the
lifetime of the franchise, the project proponent shall undertake the necessary maintenance and repair of

the facility in accordance with standards prescribed in the bidding documents and in the contract. In the
case of a build-and-transfer arrangement, the repayment scheme is to be effected through amortization
payments by the government agency or local government unit concerned to the project proponent
according to the scheme proposed in the bid and incorporated in the contract. ADEHTS
10.
Entitled "AN ACT AUTHORIZING THE FINANCING, CONSTRUCTION, OPERATION
AND MAINTENANCE OF INFRASTRUCTURE PROJECTS BY THE PRIVATE SECTOR, AND
FOR OTHER PURPOSES".
11.
G.R. No. 168557, February 16, 2007, 516 SCRA 186.
12.
G.R. No. 170628, February 16, 2007, 516 SCRA 186.
13.
G.R. No. 149110, April 9, 2003, 401 SCRA 259.
14.
Rollo, p. 19.
15.
See the provisions of Clause 8 of the BOT Agreement (rollo, pp. 85-86); some of the pertinent
provisions state: IaEASH
8.01. CONTRACTOR, shall at its own cost, be responsible for the management, operation,
maintenance and repair of the Power Station during the co-operation period and shall use its best
endeavors to ensure that the Power Station is in good operating condition and capable of converting
Fuel supplied by NAPOCOR into electricity in a safe and stable manner within the Operating
Parameters.
8.04. In pursuance of its obligations under Clause 8.01, CONTRACTOR shall have the right
to: DaEATc
(i)
Enter into contracts for the supply of materials and services, including contracts
with NAPOCOR;
(ii)
...
(iii) Purchase replacement equipment;
xxx
xxx
xxx
16.
CONSTITUTION, Article X, Section 5. Each Local Government unit shall have the power
to create its own sources of revenue, to levy taxes, fees and charges subject to such guidelines and
limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such
taxes, fees and charges shall accrue exclusively to the Local Governments. aTCAcI
17.
Supra note 11, pp. 207-208.
*
Designated additional member per Special Order No. 558 dated January 15, 2009.

SECOND DIVISION
[G.R. No. 127139. February 19, 1999.]
JAIME C. LOPEZ, petitioner, vs. CITY OF MANILA and HON. BENJAMIN A.G. VEGA, Presiding
Judge, RTC, Manila, Branch 39, respondents.
Reynaldo B. Aralar & Associates for petitioner.
The City Legal Officer for City of Manila
SYNOPSIS
Section 219 of Republic Act 7160, or the Local Government Code of 1991, requires the conduct of the
general revision of real property. In September 1995, the City Assessor's Office submitted the proposed
schedule of fair market values to the City Council for its appropriate action. The Council, acting on the
proposed schedule, conducted public hearings as required by law. The proposed ordinance was
subjected to the regular process in the enactment of ordinances pursuant to the City Charter of Manila.
The ordinance was approved by the City Mayor and was made effective on January 1, 1996. With the
implementation of Manila Ordinance No. 7894, the tax on the land owned by the petitioner was
increased by 580%. With respect to the improvement, the tax was increased by 250%. Consequently,
petitioner filed a special proceeding for the declaration of nullity of the ordinance. The case was
raffled, but on the same day, Manila Ordinance No. 7905 took effect, reducing by 50% the assessment
levels for the computation of tax due. The court directed the issuance of a writ of injunction and denied
the motion to dismiss by the respondent. The latter filed a motion for reconsideration and cited the
happening of a supervening event, i.e., the enactment and approval of Manila Ordinance No. 7905. The
trial court granted the motion to dismiss, which was justified by the failure of petitioner to exhaust the
administrative remedies and that the petition had become moot and academic. Petitioner filed a motion
for reconsideration, but it was denied for lack of merit. Hence, this petition. AcSHCD
The Supreme Court found no cogent reason to depart from the findings of the trial court. As correctly
found by the trial court, the petition does not fall under any of the exceptions to excuse compliance
with the rule on exhaustion of administrative remedies. The Court, likewise, was in full accord with the
ruling of the trial court that Manila Ordinance No. 7905 affects the resulting tax imposed on the market
values of real properties as specified in Manila Ordinance No. 7894. Therefore, this supervening
circumstance had rendered the petition moot and academic, for failure of petitioner to amend his cause
of action.
SYLLABUS
1.
ADMINISTRATIVE LAW; EXHAUSTION OF ADMINISTRATIVE REMEDIES; RELIEF
TO COURTS CAN BE SOUGHT ONLY AFTER EXHAUSTING ALL REMEDIES PROVIDED;
RATIONALE. As a general rule, where the law provides for the remedies against the action of an
administrative board, body, or officer, relief to courts can be sought only after exhausting all remedies
provided. The reason rests upon the presumption that the administrative body, if given the chance to
correct its mistake or error, may amend its decision on a given matter and decide it properly. Therefore,
where a remedy is available within the administrative machinery, this should be resorted to before
resort can be made to the courts, not only to give the administrative agency the opportunity to decide
the matter by itself correctly, but also to prevent unnecessary and premature resort to courts. This rule,
however, admits certain exceptions.
2.
ID.; ID.; ID.; EXCEPTIONS; NOT APPLICABLE IN CASE AT BAR. As correctly found
by the trial court, the petition does not fall under any of the exceptions to excuse compliance with the
rule on exhaustion of administrative remedies, to wit: "One of the reasons for the doctrine of
exhaustion is the separation of powers which enjoins upon the judiciary a becoming policy of noninterference with matters coming primarily within the competence of other department. . . . There are
however a number of instances when the doctrine may be dispensed with the judicial action validly
resorted to immediately. Among these exceptional cases are: (1) when the question raised is purely
legal, (2) when the administrative body is in estoppel; (3) when the act complained of is patently

illegal; (4) when there is urgent need for judicial intervention; (5) when the claim involved is small; (6)
when irreparable damage will be suffered; (7) when there is no other plain, speedy and adequate
remedy; (8) when strong public interest is involved; (9) when the subject of controversy is private land;
and (10) in quo warranto proceeding. In the court's opinion, however, the instant petition does not fall
within any of the exceptions above-mentioned. . . . Instant petition involves not only questions of law
but more importantly the questions of facts which therefore needed the reception of evidence contrary
to the position of the respondent before the hearing of its motion for reconsideration. Now, on the
second exception on the rule of exhaustion of administrative remedies, supra, there is no showing that
administrative bodies, viz., the Secretary of Justice, the City Treasurer, Board of Assessment Appeals,
and the Central Board of Assessment Appeals are in estoppel. On the third exception, it does not appear
that Ordinance No. 7894 or the amendatory Ordinance No. 7905 are patently illegal. Re the fourth
exception, in the light of circumstances as pointed elsewhere herein, the matter does not need a
compelling judicial intervention. On the fifth exception, the claim of the petitioner is not small. Re the
sixth exception, the court does not see any irreparable damage that the petitioner will suffer if he had
paid or will pay under protest as per the ordinance. He could always ask for a refund of the excess
amount he paid under protest or be credited thereof if the administrative bodies mentioned in the law
(R.A. 7180) will find that his position is meritorious. Re the seventh exception, the court is of the
opinion that administrative relief provided for in the law are plain, speedy and adequate. On the eighth
exception, while the controversy involves public interest, judicial intervention as the petitioner would
like this court to do should be avoided as demonstrated herein below in the discussion of the third
issue. The ninth and tenth exception obviously are not applicable in the instant case.
3.
TAXATION; TAX ORDINANCE; REMEDIES AVAILABLE TO TAXPAYER WITH
REGARD TO QUESTIONS ON THE LEGALITY THEREOF. With regard to questions on the
legality of a tax ordinance, the remedies available to the taxpayer are provided under Section 187, 226,
and 252 of R.A. 7160. Section 187 of R.A. 7160 provides, that the taxpayer may question the
constitutionality or legality of tax ordinance on appeal within thirty (30) days from effectivity thereof,
to the Secretary of Justice. The petitioner after finding that his assessment is unjust, confiscatory, or
excessive, must have brought the case before the Secretary of Justice for questions of legality or
constitutionality of the city ordinance. Under Section 226 of R.A. 7160, an owner of real property who
is not satisfied with the assessment of his property may, within sixty (60) days from notice of
assessment, appeal to the Board of Assessment Appeals. Should the taxpayer question the
excessiveness of the amount of tax, he must first pay the amount due, in accordance with Section 252
of R.A. 7160. Then, he must request the annotation of the phrase "paid under protest" and accordingly
appeal to the Board of Assessment Appeals by filing a petition under oath together with copies of the
tax declarations and affidavits or documents to support his appeal. The rule is well-settled that courts
will not interfere in matters which are addressed to the sound discretion of government agencies
entrusted with the regulations of activities coming under the special technical knowledge and training
of such agencies. Furthermore, the crux of petitioner's cause of action is the determination of whether
or not the tax is excessive, oppressive or confiscatory. This issue is essentially a question of fact and
thereby, precludes this Court from reviewing the same.
4.
ID.; REAL PROPERTY TAX; STEPS TO FOLLOW FOR THE GENERAL REVISION OF
REAL PROPERTY ASSESSMENTS; SUBSTANTIAL COMPLIANCE IN CASE AT BAR. Based
on the evidence presented by the parties, the steps to be followed for the mandatory conduct of General
Revision of Real Property assessments, pursuant to the provision of Sec. 219 of R.A. No. 7160 are as
follows: "1. The preparation of Schedule of Fair Market Values. 2. The enactment of Ordinances: a)
levying an annual "ad valorem" tax on real property and an additional tax accruing to the SEF; b) fixing
the assessment levels to be applied to the market values of real properties; c) providing necessary
appropriation to defray expenses incident to general revision of real property assessments; and d)
adopting the Schedule of Fair Market Values prepared by the assessors." The preparation of fair market

values as a preliminary step in the conduct of general revision was set forth in Section 212 of R.A.
7160, to wit: (1) The city or municipal assessor shall prepare a schedule of fair market values for the
different classes of real property situated in their respective Local Government Units for the enactment
of an ordinance by the sanggunian concerned. (2) The schedule of fair market values shall be published
in a newspaper of general circulation in the province, city or municipality concerned or the posting in
the provincial capitol or other places as required by law. It was clear from the records that Mrs. Lourdes
Laderas, the incumbent City Assessor, prepared the fair market values of real properties and in
preparation thereof, she considered the fair market values prepared in the calendar year 1992. Upon
that basis, the City Assessor's Office updated the schedule for the year 1995. In fact, the initial schedule
of fair market values of real properties showed an increase in real estate costs, which ranges from
600%-3,330% over the values determined in the year 1979. However, after a careful study on the
movement of prices, Mrs. Laderas eventually lowered the average increase to 1,020%. Thereafter, the
proposed ordinance with the schedule of the fair market values of real properties was published in the
Manila Standard on October 28, 1995 and the Balita on November 1, 1995. Under the circumstances of
this case, there was compliance with the requirement provided under Sec. 212 of R.A. 7160.
5.
ID.; ID.; PROCEDURAL STEPS IN THE COMPUTATION THEREOF. With the
introduction of assessment levels, tax rates could be maintained, although tax payments can be made
either higher or lower depending on their percentage (assessment level) applied to the fair market value
of property to derive its assessed value which is subject to tax. Moreover, classes, and values of real
properties can be given proper consideration, like assigning lower assessment levels to residential
properties and higher levels to properties used in business. The procedural steps in computing the real
property tax are as follows: "1) Ascertain the assessment level of the property 2) Multiply the market
value by the applicable assessment level of the property 3) Find the tax rate which corresponds to the
class (use) of the property and multiply the assessed value by the applicable tax rates." ICAcaH
DECISION
QUISUMBING, J p:
This petition for review on certiorari, assails the Order 1 of the Regional Trial Court of Manila, Branch
39, promulgated on October 24, 1996, dismissing Civil Case No. 96-77510 which sought the
declaration of nullity of City of Manila Ordinance No. 7894, filed by petitioner Jaime C. Lopez.
The facts as found by the trial court are as follows:
Section 219 of Republic Act 7160 (R.A. 7160) or the Local Government Code of 1991 requires the
conduct of the general revision of real property as follows:
"General Revision of Assessments 2 and Property Classification The provincial, city or municipal
assessor shall undertake a general revision of real property assessments within two (2) years after the
effectivity of this Code and every three (3) years thereafter."
Although R.A. 7160 took effect on January 1, 1992, the revision of real property assessments
prescribed therein was not yet enforced in the City of Manila. However, the process of real property
valuation had already been started and done by the former city assessor.
In 1992, the schedule of real property values in the city was prepared and submitted to the City Council
of Manila, but for unknown reason, was not acted upon. Nevertheless, despite the inaction of the City
Council, there was a continuous update of the fair market values of the real properties within the city.
Until the year 1995, the basis for collection of real estate taxes in the City of Manila was the old, year 1979, real estate market values.
Mrs. Lourdes Laderas, the newly appointed City Assessor of Manila, received Memorandum Circular
No. 04-95 dated March 20, 1995, from the Bureau of Local Government Finance, Department of
Finance. This memorandum relates to the failure of most of the cities and municipalities of
Metropolitan Manila, including the City of Manila, to conduct the general revision of real property. For
this purpose, Mrs. Laderas embarked in a working dialogue with the Office of the City Mayor and the
City Council for the completion of the task.

After obtaining the necessary funds from the City Council, the City Assessor began the process of
general revision based on the updated fair market values of the real properties.
In the year 1995, the increase in valuation of real properties compared to the year - 1979 market values
ranges from 600% to 3,330%, but the City Assessor's office initially fixed the general average of
increase to 1,700%. Mrs. Laderas felt that the increase may have adverse reactions from the public,
hence, she ended up reducing the increase in the valuation of real properties to 1,020%.
In September 1995, the City Assessor's Office submitted the proposed schedule of fair market values to
the City Council for its appropriate action. The Council acting on the proposed schedule, conducted
public hearings as required by law. The proposed ordinance was subjected to the regular process in the
enactment of ordinances pursuant to the City Charter of Manila. The first reading was held on
September 12, 1995, the second on October 28, 1995, and the third on December 12, 1995. In between
these dates, public hearings on the general revision, which included the schedule of values of real
properties, were had, viz.; on September 28, 1995, October 5, 12 and 19, 1995 and November 27 and
29, 1995.
The proposed ordinance with the schedule of fair market values of real properties was published in the
Manila Standard on October 28, 1995, and the Balita on November 1, 1995. On December 12, 1995,
the City Council enacted Manila Ordinance No. 7894, entitled: "An Ordinance Prescribed as the
Revised Schedule of Fair Market Values of Real Properties of the City of Manila." The ordinance was
approved by the City Mayor on December 27, 1995, and made effective on Jan. 01, 1996. Thereafter,
notices of the revised assessments were distributed to the real property owners of Manila pursuant to
Sec. 223 of R.A. 7160. 3
With the implementation of Manila Ordinance No. 7894, the tax on the land owned by the petitioner
was increased by five hundred eighty percent (580%). With respect to the improvement on petitioner's
property, the tax increased by two hundred fifty percent (250%).
As a consequence of these increases, petitioner Jaime C. Lopez, filed on March 18, 1996, a special
proceeding for the declaration of nullity of the City of Manila Ordinance No. 7894 with preliminary
injunction and prayer for temporary restraining order (TRO). The petition alleged that Manila
Ordinance No. 7894 appears to be "unjust, excessive, oppressive or confiscatory." The case was
originally raffled to the Regional Trial Court of Manila, Branch 5, which issued the TRO on April 10,
1996.
On the same date, Manila Ordinance No. 7905 4 took effect, reducing by fifty percent (50%) the
assessment levels 5 (depending on the use of property, e.g., residential, commercial) for the
computation of tax due. The new ordinance amended the assessment levels provided by Section 74, 6
paragraph (A) of Manila Ordinance No. 7794.
Moreover, Section 2 of Manila Ordinance No. 7905 7 provides that the amendment embodied therein
shall take effect retroactively to January 1, 1996. The same provision indicates the maximum realty tax
increases, as follows:
"SECTION 2. . . . Provided, however, that the tax increase on residential lands and improvements shall
in no case exceed by two hundred percent (200%) of the tax levied thereon in calendar year 1995 and
the tax increase on commercial and industrial land, buildings and other structures shall not exceed by
three hundred percent (300%) of the tax imposed thereon in calendar year 1995; Provided further, that
the tax on all lands and improvements shall in no case be lower than the tax imposed thereon in
calendar year 1995."
As a result, Manila Ordinance No. 7905 reduced the tax increase of petitioner's residential land to one
hundred fifty-five percent (155%), while the tax increase for residential improvement was eighty-two
percent (82%).
The maximum tax increase on classified commercial estates is three hundred percent (300%) but the
tax increase on commercial land was only, two hundred eighty-eight percent (288%), and seventy-two
percent (72%) on commercial portion of the improvement.

On April 12, 1996, respondent filed a motion for inhibition of the presiding judge of RTC, Branch 5,
alleging that Judge Amelia Andrade had shown "markedly indulgent attitude towards the petitioner."
Hence, Judge Andrade inhibited herself and directed the forwarding of the case record to the Clerk of
Court for its re-raffle to another branch of the court.
Despite the amendment brought about by Manila Ordinance No. 7905, the controversy proceeded and
the case was re-raffled to Branch 39 of the court which acted on the motions submitted by the parties
for resolution, viz.: 1) application for preliminary injunction by the petitioner, and 2) motion to dismiss
by the respondent. The reason relied upon by the City of Manila for the dismissal of the petition was
for failure of the petitioner to exhaust administrative remedies.
On May 9, 1996, the court directed the issuance of a writ of injunction and denied, in the meanwhile,
the motion to dismiss by the respondent. The reason for the denial of the respondent's motion to dismiss
was not detailed to avoid a repetition of the unfortunate situation in RTC-Manila, Branch 5, wherein the
counsel for the respondent assumed bias on the part of Judge Andrade.
On May 22, 1996, the respondent filed the instant motion for reconsideration on the denial of its
motion to dismiss. The movant-respondent aside from reiterating the basic ground alleged in its motion
to dismiss underscored the additional premise, which is the happening of a supervening event, i.e., the
enactment and approval of the City Mayor of Manila Ordinance No. 7905.
On October 24, 1996, the trial court granted the motion to dismiss filed by the respondent. The
dismissal order was justified by petitioner's failure to exhaust the administrative remedies and that the
petition had become moot and academic when Manila Ordinance No. 7894 was repealed by Manila
Ordinance No. 7905. Notwithstanding, the trial court likewise resolved all other interlocking issues.
The dispositive portion of the trial court's order is as follows:
"WHEREFORE, finding the motion dated May 19, 1996 filed by the herein respondent on May 22,
1996 sufficiently well-taken, the order dated May 9, 1996 is hereby set aside. Let the petition filed by
the herein petitioner on March 8, 1996 be, as it is, hereby DISMISSED. The order of preliminary
injunction dated May 9, 1996, is also set aside and the writ of injunction likewise issued pursuant
thereto, dissolved.
SO ORDERED." 8
The petitioner filed a motion for reconsideration, but it was denied for lack of merit.
Hence, the petitioner now comes before this Court raising in his petition the following issues:
I.
DID THE RESPONDENT TRIAL COURT IN CIVIL CASE NO. 96-77510 ERR IN
HOLDING THAT THE PETITIONER FAILED TO EXHAUST ALL ADMINISTRATIVE
REMEDIES, AND THEREFORE, THE PETITION OUGHT TO BE DISMISSED? AND;
II.
DID THE RESPONDENT COURT ERR IN FAILING TO CORRECTLY APPLY SECTIONS
212 AND 221 OF THE LOCAL GOVERNMENT CODE OF 1991?
Petitioner contends that when the trial court ruled that it has jurisdiction over the case, the question of
whether he needs to resort to the exhaustion of administrative remedies becomes moot and academic.
He claims that resort to administrative remedies on constitutionality of law is merely permissive as
provided by Sec. 187 of R.A. 7160, viz.:
". . . Provided, further, That any question on the constitutionality or legality of tax ordinances or
revenue measures may be raised on appeal within thirty (30) days from the effectivity thereof to the
Secretary of Justice who shall render a decision within sixty (60) days from the date of receipt of the
appeal. . . ." (emphasis supplied)
Petitioner further asserts that the question of the constitutionality of the city ordinance may be raised on
appeal, either to the Secretary of Justice or the Regional Trial Court, both having concurrent
jurisdiction over the case, in accordance with Batas Pambansa Blg. 129. He states that at the time he
instituted this complaint, it was premature to resort to the remedies provided by R.A. 7160 because he
has not received the formal notice of assessment yet, hence, he could not be expected to pay under
protest and elevate the exorbitant assessment to the Board of Assessment Appeals.

On the other hand, respondent argues that the adjustment of the fair market values of real properties in
the City of Manila was long overdue, being updated only after fifteen (15) years. According to the
respondent, petitioner filed the case, merely to take advantage of the situation to gain political mileage
and help advance his mayoralty bid.
As a general rule, where the law provides for the remedies against the action of an administrative
board, body, or officer, relief to courts can be sought only after exhausting all remedies provided. The
reason rests upon the presumption that the administrative body, if given the chance to correct its
mistake or error, may amend its decision on a given matter and decide it properly. Therefore, where a
remedy is available within the administrative machinery, this should be resorted to before resort can be
made to the courts, not only to give the administrative agency the opportunity to decide the matter by
itself correctly, but also to prevent unnecessary and premature resort to courts. 9 This rule, however,
admits certain exceptions. 10
With regard to questions on the legality of a tax ordinance, the remedies available to the taxpayer are
provided under Sections 187, 226, and 252 of R.A. 7160.
Section 187 of R.A. 7160 provides, that the taxpayer may question the constitutionality or legality of
tax ordinance on appeal within thirty (30) days from effectivity thereof, to the Secretary of Justice. The
petitioner after finding that his assessment is unjust, confiscatory, or excessive, must have brought the
case before the Secretary of Justice for questions of legality or constitutionality of the city ordinance.
Under Section 226 of R.A. 7160, an owner of real property who is not satisfied with the assessment of
his property may, within sixty (60) days from notice of assessment, appeal to the Board of Assessment
Appeals. 11
Should the taxpayer question the excessiveness of the amount of tax, he must first pay the amount due,
in accordance with Section 252 of R.A. 7160. Then, he must request the annotation of the phrase "paid
under protest" and accordingly appeal to the Board of Assessment Appeals by filing a petition under
oath together with copies of the tax declarations and affidavits or documents to support his appeal. 12
The rule is well-settled that courts will not interfere in matters which are addressed to the sound
discretion of government agencies entrusted with the regulations of activities coming under the special
technical knowledge and training of such agencies. 13 Furthermore, the crux of petitioner's cause of
action is the determination of whether or not the tax is excessive, oppressive or confiscatory. This issue
is essentially a question of fact and thereby, precludes this Court from reviewing the same. 14
We have carefully scrutinized the record of this case and we found no cogent reason to depart from the
findings made by the trial court on this point. As correctly found by the trial court, the petition does not
fall under any of the exceptions to excuse compliance with the rule on exhaustion of administrative
remedies, to wit:
"One of the reasons for the doctrine of exhaustion is the separation of powers which enjoins upon the
judiciary a becoming policy of non-interference with matters coming primarily within the competence
of other department. . . .
There are however a number of instances when the doctrine may be dispensed with and judicial action
validly resorted to immediately. Among these exceptional cases are: (1) when the question raised is
purely legal; (2) when the administrative body is in estoppel; (3) when the act complained of is patently
illegal; (4) when there is urgent need for judicial intervention; (5) when the claim involved is small; (6)
when irreparable damage will be suffered; (7) when there is no other plain, speedy and adequate
remedy; (8) when strong public interest is involved; (9) when the subject of controversy is private land;
and (10) in quo-warranto proceeding (citation omitted).
In the court's opinion, however, the instant petition does not fall within any of the exceptions abovementioned. . . .
. . . Instant petition involves not only questions of law but more importantly the questions of facts
which therefore needed the reception of evidence contrary to the position of the respondent before the
hearing of its motion for reconsideration.

Now, on the second exception on the rule of exhaustion of administrative remedies, supra, there is no
showing that administrative bodies, viz., The Secretary of Justice, the City Treasurer, Board of
Assessment Appeals, and the Central Board of Assessment Appeals are in estoppel. On the third
exception, it does not appear that Ordinance No. 7894 or the amendatory Ordinance No. 7905 are
patently illegal. Re the fourth exception, in the light of circumstances as pointed elsewhere herein, the
matter does not need a compelling judicial intervention. On the fifth exception, the claim of the
petitioner is not small. Re the sixth exception, the court does not see any irreparable damage that the
petitioner will suffer if he had paid or will pay under protest as per the ordinance. He could always ask
for a refund of the excess amount he paid under protest or be credited thereof if the administrative
bodies mentioned in the law (R.A. 7180 15 ) will find that his position is meritorious. Re the seventh
exception, the court is of the opinion that administrative relief provided for in the law are plain, speedy
and adequate. On the eight exception, while the controversy involves public interest, judicial
intervention as the petitioner would like this court to do should be avoided as demonstrated herein
below in the discussion of the third issue. The ninth and tenth exception obviously are not applicable in
the instant case." 16
Proceeding to the second issue, petitioner contends that the respondent court failed to apply correctly
Sections 212 and 221 of R.A. 7160. The pertinent provisions are set forth below:
"SECTION 212.
Preparation of Schedule of Fair Market Values. Before any general revision of
property assessment is made pursuant to the provisions of this Title, there shall be prepared a schedule
of fair market values by the provincial, city and the municipal assessors of the municipalities within the
Metropolitan Manila Area for the different classes of real property situated in their respective local
government units [LGU] for enactment by ordinance of the sanggunian concerned. The schedule of fair
market values shall be published in a newspaper of general circulation in the province, city or
municipality concerned, or in the absence thereof, shall be posted in the provincial capitol, city or
municipal hall and in two other conspicuous public places therein."
"SECTION 221.
Date of Effectivity of Assessment or Reassessment. All assessments or
reassessments made after the first (1st) day of January of any year shall take effect on the first (1st) day
of January of the succeeding year: Provided, however, That the reassessment of real property due to its
partial or total destruction, or to a major change in its actual use, or to any great and sudden inflation or
deflation of real property values, or to the gross illegality of the assessment when made or to any other
abnormal cause, shall be made within ninety (90) days from the date any such cause or causes
occurred, and shall take effect at the beginning of the quarter next following assessment."
The petitioner claims that the effectivity date of Manila Ordinance No. 7894 and the schedule of the
fair market values is January 1, 1996. He contends that Sec. 212 of the R.A. 7160 prohibits the general
revision of real property assessment before the approval of the schedule of the fair market values. Thus,
the alleged revision of real property assessment in 1995 is illegal.
Based on the evidence presented by the parties, the steps to be followed for the mandatory conduct of
General Revision of Real Property assessments, pursuant to the provision of Sec. 219 of R.A. No. 7160
are as follows:
"1.
The preparation of Schedule of Fair Market Values.
2.
The enactment of Ordinances:
a)
levying an annual "ad valorem" tax on real property and an additional tax accruing to the SEF;
b)
fixing the assessment levels to be applied to the market values of real properties;
c)
providing necessary appropriation to defray expenses incident to general revision of real
property assessments; and
d)
adopting the Schedule of Fair Market Values prepared by the assessors." 17
The preparation of fair market values as a preliminary step in the conduct of general revision was set
forth in Section 212 of R.A. 7160, to wit: (1) The city or municipal assessor shall prepare a schedule of
fair market values for the different classes of real property situated in their respective Local

Government Units for the enactment of an ordinance by the sanggunian concerned. (2) The schedule of
fair market values shall be published in a newspaper of general circulation in the province, city or
municipality concerned or the posting in the provincial capitol or other places as required by law.
It was clear from the records that Mrs. Lourdes Laderas, the incumbent City Assessor, prepared the fair
market values of real properties and in preparation thereof, she considered the fair market values
prepared in the calendar year 1992. Upon that basis, the City Assessor's Office updated the schedule for
the year 1995. In fact, the initial schedule of fair market values of real properties showed an increase in
real estate costs, which ranges from 600%-3,330% over the values determined in the year 1979.
However, after a careful study on the movement of prices, Mrs. Laderas eventually lowered the average
increase to 1,020%. Thereafter, the proposed ordinance with the schedule of the fair market values of
real properties was published in the Manila Standard on October 28, 1995 and the Balita on November
1, 1995. 18 Under the circumstances of this case, there was compliance with the requirement provided
under Sec. 212 of R.A. 7160.
Thereafter, on January 1, 1996, the Sanggunian approved Manila Ordinance No. 7894. The schedule of
values of real properties in the City of Manila, which formed an integral part of the ordinance, was
likewise approved on the same date.
When Manila Ordinance No. 7894 took effect on January 1, 1996, the existing assessment levels to be
multiplied by the market value of the property in computing the assessed value (taxable value) subject
to tax were those enumerated in Section 74 paragraph (A) of Manila Ordinance Number 7794.
Coming down to specifics, we find it desirable to lay down the procedure in computing the real
property tax. With the introduction of assessment levels, tax rates could be maintained, although tax
payments can be made either higher or lower depending on their percentage (assessment level) applied
to the fair market value of property to derive its assessed value which is subject to tax. Moreover,
classes and values of real properties can be given proper consideration, like assigning lower assessment
levels to residential properties and higher levels to properties used in business. 19 The procedural steps
in computing the real property tax are as follows:
"1)
Ascertain the assessment level of the property
2)
Multiply the market value by the applicable assessment level of the property
3)
Find the tax rate which corresponds to the class (use) of the property and multiply the assessed
value by the applicable tax rates." 20
For easy reference, the computation of real property tax is cited below:
Market Value P
xxx
Multiplied by Assessment Level
(
x%)

Assessed Value
P
xxx
Multiplied by Rate of Tax (
x%)

Real Property Tax

P
xx
======
On April 10, 1996, Manila Ordinance No. 7905 was enacted and approved to take effect, retroactively
to January 1, 1996. As a result of this new ordinance, the assessment levels applicable to the market
values of real properties were lowered into half. A comparative evaluation between the old and the new
assessment levels is as follows:
Assessment Levels
Ordinance 7794
Ordinance 7905
Old New
(1)
On Lands:
Class
Residential 20% 10%

Commercial 50% 25%

Industrial
50% 25%
(2)
On Buildings and other structures:
(a)
Residential Fair Market Value
Over Not Over
P175,000.00
0%
0%
175,000.00 P300,000.00 10% 5%
300,000.00 500,000.00 20% 10%
500,000.00 750,000.00 25% 12.5%
750,000.00 1,000,000.00 30% 15%
1,000,000.00 2,000,000.00 35% 17.5%
2,000,000.00 5,000,000.00 40% 20%
5,000,000.00 10,000,000.00 50% 25%
10,000,000.00
60% 30%
(b)
Commercial/Industrial Fair Market Value
Over Not Over
300,000.00
30% 15%
300,000.00 500,000.00 35% 17.5%
500,000.00 750,000.00 40% 20%
750,000.00 1,000,000.00 50% 25%
1,000,000.00 2,000,000.00 60% 30%
2,000,000.00 5,000,000.00 70% 35%
5,000,000.00 10,000,000.00 75% 37.5%
10,000,000.00
80% 40%
(3)
On Machineries:
Class
Residential 50% 25%
Commercial 80% 40%
Industrial
66% 40%
(4)
On special classes The assessment levels for all lands, buildings, machineries
and other improvements shall be as follows:
Actual Use
Cultural
15% 7.5%
Scientific
15% 7.5%
Hospital
15% 7.5%
Local Water Districts 15% 7.5%
GOCC engaged in the
supply and distribution
of water and/or degeneration
and transmission of electric
power 10% 5%
Despite the favorable outcome of Manila Ordinance No. 7905, the petitioner insists that since it was
approved on April 10, 1996, it cannot be implemented in the year 1996. Using Section 221 of R.A.
7160 as basis for his argument, petitioner claims that the assessments or reassessments made after the
first (1st) day of January of any year shall take effect on the first (1st) day of January of the succeeding
year.
Contrarily, the trial court viewed that Manila Ordinance No. 7905 affects the resulting tax imposed on
the market values of real properties as specified in Manila Ordinance No. 7894. Therefore, this
supervening circumstance has rendered the petition, moot and academic, for failure of the petitioner to

amend his cause of action. The trial court said:

"A mere cursory reading of his petition that he questioned fair market values and the assessment levels
and the resulting tax based thereon as imposed by Ordinance No. 7894. The petitioner, however, failed
to amend his petition. Thus, it is clear that the petition has become moot and academic. As correctly
stated by the respondent, the facts, viz., the tax rates on level prescribed by Ordinance 7894 upon
which the petition was anchored no longer exist because the tax rates in Ordinance No. 7894 have been
amended, otherwise, impliedly repealed by Ordinance No. 7905. If only for this, the petition could be
dismissed but this court followed the advice of the Supreme Court in the case of National Housing
Authority vs. Court of Appeals, et al. (121 SCRA 777) that the case may be decided in its totality
resolving all interlocking issues in order to render justice to all concerned and end litigation once and
for all." 21
Although, we are in full accord with the ruling of the trial court, it is likewise necessary to stress that
Manila Ordinance No. 7905 is favorable to the taxpayers when it specifically states that the reduced
assessment levels shall be applied retroactively to January 1, 1996. The reduced assessment levels
multiplied by the schedule of fair market values of real properties, provided by Manila Ordinance No.
7894, resulted to decrease in taxes. To that extent, the ordinance is likewise, a social legislation
intended to soften the impact of the tremendous increase in the value of the real properties subject to
tax. The lower taxes will ease, in part, the economic predicament of the low and middle-income groups
of taxpayers. In enacting this ordinance, the due process of law was considered by the City of Manila
so that the increase in realty tax will not amount to the confiscation of the property.
WHEREFORE, the instant petition is hereby DENIED, and the assailed Order of Regional Trial Court
of Manila, Branch 39 in Civil Case No. 96-77510 is hereby AFFIRMED. COSTS against the petitioner.
SO ORDERED.
Bellosillo, Puno, Mendoza and Buena, JJ., concur.
Footnotes
1.
Penned by Judge Benjamin A.G. Vega, Regional Trial Court of Manila, Branch, 39, rollo, pp.
16-28.
2.
R.A. 7160, Sec. 198.
xxx
xxx
xxx
(f)
Assessment is the act or process of determining the value of a property or proportion thereof
subject to tax, including the discovery, listing, classification, and appraisal of properties.
xxx
xxx
xxx
(g)
Reassessment is the assigning of new assessed values to property, particularly real estate, as
the result of a general, partial, or individual reappraisal of the property.
3.
Sec. 223 Notification of New or Revised Assessment. When real property is assessed for
the first time or when an existing assessment is increased or decreased, the provincial, city or municipal
assessor shall within thirty (30) days give written notice of such new or revised assessment to the
person in whose name the property is declared. The notice may be delivered personally or by registered
mail or through the assistance of the punong barangay to the last known address to the person to be
served.
4.
"An Ordinance Amending Sec. 74 (A) of Ordinance No. 7794 as amended, otherwise known as
the Revenue Code of the City of Manila".
5.
"Assessment Level" is the percentage applied or multiplied to the fair market value to determine
the taxable value of the property; R.A. 7160, Sec. 198, (g).
6.
Revenue Code of City of Manila (enacted and approved in 1993)
Sec. 74.
Assessment Levels
A)
. . . (Enumeration of assessment levels in accordance with Sec. 218 of R.A. 7160)
B)
The assessment levels in paragraph (a) hereof shall be applied initially during the first general
revision of real property assessments to be undertaken pursuant to Sections 73 and 76 of this

Ordinance.
7.
Rollo, p. 91.
8.
Rollo, p. 28.
9.
Cruz vs. Del Rosario, 9 SCRA 755 (1963), citing Jao Igco vs. Shuster, 10 Phil. 448; Lamb vs.
Phipps, 22 Phil. 456; Miguel vs. Reyes, G.R. No. L-4851, July 31, 1953; Arnedo vs. Aldanese, 63 Phil.
768; Tuan Kay vs. Import Control Commission, G.R. No. L-4427, April 31, 1952; Veloso vs. Board of
Accountancy, G.R. No. L-5760, April 20, 1953; Lubugan, et al. vs. Castrillo and Malinay, G.R. No. L10521, May 29, 1957.
10.
Sunville Timber Products, Inc. vs. Abad, 206 SCRA 483, at p. 487; citing Valmonte vs.
Belmonte, 170 SCRA 256; Tan vs. Veterans Backpay Commission, 105 Phil. 377; Laganapan vs.
Asedillo, 154 SCRA 377; Aquino vs. Luntok, 184 SCRA 177; Cipriano vs. Marcelino, 43 SCRA 291;
De Lara vs. Cloribel, 14 SCRA 269; National Development Company vs. Collector of Customs, 9
SCRA 429; Arrow Transportation Corporation vs. Board of Transportation, 63 SCRA 193; Soto vs.
Jareno, 144 SCRA 116; Corpus vs. Cuaderno, 4 SCRA 749.
11.
Sec 226. Local Board of Assessment Appeals. Any owner or person having legal interest in
the property who is not satisfied with the action of the provincial, city or municipal assessor in the
assessment of his property may, within sixty (60) days from the date of receipt of the written notice of
assessment, appeal to the Board of Assessment Appeals of the province or city by filing a petition under
oath in the form prescribed for the purpose, together with copies of the tax declarations and such
affidavits or documents submitted in support of the appeal.
12.
Sec. 252. Payment Under Protest. (a) No protest shall be entertained unless the taxpayer first
pays the tax. There shall be annotated on the tax receipts the words "paid under protest." The protest in
writing must be filed within thirty (30) days from payment of the tax to the provincial, city treasurer or
municipal treasurer, in the case of a municipality within Metropolitan Manila Area, who shall decide
the protest within sixty (60) days from receipt. (b) The tax or a portion thereof paid under protest, shall
be held in trust by the treasurer concerned. (c) In the event that the protest is finally decided in favor of
the taxpayer, the amount or portion of the tax protested shall be refunded to the protestant, or applied as
tax credit against his existing or future tax liability. (d) In the event that the protest is denied or upon
the lapse of the sixty day period prescribed in subparagraph (a), the taxpayer may avail of the remedies
as provided for in Chapter 3, Title II, Book II of this Code.
13.
First Lepanto Ceramics, Inc. vs. Court of Appeals, 253 SCRA 540 (1996).
14.
See Ty vs. Trampe, 250 SCRA 500 (1995).
15.
It should be RA 7160.
16.
Rollo, pp. 23-24.
17.
Memorandum Circular No. 04-95, Bureau of Local Government Finance; RTC records, pp.
202-207, at 206.
18.
Certification issued by the Secretary to the City Council, records pp. 251 (Exhibit 35).
19.
Metropolitan Manila Taxation - Calaguio, Oamar, Ortiz,
20.
Ibid.
21.
Rollo, p. 27.

EN BANC
[G.R. Nos. 115253-74. January 30, 1998.]
ANTONIO P. CALLANTA, GILBERTO M. DELOS REYES, CESAR Q. CONCON, ALMICAR
EDIRA, 1 JACINTO PAHAMTANG, ANTONIO V. ABELLANA, APOLINARIO SALARES, JR. and
SHIRLEY PALMERO, petitioners, vs. OFFICE OF THE OMBUDSMAN and CITY GOVERNMENT
OF CEBU, respondents.
Gregorio B. Escasinas for petitioners.
The Office of the City Attorney for respondents.
SYNOPSIS
Petitioners, who are officers and staff of the City Assessor's Office of Cebu, conducted general revision
of assessment in 1988 for which, without the authority of the Local Board of Assessment Appeals
(LBAA), reassessed the values of certain properties, in contravention of Sec. 30 of P.D. 464. The said
assessment resulted in the reduction of assessed values of the properties within the city's taxing
jurisdiction. cACEaI
The City of Cebu filed criminal and administrative charges against them before the Ombudsman which
encapsulizes the issues, among which is, whether or not petitioners violated the law by their acts of
accommodating requests for reconsideration of the revised assessments.
Petitioners have no legal authority to act upon requests for reconsideration or appeals of property
owners, a power which is explicitly vested upon the LBAA under Sec. 30 of the Real Property Tax
Code, as amended. Sec. 22 clearly provides three (3) occasions when assessments of real properties
may be made by the local assessor. In the case at bar, the second instance gave rise to the revised
assessed values for which the property owners subsequently sought reconsideration. Sec. 30 of the
same Code is equally clear that the aggrieved owners should have brought their appeals before the
LBAA. Unfortunately, despite the advice to this effect contained in their respective notices of
assessment, the owners chose to bring their requests for a review/readjustment before the city assessor,
a remedy not sanctioned by the law. To allow this procedure would indeed invite corruption in the
system of appraisal and assessment. It conveniently courts a graft-prone situation where values of real
property may be initially set unreasonably high, and then subsequently reduced upon the request of a
property owner. In the latter instance, allusions of a possible covert, illicit trade-off cannot be avoided,
and in fact can conveniently take place. Such occasion for mischief must be prevented and excised
from our system. aEHADT
SYLLABUS
1.
TAXATION; REAL PROPERTY TAX CODE (P.D. 464); CITY ASSESSOR; WITHOUT
AUTHORITY TO RECONSIDER REAL PROPERTY ASSESSMENTS. Petitioners have no legal
authority to act upon requests for reconsideration or appeals of property owners, a power which is
explicitly vested upon the LBAA under Sec. 30 of the Real Property Tax Code, as amended. Sec 22
clearly provides three (3) occasions when assessments of real properties may be made by the local
assessor. In the case at bar, the second instance gave rise to the revised assessed values for which the
property owners subsequently sought reconsideration. Sec. 30 of the same Code is equally clear that the
aggrieved owners should have brought their appeals before the LBAA. Unfortunately, despite the
advice to this effect contained in their respective notices of assessment, the owners chose to bring their
requests for a review/readjustment before the city assessor, a remedy not sanctioned by the law. In this
case, based on a list of properties submitted by petitioners comparing their (1) previous assessed values
("old values"), (2) assessed values under the general revision ("revised values"), and (3) the
unauthorized adjusted values ("unauthorized values"), the Court observes that the old values of some
properties were increased by more than 1,000% (or 10 times) in the general revision, but were reduced
to only about half under the unauthorized adjustments. The large discrepancies seem to indicate a
tendency to overvalue initially and thereafter to reduce the increases upon "request" of the property
owner affected. To avoid this dubious, suspicious, bribable and compromising situation, the law itself

specifically provided an appellate body the LBAA before which property owners may seek relief.
Neither habit nor good faith can amend this appellate procedure provided under law. TECcHA
2.
ID.; ID.; ID.; ID.; LONG PRACTICE DOES NOT JUSTIFY CONTINUANCE OF ACTS.
Indeed, the long-standing practice adverted to by petitioners does not justify a continuance of their acts.
We cannot sanction such compromising situations. Henceforth, whenever the Local Assessor sends a
notice to the owner or lawful possessor of real property of its revised assessed value, the former shall
thereafter no longer have any jurisdiction to entertain any request for a review or readjustment. The
appropriate forum where the aggrieved party may bring his appeal is the LBAA, as provided by law.
3.
ID.; ID.; NEW ASSESSMENTS TAKE EFFECT ON THE FIRST DAY OF JANUARY OF
THE SUCCEEDING YEAR. Petitioners solely invoke Sec. 23 and ignore Sec. 24. This Court
believes both sections should be construed together. While, at first glance, Sec. 23 seems to impose the
certification to the Secretary of Finance as a condition sine qua non before the revised values may
become effective, the second part of the section, which we underscored above, gives a contrary
understanding. We hold that the dominant provision is Sec. 24, the specific provision on the effectivity
of assessments or reassessments. This section is clear and unequivocal. The assessments take effect on
the first day of January of the succeeding year after the revision is made. While Sec. 23 requires the
local assessor to certify to the finance secretary that the general revision has been finished, such
certification is, however, not the operative act for the effectivity of the new assessments. This
interpretation is bolstered by the fact that under the Local Government Code of 1991, Title Two, Book
II of which has replaced the Real Property Tax Code, there is no longer any provision requiring such
certification.
4.
ID.; ID.; ID.; RIGHT TO COLLECT SAID TAXES BY THE LOCAL GOVERNMENT ALSO
ARISES ON SAME DATE; UNAUTHORIZED REDUCTION OF THE ASSESSED VALUES
RESULTED TO DEPRIVATION OF CORRESPONDING REVENUES. With respect to real
property taxes, the obligation to pay arises on the first day of January of the year following the
assessment. Corollarily, on the same date, the right of the local government to collect said taxes also
arises. And where the taxpayer fails to question such assessment within the reglementary period
provided by law, the local government's right becomes absolute upon the expiration of such period with
respect to that taxpayer's property. Thus, petitioners' unauthorized reduction of the assessed values
ineluctably resulted in the local government's deprivation of the corresponding revenues. Lost or
reduced revenues undeniably translate into damages or injury within the contemplation of the law. The
city government of Cebu, therefore, had every legal right to feel aggrieved and to institute this
proceeding against petitioners.
5.
ADMINISTRATIVE LAW; PUBLIC OFFICERS; GRAVE MISCONDUCT; CLEAR INTENT
TO VIOLATE THE LAW MUST BE MANIFEST. In grave misconduct, the elements of corruption,
clear intent to violate the law or flagrant disregard of established rule must be manifest.
6.
ID.; ID.; ID.; NEGATED BY THE HONEST BELIEF THAT ACTS WERE SANCTIONED BY
LAW; CASE AT BAR. Without evidence showing that petitioners received any gift, money or other
payoff or that they were induced by offers of such, we cannot impute any taint of direct corruption to
the questioned acts of petitioners. Any indication of intent to violate the law or of flagrant disregard of
established rule is meanwhile negated by the petitioners' honest belief that their act were sanctioned
under the third instance provided in Sec. 22 of PD 464, as buttressed by the long-standing adherence of
local assessors to the questioned procedure. cDCEIA
7.
ID.; ID.; GROSS NEGLIGENCE; FLAGRANT AND PALPABLE DISREGARD OR
BREACH OF DUTY. Gross negligence, on the other hand, is flagrant and palpable disregard or
breach of duty. It is the conscious pursuit of a course of conduct which would naturally and reasonably
cause injury.
8.
ID.; ID.; REMOVAL FROM OFFICE; GROUND SHOULD BE CLEARLY ESTABLISHED.
Where the charges on which the removal of the public officer is sought are misconduct in office,

gross negligence, or corruption, the ground for dismissal should be clearly established.
9.
ID.; ID.; MISCONDUCT OR MALFEASANCE IN OFFICE; ONE YEAR SUSPENSION FOR
AUTHORIZING MULTIFOLD INCREASES IN THE ASSESSED VALUES AND SUBSEQUENTLY
REDUCING IT TO AS MUCH AS 50% UPON "REQUEST" OF AFFECTED PROPERTY OWNERS;
CASE AT BAR. Petitioners Callanta, Delos Reyes and Concon, as public officers occupying exalted
positions in the civil service, must, in accordance with the Constitution and the Ethical Standards Law,
exemplify the ideals of integrity, efficiency, and particularly proficiency in the law. They must ever be
prudent to act always in accordance with law, and not to perform or authorize legally doubtful acts that
may stain the integrity of their office. Their act alone of initially authorizing multifold increases in the
assessed values, only to scale them down to as much as fifty per cent upon "requests" of the affected
property owners, is already reflective of inefficiency, and indicative of misconduct or malfeasance, if
not incompetence in their offices, for which they should be penalized. Considering that they are senior
officials who had failed to live up to the standards and ideals expected of their rank and stature,
Petitioners Callanta, Delos Reyes and Concon are hereby imposed the penalty of suspension from
office for one (1) year.
10.
ID.; ID.; PUBLIC OFFICIALS AND EMPLOYEES ARE REQUIRED TO FOLLOW ONLY
LAWFUL ORDERS OF THEIR SUPERIORS; CASE AT BAR. The defense of the other petitioners
that they were merely following the orders of their superiors does not totally exculpate them from
liability. They should likewise be aware of the limits of the functions of their office. Public officials and
employees are required to follow only the lawful orders of their superiors which are issued within the
scope of their authority. In our jurisdiction, the rule of law, and not of men, governs. Nowhere in our
statutes is blind obedience required of junior personnel to the commands and directives of their
superiors. In indiscreetly following the orders of their superiors, Petitioners Edira, Pahamtang,
Abellana, Salares, Jr. and Palmero had breached their accountability to the public. They deserve to be
reprimanded. SITCEA
DECISION
PANGANIBAN, J p:
May officials and employees of the Office of the City Assessor reduce the new assessed values of real
properties upon requests of the affected property owners? To forestall the practice of initially setting
unreasonably high reassessment values only to eventually change them to unreasonably lower values
upon "requests" of property owners, the law gives no such authority to the city assessor or his
subalterns. Seemingly innocuous occasions for mischief and veiled opportunities for graft should be
excised from the public system. Built-in checks should be zealously observed so that the ingenious and
shrewd cannot circumvent them and the audacious cannot violate them with impunity. cda
Statement of the Case
Before us is a petition for certiorari under Rule 65 of the Rules of Court seeking to set aside the
ombudsman's amended Resolution 2 dated October 28, 1993, which dismissed from government
service Petitioners Callanta, Delos Reyes and Concon and suspended the other petitioners from holding
office for three (3) months without pay. Also challenged is the ombudsman's Order 3 dated April 18,
1994, denying petitioners' motion for reconsideration and urgent motion to stop the execution of the
amended Resolution.
The Facts
The parties do not dispute the findings of fact of the deputy ombudsman 4 for the Visayas, as approved
by the ombudsman and which this Court finds substantiated by the records. The pertinent portions are
as follows:
"It is alleged that a general revision of assessment was conducted by the Office of the City Assessor in
1988 and sometime thereafter. Notices of assessment together with the new tax declarations were
subsequently sent to the property owners. Thereafter, respondents, without the authority of the Local
Board of Assessment Appeals, reassessed the values of certain properties, in contravention of Sec. 30 of

P.D. 464. The said assessment resulted in the reduction of assessed values of the properties . . .
xxx
xxx
xxx
The extent of participation of the individual respondents in the adjustments [reductions] referred to
above, could be summarized as follows, to wit:
1.
Antonio P. Callanta
approved and ordered the adjustments of the revised assessments reducing both the market and
assessed values of real properties under Tax Declaration Nos. . .
2.
Ma. Almicar Edera [, Jacinto Pahamtang, Segundino Lucero, Antonio V. Abellana, Nicolas
Abarri and Apolinario Salares, Jr.]
conducted the adjustments of the revised assessments reducing both the market and assessed values
of real properties under Tax Declaration Nos. . .
3.
Gilberto delos Reyes [and Cesar Q. Concon]
approved for and in behalf of the City Assessor the adjustments of the revised assessments reducing
both the market and assessed values of real properties under Tax Declaration Nos. . . .
xxx
xxx
xxx
10.
Shirley Palmero
recommended the approval of the adjustment of the revised assessment reducing both the market
and assessed value of real property under Tax Declaration No. GR-04-028-05093 and conducted
similar aforesaid adjustments on real properties under Tax Declaration Nos. . ." 5
In several similarly worded letter-complaints dated December 19, 1991, the City of Cebu
simultaneously filed criminal and administrative charges against the above-enumerated officers and
staff of the City Assessor's Office for "violations of Section 106 of the Real Property Tax Code[,] for
gross negligence or willful under-assessment of real properties within the city's taxing jurisdiction and
for violation of Sec. 3 (e) of R.A. 3019, otherwise known as the Anti-Graft and Corrupt Practices Act[,]
for the act of causing undue injury to the City Government by giving private persons unwarranted
benefits, advantages or preferences in the discharge of their official and administrative functions
through manifest partiality, evident bad faith or gross inexcusable negligence by reassessing the real
properties of taxpayers without any authority whatsoever, thereby resulting in the reduction of tax
assessments to the prejudice of the city government . . ." Specifically, the administrative charges were
for "dishonesty and/or serious irregularities in the performance of duties/public functions." The deputy
ombudsman summarized the defenses of petitioners in this wise:
"Respondents [herein petitioners], in their joint counter-affidavit, denied the charges filed against them.
They explained that the acts complained of were done within the bounds of their official duties and
functions, citing as their legal basis, Sec. 22 of P.D. 464. That Sec. 30 of P.D. 464 which is the basis of
the complaints does not prohibit the Assessor from either correcting from whatever error or flaw he and
his deputies may have made.
Respondents further alleged that they have not derived any benefit from the adjustments nor caused
injury to any party particularly the City Government of Cebu. They explained that the general revision
of real property assessments for the City of Cebu has not been completed nor has the City Assessor
certified its completion to the Secretary of Justice, thus taxes under these revised tax declarations are
not yet due, has [sic] not yet accrued, are not yet collectible and therefore, cannot serve as basis for
alleged injury." 6
The deputy ombudsman, ruling purely on the administrative aspect of the cases, held in the assailed
amended Resolution that while the city assessor had not yet submitted a certification to the secretary of
finance stating that the general revision of property assessments has been completed, "thus forestalling
the effectivity of [the] assessments and the accrual of taxes thereunder," the city government of Cebu
already acquired a vested interest on the taxes by reason of the property owners' failure to question the
same to the Local Board of Assessment Appeals (LBAA) within sixty (60) days from receipt of their
notices of assessment, as provided under Sec. 30 7 of PD 464, as amended. He opined that approval by

the secretary of finance is not necessary for the assessments to take effect, and the taxes thereunder to
accrue and become payable. In addition, even no law expressly prohibits the local assessor or his
authorized deputies from making corrections or adjustments in assessments, the unrestricted exercise of
such authority in all stages of the appraisal and assessment process "would open the floodgates to
corruption." Besides, the questioned assessments were done pursuant to the general revision; hence,
requests for readjustment are effectively petitions for reappraisal and reassessment which are not
allowed under the law. Section 30 of PD 464, as amended, provides the remedy for questioning
assessments of real properties and the "reassessments" requested by the property owners and granted by
the assessor is not included therein. The deputy ombudsman thus concluded that the unauthorized and
improper corrections/adjustments made by petitioners resulting in decreased fair market values of the
real properties involved adversely affected the city government. Such acts allegedly constituted willful
or gross negligence amounting to intentional violation and gross disregard of Sec. 106 8 of PD 464, as
amended.
Finding that the readjustments were made pursuant to the direct orders of Petitioner Antonio P.
Callanta, who was then officer-in-charge of the Office of the City Assessor, and of Petitioners Gilberto
delos Reyes and Cesar Concon who acted on behalf of Callanta in approving the reduced assessments,
the deputy ombudsman resolved that the three violated Sec. 4, par. (c) 9 of RA 6713 (the "Code of
Conduct and Ethical Standards for Public Officials and Employees") for performing acts contrary to
law, specifically PD 464, amounting to gross neglect of duty and/or grave misconduct. The penalty of
dismissal with forfeiture of accrued benefits was meted upon them. As regards Petitioners Edira,
Pahamtang, Lucero, Abellana, Abarri, Salares Jr. and Palmero, the deputy ombudsman found them
guilty only of negligence in the performance of their functions for making the adjustments without
taking into account the revised assessments previously made. The penalty of suspension for three (3)
months without pay was imposed on them.
Ombudsman Conrado M. Vasquez approved the findings and recommendations of the deputy
ombudsman for the Visayas on December 8, 1993. Petitioners filed a motion for reconsideration as well
as a motion to stop the execution of the ombudsman's decision by the city government of Cebu. Both
motions were denied for lack of merit. 10
Hence, this petition. 11
Issues
Petitioners present the following assignment of errors:
"First The Ombudsman gravely erred in resolving that the assessor acted illegally and in grave
misconduct by adjusting/correcting the valuations of the tax declarations subject of the complaints.
Second It is gravely erroneous for both respondents to assume that taxes for the subject tax
declarations had accrued and become payable, thereby making petitioners liable for causing undue
injury to the city government of Cebu.
Third The Ombudsman manifestly overlooked certain relevant facts not disputed by the parties and
which if properly considered would justify a different conclusion.
Fourth It is both gravely erroneous and a grave abuse in the exercise of discretion for the
Ombudsman to hold liable the rest of the petitioners aside from Mr. Callanta, the city assessor who
alone promulgated the act/policy.
Fifth The Ombudsman and Mayor Osmea [of Cebu City] had clearly acted with undue haste
amounting to grave abuse of discretion and violation of existing laws and regulations in effecting the
dismissal of herein petitioners." 12
In his Memorandum 13 dated March 18, 1997, the ombudsman encapsulates the issues, which we
adopt, as follows:
"Whether or not petitioners violated the law by their acts of accommodating requests for
reconsideration of the revised assessments;
In the affirmative, whether or not the violations were injurious/prejudicial to Cebu City; and

Whether or not the acts of petitioners constitute grave misconduct and/or negligence which warrants
[sic] their dismissal/suspension from service."
The Court's Ruling
The petition is partly meritorious.
First Issue : Authority of the City Assessor to Reconsider Real Property Assessments
Petitioners anchor the validity of their acts upon the absence of a specific provision of law expressly
prohibiting the assessor from making adjustments or corrections in the assessment of real properties,
and upon the long-standing practice of the city assessor's office in making such adjustments/corrections
believed in good faith to be sanctioned under Sec. 22, PD 464 14 (now Sec. 220 of RA 7160), which
reads:
"Sec. 22.
Valuation of Real Property. Upon the discovery of real property or during the general
revision of property assessments as provided in Section twenty-one of this Code or at any time when
requested by the person in whose name the property is declared, the provincial or city assessor or his
authorized deputy shall make an appraisal and assessment in accordance with Section five hereof of the
real property listed and described in the declaration irrespective of any previous assessment or
taxpayer's valuation thereon: Provided, however, That the assessment of real property shall not be
increased oftener once every five years in the absence of new improvements increasing the value of
said property or of any change in its use, except as otherwise provided in this Code."
Public respondents, on the other hand, insist that petitioners have no legal authority to act upon requests
for reconsideration or appeals of property owners, a power which is explicitly vested upon the LBAA
under Sec. 30 of the Real Property Tax Code, as amended, which provides:
"Sec. 30.
Local Board of Assessment Appeals. Any owner who is not satisfied with the action
of the provincial or city assessor in the assessment of his property may, within sixty days from the date
of receipt by him of the written notice of assessment as provided in this Code, appeal to the Board of
Assessment Appeals of the province or city, by filing with it a petition under oath using the form
prescribed for the purpose, together with the copies of the tax declarations and such affidavit or
documents submitted in support of the appeal."
We find no merit in the contentions of petitioners. Enlightening is the following disquisition by the
counsel 15 for the ombudsman on the above-cited legal provisions:
"The instances referred to [under Sec. 22] are as follows:
1)
upon the discovery of real property;
2)
during the general revision of property assessments as provided in Section 21 of the Code; and
cda
3)
at anytime [sic] when requested by the person in whose name the property is declared.
It is not disputed that the assessment/valuation involved herein were conducted by virtue of the 1988
general revision of property assessments under No. 2 instance above.
After an assessment has been conducted, the assessor shall within thirty days issue a written notice of
such new or revised assessment to the person in whose name the property is declared. (Section 27, PD
464). If the owner is not satisfied with the action of the assessor in the assessment of his property, he
may appeal within sixty days from receipt of the notice of assessment to the Local Board of
Assessment Appeals pursuant to Section 30 of P.D. 464 which provides:
xxx
xxx
xxx
Under the aforecited procedure, the issuance of a notice of assessment by the local assessor shall be his
last action on a particular assessment. On the side of the property owner, it is this last action which
gives him [the] right to appeal to the Local Board of Assessment Appeals. The above procedure also,
does not grant the property owner the remedy of filing a motion for reconsideration before the local
assessor.
The act of herein petitioners in providing the corresponding notices of assessment the chance for the
property owners concerned to file a motion for reconsideration and for acting on the motions filed is

not in accordance with law and in excess of their authority and therefore constitutes ultra vires acts."16
Applying the above, we agree with the following conclusions of the deputy ombudsman:
". . . The appraisal and assessment done pursuant to the 1988 general revision work were within the
purview of the second instance (i.e. during the general revision . . . as set forth in said Sec. 22[)]. But to
make the same appraisal and assessment upon the request of the property owners who were not
satisfied with the result of the first valuation of their property is grossly out of context in the application
of the third instance allowed by Sec. 22. [W]hat the property owners involved were actually asking
were practically a reappraisal and reassessment of the properties (because an appraisal and assessment
had already been made under the second instance and their request was prompted by the receipt of the
written notice of such valuation), the allowance for which is nowhere to be discerned in the provisions
of Sec. 22 . . ." 17
To repeat, Sec. 22 clearly provides three (3) occasions when assessments of real properties may be
made by the local assessor. In the case at bar, the second instance gave rise to the revised assessed
values for which the property owners subsequently sought reconsideration. Sec. 30 of the same Code is
equally clear that the aggrieved owners should have brought their appeals before the LBAA.
Unfortunately, despite the advice to this effect contained in their respective notices of assessment, the
owners chose to bring their requests for a review/readjustment before the city assessor, a remedy not
sanctioned by the law. To allow this procedure would indeed invite corruption in the system of
appraisal and assessment. It conveniently courts a graft-prone situation where values of real property
may be initially set unreasonably high, and then subsequently reduced upon the request of a property
owner. In the latter instance, allusions of a possible covert, illicit trade-off cannot be avoided, and in
fact can conveniently take place. Such occasion for mischief must be prevented and excised from our
system.
In this case, based on a list 18 of properties submitted by petitioners comparing their (1) previous
assessed values ("old values"), (2) assessed values under the general revision ("revised values"), and
(3) the unauthorized adjusted values ("unauthorized values"), the Court observes that the old values of
some properties were increased by more than 1,000% (or 10 times) in the general revision, but were
reduced to only about half under the unauthorized adjustments. 19 The large discrepancies seem to
indicate a tendency to overvalue initially and thereafter to reduce the increases upon "request" of the
property owner affected. To avoid this dubious, suspicious, bribable and compromising situation, the
law itself specifically provided an appellate body the LBAA before which property owners may
seek relief. Neither habit nor good faith can amend this appellate procedure provided under the law.
Indeed, the long-standing practice adverted to by petitioners does not justify a continuance of their acts.
We cannot sanction such compromising situations. Henceforth, whenever the local assessor sends a
notice to the owner or lawful possessor of real property of its revised assessed value, the former shall
thereafter no longer have any jurisdiction to entertain any request for a review or readjustment. The
appropriate forum where the aggrieved party may bring his appeal is the LBAA, as provided by law.
Second Issue : Injury or Prejudice to the City Government of Cebu
In order to determine whether the city government of Cebu was prejudiced by the acts of petitioners,
we need to determine the date when the revised assessments became due and payable.
Petitioners argue that at the time the complaint was filed, the general revision of property values
undertaken by their office was not yet finished or completed for the entire city; hence, the revised
values were not yet effective and payments thereon were not yet due and payable. No certification has
yet been submitted to the secretary of finance as required under Sec. 23 of PD 464. Therefore, it was
premature for the city government of Cebu to claim prejudice or injury caused by the questioned
readjustments. cdasia
Public respondents, on the other hand, aver that the city government acquired a vested interest in the
taxes accruing from the revised values, because such values became final and effective upon the
property owners' failure to appeal to the LBAA within the reglementary period provided by law.

The following provisions of PD 464, which is the law applicable to the instant case, are relevant in
determining when the revised assessments on real properties became effective:
"Sec. 23.
Certification of Revised Values to the Secretary of Finance. When the provincial or
city assessor shall have finished a general revision of property assessments for any province,
municipality or city, he shall so certify to the Secretary of Finance and the assessments shall become
effective and taxes shall accrue be payable thereunder in accordance with the provisions of this Code.
Sec. 24.
Date of Effectivity of Assessment or Reassessment. All assessments or reassessments
made after the first day of January of any year shall take effect on the first day of January of the
succeeding year: . . ." [emphasis ours]
Petitioners solely invoke Sec. 23 and ignore Sec. 24. This Court believes both sections should be
construed together. While, at first glance, Sec. 23 seems to impose the certification to the secretary of
finance as a condition sine qua non before the revised values may become effective, the second part of
the section, which we underscored above, gives a contrary understanding. We hold that the dominant
provision is Sec. 24, the specific provision on the effectivity of assessments or reassessments. This
section is clear and unequivocal. The assessments take effect on the first day of January of the
succeeding year after the revision is made. While Sec. 23 requires the local assessor to certify to the
finance secretary that the general revision has been finished, such certification is, however, not the
operative act for the effectivity of the new assessments. This interpretation is bolstered by the fact that
under the Local Government Code of 1991, 20 Title Two, Book II of which has replaced the Real
Property Tax Code, there is no longer any provision requiring such certification.
The general revision of property values was commenced by the city assessor of Cebu in 1988.
Subsequently, the notices of the new assessments and the new tax declarations were sent to the property
owners. The nature of an assessment has been explained this wise:
"An assessment fixes and determines the tax liability of a taxpayer. As soon as it is served, an
obligation arises on the part of the taxpayer concerned to pay the amount assessed and demanded." 21
In the same vein, we have said that "the assessment is deemed made when the notice to this effect is
released, mailed or sent to the taxpayer for the purpose of giving effect to said assessment." 22
With respect to real property taxes, the obligation to pay arises on the first day of January of the year
following the assessment. Corollarily, on the same date, the right of the local government to collect said
taxes also arises. And where the taxpayer fails to question such assessment within the reglementary
period provided by law, the local government's right becomes absolute 23 upon the expiration of such
period with respect to that taxpayer's property.
Thus, petitioners' unauthorized reduction of the assessed values ineluctably resulted in the local
government's deprivation of the corresponding revenues. Lost or reduced revenues undeniably translate
into damages or injury within the contemplation of the law. The city government of Cebu, therefore,
had every legal right to feel aggrieved and to institute this proceeding against petitioners.
Third Issue : Penalties Imposed Too Harsh Under the Circumstances
Lastly, petitioners contend that the city assessor alone should be held responsible for the acts
questioned, since, as head of the office, he laid down the policies and issued the orders, while his
deputies and the employees under him merely followed his instructions. In the instant controversy, the
other petitioners acted only upon the orders of Petitioner Callanta, which did not appear to be unlawful
or erroneous on its face. They aver that they merely followed in good faith a procedure long practiced
by the office. They deny acting with evident bad faith or gross negligence, since they honestly believed
that they had the authority to act on the requests for reconsideration. This is bolstered by the absence of
any findings of corruption on their part.
These averments of petitioners are impressed with some merit. In grave misconduct, the elements of
corruption, clear intent to violate the law or flagrant disregard of established rule must be manifest. 24
From the evidence on record, we do not find any of these elements. In the words of the deputy
ombudsman himself: aisadc

"No proof, however, can be obtained from the evidence presented that would strongly indicate that
private respondents knowingly induced or caused the respondent public officers to commit the offense
defined in Sec. 3 (e), R.A. 3019 as amended, nor is there any sufficient showing that said private
respondents had directly or indirectly given any gift, present, share, percentage or benefit to the
respondents [sic] public officers or any other person in connection with the questioned transaction
subject of the instant cases. . . ." 25
Without evidence showing that petitioners received any gift, money or other payoff or that they were
induced by offers of such, we cannot impute any taint of direct corruption to the questioned acts of
petitioners.
Any indication of intent to violate the law or of flagrant disregard of established rule is meanwhile
negated by the petitioners' honest belief that their acts were sanctioned under the third instance
provided in Sec. 22 of PD 464, as buttressed by the long-standing adherence of local assessors to the
questioned procedure. prLL
Gross negligence, on the other hand, is flagrant and palpable disregard or breach of duty. It is the
conscious pursuit of a course of conduct which would naturally and reasonably cause injury. 26 As
discussed above, we can hardly characterize the acts of petitioners as grossly negligent. Where the
charges on which the removal of the public officer is sought are misconduct in office, gross negligence,
or corruption, the ground for dismissal should be clearly established.
But Petitioners Callanta, Delos Reyes and Concon, as public officers occupying exalted positions in the
civil service, must, in accordance with the Constitution 27 and the Ethical Standards Law, exemplify
the ideals of integrity, efficiency, and particularly proficiency in the law. They must ever be prudent to
act always in accordance with law, and not to perform or authorize legally doubtful acts that may stain
the integrity of their office. Their act alone of initially authorizing multifold increases in the assessed
values, only to scale them down to as much as fifty per cent upon "requests" of the affected property
owners, is already reflective of inefficiency, and indicative of misconduct or malfeasance, if not
incompetence in their offices, for which they should be penalized. Considering that they are senior
officials who had failed to live up to the standards and ideals expected of their rank and stature,
Petitioners Callanta, Delos Reyes and Concon are hereby imposed the penalty of suspension from
office for one (1) year. 28
The defense of the other petitioners that they were merely following the orders of their superiors does
not totally exculpate them from liability. They should likewise be aware of the limits of the functions of
their office. Public officials and employees are required to follow only the lawful orders of their
superiors which are issued within the scope of their authority. 29 In our jurisdiction, the rule of law, and
not of men, governs. Nowhere in our statutes is blind obedience required of junior personnel to the
commands and directives of their superiors. In indiscreetly following the orders of their superiors,
Petitioners Edira, Pahamtang, Abellana, Salares Jr. and Palmero had breached their accountability to
the public. They deserve to be reprimanded.
Epilogue
The Court notes the solicitor general's Manifestation and Motion 30 dated September 20, 1994, which
was adverse to the ombudsman. The chief government lawyer thus declined to file a comment on the
former's behalf. Hence, the ombudsman had to defend his findings and conclusions in the assailed
Resolution through his own counsel. We must commend the chief graft-buster for his vigilance and
effort to dose gaps that provide clandestine opportunities for corruption. His drive to eliminate existing
systems of procedure in government that covertly allow graft and corrupt practices which he
describes as "predominantly in the form of leeway to bargain" is exemplary. Similar approaches to
curb and arrest the most serious and prevalent problem in the bureaucracy are imperative. Indeed, what
we need now is not only to punish the wrongdoers or reward the "outstanding" civil servants, but also
to plug the hidden gaps and potholes of corruption as well as to insist on strict compliance with existing
legal procedures in order to abate any occasion for graft or circumvention of the law. cdtai

WHEREFORE, the petition is PARTLY GRANTED. The challenged amended Resolution is hereby
MODIFIED as follows: Petitioners Antonio P. Callanta, Gilberto M. delos Reyes and Cesar Q. Concon
are SUSPENDED from office for one (1) year, while Petitioners Almicar Edira, Jacinto Pahamtang,
Antonio V. Abellana, Apolinario Salares Jr. and Shirley Palmero are REPRIMANDED. All petitioners
are WARNED that a repetition of the same or similar acts in the future will be dealt with more severely.
SO ORDERED.
Narvasa, C .J ., Regalado, Davide, Jr., Romero, Bellosillo, Melo, Puno, Vitug, Kapunan, Mendoza,
Francisco and Martinez, JJ ., concur.
Footnotes
1.
Spelled "Edera" in the assailed Resolution of the ombudsman. But as one of the petitioners
herein, she is presumed to have used the correct spelling of her surname. Hence, this Decision shall
refer to her as "Edira."
2.
Rollo, pp. 26-36.
3.
Ibid., pp. 37-38.
4.
Deputy Ombudsman Arturo C. Mojica.
5.
Assailed amended Resolution, pp. 2-6; Rollo, pp. 27-31.
6.
Ibid., p. 6; ibid. p. 31.
7.
"Sec. 30. Any owner who is not satisfied with the action of the provincial or city assessor in the
assessment of his property may, within sixty (60) days from the date of receipt by him of the written
notice of assessment . . . appeal to the Board of Assessment Appeals of the province or city, . . ."
8.
"Sec. 106.
Omission of property from assessment or tax rolls by officers and other acts.
Any officer charged with the duty of assessing real property, who shall willfully fail to assess, or shall
intentionally omit from the assessment or tax roll, any real property which he knows to be lawfully
taxable or shall willfully or through gross negligence underassess any real property or shall
intentionally violate or fail to perform any duty imposed upon him by law relating to the assessment of
taxable real property, shall upon conviction be punished by a fine of not more than one thousand pesos
or by imprisonment of not more than one year, or both, at the discretion of the court.
The same penalty shall be imposed upon any officer charged with the duty of collecting the tax due on
real property who shall willfully fail to collect the tax and institute the necessary proceedings for the
collection of the same.
Any other officer required by this Code to perform acts relating to the administration of the real
property tax, or to assist the assessor or treasurer in such administration, who shall willfully fail to
discharge such duties, shall upon conviction, be punished by a fine not exceeding five hundred pesos or
by imprisonment of not more than six months, or both, at the discretion of the court."
9.
The Deputy Ombudsman must have referred to Sec. 4 (A) (c), which provides
"Sec. 4.
Norms of Conduct of Public Officials and Employees. A) Every public official and
employee shall observe the following as standards of personal conduct in the discharge and execution
of official duties:
xxx
xxx
xxx
(c)
Justness and sincerity. Public officials and employees shall remain true to the people at all
times. They must act with justness and sincerity and shall not discriminate against anyone especially
the poor and the underprivileged. They shall at all times respect the rights of others and shall refrain
from doing acts contrary to law, good morals, good customs, public policy, public order, public safety
and public interest. They shall not dispense or extend undue favors on account of their office to their
relatives whether by consanguinity or affinity except with respect to appointments of such relatives to
positions considered strictly confidential or as members of their personal staff whose terms are
coterminous with theirs."
10.
Order dated April 18, 1994; Rollo, pp. 37-38.
11.
This case was considered submitted for decision upon receipt by this Court of Respondent

Ombudsman's Memorandum, dated March 18, 1997, on March 24, 1997.

12.
Petition, pp. 4-5; Rollo, pp. 6-7. (All in upper case in the original.)
13.
Rollo, pp. 351-365.
14.
The Real Property Tax Code in force at the time of the questioned acts of petitioners, prior to
the enactment of R.A. 7160, otherwise known as the Local Government Code of 1991, which
superseded PD 464.
15.
Atty. Danilo C. Cunanan.
16.
Comment of Respondent Ombudsman, pp. 5-6; Rollo, pp. 193-194.
17.
Assailed amended Resolution, p. 9; Rollo, p. 34.
18.
Petition, pp. 13-15; Rollo, pp. 15-17.
19.
The following are some of the examples given by the petitioners:
TAXPAYER PREVIOUS AS. VALUE ADJUSTED
ASSESSED PER GEN.
ASSESSED
VALUE
REVISION VALUE
"3.
Avila Jesus 640,000
3,679,950
1,827,920"
"4.
Enriquetta Uy 49,850 414,350
171,690"
"5.
Sps. Corazon
& Lee Hiu Sing
10,350 178,590
42,230"
"9.
Alfonso Allan 19,500 545,680
258,800"
"10. Lim Khe Chiong
8,100 182,690
33,890"
"12. Discoro & Amalia
Lazaro 28,530 470,000
136,360"
"17. Gervacio Go 48,940 663,410
197,730"
"19. Victoria Lee 1,146,790
2,359.750
934,560"
"20. Cebu Graphic
Arts 69,500 797,420
159,120"
"22. Sps. Gaudencio
& Lilia Hermosisima 234,050
1,016,460
401,710"
20.
Republic Act No. 7160, which took effect on January 1, 1992.
21.
Collector of Internal Revenue vs. Benipayo, 4 SCRA 182, 185, January 31, 1962, cited in
Commissioner of Internal Revenue vs. Island Garment Manufacturing Corp., 153 SCRA 665, 677,
September 11, 1987.
22.
Republic vs. Dela Rama, 18 SCRA 861, 869, November 29, 1966, citing Bautista and Corrales
vs. Collector of Internal Revenue, 105 Phil. 1326, May 27, 1959.
23.
Unless the affected parties avail of the proper judicial recourse.
24.
Landrito vs. Civil Service Commission, 223 SCRA 564, 567, June 22, 1993, citing In Re:
Impeachment of Horrilleno, 43 Phil. 212, March 20, 1922.
25.
Assailed amended Resolution, pp. 10-11; Rollo, pp. 35-36.
26.
Quibal vs. Sandiganbayan (Second Division), 244 SCRA 224, 232, May 22, 1995.
27.
Sec. 1, Art. XI of which provides:
"Sec. 1.
Public office is a public trust. Public officers and employees must at all times be
accountable to the people, serve them with utmost responsibility, integrity, loyalty, and efficiency, act
with patriotism and justice, and lead modest lives.
28.
Section 11, RA 6713 provides:
"Sec 11.
Penalties. (a) Any public official or employee, regardless of whether or not he holds
office or employment in a casual, temporary, holdover, permanent or regular capacity, committing any
violation of this Act shall be punished with a fine not exceeding the equivalent of six (6) months salary
or suspension not exceeding one (1) year or removal depending on the gravity of the offense after due
notice and hearing by the appropriate body or agency. . ."

29.
30.

Aquino, The Revised Penal Code, Vol. I, 1987 ed., pp. 205-206.
Rollo, p. 91.

FIRST DIVISION
[G.R. No. L-59463. November 19, 1982.]
PROVINCE OF NUEVA ECIJA, plaintiff-appellant, vs. IMPERIAL MINING COMPANY, INC.,
defendant-appellee.
Isabelo Tadianan counsel for plaintiff-appellant.
Romeo Derez counsel for defendant-appellee.
SYNOPSIS
In 1968, appellee, a mining company, leased from the Government placer mining claims (192 hectares)
with the right to explore, develop, mine, extract and dispose of mineral products. The contract provided
that the lessee shall pay real estate tax on all buildings and improvements built on the leased property
but was silent on the obligation of the lessee to pay realty tax on the mineral land itself. In 1974, when
Presidential Decree 464 (Real Property Tax Code of 1974) was issued, the provincial Assessor of
Nueva Ecija where the property is located declared and assessed the leased property in the name of
appellee. In September, 1976, the Province of Nueva Ecija instituted an action for collection of real
property tax on the mineral land in question covering 1970-1976 in the amount of P38,836.22. Appellee
resisted, maintaining that the mineral land subject of the assessment is owned by the Government and
therefore exempt from real estate tax. After trial, the lower court dismissed the complaint holding that
under the terms of the lease contract and the provisions of Section 87 of Commonwealth Act 137, the
leased mineral lands were not subject to the payment of the real estate tax and that Presidential Decree
464 did not change the rule. Hence, this appeal.
The Supreme Court held that under the former Assessment Law, the basis of realty taxation was
ownership or interest tantamount to ownership so that in the Mining Act then in force leased mineral
land was not subject to real estate tax; but Presidential Decree 464 changed the basis of real property
taxation from ownership to use and, consequently, from the date of its issuance in 1974, lessees of
mineral lands are liable for payment of real estate tax.
Appealed decision is modified as regards the tax liability of defendant-appellee under Presidential
Decree 464. The records of the case are ordered remanded to the trial court for further proceedings.
SYLLABUS
1.
TAXATION; REAL PROPERTY TAX; BASIS OF TAXABILITY UNDER
COMMONWEALTH ACT 470, OWNERSHIP; CASE AT BAR. When IMC in 1968 obtained a
lease on the mineral land in question, the law governing real property taxation was the former
Assessment Law, Commonwealth Act 470, and the basis of realty taxation thereunder was ownership or
interest tantamount to ownership. A mere lessee of mineral land was therefore not liable for the
payment of realty tax thereon. This was recognized in the Mining Act then in force, Commonwealth
Act 137, under which leased mineral land was not subject to real estate tax (Sec. 87). The lease contract
of IMC was executed in accordance with these laws. The absence of a stipulation therein making the
lessee liable for realty tax on the leased mineral land was just a recognition of the real property tax
principle then prevailing; it was not a contractual commitment or guarantee by the Department of
Agriculture and Natural Resources that with respect to the leased mineral land, IMC would
permanently be exempt from real property taxation. That agency could not have made that commitment
because it was not authorized to do so; and it could not bind the lawmaking body by stipulating in
effect against amendment of the law on real property taxation. LibLex
2.
ID.; ID.; BASIS OF TAXABILITY IN PRESIDENTIAL DECREE 464 CHANGED FROM
OWNERSHIP TO ACTUAL USE; LESSEE SUBJECT TO REAL ESTATE TAX IN CASE AT BAR.
In 1974, a new Real Property Tax Code came into being when Presidential Decree 464 was issued.
It changed the basis of real property taxation. It adopted the policy of taxing real property on the basis
of actual use, even if the user is not the owner (Sections 3 (a) and 19 of PD 464). It is true that
Presidential Decree 464 recognizes and respects real property tax exemption "under other laws" and
one such law, with respect to mineral land, is Presidential Decree 463 (Section 53), the Mineral

Resources Development Decree of 1974. It does not appear however that IMC was entitled to tax
exemption, including exemption from real property tax, under Section 53 of Presidential Decree 463
during the period here in question.
DECISION
PLANA, J p:
This is an appeal from the decision of the Court of First Instance of Nueva Ecija, Branch VIII, in Civil
Case No. C-4 for collection of real property tax, which has been certified to this Court by the Court of
Appeals as a case involving purely a question of law. The legal issue is whether defendant-appellee
Imperial Mining Company, Inc. (IMC), lessee of some parcels of mineral land (placer mining claims)
in Carranglan, Nueva Ecija, is liable for real property tax thereon, although the said mineral land forms
part of the public domain.
The antecedent facts are simple. In 1968, IMC leased from the Government thru the Department of
Agriculture and Natural Resources placers mining claims (192 hectares) with the right to explore,
develop, mine, extract and dispose of mineral products. In the lease contract, it was stipulated that "the
Lessee shall pay real estate tax on all buildings and other improvements built on the land leased." The
contract however was silent on the obligation of the lessee to pay realty tax on the mineral land itself,
as distinguished from the improvements thereon.
In 1974, the Provincial Assessor of Nueva Ecija declared the leased property in the name of IMC; and
subsequently, IMC was assessed for real property tax.
In September, 1976, the Province of Nueva Ecija instituted the instant suit for the collection of real
property tax on the mineral land in question covering 1970-1976 in the amount of P38,836.22. The
defendant resisted, maintaining that the mineral land subject of the assessment was owned by the
Government and therefore exempt from real estate tax. After trial, the Court of First Instance dismissed
the complaint in reliance upon the terms of the lease contract and the provisions of Section 87 of the
old Mining Act (Commonwealth Act 137) which did not subject leased mineral lands to the payment of
real estate tax. The trial court observed that the Real Property Tax Code of 1974 (Presidential Decree
464) which took effect on June 1, 1974 did not change the rule. LexLib
Hence, this appeal.
When IMC in 1968 obtained a lease on the mineral land in question, the law governing real property
taxation was the former Assessment Law, Commonwealth Act 470, and the basis of realty taxation
thereunder was ownership or interest tantamount to ownership. A mere lessee of mineral land was
therefore not liable for the payment of realty tax thereon. This was recognized in the Mining Act then
in force, Commonwealth Act 137, under which leased mineral land was not subject to real estate tax.
(Sec. 87.). The lease contract of IMC was executed in accordance with these laws. The absence of a
stipulation therein making the lessee liable for realty tax on the leased mineral land was just a
recognition of the real property tax principle then prevailing; it was not a contractual commitment or
guarantee by the Department of Agriculture and Natural Resources that with respect to the leased
mineral land, IMC would permanently be exempt from real property taxation. That agency could not
have made that commitment because it was not authorized to do so; and it could not bind the
lawmaking body by stipulating in effect against amendment of the law on real property taxation.
In 1974, a new Real Property Tax Code came into being when Presidential Decree 464 was issued. It
changed the basis of real property taxation. It adopted the policy of taxing real property on the basis of
actual use, even if the user is not the owner.
"Actual use shall refer to the purpose for which the property is principally or predominantly utilized
by the person in possession of the property." [Sec. 3(a).]
"Actual Use of Real Property as Basis for Assessment. Real property shall be assessed on the basis
of its actual use regardless of where located and whoever uses it." (Section 19. Emphasis supplied.)
The above policy declaration is given substance in various provisions of the new law. Thus, Section 40
of Presidential Decree 464 specifies the exemptions from real property tax.

"SEC. 40.
Exemption from Real Property Tax. The exemption shall be as follows:
"a)
Real property owned by the Republic of the Philippines or any of its political subdivisions and
any government-owned corporation so exempt by its charter: Provided, however, That this exemption
shall not apply to real property of the abovenamed entities the beneficial use of which has been granted,
for consideration or otherwise, to a taxable person.
xxx
xxx
xxx
"e)
Land acquired by grant, purchase or lease from the public domain for conversion into dairy
farms for a period of five years from the time of such conversion. . . ."
Incidentally, Presidential Decree 939 was subsequently enacted exempting from real property tax
"pasture and/or grazing lands acquired by grant, purchase or lease from the public domain, actually
used for livestock production, for a period of five years. . . ."
The foregoing exemptions make it very clear that leased lands of the public domain would otherwise be
subject to real property tax; if that were not so, there would have been no need to specifically exempt
some of them from real property tax. llcd
Presidential Decree 464 also prescribes the classification of real property for assessment purposes,
specifically including mineral land: "For purposes of assessment, real property shall be classified as
residential, agricultural, commercial or industrial and also as mineral in the case of lands." (Section 18.)
And for purposes of real property taxation, the assessment levels to be applied as regards mineral lands
are laid down:
"Mineral Lands For purposes of taxation, mineral lands not covered by lease shall be appraised at
fifty per cent of their market value to be determined by the Secretary of Finance upon consultation with
the Director of Mines; Provided, however, that mineral lands covered by leases shall be declared for
taxation purposes either by the owner of the land or lessee and the assessment level thereof shall be
maintained at the current level of fifty per cent." [Sec. 20 (b). Emphasis supplied.]
It is true that Presidential Decree 464 recognizes and respects real property tax exemption "under other
laws", and one such law, with respect to mineral land, is Presidential Decree 463, the Mineral
Resources Development Decree of 1974, which provides:
"SEC. 53.
Tax Exemptions. Machineries, equipment, tools for production, plants to convert
mineral ores into saleable form, spare parts, supplies, materials, accessories, explosives, chemicals and
transportation and communication facilities imported by and for the use of new mines and old mines
which resume operation, when certified as such by the Secretary (of Natural Resources) upon
recommendation of the Director (of Mines), are exempt from the payment of customs duties and all
taxes except income tax for a period starting from the first date of actual commercial production of
saleable mineral products."
xxx
xxx
xxx
"All mining claims, improvements thereon and mineral products derived therefrom shall likewise be
exempt from the payment of all taxes, except income tax, for the same period provided for in the first
paragraph of this section."
It does not appear however that IMC was entitled to tax exemption, including exemption from real
property tax, under Section 53 of Presidential Decree 463 during the period here in question.
We therefore conclude that under the provisions of Presidential Decree 464, IMC is subject to the
payment of real property tax on the mineral land leased by it. Since the said law took effect on June 1,
1974, and assessment in pursuance thereof was made after January 1, 1974, the liability of IMC for real
property tax on the mineral land leased by it should start on January 1, 1975 pursuant to Section 24 of
P.D. 464: cdll
"Date of Effectivity of Assessment or Reassessment. All assessment or reassessment made after the
first day of January of any year shall take effect on the first day of January of the succeeding year."
Wherefore, the decision of the lower court dismissing the complaint in Civil Case No. C-4 is hereby
modified as regards the real property tax liability of defendant-appellee under P.D. 464. The records of

the case are ordered remanded to the trial court for further proceedings to determine the amount of real
property tax due from IMC in accordance with this decision. Costs against defendant-appellee.
SO ORDERED.
Teehankee, Melencio-Herrera, Vasquez, Relova and Gutierrez, Jr., JJ ., concur.

EN BANC
[G.R. No. L-17870. September 29, 1962.]
MINDANAO BUS COMPANY, petitioner, vs. THE CITY ASSESSOR & TREASURER and the
BOARD OF TAX APPEALS OF CAGAYAN DE ORO CITY, respondents.
Binamira, Barria & Irabagon for petitioner.
Vicente E. Sabellina for respondents.
SYLLABUS
1.
PROPERTY; IMMOVABLE PROPERTY BY DESTINATION; TWO REQUISITES BEFORE
MOVABLES MAY BE DEEMED TO HAVE BEEN IMMOBILIZED; TOOLS AND EQUIPMENTS
MERELY INCIDENTAL TO BUSINESS NOT SUBJECT TO REAL ESTATE TAX. Movable
equipments, to be immobilized in contemplation of Article 415 of the Civil Code, must be the essential
and principal elements of an industry or works which are carried on in a building or on a piece of land.
Thus, where the business is one of transportation, which is carried on without a repair or service shop,
and its rolling equipment is repaired or serviced in a shop belonging to another, the tools and
equipments in its repair shop which appear movable are merely incidentals and may not be considered
immovables, and, hence, not subject to assessment as real estate for purposes of the real estate tax.
DECISION
LABRADOR, J p:
This is a petition for the review of the decision of the Court of Tax Appeals in C.T.A. Case No. 710
holding that the petitioner Mindanao Bus Company is liable to the payment of the realty tax on its
maintenance and repair equipment hereunder referred to.
Respondent City Assessor of Cagayan de Oro City assessed at P4,400 petitioner's above-mentioned
equipment. Petitioner appealed the assessment to the respondent Board of Tax Appeals on the ground
that the same are not realty. The Board of Tax Appeals of the City sustained the city assessor, so
petitioner herein filed with the Court of Tax Appeals a petition for the review of the assessment.
In the Court of Tax Appeals the parties submitted the following stipulation of facts:
"Petitioner and respondents, thru their respective counsels agreed to the following stipulation of facts:
"1.
That petitioner is a public utility solely engaged in transporting passengers and cargoes by
motor trucks, over its authorized lines in the Island of Mindanao, collecting rates approved by the
Public Service Commission;
"2.
That petitioner has its main office and shop at Cagayan de Oro City. It maintains Branch Offices
and/or stations at Iligan City, Lanao; Pagadian, Zamboanga del Sur; Davao City and Kibawe, Bukidnon
Province;
"3.
That the machineries sought to be assessed by the respondent as real properties are the
following:
"(a) Hobart Electric Welder Machine, appearing in the attached photograph, marked Annex 'A';
"(b) Storm Boring machine, appearing in the attached photograph, marked Annex 'B';
"(c) Lathe machine with motor, appearing in the attached photograph, marked Annex 'C';
"(d) Black and Decker Grinder, appearing in the attached photograph, marked Annex 'D';
"(e) PEMCO Hydraulic Press, appearing in the attached photograph, marked Annex 'E';
"(f)
Battery charger (Tungar charge machine) appearing in the attached photograph, marked Annex
'F'; and
"(g) D-Engine Waukesha-M-Fuel, appearing in the attached photograph, marked Annex 'G'.
"4.
That these machineries are sitting on cement or wooden platforms as may be seen in the
attached photographs which form part of this agreed stipulation of facts;
"5.
That petitioner is the owner of the land where it maintains and operates a garage for its TPU
motor trucks; a repair shop; blacksmith and carpentry shops, and with these machineries which are
placed therein, its TPU trucks are made; body constructed; and same are repaired in a condition to be
serviceable in the TPU land transportation business it operates;

"6.
That these machineries have never been or were never used as industrial equipments to produce
finished products for sale, nor to repair machineries, parts and the like offered to the general public
indiscriminately for business or commercial purposes for which petitioner has never engaged in, to
date."
The Court of Tax Appeals having sustained the respondent city assessor's ruling, and having denied a
motion for reconsideration, petitioner brought the case to this Court assigning the following errors:
"1.
The Honorable Court of Tax Appeals erred in upholding respondents' contention that the
questioned assessments are valid; and that said tools, equipments or machineries are immovable taxable
real properties.
"2.
The Tax Court erred in its interpretation of paragraph 5 of Article 415 of the New Civil Code,
and holding that pursuant thereto, the movable equipments are taxable realties, by reason of their being
intended or destined for use in an industry.
"3.
The Court of Tax Appeals erred in denying petitioner's contention that the respondent City
Assessor's power to assess and levy real estate taxes on machineries is further restricted by section 31,
paragraph (c) of Republic Act No. 521; and
"4.
The Tax Court erred in denying petitioner's motion for reconsideration."
Respondents contend that said equipments, the movable, are immobilized by destination, in accordance
with paragraph 5 of Article 415 of the New Civil Code which provides:
"ART. 415. The following are immovable properties:
xxx
xxx
xxx
"(5) Machinery, receptacles, instruments or implements intended by the owner of the tenement for
an industry or works which may be carried on in a building or on a piece of land, and which tend
directly to meet the needs of the said industry or works." (Emphasis ours.)
Note that the stipulation expressly states that the equipment are placed on wooden or cement platforms.
They can be moved around and about in petitioner's repair shop. In the case of B. H. Berkenkotter vs.
Cu Unjieng, 61 Phil. 663, the Supreme Court said:
"Article 344 (Now Art. 415), paragraph (5) of the Civil Code, gives the character of real property to
'machinery, liquid containers, instruments or implements intended by the owner of any building or land
for use in connection with any industry or trade being carried on therein and which are expressly
adapted to meet the requirements of such trade or industry.'
"If the installation of the machinery and equipment in question in the central of the Mabalacat Sugar
Co., Inc., in lieu of the other of less capacity existing therein, for its sugar industry, converted them into
real property by reason of their purpose, it cannot be said that their incorporation therewith was not
permanent in character because, as essential and principal elements of a sugar central, without them the
sugar central would be unable to function or carry on the industrial purpose for which it was
established. Inasmuch as the central is permanent in character, the necessary machinery and equipment
installed for carrying on the sugar industry for which it has been established must necessarily be
permanent." (Emphasis ours.)
So that movable equipments to be immobilized in contemplation of the law must first be "essential and
principal elements" of an industry or works without which such industry or works would be "unable to
function or carry on the industrial purpose for which it was established." We may here distinguish,
therefore, those movables which become immobilized by destination because they are essential and
principal elements in the industry from those which may not be so considered immobilized because
they are merely incidental, not essential and principal. Thus, cash registers, typewriters, etc., usually
found and used in hotels, restaurants, theaters, etc. are merely incidentals and are not and should not be
considered immobilized by destination, for these businesses can continue or carry on their functions
without these equipments. Airline companies use forklifts, jeep-wagons, pressure pumps, IMB
machines, etc. which are incidentals, not essentials, and thus retain their movable nature. On the other
hand, machineries of breweries used in the manufacture of liquor and soft drinks, though movable in

nature, are immobilized because they are essential to said industries; but the delivery trucks and adding
machines which they usually own and use and are found within their industrial compounds are merely
incidentals and retain their movable nature.
Similarly, the tools and equipments in question in this instant case are, by their nature, not essential and
principal elements of petitioner's business of transporting passengers and cargoes by motor trucks.
They are merely incidentals acquired as movables and used only for expediency to facilitate and/or
improve its service. Even without such tools and equipments, its business may be carried on, as
petitioner has carried on, without such equipments, before the war. The transportation business could
be carried on without the repair or service shop if its rolling equipment is repaired or serviced in
another shop belonging to another.
The law that governs the determination of the question at issue is as follows:
"ART. 415. The following are immovable property:
xxx
xxx
xxx
"(5) Machinery, receptacles, instruments or implements intended by the owner of the tenement for
an industry or works which may be carried on in a building or on a piece of land, and which tend
directly to meet the needs of the said industry or works;" (Civil Code of the Phil.)
Aside from the element of essentiality the above-quoted provision also requires that the industry or
works be carried on in a building or on a piece of land. Thus in the case of Berkenkotter vs. Cu
Unjieng, supra, the "machinery, liquid containers, and instruments or implements" are found in a
building constructed on the land. A sawmill would also be installed in a building on land more or less
permanently, and the sawing is conducted in the land or building.
But in the case at bar the equipments in question are destined only to repair or service the transportation
business, which is not carried on in a building or permanently on a piece of land, as demanded by the
law. Said equipments may not, therefore, be deemed real property.
Resuming what we have set forth above, we hold that the equipments in question are not absolutely
essential to the petitioner's transportation business, and petitioner's business is not carried on in a
building, tenement or on a specified land, so said equipment may not be considered real estate within
the meaning of Article 415 (c) of the Civil Code.
WHEREFORE, the decision subject of the petition for review is hereby set aside and the equipment in
question declared not subject to assessment as real estate for the purposes of the real estate tax. Without
costs. So ordered.
Bengzon, C . J ., Padilla, Bautista Angelo, Reyes, J.B.L., Paredes, Dizon and Makalintal, JJ ., concur.
Concepcion and Barrera, JJ ., took no part.
Regala, J ., did not take part.

SECOND DIVISION
[G.R. No. L-50466. May 31, 1982.]
CALTEX (PHILIPPINES) INC., petitioner, vs. CENTRAL BOARD OF ASSESSMENT APPEALS
and CITY ASSESSOR OF PASAY, respondents.
Siguion Reyna, Montecillo & Ongsiako for petitioner.
Eduardo Z. Gatchalian for respondents.
SYNOPSIS
Petitioner installed underground tanks, elevated tanks, elevated water tanks, water tanks, gasoline and
computing pumps, car washers, car and tire hoists, air compressors and tireflators in its gasoline
stations located on leased land. They were attached to the pavement covering the entire lot. The said
machines were loaned by petitioner to gas station operators under lease contracts to be returned to
petitioner upon demand. The city assessor of Pasay City treated the said machines as taxable realty and
imposed real tax thereon. The city board of tax appeals ruled that they are personality not subject to
realty tax, but the Central Board of Assessment Appeals reversed the ruling and found that the
machines and equipment were real property within the meaning of Section 3(k) and (m) and 38 of the
Real Property Tax Code, Presidential Decree 464, and that the definitions of real property and personal
property in Articles 415 and 416 of the Civil Code are not applicable to this case. Hence, this petition.
The Supreme Court, on review, held that the equipment and machinery necessary to the operation of a
gas station and which are attached or affixed permanently thereto or embedded therein are taxable
improvements and machinery within the meaning of the Assessment Law and the Real Property Tax
Code.
Petition dismissed and the questioned decision and resolution of the Central Board of Assessment
Appeals are affirmed. LibLex
SYLLABUS
1.
ADMINISTRATIVE LAW; TAXATION; REALTY TAX; EQUIPMENT AND MACHINERY
PERMANENTLY AFFIXED TO GAS STATION SUBJECT THEREOF AS IMPROVEMENT. The
said equipment and machinery, as appurtenances to the gas station building or shed owned by Caltex
(as to which it is subject to realty tax) and which fixtures are necessary to the gas station, for without
them the gas station would be useless, and which have been attached or affixed permanently to the gas
station site or embedded therein, are taxable improvements and machinery within the meaning of the
Assessment Law and the Real Property Tax Code.
2.
ID.; ID.; PROPERTY SUBJECT THERETO; IMPROVEMENTS ON LAND COMMONLY
TAXED AS A REALTY. Improvements on land are commonly taxed as realty even though for some
purposes they might be considered personality (84 C.J.S. 181-2, Notes 40 and 41). It is a familiar
phenomenon to see things in classed as real property for purposes of taxation which on general
principle might be considered personal property (Standard Oil Co. of New York vs. Jaramillo, 44 Phil.
630, 633).
DECISION
AQUINO, J p:
This case is about the realty tax on machinery and equipment installed by Caltex (Philippines) Inc. in
its gas stations located on leased land.
The machines and equipment consists of underground tanks, elevated tank, elevated water tanks, water
tanks, gasoline pumps, computing pumps, water pumps, car washer, car hoists, truck hoists, air
compressors and tireflators. The city assessor described the said equipment and machinery in this
manner:
"A gasoline service station is a piece of lot where a building or shed is erected, a water tank if there is
any is placed in one corner of the lot, car hoists are placed in an adjacent shed, an air compressor is
attached in the wall of the shed or at the concrete wall fence.
"The controversial underground tank, depository of gasoline or crude oil, is dug deep about six feet

more or less, a few meters away from the shed. This is done to prevent conflagration because gasoline
and other combustible oil are very inflammable.
"This underground tank is connected with a steel pipe to the gasoline pump and the gasoline pump is
commonly placed or constructed under the shed. The footing of the pump is a cement pad and this
cement pad is imbedded in the pavement under the shed, and evidence that the gasoline underground
tank is attached and connected to the shed or building through the pipe to the pump and the pump is
attached and affixed to the cement pad and pavement covered by the roof of the building or shed.
cdasia
"The building or shed, the elevated water tank, the car hoist under a separate shed, the air compressor,
the underground gasoline tank, neon lights signboard, concrete fence and pavement and the lot where
they are all placed or erected, all of them used in the pursuance of the gasoline service station business
formed the entire gasoline service station.
"As to whether the subject properties are attached and affixed to the tenement, it is clear they are, for
the tenement we consider in this particular case are (is) the pavement covering the entire lot which was
constructed by the owner of the gasoline station and the improvement which holds all the properties
under question, they are attached and affixed to the pavement and to the improvement.
"The pavement covering the entire lot of the gasoline service station, as well as all the improvements,
machines, equipments and apparatus are allowed by Caltex (Philippines) Inc. . . .
"The underground gasoline tank is attached to the shed by the steel pipe to the pump, so with the water
tank it is connected also by a steel pipe to the pavement, then to the electric motor which electric motor
is placed under the shed. So to say that the gasoline pumps, water pumps and underground tanks are
outside of the service station, and to consider only the building as the service station is grossly
erroneous." (pp. 58-60, Rollo).
The said machines and equipment are loaned by Caltex to gas station operators under an appropriate
lease agreement or receipt. It is stipulated in the lease contract that the operators, upon demand, shall
return to Caltex the machines and equipment in good condition as when received, ordinary wear and
tear excepted.
The lessor of the land, where the gas station is located, does not become the owner of the machines and
equipment installed therein. Caltex retains the ownership thereof during the term of the lease.
The city assessor of Pasay City characterized the said items of gas station equipment and machinery as
taxable realty. The realty tax on said equipment amounts to P4,541.10 annually (p. 52, Rollo). The city
board of tax appeals ruled that they are personality. The assessor appealed to the Central Board of
Assessment Appeals. prcd
The Board, which was composed of Secretary of Finance Cesar Virata as chairman, Acting Secretary of
Justice Catalino Macaraig, Jr. and Secretary of Local Government and Community Development Jose
Roo, held in its decision of June 3, 1977 that the said machines and equipment are real property within
the meaning of sections 3(k) & (m) and 38 of the Real Property Tax Code, Presidential Decree No. 464,
which took effect on June 1, 1974, and that the definitions of real property and personal property in
articles 415 and 416 of the Civil Code are not applicable to this case.
The decision was reiterated by the Board (Minister Vicente Abad Santos took Macaraig's place) in its
resolution of January 12, 1978, denying Caltex's motion for reconsideration, a copy of which was
received by its lawyer on April 2, 1979.
On May 2, 1979 Caltex filed this certiorari petition wherein it prayed for the setting aside of the
Board's decision and for a declaration that the said machines and equipment are personal property not
subject to realty tax (p. 16, Rollo).
The Solicitor General's contention that the Court of Tax Appeals has exclusive appellate jurisdiction
over this case is not correct. When Republic act No. 1125 created the Tax Court in 1954, there was as
yet no Central Board of Assessment Appeals. Section 7(3) of that law in providing that the Tax Court
had jurisdiction to review by appeal decisions of provincial or city boards of assessment appeals had in

mind the local boards of assessment appeals but not the Central Board of Assessment Appeals which
under the Real Property Tax Code has appellate jurisdiction over decisions of the said local boards of
assessment appeals and is, therefore, in the same category as the Tax Court. cdll
Section 36 of the Real Property Tax Code provides that the decision of the Central Board of
Assessment Appeals shall become final and executory after the lapse of fifteen days from the receipt of
its decision by the appellant. Within that fifteen-day period, a petition for reconsideration may be filed.
The Code does not provide for the review of the Board's decision by this Court.
Consequently, the only remedy available for seeking a review by this Court of the decision of the
Central Board of Assessment Appeals is the special civil action of certiorari, the recourse resorted to
herein by Caltex (Philippines), Inc.
The issue is whether the pieces of gas station equipment and machinery already enumerated are subject
to realty tax. This issue has to be resolved primarily under the provisions of the Assessment Law and
the Real Property Tax Code.
Section 2 of the Assessment Law provides that the realty tax is due "on real property, including land,
buildings, machinery, and other improvements" not specifically exempted in section 3 thereof. This
provision is reproduced with some modification in the Real Property Tax Code which provides:
"SEC. 38.
Incidence of Real Property Tax. There shall be levied, assessed and collected in all
provinces, cities and municipalities an annual ad valorem tax on real property, such as land, buildings,
machinery and other improvements affixed or attached to real property not hereinafter specifically
exempted."
The Code contains the following definitions in its section 3:
"k)
Improvements is a valuable addition made to property or an amelioration in its condition,
amounting to more than mere repairs or replacement of waste, costing labor or capital and intended to
enhance its value, beauty or utility or to adapt it for new or further purposes."
"m) Machinery shall embrace machines, mechanical contrivances, instruments, appliances and
apparatus attached to the real estate. It includes the physical facilities available for production, as well
as the installations and appurtenant service facilities, together with all other equipment designed for or
essential to its manufacturing, industrial or agricultural purposes." (See sec. 3[f], Assessment Law).
We hold that the said equipment and machinery, as appurtenances to the gas station building or shed
owned by Caltex (as to which it is subject to realty tax) and which fixtures are necessary to the
operation of the gas station, for without them the gas station would be useless, and which have been
attached or affixed permanently to the gas station site or embedded therein, are taxable improvements
and machinery within the meaning of the Assessment Law and the Real Property Tax Code. LLphil
Caltex invokes the rule that machinery which is movable in its nature only becomes immobilized when
placed in a plant by the owner of the property or plant but not when so placed by a tenant, a
usufructuary, or any person having only a temporary right, unless such person acted as the agent of the
owner (Davao Saw Mill Co. vs. Castillo, 61 Phil. 709).
That ruling is an interpretation of paragraph 5 of article 415 of the Civil Code regarding machinery that
becomes real property by destination. In the Davao Saw Mills case the question was whether the
machinery mounted on foundations of cement and installed by the lessee on leased land should be
regarded as real property for purposes of execution of a judgment against the lessee. The sheriff treated
the machinery as personal property. This Court sustained the sheriff's action. (Compare with Machinery
& Engineering Supplies, Inc. vs. Court of Appeals, 96 Phil. 70, where in a replevin case machinery was
treated as realty).
Here, the question is whether the gas station equipment and machinery permanently affixed by Caltex
to its gas station and pavement (which are indubitably taxable realty) should be subject to the realty tax.
This question is different from the issue raised in the Davao Saw Mill case.
Improvements on land are commonly taxed as realty even though for some purposes they might be
considered personality (84 C.J.S. 181-2, Notes 40 and 41). "It is a familiar phenomenon to see things

classed as real property for purposes of taxation which on general principle might be considered
personal property" (Standard Oil Co. of New York vs. Jaramillo, 44 Phil. 630, 633). LexLib
This case is also easily distinguishable from Board of Assessment Appeals vs. Manila Electric Co., 119
Phil. 328, where Meralco's steel towers were considered poles within the meaning of paragraph 9 of its
franchise which exempts its poles from taxation. The steel towers were considered personality because
they were attached to square metal frames by means of bolts and could be moved from place to place
when unscrewed and dismantled.
Nor are Caltex's gas station equipment and machinery the same as tools and equipment in the repair
shop of a bus company which were held to be personal property not subject to realty tax (Mindanao
Bus Co. vs. City Assessor, 116 Phil. 501).
The Central Board of Assessment Appeals did not commit a grave abuse of discretion in upholding the
city assessor's imposition of the realty tax on Caltex's gas station and equipment.
WHEREFORE, the questioned decision and resolution of the Central Board of Assessment Appeals are
affirmed. The petition for certiorari is dismissed for lack of merit. No costs.
SO ORDERED.
Barredo, Guerrero, De Castro and Escolin, JJ ., concur.
Concepcion Jr. and Abad Santos, JJ ., took no part.

SECOND DIVISION
[G.R. No. 152904. June 8, 2007.]
CITY ASSESSOR OF CEBU CITY, petitioner, vs. ASSOCIATION OF BENEVOLA DE CEBU, INC.,
respondent.
DECISION
VELASCO, JR., J p:
Is a medical arts center built by a hospital to house its doctors a separate commercial establishment or
an appurtenant to the hospital? This is the core issue to be resolved in the instant petition where
petitioner insists on a 35% assessment rate on the building which he considers commercial in nature
contrary to respondent's position that it is a special real property entitled to a 10% assessment rate for
purposes of realty tax. CAIaDT
The Case
This Petition for Review on Certiorari 1 under Rule 45 assails the October 31, 2001 Decision 2 of the
Court of Appeals (CA) in CA-G.R. SP No. 62548, which affirmed the January 24, 2000 Decision 3 and
October 25, 2000 Resolution 4 of the Central Board of Assessment Appeals (CBAA); and the March
11, 2002 Resolution 5 of the same court denying petitioner's Motion for Reconsideration. 6 The CBAA
upheld the February 10, 1999 Decision of the Local Board of Assessment Appeals (LBAA), which
overturned the 35% assessment rate of respondent Cebu City Assessor and ruled that petitioner is
entitled to a 10% assessment.
The Facts
Respondent Association of Benevola de Cebu, Inc. is a non-stock, non-profit organization organized
under the laws of the Republic of the Philippines and is the owner of Chong Hua Hospital (CHH) in
Cebu City. In the late 1990's, respondent constructed the CHH Medical Arts Center (CHHMAC).
Thereafter, an April 17, 1998 Certificate of Occupancy 7 was issued to the center with a classification
of "Commercial [Clinic]." CHDAaS
Petitioner City Assessor of Cebu City assessed the CHHMAC building under Tax Declaration (TD) No.
'97 GR-04-024-02529 as "commercial" with a market value of PhP28,060,520 and an assessed value of
PhP9,821,180 at the assessment level of 35% for commercial buildings, and not at the 10% special
assessment currently imposed for CHH and its other separate buildings the CHH's Dietary and
Records Departments.
Thus, respondent filed its September 15, 1998 letter-petition with the Cebu City LBAA for
reconsideration, asserting that CHHMAC is part of CHH and ought to be imposed the same special
assessment level of 10% with that of CHH. On September 25, 1998, respondent formally filed its
appeal with the LBAA which was docketed as Case No. 4406, TD No. '97 GR-04-024-02529 entitled
Association Benevola de Cebu, Inc. v. City Assessor.
In the September 30, 1998 Order, the LBAA directed petitioner to conduct an ocular inspection of the
subject property and to submit a report on the scheduled date of hearing. In the October 7, 1998
hearing, the parties were required to submit their respective position papers. TCcIaA
In its position paper, petitioner argued that CHHMAC is a newly constructed five-storey building
situated about 100 meters away from CHH and, based on actual inspection, was ascertained that it is
not a part of the CHH building but a separate building which is actually used as commercial
clinic/room spaces for renting out to physicians and, thus, classified as "commercial." Petitioner
contended that in turn the medical specialists in CHHMAC charge consultation fees for patients who
consult for diagnosis and relief of bodily ailment together with the ancillary (or support) services which
include the areas of anesthesia, radiology, pathology, and more. Petitioner concluded the foregoing set
up to be ultimately geared for commercial purposes, and thus having the proper classification as
"commercial" under Building Permit No. B01-9750087 pursuant to Section 10 of the Local Assessment
Regulations No. 1-92 issued by the Department of Finance (DOF).
On the other hand, respondent contended in its position paper that CHHMAC building is actually,

directly, and exclusively part of CHH and should have a special assessment level of 10% as provided
under City Tax Ordinance LXX. Respondent asserted that the CHHMAC building is similarly situated
as the buildings of CHH, housing its Dietary and Records Departments, are completely separate from
the main CHH building and are imposed the 10% special assessment level. In fine, respondent argued
that the CHHMAC, though not actually indispensable, is nonetheless incidental and reasonably
necessary to CHH's operations. SDHCac
The Ruling of the Local Board of Assessment Appeals
On February 10, 1999, the LBAA rendered a Decision, 8 the dispositive portion of which reads:
WHEREFORE, premises considered, the appealed decision imposing a thirty five (35) percent
assessment level of TD No. '97 GR-04-024-02529 on the Chong Hua Hospital Medical Arts building is
reversed and set aside and other [sic] one issued declaring that the building is entitled to a ten (10)
percent assessment level.
In reversing the ruling of petitioner City Assessor of Cebu City, the LBAA reasoned that it is of public
knowledge that hospitals have plenty of spaces leased out to medical practitioners, which is both an
accepted and desirable fact; thus, respondent's claim is not disputed that such is a must for a tertiary
hospital like CHH. The LBAA held that it is inconsequential that a separate building was constructed
for that purpose pointing out that departments or services of other institutions and establishments are
also not always housed in the same building. CTDacA
Thus, the LBAA pointed to the fact that respondent's Dietary and Records Departments which are
housed in separate buildings were similarly imposed with CHH the special assessment level of 10%,
ratiocinating in turn that there is no reason therefore why a higher level would be imposed for
CHHMAC as it is similarly situated with the Dietary and Records Departments of the CHH.
The Ruling of the Central Board of Assessment Appeals
Aggrieved, petitioner filed its March 15, 1999 Notice of Appeal 9 and March 16, 1999 Appeal
Memorandum 10 before the CBAA Visayas Field Office which docketed the appeal as CBAA Case No.
V-15, In Re: LBAA Case No. 4406, TD No. '97 GR-04-024-02529 entitled City Assessor of Cebu City
v. Local Board of Assessment Appeals of Cebu City and Associacion Benevola de Cebu, Inc. On June
3, 1999, respondent filed its Answer 11 to petitioner's appeal.
Subsequently, on January 24, 2000, the CBAA rendered a Decision 12 affirming in toto the LBAA
Decision and resolved the issue of whether the subject building of CHHMAC is part and parcel of
CHH. It agreed with the above disquisition of the LBAA that it is a matter of public knowledge that
hospitals lease out spaces to its accredited medical practitioners, and in particular it is of public
knowledge that before the CHHMAC was constructed, the accredited doctors of CHH were housed in
the main hospital building of CHH. Moreover, citing Herrera v. Quezon City Board of Assessment
Appeals 13 later applied in Abra Valley College, Inc. v. Aquino, 14 the CBAA held that the fact that the
subject building is detached from the main hospital building is of no consequence as the exemption in
favor of property used exclusively for charitable or educational purposes is not only limited to property
actually indispensable to the hospital, but also extends to facilities which are incidental and reasonably
necessary for the accomplishment of such purposes. HcDaAI
Through its October 25, 2000 Resolution, 15 the CBAA denied petitioner's Motion for
Reconsideration. 16
The Ruling of the Court of Appeals
Not satisfied, petitioner brought before the CA a petition for review 17 under Rule 43 of the Rules of
Court, docketed as CA-G.R. SP No. 62548, ascribing error on the CBAA in dismissing his appeal and
in affirming the February 10, 1999 Decision 18 of the LBAA.
On October 31, 2001, the appellate court rendered the assailed Decision 19 which affirmed the January
24, 2000 Decision of the CBAA. It agreed with the CBAA that CHHMAC is part and parcel of CHH in
line with the ruling in Herrera 20 on what the term "appurtenant thereto" means. Thus, the CA held that
the facilities and utilities of CHHMAC are undoubtedly necessary and indispensable for the CHH to

achieve its ultimate purpose.

The CA likewise ruled that the fact that rentals are paid by CHH accredited doctors and medical
specialists for spaces in CHHMAC has no bearing on its classification as a hospital since CHHMAC
serves also as a place for medical check-up, diagnosis, treatment, and care for its patients as well as a
specialized out-patient department of CHH where treatment and diagnosis are done by accredited
medical specialists in their respective fields of anesthesia, radiology, pathology, and more. cDHCAE
The appellate court also applied Secs. 215 and 216 of the Local Government Code (Republic Act No.
7160) which classify lands, buildings, and improvements actually, directly, and exclusively used for
hospitals as special cases of real property and not as commercial. Thus, CHHMAC being an integral
part of CHH is not commercial but special and should be imposed the 10% special assessment, the
same as CHH, instead of the 35% for commercial establishments.
Lastly, the CA pointed out that courts generally will not interfere in matters which are addressed to the
sound discretion of the government agencies entrusted with the regulation of activities under their
special technical knowledge and training their findings and conclusions are accorded not only
respect but even finality.
Through the assailed March 11, 2002 Resolution, 21 the CA denied petitioner's Motion for
Reconsideration.
The Issues
Hence, before us is the instant petition with the solitary issue, as follows:
WHETHER OR NOT THERE IS SERIOUS ERROR BY THE COURT OF APPEALS IN
AFFIRMING THE DECISION OF THE CENTRAL BOARD OF ASSESSMENT APPEALS THAT
THE NEW BUILDING "CHONG HUA HOSPITAL AND MEDICAL ARTS CENTER" (CHHMAC)
IS AN ESSENTIAL PART OF THE OLD BUILDING KNOWN AS "CHONG HUA HOSPITAL." IN
THE NEGATIVE, WHETHER OR NOT THE NEW BUILDING IS LIABLE TO PAY THE 35%
ASSESSMENT LEVEL. AND WHETHER OR NOT THE COURT OF APPEALS COULD
INTERFERE WITH THE FINDINGS OF THE CENTRAL BOARD OF ASSESSMENT APPEALS, A
GOVERNMENT AGENCY HAVING SPECIAL TECHNICAL KNOWLEDGE AND TRAINING ON
THE MATTER SUBJECT OF THE PRESENT CASE. 22 HSEcTC
The Court's Ruling
The petition is devoid of merit.
It is petitioner's strong belief that the subject building, CHHMAC, which is built on a rented land and
situated about 100 meters from the main building of CHH, is not an extension nor an integral part of
CHH and thus should not enjoy the 10% special assessment. Petitioner anchors the classification of
CHHMAC as "commercial", first, on Sec. 10 of Local Assessment Regulations No. 1-92 issued by the
DOF, which provides:
SEC. 10.
Actual use of Real Property as basis of Assessment. Real Property shall be classified,
valued and assessed on the basis of its actual use regardless of where located, whoever owns it, and
whoever uses it. (Sec. 217, R.A. 7160)
A.
"Actual use" refers to the purpose for which the property is principally or predominantly
utilized by the person in possession of the property. (Sec. 199 (b), R.A. 7160) HICSaD
Secondly, the result of the inspection on subject building by the City Assessor's inspection team shows
that CHHMAC is a commercial establishment based on the following: (1) CHHMAC is exclusively
intended for lease to doctors; (2) there are neither operating rooms nor beds for patients; and (3) the
doctors renting the spaces earn income from the patients who avail themselves of their services. Thus,
petitioner argues that CHHMAC is principally and actually used for lease to doctors, and respondent as
owner of CHHMAC derives rental income from it; hence, CHHMAC was built and is intended for
profit and functions commercially.
Moreover, petitioner asserts that CHHMAC is not part of the CHH main building as it is exclusively
used as private clinics of physicians who pay rental fees to petitioner. And while the private clinics

might be considered facilities, they are not incidental to nor reasonably necessary for the
accomplishment of the hospital's purposes as CHH can still function and accomplish its purpose
without the existence of CHHMAC. In addition, petitioner contends that the Abra Valley College, Inc.
23 ruling is not applicable to the instant case for schools, the subject matter in said case, are already
entitled to special assessment. Besides, petitioner points CHHMAC is not among the facilities
mentioned in said case. Further, petitioner argues that CHHMAC is not in the same category as nurses'
homes and housing facilities for the hospital staff as these are clearly not for profit, that is, not
commercial, and are clearly incidental and reasonably necessary for the hospital's purposes. cCSEaA
We are not persuaded.
A careful review of the records compels us to affirm the assailed CA Decision as we find no reversible
error for us to reverse or alter it.
Chong Hua Hospital Medical Arts Center is an integral part of Chong Hua Hospital
We so hold that CHHMAC is an integral part of CHH.
It is undisputed that the doctors and medical specialists holding clinics in CHHMAC are those duly
accredited by CHH, that is, they are consultants of the hospital and the ones who can treat CHH's
patients confined in it. This fact alone takes away CHHMAC from being categorized as "commercial"
since a tertiary hospital like CHH is required by law to have a pool of physicians who comprises the
required medical departments in various medical fields. As aptly pointed out by respondent:
Chong Hua Hospital is a duly licensed tertiary hospital and is covered by Dept. of Health (DOH) Adm.
Order No. 68-A and the "1989 Revised Rules and Regulations" governing the registration, licensure
and operation of hospitals in the Philippines. Under Sec. 6, sub-sec. 6.3, it is mandated by law, that
respondent appellee in order to retain its classification as a "TERTIARY HOSPITAL," must be fully
departmentalized and equipped with the service capabilities needed to support certified medical
specialists and other licensed physicians rendering services in the field of medicine, pediatrics,
obstetrics and gynecology, surgery, and their sub-specialties, ICCU and ancillary services which is
precisely the function of the Chong Hua Hospital Medical Arts Center. 24 TSEHcA
Sec. 6.3, Administrative Order No. (AO) 68-A, Series of 1989, Revised Rules and Regulations
Governing the Registration, Licensure and Operation of Hospitals in the Philippines pertinently
provides:
Tertiary Hospital is fully departmentalized and equipped with the service capabilities needed to
support certified medical specialists and other licensed physicians rendering services in the field of
Medicine, Pediatrics, Obstetrics and Gynecology, Surgery, their subspecialties and ancillary services.
(Emphasis supplied.)
Moreover, AO 68-A likewise provides what clinic service and medical ancillary service are, thus:
11.3.2 Clinical Service The medical services to patients shall be performed by the medical staff
appointed by the governing body of the institution. . . .
11.3.3 Medical Ancillary Service These are support services which include Anesthesia Department,
Pathology Department, Radiology Department, Out-Patient Department (OPD), Emergency Service,
Dental, Pharmacy, Medical Records and Medical Social Services. SACEca
Based on these provisions, these physicians holding offices or clinics in CHHMAC, duly appointed or
accredited by CHH, precisely fulfill and carry out their roles in the hospital's services for its patients
through the CHHMAC. The fact that they are holding office in a separate building, like at CHHMAC,
does not take away the essence and nature of their services vis--vis the over-all operation of the
hospital and the benefits to the hospital's patients. Given what the law requires, it is clear that
CHHMAC is an integral part of CHH.
These accredited physicians normally hold offices within the premises of the hospital; in which case
there is no question as to the conduct of their business in the ambit of diagnosis, treatment and/or
confinement of patients. This was the case before 1998 and before CHHMAC was built. Verily, their
transfer to a more spacious and, perhaps, convenient place and location for the benefit of the hospital's

patients does not remove them from being an integral part of the overall operation of the hospital.
Conversely, it would have been different if CHHMAC was also open for non-accredited physicians,
that is, any medical practitioner, for then respondent would be running a commercial building for lease
only to doctors which would indeed subject the CHHMAC to the commercial level of 35% assessment.
Moreover, the CHHMAC, being hundred meters away from the CHH main building, does not denigrate
from its being an integral part of the latter. As aptly applied by the CBAA, the Herrera ruling on what
constitutes property exempt from taxation is indeed applicable in the instant case, thus: CAaSED
Moreover, the exemption in favor of property used exclusively for charitable or educational purposes is
"not limited to property actually indispensable" therefore (Cooley on Taxation, Vol. 2, p. 1430), but
extends to facilities which are "incidental to and reasonably necessary for" the accomplishment of said
purposes, such as, in the case of hospitals, "a school for training nurses, a nurses' home, property use to
provide housing facilities for interns, resident doctors, superintendents, and other members of the
hospital staff, and recreational facilities for student nurses, interns and residents" (84 C.J.S., 621), such
as "athletic fields," including "a farm used for the inmates of the institution" (Cooley on Taxation, Vol.
2, p. 1430). 25
Verily, being an integral part of CHH, CHHMAC should be under the same special assessment level of
as that of the former.
The CHHMAC facility is definitely incidental to and reasonably necessary for the operations of Chong
Hua Hospital
Given our discussion above, the CHHMAC facility, while seemingly not indispensable to the
operations of CHH, is definitely incidental to and reasonably necessary for the operations of the
hospital. Considering the legal requirements and the ramifications of the medical and clinical
operations that have been transferred to the CHHMAC from the CHH main building in light of the
accredited physicians' transfer of offices in 1998 after the CHHMAC building was finished, it cannot
be gainsaid that the services done in CHHMAC are indispensable and essential to the hospital's
operation.
For one, as found by the appellate court, the CHHMAC facility is primarily used by the hospital's
accredited physicians to perform medical check-up, diagnosis, treatment, and care of patients. For
another, it also serves as a specialized outpatient department of the hospital. DcCITS
Indubitably, the operation of the hospital is not only for confinement and surgical operations where
hospital beds and operating theaters are required. Generally, confinement is required in emergency
cases and where a patient necessitates close monitoring. The usual course is that patients have to be
diagnosed, and then treatment and follow-up consultations follow or are required. Other cases may
necessitate surgical operations or other medical intervention and confinement. Thus, the more the
patients, the more important task of diagnosis, treatment, and care that may or may not require eventual
confinement or medical operation in the CHHMAC.
Thus, the importance of CHHMAC in the operation of CHH cannot be over-emphasized nor disputed.
Clearly, it plays a key role and provides critical support to hospital operations.
Charging rentals for the offices used by its accredited physicians cannot be equated to a commercial
venture
Finally, respondent's charge of rentals for the offices and clinics its accredited physicians occupy
cannot be equated to a commercial venture, which is mainly for profit. ESAHca
Respondent's explanation on this point is well taken. First, CHHMAC is only for its consultants or
accredited doctors and medical specialists. Second, the charging of rentals is a practical necessity: (1)
to recoup the investment cost of the building, (2) to cover the rentals for the lot CHHMAC is built on,
and (3) to maintain the CHHMAC building and its facilities. Third, as correctly pointed out by
respondent, it pays the proper taxes for its rental income. And, fourth, if there is indeed any net income
from the lease income of CHHMAC, such does not inure to any private or individual person as it will
be used for respondent's other charitable projects.

Given the foregoing arguments, we fail to see any reason why the CHHMAC building should be
classified as "commercial" and be imposed the commercial level of 35% as it is not operated primarily
for profit but as an integral part of CHH. The CHHMAC, with operations being devoted for the benefit
of the CHH's patients, should be accorded the 10% special assessment. DaIACS
In this regard, we point with approbation the appellate court's application of Sec. 216 in relation with
Sec. 215 of the Local Government Code on the proper classification of the subject CHHMAC building
as "special" and not "commercial". Secs. 215 and 216 pertinently provide:
SEC. 215.
Classes of Real Property for Assessment Purposes. For purposes of assessment, real
property shall be classified as residential, agricultural, commercial, industrial, mineral, timberland or
special.
xxx
xxx
xxx
SEC. 216.
Special Classes of Real Property. All lands, buildings, and other improvements
thereon actually, directly and exclusively used for hospitals, cultural or scientific purposes, and those
owned and used by local water districts, and government-owned or controlled corporations rendering
essential public services in the supply and distribution of water and/or generation and transmission of
electric power shall be classified as special. (Emphasis supplied.)
Thus, applying the above provisos in line with City Tax Ordinance LXX of Cebu City, the 10% special
assessment should be imposed for the CHHMAC building which should be classified as "special".
WHEREFORE, the petition is DENIED for lack of merit and the October 31, 2001 Decision and March
11, 2002 Resolution of the CA are hereby AFFIRMED. No pronouncement as to costs. CIDaTc
SO ORDERED.
Quisumbing, Carpio, Carpio-Morales and Tinga, JJ., concur.
Footnotes
1.
Rollo, pp. 12-24.
2.
Id. at 26-34. The Decision was penned by Associate Justice Portia Alio-Hormachuelos
(Chairperson) and concurred in by Associate Justices Eriberto U. Rosario, Jr. and Amelita G. Tolentino
of the Seventeenth Division.
3.
CA rollo, pp. 13-17.
4.
Id. at 22.
5.
Rollo, p. 36.
6.
Id. at 37-43.
7.
CA rollo, p. 23.
8.
Folder 1, CBAA Records; per Cebu City Prosecutor Primo C. Miro as concurred in by Cebu
City Register of Deeds Felixberto F. Alino (Chairperson) and Cebu City Engineer Antonio B. Sanchez.
TSHEIc
9.
Id.
10.
Id.
11.
Id.
12.
Supra note 3.
13.
No. L-15270, September 30, 1961, 3 SCRA 186.
14.
No. L-39086, June 15, 1988, 162 SCRA 106.
15.
Supra note 4.
16.
CA rollo, pp. 18-21.
17.
Id. at 2-10.
18.
Supra note 8.
19.
Supra note 2.
20.
Supra note 13.
21.
Supra note 5.
22.
Rollo, p. 91.

23.
24.
25.

Supra note 14.

Rollo, pp. 107-108.
Supra note 13, at 192.

cCaIET

THIRD DIVISION
[G.R. No. 127316. October 12, 2000.]
LIGHT RAIL TRANSIT AUTHORITY, petitioner, vs. CENTRAL BOARD OF ASSESSMENT
APPEALS, BOARD OF ASSESSMENT APPEALS OF MANILA and the CITY ASSESSOR OF
MANILA, respondents.
Office of the Government Corporate Counsel for petitioner.
Office of the City Legal Officer for respondent City Assessor of Manila.
SYNOPSIS
This is a Petition for Review filed by the Light Rail Transit Authority (LRTA) challenging the
November 15, 1996 Decision of the Court of Appeals in CA-GR SP No. 38137. The challenged
decision affirmed the ruling of the Central Board of Assessment Appeals (CBAA) which upheld the
June 26, 1992 Resolution of the Board of Assessment Appeals of Manila. Said resolution declared
petitioner's carriageways and passenger terminals as improvements subject to real property taxes.
Petitioner argued that the subject carriageways and stations are improvements not of its properties, but
of the government-owned national roads to which they are immovably attached. It theorized that to
impose a tax on the carriageways and terminal stations would be to impose taxes on public roads.
Though the creation of the LRTA was impelled by public service, its operation undeniably partakes of
ordinary business, It operates much like any private corporation engaged in the mass transport industry.
Given that it is engaged in a service-oriented commercial endeavor, its carriageways and terminal
stations are patrimonial property subject to tax, notwithstanding its claim of being a government-owned
or controlled corporation. True, carriageways and terminal stations are anchored, at certain points, on
public roads. However, these carriageways and terminal stations serve a function different from that of
the public roads. The former are part and parcel of the Light Rail Transit (LRT) system which, unlike
the latter, are not open to use by the general public. The carriageways are accessible only to the LRT
trains, while the terminal stations have been built for the convenience of LRTA itself and its customers
who pay the required fare.
SYLLABUS
1.
TAXATION; REAL PROPERTY TAX; BASIS OF ASSESSMENT IS ACTUAL USE OF
REAL PROPERTY; DEFINITION OF ACTUAL USE. Under the Real Property Tax Code, real
property is classified for assessment purposes on the basis of actual use, which is defined as "the
purpose for which the property is principally or predominantly utilized by the person in possession of
the property."
2.
ID.; ID.; ID.; IMPROVEMENTS ATTACHED TO PUBLIC ROADS, TAXABLE; CASE AT
BAR. Petitioner argues that it merely operates and maintains the LRT system, and that the actual
users of the carriageways and terminal stations are the commuting public. It adds that the public-use
character of the LRT is not negated by the fact that revenue is obtained from the latter's operations. We
do not agree. Unlike public roads which are open for use by everyone, the LRT is accessible only to
those who pay the required fare. It is thus apparent that petitioner does not exist solely for public
service, and that the LRT carriageways and terminal stations are not exclusively for public use.
Although petitioner is a public utility, it is nonetheless profit-earning. EaIcAS
3.
ID.;
ID.; GOVERNMENT-OWNED OR CONTROLLED CORPORATION;
PATRIMONIAL PROPERTY THEREOF, TAXABLE. Though the creation of the LRTA was
impelled by public service to provide mass transportation to alleviate the traffic and transportation
situation in Metro-Manila its operation undeniably partakes of ordinary business. Petitioner is
clothed with corporate status and corporate powers in the furtherance of its proprietary objectives.
Indeed, it operates much like any private corporation engaged in the mass transport industry. Given that
it is engaged in a service-oriented commercial endeavor, its carriageways and terminal stations are
patrimonial property subject to tax, notwithstanding its claim of being a government-owned or
controlled corporation.

4.
ID.; ID.; ID.; GENERALLY, REAL PROPERTY OWNED THEREBY IS NOT TAXABLE
WHEN SO PROVIDED BY ITS CHARTER; EXCEPTION. Under the Real Property Tax Code,
real property "owned by the Republic of the Philippines or any of its political subdivisions and any
government-owned or controlled corporation so exempt by its charter, provided, however, that this
exemption shall not apply to real property of the abovenamed entities the beneficial use of which has
been granted, for consideration or otherwise, to a taxable person."
5.
ID.; ID.; ID.; ID.; ID.; CASE AT BAR. Executive Order No. 603, the charter of petitioner,
does not provide for any real estate tax exemption in its favor. Its exemption is limited to direct and
indirect taxes, duties or fees in connection with the importation of equipment not locally available.
Even granting that the national government indeed owns the carriageways and terminal stations, the
exemption would not apply because their beneficial use has been granted to petitioner, a taxable entity.
HScAEC
6.
ID.; TAX EXEMPTION STRICTLY CONSTRUED AGAINST CLAIMANT. Taxation is the
rule and exemption is the exception. Any claim for tax exemption is strictly construed against the
claimant. LRTA has not shown its eligibility for exemption; hence, it is subject to the tax.
DECISION
PANGANIBAN, J p:
The Light Rail Transit Authority and the Metro Transit Organization function as service-oriented
business entities, which provide valuable transportation facilities to the paying public. In the absence,
however, of any express grant of exemption in their favor, they are subject to the payment of real
property taxes. CDAHIT
The Case
In the Petition for Review before us, the Light Rail Transit Authority (LRTA) challenges the November
15, 1996 Decision 1 of the Court of Appeals (CA) in CA-GR SP No. 38137, which disposed as follows:
WHEREFORE, premises considered, the appealed decision (dated October 15, 1994) of the Central
Board of Assessment Appeals is hereby AFFIRMED, with costs against the petitioner." 2
The affirmed ruling of the Central Board of Assessment Appeals (CBAA) upheld the June 26, 1992
Resolution of the Board of Assessment Appeals of Manila, which had declared petitioner's
carriageways and passenger terminals as improvements subject to real property taxes.
The Facts
The undisputed facts are quoted by the Court of Appeals (CA) from the CBAA ruling, as follows: 3
1.
The LRTA is a government-owned and controlled corporation created and organized under
Executive Order No. 603, dated July 12, 1980 '. . . primarily responsible for the construction, operation,
maintenance and/or lease of light rail transit system in the Philippines, giving due regard to the
[reasonable requirements] of the public transportation of the country' (LRTA vs. The Hon. Commission
on Audit, G.R. No. 88365);
"2.
. . . [B]y reason of . . . Executive Order 603, LRTA acquired real properties . . . constructed
structural improvements, such as buildings, carriageways, passenger terminal stations, and installed
various kinds of machinery and equipment and facilities for the purpose of its operations; TDSICH
"3.
. . . [F]or . . . an effective maintenance, operation and management, it entered into a Contract of
Management with the Meralco Transit Organization (METRO) in which the latter undertook to
manage, operate and maintain the Light Rail Transit System owned by the LRTA subject to the specific
stipulations contained in said agreement, including payments of a management fee and real property
taxes (Add'l Exhibit "I", Records)
"4.
That it commenced its operations in 1984, and that sometime that year, Respondent-Appellee
City Assessor of Manila assessed the real properties of [petitioner], consisting of lands, buildings,
carriageways and passenger terminal stations, machinery and equipment which he considered real
propert[y] under the Real Property Tax Code, to commence with the year 1985;
"5.
That [petitioner] paid its real property taxes on all its real property holdings, except the

carriageways and passenger terminal stations including the land where it is constructed on the ground
that the same are not real properties under the Real Property Tax Code, and if the same are real
propert[y], these . . . are for public use/purpose, therefore, exempt from realty taxation, which claim
was denied by the Respondent-Appellee City Assessor of Manila; and
"6.
. . . [Petitioner], aggrieved by the action of the Respondent-Appellee City Assessor, filed an
appeal with the Local Board of Assessment Appeals of Manila . . . . Appellee, herein, after due hearing,
in its resolution dated June 26, 1992, denied [petitioner's] appeal, and declared that carriageways and
passenger terminal stations are improvements, therefore, are real propert[y] under the Code, and not
exempt from the payment of real property tax. EATCcI
"A motion for reconsideration filed by [petitioner] was likewise denied."
The CA Ruling
The Court of Appeals held that petitioner's carriageways and passenger terminal stations constituted
real property or improvements thereon and, as such, were taxable under the Real Property Tax Code.
The appellate court emphasized that such pieces of property did not fall under any of the exemptions
listed in Section 40 of the aforementioned law. The reason was that they were not owned by the
government or any government-owned corporation which, as such, was exempt from the payment of
real property taxes. True, the government owned the real property upon which the carriageways and
terminal stations were built. However, they were still taxable because beneficial use had been
transferred to petitioner, a taxable entity. ICcaST
The CA debunked the argument of petitioner that carriageways and terminals were intended for public
use. The former agreed, instead, with the CBAA. The CBAA had concluded that since petitioner was
not engaged in purely governmental or public service, the latter's endeavors were proprietary. Indeed,
petitioner was deemed as a profit-oriented endeavor, serving as it did, only the paying public.
Hence, this Petition. 4
The Issues
In its Memorandum, 5 petitioner urges the Court to resolve the following matters:
"I
The Honorable Court of Appeals erred in not holding that the carriageways and terminal stations of
petitioner are not improvements for purposes of the Real Property Tax Code.
"II
The Honorable Court of Appeals erred in not holding that being attached to national roads owned by
the national government, subject carriageways and terminal stations should be considered property of
the national government. DTcACa
"III
The Honorable Court of Appeals erred in not holding that payment of charges or fares in the operation
of the light rail transit system does not alter the nature of the subject carriageways and terminal stations
as devoted for public use.
"IV
The Honorable Court of Appeals erred in failing to consider the view advanced by the Department of
Finance, which takes charge of the overall collection of taxes, that subject carriageways and terminal
stations are not subject to realty taxes. SACEca
"V
The Honorable Court of Appeals erred in failing to consider that payment of the realty taxes assessed is
not warranted and should the legality of the questioned assessment be upheld, the amount of the realty
taxes assessed would far exceed the annual earnings of petitioner, a government corporation."
The foregoing all point to one main issue: whether petitioner's carriageways and passenger terminal
stations are subject to real property taxes. cSICHD
The Court's Ruling
The Petition has no merit.

Main Issue:
May Real Property Taxes be Assessed and Collected?
The Real Property Tax Code, 6 the law in force at the time of the assailed assessment in 1984,
mandated that "there shall be levied, assessed and collected in all provinces, cities and municipalities
an annual ad valorem tax on real property such as lands, buildings, machinery and other improvements
affixed or attached to real property not hereinafter specifically exempted." 7
Petitioner does not dispute that its subject carriageways and stations may be considered real property
under Article 415 of the Civil Code. However, it resolutely argues that the same are improvements, not
of its properties, but of the government-owned national roads to which they are immovably attached.
They are thus not taxable as improvements under the Real Property Tax Code. In essence, it contends
that to impose a tax on the carriageways and terminal stations would be to impose taxes on public
roads.
The argument does not persuade. We quote with approval the solicitor general's astute comment on this
matter:
"There is no point in clarifying the concept of industrial accession to determine the nature of the
property when what is fundamentally important for purposes of tax classification is to determine the
character of the property subject [to] tax. The character of tax as a property tax must be determined by
its incidents, and from the natural and legal effect thereof. It is irrelevant to associate the carriageways
and/or the passenger terminals as accessory improvements when the view of taxability is focused on
the character of the property. The latter situation is not a novel issue as it has already been resolved by
this Honorable Court in the case of City of Manila vs. IAC (GR No. 71159, November 15, 1989)
wherein it was held:
'The New Civil Code divides the properties into property for public and patrimonial property (Art.
423), and further enumerates the property for public use as provincial road, city streets, municipal
streets, squares, fountains, public waters, public works for public service paid for by said [provinces],
cities or municipalities; all other property is patrimonial without prejudice to provisions of special laws.
(Art. 424, Province of Zamboanga v. City of Zamboanga, 22 SCRA 1334 [1968]) THaAEC
xxx
xxx
xxx
'. . .while the following are corporate or proprietary property in character, viz: 'municipal water works,
slaughter houses, markets, stables, bathing establishments, wharves, ferries and fisheries.' Maintenance
of parks, golf courses, cemeteries and airports, among others, are also recognized as municipal or city
activities of a proprietary character (Dept. of Treasury v. City of Evansville; 60 NE 2nd 952)
"The foregoing enumeration in law does not specify or include carriageway or passenger terminals as
inclusive of properties strictly for public use to exempt petitioner's properties from taxes. Precisely, the
properties of petitioner are not exclusively considered as public roads being improvements placed upon
the public road, and this separability nature of the structure in itself physically distinguishes it from a
public road. Considering further that carriageways or passenger terminals are elevated structures which
are not freely accessible to the public, vis-a-vis roads which are public improvements openly utilized
by the public, the former are entirely different from the latter. CHaDIT
"The character of petitioner's property, be it an improvements as otherwise distinguished by petitioner,
needs no further classification when the law already classified it as patrimonial property that can be
subject to tax. This is in line with the old ruling that if the public works is not for such free public
service, it is not within the purview of the first paragraph of Art. 424 if the New Civil Code." 8
Though the creation of the LRTA was impelled by public service to provide mass transportation to
alleviate the traffic and transportation situation in Metro Manila its operation undeniably partakes of
ordinary business. Petitioner is clothed with corporate status and corporate powers in the furtherance of
its proprietary objectives. 9 Indeed, it operates much like any private corporation engaged in the mass
transport industry. Given that it is engaged in a service-oriented commercial endeavor, its carriageways
and terminal stations are patrimonial property subject to tax, notwithstanding its claim of being a

government-owned or controlled corporation.

True, petitioner's carriageways and terminal stations are anchored, at certain points, on public roads.
However, it must be emphasized that these structures do not form part of such roads, since the former
have been constructed over the latter in such a way that the flow of vehicular traffic would not be
impeded. These carriageways and terminal stations serve a function different from that of the public
roads. The former are part and parcel of the light rail transit (LRT) system which, unlike the latter, are
not open to use by the general public. The carriageways are accessible only to the LRT trains, while the
terminal stations have been built for the convenience of LRTA itself and its customers who pay the
required fare. aAEIHC
Basis of Assessment
Is Actual Use of
Real Property
Under the Real Property Tax Code, real property is classified for assessment purposes on the basis of
actual use, 10 which is defined as "the purpose for which the property is principally or predominantly
utilized by the person in possession of the property." 11
Petitioner argues that it merely operates and maintains the LRT system, and that the actual users of the
carriageways and terminal stations are the commuting public. It adds that the public-use character of
the LRT is not negated by the fact that revenue is obtained from the latter's operations.
We do not agree. Unlike public roads which are open for use by everyone, the LRT is accessible only to
those who pay the required fare. It is thus apparent that petitioner does not exist solely for public
service, and that the LRT carriageways and terminal stations are not exclusively for public use.
Although petitioner is a public utility, it is nonetheless profit-earning. It actually uses those
carriageways and terminal stations in its public utility business and earns money therefrom. HEcSDa
Petitioner Not Exempt from
Payment of Real Property Taxes
In any event, there is another legal justification for upholding the assailed CA Decision. Under the Real
Property Tax Code, real property owned by the Republic of the Philippines or any of its political
subdivisions and any government-owned or controlled corporation so exempt by its charter, provided,
however, that this exemption shall not apply to real property of the abovenamed entities the beneficial
use of which has been granted, for consideration or otherwise, to a taxable person." 12
Executive Order No. 603, the charter of petitioner, does not provide for any real estate tax exemption in
its favor. Its exemption is limited to direct and indirect taxes, duties or fees in connection with the
importation of equipment not locally available, as the following provision shows:
"ARTICLE 4
TAX AND DUTY EXEMPTIONS
Sec. 8. Equipment, Machineries, Spare Parts and Other Accessories and Materials. The importation
of equipment, machineries, spare parts, accessories and other materials, including supplies and
services, used directly in the operations of the Light Rails Transit System, not obtainable locally on
favorable terms, out of any funds of the authority including, as stated in Section 7 above, proceeds from
foreign loans credits or indebtedness, shall likewise be exempted from all direct and indirect taxes,
customs duties, fees, imposts, tariff duties, compensating taxes, wharfage fees and other charges and
restrictions, the provisions of existing laws to the contrary notwithstanding." aIHCSA
Even granting that the national government indeed owns the carriageways and terminal stations, the
exemption would not apply because their beneficial use has been granted to petitioner, a taxable entity.
Taxation is the rule and exemption is the exception. Any claim for tax exemption is strictly construed
against the claimant. 13 LRTA has not shown its eligibility for exemption; hence, it is subject to the tax.
HCEISc
WHEREFORE, the Petition is hereby DENIED and the assailed Decision of the Court of Appeals
AFFIRMED. Costs against the petitioner.

SO ORDERED.
Melo, Vitug and Purisima, JJ., concur.
Gonzaga-Reyes, J., took no part.
Footnotes
1.
Penned by Justice Ramon Mabutas Jr., with the concurrence of Justices Minerva P. GonzagaReyes (Division chairperson and now a member of this Court) and Salvador J. Valdez (member).
2.
Rollo, p. 43.
3.
CA Decision, pp. 2-3; rollo, pp. 29-30.
4.
This Petition was deemed submitted for decision on October 13, 1999, upon receipt by the
Court of the Explanation filed by Attys. Melchor R. Monsod and Jose A. Perello Jr. of the Office of the
City Legal Officer of Manila, who clarified that they were adopting as memorandum their February 28,
1998 Comment. Received by the Court on November 3, 1998 was Petitioner LRTA's Memorandum
signed by Government Corporate Counsel Jun Valerio, Assistant Government Corporate Counsel
Antonio M. Brillantes, and Government Corporate Attorney IV Isabelo G. Gumaru. On September 30,
1998, the Office of the Solicitor General filed a "Manifestation and Motion for Leave to Adopt
Comment as Memorandum for the Central Board of Assessment Appeals." The OSG's May 2, 1997
Comment was signed by Assistant Solicitor General Mariano M. Martinez and Solicitors Luis F. Simon
and Brigido Artemon M. Luna.
5.
Rollo, pp. 151-152; original written entirely in upper case.
6.
Presidential Decree No. 464. See also the Local Government Code of 1991 or Republic Act No.
7160, which took effect on January 1, 1992.
7.
Ibid., 38. This is identical to 232 of the Local Government Code (LGC), which reads:
"Section 232. Power to Levy Real Property Tax. A province or city or a municipality
within the Metropolitan Manila Area may levy an annual ad valorem tax on real property such as land,
building, machinery, and other improvement not hereinafter specifically exempted."
8.
Comment of the Office of the Solicitor General, pp. 8-10; rollo, pp. 70-72.
9.
See Section 4 of Executive Order No. 603, the LRTA charter, which provides:
"ARTICLE 2
CORPORATE POWERS
"Sec. 4.
General Powers. The Authority, through the Board of Directors, may
undertake such action as are expedient for or conducive to attainment of the purposes and objectives of
the Authority, or of any purpose reasonably incidental to or consequential upon any of these purposes.
As such, the Authority shall have the following general powers:
(1)
To have continuous succession under its corporate name, until otherwise
provided by law;
(2)
To prescribe, amend and/or repeal its by-laws;
(3)
To adopt and use a seal and alter it at its pleasure;
(4)
To sue and be sued;
(5)
To contract any obligation or enter into, assign or accept the assignment of, and
vary or rescind any agreement, contract of obligation necessary or incidental to the proper management
of the Authority;
(6)
To borrow funds from any source, private or public, foreign or domestic, and to
issue bonds and other evidence of indebtedness, the payment of which shall be guaranteed by the
National Government, subject to pertinent borrowing law;
(7)
To acquire, receive, take, and hold by bequest, devise, gift, purchase or lease,
either absolutely or in trust for any of its purposes, from foreign and domestic sources, any asset, grant
or property, real or personal, subject to such limitations as are provided in existing laws; to convey or
dispose of such assets, grants, or properties, movable and immovable; and invest and/or reinvest such
proceeds and deal with and expand its assets and income in such a manner as will best promote its

objectives;
(8)
(9)

To improve, develop or alter any property held by it;

To carry on any business, either alone or in partnership with any other person or

(10)

To employ an agent or contractor or perform such things as the Authority may

persons;
perform;
(11) To exercise the right of eminent domain, whenever the Authority deems it
necessary for the attainment of its objectives;
(12) To prescribe rules and regulations in the conduct of its general business as well
as to fix and implement the terms and conditions of its related activities;
(13) To determine the fares payable by persons traveling on the light rail system, in
consultation with the Board of Transportation;
(14) To establish, operate, and maintain branches or field offices when required by the
exigencies of its business;
(15) To determine its organizational structure and the number, positions and salaries
of its personnel, subject to pertinent organization and compensation law; and
(16) To exercise such powers and perform such duties as may be necessary to carry
out the business and purposes for which the Authority was established or which, from time to time may
be declared but the Board of Directors to be necessary, useful, incidental or auxiliary to accomplish
such purposes; and generally, to exercise all powers of an Authority under the Corporation Law that are
not inconsistent with the provisions of this Order, or with orders pertaining to government corporate
budgeting, organization, borrowing, or compensation."
10.
19 of the Real Property Tax Code reads: "Real property shall be classified for assessment on
the basis of its actual use, regardless of where located and whoever uses it." See Also 198 (b) of the
LGC, an identical proviso which reads: "Real property shall be classified for assessment purposes on
the basis of its actual use."
11.
See 3 (a) of the Real Property Tax Code and 199 (b) of the LGC.
12.
Section 40 (a) of the Real Property Code and Section 234 (a) of the Local Government Code.
Thus, petitioner will not find solace under the Local Government Code either, for the reasons discussed
above.
13.
Mactan Cebu International Airport Authority v. Marcos, 261 SCRA 667, September 11, 1996.

EN BANC
[G.R. No. 154126. October 11, 2005.]
ALLIED BANKING CORPORATION AS TRUSTEE FOR THE TRUST FUND OF COLLEGE
ASSURANCE PLAN PHILIPPINES, INC. (CAP), petitioner, vs. THE QUEZON CITY
GOVERNMENT, THE QUEZON CITY TREASURER, THE QUEZON CITY ASSESSOR AND THE
CITY MAYOR OF QUEZON CITY, respondents.
DECISION
CARPIO-MORALES, J p:
From the Resolution 1 of April 10, 2002 issued by Branch 225 of the Regional Trial Court (RTC) of
Quezon City dismissing the petition for prohibition and declaratory relief 2 of Allied Banking
Corporation (petitioner), the present appeal by certiorari was lodged. CaAcSE
On December 19, 1995, the Quezon City government enacted City Ordinance No. 357, Series of 1995
(the ordinance), 3 Section 3 of which reads:
Section 3.
The City Assessor shall undertake a general revision of real property assessments using
as basis the newly approved schedule specified in Sections 1 and 2 hereof. He shall apply the new
assessment level of 15% for residential and 40% for commercial and industrial classification,
respectively as prescribed in Section 8 (a) of the 1993 Quezon City Revenue Code to determine the
assessed value of the land. Provided; however, that parcels of land sold, ceded, transferred and
conveyed for remuneratory consideration after the effectivity of this revision shall be subject to real
estate tax based on the actual amount reflected in the deed of conveyance or the current approved zonal
valuation of the Bureau of Internal Revenue prevailing at the time of sale, cession, transfer and
conveyance, whichever is higher, as evidenced by the certificate of payment of the capital gains tax
issued therefor. 4 (Emphasis and underscoring supplied)
On July 1, 1998, petitioner, as trustee for College Assurance Plan of the Philippines, Inc., purchased
from Liwanag C. Natividad et al. a 1,000 square meter parcel of land located along Aurora Boulevard,
Quezon City in the amount of P38,000,000.00. 5
Prior to the sale, Natividad et al. had been paying the total amount of P85,050.00 6 as annual real
property tax based on the property's fair market value of P4,500,000.00 and assessed value of
P1,800,000.00 under Tax Declaration No. D-102-03778. 7
After its acquisition of the property, petitioner was, in accordance with Section 3 of the ordinance,
required to pay P102,600.00 as quarterly real estate tax (or P410,400.00 annually) under Tax
Declaration No. D-102-03780 which pegged the market value of the property at P38,000,000.00 the
consideration appearing in the Deed of Absolute Sale, and its assessed value at P15,200,000.00. 8
Petitioner paid the quarterly real estate tax for the property from the 1st quarter of 1999 up to the 3rd
quarter of 2000. Its tax payments for the 2nd, 3rd, and 4th quarter of 1999, and 1st and 2nd quarter of
2000 were, however, made under protest. 9
In its written protest 10 with the City Treasurer, petitioner assailed Section 3 of the ordinance as null
and void, it contending that it is violative of the equal protection and uniformity of taxation clauses of
the Constitution. 11 Petitioner, moreover, contended that the proviso is unjust, excessive, oppressive,
unreasonable, confiscatory and contrary to Section 130 of the Local Government Code which provides:
SECTION 130.
Fundamental Principles. The following fundamental principles shall govern
the exercise of the taxing and revenue-raising powers of local government units:
(a)
Taxation shall be uniform in each local government unit;
(b)
Taxes, fees, charges and other impositions shall:
(1)
be equitable and based as far as practicable on the taxpayer's ability to pay; CcAESI
(2)
be levied and collected only for public purposes;
(3)
not be unjust, excessive, oppressive, or confiscatory;
(4)
not be contrary to law, public policy, national economic policy, or in restraint of trade;
xxx
xxx
xxx

Petitioner, through its counsel, later sent a March 24, 2000 demand letter to the Quezon City Treasurer's
Office seeking a refund of the real estate taxes it erroneously collected from it. 12 The letter was
referred for appropriate action 13 to the City Assessor who, by letter dated May 7, 2000, denied the
demand for refund on the ground that the ordinance is presumed valid and legal unless otherwise
declared by a court of competent jurisdiction. 14
Petitioner thereupon filed on August 11, 2000 a petition for prohibition and declaratory relief before the
Quezon City RTC for the declaration of nullity of Section 3 of the ordinance; the enjoining of
respondents Quezon City Treasurer, Quezon City Assessor, and City Mayor of Quezon City from
further implementing the ordinance; for the Quezon City Treasurer to be ordered to refund the amount
of P633,150.00 representing the real property tax erroneously collected and paid under protest; and for
respondents to pay attorney's fees in the amount of P1,000,000.00 and costs of the suit. 15
In support of its thesis, petitioner contended that the re-assessment under the third sentence of Section 3
of the ordinance for purposes of real estate taxation of a property's fair market value where it is sold,
ceded, transferred or conveyed for remuneratory consideration is null and void as it is an invalid
classification of real properties which are transferred, ceded or conveyed and those which are not, the
latter remaining to be valued and assessed in accordance with the general revisions of assessments of
real properties under the first sentence of Section 3. 16
Petitioner additionally contended that the proviso of Section 3 of the ordinance which allows reassessment every time the property is transferred, ceded or conveyed violates Sections 219 17 and 220
18 of the Local Government Code which provide that the assessment of real property shall not be
increased oftener than once every three (3) years except in case of new improvements substantially
increasing the value of said property or of any change in its actual use. 19
Before respondents could file any responsive pleading or on March 6, 2001, respondent Quezon City
Government enacted Ordinance No. SP-1032, S-2001 20 which repealed the assailed proviso in Section
3 of the 1995 Ordinance. The repealing ordinance which took effect upon its approval on March 28,
2001 reads in part:
"WHEREAS, the implementation of the second (2nd) sentence of Section 3 of the Ordinance creates a
situation whereby owners of newly acquired land for remuneratory consideration beginning January 1,
1996 and forward will have to pay higher taxes than its adjoining/adjacent lot or lots in the adjoining
blocks, or nearby lots within its immediate vicinity which have remained undisturbed, not having been
sold, ceded, transferred, and/or conveyed;
WHEREAS, the owners of the newly acquired property are complaining/protesting the validity/legality
of the second (2nd) sentence of Section 3 of the ordinance for being either arbitrary, unjust, excessive,
oppressive, and/or contrary to law;
WHEREAS, Section 5 Article X of the Philippine Constitution provides that: 'Each local government
unit shall have the power to create its own sources of revenue and to levy taxes, fees and charges
subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy
of local autonomy. Such taxes, fees and charges shall accrue exclusively to the local government'
(Underscoring supplied); ETDAaC
WHEREAS, the guidelines and limitations imposed on the local government units in the exercise of
their taxing powers have been expressly stipulated by Congress when it enacted Section 130 of
Republic Act No. 7160, otherwise known as the Local Government Code of 1991 . . .;
WHEREAS, these fundamental principles of taxation find support and affirmation in the following
applicable cases decided by the Court of Tax Appeals (sic), on similar cases which held that:
1.
An increase in the valuation of land due to sale and transfer of such property was arbitrary.
Uniformity in taxation means that all kinds of property of the same class shall be taxed at the same rate.
(Churchill vs. Concepcion, 34 Phi. 969; Eastern Theatrical Co. vs. Alfonso, 83 Phil. 852) . . . .
2.
The law requires the real property shall be assessed at its true and full value, or cash value, or
fair market value. But in determining or fixing the fair market value of property for tax purposes it is

essential that the rules of uniformity be observed. More important tha[n] the obligation to seek the fair
market value of property is the obligation of the assessor to see to it that the "rule of taxation shall be
uniform," for this a (sic) rule which is guaranteed by the Constitution. A taxpayer should not be made
to pay more taxes on his property while owners of surrounding properties, under the same circumstance
pay less.
WHEREAS, it is clear from the foregoing premises that the second (2nd) sentence of the Ordinance,
fixing the realty tax based on the actual amount reflected in the deed of conveyance or the current
approved zonal valuation . . . is violative of, and repugnant to, the uniformity rule of taxation;
WHEREAS, in view of the above considerations there appear to be merit and validity to the
complaints/protests of tax payers, a re-examination and repeal of the entire second sentence of Section
3 of the Ordinance is in order."
Petitioner subsequently moved to declare respondents in default 21 for failure to file a responsive
pleading within the period, as extended. Before the motion could be heard, 22 however, respondents
moved to dismiss the petition, 23 averring that the passage of the repealing ordinance had rendered the
petition moot and academic.
Petitioner opposed the motion, it alleging that while its action for the declaration of nullity of the
proviso was rendered moot and academic by its repeal, its claim for refund and attorney's fees had not
been mooted, and the trial court still had to determine if Section 3 of the ordinance "is null and void ab
initio and perforce, may not be enforced during the intervening period from the time of its enactment
until the time of its repeal." 24
Respondents maintained, however, that the assailed proviso remained in full force and effect until the
date of its repeal, based on the rule that a statute is construed prospectively unless the legislative intent
was to give it retrospective application. 25 And they called attention to the provision in Section 2 of the
repealing ordinance that "[it] shall take effect upon its approval," hence, clearly showing that the local
legislative body was to grant it prospective application. 26
As to the claim for refund, respondents averred that it was premature for the trial court to take
cognizance thereof as petitioner had an administrative remedy. 27
By Resolution of April 10, 2002, the trial court granted respondents' motion to dismiss in this wise:
There is no need for this Court to resolve whether the subject Ordinance is null and void as the same
was already declared to be violative of, and repugnant to the "uniformity rule" on taxation by the
Quezon City Council itself thru its pronouncements in Quezon City Ordinance No. 1032, Series of
2001. . . .
xxx
xxx
xxx
As to petitioner's claim for refund, since an administrative remedy is available for refund of taxes
illegally and erroneously collected and petitioner has not yet availed of it, the Court shall not take
cognizance of this issue considering the rule on "Exhaustion of Administrative Remedy." 28
(Underscoring supplied) cHSIAC
Its Motion for Reconsideration 29 having been denied, 30 petitioner comes before this Court on appeal
by certiorari under Rule 45 on the following issues:
A
WHETHER OR NOT THE TRIAL COURT ERRED IN DISMISSING THE INSTANT CASE FOR
FAILURE OF THE PETITIONER TO EXHAUST ADMINISTRATIVE REMEDIES.
B
WHETHER OR NOT SECTION 3, QUEZON CITY ORDINANCE NO. 357, SERIES OF 1995,
WHICH WAS ABROGATED FOR BEING UNCONSTITUTIONAL CAN BE THE BASIS OF
COLLECTING REAL ESTATE TAXES PRIOR TO ITS REPEAL. 31
Although as a rule, administrative remedies must first be exhausted before resort to judicial action can
prosper, there is a well-settled exception in cases where the controversy does not involve questions of
fact but only of law. 32

Nevertheless, while cases raising purely legal questions are excepted from the rule requiring exhaustion
of administrative remedies before a party may resort to the courts, petitioner, in the case at bar, does not
raise just pure questions of law. Its cause of action requires the determination of the amount of real
property tax paid under protest and the amount of attorney's fees. These issues are essentially questions
of fact which preclude this Court from reviewing the same. 33
Since the procedure for obtaining a refund of real property taxes is provided under Sections 252, 34
226, 35 229, 36 230 37 and 231 38 of the Local Government Code, petitioner's action for prohibition in
the RTC was premature as it had a plain, speedy and adequate remedy of appeal in the ordinary course
of law. 39 As such, the trial court correctly dismissed its action on the ground that it failed to exhaust
the administrative remedies stated above. 40
Raising questions of fact is moreover inappropriate in an appeal by certiorari under Rule 45 of the
Rules of Court where only questions of law may be reviewed. 41 It is axiomatic that the Supreme Court
is not a trier of facts 42 and the factual findings of the court a quo are conclusive upon it, except: (1)
where the conclusion is a finding grounded entirely on speculation, surmise and conjectures; (2) where
the inference made is manifestly mistaken; (3) where there is grave abuse of discretion; and (4) where
the judgment is based on a misapprehension of facts, and the findings of fact of the trial court are
premised on the absence of evidence and are contradicted by evidence on record. 43
From a considered scrutiny of the records of the case, this Court finds that petitioner has shown no
cause for this Court to apply any of the foregoing exceptions. HDCAaS
Petitioner has not put squarely in issue the constitutionality of the proviso in Section 3 of the ordinance.
It merely alleges that the said proviso can not be the basis for collecting real estate taxes at any given
time, the Sangguniang Panlungsod of Quezon City not having intended to impose such taxes in the first
place. As such the repealing ordinance should be given retroactive effect.
As a rule, the courts will not resolve the constitutionality of a law, if the controversy can be settled on
other grounds. 44
Where questions of constitutional significance are raised, the Court can exercise its power of judicial
review only if the following requisites are complied: First, there must be before the Court an actual
case calling for the exercise of judicial review. Second, the question before the Court must be ripe for
adjudication. Third, the person challenging the validity of the act must have standing to challenge.
Fourth, the question of constitutionality must have been raised at the earliest opportunity, and lastly, the
issue of constitutionality must be the very lis mota of the case. 45
Considering that there are factual issues still waiting to be threshed out at the level of the administrative
agency, there is no actual case calling for the exercise of judicial review. In addition, the requisite that
the constitutionality of the assailed proviso in question be the very lis mota of the case is absent. Thus,
this Court refrains from passing on the constitutionality of the proviso in Section 3 of the 1995
Ordinance.
The factual issues which petitioner interjected in its petition aside, the only crucial legal query in this
case is the validity of the proviso fixing the appraised value of property at the stated consideration at
which the property was last sold.
This Court holds that the proviso in question is invalid as it adopts a method of assessment or appraisal
of real property contrary to the Local Government Code, its Implementing Rules and Regulations and
the Local Assessment Regulations No. 1-92 46 issued by the Department of Finance. 47
Under these immediately stated authorities, real properties shall be appraised at the current and fair
market value prevailing in the locality where the property is situated 48 and classified for assessment
purposes on the basis of its actual use. 49
"Fair market value" is the price at which a property may be sold by a seller who is not compelled to sell
and bought by a buyer who is not compelled to buy, 50 taking into consideration all uses to which the
property is adapted and might in reason be applied. The criterion established by the statute
contemplates a hypothetical sale. Hence, the buyers need not be actual and existing purchasers. 51

As this Court stressed in Reyes v. Almanzor, 52 assessors, in fixing the value of real property, have to
consider all the circumstances and elements of value, and must exercise prudent discretion in reaching
conclusions. 53 In this regard, Local Assessment Regulations No. 1-92 54 establishes the guidelines to
assist assessors in classifying, appraising and assessing real property. THADEI
Local Assessment Regulations No. 1-92 suggests three approaches in estimating the fair market value,
namely: (1) the sales analysis or market data approach; (2) the income capitalization approach; and (3)
the replacement or reproduction cost approach. 55
Under the sales analysis approach, the price paid in actual market transactions is considered by taking
into account valid sales data accumulated from among the various sources stated in Sections 202, 203,
208, 209, 210, 211 and 213 of the Code. 56
In the income capitalization approach, the value of an income-producing property is no more than the
return derived from it. An analysis of the income produced is necessary in order to estimate the sum
which might be invested in the purchase of the property.
The reproduction cost approach, on the other hand, is a factual approach used exclusively in appraising
man-made improvements such as buildings and other structures, based on such data as materials and
labor costs to reproduce a new replica of the improvement.
The assessor uses any or all of these approaches in analyzing the data gathered to arrive at the
estimated fair market value to be included in the ordinance containing the schedule of fair market
values.
Given these different approaches to guide the assessor, it can readily be seen that the Code did not
intend to have a rigid rule for the valuation of property, which is affected by a multitude of
circumstances which no rule could foresee or provide for. Thus, what a thing has cost is no singular and
infallible criterion of its market value. 57
Accordingly, this Court holds that the proviso directing that the real property tax be based on the actual
amount reflected in the deed of conveyance or the prevailing BIR zonal value is invalid not only
because it mandates an exclusive rule in determining the fair market value but more so because it
departs from the established procedures stated in the Local Assessment Regulations No. 1-92 and
unduly interferes with the duties statutorily placed upon the local assessor 58 by completely dispensing
with his analysis and discretion which the Code and the regulations require to be exercised. An
ordinance that contravenes any statute is ultra vires and void. 59
Further, it is noted that there is nothing in the Charter of Quezon City 60 and the Quezon City Revenue
Code of 1993 61 that authorize public respondents to appraise property at the consideration stated in
the deed of conveyance.
Using the consideration appearing in the deed of conveyance to assess or appraise real properties is not
only illegal since "the appraisal, assessment, levy and collection of real property tax shall not be let to
any private person," 62 but it will completely destroy the fundamental principle in real property
taxation that real property shall be classified, valued and assessed on the basis of its actual use
regardless of where located, whoever owns it, and whoever uses it. 63 Necessarily, allowing the parties
to a private sale to dictate the fair market value of the property will dispense with the distinctions of
actual use stated in the Code and in the regulations. cDACST
The invalidity of the assessment or appraisal system adopted by the proviso is not cured even if the
proviso mandates the comparison of the stated consideration as against the prevailing BIR zonal value,
whichever is higher, because an integral part of that system still permits valuing real property in
disregard of its "actual use."
In the same vein, there is also nothing in the Code or the regulations showing the congressional intent
to require an immediate adjustment of taxes on the basis of the latest market developments as, in fact,
real property assessments may be revised and/or increased only once every three (3) years. 64
Consequently, the real property tax burden should not be interpreted to include those beyond what the
Code or the regulations expressly and clearly state.

Still another consequence of the proviso is to provide a chilling effect on real property owners or
administrators to enter freely into contracts reflecting the increasing value of real properties in
accordance with prevailing market conditions. While the Local Government Code provides that the
assessment of real property shall not be increased oftener than once every three (3) years, 65 the
questioned part of the proviso subjects the real property to a tax based on the actual amount appearing
on the deed of conveyance or the current approved zonal valuation of the Bureau of Internal Revenue
prevailing at the time of sale, cession, transfer and conveyance, whichever is higher. As such, any
subsequent sale during the three-year period will result in a real property tax higher than the tax
assessed at the last prior conveyance within the same period. To save on taxes, real property owners or
administrators are forced to hold on to the property until after the said three-year period has lapsed.
Should they nonetheless decide to sell within the said three-year period, they are compelled to dispose
the property at a price not exceeding that obtained from the last prior conveyance in order to avoid a
higher tax assessment. In these two scenarios, real property owners are effectively prevented from
obtaining the best price possible for their properties and unduly hampers the equitable distribution of
wealth.
While the state may legitimately decide to structure its tax system to discourage rapid turnover in
ownership of real properties, such state interest must be expressly stated in the executing statute or it
can at least be gleaned from its provisions.
In the case at bar, there is nothing in the Local Government Code, the implementing rules and
regulations, the local assessment regulations, the Quezon City Charter, the Quezon City Revenue Code
of 1993 and the "Whereas" clauses of the 1995 Ordinance from which this Court can draw, at the very
least, an intimation of this state interest. As such, the proviso must be stricken down for being contrary
to public policy and for restraining trade. 66
In fine, public respondent Quezon City Government exceeded its statutory authority when it enacted
the proviso in question. The provision is thus null and void ab initio for being ultra vires and for
contravening the provisions of the Local Government Code, its implementing regulations and the Local
Assessment Regulations No. 1-92. As such, it acquired no legal effect and conferred no rights from its
inception. aACEID
A word on the applicability of the doctrine in this decision. It applies only in the determination of real
estate tax payable by owners or administrators of real property.
In light of the foregoing disquisitions, addressing the issue of retroactivity of the repealing ordinance is
rendered unnecessary.
WHEREFORE, the petition is hereby GRANTED. The assailed portion of the provisions of Section 3
of Quezon City Ordinance No. 357, Series of 1995 is hereby declared invalid.
Petitioner's claim for refund, however, must be lodged with the Local Board of Assessment Appeals, if
it is not barred by the statute of limitations. AISHcD
SO ORDERED.
Davide, Jr., C.J., Puno, Panganiban, Quisumbing, Ynares-Santiago, Sandoval-Gutierrez, AustriaMartinez, Corona, Callejo, Sr., Azcuna, Tinga, Chico-Nazario and Garcia, JJ., concur.
Carpio, J., concurs. The assailed ordinance violates the statutory prohibition against increases in
assessments oftener than 3 years.
Footnotes
1.
Rollo at 35-39.
2.
Id. at 42-60.
3.
Entitled "An Ordinance Approving the Schedule of Fair Market Values for Land, Buildings and
Other Structures Situated in Quezon City Jointly Prepared by the City Assessors of the Four (4) Local
Treasury and Assessment Districts Pursuant to Section 9 of P.D. 921 in Relation to the Provisions of the
Local Government Code, R.A. 7160, as Basis for the General Revision of Real Property Assessment."
4.
Rollo at 7. Petitioner failed to attach a certified true copy of the ordinance.

5.
6.
7.
8.
9.
10.
11.

Id. at 64-66.
Id. at 46.
Id. at 63.
Id. at 67.
Id. at 68-73.
Id. at 74-85.
CONST. art. VI, sec. 28 (1), viz:
Section 28. (1). The rule of taxation shall be uniform and equitable. . . .
12.
Rollo at 86-87.
13.
Id. at 88-89.
14.
Id. at 92.
15.
Id. at 42-60.
16.
Id. at 50.
17.
SECTION 219. General Revision of Assessments and Property Classification. The
provincial, city or municipal assessor shall undertake a general revision of real property assessments
within two (2) years after the effectivity of this Code and every three (3) years thereafter.
18.
Section 220. Valuation of Real Property. In cases where (a) real property is declared and
listed for taxation purposes for the first time; (b) there is an ongoing general revision of property
classification and assessment; or (c) a request is made by the person in whose name the property is
declared, the provincial, city or municipal assessor or his duly authorized deputy shall, in accordance
with the provisions of this Chapter, make a classification, appraisal and assessment of the real property
listed and described in the declaration irrespective of any previous assessment or taxpayer's valuation
thereon: Provided, however, That the assessment of real property shall not be increased oftener than
once every three (3) years except in case of new improvements substantially increasing the value of
said property or of any change in its actual use.
19.
Rollo at 54.
20.
Id. at 103.
21.
Records at 68-70.
22.
Id. at 71.
23.
Id. at 72-75.
24.
Id. at 107-108.
25.
CIVIL CODE, ART. 4. Laws shall have no retroactive effect, unless the contrary is provided.
26.
Rollo at 114-115. Vide Rollo 105.
27.
Id. at 116.
28.
Id. at 37-38.
29.
Id. at 124-133.
30.
Id. at 40-41.
31.
Id. at 15.
32.
Ty v. Trampe, 250 SCRA 500, 518 (1995).
33.
Ibid.; Vide also PNB v. Romillo, 139 SCRA 320, (1985) where we held that the determination
of whether an appeal involves only questions of law or both questions of law and fact is best left to the
appellate court.
34.
SECTION 252. Payment Under Protest. (a) No protest shall be entertained unless the
taxpayer first pays the tax. There shall be annotated on the tax receipts the words "paid under protest".
The protest in writing must be filed within thirty (30) days from payment of the tax to the provincial,
city treasurer or municipal treasurer, in the case of a municipality within Metropolitan Manila Area,
who shall decide the protest within sixty (60) days from receipt.
(b)
The tax or a portion thereof paid under protest, shall be held in trust by the
treasurer concerned.

(c)
In the event that the protest is finally decided in favor of the taxpayer, the amount
or portion of the tax protested shall be refunded to the protestant, or applied as tax credit against his
existing or future tax liability.
(d)
In the event that the protest is denied or upon the lapse of the sixty day period
prescribed in subparagraph (a), the taxpayer may avail of the remedies as provided for in Chapter 3,
Title II, Book II of this Code.
35.
SECTION 226. Local Board of Assessment Appeals. Any owner or person having legal
interest in the property who is not satisfied with the action of the provincial, city or municipal assessor
in the assessment of his property may, within sixty (60) days from the date of receipt of the written
notice of assessment, appeal to the Board of Assessment Appeals of the provincial or city by filing a
petition under oath in the form prescribed for the purpose, together with copies of the tax declarations
and such affidavits or documents submitted in support of the appeal.
36.
SECTION 229. Action by the Local Board of Assessment Appeals. (a) The Board shall
decide the appeal within one hundred twenty (120) days from the date of receipt of such appeal. The
Board, after hearing, shall render its decision based on substantial evidence or such relevant evidence
on record as a reasonable mind might accept as adequate to support the conclusion.
(b)
In the exercise of its appellate jurisdiction, the Board shall have the power to
summon witnesses, administer oaths, conduct ocular inspection, take depositions, and issue subpoena
and subpoena duces tecum. The proceedings of the Board shall be conducted solely for the purpose of
ascertaining the facts without necessarily adhering to technical rules applicable in judicial proceedings.
(c)
The secretary of the Board shall furnish the owner of the property or the person
having legal interest therein and the provincial or city assessor with a copy of the decision of the Board.
In case the provincial or city assessor concurs in the revision or the assessment, it shall be his duty to
notify the owner of the property or the person having legal interest therein of such fact using the form
prescribed for the purpose. The owner of the property or the person having legal interest therein or the
assessor who is not satisfied with the decision of the Board, may, within thirty (30) days after receipt of
the decision of said Board, appeal to the Central Board of Assessment Appeals, as herein provided. The
decision of the Central Board shall be final and executory.
37.
SECTION 230. Central Board of Assessment Appeals. The Central Board of Assessment
Appeals shall be composed of a chairman, and two (2) members to be appointed by the President, who
shall serve for a term of seven (7) years, without reappointment. Of those first appointed, the chairman
shall hold office for seven (7) years, one member for five (5) years, and the other member for three (3)
years. Appointment to any vacancy shall be only for the unexpired portion of the term of the
predecessor. In no case shall any member be appointed or designated in a temporary or acting capacity.
The chairman and the members of the Board shall be Filipino citizens, at least forty (40) years old at
the time of their appointment, and members of the Bar or Certified Public Accountants for at least ten
(10) years immediately preceding their appointment. The chairman of the Board of Assessment Appeals
shall have the salary grade equivalent to the rank of Director III under the Salary Standardization Law
exclusive of allowances and other emoluments. The members of the Board shall have the salary grade
equivalent to the rank of Director II under the Salary Standardization Law exclusive of allowances and
other emoluments. The Board shall have appellate jurisdiction over all assessment cases decided by the
Local Board of Assessment Appeals.
There shall be Hearing Officers to be appointed by the Central Board of Assessment
Appeals pursuant to civil service laws, rules and regulations, one each for Luzon, Visayas and
Mindanao, who shall hold office in Manila, Cebu City and Cagayan de Oro City, respectively, and who
shall serve for a term of six (6) years, without reappointment until their successors have been appointed
and qualified. The Hearing Officers shall have the same qualifications as that of the Judges of the
Municipal Trial Courts.
The Central Board Assessment Appeals, in the performance of its powers and duties,

may establish and organize staffs, offices, units, prescribe the titles, functions and duties of their
members and adopt its own rules and regulations.
Unless otherwise provided by law, the annual appropriations for the Central Board of
Assessment Appeals shall be included in the budget of the Department of Finance in the corresponding
General Appropriations Act.
38.
SECTION 231. Effect of Appeal on the Payment of Real Property Tax. Appeal on
assessments of real property made under the provisions of this Code shall, in no case, suspend the
collection of the corresponding realty taxes on the property involved as assessed by the provincial or
city assessor, without prejudice to subsequent adjustment depending upon the final outcome of the
appeal.
39.
Rule 65, Section 1, Rules of Court.
40.
Manila Electric Company v. Barlis, 357 SCRA 832, 843 (2001).
41.
Rule 45, Section 1, Rules of Court.
42.
Macapagal v. Court of Appeals, et al.,/Silverio v. Court of Appeals, et al., 297 SCRA 429
(1998).
43.
Pareo v. Sandiganbayan, 256 SCRA 242, 265 (1996).
44.
Ty v. Trampe, supra, note 32 at 520.
45.
Board of Optometry v. Colet, 260 SCRA 88, 103 (1996) citing Garcia v. Executive Secretary,
204 SCRA 516, 522 (1991); Santos v. Northwest Orient Airlines, 210 SCRA 256, 261 (1992).
46.
Dated October 6, 1992.
47.
Pursuant to the authority granted by Rep. Act No. 7160 (1991), Section 201.
48.
Rep. Act No. 7160 (1991), Sec. 201.
49.
Rep. Act No. 7160 (1991), Sec. 198 (b).
50.
Rep. Act No. 7160 (1991), Sec. 198 (l).
51.
Army and Navy Club, Manila v. Trinidad, 44 Phil. 383 at 387.
52.
196 SCRA 322, 327 (1991).
53.
Army and Navy Club, Manila v. Trinidad, supra, note 51.
54.
Dated October 6, 1992.
55.
Section 21. Approaches Used to Estimate Values As discussed in Section 34 hereof, to
estimate value, three approaches may be used in the construction of the schedule of fair market values.
Sales Analysis Approach (also called Market Data Approach), the Income Capitalization Approach, and
the Replacement or Reproduction Cost Approach.
A.
Under the Sales Analysis Approach, the price pain in actual market transactions
is considered. It requires the accumulation of valid sales data. Such data can be secured from the office
of the Registrar of Deeds and notaries public, who are required under Section 278 of the Code to
furnish the provincial, city or municipal assessors with copies of all contracts, conveying, leasing, or
mortgaging of real property, received or acknowledged before them. Other evidences of market values
to augment sales data re: bids, offers to sell, opinions of informed real estate appraisers, brokers,
salesmen, dealers or bank officials. Values declared by property owners or administrators embodied in
sworn statements filed pursuant to Section 202 of the Code fully evaluated, may also be considered as
additional source of information of Market Data Analysis.
In the absence or unavailability of valid sales, data, price indices of real property
situated in the different provinces, cities and municipalities, compiled in the National Statistics Office
and the Economic Research Division of the Central Bank of the Philippines, may be used as primary
basis in computing the fair market value that will be incorporated in the schedule of market values.
1.
Analysis of Sales Transactions The elements that enter into sales transactions
should be analyzed thoroughly, to determine the relationship between the amount of consideration
contained therein and the current value of subject property. Only sales transactions which meet more or
less the following criteria shall be considered for the sales analysis:

(a)
The date of the transaction must be reasonably near the general assessment date.
Sales transactions for the current year or preceding year, if adequate, would also serve as a good basis
for studies on trends of market values.
If the data derived therefrom are inadequate, studies may extend to preceding year, but
in no case shall it be for more than three (3) years from the general re-assessment date.
(b)
Type of conveyance representing a normal transaction is one which envisions
willing, able and well-informed, buyers and sellers. Quitclaims, transfers between relatives, interrelated corporations and the like, should not be considered.
(c)
The amount of consideration reflects a strong presumption of the fair market
value of the property involved.
2.
Abstraction Method Where sales cover land and improvements, a method
called abstraction method is used to estimate value of land. The value of the improvement is first
estimated pursuant to Section 210 of the Code and later deducted from the total sales of the property to
derive the land price which, when divided by the area of the land, result in the estimated price per
hectare or per square meter. For this process to have validity, as in other techniques for estimating
value, it has to be applied to sales of similar real properties so that a range of value may be prepared as
basis for studying fair market value for purposes of construction of the schedule of market values.
B.
Income Capitalization Approach Is a direct approach to estimate the value of
property. It is based on the theory that the value of an income producing property is no more than the
return derived from it. It requires an analysis of the income produced by a property in order to estimate
the sum which might be invested in the purchase of the property. A detailed financial study must be
made of the property. Gross annual income is either determined from actual figures or is estimated.
Annual expense figures are obtained from the owner. The income, operating expenses and fixed
charges of the subject property are analyzed and the expenses derived thereof are then subtracted from
the gross income. The resultant net income capitalized at a rate which the investor of the property can
expect as reasonable return or interest prevailing in the locality. The capitalized value of the income
represents the present value of the property.
Income method may be utilized to check results derived from sales analysis approach in
the case of rental or income producing property.
C.
Reproduction Cost (New) Approach This is a factual approach used
exclusively in appraising man-made improvements such as buildings and other structures. This method
depends on guides and standards, based on such data as materials and labor costs.
The "reproduction or replacement cost approach" makes use of a value estimate of
reproducing a new replica property within the same or closely similar materials and labor costs. Unit
base construction cost is developed on a per square meter or per cubic meter basis for typical buildings
or structures. The unit cost is multiplied by the ground area or volume, as the case may be, of the
subject structure to derive its total reproduction or replacement cost, allowance for depreciation is
deducted to arrive at the depreciated cost of subject property.
(1)
Quantitative Analysis Method The schedule of unit base construction cost for
buildings shall be established by the quantitative analysis method of the reproduction cost (new)
approach. A base unit cost for each type and sub-type of typical buildings in the province or city or
municipality shall be established.
By this method, a detailed inventory of all materials and labor that went into the finished
building is made.
The first step in this method is collection or preparation of plans and specifications for
adopted typical (sample) buildings, representing each type. Data on cost of construction materials
prevailing in the city or province or municipality shall then be gathered and listed. Labor cost and
others that contribute to the construction cost may be estimated by proper consultation with building
contractors, engineers, architects and labor agencies.

From the plans and specifications, materials and labor quantities are then computed for
all parts of the structures. The materials cost shall be determined by applying the price for building
materials computed from the material quantities that went with finished buildings. The amount added
to the estimated labor cost and miscellaneous expenses, results in the total cost of the subject building.
The base unit cost shall be then determined by dividing this total cost by average area in square meters
of the subject structure.
56.
SECTION 202. Declaration of real Property by the Owner or Administrator. It shall be the
duty of all persons, natural or juridical, owning or administering real property, including the
improvements therein, within a city or municipality, or their duly authorized representative, to prepare,
or cause to be prepared, and file with the provincial, city or municipal assessor, a sworn statement
declaring the true value of their property, whether previously declared or undeclared, taxable or
exempt, which shall be the current and fair market value of the property, as determined by the
declarant. Such declaration shall contain a description of the property sufficient in detail to enable the
assessor or his deputy to identify the same for assessment purposes. The sworn declaration of real
property herein referred to shall be filed with the assessor concerned once every three (3) years during
the period from January first (1st) to June thirtieth (30th) commencing with the calendar year 1992.
SECTION 203. Duty of Person Acquiring Real Property or Making Improvement
Thereon. It shall also be the duty of any person, or his authorized representative, acquiring at any
time real property in any municipality or city or making any improvement on real property, to prepare,
or cause to be prepared, and file with the provincial, city or municipal assessor, a sworn statement
declaring the true value of subject property, within sixty (60) days after the acquisition of such property
or upon completion or occupancy of the improvement, whichever comes earlier.
SECTION 208. Notification of Transfer of Real Property Ownership. Any person
who shall transfer real property ownership to another shall notify the provincial, city or municipal
assessor concerned within sixty (60) days from the date of such transfer. The notification shall include
the mode of transfer, the description of the property alienated, the name and address of the transferee.
SECTION 209. Duty of Registrar of Deeds to Appraise Assessor of Real Property Listed
in Registry. (a) To ascertain whether or not any real property entered in the Registry of Property has
escaped discovery and listing for the purpose of taxation, the Registrar of Deeds shall prepare and
submit to the provincial, city or municipal assessor, within six (6) months from the date of effectivity of
this Code and every year thereafter, an abstract of his registry, which shall include brief but sufficient
description of the real properties entered therein, their present owners, and the dates of their most
recent transfer or alienation accompanied by copies of corresponding deeds of sale, donation, or
partition or other forms of alienation.
(b)
It shall also be the duty of the Registrar of Deeds to require every person who
shall present for registration a document of transfer, alienation, or encumbrance of real property to
accompany the same with a certificate to the effect that the real property subject of the transfer,
alienation, or encumbrance, as the case may be, has been fully paid of all real property taxes due
thereon. Failure to provide such certificate shall be a valid cause for the Registrar of Deeds to refuse
the registration of the document.
SECTION 210. Duty of Official Issuing Building Permit or Certificate of Registration of
Machinery to Transmit Copy to Assessor. Any public official or employee who may now or
hereafter be required by law or regulation to issue to any person a permit for the construction, addition,
repair, or renovation of a building, or permanent improvement on land, or a certificate of registration
for any machinery, including machines, mechanical contrivances, and apparatus attached or affixed on
land or to another real property, shall transmit a copy of such permit or certificate within thirty (30)
days of its issuance, to the assessor of the province, city or municipality where the property is situated.
SECTION 211. Duty of Geodetic Engineers to Furnish Copy of Plans to Assessor. It
shall be the duty of all geodetic engineers, public or private, to furnish free of charge to the assessor of

the province, city or municipality where the land is located with a white or blue print copy of each of
all approved original or subdivision plans or maps of surveys executed by them within thirty (30) days
from receipt of such plans from the Lands Management Bureau, the Land Registration Authority, or the
Housing and Land Use Regulatory Board, as the case may be.
SECTION 213. Authority of Assessor to Take Evidence. For the purpose of obtaining
information on which to base the market value of any real property, the assessor of the province, city or
municipality or his deputy may summon the owners of the properties to be affected or persons having
legal interest therein and witnesses, administer oaths, and take deposition concerning the property, its
ownership, amount, nature, and value.
57.
Vide Army and Navy Club, Manila v. Trinidad, supra, note 51 at 385.
58.
Vide also Local Assessment Regulations No. 1-92 (1992), Section 19. Duty of the
Provincial/City/Municipal Assessor It is the duty of all provincial and city assessors, and municipal
assessors of the municipalities within the Metropolitan Manila Area to prepare of cause to be prepared
a schedule of market values as the basis for the appraisal and assessment of lands, buildings and other
improvements situated in their respective jurisdictions within one (1) year after the effectivity of the
Code and every three (3) years thereafter; and
Market values for real property situated within the province shall be prepared by the
provincial assessors who shall be assisted by the municipal assessors of municipalities within his
jurisdiction.
59.
Vide Magtajas v. Pryce Properties Corp., Inc., 234 SCRA 255, at 268 and 274.
60.
Rep. Act No. 537 (1950), as amended.
61.
City Ordinance No. SP-91, S-93.
62.
Rep. Act. No. 7160, Sec. 198 (d).
63.
Id., Secs. 198 (b) and 217.
64.
Id., Secs. 219 and 220, supra, notes 17 & 18.
65.
Id., Sec. 220.
66.
Id., Sec. 130 (4).

EN BANC
[G.R. No. 121782. May 9, 2005.]
The Honorable Secretary of Finance, petitioner, vs. THE HONORABLE RICARDO M. ILARDE,
Presiding Judge, Regional Trial Court, 6th Judicial Region, Branch 26, Iloilo City, and CIPRIANO P.
CABALUNA, JR., respondents.
The Solicitor General for petitioner.
Enrique G. Arguelles for private respondent.
SYLLABUS
1.
STATUTORY CONSTRUCTION; STATUTES; INTERPRETATION; REPEAL OF LAWS
SHOULD BE MADE CLEAR AND EXPRESSED; RATIONALE. Repeal of laws should be made
clear and expressed. Repeals by implication are not favored as laws are presumed to be passed with
deliberation and full knowledge of all laws existing on the subject. Such repeals are not favored for a
law cannot be deemed repealed unless it is clearly manifest that the legislature so intended it. The
failure to add a specific repealing clause indicates that the intent was not to repeal any existing law
unless an irreconcilable inconsistency and repugnancy exist in the terms of the new and old laws.
SDAaTC
2.
TAXATION; P.D. NO. 464 (REAL PROPERTY TAX CODE); APPLICABLE TO ALL REAL
PROPERTY TITLED TO INDIVIDUAL WHO BECAME DELINQUENT IN PAYING TAX. P.D.
No. 464 makes no distinction as to whether it is simple delinquency or other forms thereof. The Real
Property Tax Code covers the wide ilk of failure to promptly pay the real property taxes due and
demandable for a particular period. Ubi lex non distinguit nec nos distinguere debemus. When the law
does not distinguish, we must not distinguish. Further, P.D. No. 464 covers all real property titled to
individuals who become delinquents in paying real estate tax. P.D. No. 464 is a law of general
application.
3.
ID.; ID.; EXPRESSLY REPEALED BY REP. ACT NO. 7160 (LOCAL GOVERNMENT
CODE); EFFECT THEREOF. At bottom, the law applicable, in the case at bar, for purposes of
computation of the real property taxes due from private respondent for the years 1986 to 1991,
including the penalties and interests, is still Section 66 of the Real Property Tax Code of 1974 or P.D.
No. 464. The penalty that ought to be imposed for delinquency in the payment of real property taxes
should, therefore, be that provided for in Section 66 of P.D. No. 464, i.e., two per centum on the
amount of the delinquent tax for each month of delinquency or fraction thereof but "in no case shall the
total penalty exceed twenty-four per centum of the delinquent tax." Accordingly, the penalties imposed
by respondents City Treasurer and Assistant City Treasurer of Iloilo City on the property of private
respondent are valid only up to 24% of the delinquent taxes. The excess penalties paid by the private
respondent should, in view of that, be refunded by the latter. However, from 01 January 1992 onwards,
the proper basis for the computation of the real property tax payable, including penalties or interests, if
applicable, must be Rep. Act No. 7160, known as the Local Government Code, which took effect on
the 1st of January 1992 inasmuch as Section 534 thereof had expressly repealed P.D. No. 464 or the
Real Property Tax Code. Section 5 (d) of Rep. Act No. 7160 provides that rights and obligations
existing on the date of effectivity of the new Code and arising out of contracts or any source of
prestation involving a local government unit shall be governed by the original terms and conditions of
the said contracts or the law in force at the time such contracts were vested. IDcHCS
DECISION
CHICO-NAZARIO, J p:
At the fulcrum in the case before Us is the constitutional question of whether or not the then Ministry
of Finance could legally promulgate regulations prescribing a rate of penalty on delinquent taxes other
than that provided for under Presidential Decree (P.D.) No. 464, also known as the Real Property Tax
Code. TCaSAH
In this petition for review, petitioner Secretary of Finance seeks to reverse and set aside the Decision 1

dated 28 August 1995 rendered by respondent Judge Ricardo M. Ilarde of the Regional Trial Court
(RTC), 6th Judicial Region, Branch 26, Iloilo City, in Civil Case No. 21207 for Declaratory Relief with
Damages, declaring as null and void Joint Assessment Regulations No. 1-85 and Local Treasury
Regulations No. 2-85 of the Ministry (now Department) of Finance for being contrary to Section 66 of
P.D. No. 464 or the Real Property Tax Code, which pegged the maximum penalty for delinquency in
the payment of real estate taxes at 24% of the delinquent tax.
Private respondent Cipriano P. Cabaluna, Jr., was the Regional Director of Regional Office No. VI of
the Department of Finance in Iloilo City. He co-owns with his wife certain properties, namely, Lot No.
941-D-1, Lot No. 941-D-2, and a residential house on Lot No. 942-D-1, all situated in 14 Jalandoni St.,
Jaro, Iloilo City. Aside from these properties, the Cabaluna spouses own Lot No. 12 (4491-E and F) and
Lot No. 14 (4495-E and F), both situated in Barangay Tacas, Jaro, Iloilo City. 2
Private respondent failed to pay the land taxes on Lot No. 12 (4491-E and F) and Lot No. 14 (4495-E
and F) for the years 1986 to 1992. For the years 1991 to 1992, taxes were also unpaid on Lot No. 941D-2, on the residential house, and on Lot No. 941-D-1. 3
A breakdown of the computation of the delinquent taxes and penalties, both Basic and Special
Education Fund (SEF), 4 for private respondent's lots and residential house as of May 1993 as reflected
in the various receipts issued by the City Treasurer's Office of Iloilo City, shows that more than twentyfour percent (24%) of the delinquent taxes were charged and collected from private respondent by way
of penalties. On the 6th and 7th of May 1993, private respondent paid his land taxes and the
corresponding receipts were issued to him by the City Treasurer's Office with the notation "paid under
protest." ICaDHT
On 27 May 1993, soon after private respondent retired from his post as Regional Director of Regional
Office No. VI of the Department of Finance in Iloilo City, he filed a formal letter of protest with the
City Treasurer of Iloilo City 5 wherein he contends that the City Treasurer's computation of penalties
was erroneous since the rate of penalty applied exceeded twenty-four percent (24%) in contravention of
Section 66 of P.D. No. 464, otherwise known as the Real Property Tax Code, as amended.
In response, however, respondent Assistant City Treasurer, Rizalina F. Tulio, for and in behalf of the
City Treasurer of Iloilo City, turned down private respondent's protest, citing Sec. 4(c) of Joint
Assessment Regulations No. 1-85 and Local Treasury Regulations No. 2-85 of the then Ministry (now
Department) of Finance which reads:
Sec. 4. Computation of Penalties on Delinquent Real Property Taxes.
(a)
Unless condoned, wholly or partially, in a duly approved resolution of the Local Sanggunian,
delinquent real property taxes shall be subject to penalty at the rate of two per cent (2%) for every
month of delinquency, provided that the total penalty for one tax year shall not exceed twenty-four
percent (24%).
(b)
Failure to pay on time at least the first quarter installment of the real property tax shall
constitute a waiver on the part of the property owner or administrator to avail of the privilege granted
by law for him to pay without penalty his annual realty tax obligation in four (4) equal installment on
or before the end of every quarter of the tax year. aHDTAI
Accordingly, if the portion of the real property tax due for the first quarter of tax year is not paid on or
before the thirty-first day of March of the same year, the penalty shall be reckoned from the first day of
January at the rate of two per cent (2%) for every month of delinquency on the basis of the total amount
due for the entire year and not only on the amount due for the said first quarter of the tax year.
(c)
The penalty of two percent (2%) per month of delinquency, or twenty-four percent (24%) per
annum, as the case may be, shall continue to be imposed on the unpaid tax from the time the
delinquency was incurred up to the time that it is paid for in full. 6 (Underlining supplied)
Despite his labors to exhaust all administrative remedies, the denial of his protest and his motion for
reconsideration compelled private respondent to file a Petition for Declaratory Relief with Damages on
06 July 1993 before the sala of respondent Judge, assailing Joint Assessment Regulations No. 1-85 and

Local Treasury Regulations No. 2-85 which, according to him, flouted Section 66 of P.D. No. 464
which fixed the maximum penalty for delinquency in the payment of real estate taxes at 24% of the
delinquent tax.
On 28 August 1995, respondent Judge rendered his Decision, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered, (1) declaring as null and void Section 4(c) of Joint
Assessment Regulation No. 1-85 and Local Treasury Regulation No. 2-85 issued on August 1, 1985 by
respondent Secretary (formerly Minister) of Finance; (2) declaring that the penalty that should be
imposed for delinquency in the payment of real property taxes should be two per centum on the amount
of the delinquent tax for each month of delinquency or fraction thereof, until the delinquent tax is fully
paid but in no case shall the total penalty exceed twenty-four per centum of the delinquent tax as
provided for in Section 66 of P.D. 464 otherwise known as the Real Property Tax Code; and (3)
ordering the respondent City Treasurer of Iloilo City to refund and/or reimburse to petitioner Cipriano
P. Cabaluna [Jr.] the amounts paid by the latter corresponding to the penalties on his delinquent real
property taxes in excess of twenty-four percent (24%) thereof. No pronouncement as to cost. 7
Petitioner, in this appeal, attributes the following errors to the trial court as grounds for the reversal of
the assailed Decision: aEIcHA
I.
RESPONDENT JUDGE'S DECISION OF AUGUST 28, 1995 GRANTING PRIVATE
RESPONDENT'S PRAYER FOR DECLARATORY RELIEF WAS PREMISED ON ERRONEOUS
GROUNDS.
II.
RESPONDENT JUDGE ERRED WHEN HE IGNORED THE FACT THAT PRIVATE
RESPONDENT WAS ESTOPPED TO QUESTION THE VALIDITY OF THE SUBJECT
REGULATION WHICH HE HIMSELF UPHELD AND APPLIED TO OTHER PROPERTY
OWNERS WHILE HE WAS THEN THE REGIONAL DIRECTOR OF FINANCE FOR REGION VI.
8
The key in unlocking the present constitutional imbroglio is to address the following issues: (1)
Whether or not Joint Assessment Regulations No. 1-85 and Local Treasury Regulations No. 2-85 are
valid; (2) What is the proper rate of penalty for delinquent real property taxes; and (3) Whether or not
the penalties for delinquent real property tax imposed by petitioner on the properties of private
respondent are valid.
Petitioner claims that respondent Judge has decided questions of substance in a way not in accord with
law and jurisprudence as to call for an exercise of the power of review and supervision vested in this
Honorable Court. 9 Private respondent, on the other hand, assails as unconstitutional the said Joint
Assessment and Local Treasury Regulations. 10
Petitioner's standpoint is devoid of basis in law or in logic. The subject Regulations must be struck
down for being repugnant to Section 66 of P.D. No. 464 or the Real Property Tax Code, which is the
law prevailing at the time material to this case. Section 66 provides: HDTCSI
Section 66. Penalty for delinquency. Failure to pay the real property tax before the expiration of
the period for the payment without penalty of the quarterly installments thereof shall subject the
taxpayer to the payment of a penalty of two per centum on the amount of the delinquent tax for each
month of delinquency or fraction thereof, until the delinquent tax shall be fully paid: Provided, That in
no case shall the total penalty exceed twenty-four per centum of the delinquent tax. The rate of penalty
for tax delinquency fixed herein shall be uniformly applied in all provinces and cities. (Underlining
supplied)
Note that under Section 66 of P.D. No. 464, the maximum penalty for delinquency in the payment of
real property tax shall in no case exceed twenty-four per centum of the delinquent tax. Upon the other
hand, Section 4(c) of the challenged Joint Assessment Regulations No. 1-85 and Local Treasury
Regulations No. 2-85 issued by respondent Secretary (formerly Minister) of Finance provides that "the

penalty of two percent (2%) per month of delinquency or twenty-four percent (24%) per annum as the
case may be, shall continue to be imposed on the unpaid tax from the time the delinquency was
incurred up to the time that the delinquency is paid for in full." As adeptly observed by the trial court,
the penalty imposed under the assailed Regulations has no limit inasmuch as the 24% penalty per
annum shall be continuously imposed on the unpaid tax until it is paid for in full unlike that imposed
under Section 66 of the Real Property Tax Code where the total penalty is limited only to twenty-four
percent of the delinquent tax. DaCTcA
That such is the effect of an application of the Regulations under review is not disclaimed by the
petitioner anywhere in his pleadings. Petitioner, however, attempts to justify the issued Regulations'
departure from the Real Property Tax Code. Said Regulations, petitioner says, are sanctioned by
Executive Order (E.O.) No. 73 and its implementing guidelines, Joint Local Assessment/Treasury
Regulations No. 2-86. 11 Joint Local Assessment/Treasury Regulations No. 2-86, which provides in
material parts:
SECTION 1. Computation of Real Property Taxes. Effective January 1, 1987 the assessed values of
real properties determined by the assessors during the latest general revision of real property
assessments, which ended in December 1984, shall be used as the basis for the computation of the basic
and additional 1% (SEF) real property taxes.
However, in order to ease the tax burden, and pursuant to the provisions of Section 97-A of the Real
Property Tax Code (PD 464, as amended), increases in real property taxes arising from the 1984 new or
revised assessments shall become due and collectible, in addition to the preceding year's tax, as
follows:
(a)
in CY 1987, a maximum increase of fifty percent (50%) over the 1986 tax,
(b)
in CY 1988, the remaining increase in tax but not exceeding a second fifty percent (50%)
increase, or a total of 100%, over the 1986 tax, and
(c)
in CY 1989, the remaining increase in tax shall not exceed the yearly increments originally
arrived at in applying the 1984 new or revised assessment of the property subject to tax. ADaSEH
It is understood that the herein-authorized annual increases but not exceeding a third fifty percent
(50%) increase, or a total of 150%, over the 1986 tax.
Any increase in tax in excess of the maximum authorized for CY 1989 shall no longer be collectible.
The annual 50% increase ceiling prescribed in the foregoing provisions may be availed of, however,
only by taxpayers who shall meet the quarterly deadlines provided for in the Real Property Tax Code
and where the subject property has no outstanding real property tax delinquency except those that are
covered by Amnesty Compromise Agreements executed by and between the taxpayer and the local
government pursuant to the provisions of Executive Order No. 42, dated August 22, 1986, of the
President, as implemented by Joint Assessment/Treasury Regulations No. 2-86, dated August 26, 1986
of this Ministry. TAEDcS
In case of failure to make prompt payments, the taxpayer shall be required to pay in full the increase in
tax due and demandable for the tax year as a result of the full application of the 1984 new or revised
assessment of the subject property. In addition, the two percent (2%) per month penalty shall be
imposed on the amount due in the manner provided for under existing regulations. (Underscoring
supplied.) 12
Petitioner Secretary of Finance avers in his petition that the last paragraph of Section 1, Joint Local
Assessment/Treasury Regulations No. 2-86, explicitly provides for a 2% per month penalty without any
limitation as to the maximum amount thereof, which is entirely consistent with the then existing
Regulations, the now challenged Joint Assessment Regulations No. 1-85 and Local Treasury
Regulations No. 2-85. 13 Petitioner further asserts that inasmuch as Joint Local Assessment/Treasury
Regulations No. 2-86, which echoes the disputed Regulations, was issued to implement E.O. No. 73,
private respondent's recourse is to file a case questioning the validity of Joint Local
Assessment/Treasury Regulations No. 2-86 in the same way that he has assailed Joint Assessment

Regulations No. 1-85 and Local Treasury Regulations No. 2-85. 14

Petitioner's reasoning is, to our mind, but a futile attempt to muddle the facts of the case and the issues
involved. Recall that the present controversy cropped up when private respondent Cabaluna protested
the payment of penalties on his delinquent taxes for being in excess of the 24% cap provided in P.D.
No. 464 or the Real Property Tax Code. In response to his letter of protest, the Assistant Treasurer of
Iloilo City justified the assessment by citing Sec. 4(c) of Joint Assessment Regulations No. 1-85 and
Local Treasury Regulations No. 2-85 issued by petitioner Minister (now Secretary) of Finance. This
has lead to the filing of the present case by Cabaluna to question the validity of the said regulations. It
is the validity of said regulations, not Joint Local Assessment/Treasury Regulations No. 2-86, that is
sought to be resolved herein and petitioner should not depart from the issue on hand. CaAcSE
Petitioner urges this Court that inasmuch as Joint Local Assessment/Treasury Regulations No. 2-86
which was allegedly borne out of E.O. No. 73 is consistent with the Joint Assessment Regulations No.
1-85 and Local Treasury Regulations No. 2-85 now under scrutiny, E.O. No. 73 had the effect of
validating the latter.
The Court harbors doubts on the veracity of petitioner's contention that the Regulations at issue are
sanctioned by E.O. No. 73. The underlying principle behind E.O. No. 73, as gleaned from the whereas
clauses and Section 1 thereof as quoted above, is to advance the date of effectivity of the application of
the Real Property Tax Values of 1984 from 01 January 1988, the original date it was intended by E.O.
No. 1019 to take effect for purposes stated therein, to 01 January 1987. E.O. No. 73 did not, in any
way, alter the structure of the real property tax assessments as provided for in P.D. No. 464 or the Real
Property Tax Code.
Neither is this Court easily dissuaded by the submission of the Secretary of Finance that E.O. No. 73,
which provides in Section 2 thereof that: "The Minister of Finance shall promulgate the necessary rules
and regulations to implement this Executive Order," has the effect of according petitioner the blanket
authority to tinker with the rates of penalty on delinquency taxes as provided for in P.D. No. 464, the
general law on real property taxation. The Court takes notice that E.O. No. 73 did not touch at all on
the topic of amendment of rates of delinquent taxes or the amendment of rates of penalty on delinquent
taxes. E.O. No. 73, particularly in Section 2 thereof, has merely designated the Minister of Finance to
promulgate the rules and regulations towards the implementation of E.O. No. 73, particularly on the
application of the Real Property Values as of 31 December 1984, which is the general purpose for
enacting said executive order. CIHAED
In our mind, what is patent from the above-quoted Section 3 of E.O. No. 73 is the repeal of E.O. No.
1019, not Section 66 of P.D. No. 464. Said E.O. No. 1019 is known as the law "Reorganizing the Tax
Collection and Assessment Machinery in the Provinces, Municipalities, Municipalities and Cities, and
Other Purpose," which was signed into law by deposed President Ferdinand E. Marcos on 18 April
1985, reads:
WHEREAS, there have been numerous requests from people in the provinces and towns proclaimed as
calamity areas to allow them temporary respite from the payment of the increase in real property taxes;
WHEREAS, there is a resolution in the Batasang Pambansa asking the President of the Philippines to
suspend the accrual of real property taxes based on the general revision of real property assessments
undertaken from July 1, 1981 to June 30, 1985;
xxx
xxx
xxx
SECTION 1. The Ministry of Finance and the Ministry of Local Government shall immediately
establish a more efficient tax collecting system to strengthen the present machinery in order to
maximize the collection of taxes on the province, municipality or city levels;
SEC. 2.
For the above purpose, responsibilities now being performed by the province,
municipality or city treasurers which do not pertain directly to treasury service, especially tax
collection, shall be removed from said treasurers in order to enable them to concentrate on the
collection of taxes. STaHIC

SEC. 3.
The Ministry of Finance and the Ministry of Local Government shall likewise revise and
strengthen the present tax assessment process in order to obtain a more efficient, equitable and realistic
system.
SEC. 4.
The present distribution of shares from real property tax revenues among the provinces
and municipalities or cities namely, 45% to the province, 45% to the municipality or city, and 10 % for
the barangays, shall be maintained. . . .
SEC. 5.
The increase in real property taxes resulting from the revised real property assessments
as provided for under Section 21 of Presidential Decree No. 464, as amended by Presidential Decree
No. 1621, shall be collected beginning January 1, 1988 instead of January 1, 1985 in order to enable the
Ministry of Finance and the Ministry of Local Government to establish the new systems of tax
collection and assessment provided herein and in order to alleviate the condition of the people,
including real property owners, as a result of temporary economic difficulties.
SEC. 6.
Payments already made pursuant to the revised real property assessments shall be
credited to future real property taxes due on the same property. . . . (Emphases supplied)
Neither did E.O. No. 1019 directly or indirectly vest upon the Department of Finance the right to fiddle
with the rates of penalty to be assessed on delinquency taxes as contained in the Real Property Tax
Code. Even assuming that E.O. No. 1019 had vested the then Ministry of Finance with the authority to
impose new rates of penalty on delinquency taxes, as petitioner would have us believe, such authority
would have been automatically stripped off from it upon the express repeal of E.O. No. 1019 by E.O.
No. 73 on the 25th of November 1986. EcHAaS
Despite the promulgation of E.O. No. 73, P.D. No. 464 in general and Section 66 in particular,
remained to be good law. To accept petitioner's premise that E.O. No. 73 had accorded the Ministry of
Finance the authority to alter, increase, or modify the tax structure would be tantamount to saying that
E.O. No. 73 has repealed or amended P.D. No. 464. Repeal of laws should be made clear and
expressed. Repeals by implication are not favored as laws are presumed to be passed with deliberation
and full knowledge of all laws existing on the subject. Such repeals are not favored for a law cannot be
deemed repealed unless it is clearly manifest that the legislature so intended it. 15 The failure to add a
specific repealing clause indicates that the intent was not to repeal any existing law, unless an
irreconcilable inconsistency and repugnancy exist in the terms of the new and old laws. We find, as the
trial court has found, no such inconsistency or repugnancy between E.O. No. 73 and Section 66 of P.D.
No. 464. Jurisprudence thrives to the effect that it is only Republic Act No. 7160 or the Local
Government Code of 1991, which repealed the Real Property Tax Code or P.D. No. 464. 16
Assuming argumenti that E.O. No. 73 has authorized the petitioner to issue the objected Regulations,
such conferment of powers is void for being repugnant to the well-encrusted doctrine in political law
that the power of taxation is generally vested with the legislature. 17 Yes, President Corazon Aquino, at
that time, was exercising both executive and legislative powers. But, the power delegated to the
executive branch, in this case the Ministry of Finance, to lay down implementing rules must,
nevertheless, be germane to the general law it seeks to apply. The implementing rules cannot add to or
detract from the provisions of the law it is designed to implement. 18 Administrative regulations
adopted under legislative authority by a particular department must be in harmony with the provisions
of the law they are intended to carry into effect, 19 which in this case is merely to antedate the
effectivity of the 1984 Real Property Tax values inasmuch as this is the raison d'tre of E.O. No. 73.
STaAcC
In a last-ditch effort to salvage the impugned Regulations, petitioner pushes on that Joint Local
Assessment/Treasury Regulations No. 2-86, or the so-called implementing rules of E.O. No. 73, is not
contrary to Section 66 of P.D. No. 464 inasmuch as the latter applies merely to simple delinquency in
the payment of real property taxes while the former covers cases wherein there was failure to promptly
pay the real property tax due, including the increase in tax due and demandable for the tax year as a
result of the application of the 1984 New or Revised Assessment of the value of the subject property.

20
Such rationalization lacks legal traction. P.D. No. 464 makes no distinction as to whether it is simple
delinquency or other forms thereof. The Real Property Tax Code covers the wide ilk of failure to
promptly pay the real property taxes due and demandable for a particular period. Ubi lex non distinguit
nec nos distinguere debemus. When the law does not distinguish, we must not distinguish. Further, P.D.
No. 464 covers all real property titled to individuals who become delinquents in paying real estate tax.
P.D. No. 464 is a law of general application. 21
On the second assigned error, the fact that private respondent Cabaluna was responsible for the
issuance and implementation of Regional Office Memorandum Circular No. 04-89 which implemented
Joint Assessment Regulations No. 1-85 and Local Treasury Regulations No. 2-85 does not put him in
estoppel from seeking the nullification of said Regulations at this point. As adroitly elucidated by the
trial court
That petitioner had previously endorsed implementation of subject regulations is of no moment. For he
did so then in his capacity as the Regional Director of Regional Office No. VI of the Department of
Finance in Iloilo City. As such Regional Director, he was a subordinate of the Secretary of Finance so
that he was duty bound to implement subject regulations. Petitioner had no alternative but to carry out
the orders and issuances of his superior. aADSIc
In the case at bar, however, petitioner is suing as a plain taxpayer, he having already retired as Regional
Director. His official acts as Regional Director could not have stripped him of his rights as a taxpayer.
To be sure, the official acts of petitioner as Regional Director cannot serve as estoppel for him to
pursue the present course of action that he has taken as a taxpayer.
In any event, a regulation which is in itself invalid for being contrary to law cannot be validated by any
act of endorsement of any official, much less, by a subordinate of the official who issued such
regulation. Estoppel, certainly, cannot make an invalid regulation valid. 22
At bottom, the law applicable, in the case at bar, for purposes of computation of the real property taxes
due from private respondent for the years 1986 to 1991, including the penalties and interests, is still
Section 66 of the Real Property Tax Code of 1974 or P.D. No. 464. The penalty that ought to be
imposed for delinquency in the payment of real property taxes should, therefore, be that provided for in
Section 66 of P.D. No. 464, i.e., two per centum on the amount of the delinquent tax for each month of
delinquency or fraction thereof but "in no case shall the total penalty exceed twenty-four per centum of
the delinquent tax."
Accordingly, the penalties imposed by respondents City Treasurer and Assistant City Treasurer of Iloilo
City on the property of private respondent are valid only up to 24% of the delinquent taxes. The excess
penalties paid by the private respondent should, in view of that, be refunded by the latter. IHCacT
However, from 01 January 1992 onwards, the proper basis for the computation of the real property tax
payable, including penalties or interests, if applicable, must be Rep. Act No. 7160, known as the Local
Government Code, which took effect on the 1st of January 1992 23 inasmuch as Section 534 24 thereof
had expressly repealed P.D. No. 464 or the Real Property Tax Code. Section 5(d) of Rep. Act No. 7160
provides that rights and obligations existing on the date of effectivity of the new Code and arising out
of contracts or any source of prestation involving a local government unit shall be governed by the
original terms and conditions of the said contracts or the law in force at the time such contracts were
vested.
WHEREFORE, the instant petition is hereby DENIED and the order dated 28 August 1995 in Civil
Case No. 21207 rendered by respondent Judge Ricardo M. Ilarde of the Regional Trial Court, 6th
Judicial Region, Branch 26, Iloilo City, is hereby AFFIRMED with MODIFICATION that the real
property tax payable by private respondent Cipriano P. Cabaluna, Jr., for the year 1992 shall be based
on the Local Government Code of 1991. No costs. AacCHD
SO ORDERED.
Davide, Jr., C. J., Puno, Panganiban, Quisumbing, Ynares-Santiago, Sandoval-Gutierrez, Carpio,

Austria-Martinez, Corona, Carpio-Morales, Callejo, Sr., Azcuna, Tinga and Garcia, JJ., concur.
Footnotes
1.
Rollo, pp. 29-34.
2.
Rollo, p. 29.
3.
Rollo, p. 29.
4.
SEC. 41. An additional one per cent tax on real property for the Special Education Fund.
There is hereby imposed an annual tax of one per cent on real property to accrue to the Special
education Fund created under Republic Act. No. 5447, which shall be in addition to the real property
tax which local governments are authorized to levy, assess and collect under this Code; Provided,
however, That when the entire total assessed valuation of real property situated in a province or city
assessable to any one person does not exceed three thousand pesos, the additional one per cent tax
herein imposed shall not be collected. (P.D. 464, Real Property Tax Code)
5.
Rollo, p. 30.
6.
Rollo, pp. 49-50.
7.
Rollo, p. 34.
8.
Rollo, pp. 11-12.
9.
Rollo, pp. 10-11.
10.
Rollo, p. 155.
11.
Rollo, p. 12.
12.
Rollo, pp. 16-17.
13.
Rollo, p. 18.
14.
Rollo, p. 15.
15.
Recaa, Jr. v. Court of Appeals, G.R. No. 123850, 05 January 2001, 349 SCRA 24.
16.
National Power Corp. v. Province of Lanao del Sur, G.R. No. 96700, 19 November 1996, 264
SCRA 271; Ty v. Trampe, G.R. No. 117577, 01 December 1995, 250 SCRA 500.
17.
Cruz, Philippine Political Law, p. 179 (1998 ed.).
18.
Cebu Oxygen and Acetylene Co., Inc. v. Drilon, G.R. No. 82849, 02 August 1989, 176 SCRA
24.
19.
Boie-Takeda Chemicals, Inc. v. De La Serna, G.R. No. 92174, 10 December 1993, 228 SCRA
329, 340.
20.
Rollo, p. 19.
21.
Recaa, Jr. v. Court of Appeals, supra, note 15.
22.
Rollo, p. 33.
23.
SECTION 536. Effectivity Clause. This Code shall take effect on January first, nineteen
hundred ninety-two, unless otherwise provided herein, after its complete publication in at least one (1)
newspaper of general circulation. (Local Government Code)
24.
SECTION 534. Repealing Clause. . . .
(c)
The provisions of Sections 2, 3, and 4 of Republic Act No. 1939 regarding
hospital fund; Section 3, a(3) and b(2) of Republic Act No. 5447 regarding the Special Education Fund;
Presidential Decree No. 144 as amended by Presidential Decree Nos. 559 and 1741; Presidential
Decree No. 231 as amended; Presidential Decree No. 436 as amended by Presidential Decree No. 558;
and Presidential Decree Nos. 381, 436, 464, 477, 526, 632, 752, and 1136 are hereby repealed and
rendered of no force and effect. (Emphasis supplied.)

EN BANC
[G.R. No. 155650. July 20, 2006.]
MANILA INTERNATIONAL AIRPORT AUTHORITY, petitioner, vs. COURT OF APPEALS, CITY
OF PARAAQUE, CITY MAYOR OF PARAAQUE, SANGGUNIANG PANGLUNGSOD NG
PARAAQUE, CITY ASSESSOR OF PARAAQUE, and CITY TREASURER OF PARAAQUE,
respondents.
DECISION
CARPIO, J p:
The Antecedents
Petitioner Manila International Airport Authority (MIAA) operates the Ninoy Aquino International
Airport (NAIA) Complex in Paraaque City under Executive Order No. 903, otherwise known as the
Revised Charter of the Manila International Airport Authority ("MIAA Charter"). Executive Order No.
903 was issued on 21 July 1983 by then President Ferdinand E. Marcos. Subsequently, Executive Order
Nos. 909 1 and 298 2 amended the MIAA Charter. EcHAaS
As operator of the international airport, MIAA administers the land, improvements and equipment
within the NAIA Complex. The MIAA Charter transferred to MIAA approximately 600 hectares of
land, 3 including the runways and buildings ("Airport Lands and Buildings") then under the Bureau of
Air Transportation. 4 The MIAA Charter further provides that no portion of the land transferred to
MIAA shall be disposed of through sale or any other mode unless specifically approved by the
President of the Philippines. 5
On 21 March 1997, the Office of the Government Corporate Counsel (OGCC) issued Opinion No. 061.
The OGCC opined that the Local Government Code of 1991 withdrew the exemption from real estate
tax granted to MIAA under Section 21 of the MIAA Charter. Thus, MIAA negotiated with respondent
City of Paraaque to pay the real estate tax imposed by the City. MIAA then paid some of the real
estate tax already due.
On 28 June 2001, MIAA received Final Notices of Real Estate Tax Delinquency from the City of
Paraaque for the taxable years 1992 to 2001. MIAA's real estate tax delinquency is broken down as
follows:
TAX DECLARATION
TAXABLE YEAR TAX DUE
PENALTY TOTAL
E-016-01370 1992-2001
19,558,160.00 11,201,083.20 30,789,243.20
E-016-01374 1992-2001
111,689,424.90
68,149,479.59 179,838,904.49
E-016-01375 1992-2001
20,276,058.00 12,371,832.00 32,647,890.00
E-016-01376 1992-2001
58,144,028.00 35,477,712.00 93,621,740.00
E-016-01377 1992-2001
18,134,614.65 11,065,188.59 29,199,803.24
E-016-01378 1992-2001
111,107,950.40
67,794,681.59 178,902,631.99
E-016-01379 1992-2001
4,322,340.00 2,637,360.00 6,959,700.00
E-016-01380 1992-2001
7,776,436.00 4,744,944.00 12,521,380.00
*E-016-013-85
1998-2001
6,444,810.00 2,900,164.50 9,344,974.50
*E-016-01387 1998-2001
34,876,800.00 5,694,560.00 50,571,360.00
*E-016-01396 1998-2001
75,240.00
33,858.00
109,098.00
GRAND TOTAL
P392,435,861.95
P232,070,863.47
P624,506,725.42
1992-1997 RPT was paid on Dec. 24, 1997 as per O.R. #9476102 for P4,207,028.75
#9476101 for P28,676,480.00
#9476103 for P49,115.00 6
On 17 July 2001, the City of Paraaque, through its City Treasurer, issued notices of levy and warrants
of levy on the Airport Lands and Buildings. The Mayor of the City of Paraaque threatened to sell at
public auction the Airport Lands and Buildings should MIAA fail to pay the real estate tax delinquency.
MIAA thus sought a clarification of OGCC Opinion No. 061.
On 9 August 2001, the OGCC issued Opinion No. 147 clarifying OGCC Opinion No. 061. The OGCC

pointed out that Section 206 of the Local Government Code requires persons exempt from real estate
tax to show proof of exemption. The OGCC opined that Section 21 of the MIAA Charter is the proof
that MIAA is exempt from real estate tax.
On 1 October 2001, MIAA filed with the Court of Appeals an original petition for prohibition and
injunction, with prayer for preliminary injunction or temporary restraining order. The petition sought to
restrain the City of Paraaque from imposing real estate tax on, levying against, and auctioning for
public sale the Airport Lands and Buildings. The petition was docketed as CA-G.R. SP No. 66878.
On 5 October 2001, the Court of Appeals dismissed the petition because MIAA filed it beyond the 60day reglementary period. The Court of Appeals also denied on 27 September 2002 MIAA's motion for
reconsideration and supplemental motion for reconsideration. Hence, MIAA filed on 5 December 2002
the present petition for review. 7
Meanwhile, in January 2003, the City of Paraaque posted notices of auction sale at the Barangay Halls
of Barangays Vitalez, Sto. Nio, and Tambo, Paraaque City; in the public market of Barangay La
Huerta; and in the main lobby of the Paraaque City Hall. The City of Paraaque published the notices
in the 3 and 10 January 2003 issues of the Philippine Daily Inquirer, a newspaper of general circulation
in the Philippines. The notices announced the public auction sale of the Airport Lands and Buildings to
the highest bidder on 7 February 2003, 10:00 a.m., at the Legislative Session Hall Building of
Paraaque City.
A day before the public auction, or on 6 February 2003, at 5:10 p.m., MIAA filed before this Court an
Urgent Ex-Parte and Reiteratory Motion for the Issuance of a Temporary Restraining Order. The
motion sought to restrain respondents the City of Paraaque, City Mayor of Paraaque,
Sangguniang Panglungsod ng Paraaque, City Treasurer of Paraaque, and the City Assessor of
Paraaque ("respondents") from auctioning the Airport Lands and Buildings.
On 7 February 2003, this Court issued a temporary restraining order (TRO) effective immediately. The
Court ordered respondents to cease and desist from selling at public auction the Airport Lands and
Buildings. Respondents received the TRO on the same day that the Court issued it. However,
respondents received the TRO only at 1:25 p.m. or three hours after the conclusion of the public
auction. DTSaIc
On 10 February 2003, this Court issued a Resolution confirming nunc pro tunc the TRO.
On 29 March 2005, the Court heard the parties in oral arguments. In compliance with the directive
issued during the hearing, MIAA, respondent City of Paraaque, and the Solicitor General
subsequently submitted their respective Memoranda.
MIAA admits that the MIAA Charter has placed the title to the Airport Lands and Buildings in the
name of MIAA. However, MIAA points out that it cannot claim ownership over these properties since
the real owner of the Airport Lands and Buildings is the Republic of the Philippines. The MIAA
Charter mandates MIAA to devote the Airport Lands and Buildings for the benefit of the general
public. Since the Airport Lands and Buildings are devoted to public use and public service, the
ownership of these properties remains with the State. The Airport Lands and Buildings are thus
inalienable and are not subject to real estate tax by local governments.
MIAA also points out that Section 21 of the MIAA Charter specifically exempts MIAA from the
payment of real estate tax. MIAA insists that it is also exempt from real estate tax under Section 234 of
the Local Government Code because the Airport Lands and Buildings are owned by the Republic. To
justify the exemption, MIAA invokes the principle that the government cannot tax itself. MIAA points
out that the reason for tax exemption of public property is that its taxation would not inure to any
public advantage, since in such a case the tax debtor is also the tax creditor.
Respondents invoke Section 193 of the Local Government Code, which expressly withdrew the tax
exemption privileges of "government-owned and-controlled corporations" upon the effectivity of the
Local Government Code. Respondents also argue that a basic rule of statutory construction is that the
express mention of one person, thing, or act excludes all others. An international airport is not among

the exceptions mentioned in Section 193 of the Local Government Code. Thus, respondents assert that
MIAA cannot claim that the Airport Lands and Buildings are exempt from real estate tax.
Respondents also cite the ruling of this Court in Mactan International Airport v. Marcos 8 where we
held that the Local Government Code has withdrawn the exemption from real estate tax granted to
international airports. Respondents further argue that since MIAA has already paid some of the real
estate tax assessments, it is now estopped from claiming that the Airport Lands and Buildings are
exempt from real estate tax.
The Issue
This petition raises the threshold issue of whether the Airport Lands and Buildings of MIAA are
exempt from real estate tax under existing laws. If so exempt, then the real estate tax assessments
issued by the City of Paraaque, and all proceedings taken pursuant to such assessments, are void. In
such event, the other issues raised in this petition become moot.
The Court's Ruling
We rule that MIAA's Airport Lands and Buildings are exempt from real estate tax imposed by local
governments.
First, MIAA is not a government-owned or controlled corporation but an instrumentality of the
National Government and thus exempt from local taxation. Second, the real properties of MIAA are
owned by the Republic of the Philippines and thus exempt from real estate tax.
1.
MIAA is Not a Government-Owned or Controlled Corporation
Respondents argue that MIAA, being a government-owned or controlled corporation, is not exempt
from real estate tax. Respondents claim that the deletion of the phrase "any government-owned or
controlled so exempt by its charter" in Section 234(e) of the Local Government Code withdrew the real
estate tax exemption of government-owned or controlled corporations. The deleted phrase appeared in
Section 40(a) of the 1974 Real Property Tax Code enumerating the entities exempt from real estate tax.
There is no dispute that a government-owned or controlled corporation is not exempt from real estate
tax. However, MIAA is not a government-owned or controlled corporation. Section 2(13) of the
Introductory Provisions of the Administrative Code of 1987 defines a government-owned or controlled
corporation as follows:
SEC. 2.
General Terms Defined. . . .
(13) Government-owned or controlled corporation refers to any agency organized as a stock or nonstock corporation, vested with functions relating to public needs whether governmental or proprietary
in nature, and owned by the Government directly or through its instrumentalities either wholly, or,
where applicable as in the case of stock corporations, to the extent of at least fifty-one (51) percent of
its capital stock: . . . . (Emphasis supplied) cADTSH
A government-owned or controlled corporation must be "organized as a stock or non-stock
corporation." MIAA is not organized as a stock or non-stock corporation. MIAA is not a stock
corporation because it has no capital stock divided into shares. MIAA has no stockholders or voting
shares. Section 10 of the MIAA Charter 9 provides:
SECTION 10. Capital. The capital of the Authority to be contributed by the National Government
shall be increased from Two and One-half Billion (P2,500,000,000.00) Pesos to Ten Billion
(P10,000,000,000.00) Pesos to consist of:
(a)
The value of fixed assets including airport facilities, runways and equipment and such other
properties, movable and immovable[,] which may be contributed by the National Government or
transferred by it from any of its agencies, the valuation of which shall be determined jointly with the
Department of Budget and Management and the Commission on Audit on the date of such contribution
or transfer after making due allowances for depreciation and other deductions taking into account the
loans and other liabilities of the Authority at the time of the takeover of the assets and other properties;
(b)
That the amount of P605 million as of December 31, 1986 representing about seventy
percentum (70%) of the unremitted share of the National Government from 1983 to 1986 to be remitted

to the National Treasury as provided for in Section 11 of E.O. No. 903 as amended, shall be converted
into the equity of the National Government in the Authority. Thereafter, the Government contribution to
the capital of the Authority shall be provided in the General Appropriations Act.
Clearly, under its Charter, MIAA does not have capital stock that is divided into shares.
Section 3 of the Corporation Code 10 defines a stock corporation as one whose "capital stock is divided
into shares and . . . authorized to distribute to the holders of such shares dividends . . . ." MIAA has
capital but it is not divided into shares of stock. MIAA has no stockholders or voting shares. Hence,
MIAA is not a stock corporation.
MIAA is also not a non-stock corporation because it has no members. Section 87 of the Corporation
Code defines a non-stock corporation as "one where no part of its income is distributable as dividends
to its members, trustees or officers." A non-stock corporation must have members. Even if we assume
that the Government is considered as the sole member of MIAA, this will not make MIAA a non-stock
corporation. Non-stock corporations cannot distribute any part of their income to their members.
Section 11 of the MIAA Charter mandates MIAA to remit 20% of its annual gross operating income to
the National Treasury. 11 This prevents MIAA from qualifying as a non-stock corporation.
Section 88 of the Corporation Code provides that non-stock corporations are "organized for charitable,
religious, educational, professional, cultural, recreational, fraternal, literary, scientific, social, civil
service, or similar purposes, like trade, industry, agriculture and like chambers." MIAA is not organized
for any of these purposes. MIAA, a public utility, is organized to operate an international and domestic
airport for public use.
Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a governmentowned or controlled corporation. What then is the legal status of MIAA within the National
Government?
MIAA is a government instrumentality vested with corporate powers to perform efficiently its
governmental functions. MIAA is like any other government instrumentality, the only difference is that
MIAA is vested with corporate powers. Section 2(10) of the Introductory Provisions of the
Administrative Code defines a government "instrumentality" as follows:
SEC. 2.
General Terms Defined. . . .
(10) Instrumentality refers to any agency of the National Government, not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some if not
all corporate powers, administering special funds, and enjoying operational autonomy, usually through
a charter. . . . (Emphasis supplied)
When the law vests in a government instrumentality corporate powers, the instrumentality does not
become a corporation. Unless the government instrumentality is organized as a stock or non-stock
corporation, it remains a government instrumentality exercising not only governmental but also
corporate powers. Thus, MIAA exercises the governmental powers of eminent domain, 12 police
authority 13 and the levying of fees and charges. 14 At the same time, MIAA exercises "all the powers
of a corporation under the Corporation Law, insofar as these powers are not inconsistent with the
provisions of this Executive Order." 15
Likewise, when the law makes a government instrumentality operationally autonomous, the
instrumentality remains part of the National Government machinery although not integrated with the
department framework. The MIAA Charter expressly states that transforming MIAA into a "separate
and autonomous body" 16 will make its operation more "financially viable." 17
Many government instrumentalities are vested with corporate powers but they do not become stock or
non-stock corporations, which is a necessary condition before an agency or instrumentality is deemed a
government-owned or controlled corporation. Examples are the Mactan International Airport Authority,
the Philippine Ports Authority, the University of the Philippines and Bangko Sentral ng Pilipinas. All
these government instrumentalities exercise corporate powers but they are not organized as stock or
non-stock corporations as required by Section 2(13) of the Introductory Provisions of the

Administrative Code. These government instrumentalities are sometimes loosely called government
corporate entities. However, they are not government-owned or controlled corporations in the strict
sense as understood under the Administrative Code, which is the governing law defining the legal
relationship and status of government entities. acHCSD
A government instrumentality like MIAA falls under Section 133(o) of the Local Government Code,
which states:
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
xxx
xxx
(o)
Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities and local government units. (Emphasis and underscoring supplied)
Section 133(o) recognizes the basic principle that local governments cannot tax the national
government, which historically merely delegated to local governments the power to tax. While the
1987 Constitution now includes taxation as one of the powers of local governments, local governments
may only exercise such power "subject to such guidelines and limitations as the Congress may
provide." 18
When local governments invoke the power to tax on national government instrumentalities, such power
is construed strictly against local governments. The rule is that a tax is never presumed and there must
be clear language in the law imposing the tax. Any doubt whether a person, article or activity is taxable
is resolved against taxation. This rule applies with greater force when local governments seek to tax
national government instrumentalities.
Another rule is that a tax exemption is strictly construed against the taxpayer claiming the exemption.
However, when Congress grants an exemption to a national government instrumentality from local
taxation, such exemption is construed liberally in favor of the national government instrumentality. As
this Court declared in Maceda v. Macaraig, Jr.:
The reason for the rule does not apply in the case of exemptions running to the benefit of the
government itself or its agencies. In such case the practical effect of an exemption is merely to reduce
the amount of money that has to be handled by government in the course of its operations. For these
reasons, provisions granting exemptions to government agencies may be construed liberally, in favor of
non tax-liability of such agencies. 19
There is, moreover, no point in national and local governments taxing each other, unless a sound and
compelling policy requires such transfer of public funds from one government pocket to another.
There is also no reason for local governments to tax national government instrumentalities for
rendering essential public services to inhabitants of local governments. The only exception is when the
legislature clearly intended to tax government instrumentalities for the delivery of essential public
services for sound and compelling policy considerations. There must be express language in the law
empowering local governments to tax national government instrumentalities. Any doubt whether such
power exists is resolved against local governments.
Thus, Section 133 of the Local Government Code states that "unless otherwise provided" in the Code,
local governments cannot tax national government instrumentalities. As this Court held in Basco v.
Philippine Amusements and Gaming Corporation:
The states have no power by taxation or otherwise, to retard, impede, burden or in any manner control
the operation of constitutional laws enacted by Congress to carry into execution the powers vested in
the federal government. (MC Culloch v. Maryland, 4 Wheat 316, 4 L Ed. 579)
This doctrine emanates from the "supremacy" of the National Government over local governments.
"Justice Holmes, speaking for the Supreme Court, made reference to the entire absence of power on the
part of the States to touch, in that way (taxation) at least, the instrumentalities of the United States
(Johnson v. Maryland, 254 US 51) and it can be agreed that no state or political subdivision can

regulate a federal instrumentality in such a way as to prevent it from consummating its federal
responsibilities, or even to seriously burden it in the accomplishment of them." (Antieau, Modern
Constitutional Law, Vol. 2, p. 140, emphasis supplied)
Otherwise, mere creatures of the State can defeat National policies thru extermination of what local
authorities may perceive to be undesirable activities or enterprise using the power to tax as "a tool for
regulation" (U.S. v. Sanchez, 340 US 42). TAScID
The power to tax which was called by Justice Marshall as the "power to destroy" (Mc Culloch v.
Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very entity which
has the inherent power to wield it. 20
2.
Airport Lands and Buildings of MIAA are Owned by the Republic
a.
Airport Lands and Buildings are of Public Dominion
The Airport Lands and Buildings of MIAA are property of public dominion and therefore owned by the
State or the Republic of the Philippines. The Civil Code provides:
ARTICLE 419.
Property is either of public dominion or of private ownership.
ARTICLE 420.
The following things are property of public dominion:
(1)
Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores, roadsteads, and others of similar character;
(2)
Those which belong to the State, without being for public use, and are intended for some public
service or for the development of the national wealth. (Emphasis supplied)
ARTICLE 421.
All other property of the State, which is not of the character stated in the
preceding article, is patrimonial property.
ARTICLE 422.
Property of public dominion, when no longer intended for public use or for
public service, shall form part of the patrimonial property of the State.
No one can dispute that properties of public dominion mentioned in Article 420 of the Civil Code, like
"roads, canals, rivers, torrents, ports and bridges constructed by the State," are owned by the State. The
term "ports" includes seaports and airports. The MIAA Airport Lands and Buildings constitute a "port"
constructed by the State. Under Article 420 of the Civil Code, the MIAA Airport Lands and Buildings
are properties of public dominion and thus owned by the State or the Republic of the Philippines.
The Airport Lands and Buildings are devoted to public use because they are used by the public for
international and domestic travel and transportation. The fact that the MIAA collects terminal fees and
other charges from the public does not remove the character of the Airport Lands and Buildings as
properties for public use. The operation by the government of a tollway does not change the character
of the road as one for public use. Someone must pay for the maintenance of the road, either the public
indirectly through the taxes they pay the government, or only those among the public who actually use
the road through the toll fees they pay upon using the road. The tollway system is even a more efficient
and equitable manner of taxing the public for the maintenance of public roads.
The charging of fees to the public does not determine the character of the property whether it is of
public dominion or not. Article 420 of the Civil Code defines property of public dominion as one
"intended for public use." Even if the government collects toll fees, the road is still "intended for public
use" if anyone can use the road under the same terms and conditions as the rest of the public. The
charging of fees, the limitation on the kind of vehicles that can use the road, the speed restrictions and
other conditions for the use of the road do not affect the public character of the road.
The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to airlines,
constitute the bulk of the income that maintains the operations of MIAA. The collection of such fees
does not change the character of MIAA as an airport for public use. Such fees are often termed user's
tax. This means taxing those among the public who actually use a public facility instead of taxing all
the public including those who never use the particular public facility. A user's tax is more equitable
a principle of taxation mandated in the 1987 Constitution. 21
The Airport Lands and Buildings of MIAA, which its Charter calls the "principal airport of the

Philippines for both international and domestic air traffic," 22 are properties of public dominion
because they are intended for public use. As properties of public dominion, they indisputably belong to
the State or the Republic of the Philippines.
b.
Airport Lands and Buildings are Outside the Commerce of Man
The Airport Lands and Buildings of MIAA are devoted to public use and thus are properties of public
dominion. As properties of public dominion, the Airport Lands and Buildings are outside the commerce
of man. The Court has ruled repeatedly that properties of public dominion are outside the commerce of
man. As early as 1915, this Court already ruled in Municipality of Cavite v. Rojas that properties
devoted to public use are outside the commerce of man, thus:
According to article 344 of the Civil Code: "Property for public use in provinces and in towns
comprises the provincial and town roads, the squares, streets, fountains, and public waters, the
promenades, and public works of general service supported by said towns or provinces."
The said Plaza Soledad being a promenade for public use, the municipal council of Cavite could not in
1907 withdraw or exclude from public use a portion thereof in order to lease it for the sole benefit of
the defendant Hilaria Rojas. In leasing a portion of said plaza or public place to the defendant for
private use the plaintiff municipality exceeded its authority in the exercise of its powers by executing a
contract over a thing of which it could not dispose, nor is it empowered so to do. IEHDAT
The Civil Code, article 1271, prescribes that everything which is not outside the commerce of man may
be the object of a contract, and plazas and streets are outside of this commerce, as was decided by the
supreme court of Spain in its decision of February 12, 1895, which says: "Communal things that cannot
be sold because they are by their very nature outside of commerce are those for public use, such as the
plazas, streets, common lands, rivers, fountains, etc." (Emphasis supplied) 23
Again in Espiritu v. Municipal Council, the Court declared that properties of public dominion are
outside the commerce of man:
. . . Town plazas are properties of public dominion, to be devoted to public use and to be made
available to the public in general. They are outside the commerce of man and cannot be disposed of or
even leased by the municipality to private parties. While in case of war or during an emergency, town
plazas may be occupied temporarily by private individuals, as was done and as was tolerated by the
Municipality of Pozorrubio, when the emergency has ceased, said temporary occupation or use must
also cease, and the town officials should see to it that the town plazas should ever be kept open to the
public and free from encumbrances or illegal private constructions. 24 (Emphasis supplied)
The Court has also ruled that property of public dominion, being outside the commerce of man, cannot
be the subject of an auction sale. 25
Properties of public dominion, being for public use, are not subject to levy, encumbrance or disposition
through public or private sale. Any encumbrance, levy on execution or auction sale of any property of
public dominion is void for being contrary to public policy. Essential public services will stop if
properties of public dominion are subject to encumbrances, foreclosures and auction sale. This will
happen if the City of Paraaque can foreclose and compel the auction sale of the 600-hectare runway of
the MIAA for non-payment of real estate tax.
Before MIAA can encumber 26 the Airport Lands and Buildings, the President must first withdraw
from public use the Airport Lands and Buildings. Sections 83 and 88 of the Public Land Law or
Commonwealth Act No. 141, which "remains to this day the existing general law governing the
classification and disposition of lands of the public domain other than timber and mineral lands," 27
provide:
SECTION 83. Upon the recommendation of the Secretary of Agriculture and Natural Resources, the
President may designate by proclamation any tract or tracts of land of the public domain as reservations
for the use of the Republic of the Philippines or of any of its branches, or of the inhabitants thereof, in
accordance with regulations prescribed for this purposes, or for quasi-public uses or purposes when the
public interest requires it, including reservations for highways, rights of way for railroads, hydraulic

power sites, irrigation systems, communal pastures or lequas communales, public parks, public
quarries, public fishponds, working men's village and other improvements for the public benefit.
SECTION 88. The tract or tracts of land reserved under the provisions of Section eighty-three shall be
non-alienable and shall not be subject to occupation, entry, sale, lease, or other disposition until again
declared alienable under the provisions of this Act or by proclamation of the President. (Emphasis and
underscoring supplied)
Thus, unless the President issues a proclamation withdrawing the Airport Lands and Buildings from
public use, these properties remain properties of public dominion and are inalienable. Since the Airport
Lands and Buildings are inalienable in their present status as properties of public dominion, they are
not subject to levy on execution or foreclosure sale. As long as the Airport Lands and Buildings are
reserved for public use, their ownership remains with the State or the Republic of the Philippines.
The authority of the President to reserve lands of the public domain for public use, and to withdraw
such public use, is reiterated in Section 14, Chapter 4, Title I, Book III of the Administrative Code of
1987, which states:
SEC. 14.
Power to Reserve Lands of the Public and Private Domain of the Government. (1)
The President shall have the power to reserve for settlement or public use, and for specific public
purposes, any of the lands of the public domain, the use of which is not otherwise directed by law. The
reserved land shall thereafter remain subject to the specific public purpose indicated until otherwise
provided by law or proclamation;
xxx
xxx
xxx. (Emphasis supplied)
There is no question, therefore, that unless the Airport Lands and Buildings are withdrawn by law or
presidential proclamation from public use, they are properties of public dominion, owned by the
Republic and outside the commerce of man. DSAICa
c.
MIAA is a Mere Trustee of the Republic
MIAA is merely holding title to the Airport Lands and Buildings in trust for the Republic. Section 48,
Chapter 12, Book I of the Administrative Code allows instrumentalities like MIAA to hold title to real
properties owned by the Republic, thus:
SEC. 48.
Official Authorized to Convey Real Property. Whenever real property of the
Government is authorized by law to be conveyed, the deed of conveyance shall be executed in behalf of
the government by the following:
(1)
For property belonging to and titled in the name of the Republic of the Philippines, by the
President, unless the authority therefor is expressly vested by law in another officer.
(2)
For property belonging to the Republic of the Philippines but titled in the name of any political
subdivision or of any corporate agency or instrumentality, by the executive head of the agency or
instrumentality. (Emphasis supplied)
In MIAA's case, its status as a mere trustee of the Airport Lands and Buildings is clearer because even
its executive head cannot sign the deed of conveyance on behalf of the Republic. Only the President of
the Republic can sign such deed of conveyance. 28
d.
Transfer to MIAA was Meant to Implement a Reorganization
The MIAA Charter, which is a law, transferred to MIAA the title to the Airport Lands and Buildings
from the Bureau of Air Transportation of the Department of Transportation and Communications. The
MIAA Charter provides:
SECTION 3. Creation of the Manila International Airport Authority. . . .
The land where the Airport is presently located as well as the surrounding land area of approximately
six hundred hectares, are hereby transferred, conveyed and assigned to the ownership and
administration of the Authority, subject to existing rights, if any. The Bureau of Lands and other
appropriate government agencies shall undertake an actual survey of the area transferred within one
year from the promulgation of this Executive Order and the corresponding title to be issued in the name
of the Authority. Any portion thereof shall not be disposed through sale or through any other mode

unless specifically approved by the President of the Philippines. (Emphasis supplied)

SECTION 22. Transfer of Existing Facilities and Intangible Assets. All existing public airport
facilities, runways, lands, buildings and other property, movable or immovable, belonging to the
Airport, and all assets, powers, rights, interests and privileges belonging to the Bureau of Air
Transportation relating to airport works or air operations, including all equipment which are necessary
for the operation of crash fire and rescue facilities, are hereby transferred to the Authority. (Emphasis
supplied)
SECTION 25. Abolition of the Manila International Airport as a Division in the Bureau of Air
Transportation and Transitory Provisions. The Manila International Airport including the Manila
Domestic Airport as a division under the Bureau of Air Transportation is hereby abolished.
xxx
xxx
xxx.
The MIAA Charter transferred the Airport Lands and Buildings to MIAA without the Republic
receiving cash, promissory notes or even stock since MIAA is not a stock corporation.
The whereas clauses of the MIAA Charter explain the rationale for the transfer of the Airport Lands
and Buildings to MIAA, thus:
WHEREAS, the Manila International Airport as the principal airport of the Philippines for both
international and domestic air traffic, is required to provide standards of airport accommodation and
service comparable with the best airports in the world;
WHEREAS, domestic and other terminals, general aviation and other facilities, have to be upgraded to
meet the current and future air traffic and other demands of aviation in Metro Manila;
WHEREAS, a management and organization study has indicated that the objectives of providing high
standards of accommodation and service within the context of a financially viable operation, will best
be achieved by a separate and autonomous body; and AIDTHC
WHEREAS, under Presidential Decree No. 1416, as amended by Presidential Decree No. 1772, the
President of the Philippines is given continuing authority to reorganize the National Government,
which authority includes the creation of new entities, agencies and instrumentalities of the
Government[.] (Emphasis supplied)
The transfer of the Airport Lands and Buildings from the Bureau of Air Transportation to MIAA was
not meant to transfer beneficial ownership of these assets from the Republic to MIAA. The purpose
was merely to reorganize a division in the Bureau of Air Transportation into a separate and autonomous
body. The Republic remains the beneficial owner of the Airport Lands and Buildings. MIAA itself is
owned solely by the Republic. No party claims any ownership rights over MIAA's assets adverse to the
Republic.
The MIAA Charter expressly provides that the Airport Lands and Buildings "shall not be disposed
through sale or through any other mode unless specifically approved by the President of the
Philippines." This only means that the Republic retained the beneficial ownership of the Airport Lands
and Buildings because under Article 428 of the Civil Code, only the "owner has the right to . . . dispose
of a thing." Since MIAA cannot dispose of the Airport Lands and Buildings, MIAA does not own the
Airport Lands and Buildings.
At any time, the President can transfer back to the Republic title to the Airport Lands and Buildings
without the Republic paying MIAA any consideration. Under Section 3 of the MIAA Charter, the
President is the only one who can authorize the sale or disposition of the Airport Lands and Buildings.
This only confirms that the Airport Lands and Buildings belong to the Republic.
e.
Real Property Owned by the Republic is Not Taxable
Section 234(a) of the Local Government Code exempts from real estate tax any "[r]eal property owned
by the Republic of the Philippines." Section 234(a) provides:
SEC. 234.
Exemptions from Real Property Tax. The following are exempted from payment of
the real property tax:
(a)
Real property owned by the Republic of the Philippines or any of its political subdivisions

except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable
person;
xxx
xxx
xxx. (Emphasis supplied)
This exemption should be read in relation with Section 133(o) of the same Code, which prohibits local
governments from imposing "[t]axes, fees or charges of any kind on the National Government, its
agencies and instrumentalities . . . ." The real properties owned by the Republic are titled either in the
name of the Republic itself or in the name of agencies or instrumentalities of the National Government.
The Administrative Code allows real property owned by the Republic to be titled in the name of
agencies or instrumentalities of the national government. Such real properties remain owned by the
Republic and continue to be exempt from real estate tax.
The Republic may grant the beneficial use of its real property to an agency or instrumentality of the
national government. This happens when title of the real property is transferred to an agency or
instrumentality even as the Republic remains the owner of the real property. Such arrangement does not
result in the loss of the tax exemption. Section 234(a) of the Local Government Code states that real
property owned by the Republic loses its tax exemption only if the "beneficial use thereof has been
granted, for consideration or otherwise, to a taxable person." MIAA, as a government instrumentality,
is not a taxable person under Section 133(o) of the Local Government Code. Thus, even if we assume
that the Republic has granted to MIAA the beneficial use of the Airport Lands and Buildings, such fact
does not make these real properties subject to real estate tax.
However, portions of the Airport Lands and Buildings that MIAA leases to private entities are not
exempt from real estate tax. For example, the land area occupied by hangars that MIAA leases to
private corporations is subject to real estate tax. In such a case, MIAA has granted the beneficial use of
such land area for a consideration to a taxable person and therefore such land area is subject to real
estate tax. In Lung Center of the Philippines v. Quezon City, the Court ruled:
Accordingly, we hold that 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. 29
3.
Refutation of Arguments of Minority
The minority asserts that the MIAA is not exempt from real estate tax because Section 193 of the Local
Government Code of 1991 withdrew the tax exemption of "all persons, whether natural or juridical"
upon the effectivity of the Code. Section 193 provides:
SEC. 193.
Withdrawal of Tax Exemption Privileges Unless otherwise provided in this Code, tax
exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical,
including government-owned or controlled corporations, except local water districts, cooperatives duly
registered under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions are
hereby withdrawn upon effectivity of this Code. (Emphasis supplied) ESacHC
The minority states that MIAA is indisputably a juridical person. The minority argues that since the
Local Government Code withdrew the tax exemption of all juridical persons, then MIAA is not exempt
from real estate tax. Thus, the minority declares:
It is evident from the quoted provisions of the Local Government Code that the withdrawn exemptions
from realty tax cover not just GOCCs, but all persons. To repeat, the provisions lay down the explicit
proposition that the withdrawal of realty tax exemption applies to all persons. The reference to or the
inclusion of GOCCs is only clarificatory or illustrative of the explicit provision.
The term "All persons" encompasses the two classes of persons recognized under our laws, natural and
juridical persons. Obviously, MIAA is not a natural person. Thus, the determinative test is not just
whether MIAA is a GOCC, but whether MIAA is a juridical person at all. (Emphasis and underscoring
in the original)
The minority posits that the "determinative test" whether MIAA is exempt from local taxation is its

status whether MIAA is a juridical person or not. The minority also insists that "Sections 193 and
234 may be examined in isolation from Section 133(o) to ascertain MIAA's claim of exemption."
The argument of the minority is fatally flawed. Section 193 of the Local Government Code expressly
withdrew the tax exemption of all juridical persons "[u]nless otherwise provided in this Code." Now,
Section 133(o) of the Local Government Code expressly provides otherwise, specifically prohibiting
local governments from imposing any kind of tax on national government instrumentalities. Section
133(o) states:
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
xxx
xxx
(o)
Taxes, fees or charges of any kinds on the National Government, its agencies and
instrumentalities, and local government units. (Emphasis and underscoring supplied)
By express mandate of the Local Government Code, local governments cannot impose any kind of tax
on national government instrumentalities like the MIAA. Local governments are devoid of power to tax
the national government, its agencies and instrumentalities. The taxing powers of local governments do
not extend to the national government, its agencies and instrumentalities, "[u]nless otherwise provided
in this Code" as stated in the saving clause of Section 133. The saving clause refers to Section 234(a)
on the exception to the exemption from real estate tax of real property owned by the Republic.
The minority, however, theorizes that unless exempted in Section 193 itself, all juridical persons are
subject to tax by local governments. The minority insists that the juridical persons exempt from local
taxation are limited to the three classes of entities specifically enumerated as exempt in Section 193.
Thus, the minority states:
. . . Under Section 193, the exemption is limited to (a) local water districts; (b) cooperatives duly
registered under Republic Act No. 6938; and (c) non-stock and non-profit hospitals and educational
institutions. It would be belaboring the obvious why the MIAA does not fall within any of the exempt
entities under Section 193. (Emphasis supplied)
The minority's theory directly contradicts and completely negates Section 133(o) of the Local
Government Code. This theory will result in gross absurdities. It will make the national government,
which itself is a juridical person, subject to tax by local governments since the national government is
not included in the enumeration of exempt entities in Section 193. Under this theory, local governments
can impose any kind of local tax, and not only real estate tax, on the national government.
Under the minority's theory, many national government instrumentalities with juridical personalities
will also be subject to any kind of local tax, and not only real estate tax. Some of the national
government instrumentalities vested by law with juridical personalities are: Bangko Sentral ng
Pilipinas, 30 Philippine Rice Research Institute, 31 Laguna Lake Development Authority, 32 Fisheries
Development Authority, 33 Bases Conversion Development Authority, 34 Philippine Ports Authority,
35 Cagayan de Oro Port Authority, 36 San Fernando Port Authority, 37 Cebu Port Authority, 38 and
Philippine National Railways. 39
The minority's theory violates Section 133(o) of the Local Government Code which expressly prohibits
local governments from imposing any kind of tax on national government instrumentalities. Section
133(o) does not distinguish between national government instrumentalities with or without juridical
personalities. Where the law does not distinguish, courts should not distinguish. Thus, Section 133(o)
applies to all national government instrumentalities, with or without juridical personalities. The
determinative test whether MIAA is exempt from local taxation is not whether MIAA is a juridical
person, but whether it is a national government instrumentality under Section 133(o) of the Local
Government Code. Section 133(o) is the specific provision of law prohibiting local governments from
imposing any kind of tax on the national government, its agencies and instrumentalities. ETDSAc
Section 133 of the Local Government Code starts with the saving clause "[u]nless otherwise provided

in this Code." This means that unless the Local Government Code grants an express authorization, local
governments have no power to tax the national government, its agencies and instrumentalities. Clearly,
the rule is local governments have no power to tax the national government, its agencies and
instrumentalities. As an exception to this rule, local governments may tax the national government, its
agencies and instrumentalities only if the Local Government Code expressly so provides.
The saving clause in Section 133 refers to the exception to the exemption in Section 234(a) of the
Code, which makes the national government subject to real estate tax when it gives the beneficial use
of its real properties to a taxable entity. Section 234(a) of the Local Government Code provides:
SEC. 234.
Exemptions from Real Property Tax The following are exempted from payment of
the real property tax:
(a)
Real property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable
person.
xxx
xxx
xxx. (Emphasis supplied)
Under Section 234(a), real property owned by the Republic is exempt from real estate tax. The
exception to this exemption is when the government gives the beneficial use of the real property to a
taxable entity.
The exception to the exemption in Section 234(a) is the only instance when the national government,
its agencies and instrumentalities are subject to any kind of tax by local governments. The exception to
the exemption applies only to real estate tax and not to any other tax. The justification for the exception
to the exemption is that the real property, although owned by the Republic, is not devoted to public use
or public service but devoted to the private gain of a taxable person.
The minority also argues that since Section 133 precedes Section 193 and 234 of the Local Government
Code, the later provisions prevail over Section 133. Thus, the minority asserts:
. . . Moreover, sequentially Section 133 antecedes Section 193 and 234. Following an accepted rule of
construction, in case of conflict the subsequent provisions should prevail. Therefore, MIAA, as a
juridical person, is subject to real property taxes, the general exemptions attaching to instrumentalities
under Section 133(o) of the Local Government Code being qualified by Sections 193 and 234 of the
same law. (Emphasis supplied)
The minority assumes that there is an irreconcilable conflict between Section 133 on one hand, and
Sections 193 and 234 on the other. No one has urged that there is such a conflict, much less has any one
presented a persuasive argument that there is such a conflict. The minority's assumption of an
irreconcilable conflict in the statutory provisions is an egregious error for two reasons.
First, there is no conflict whatsoever between Sections 133 and 193 because Section 193 expressly
admits its subordination to other provisions of the Code when Section 193 states "[u]nless otherwise
provided in this Code." By its own words, Section 193 admits the superiority of other provisions of the
Local Government Code that limit the exercise of the taxing power in Section 193. When a provision of
law grants a power but withholds such power on certain matters, there is no conflict between the grant
of power and the withholding of power. The grantee of the power simply cannot exercise the power on
matters withheld from its power.
Second, Section 133 is entitled "Common Limitations on the Taxing Powers of Local Government
Units." Section 133 limits the grant to local governments of the power to tax, and not merely the
exercise of a delegated power to tax. Section 133 states that the taxing powers of local governments
"shall not extend to the levy" of any kind of tax on the national government, its agencies and
instrumentalities. There is no clearer limitation on the taxing power than this.
Since Section 133 prescribes the "common limitations" on the taxing powers of local governments,
Section 133 logically prevails over Section 193 which grants local governments such taxing powers.
By their very meaning and purpose, the "common limitations" on the taxing power prevail over the
grant or exercise of the taxing power. If the taxing power of local governments in Section 193 prevails

over the limitations on such taxing power in Section 133, then local governments can impose any kind
of tax on the national government, its agencies and instrumentalities a gross absurdity.
Local governments have no power to tax the national government, its agencies and instrumentalities,
except as otherwise provided in the Local Government Code pursuant to the saving clause in Section
133 stating "[u]nless otherwise provided in this Code." This exception which is an exception to the
exemption of the Republic from real estate tax imposed by local governments refers to Section
234(a) of the Code. The exception to the exemption in Section 234(a) subjects real property owned by
the Republic, whether titled in the name of the national government, its agencies or instrumentalities, to
real estate tax if the beneficial use of such property is given to a taxable entity.
The minority also claims that the definition in the Administrative Code of the phrase "governmentowned or controlled corporation" is not controlling. The minority points out that Section 2 of the
Introductory Provisions of the Administrative Code admits that its definitions are not controlling when
it provides:
SEC. 2.
General Terms Defined. Unless the specific words of the text, or the context as a
whole, or a particular statute, shall require a different meaning:
xxx
xxx
xxx
The minority then concludes that reliance on the Administrative Code definition is "flawed."
The minority's argument is a non sequitur. True, Section 2 of the Administrative Code recognizes that a
statute may require a different meaning than that defined in the Administrative Code. However, this
does not automatically mean that the definition in the Administrative Code does not apply to the Local
Government Code. Section 2 of the Administrative Code clearly states that "unless the specific
words . . . of a particular statute shall require a different meaning," the definition in Section 2 of the
Administrative Code shall apply. Thus, unless there is specific language in the Local Government Code
defining the phrase "government-owned or controlled corporation" differently from the definition in the
Administrative Code, the definition in the Administrative Code prevails. EcSCHD
The minority does not point to any provision in the Local Government Code defining the phrase
"government-owned or controlled corporation" differently from the definition in the Administrative
Code. Indeed, there is none. The Local Government Code is silent on the definition of the phrase
"government-owned or controlled corporation." The Administrative Code, however, expressly defines
the phrase "government-owned or controlled corporation." The inescapable conclusion is that the
Administrative Code definition of the phrase "government-owned or controlled corporation" applies to
the Local Government Code.
The third whereas clause of the Administrative Code states that the Code "incorporates in a unified
document the major structural, functional and procedural principles and rules of governance." Thus, the
Administrative Code is the governing law defining the status and relationship of government
departments, bureaus, offices, agencies and instrumentalities. Unless a statute expressly provides for a
different status and relationship for a specific government unit or entity, the provisions of the
Administrative Code prevail.
The minority also contends that the phrase "government-owned or controlled corporation" should apply
only to corporations organized under the Corporation Code, the general incorporation law, and not to
corporations created by special charters. The minority sees no reason why government corporations
with special charters should have a capital stock. Thus, the minority declares:
I submit that the definition of "government-owned or controlled corporations" under the Administrative
Code refer to those corporations owned by the government or its instrumentalities which are created
not by legislative enactment, but formed and organized under the Corporation Code through
registration with the Securities and Exchange Commission. In short, these are GOCCs without original
charters.
xxx
xxx
xxx
It might as well be worth pointing out that there is no point in requiring a capital structure for GOCCs

whose full ownership is limited by its charter to the State or Republic. Such GOCCs are not
empowered to declare dividends or alienate their capital shares.
The contention of the minority is seriously flawed. It is not in accord with the Constitution and existing
legislations. It will also result in gross absurdities.
First, the Administrative Code definition of the phrase "government-owned or controlled corporation"
does not distinguish between one incorporated under the Corporation Code or under a special charter.
Where the law does not distinguish, courts should not distinguish.
Second, Congress has created through special charters several government-owned corporations
organized as stock corporations. Prime examples are the Land Bank of the Philippines and the
Development Bank of the Philippines. The special charter 40 of the Land Bank of the Philippines
provides:
SECTION 81. Capital. The authorized capital stock of the Bank shall be nine billion pesos, divided
into seven hundred and eighty million common shares with a par value of ten pesos each, which shall
be fully subscribed by the Government, and one hundred and twenty million preferred shares with a par
value of ten pesos each, which shall be issued in accordance with the provisions of Sections seventyseven and eighty-three of this Code. (Emphasis supplied)
Likewise, the special charter 41 of the Development Bank of the Philippines provides:
SECTION 7. Authorized Capital Stock Par value. The capital stock of the Bank shall be Five
Billion Pesos to be divided into Fifty Million common shares with par value of P100 per share. These
shares are available for subscription by the National Government. Upon the effectivity of this Charter,
the National Government shall subscribe to Twenty-Five Million common shares of stock worth Two
Billion Five Hundred Million which shall be deemed paid for by the Government with the net asset
values of the Bank remaining after the transfer of assets and liabilities as provided in Section 30 hereof.
(Emphasis supplied)
Other government-owned corporations organized as stock corporations under their special charters are
the Philippine Crop Insurance Corporation, 42 Philippine International Trading Corporation, 43 and the
Philippine National Bank 44 before it was reorganized as a stock corporation under the Corporation
Code. All these government-owned corporations organized under special charters as stock corporations
are subject to real estate tax on real properties owned by them. To rule that they are not governmentowned or controlled corporations because they are not registered with the Securities and Exchange
Commission would remove them from the reach of Section 234 of the Local Government Code, thus
exempting them from real estate tax.
Third, the government-owned or controlled corporations created through special charters are those that
meet the two conditions prescribed in Section 16, Article XII of the Constitution. The first condition is
that the government-owned or controlled corporation must be established for the common good. The
second condition is that the government-owned or controlled corporation must meet the test of
economic viability. Section 16, Article XII of the 1987 Constitution provides:
SEC. 16.
The Congress shall not, except by general law, provide for the formation, organization,
or regulation of private corporations. Government-owned or controlled corporations may be created or
established by special charters in the interest of the common good and subject to the test of economic
viability. (Emphasis and underscoring supplied) HCacDE
The Constitution expressly authorizes the legislature to create "government-owned or controlled
corporations" through special charters only if these entities are required to meet the twin conditions of
common good and economic viability. In other words, Congress has no power to create governmentowned or controlled corporations with special charters unless they are made to comply with the two
conditions of common good and economic viability. The test of economic viability applies only to
government-owned or controlled corporations that perform economic or commercial activities and need
to compete in the market place. Being essentially economic vehicles of the State for the common good
meaning for economic development purposes these government-owned or controlled

corporations with special charters are usually organized as stock corporations just like ordinary private
corporations.
In contrast, government instrumentalities vested with corporate powers and performing governmental
or public functions need not meet the test of economic viability. These instrumentalities perform
essential public services for the common good, services that every modern State must provide its
citizens. These instrumentalities need not be economically viable since the government may even
subsidize their entire operations. These instrumentalities are not the "government-owned or controlled
corporations" referred to in Section 16, Article XII of the 1987 Constitution.
Thus, the Constitution imposes no limitation when the legislature creates government instrumentalities
vested with corporate powers but performing essential governmental or public functions. Congress has
plenary authority to create government instrumentalities vested with corporate powers provided these
instrumentalities perform essential government functions or public services. However, when the
legislature creates through special charters corporations that perform economic or commercial
activities, such entities known as "government-owned or controlled corporations" must meet the
test of economic viability because they compete in the market place.
This is the situation of the Land Bank of the Philippines and the Development Bank of the Philippines
and similar government-owned or controlled corporations, which derive their income to meet operating
expenses solely from commercial transactions in competition with the private sector. The intent of the
Constitution is to prevent the creation of government-owned or controlled corporations that cannot
survive on their own in the market place and thus merely drain the public coffers.
Commissioner Blas F. Ople, proponent of the test of economic viability, explained to the Constitutional
Commission the purpose of this test, as follows:
MR. OPLE: Madam President, the reason for this concern is really that when the government creates a
corporation, there is a sense in which this corporation becomes exempt from the test of economic
performance. We know what happened in the past. If a government corporation loses, then it makes its
claim upon the taxpayers' money through new equity infusions from the government and what is
always invoked is the common good. That is the reason why this year, out of a budget of P115 billion
for the entire government, about P28 billion of this will go into equity infusions to support a few
government financial institutions. And this is all taxpayers' money which could have been relocated to
agrarian reform, to social services like health and education, to augment the salaries of grossly
underpaid public employees. And yet this is all going down the drain.
Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the "common good,"
this becomes a restraint on future enthusiasts for state capitalism to excuse themselves from the
responsibility of meeting the market test so that they become viable. And so, Madam President, I
reiterate, for the committee's consideration and I am glad that I am joined in this proposal by
Commissioner Foz, the insertion of the standard of "ECONOMIC VIABILITY OR THE ECONOMIC
TEST," together with the common good. 45
Father Joaquin G. Bernas, a leading member of the Constitutional Commission, explains in his
textbook The 1987 Constitution of the Republic of the Philippines: A Commentary:
The second sentence was added by the 1986 Constitutional Commission. The significant addition,
however, is the phrase "in the interest of the common good and subject to the test of economic
viability." The addition includes the ideas that they must show capacity to function efficiently in
business and that they should not go into activities which the private sector can do better. Moreover,
economic viability is more than financial viability but also includes capability to make profit and
generate benefits not quantifiable in financial terms. 46 (Emphasis supplied) DAEcIS
Clearly, the test of economic viability does not apply to government entities vested with corporate
powers and performing essential public services. The State is obligated to render essential public
services regardless of the economic viability of providing such service. The non-economic viability of
rendering such essential public service does not excuse the State from withholding such essential

services from the public.

However, government-owned or controlled corporations with special charters, organized essentially for
economic or commercial objectives, must meet the test of economic viability. These are the
government-owned or controlled corporations that are usually organized under their special charters as
stock corporations, like the Land Bank of the Philippines and the Development Bank of the Philippines.
These are the government-owned or controlled corporations, along with government-owned or
controlled corporations organized under the Corporation Code, that fall under the definition of
"government-owned or controlled corporations" in Section 2(10) of the Administrative Code.
The MIAA need not meet the test of economic viability because the legislature did not create MIAA to
compete in the market place. MIAA does not compete in the market place because there is no
competing international airport operated by the private sector. MIAA performs an essential public
service as the primary domestic and international airport of the Philippines. The operation of an
international airport requires the presence of personnel from the following government agencies:
1.
The Bureau of Immigration and Deportation, to document the arrival and departure of
passengers, screening out those without visas or travel documents, or those with hold departure orders;
2.
The Bureau of Customs, to collect import duties or enforce the ban on prohibited importations;
3.
The quarantine office of the Department of Health, to enforce health measures against the
spread of infectious diseases into the country;
4.
The Department of Agriculture, to enforce measures against the spread of plant and animal
diseases into the country;
5.
The Aviation Security Command of the Philippine National Police, to prevent the entry of
terrorists and the escape of criminals, as well as to secure the airport premises from terrorist attack or
seizure;
6.
The Air Traffic Office of the Department of Transportation and Communications, to authorize
aircraft to enter or leave Philippine airspace, as well as to land on, or take off from, the airport; and
7.
The MIAA, to provide the proper premises such as runway and buildings for the
government personnel, passengers, and airlines, and to manage the airport operations.
All these agencies of government perform government functions essential to the operation of an
international airport.
MIAA performs an essential public service that every modern State must provide its citizens. MIAA
derives its revenues principally from the mandatory fees and charges MIAA imposes on passengers and
airlines. The terminal fees that MIAA charges every passenger are regulatory or administrative fees 47
and not income from commercial transactions.
MIAA falls under the definition of a government instrumentality under Section 2(10) of the
Introductory Provisions of the Administrative Code, which provides:
SEC. 2. General Terms Defined. . . .
(10) Instrumentality refers to any agency of the National Government, not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some if not
all corporate powers, administering special funds, and enjoying operational autonomy, usually through
a charter. . . . (Emphasis supplied)
The fact alone that MIAA is endowed with corporate powers does not make MIAA a governmentowned or controlled corporation. Without a change in its capital structure, MIAA remains a government
instrumentality under Section 2(10) of the Introductory Provisions of the Administrative Code. More
importantly, as long as MIAA renders essential public services, it need not comply with the test of
economic viability. Thus, MIAA is outside the scope of the phrase "government-owned or controlled
corporations" under Section 16, Article XII of the 1987 Constitution. IcSHTA
The minority belittles the use in the Local Government Code of the phrase "government-owned or
controlled corporation" as merely "clarificatory or illustrative." This is fatal. The 1987 Constitution
prescribes explicit conditions for the creation of "government-owned or controlled corporations." The

Administrative Code defines what constitutes a "government-owned or controlled corporation." To

belittle this phrase as "clarificatory or illustrative" is grave error.
To summarize, MIAA is not a government-owned or controlled corporation under Section 2(13) of the
Introductory Provisions of the Administrative Code because it is not organized as a stock or non-stock
corporation. Neither is MIAA a government-owned or controlled corporation under Section 16, Article
XII of the 1987 Constitution because MIAA is not required to meet the test of economic viability.
MIAA is a government instrumentality vested with corporate powers and performing essential public
services pursuant to Section 2(10) of the Introductory Provisions of the Administrative Code. As a
government instrumentality, MIAA is not subject to any kind of tax by local governments under
Section 133(o) of the Local Government Code. The exception to the exemption in Section 234(a) does
not apply to MIAA because MIAA is not a taxable entity under the Local Government Code. Such
exception applies only if the beneficial use of real property owned by the Republic is given to a taxable
entity.
Finally, the Airport Lands and Buildings of MIAA are properties devoted to public use and thus are
properties of public dominion. Properties of public dominion are owned by the State or the Republic.
Article 420 of the Civil Code provides:
Art. 420.
The following things are property of public dominion:
(1)
Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores, roadsteads, and others of similar character;
(2)
Those which belong to the State, without being for public use, and are intended for some public
service or for the development of the national wealth. (Emphasis supplied)
The term "ports . . . constructed by the State" includes airports and seaports. The Airport Lands and
Buildings of MIAA are intended for public use, and at the very least intended for public service.
Whether intended for public use or public service, the Airport Lands and Buildings are properties of
public dominion. As properties of public dominion, the Airport Lands and Buildings are owned by the
Republic and thus exempt from real estate tax under Section 234(a) of the Local Government Code.
4.
Conclusion
Under Section 2(10) and (13) of the Introductory Provisions of the Administrative Code, which governs
the legal relation and status of government units, agencies and offices within the entire government
machinery, MIAA is a government instrumentality and not a government-owned or controlled
corporation. Under Section 133(o) of the Local Government Code, MIAA as a government
instrumentality is not a taxable person because it is not subject to "[t]axes, fees or charges of any kind"
by local governments. The only exception is when MIAA leases its real property to a "taxable person"
as provided in Section 234(a) of the Local Government Code, in which case the specific real property
leased becomes subject to real estate tax. Thus, only portions of the Airport Lands and Buildings leased
to taxable persons like private parties are subject to real estate tax by the City of Paraaque.
Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA, being devoted to
public use, are properties of public dominion and thus owned by the State or the Republic of the
Philippines. Article 420 specifically mentions "ports . . . constructed by the State," which includes
public airports and seaports, as properties of public dominion and owned by the Republic. As properties
of public dominion owned by the Republic, there is no doubt whatsoever that the Airport Lands and
Buildings are expressly exempt from real estate tax under Section 234(a) of the Local Government
Code. This Court has also repeatedly ruled that properties of public dominion are not subject to
execution or foreclosure sale.
WHEREFORE, we GRANT the petition. We SET ASIDE the assailed Resolutions of the Court of
Appeals of 5 October 2001 and 27 September 2002 in CA-G.R. SP No. 66878. We DECLARE the
Airport Lands and Buildings of the Manila International Airport Authority EXEMPT from the real
estate tax imposed by the City of Paraaque. We declare VOID all the real estate tax assessments,
including the final notices of real estate tax delinquencies, issued by the City of Paraaque on the

Airport Lands and Buildings of the Manila International Airport Authority, except for the portions that
the Manila International Airport Authority has leased to private parties. We also declare VOID the
assailed auction sale, and all its effects, of the Airport Lands and Buildings of the Manila International
Airport Authority. ESHAcI
No costs.
SO ORDERED.
Panganiban, C.J., Puno, Quisumbing, Ynares-Santiago, Sandoval-Gutierrez, Corona, Carpio-Morales,
Chico-Nazario, Garcia and Velasco, Jr., JJ., concur.
Austria-Martinez, J., agrees with separate opinion of J. Tinga.
Callejo, Sr., J., concurs with separate opinion of J. Tinga.
Azcuna, J., is on leave.
Tinga, J., please see dissenting opinion.
Separate Opinions
TINGA, J., dissenting:
The legally correct resolution of this petition would have had the added benefit of an utterly fair and
equitable result a recognition of the constitutional and statutory power of the City of Paraaque to
impose real property taxes on the Manila International Airport Authority (MIAA), but at the same time,
upholding a statutory limitation that prevents the City of Paraaque from seizing and conducting an
execution sale over the real properties of MIAA. In the end, all that the City of Paraaque would hold
over the MIAA is a limited lien, unenforceable as it is through the sale or disposition of MIAA
properties. Not only is this the legal effect of all the relevant constitutional and statutory provisions
applied to this case, it also leaves the room for negotiation for a mutually acceptable resolution between
the City of Paraaque and MIAA.
Instead, with blind but measured rage, the majority today veers wildly off-course, shattering statutes
and judicial precedents left and right in order to protect the precious Ming vase that is the Manila
International Airport Authority (MIAA). While the MIAA is left unscathed, it is surrounded by the
wreckage that once was the constitutional policy, duly enacted into law, that of local autonomy. Make
no mistake, the majority has virtually declared war on the seventy nine (79) provinces, one hundred
seventeen (117) cities, and one thousand five hundred (1,500) municipalities of the Philippines. 1
The icing on this inedible cake is the strained and purposely vague rationale used to justify the majority
opinion. Decisions of the Supreme Court are expected to provide clarity to the parties and to students of
jurisprudence, as to what the law of the case is, especially when the doctrines of long standing are
modified or clarified. With all due respect, the decision in this case is plainly so, so wrong on many
levels. More egregious, in the majority's resolve to spare the Manila International Airport Authority
(MIAA) from liability for real estate taxes, no clear-cut rule emerges on the important question of the
power of local government units (LGUs) to tax government corporations, instrumentalities or agencies.
The majority would overturn sub silencio, among others, at least one dozen precedents enumerated
below:
1)
Mactan-Cebu International Airport Authority v. Hon. Marcos, 2 the leading case penned in 1997
by recently retired Chief Justice Davide, which held that the express withdrawal by the Local
Government Code of previously granted exemptions from realty taxes applied to instrumentalities and
government-owned or controlled corporations (GOCCs) such as the Mactan-Cebu International Airport
Authority (MCIAA). The majority invokes the ruling in Basco v. Pagcor, 3 a precedent discredited in
Mactan, and a vanguard of a doctrine so noxious to the concept of local government rule that the Local
Government Code was drafted precisely to counter such philosophy. The efficacy of several rulings that
expressly rely on Mactan, such as PHILRECA v. DILG Secretary, 4 City Government of San Pablo v.
Hon. Reyes 5 is now put in question.
2)
The rulings in National Power Corporation v. City of Cabanatuan, 6 wherein the Court, through
Justice Puno, declared that the National Power Corporation, a GOCC, is liable for franchise taxes under

the Local Government Code, and succeeding cases that have relied on it such as Batangas Power Corp.
v. Batangas City 7 The majority now states that deems instrumentalities as defined under the
Administrative Code of 1987 as purportedly beyond the reach of any form of taxation by LGUs, stating
"[l]ocal governments are devoid of power to tax the national government, its agencies and
instrumentalities." 8 Unfortunately, using the definition employed by the majority, as provided by
Section 2(d) of the Administrative Code, GOCCs are also considered as instrumentalities, thus leading
to the astounding conclusion that GOCCs may not be taxed by LGUs under the Local Government
Code. EIDaAH
3)
Lung Center of the Philippines v. Quezon City, 9 wherein a unanimous en banc Court held that
the Lung Center of the Philippines may be liable for real property taxes. Using the majority's reasoning,
the Lung Center would be properly classified as an instrumentality which the majority now holds as
exempt from all forms of local taxation. 10
4)
City of Davao v. RTC, 11 where the Court held that the Government Service Insurance System
(GSIS) was liable for real property taxes for the years 1992 to 1994, its previous exemption having
been withdrawn by the enactment of the Local Government Code. 12 This decision, which expressly
relied on Mactan, would be directly though silently overruled by the majority.
5)
The common essence of the Court's rulings in the two Philippine Ports Authority v. City of
Iloilo, 13 cases penned by Justices Callejo and Azcuna respectively, which relied in part on Mactan in
holding the Philippine Ports Authority (PPA) liable for realty taxes, notwithstanding the fact that it is a
GOCC. Based on the reasoning of the majority, the PPA cannot be considered a GOCC. The reliance of
these cases on Mactan, and its rationale for holding governmental entities like the PPA liable for local
government taxation is mooted by the majority.
6)
The 1963 precedent of Social Security System Employees Association v. Soriano, 14 which
declared the Social Security Commission (SSC) as a GOCC performing proprietary functions. Based
on the rationale employed by the majority, the Social Security System is not a GOCC. Or perhaps more
accurately, "no longer" a GOCC.
7)
The decision penned by Justice (now Chief Justice) Panganiban, Light Rail Transit Authority v.
Central Board of Assessment. 15 The characterization therein of the Light Rail Transit Authority
(LRTA) as a "service-oriented commercial endeavor" whose patrimonial property is subject to local
taxation is now rendered inconsequential, owing to the majority's thinking that an entity such as the
LRTA is itself exempt from local government taxation 16 , irrespective of the functions it performs.
Moreover, based on the majority's criteria, LRTA is not a GOCC.
8)
The cases of Teodoro v. National Airports Corporation 17 and Civil Aeronautics Administration
v. Court of Appeals, 18 wherein the Court held that the predecessor agency of the MIAA, which was
similarly engaged in the operation, administration and management of the Manila International Agency,
was engaged in the exercise of proprietary, as opposed to sovereign functions. The majority would hold
otherwise that the property maintained by MIAA is actually patrimonial, thus implying that MIAA is
actually engaged in sovereign functions.
9)
My own unanimous ponencia in Phividec Industrial Authority v. Capitol Steel, 19 wherein the
Court held that the Phividec Industrial Authority, a GOCC, was required to secure the services of the
Office of the Government Corporate Counsel for legal representation. 20 Based on the reasoning of the
majority, Phividec would not be a GOCC, and the mandate of the Office of the Government Corporate
Counsel extends only to GOCCs.
10)
Two decisions promulgated by the Court just last month (June 2006), National Power
Corporation v. Province of Isabela 21 and GSIS v. City Assessor of Iloilo City. 22 In the former, the
Court pronounced that "[a]lthough as a general rule, LGUs cannot impose taxes, fees, or charges of any
kind on the National Government, its agencies and instrumentalities, this rule admits of an exception,
i.e., when specific provisions of the LGC authorize the LGUs to impose taxes, fees or charges on the
aforementioned entities." Yet the majority now rules that the exceptions in the LGC no longer hold,

since "local governments are devoid of power to tax the national government, its agencies and
instrumentalities." 23 The ruling in the latter case, which held the GSIS as liable for real property taxes,
is now put in jeopardy by the majority ruling.
There are certainly many other precedents affected, perhaps all previous jurisprudence regarding local
government taxation vis-a-vis government entities, as well as any previous definitions of GOCCs, and
previous distinctions between the exercise of governmental and proprietary functions (a distinction laid
down by this Court as far back as 191624 ). What is the reason offered by the majority for overturning
or modifying all these precedents and doctrines? None is given, for the majority takes comfort instead
in the pretense that these precedents never existed. Only children should be permitted to subscribe to
the theory that something bad will go away if you pretend hard enough that it does not exist. ACSaHc
I.
Case Should Have Been Decided
Following Mactan Precedent
The core issue in this case, whether the MIAA is liable to the City of Paraaque for real property taxes
under the Local Government Code, has already been decided by this Court in the Mactan case, and
should have been resolved by simply applying precedent.
Mactan Explained
A brief recall of the Mactan case is in order. The Mactan-Cebu International Airport Authority
(MCIAA) claimed that it was exempt from payment of real property taxes to the City of Cebu,
invoking the specific exemption granted in Section 14 of its charter, Republic Act No. 6958, and its
status as an instrumentality of the government performing governmental functions. 25 Particularly,
MCIAA invoked Section 133 of the Local Government Code, precisely the same provision utilized by
the majority as the basis for MIAA's exemption. Section 133 reads:
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
xxx
xxx
(o)
Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities and local government units. (emphasis and underscoring supplied).
However, the Court in Mactan noted that Section 133 qualified the exemption of the National
Government, its agencies and instrumentalities from local taxation with the phrase "unless otherwise
provided herein." It then considered the other relevant provisions of the Local Government Code,
particularly the following:
SEC. 193.
Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this Code, tax
exemption or incentives granted to, or enjoyed by all persons, whether natural or juridical, including
government-owned and controlled corporations, except local water districts, cooperatives duly
registered under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this Code. 26
SECTION 232.
Power to Levy Real Property Tax. A province or city or a municipality within
the Metropolitan Manila area may levy an annual ad valorem tax on real property such as land,
building, machinery, and other improvements not hereafter specifically exempted. 27
SECTION 234.
Exemptions from Real Property Tax. The following are exempted from
payment of the real property tax:
(a)
Real property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable
person;
(b)
Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, nonprofit or religious cemeteries and all lands, buildings, and improvements actually, directly, and
exclusively used for religious charitable or educational purposes;

(c)
All machineries and equipment that are actually, directly and exclusively used by local water
districts and government-owned and controlled corporations engaged in the distribution of water and/or
generation and transmission of electric power;
(d)
All real property owned by duly registered cooperatives as provided for under R.A. No. 6938;
and
(e)
Machinery and equipment used for pollution control and environmental protection.
Except as provided herein, any exemption from payment of real property tax previously granted to, or
presently enjoyed by, all persons, whether natural or juridical, including all government-owned or
controlled corporations are hereby withdrawn upon the effectivity of this Code. 28
Clearly, Section 133 was not intended to be so absolute a prohibition on the power of LGUs to tax the
National Government, its agencies and instrumentalities, as evidenced by these cited provisions which
"otherwise provided." But what was the extent of the limitation under Section 133? This is how the
Court, correctly to my mind, defined the parameters in Mactan:
The foregoing sections of the LGC speak of: (a) the limitations on the taxing powers of local
government units and the exceptions to such limitations; and (b) the rule on tax exemptions and the
exceptions thereto. The use of exceptions or provisos in these sections, as shown by the following
clauses:
(1)
"unless otherwise provided herein" in the opening paragraph of Section 133; TaCSAD
(2)
"Unless otherwise provided in this Code" in Section 193;
(3)
"not hereafter specifically exempted" in Section 232; and
(4)
"Except as provided herein" in the last paragraph of Section 234
initially hampers a ready understanding of the sections. Note, too, that the aforementioned clause in
Section 133 seems to be inaccurately worded. Instead of the clause "unless otherwise provided herein,"
with the "herein" to mean, of course, the section, it should have used the clause "unless otherwise
provided in this Code." The former results in absurdity since the section itself enumerates what are
beyond the taxing powers of local government units and, where exceptions were intended, the
exceptions are explicitly indicated in the next. For instance, in item (a) which excepts income taxes
"when levied on banks and other financial institutions"; item (d) which excepts "wharfage on wharves
constructed and maintained by the local government unit concerned"; and item (1) which excepts taxes,
fees and charges for the registration and issuance of licenses or permits for the driving of "tricycles." It
may also be observed that within the body itself of the section, there are exceptions which can be found
only in other parts of the LGC, but the section interchangeably uses therein the clause, "except as
otherwise provided herein" as in items (c) and (i), or the clause "except as provided in this Code" in
item (j). These clauses would be obviously unnecessary or mere surplusages if the opening clause of
the section were "Unless otherwise provided in this Code" instead of "Unless otherwise provided
herein." In any event, even if the latter is used, since under Section 232 local government units have the
power to levy real property tax, except those exempted therefrom under Section 234, then Section 232
must be deemed to qualify Section 133.
Thus, reading together Sections 133, 232, and 234 of the LGC, we conclude that as a general rule, as
laid down in Section 133, the taxing powers of local government units cannot extend to the levy of,
inter alia, "taxes, fees and charges of any kind on the National Government, its agencies and
instrumentalities, and local government units"; however, pursuant to Section 232, provinces, cities, and
municipalities in the Metropolitan Manila Area may impose the real property tax except on, inter alia,
"real property owned by the Republic of the Philippines or any of its political subdivisions except when
the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person," as
provided in item (a) of the first paragraph of Section 234.
As to tax exemptions or incentives granted to or presently enjoyed by natural or juridical persons,
including government-owned and controlled corporations, Section 193 of the LGC prescribes the
general rule, viz., they are withdrawn upon the effectivity of the LGC, except those granted to local

water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals
and educational institutions, and unless otherwise provided in the LGC. The latter proviso could refer
to Section 234 which enumerates the properties exempt from real property tax. But the last paragraph
of Section 234 further qualifies the retention of the exemption insofar as real property taxes are
concerned by limiting the retention only to those enumerated therein; all others not included in the
enumeration lost the privilege upon the effectivity of the LGC. Moreover, even as to real property
owned by the Republic of the Philippines or any of its political subdivisions covered by item (a) of the
first paragraph of Section 234, the exemption is withdrawn if the beneficial use of such property has
been granted to a taxable person for consideration or otherwise.
Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of the LGC,
exemptions from payment of real property taxes granted to natural or juridical persons, including
government-owned or controlled corporations, except as provided in the said section, and the petitioner
is, undoubtedly, a government-owned corporation, it necessarily follows that its exemption from such
tax granted it in Section 14 of its Charter, R.A. No. 6958, has been withdrawn. Any claim to the
contrary can only be justified if the petitioner can seek refuge under any of the exceptions provided in
Section 234, but not under Section 133, as it now asserts, since, as shown above, the said section is
qualified by Sections 232 and 234. 29
The Court in Mactan acknowledged that under Section 133, instrumentalities were generally exempt
from all forms of local government taxation, unless otherwise provided in the Code. On the other hand,
Section 232 "otherwise provided" insofar as it allowed LGUs to levy an ad valorem real property tax,
irrespective of who owned the property. At the same time, the imposition of real property taxes under
Section 232 is in turn qualified by the phrase "not hereinafter specifically exempted." The exemptions
from real property taxes are enumerated in Section 234, which specifically states that only real
properties owned "by the Republic of the Philippines or any of its political subdivisions" are exempted
from the payment of the tax. Clearly, instrumentalities or GOCCs do not fall within the exceptions
under Section 234. 30
Mactan Overturned the
Precedents Now Relied
Upon by the Majority
But the petitioners in Mactan also raised the Court's ruling in Basco v. PAGCOR, 31 decided before the
enactment of the Local Government Code. The Court in Basco declared the PAGCOR as exempt from
local taxes, justifying the exemption in this wise:
Local governments have no power to tax instrumentalities of the National Government. PAGCOR is a
government owned or controlled corporation with an original charter, PD 1869. All of its shares of
stocks are owned by the National Government. In addition to its corporate powers (Sec. 3, Title II, PD
1869) it also exercises regulatory powers . . .
PAGCOR has a dual role, to operate and to regulate gambling casinos. The latter role is governmental,
which places it in the category of an agency or instrumentality of the Government. Being an
instrumentality of the Government, PAGCOR should be and actually is exempt from local taxes.
Otherwise, its operation might be burdened, impeded or subjected to control by a mere Local
government. TIaCHA
"The states have no power by taxation or otherwise, to retard impede, burden or in any manner control
the operation of constitutional laws enacted by Congress to carry into execution the powers vested in
the federal government." (McCulloch v. Marland, 4 Wheat 316, 4 L Ed. 579)
This doctrine emanates from the "supremacy" of the National Government over local governments.
"Justice Holmes, speaking for the Supreme Court, made reference to the entire absence of power on the
part of the States to touch, in that way (taxation) at least, the instrumentalities of the United States
(Johnson v. Maryland, 254 US 51) and it can be agreed that no state or political subdivision can
regulate a federal instrumentality in such a way as to prevent it from consummating its federal

responsibilities, or even to seriously burden it in the accomplishment of them." (Antieau, Modern

Constitutional Law, Vol. 2, p. 140, emphasis supplied)
Otherwise, mere creatures of the State can defeat National policies thru extermination of what local
authorities may perceive to be undesirable activates or enterprise using the power to tax as "a tool for
regulation" (U.S. v. Sanchez, 340 US 42).
The power to tax which was called by Justice Marshall as the "power to destroy" (McCulloch v.
Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very entity which
has the inherent power to wield it. 32
Basco is as strident a reiteration of the old guard view that frowned on the principle of local autonomy,
especially as it interfered with the prerogatives and privileges of the national government. Also
consider the following citation from Maceda v. Macaraig, 33 decided the same year as Basco.
Discussing the rule of construction of tax exemptions on government instrumentalities, the sentiments
are of a similar vein.
Moreover, it is a recognized principle that the rule on strict interpretation does not apply in the case of
exemptions in favor of a government political subdivision or instrumentality.
The basis for applying the rule of strict construction to statutory provisions granting tax exemptions or
deductions, even more obvious than with reference to the affirmative or levying provisions of tax
statutes, is to minimize differential treatment and foster impartiality, fairness, and equality of treatment
among tax payers.
The reason for the rule does not apply in the case of exemptions running to the benefit of the
government itself or its agencies. In such case the practical effect of an exemption is merely to reduce
the amount of money that has to be handled by government in the course of its operations. For these
reasons, provisions granting exemptions to government agencies may be construed liberally, in favor of
non tax-liability of such agencies.
In the case of property owned by the state or a city or other public corporations, the express exemption
should not be construed with the same degree of strictness that applies to exemptions contrary to the
policy of the state, since as to such property "exemption is the rule and taxation the exception." 34
Strikingly, the majority cites these two very cases and the stodgy rationale provided therein. This
evinces the perspective from which the majority is coming from. It is admittedly a viewpoint once
shared by this Court, and en vogue prior to the enactment of the Local Government Code of 1991.
However, the Local Government Code of 1991 ushered in a new ethos on how the art of governance
should be practiced in the Philippines, conceding greater powers once held in the private reserve of the
national government to LGUs. The majority might have private qualms about the wisdom of the policy
of local autonomy, but the members of the Court are not expected to substitute their personal biases for
the legislative will, especially when the 1987 Constitution itself promotes the principle of local
autonomy.
Article II. Declaration of Principles and State Policies
xxx
xxx
xxx
Sec. 25.
The State shall ensure the autonomy of local governments.
Article X. Local Government
xxx
xxx
xxx
Sec. 2. The territorial and political subdivisions shall enjoy local autonomy. acCTIS
Section 3.
The Congress shall enact a local government code which shall provide for a more
responsive and accountable local government structure instituted through a system of decentralization
with effective mechanisms of recall, initiative, and referendum, allocate among the different local
government units their powers, responsibilities, and resources, and provide for the qualifications,
election, appointment and removal, term, salaries, powers and functions and duties of local officials,
and all other matters relating to the organization and operation of the local units.
xxx
xxx
xxx

Section 5.
Each local government unit shall have the power to create its own sources of revenues
and to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may
provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue
exclusively to the local governments.
xxx
xxx
xxx
The Court in Mactan recognized that a new day had dawned with the enactment of the 1987
Constitution and the Local Government Code of 1991. Thus, it expressly rejected the contention of the
MCIAA that Basco was applicable to them. In doing so, the language of the Court was dramatic, if only
to emphasize how monumental the shift in philosophy was with the enactment of the Local
Government Code:
Accordingly, the position taken by the [MCIAA] is untenable. Reliance on Basco v. Philippine
Amusement and Gaming Corporation is unavailing since it was decided before the effectivity of the
[Local Government Code]. Besides, nothing can prevent Congress from decreeing that even
instrumentalities or agencies of the Government performing governmental functions may be subject to
tax. Where it is done precisely to fulfill a constitutional mandate and national policy, no one can doubt
its wisdom. 35 (emphasis supplied)
The Court Has Repeatedly
Reaffirmed Mactan Over the
Precedents Now Relied Upon
By the Majority
Since then and until today, the Court has been emphatic in declaring the Basco doctrine as dead. The
notion that instrumentalities may be subjected to local taxation by LGUs was again affirmed in
National Power Corporation v. City of Cabanatuan, 36 which was penned by Justice Puno. NPC or
Napocor, invoking its continued exemption from payment of franchise taxes to the City of Cabanatuan,
alleged that it was an instrumentality of the National Government which could not be taxed by a city
government. To that end, Basco was cited by NPC. The Court had this to say about Basco.
. . . [T]he doctrine in Basco vs. Philippine Amusement and Gaming Corporation relied upon by the
petitioner to support its claim no longer applies. To emphasize, the Basco case was decided prior to the
effectivity of the LGC, when no law empowering the local government units to tax instrumentalities of
the National Government was in effect. However, as this Court ruled in the case of Mactan Cebu
International Airport Authority (MCIAA) vs. Marcos, nothing prevents Congress from decreeing that
even instrumentalities or agencies of the government performing governmental functions may be
subject to tax. In enacting the LGC, Congress exercised its prerogative to tax instrumentalities and
agencies of government as it sees fit. Thus, after reviewing the specific provisions of the LGC, this
Court held that MCIAA, although an instrumentality of the national government, was subject to real
property tax. 37
In the 2003 case of Philippine Ports Authority v. City of Iloilo, 38 the Court, in the able ponencia of
Justice Azcuna, affirmed the levy of realty taxes on the PPA. Although the taxes were assessed under
the old Real Property Tax Code and not the Local Government Code, the Court again cited Mactan to
refute PPA's invocation of Basco as the basis of its exemption.
[Basco] did not absolutely prohibit local governments from taxing government instrumentalities. In fact
we stated therein:
The power of local government to "impose taxes and fees" is always subject to "limitations" which
Congress may provide by law. Since P.D. 1869 remains an "operative" law until "amended, repealed or
revoked". . . its "exemption clause" remains an exemption to the exercise of the power of local
governments to impose taxes and fees. AHDacC
Furthermore, in the more recent case of Mactan Cebu International Airport Authority v. Marcos, where
the Basco case was similarly invoked for tax exemption, we stated: "[N]othing can prevent Congress
from decreeing that even instrumentalities or agencies of the Government performing governmental

functions may be subject to tax. Where it is done precisely to fulfill a constitutional mandate and
national policy, no one can doubt its wisdom." The fact that tax exemptions of government-owned or
controlled corporations have been expressly withdrawn by the present Local Government Code clearly
attests against petitioner's claim of absolute exemption of government instrumentalities from local
taxation. 39
Just last month, the Court in National Power Corporation v. Province of Isabela 40 again rejected Basco
in emphatic terms. Held the Court, through Justice Callejo, Sr.:
Thus, the doctrine laid down in the Basco case is no longer true. In the Cabanatuan case, the Court
noted primarily that the Basco case was decided prior to the effectivity of the LGC, when no law
empowering the local government units to tax instrumentalities of the National Government was in
effect. It further explained that in enacting the LGC, Congress empowered the LGUs to impose certain
taxes even on instrumentalities of the National Government. 41
The taxability of the PPA recently came to fore in Philippine Ports Authority v. City of Iloilo 42 case, a
decision also penned by Justice Callejo, Sr., wherein the Court affirmed the sale of PPA's properties at
public auction for failure to pay realty taxes. The Court again reiterated that "it was the intention of
Congress to withdraw the tax exemptions granted to or presently enjoyed by all persons, including
government-owned or controlled corporations, upon the effectivity" of the Code. 43 The Court in the
second Public Ports Authority case likewise cited Mactan as providing the "raison d'etre for the
withdrawal of the exemption," namely, "the State policy to ensure autonomy to local governments and
the objective of the [Local Government Code] that they enjoy genuine and meaningful local autonomy
to enable them to attain their fullest development as self-reliant communities. . . ." 44
Last year, the Court, in City of Davao v. RTC, 45 affirmed that the legislated exemption from real
property taxes of the Government Service Insurance System (GSIS) was removed under the Local
Government Code. Again, Mactan was relied upon as the governing precedent. The removal of the tax
exemption stood even though the then GSIS law 46 prohibited the removal of GSIS' tax exemptions
unless the exemption was specifically repealed, "and a provision is enacted to substitute the declared
policy of exemption from any and all taxes as an essential factor for the solvency of the fund." 47 The
Court, citing established doctrines in statutory construction and Duarte v. Dade 48 ruled that such
proscription on future legislation was itself prohibited, as "the legislature cannot bind a future
legislature to a particular mode of repeal." 49
And most recently, just less than one month ago, the Court, through Justice Corona in Government
Service Insurance System v. City Assessor of Iloilo 50 again affirmed that the Local Government Code
removed the previous exemption from real property taxes of the GSIS. Again Mactan was cited as
having "expressly withdrawn the [tax] exemption of the [GOCC]. 51
Clearly then, Mactan is not a stray or unique precedent, but the basis of a jurisprudential rule employed
by the Court since its adoption, the doctrine therein consistent with the Local Government Code.
Corollarily, Basco, the polar opposite of Mactan has been emphatically rejected and declared
inconsistent with the Local Government Code. cDTSHE
II.
Majority, in Effectively Overturning Mactan,
Refuses to Say Why Mactan Is Wrong
The majority cites Basco in support. It does not cite Mactan, other than an incidental reference that it is
relied upon by the respondents. 52 However, the ineluctable conclusion is that the majority rejects the
rationale and ruling in Mactan. The majority provides for a wildly different interpretation of Section
133, 193 and 234 of the Local Government Code than that employed by the Court in Mactan.
Moreover, the parties in Mactan and in this case are similarly situated, as can be obviously deducted
from the fact that both petitioners are airport authorities operating under similarly worded charters. And
the fact that the majority cites doctrines contrapuntal to the Local Government Code as in Basco and
Maceda evinces an intent to go against the Court's jurisprudential trend adopting the philosophy of

expanded local government rule under the Local Government Code.

Before I dwell upon the numerous flaws of the majority, a brief comment is necessitated on the
majority's studied murkiness vis--vis the Mactan precedent. The majority is obviously inconsistent
with Mactan and there is no way these two rulings can stand together. Following basic principles in
statutory construction, Mactan will be deemed as giving way to this new ruling.
However, the majority does not bother to explain why Mactan is wrong. The interpretation in Mactan
of the relevant provisions of the Local Government Code is elegant and rational, yet the majority
refuses to explain why this reasoning of the Court in Mactan is erroneous. In fact, the majority does not
even engage Mactan in any meaningful way. If the majority believes that Mactan may still stand
despite this ruling, it remains silent as to the viable distinctions between these two cases.
The majority's silence on Mactan is baffling, considering how different this new ruling is with the
ostensible precedent. Perhaps the majority does not simply know how to dispense with the ruling in
Mactan. If Mactan truly deserves to be discarded as precedent, it deserves a more honorable end than
death by amnesia or ignominious disregard. The majority could have devoted its discussion in
explaining why it thinks Mactan is wrong, instead of pretending that Mactan never existed at all. Such
an approach might not have won the votes of the minority, but at least it would provide some degree of
intellectual clarity for the parties, LGUs and the national government, students of jurisprudence and
practitioners. A more meaningful debate on the matter would have been possible, enriching the study of
law and the intellectual dynamic of this Court.
There is no way the majority can be justified unless Mactan is overturned. The MCIAA and the MIAA
are similarly situated. They are both, as will be demonstrated, GOCCs, commonly engaged in the
business of operating an airport. They are the owners of airport properties they respectively maintain
and hold title over these properties in their name. 53 These entities are both owned by the State, and
denied by their respective charters the absolute right to dispose of their properties without prior
approval elsewhere. 54 Both of them are not empowered to obtain loans or encumber their properties
without prior approval the prior approval of the President. 55
III.
Instrumentalities, Agencies
And GOCCs Generally
Liable for Real Property Tax
I shall now proceed to demonstrate the errors in reasoning of the majority. A bulwark of my position
lies with Mactan, which will further demonstrate why the majority has found it inconvenient to even
grapple with the precedent that is Mactan in the first place.
Mactan held that the prohibition on taxing the national government, its agencies and instrumentalities
under Section 133 is qualified by Section 232 and Section 234, and accordingly, the only relevant
exemption now applicable to these bodies is as provided under Section 234(o), or on "real property
owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial
use thereof has been granted, for consideration or otherwise, to a taxable person."
It should be noted that the express withdrawal of previously granted exemptions by the Local
Government Code do not even make any distinction as to whether the exempt person is a governmental
entity or not. As Sections 193 and 234 both state, the withdrawal applies to "all persons, including
[GOCCs]", thus encompassing the two classes of persons recognized under our laws, natural persons
56 and juridical persons. 57
The fact that the Local Government Code mandates the withdrawal of previously granted exemptions
evinces certain key points. If an entity was previously granted an express exemption from real property
taxes in the first place, the obvious conclusion would be that such entity would ordinarily be liable for
such taxes without the exemption. If such entities were already deemed exempt due to some
overarching principle of law, then it would be a redundancy or surplusage to grant an exemption to an
already exempt entity. This fact militates against the claim that MIAA is preternaturally exempt from

realty taxes, since it required the enactment of an express exemption from such taxes in its charter.
CIDcHA
Amazingly, the majority all but ignores the disquisition in Mactan and asserts that government
instrumentalities are not taxable persons unless they lease their properties to a taxable person. The
general rule laid down in Section 232 is given short shrift. In arriving at this conclusion, several leaps
in reasoning are committed.
Majority's Flawed Definition
of GOCCs.
The majority takes pains to assert that the MIAA is not a GOCC, but rather an instrumentality.
However, and quite grievously, the supposed foundation of this assertion is an adulteration.
The majority gives the impression that a government instrumentality is a distinct concept from a
government corporation. 58 Most tellingly, the majority selectively cites a portion of Section 2(10) of
the Administrative Code of 1987, as follows:
Instrumentality refers to any agency of the National Government not integrated within the department
framework, vested with special functions or jurisdiction by law, endowed with some if not all corporate
powers, administering special funds, and enjoying operational autonomy, usually through a charter. . . .
59 (emphasis omitted)
However, Section 2(10) of the Administrative Code, when read in full, makes an important clarification
which the majority does not show. The portions omitted by the majority are highlighted below:
(10) Instrumentality refers to any agency of the National Government not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some if not
all corporate powers, administering special funds, and enjoying operational autonomy, usually through
a charter. This term includes regulatory agencies, chartered institutions and government owned or
controlled corporations. 60
Since Section 2(10) makes reference to "agency of the National Government," Section 2(4) is also
worth citing in full:
(4)
Agency of the Government refers to any of the various units of the Government, including a
department, bureau, office, instrumentality, or government-owned or controlled corporation, or a local
government or a distinct unit therein. (emphasis supplied) 61
Clearly then, based on the Administrative Code, a GOCC may be an instrumentality or an agency of the
National Government. Thus, there actually is no point in the majority's assertion that MIAA is not a
GOCC, since based on the majority's premise of Section 133 as the key provision, the material question
is whether MIAA is either an instrumentality, an agency, or the National Government itself. The very
provisions of the Administrative Code provide that a GOCC can be either an instrumentality or an
agency, so why even bother to extensively discuss whether or not MIAA is a GOCC?
Indeed as far back as the 1927 case of Government of the Philippine Islands v. Springer, 62 the
Supreme Court already noted that a corporation of which the government is the majority stockholder
"remains an agency or instrumentality of government." 63
Ordinarily, the inconsequential verbiage stewing in judicial opinions deserve little rebuttal. However,
the entire discussion of the majority on the definition of a GOCC, obiter as it may ultimately be,
deserves emphatic refutation. The views of the majority on this matter are very dangerous, and would
lead to absurdities, perhaps unforeseen by the majority. For in fact, the majority effectively declassifies
many entities created and recognized as GOCCs and would give primacy to the Administrative Code of
1987 rather than their respective charters as to the definition of these entities.
Majority Ignores the Power
Of Congress to Legislate and
Define Chartered Corporations
First, the majority declares that, citing Section 2(13) of the Administrative Code, a GOCC must be
"organized as a stock or non-stock corporation," as defined under the Corporation Code. To insist on

this as an absolute rule fails on bare theory. Congress has the undeniable power to create a corporation
by legislative charter, and has been doing so throughout legislative history. There is no constitutional
prohibition on Congress as to what structure these chartered corporations should take on. Clearly,
Congress has the prerogative to create a corporation in whatever form it chooses, and it is not bound by
any traditional format. Even if there is a definition of what a corporation is under the Corporation Code
or the Administrative Code, these laws are by no means sacrosanct. It should be remembered that these
two statutes fall within the same level of hierarchy as a congressional charter, since they all are
legislative enactments. Certainly, Congress can choose to disregard either the Corporation Code or the
Administrative Code in defining the corporate structure of a GOCC, utilizing the same extent of
legislative powers similarly vesting it the putative ability to amend or abolish the Corporation Code or
the Administrative Code. aATHES
These principles are actually recognized by both the Administrative Code and the Corporation Code.
The definition of GOCCs, agencies and instrumentalities under the Administrative Code are laid down
in the section entitled "General Terms Defined," which qualifies:
Sec. 2. General Terms Defined. Unless the specific words of the text, or the context as a whole, or a
particular statute, shall require a different meaning: (emphasis supplied)
xxx
xxx
xxx
Similar in vein is Section 6 of the Corporation Code which provides:
SEC. 4.
Corporations created by special laws or charters. Corporations created by special
laws or charters shall be governed primarily by the provisions of the special law or charter creating
them or applicable to them, supplemented by the provisions of this Code, insofar as they are applicable.
(emphasis supplied)
Thus, the clear doctrine emerges the law that governs the definition of a corporation or entity
created by Congress is its legislative charter. If the legislative enactment defines an entity as a
corporation, then it is a corporation, no matter if the Corporation Code or the Administrative Code
seemingly provides otherwise. In case of conflict between the legislative charter of a government
corporation, on one hand, and the Corporate Code and the Administrative Code, on the other, the
former always prevails.
Majority, in Ignoring the
Legislative Charters, Effectively
Classifies Duly Established GOCCs,
With Disastrous and Far Reaching
Legal Consequences
Second, the majority claims that MIAA does not qualify either as a stock or non-stock corporation, as
defined under the Corporation Code. It explains that the MIAA is not a stock corporation because it
does not have any capital stock divided into shares. Neither can it be considered as a non-stock
corporation because it has no members, and under Section 87, a non-stock corporation is one where no
part of its income is distributable as dividends to its members, trustees or officers.
This formulation of course ignores Section 4 of the Corporation Code, which again provides that
corporations created by special laws or charters shall be governed primarily by the provisions of the
special law or charter, and not the Corporation Code.
That the MIAA cannot be considered a stock corporation if only because it does not have a stock
structure is hardly a plausible proposition. Indeed, there is no point in requiring a capital stock structure
for GOCCs whose full ownership is limited by its charter to the State or Republic. Such GOCCs are not
empowered to declare dividends or alienate their capital shares.
Admittedly, there are GOCCs established in such a manner, such as the National Power Corporation
(NPC), which is provided with authorized capital stock wholly subscribed and paid for by the
Government of the Philippines, divided into shares but at the same time, is prohibited from transferring,
negotiating, pledging, mortgaging or otherwise giving these shares as security for payment of any

obligation. 64 However, based on the Corporation Code definition relied upon by the majority, even the
NPC cannot be considered as a stock corporation. Under Section 3 of the Corporation Code, stock
corporations are defined as being "authorized to distribute to the holders of its shares dividends or
allotments of the surplus profits on the basis of the shares held." 65 On the other hand, Section 13 of
the NPC's charter states that "the Corporation shall be non-profit and shall devote all its returns from its
capital investment, as well as excess revenues from its operation, for expansion." 66 Can the holder of
the shares of NPC, the National Government, receive its surplus profits on the basis of its shares held?
It cannot, according to the NPC charter, and hence, following Section 3 of the Corporation Code, the
NPC is not a stock corporation, if the majority is to be believed.
The majority likewise claims that corporations without members cannot be deemed non-stock
corporations. This would seemingly exclude entities such as the NPC, which like MIAA, has no
ostensible members. Moreover, non-stock corporations cannot distribute any part of its income as
dividends to its members, trustees or officers. The majority faults MIAA for remitting 20% of its gross
operating income to the national government. How about the Philippine Health Insurance Corporation,
created with the "status of a tax-exempt government corporation attached to the Department of Health"
under Rep. Act No. 7875. 67 It too cannot be considered as a stock corporation because it has no capital
stock structure. But using the criteria of the majority, it is doubtful if it would pass muster as a nonstock corporation, since the PHIC or Philhealth, as it is commonly known, is expressly empowered "to
collect, deposit, invest, administer and disburse" the National Health Insurance Fund. 68 Or how about
the Social Security System, which under its revised charter, Republic Act No. 8282, is denominated as
a "corporate body." 69 The SSS has no capital stock structure, but has capital comprised of
contributions by its members, which are eventually remitted back to its members. Does this disqualify
the SSS from classification as a GOCC, notwithstanding this Court's previous pronouncement in Social
Security System Employees Association v. Soriano? 70
In fact, Republic Act No. 7656, enacted in 1993, requires that all GOCCs, whether stock or non-stock,
71 declare and remit at least fifty percent (50%) of their annual net earnings as cash, stock or property
dividends to the National Government. 72 But according to the majority, non-stock corporations are
prohibited from declaring any part of its income as dividends. But if Republic Act No. 7656 requires
even non-stock corporations to declare dividends from income, should it not follow that the prohibition
against declaration of dividends by non-stock corporations under the Corporation Code does not apply
to government-owned or controlled corporations? For if not, and the majority's illogic is pursued,
Republic Act No. 7656, passed in 1993, would be fatally flawed, as it would contravene the
Administrative Code of 1987 and the Corporation Code. TCcIaA
In fact, the ruinous effects of the majority's hypothesis on the nature of GOCCs can be illustrated by
Republic Act No. 7656. Following the majority's definition of a GOCC and in accordance with
Republic Act No. 7656, here are but a few entities which are not obliged to remit fifty (50%) of its
annual net earnings to the National Government as they are excluded from the scope of Republic Act
No. 7656:
1)
Philippine Ports Authority 73 has no capital stock 74 , no members, and obliged to apply the
balance of its income or revenue at the end of each year in a general reserve. 75
2)
Bases Conversion Development Authority 76 has no capital stock, 77 no members.
3)
Philippine Economic Zone Authority 78 no capital stock, 79 no members.
4)
Light Rail Transit Authority 80 no capital stock, 81 no members.
5)
Bangko Sentral ng Pilipinas 82 no capital stock, 83 no members, required to remit fifty
percent (50%) of its net profits to the National Treasury. 84
6)
National Power Corporation 85 has capital stock but is prohibited from "distributing to the
holders of its shares dividends or allotments of the surplus profits on the basis of the shares held;" 86
no members.
7)
Manila International Airport Authority no capital stock 87 , no members 88 , mandated to

remit twenty percent (20%) of its annual gross operating income to the National Treasury. 89
Thus, for the majority, the MIAA, among many others, cannot be considered as within the coverage of
Republic Act No. 7656. Apparently, President Fidel V. Ramos disagreed. How else then could
Executive Order No. 483, signed in 1998 by President Ramos, be explained? The issuance provides:
WHEREAS, Section 1 of Republic Act No. 7656 provides that:
"Section 1.
Declaration of Policy. It is hereby declared the policy of the State that in order for the
National Government to realize additional revenues, government-owned and/or controlled
corporations, without impairing their viability and the purposes for which they have been established,
shall share a substantial amount of their net earnings to the National Government."
WHEREAS, to support the viability and mandate of government-owned and/or controlled corporations
[GOCCs], the liquidity, retained earnings position and medium-term plans and programs of these
GOCCs were considered in the determination of the reasonable dividend rates of such corporations on
their 1997 net earnings.
WHEREAS, pursuant to Section 5 of RA 7656, the Secretary of Finance recommended the adjustment
on the percentage of annual net earnings that shall be declared by the Manila International Airport
Authority [MIAA] and Phividec Industrial Authority [PIA] in the interest of national economy and
general welfare.
NOW, THEREFORE, I, FIDEL V. RAMOS, President of the Philippines, by virtue of the powers
vested in me by law, do hereby order:
SECTION 1. The percentage of net earnings to be declared and remitted by the MIAA and PIA as
dividends to the National Government as provided for under Section 3 of Republic Act No. 7656 is
adjusted from at least fifty percent [50%] to the rates specified hereunder:
1.
Manila International Airport Authority
35% [cash]
2.
Phividec Industrial Authority 25% [cash]
SECTION 2. The adjusted dividend rates provided for under Section 1 are only applicable on 1997 net
earnings of the concerned government-owned and/or controlled corporations.
Obviously, it was the opinion of President Ramos and the Secretary of Finance that MIAA is a GOCC,
for how else could it have come under the coverage of Republic Act No. 7656, a law applicable only to
GOCCs? But, the majority apparently disagrees, and resultantly holds that MIAA is not obliged to
remit even the reduced rate of thirty five percent (35%) of its net earnings to the national government,
since it cannot be covered by Republic Act No. 7656. TCaSAH
All this mischief because the majority would declare the Administrative Code of 1987 and the
Corporation Code as the sole sources of law defining what a government corporation is. As I stated
earlier, I find it illogical that chartered corporations are compelled to comply with the templates of the
Corporation Code, especially when the Corporation Code itself states that these corporations are to be
governed by their own charters. This is especially true considering that the very provision cited by the
majority, Section 87 of the Corporation Code, expressly says that the definition provided therein is laid
down "for the purposes of this [Corporation] Code." Read in conjunction with Section 4 of the
Corporation Code which mandates that corporations created by charter be governed by the law creating
them, it is clear that contrary to the majority, MIAA is not disqualified from classification as a nonstock corporation by reason of Section 87, the provision not being applicable to corporations created by
special laws or charters. In fact, I see no real impediment why the MIAA and similarly situated
corporations such as the PHIC, the SSS, the Philippine Deposit Insurance Commission, or maybe even
the NPC could at the very least, be deemed as no stock corporations (as differentiated from non-stock
corporations).
The point, stripped to bare simplicity, is that entity created by legislative enactment is a corporation if
the legislature says so. After all, it is the legislature that dictates what a corporation is in the first place.
This is better illustrated by another set of entities created before martial law. These include the
Mindanao Development Authority, 90 the Northern Samar Development Authority, 91 the Ilocos Sur

Development Authority, 92 the Southeastern Samar Development Authority 93 and the Mountain
Province Development Authority. 94 An examination of the first section of the statutes creating these
entities reveal that they were established "to foster accelerated and balanced growth" of their respective
regions, and towards such end, the charters commonly provide that "it is recognized that a government
corporation should be created for the purpose," and accordingly, these charters "hereby created a body
corporate." 95 However, these corporations do not have capital stock nor members, and are obliged to
return the unexpended balances of their appropriations and earnings to a revolving fund in the National
Treasury. The majority effectively declassifies these entities as GOCCs, never mind the fact that their
very charters declare them to be GOCCs.
I mention these entities not to bring an element of obscurantism into the fray. I cite them as examples to
emphasize my fundamental point that it is the legislative charters of these entities, and not the
Administrative Code, which define the class of personality of these entities created by Congress. To
adopt the view of the majority would be, in effect, to sanction an implied repeal of numerous
congressional charters for the purpose of declassifying GOCCs. Certainly, this could not have been the
intent of the crafters of the Administrative Code when they drafted the "Definition of Terms"
incorporated therein.
MIAA Is Without
Doubt, A GOCC
Following the charters of government corporations, there are two kinds of GOCCs, namely: GOCCs
which are stock corporations and GOCCs which are no stock corporations (as distinguished from nonstock corporation). Stock GOCCs are simply those which have capital stock while no stock GOCCs are
those which have no capital stock. Obviously these definitions are different from the definitions of the
terms in the Corporation Code. Verily, GOCCs which are not incorporated with the Securities and
Exchange Commission are not governed by the Corporation Code but by their respective charters.
For the MIAA's part, its charter is replete with provisions that indubitably classify it as a GOCC.
Observe the following provisions from MIAA's charter:
SECTION 3. Creation of the Manila International Airport Authority. There is hereby established a
body corporate to be known as the Manila International Airport Authority which shall be attached to the
Ministry of Transportation and Communications. The principal office of the Authority shall be located
at the New Manila International Airport. The Authority may establish such offices, branches, agencies
or subsidiaries as it may deem proper and necessary; Provided, That any subsidiary that may be
organized shall have the prior approval of the President.
The land where the Airport is presently located as well as the surrounding land area of approximately
six hundred hectares, are hereby transferred, conveyed and assigned to the ownership and
administration of the Authority, subject to existing rights, if any. The Bureau of Lands and other
appropriate government agencies shall undertake an actual survey of the area transferred within one
year from the promulgation of this Executive Order and the corresponding title to be issued in the name
of the Authority. Any portion thereof shall not be disposed through sale or through any other mode
unless specifically approved by the President of the Philippines. AcDaEH
xxx
xxx
xxx
SECTION 5. Functions, Powers, and Duties. The Authority shall have the following functions,
powers and duties:
xxx
xxx
xxx
(d)
To sue and be sued in its corporate name;
(e)
To adopt and use a corporate seal;
(f)
To succeed by its corporate name;
(g)
To adopt its by-laws, and to amend or repeal the same from time to time;
(h)
To execute or enter into contracts of any kind or nature;
(i)
To acquire, purchase, own, administer, lease, mortgage, sell or otherwise dispose of any land,

building, airport facility, or property of whatever kind and nature, whether movable or immovable, or
any interest therein;
(j)
To exercise the power of eminent domain in the pursuit of its purposes and objectives;
xxx
xxx
xxx
(o)
To exercise all the powers of a corporation under the Corporation Law, insofar as these powers
are not inconsistent with the provisions of this Executive Order.
xxx
xxx
xxx
SECTION 16. Borrowing Power. The Authority may, after consultation with the Minister of Finance
and with the approval of the President of the Philippines, as recommended by the Minister of
Transportation and Communications, raise funds, either from local or international sources, by way of
loans, credits or securities, and other borrowing instruments, with the power to create pledges,
mortgages and other voluntary liens or encumbrances on any of its assets or properties.
All loans contracted by the Authority under this Section, together with all interests and other sums
payable in respect thereof, shall constitute a charge upon all the revenues and assets of the Authority
and shall rank equally with one another, but shall have priority over any other claim or charge on the
revenue and assets of the Authority: Provided, That this provision shall not be construed as a
prohibition or restriction on the power of the Authority to create pledges, mortgages, and other
voluntary liens or encumbrances on any assets or property of the Authority.
Except as expressly authorized by the President of the Philippines the total outstanding indebtedness of
the Authority in the principal amount, in local and foreign currency, shall not at any time exceed the net
worth of the Authority at any given time.
xxx
xxx
xxx
The President or his duly authorized representative after consultation with the Minister of Finance may
guarantee, in the name and on behalf of the Republic of the Philippines, the payment of the loans or
other indebtedness of the Authority up to the amount herein authorized.
These cited provisions establish the fitness of MIAA to be the subject of legal relations. 96 MIAA
under its charter may acquire and possess property, incur obligations, and bring civil or criminal
actions. It has the power to contract in its own name, and to acquire title to real or personal property. It
likewise may exercise a panoply of corporate powers and possesses all the trappings of corporate
personality, such as a corporate name, a corporate seal and by-laws. All these are contained in MIAA's
charter which, as conceded by the Corporation Code and even the Administrative Code, is the primary
law that governs the definition and organization of the MIAA.
In fact, MIAA itself believes that it is a GOCC represents itself as such. It said so itself in the very first
paragraph of the present petition before this Court. 97 So does, apparently, the Department of Budget
and Management, which classifies MIAA as a "government owned & controlled corporation" on its
internet website. 98 There is also the matter of Executive Order No. 483, which evinces the belief of
the then-president of the Philippines that MIAA is a GOCC. And the Court before had similarly
characterized MIAA as a government-owned and controlled corporation in the earlier MIAA case,
Manila International Airport Authority v. Commission on Audit. 99
Why then the hesitance to declare MIAA a GOCC? As the majority repeatedly asserts, it is because
MIAA is actually an instrumentality. But the very definition relied upon by the majority of an
instrumentality under the Administrative Code clearly states that a GOCC is likewise an instrumentality
or an agency. The question of whether MIAA is a GOCC might not even be determinative of this
Petition, but the effect of the majority's disquisition on that matter may even be more destructive than
the ruling that MIAA is exempt from realty taxes. Is the majority ready to live up to the momentous
consequences of its flawed reasoning? ACaDTH
Novel Proviso in 1987 Constitution
Prescribing Standards in the
Creation of GOCCs Necessarily

Applies only to GOCCs Created

After 1987.
One last point on this matter on whether MIAA is a GOCC. The majority triumphantly points to
Section 16, Article XII of the 1987 Constitution, which mandates that the creation of GOCCs through
special charters be "in the interest of the common good and subject to the test of economic viability."
For the majority, the test of economic viability does not apply to government entities vested with
corporate powers and performing essential public services. But this test of "economic viability" is new
to the constitutional framework. No such test was imposed in previous Constitutions, including the
1973 Constitution which was the fundamental law in force when the MIAA was created. How then
could the MIAA, or any GOCC created before 1987 be expected to meet this new precondition to the
creation of a GOCC? Does the majority seriously suggest that GOCCs created before 1987 may be
declassified on account of their failure to meet this "economic viability test"?
Instrumentalities and Agencies
Also Generally Liable For
Real Property Taxes
Next, the majority, having bludgeoned its way into asserting that MIAA is not a GOCC, then argues
that MIAA is an instrumentality. It cites incompletely, as earlier stated, the provision of Section 2(10)
of the Administrative Code. A more convincing view offered during deliberations, but which was not
adopted by the ponencia, argued that MIAA is not an instrumentality but an agency, considering the
fact that under the Administrative Code, the MIAA is attached within the department framework of the
Department of Transportation and Communications. 100 Interestingly, Executive Order No. 341,
enacted by President Arroyo in 2004, similarly calls MIAA an agency. Since instrumentalities are
expressly defined as "an agency not integrated within the department framework," that view concluded
that MIAA cannot be deemed an instrumentality.
Still, that distinction is ultimately irrelevant. Of course, as stated earlier, the Administrative Code
considers GOCCs as agencies, 101 so the fact that MIAA is an agency does not exclude it from
classification as a GOCC. On the other hand, the majority justifies MIAA's purported exemption on
Section 133 of the Local Government Code, which similarly situates "agencies and instrumentalities"
as generally exempt from the taxation powers of LGUs. And on this point, the majority again evades
Mactan and somehow concludes that Section 133 is the general rule, notwithstanding Sections 232 and
234(a) of the Local Government Code. And the majority's ultimate conclusion? "By express mandate of
the Local Government Code, local governments cannot impose any kind of tax on national government
instrumentalities like the MIAA. Local governments are devoid of power to tax the national
government, its agencies and instrumentalities." 102
The Court's interpretation of the Local Government Code in Mactan renders the law integrally
harmonious and gives due accord to the respective prerogatives of the national government and LGUs.
Sections 133 and 234(a) ensure that the Republic of the Philippines or its political subdivisions shall
not be subjected to any form of local government taxation, except realty taxes if the beneficial use of
the property owned has been granted for consideration to a taxable entity or person. On the other hand,
Section 133 likewise assures that government instrumentalities such as GOCCs may not be arbitrarily
taxed by LGUs, since they could be subjected to local taxation if there is a specific proviso thereon in
the Code. One such proviso is Section 137, which as the Court found in National Power Corporation,
103 permits the imposition of a franchise tax on businesses enjoying a franchise, even if it be a GOCC
such as NPC. And, as the Court acknowledged in Mactan, Section 232 provides another exception on
the taxability of instrumentalities.
The majority abjectly refuses to engage Section 232 of the Local Government Code although it
provides the indubitable general rule that LGUs "may levy an annual ad valorem tax on real property
such as land, building, machinery, and other improvements not hereafter specifically exempted." The
specific exemptions are provided by Section 234. Section 232 comes sequentially after Section 133(o),

104 and even if the sequencing is irrelevant, Section 232 would fall under the qualifying phrase of
Section 133, "Unless otherwise provided herein." It is sad, but not surprising that the majority is not
willing to consider or even discuss the general rule, but only the exemptions under Section 133 and
Section 234. After all, if the majority is dead set in ruling for MIAA no matter what the law says, why
bother citing what the law does say. CaTSEA
Constitution, Laws and
Jurisprudence Have Long
Explained the Rationale
Behind the Local Taxation
Of GOCCs.
This blithe disregard of precedents, almost all of them unanimously decided, is nowhere more evident
than in the succeeding discussion of the majority, which asserts that the power of local governments to
tax national government instrumentalities be construed strictly against local governments. The Maceda
case, decided before the Local Government Code, is cited, as is Basco. This section of the majority
employs deliberate pretense that the Code never existed, or that the fundamentals of local autonomy are
of limited effect in our country. Why is it that the Local Government Code is barely mentioned in this
section of the majority? Because Section 5 of the Code, purposely omitted by the majority provides for
a different rule of interpretation than that asserted:
Section 5.
Rules of Interpretation. In the interpretation of the provisions of this Code, the
following rules shall apply:
(a)
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. Any fair and reasonable doubt as to the existence of the power shall be
interpreted in favor of the local government unit concerned;
(b)
In 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. Any tax exemption, incentive
or relief granted by any local government unit pursuant to the provisions of this Code shall be
construed strictly against the person claiming it; . . .
Yet the majority insists that "there is no point in national and local governments taxing each other,
unless a sound and compelling policy requires such transfer of public funds from one government
pocket to another." 105 I wonder whether the Constitution satisfies the majority's desire for "a sound
and compelling policy." To repeat:
Article II. Declaration of Principles and State Policies
xxx
xxx
xxx
Sec. 25.
The State shall ensure the autonomy of local governments.
Article X. Local Government
xxx
xxx
xxx
Sec. 2. The territorial and political subdivisions shall enjoy local autonomy.
xxx
xxx
xxx
Section 5.
Each local government unit shall have the power to create its own sources of revenues
and to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may
provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue
exclusively to the local governments.
Or how about the Local Government Code, presumably an expression of sound and compelling policy
considering that it was enacted by the legislature, that veritable source of all statutes:
SEC. 129.
Power to Create Sources of Revenue. Each local government unit shall exercise its
power to create its own sources of revenue and to levy taxes, fees, and charges subject to the provisions
herein, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue
exclusively to the local government units.

Justice Puno, in National Power Corporation v. City of Cabanatuan, 106 provides a more "sound and
compelling policy considerations" that would warrant sustaining the taxability of government-owned
entities by local government units under the Local Government Code.
Doubtless, the power to tax is the most effective instrument to raise needed revenues to finance and
support myriad activities of the local government units for the delivery of basic services essential to the
promotion of the general welfare and the enhancement of peace, progress, and prosperity of the people.
As this Court observed in the Mactan case, "the original reasons for the withdrawal of tax exemption
privileges granted to government-owned or controlled corporations and all other units of government
were that such privilege resulted in serious tax base erosion and distortions in the tax treatment of
similarly situated enterprises." With the added burden of devolution, it is even more imperative for
government entities to share in the requirements of development, fiscal or otherwise, by paying taxes or
other charges due from them. 107
I dare not improve on Justice Puno's exhaustive disquisition on the statutory and jurisprudential shift
brought about the acceptance of the principles of local autonomy:
In recent years, the increasing social challenges of the times expanded the scope of state activity, and
taxation has become a tool to realize social justice and the equitable distribution of wealth, economic
progress and the protection of local industries as well as public welfare and similar objectives. Taxation
assumes even greater significance with the ratification of the 1987 Constitution. Thenceforth, the
power to tax is no longer vested exclusively on Congress; local legislative bodies are now given direct
authority to levy taxes, fees and other charges pursuant to Article X, section 5 of the 1987 Constitution,
viz:
"Section 5.
Each Local Government unit shall have the power to create its own sources of revenue,
to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide,
consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue
exclusively to the Local Governments."
This paradigm shift results from the realization that genuine development can be achieved only by
strengthening local autonomy and promoting decentralization of governance. For a long time, the
country's highly centralized government structure has bred a culture of dependence among local
government leaders upon the national leadership. It has also "dampened the spirit of initiative,
innovation and imaginative resilience in matters of local development on the part of local government
leaders." The only way to shatter this culture of dependence is to give the LGUs a wider role in the
delivery of basic services, and confer them sufficient powers to generate their own sources for the
purpose. To achieve this goal, section 3 of Article X of the 1987 Constitution mandates Congress to
enact a local government code that will, consistent with the basic policy of local autonomy, set the
guidelines and limitations to this grant of taxing powers, viz:
"Section 3.
The Congress shall enact a local government code which shall provide for a more
responsive and accountable local government structure instituted through a system of decentralization
with effective mechanisms of recall, initiative, and referendum, allocate among the different local
government units their powers, responsibilities, and resources, and provide for the qualifications,
election, appointment and removal, term, salaries, powers and functions and duties of local officials,
and all other matters relating to the organization and operation of the local units." ATDHSC
To recall, prior to the enactment of the Rep. Act No. 7160, also known as the Local Government Code
of 1991 (LGC), various measures have been enacted to promote local autonomy. These include the
Barrio Charter of 1959, the Local Autonomy Act of 1959, the Decentralization Act of 1967 and the
Local Government Code of 1983. Despite these initiatives, however, the shackles of dependence on the
national government remained. Local government units were faced with the same problems that
hamper their capabilities to participate effectively in the national development efforts, among which
are: (a) inadequate tax base, (b) lack of fiscal control over external sources of income, (c) limited
authority to prioritize and approve development projects, (d) heavy dependence on external sources of

income, and (e) limited supervisory control over personnel of national line agencies.
Considered as the most revolutionary piece of legislation on local autonomy, the LGC effectively deals
with the fiscal constraints faced by LGUs. It widens the tax base of LGUs to include taxes which were
prohibited by previous laws such as the imposition of taxes on forest products, forest concessionaires,
mineral products, mining operations, and the like. The LGC likewise provides enough flexibility to
impose tax rates in accordance with their needs and capabilities. It does not prescribe graduated fixed
rates but merely specifies the minimum and maximum tax rates and leaves the determination of the
actual rates to the respective sanggunian. 108
And the Court's ruling through Justice Azcuna in Philippine Ports Authority v. City of Iloilo 109 ,
provides especially clear and emphatic rationale:
In closing, we reiterate that in taxing government-owned or controlled corporations, the State
ultimately suffers no loss. In National Power Corp. v. Presiding Judge, RTC, Br. XXV, 38 we
elucidated:
Actually, the State has no reason to decry the taxation of NPC's properties, as and by way of real
property taxes. Real property taxes, after all, form part and parcel of the financing apparatus of the
Government in development and nation-building, particularly in the local government level.
xxx
xxx
xxx
To all intents and purposes, real property taxes are funds taken by the State with one hand and given to
the other. In no measure can the government be said to have lost anything.
Finally, we find it appropriate to restate that the primary reason for the withdrawal of tax exemption
privileges granted to government-owned and controlled corporations and all other units of government
was that such privilege resulted in serious tax base erosion and distortions in the tax treatment of
similarly situated enterprises, hence resulting in the need for these entities to share in the requirements
of development, fiscal or otherwise, by paying the taxes and other charges due from them. 110
How does the majority counter these seemingly valid rationales which establish the soundness of a
policy consideration subjecting national instrumentalities to local taxation? Again, by simply ignoring
that these doctrines exist. It is unfortunate if the majority deems these cases or the principles of
devolution and local autonomy as simply too inconvenient, and relies instead on discredited precedents.
Of course, if the majority faces the issues squarely, and expressly discusses why Basco was right and
Mactan was wrong, then this entire endeavor of the Court would be more intellectually satisfying. But,
this is not a game the majority wants to play.
Mischaracterization of this Writer's
Views on the Tax Exemption
Enjoyed by the National Government
Instead, the majority engages in an extended attack pertaining to Section 193, mischaracterizing my
views on that provision as if I had been interpreting the provision as making "the national government,
which itself is a juridical person, subject to tax by local governments since the national government is
not included in the enumeration of exempt entities in Section 193." 111
Nothing is farther from the truth. I have never advanced any theory of the sort imputed in the majority.
My main thesis on the matter merely echoes the explicit provision of Section 193 that unless otherwise
provided in the Local Government Code (LGC) all tax exemptions enjoyed by all persons, whether
natural or juridical, including GOCCs, were withdrawn upon the effectivity of the Code. Since the
provision speaks of withdrawal of tax exemptions of persons, it follows that the exemptions theretofore
enjoyed by MIAA which is definitely a person are deemed withdrawn upon the advent of the Code.
aSDCIE
On the other hand, the provision does not address the question of who are beyond the reach of the
taxing power of LGUs. In fine, the grant of tax exemption or the withdrawal thereof assumes that the
person or entity involved is subject to tax. Thus, Section 193 does not apply to entities which were
never given any tax exemption. This would include the national government and its political

subdivisions which, as a general rule, are not subjected to tax in the first place. 112 Corollarily, the
national government and its political subdivisions do not need tax exemptions. And Section 193 which
ordains the withdrawal of tax exemptions is obviously irrelevant to them.
Section 193 is in point for the disposition of this case as it forecloses dependence for the grant of tax
exemption to MIAA on Section 21 of its charter. Even the majority should concede that the charter
section is now ineffectual, as Section 193 withdraws the tax exemptions previously enjoyed by all
juridical persons.
With Section 193 mandating the withdrawal of tax exemptions granted to all persons upon the
effectivity of the LGC, for MIAA to continue enjoying exemption from realty tax, it will have to rely
on a basis other than Section 21 of its charter.
Lung Center of the Philippines v. Quezon City 113 provides another illustrative example of the
jurisprudential havoc wrought about by the majority. Pursuant to its charter, the Lung Center was
organized as a trust administered by an eponymous GOCC organized with the SEC. 114 There is no
doubt it is a GOCC, even by the majority's reckoning. Applying the Administrative Code, it is also
considered as an agency, the term encompassing even GOCCs. Yet since the Administrative Code
definition of "instrumentalities" encompasses agencies, especially those not attached to a line
department such as the Lung Center, it also follows that the Lung Center is an instrumentality, which
for the majority is exempt from all local government taxes, especially real estate taxes. Yet just in 2004,
the Court unanimously held that the Lung Center was not exempt from real property taxes. Can the
majority and Lung Center be reconciled? I do not see how, and no attempt is made to demonstrate
otherwise.
Another key point. The last paragraph of Section 234 specifically asserts that any previous exemptions
from realty taxes granted to or enjoyed by all persons, including all GOCCs, are thereby withdrawn.
The majority's interpretation of Sections 133 and 234(a) however necessarily implies that all
instrumentalities, including GOCCs, can never be subjected to real property taxation under the Code. If
that is so, what then is the sense of the last paragraph specifically withdrawing previous tax exemptions
to all persons, including GOCCs when juridical persons such as MIAA are anyway, to his view, already
exempt from such taxes under Section 133? The majority's interpretation would effectively render the
express and emphatic withdrawal of previous exemptions to GOCCs inutile. Ut magis valeat quam
pereat. Hence, where a statute is susceptible of more than one interpretation, the court should adopt
such reasonable and beneficial construction which will render the provision thereof operative and
effective, as well as harmonious with each other. 115
But, the majority seems content rendering as absurd the Local Government Code, since it does not have
much use anyway for the Code's general philosophy of fiscal autonomy, as evidently seen by the
continued reliance on Basco or Maceda. Local government rule has never been a grant of emancipation
from the national government. This is the favorite bugaboo of the opponents of local autonomy the
fallacy that autonomy equates to independence.
Thus, the conclusion of the majority is that under Section 133(o), MIAA as a government
instrumentality is beyond the reach of local taxation because it is not subject to taxes, fees or charges of
any kind. Moreover, the taxation of national instrumentalities and agencies by LGUs should be strictly
construed against the LGUs, citing Maceda and Basco. No mention is made of the subsequent rejection
of these cases in jurisprudence following the Local Government Code, including Mactan. The majority
is similarly silent on the general rule under Section 232 on real property taxation or Section 5 on the
rules of construction of the Local Government Code.
V.
MIAA, and not the National Government
Is the Owner of the Subject Taxable Properties
Section 232 of the Local Government Code explicitly provides that there are exceptions to the general
rule on rule property taxation, as "hereafter specifically exempted." Section 234, certainly "hereafter,"

provides indubitable basis for exempting entities from real property taxation. It provides the most
viable legal support for any claim that an governmental entity such as the MIAA is exempt from real
property taxes. To repeat:
SECTION 234. Exemptions from Real Property Tax. The following are exempted from payment of
the real property tax:
xxx
xxx
xxx
(f)
Real property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable
person:
The majority asserts that the properties owned by MIAA are owned by the Republic of the Philippines,
thus placing them under the exemption under Section 234. To arrive at this conclusion, the majority
employs four main arguments. DTSaHI
MIAA Property Is Patrimonial
And Not Part of Public Dominion
The majority claims that the Airport Lands and Buildings are property of public dominion as defined by
the Civil Code, and therefore owned by the State or the Republic of the Philippines. But as pointed out
by Justice Azcuna in the first PPA case, if indeed a property is considered part of the public dominion,
such property is "owned by the general public and cannot be declared to be owned by a public
corporation, such as [the PPA]."
Relevant on this point are the following provisions of the MIAA charter:
Section 3.
Creation of the Manila International Airport Authority. . . .
The land where the Airport is presently located as well as the surrounding land area of approximately
six hundred hectares, are hereby transferred, conveyed and assigned to the ownership and
administration of the Authority, subject to existing rights, if any. . . . Any portion thereof shall not be
disposed through sale or through any other mode unless specifically approved by the President of the
Philippines.
Section 22. Transfer of Existing Facilities and Intangible Assets. All existing public airport
facilities, runways, lands, buildings and other property, movable or immovable, belonging to the
Airport, and all assets, powers rights, interests and privileges belonging to the Bureau of Air
Transportation relating to airport works or air operations, including all equipment which are necessary
for the operation of crash fire and rescue facilities, are hereby transferred to the Authority.
Clearly, it is the MIAA, and not either the State, the Republic of the Philippines or the national
government that asserts legal title over the Airport Lands and Buildings. There was an express transfer
of ownership between the MIAA and the national government. If the distinction is to be blurred, as the
majority does, between the State/Republic/Government and a body corporate such as the MIAA, then
the MIAA charter showcases the remarkable absurdity of an entity transferring property to itself.
Nothing in the Civil Code or the Constitution prohibits the State from transferring ownership over
property of public dominion to an entity that it similarly owns. It is just like a family transferring
ownership over the properties its members own into a family corporation. The family exercises
effective control over the administration and disposition of these properties. Yet for several purposes
under the law, such as taxation, it is the corporation that is deemed to own those properties. A similar
situation obtains with MIAA, the State, and the Airport Lands and Buildings.
The second Public Ports Authority case, penned by Justice Callejo, likewise lays down useful doctrines
in this regard. The Court refuted the claim that the properties of the PPA were owned by the Republic
of the Philippines, noting that PPA's charter expressly transferred ownership over these properties to
the PPA, a situation which similarly obtains with MIAA. The Court even went as far as saying that the
fact that the PPA "had not been issued any torrens title over the port and port facilities and
appurtenances is of no legal consequence. A torrens title does not, by itself, vest ownership; it is merely
an evidence of title over properties. . . . It has never been recognized as a mode of acquiring ownership

over real properties." 116

The Court further added:
. . . The bare fact that the port and its facilities and appurtenances are accessible to the general public
does not exempt it from the payment of real property taxes. It must be stressed that the said port
facilities and appurtenances are the petitioner's corporate patrimonial properties, not for public use, and
that the operation of the port and its facilities and the administration of its buildings are in the nature of
ordinary business. The petitioner is clothed, under P.D. No. 857, with corporate status and corporate
powers in the furtherance of its proprietary interests . . . The petitioner is even empowered to invest its
funds in such government securities approved by the Board of Directors, and derives its income from
rates, charges or fees for the use by vessels of the port premises, appliances or equipment. . . . Clearly
then, the petitioner is a profit-earning corporation; hence, its patrimonial properties are subject to tax.
117
There is no doubt that the properties of the MIAA, as with the PPA, are in a sense, for public use. A
similar argument was propounded by the Light Rail Transit Authority in Light Rail Transit Authority v.
Central Board of Assessment, 118 which was cited in Philippine Ports Authority and deserves renewed
emphasis. The Light Rail Transit Authority (LRTA), a body corporate, "provides valuable
transportation facilities to the paying public." 119 It claimed that its carriage-ways and terminal stations
are immovably attached to government-owned national roads, and to impose real property taxes
thereupon would be to impose taxes on public roads. This view did not persuade the Court, whose
decision was penned by Justice (now Chief Justice) Panganiban. It was noted:
Though the creation of the LRTA was impelled by public service to provide mass transportation to
alleviate the traffic and transportation situation in Metro Manila its operation undeniably partakes of
ordinary business. Petitioner is clothed with corporate status and corporate powers in the furtherance of
its proprietary objectives. Indeed, it operates much like any private corporation engaged in the mass
transport industry. Given that it is engaged in a service-oriented commercial endeavor, its carriageways
and terminal stations are patrimonial property subject to tax, notwithstanding its claim of being a
government-owned or controlled corporation. aCHDST
xxx
xxx
xxx
Petitioner argues that it merely operates and maintains the LRT system, and that the actual users of the
carriageways and terminal stations are the commuting public. It adds that the public use character of
the LRT is not negated by the fact that revenue is obtained from the latter's operations.
We do not agree. Unlike public roads which are open for use by everyone, the LRT is accessible only to
those who pay the required fare. It is thus apparent that petitioner does not exist solely for public
service, and that the LRT carriageways and terminal stations are not exclusively for public use.
Although petitioner is a public utility, it is nonetheless profit-earning. It actually uses those
carriageways and terminal stations in its public utility business and earns money therefrom. 120
xxx
xxx
xxx
Even granting that the national government indeed owns the carriageways and terminal stations, the
exemption would not apply because their beneficial use has been granted to petitioner, a taxable entity.
121
There is no substantial distinction between the properties held by the PPA, the LRTA, and the MIAA.
These three entities are in the business of operating facilities that promote public transportation.
The majority further asserts that MIAA's properties, being part of the public dominion, are outside the
commerce of man. But if this is so, then why does Section 3 of MIAA's charter authorize the President
of the Philippines to approve the sale of any of these properties? In fact, why does MIAA's charter in
the first place authorize the transfer of these airport properties, assuming that indeed these are beyond
the commerce of man?
No Trust Has Been Created
Over MIAA Properties For

The Benefit of the Republic

The majority posits that while MIAA might be holding title over the Airport Lands and Buildings, it is
holding it in trust for the Republic. A provision of the Administrative Code is cited, but said provision
does not expressly provide that the property is held in trust. Trusts are either express or implied, and
only those situations enumerated under the Civil Code would constitute an implied trust. MIAA does
not fall within this enumeration, and neither is there a provision in MIAA's charter expressly stating
that these properties are being held in trust. In fact, under its charter, MIAA is obligated to retain up to
eighty percent (80%) of its gross operating income, not an inconsequential sum assuming that the
beneficial owner of MIAA's properties is actually the Republic, and not the MIAA.
Also, the claim that beneficial ownership over the MIAA remains with the government and not MIAA
is ultimately irrelevant. Section 234(a) of the Local Government Code provides among those exempted
from paying real property taxes are "[r]eal property owned by the [Republic] . . . except when the
beneficial use thereof has been granted, for consideration or otherwise, to a taxable person." In the
context of Section 234(a), the identity of the beneficial owner over the properties is not determinative
as to whether the exemption avails. It is the identity of the beneficial user of the property owned by the
Republic or its political subdivisions that is crucial, for if said beneficial user is a taxable person, then
the exemption does not lie.
I fear the majority confuses the notion of what might be construed as "beneficial ownership" of the
Republic over the properties of MIAA as nothing more than what arises as a consequence of the fact
that the capital of MIAA is contributed by the National Government. 122 If so, then there is no
difference between the State's ownership rights over MIAA properties than those of a majority
stockholder over the properties of a corporation. Even if such shareholder effectively owns the
corporation and controls the disposition of its assets, the personality of the stockholder remains
separately distinct from that of the corporation. A brief recall of the entrenched rule in corporate law is
in order:
The first consequence of the doctrine of legal entity regarding the separate identity of the corporation
and its stockholders insofar as their obligations and liabilities are concerned, is spelled out in this
general rule deeply entrenched in American jurisprudence:
Unless the liability is expressly imposed by constitutional or statutory provisions, or by the charter, or
by special agreement of the stockholders, stockholders are not personally liable for debts of the
corporation either at law or equity. The reason is that the corporation is a legal entity or artificial
person, distinct from the members who compose it, in their individual capacity; and when it contracts a
debt, it is the debt of the legal entity or artificial person the corporation and not the debt of the
individual members. (13A Fletcher Cyc. Corp. Sec. 6213) AaSIET
The entirely separate identity of the rights and remedies of a corporation itself and its individual
stockholders have been given definite recognition for a long time. Applying said principle, the Supreme
Court declared that a corporation may not be made to answer for acts or liabilities of its stockholders or
those of legal entities to which it may be connected, or vice versa. (Palay Inc. v. Clave et al. 124 SCRA
638) It was likewise declared in a similar case that a bonafide corporation should alone be liable for
corporate acts duly authorized by its officers and directors. (Caram Jr. v. Court of Appeals et.al. 151
SCRA, p. 372) 123
It bears repeating that MIAA under its charter, is expressly conferred the right to exercise all the
powers of a corporation under the Corporation Law, including the right to corporate succession, and the
right to sue and be sued in its corporate name. 124 The national government made a particular choice to
divest ownership and operation of the Manila International Airport and transfer the same to such an
empowered entity due to perceived advantages. Yet such transfer cannot be deemed consequence free
merely because it was the State which contributed the operating capital of this body corporate.
The majority claims that the transfer the assets of MIAA was meant merely to effect a reorganization.
The imputed rationale for such transfer does not serve to militate against the legal consequences of

such assignment. Certainly, if it was intended that the transfer should be free of consequence, then why
was it effected to a body corporate, with a distinct legal personality from that of the State or Republic?
The stated aims of the MIAA could have very well been accomplished by creating an agency without
independent juridical personality.
VI.
MIAA Performs Proprietary Functions
Nonetheless, Section 234(f) exempts properties owned by the Republic of the Philippines or its
political subdivisions from realty taxation. The obvious question is what comprises "the Republic of the
Philippines." I think the key to understanding the scope of "the Republic" is the phrase "political
subdivisions." Under the Constitution, political subdivisions are defined as "the provinces, cities,
municipalities and barangays." 125 In correlation, the Administrative Code of 1987 defines "local
government" as referring to "the political subdivisions established by or in accordance with the
Constitution."
Clearly then, these political subdivisions are engaged in the exercise of sovereign functions and are
accordingly exempt. The same could be said generally of the national government, which would be
similarly exempt. After all, even with the principle of local autonomy, it is inherently noxious and selfdefeatist for local taxation to interfere with the sovereign exercise of functions. However, the exercise
of proprietary functions is a different matter altogether.
Sovereign and Proprietary
Functions Distinguished
Sovereign or constituent functions are those which constitute the very bonds of society and are
compulsory in nature, while ministrant or proprietary functions are those undertaken by way of
advancing the general interests of society and are merely optional. 126 An exhaustive discussion on the
matter was provided by the Court in Bacani v. NACOCO: 127
. . . This institution, when referring to the national government, has reference to what our Constitution
has established composed of three great departments, the legislative, executive, and the judicial,
through which the powers and functions of government are exercised. These functions are twofold:
constituent and ministrant. The former are those which constitute the very bonds of society and are
compulsory in nature; the latter are those that are undertaken only by way of advancing the general
interests of society, and are merely optional. President Wilson enumerates the constituent functions as
follows:
"'(1) The keeping of order and providing for the protection of persons and property from violence
and robbery.
'(2)
The fixing of the legal relations between man and wife and between parents and children.
'(3)
The regulation of the holding, transmission, and interchange of property, and the determination
of its liabilities for debt or for crime.
'(4)
The determination of contract rights between individuals.
'(5)
The definition and punishment of crime.
'(6)
The administration of justice in civil cases.
'(7)
The determination of the political duties, privileges, and relations of citizens.
'(8)
Dealings of the state with foreign powers: the preservation of the state from external danger or
encroachment and the advancement of its international interests.'" (Malcolm, The Government of the
Philippine Islands, p. 19.)
The most important of the ministrant functions are: public works, public education, public charity,
health and safety regulations, and regulations of trade and industry. The principles determining whether
or not a government shall exercise certain of these optional functions are: (1) that a government should
do for the public welfare those things which private capital would not naturally undertake and (2) that a
government should do these things which by its very nature it is better equipped to administer for the
public welfare than is any private individual or group of individuals. (Malcolm, The Government of the

Philippine Islands, pp. 19-20.) EIAaDC

From the above we may infer that, strictly speaking, there are functions which our government is
required to exercise to promote its objectives as expressed in our Constitution and which are exercised
by it as an attribute of sovereignty, and those which it may exercise to promote merely the welfare,
progress and prosperity of the people. To this latter class belongs the organization of those corporations
owned or controlled by the government to promote certain aspects of the economic life of our people
such as the National Coconut Corporation. These are what we call government-owned or controlled
corporations which may take on the form of a private enterprise or one organized with powers and
formal characteristics of a private corporations under the Corporation Law. 128
The Court in Bacani rejected the proposition that the National Coconut Corporation exercised
sovereign functions:
Does the fact that these corporations perform certain functions of government make them a part of the
Government of the Philippines?
The answer is simple: they do not acquire that status for the simple reason that they do not come under
the classification of municipal or public corporation. Take for instance the National Coconut
Corporation. While it was organized with the purpose of "adjusting the coconut industry to a position
independent of trade preferences in the United States" and of providing "Facilities for the better curing
of copra products and the proper utilization of coconut by-products," a function which our government
has chosen to exercise to promote the coconut industry, however, it was given a corporate power
separate and distinct from our government, for it was made subject to the provisions of our Corporation
Law in so far as its corporate existence and the powers that it may exercise are concerned (sections 2
and 4, Commonwealth Act No. 518). It may sue and be sued in the same manner as any other private
corporations, and in this sense it is an entity different from our government. As this Court has aptly
said, "The mere fact that the Government happens to be a majority stockholder does not make it a
public corporation" (National Coal Co. vs. Collector of Internal Revenue, 46 Phil., 586-587). "By
becoming a stockholder in the National Coal Company, the Government divested itself of its sovereign
character so far as respects the transactions of the corporation. . . . Unlike the Government, the
corporation may be sued without its consent, and is subject to taxation. Yet the National Coal Company
remains an agency or instrumentality of government." (Government of the Philippine Islands vs.
Springer, 50 Phil., 288.)
The following restatement of the entrenched rule by former SEC Chairperson Rosario Lopez bears
noting:
The fact that government corporations are instrumentalities of the State does not divest them with
immunity from suit. (Malong v. PNR, 138 SCRA p. 63) It is settled that when the government engages
in a particular business through the instrumentality of a corporation, it divests itself pro hoc vice of its
sovereign character so as to subject itself to the rules governing private corporations, (PNB v. Pabolan
82 SCRA 595) and is to be treated like any other corporation. (PNR v. Union de Maquinistas Fogonero
y Motormen, 84 SCRA 223)
In the same vein, when the government becomes a stockholder in a corporation, it does not exercise
sovereignty as such. It acts merely as a corporator and exercises no other power in the management of
the affairs of the corporation than are expressly given by the incorporating act. Nor does the fact that
the government may own all or a majority of the capital stock take from the corporation its character as
such, or make the government the real party in interest. (Amtorg Trading Corp. v. US 71 F2d 524, 528)
129
MIAA Performs Proprietary
Functions No Matter How
Vital to the Public Interest
The simple truth is that, based on these accepted doctrinal tests, MIAA performs proprietary functions.
The operation of an airport facility by the State may be imbued with public interest, but it is by no

means indispensable or obligatory on the national government. In fact, as demonstrated in other

countries, it makes a lot of economic sense to leave the operation of airports to the private sector.
The majority tries to becloud this issue by pointing out that the MIAA does not compete in the
marketplace as there is no competing international airport operated by the private sector; and that
MIAA performs an essential public service as the primary domestic and international airport of the
Philippines. This premise is false, for one. On a local scale, MIAA competes with other international
airports situated in the Philippines, such as Davao International Airport and MCIAA. More pertinently,
MIAA also competes with other international airports in Asia, at least. International airlines take into
account the quality and conditions of various international airports in determining the number of flights
it would assign to a particular airport, or even in choosing a hub through which destinations
necessitating connecting flights would pass through. cTDaEH
Even if it could be conceded that MIAA does not compete in the market place, the example of the
Philippine National Railways should be taken into account. The PNR does not compete in the
marketplace, and performs an essential public service as the operator of the railway system in the
Philippines. Is the PNR engaged in sovereign functions? The Court, in Malong v. Philippine National
Railways, 130 held that it was not. 131
Even more relevant to this particular case is Teodoro v. National Airports Corporation, 132 concerning
the proper appreciation of the functions performed by the Civil Aeronautics Administration (CAA),
which had succeeded the defunction National Airports Corporation. The CAA claimed that as an
unincorporated agency of the Republic of the Philippines, it was incapable of suing and being sued.
The Court noted:
Among the general powers of the Civil Aeronautics Administration are, under Section 3, to execute
contracts of any kind, to purchase property, and to grant concession rights, and under Section 4, to
charge landing fees, royalties on sales to aircraft of aviation gasoline, accessories and supplies, and
rentals for the use of any property under its management.
These provisions confer upon the Civil Aeronautics Administration, in our opinion, the power to sue
and be sued. The power to sue and be sued is implied from the power to transact private business. And
if it has the power to sue and be sued on its behalf, the Civil Aeronautics Administration with greater
reason should have the power to prosecute and defend suits for and against the National Airports
Corporation, having acquired all the properties, funds and choses in action and assumed all the
liabilities of the latter. To deny the National Airports Corporation's creditors access to the courts of
justice against the Civil Aeronautics Administration is to say that the government could impair the
obligation of its corporations by the simple expedient of converting them into unincorporated agencies.
133
xxx
xxx
xxx
Eventually, the charter of the CAA was revised, and it among its expanded functions was "[t]o
administer, operate, manage, control, maintain and develop the Manila International Airport." 134
Notwithstanding this expansion, in the 1988 case of CAA v. Court of Appeals 135 the Court reaffirmed
the ruling that the CAA was engaged in "private or non-governmental functions." 136 Thus, the Court
had already ruled that the predecessor agency of MIAA, the CAA was engaged in private or nongovernmental functions. These are more precedents ignored by the majority. The following observation
from the Teodoro case very well applies to MIAA.
The Civil Aeronautics Administration comes under the category of a private entity. Although not a body
corporate it was created, like the National Airports Corporation, not to maintain a necessary function of
government, but to run what is essentially a business, even if revenues be not its prime objective but
rather the promotion of travel and the convenience of the traveling public. It is engaged in an enterprise
which, far from being the exclusive prerogative of state, may, more than the construction of public
roads, be undertaken by private concerns. 137
If the determinative point in distinguishing between sovereign functions and proprietary functions is

the vitality of the public service being performed, then it should be noted that there is no more
important public service performed than that engaged in by public utilities. But notably, the
Constitution itself authorizes private persons to exercise these functions as it allows them to operate
public utilities in this country. 138 If indeed such functions are actually sovereign and belonging
properly to the government, shouldn't it follow that the exercise of these tasks remain within the
exclusive preserve of the State?
There really is no prohibition against the government taxing itself, 139 and nothing obscene with
allowing government entities exercising proprietary functions to be taxed for the purpose of raising the
coffers of LGUs. On the other hand, it would be an even more noxious proposition that the government
or the instrumentalities that it owns are above the law and may refuse to pay a validly imposed tax.
MIAA, or any similar entity engaged in the exercise of proprietary, and not sovereign functions, cannot
avoid the adverse-effects of tax evasion simply on the claim that it is imbued with some of the
attributes of government. CSIHDA
VII.
MIAA Property Not Subject to
Execution Sale Without Consent
Of the President.
Despite the fact that the City of Paraaque ineluctably has the power to impose real property taxes over
the MIAA, there is an equally relevant statutory limitation on this power that must be fully upheld.
Section 3 of the MIAA charter states that "[a]ny portion [of the [lands transferred, conveyed and
assigned to the ownership and administration of the MIAA] shall not be disposed through sale or
through any other mode unless specifically approved by the President of the Philippines." 140
Nothing in the Local Government Code, even with its wide grant of powers to LGUs, can be deemed as
repealing this prohibition under Section 3, even if it effectively forecloses one possible remedy of the
LGU in the collection of delinquent real property taxes. While the Local Government Code withdrew
all previous local tax exemptions of the MIAA and other natural and juridical persons, it did not
similarly withdraw any previously enacted prohibitions on properties owned by GOCCs, agencies or
instrumentalities. Moreover, the resulting legal effect, subjecting on one hand the MIAA to local taxes
but on the other hand shielding its properties from any form of sale or disposition, is not contradictory
or paradoxical, onerous as its effect may be on the LGU. It simply means that the LGU has to find
another way to collect the taxes due from MIAA, thus paving the way for a mutually acceptable
negotiated solution. 141
There are several other reasons this statutory limitation should be upheld and applied to this case. It is
at this juncture that the importance of the Manila Airport to our national life and commerce may be
accorded proper consideration. The closure of the airport, even by reason of MIAA's legal omission to
pay its taxes, will have an injurious effect to our national economy, which is ever reliant on air travel
and traffic. The same effect would obtain if ownership and administration of the airport were to be
transferred to an LGU or some other entity which were not specifically chartered or tasked to perform
such vital function. It is for this reason that the MIAA charter specifically forbids the sale or disposition
of MIAA properties without the consent of the President. The prohibition prevents the peremptory
closure of the MIAA or the hampering of its operations on account of the demands of its creditors. The
airport is important enough to be sheltered by legislation from ordinary legal processes.
Section 3 of the MIAA charter may also be appreciated as within the proper exercise of executive
control by the President over the MIAA, a GOCC which despite its separate legal personality, is still
subsumed within the executive branch of government. The power of executive control by the President
should be upheld so long as such exercise does not contravene the Constitution or the law, the President
having the corollary duty to faithfully execute the Constitution and the laws of the land. 142 In this
case, the exercise of executive control is precisely recognized and authorized by the legislature, and it
should be upheld even if it comes at the expense of limiting the power of local government units to

collect real property taxes.

Had this petition been denied instead with Mactan as basis, but with the caveat that the MIAA
properties could not be subject of execution sale without the consent of the President, I suspect that the
parties would feel little distress. Through such action, both the Local Government Code and the MIAA
charter would have been upheld. The prerogatives of LGUs in real property taxation, as guaranteed by
the Local Government Code, would have been preserved, yet the concerns about the ruinous effects of
having to close the Manila International Airport would have been averted. The parties would then be
compelled to try harder at working out a compromise, a task, if I might add, they are all too willing to
engage in. 143 Unfortunately, the majority will cause precisely the opposite result of unremitting
hostility, not only to the City of Paraaque, but to the thousands of LGUs in the country.
VIII.
Summary of Points
My points may be summarized as follows:
1)
Mactan and a long line of succeeding cases have already settled the rule that under the Local
Government Code, enacted pursuant to the constitutional mandate of local autonomy, all natural and
juridical persons, even those GOCCs, instrumentalities and agencies, are no longer exempt from local
taxes even if previously granted an exemption. The only exemptions from local taxes are those
specifically provided under the Local Government Code itself, or those enacted through subsequent
legislation. CcEHaI
2)
Under the Local Government Code, particularly Section 232, instrumentalities, agencies and
GOCCs are generally liable for real property taxes. The only exemptions therefrom under the same
Code are provided in Section 234, which include real property owned by the Republic of the
Philippines or any of its political subdivisions.
3)
The subject properties are owned by MIAA, a GOCC, holding title in its own name. MIAA, a
separate legal entity from the Republic of the Philippines, is the legal owner of the properties, and is
thus liable for real property taxes, as it does not fall within the exemptions under Section 234 of the
Local Government Code.
4)
The MIAA charter expressly bars the sale or disposition of MIAA properties. As a result, the
City of Paraaque is prohibited from seizing or selling these properties by public auction in order to
satisfy MIAA's tax liability. In the end, MIAA is encumbered only by a limited lien possessed by the
City of Paraaque.
On the other hand, the majority's flaws are summarized as follows:
1)
The majority deliberately ignores all precedents which run counter to its hypothesis, including
Mactan. Instead, it relies and directly cites those doctrines and precedents which were overturned by
Mactan. By imposing a different result than that warranted by the precedents without explaining why
Mactan or the other precedents are wrong, the majority attempts to overturn all these ruling sub silencio
and without legal justification, in a manner that is not sanctioned by the practices and traditions of this
Court.
2)
The majority deliberately ignores the policy and philosophy of local fiscal autonomy, as
mandated by the Constitution, enacted under the Local Government Code, and affirmed by precedents.
Instead, the majority asserts that there is no sound rationale for local governments to tax national
government instrumentalities, despite the blunt existence of such rationales in the Constitution, the
Local Government Code, and precedents.
3)
The majority, in a needless effort to justify itself, adopts an extremely strained exaltation of the
Administrative Code above and beyond the Corporation Code and the various legislative charters, in
order to impose a wholly absurd definition of GOCCs that effectively declassifies innumerable existing
GOCCs, to catastrophic legal consequences.
4)
The majority asserts that by virtue of Section 133(o) of the Local Government Code, all
national government agencies and instrumentalities are exempt from any form of local taxation, in

contravention of several precedents to the contrary and the proviso under Section 133, "unless
otherwise provided herein [the Local Government Code]."
5)
The majority erroneously argues that MIAA holds its properties in trust for the Republic of the
Philippines, and that such properties are patrimonial in character. No express or implied trust has been
created to benefit the national government. The legal distinction between sovereign and proprietary
functions, as affirmed by jurisprudence, likewise preclude the classification of MIAA properties as
patrimonial.
IX.
Epilogue
If my previous discussion still fails to convince on how wrong the majority is, then the following points
are well-worth considering. The majority cites the Bangko Sentral ng Pilipinas (Bangko Sentral) as a
government instrumentality that exercises corporate powers but not organized as a stock or non-stock
corporation. Correspondingly for the majority, the Bangko ng Sentral is exempt from all forms of local
taxation by LGUs by virtue of the Local Government Code.
Section 125 of Rep. Act No. 7653, The New Central Bank Act, states:
SECTION 125.
Tax Exemptions. The Bangko Sentral shall be exempt for a period of five (5)
years from the approval of this Act from all national, provincial, municipal and city taxes, fees, charges
and assessments.
The New Central Bank Act was promulgated after the Local Government Code. If the BSP is already
preternaturally exempt from local taxation owing to its personality as an "government instrumentality,"
why then the need to make a new grant of exemption, which if the majority is to be believed, is actually
a redundancy. But even more tellingly, does not this provision evince a clear intent that after the lapse
of five (5) years, that the Bangko Sentral will be liable for provincial, municipal and city taxes? This is
the clear congressional intent, and it is Congress, not this Court which dictates which entities are
subject to taxation and which are exempt. TCHEDA
Perhaps this notion will offend the majority, because the Bangko Sentral is not even a government
owned corporation, but a government instrumentality, or perhaps "loosely", a "government corporate
entity." How could such an entity like the Bangko Sentral, which is not even a government owned
corporation, be subjected to local taxation like any mere mortal? But then, see Section 1 of the New
Central Bank Act:
SECTION 1. Declaration of Policy. The State shall maintain a central monetary authority that shall
function and operate as an independent and accountable body corporate in the discharge of its
mandated responsibilities concerning money, banking and credit. In line with this policy, and
considering its unique functions and responsibilities, the central monetary authority established under
this Act, while being a government-owned corporation, shall enjoy fiscal and administrative autonomy.
Apparently, the clear legislative intent was to create a government corporation known as the Bangko
Sentral ng Pilipinas. But this legislative intent, the sort that is evident from the text of the provision and
not the one that needs to be unearthed from the bowels of the archival offices of the House and the
Senate, is for naught to the majority, as it contravenes the Administrative Code of 1987, which after all,
is "the governing law defining the status and relationship of government agencies and
instrumentalities" and thus superior to the legislative charter in determining the personality of a
chartered entity. Its like saying that the architect who designed a school building is better equipped to
teach than the professor because at least the architect is familiar with the geometry of the classroom.
Consider further the example of the Philippine Institute of Traditional and Alternative Health Care
(PITAHC), created by Republic Act No. 8243 in 1997. It has similar characteristics as MIAA in that it
is established as a body corporate, 144 and empowered with the attributes of a corporation, 145
including the power to purchase or acquire real properties. 146 However the PITAHC has no capital
stock and no members, thus following the majority, it is not a GOCC.
The state policy that guides PITAHC is the development of traditional and alternative health care, 147

and its objectives include the promotion and advocacy of alternative, preventive and curative health
care modalities that have been proven safe, effective and cost effective. 148 "Alternative health care
modalities" include "other forms of non-allophatic, occasionally non-indigenous or imported healing
methods" which include, among others "reflexology, acupuncture, massage, acupressure" and
chiropractics. 149
Given these premises, there is no impediment for the PITAHC to purchase land and construct
thereupon a massage parlor that would provide a cheaper alternative to the opulent spas that have
proliferated around the metropolis. Such activity is in line with the purpose of the PITAHC and with
state policy. Is such massage parlor exempt from realty taxes? For the majority, it is, for PITAHC is an
instrumentality or agency exempt from local government taxation, which does not fall under the
exceptions under Section 234 of the Local Government Code. Hence, this massage parlor would not
just be a shelter for frazzled nerves, but for taxes as well. CAHaST
Ridiculous? One might say, certainly a decision of the Supreme Court cannot be construed to promote
an absurdity. But precisely the majority, and the faulty reasoning it utilizes, opens itself up to all sorts
of mischief, and certainly, a tax-exempt massage parlor is one of the lesser evils that could arise from
the majority ruling. This is indeed a very strange and very wrong decision.
I dissent.
Footnotes
1.
Dated 16 September 1983.
2.
Dated 26 July 1987.
3.
Section 3, MIAA Charter.
4.
Section 22, MIAA Charter.
5.
Section 3, MIAA Charter.
6.
Rollo, pp. 22-23.
7.
Under Rule 45 of the 1997 Rules of Civil Procedure.
8.
330 Phil. 392 (1996).
9.
MIAA Charter as amended by Executive Order No. 298. See note 2.
10.
Batas Pambansa Blg. 68.
11.
Section 11 of the MIAA Charter provides:
Contribution to the General Fund for the Maintenance and Operation of other Airports.
Within thirty (30) days after the close of each quarter, twenty percentum (20%) of the gross
operating income, excluding payments for utilities of tenants and concessionaires and terminal fee
collections, shall be remitted to the General Fund in the National Treasury to be used for the
maintenance and operation of other international and domestic airports in the country. Adjustments in
the amount paid by the Authority to the National Treasury under this Section shall be made at the end
of each year based on the audited financial statements of the Authority.
12.
Section 5(j), MIAA Charter.
13.
Section 6, MIAA Charter.
14.
Section 5(k), MIAA Charter.
15.
Section 5(o), MIAA Charter.
16.
Third Whereas Clause, MIAA Charter.
17.
Id.
18.
CONSTITUTION, Art. X, Sec. 5.
19.
274 Phil. 1060, 1100 (1991) quoting C. Dallas Sands, 3 STATUTES and STATUTORY
CONSTRUCTION 207.
20.
274 Phil. 323, 339-340 (1991).
21.
CONSTITUTION, Art. VI, Sec. 28(1).
22.
First Whereas Clause, MIAA Charter.
23.
30 Phil. 602, 606-607 (1915).

24.
102 Phil. 866, 869-870 (1958).
25.
PNB v. Puruganan, 130 Phil. 498 (1968). See also Martinez v. CA, 155 Phil. 591 (1974).
26.
MIAA Charter, Sec. 16.
27.
Chavez v. Public Estates Authority, 433 Phil. 506 (2002).
28.
Section 3, MIAA Charter.
29.
G.R. No. 144104, 29 June 2004, 433 SCRA 119, 138.
30.
Republic Act No. 7653, 14 June 1993, Sec. 5.
31.
Executive Order No. 1061, 5 November 1985, Sec. 3(p).
32.
Republic Act No. 4850, 18 July 1966, Sec. 5.
33.
Presidential Decree No. 977, 11 August 1976, Section 4(j).
34.
Republic Act No. 7227, 13 March 1992, Sec. 3.
35.
Presidential Decree No. 857, 23 December 1975, Sec. 6(b)(xvi).
36.
Republic Act No. 4663, 18 June 1966, Sec. 7(m).
37.
Republic Act No. 4567, 19 June 1965, Sec. 7(m).
38.
Republic Act No. 7621, 26 June 1992, Sec. 7(m).
39.
Republic Act No. 4156, 20 June 1964. Section 4(b).
40.
Republic Act No. 3844, 8 August 1963, as amended by Republic Act No. 7907, 23 February
1995.
41.
Executive Order No. 81, 3 December 1986.
42.
Republic Act No. 8175, 29 December 1995.
43.
Presidential Decree No. 252, 21 July 1973, as amended by Presidential Decree No. 1071, 25
January 1977 and Executive Order No. 1067, 25 November 1985.
44.
Executive Order No. 80, 3 December 1986.
45.
III RECORDS, CONSTITUTIONAL COMMISSION 63 (22 August 1986).
46.
2003 ed., 1181.
47.
Manila International Airport Authority v. Airspan Corporation, G.R. No. 157581, 1 December
2004, 445 SCRA 471.
TINGA, J., dissenting:
1.
Per Department of Interior and Local Government. See also "Summary" from the National
Statistical Coordination Board,
http://www.nscb.gov.ph/activestats/psgc/NSCB_PSGC_SUMMARY_DEC04.pdf.
2.
330 Phil. 392 (1996).
3.
G.R. No. 91649, 14 May 1991, 197 SCRA 52.
4.
451 Phil. 683, 698 (2003).
5.
364 Phil. 843, 855 (1999).
6.
449 Phil. 233 (2003).
7.
G.R. No. 152675 & 152771, 28 April 2004.
8.
Decision, p. 24.
9.
G.R. No. 144104, 29 June 2004, 433 SCRA 119.
10.
Supra note 8.
11.
G.R. No. 127383, 18 August 2005, 467 SCRA 280. Per the author of this Dissenting Opinion.
12.
Nonetheless, the Court noted therein GSIS's exemption from real property taxes was reenacted
in 1997, and the GSIS at present is exempt from such taxes under the GSIS Act of 1997. Id., at 299.
13.
G.R. No. 109791, 14 July 2003, 406 SCRA 88, and G.R. No. 143214, 11 November 2004, 442
SCRA 175, respectively.
14.
118 Phil. 1354 (1963).
15.
396 Phil. 860 (2000).
16.
Supra note 8.
17.
91 Phil 203 (1952).

18.
19.
20.
21.
22.
23.
24,
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.

G.R. No. L-51806, 8 November 1988, 167 SCRA 28.

G.R. No. 155692, 23 October 2003, 414 SCRA 327.
Id. at 333, citing Section 10, Book IV, Title III, Chapter 3, Administrative Code of 1987.
G.R. No. 165827, 16 June 2006.
G.R. No. 147192, 27 June 2006.
Supra note 8.
See Mendoza v. De Leon, 33 Phil. 508 (1916).
Mactan, supra note 2, at 397-398.
Section 193, Rep. Act No. 7160.
Section 232, Rep. Act No. 7160.
Section 234, Rep. Act No. 7160. Emphasis supplied.
Id. at 411-413.
See City of Davao v. RTC, supra note 11, at 293.
Supra note 3.
Id. at 63-65.
G.R. No. 88921, 31 May 1991, 197 SCRA 771.
Id. at 799.
Mactan, supra note 2, at 419-420.
Supra note 6.
Id. at 250-251.
G.R. No. 109791, 14 July 2003, 406 SCRA 88.
Id. at 99-100.
Supra note 21.
Id.
G.R. No. 143214, 11 November 2004, 442 SCRA 175.
Id., at 184.
Id. at 185-186, citing MCIAA v. Marcos, supra note 2.
Supra note 11.
P.D. No. 1981. See City of Davao v. RTC, supra note 40, at 289.
Id. at 287-288.
32 Phil. 36, 49; cited in City of Davao v. RTC, supra note 40 at 296-297.
Id.
Supra note 22.
Id.
Decision, p. 6.
MIAA's Charter (E.O No. 903, as amended) provides:
Section 3.
Creation of the Manila International Airport Authority. . . .
The land where the Airport is presently located as well as the surrounding land area of
approximately six hundred hectares, are hereby transferred, conveyed and assigned to the ownership
and administration of the Authority, subject to existing rights, if any. . . . Any portion thereof shall not
be disposed through sale or through any other mode unless specifically approved by the President of
the Philippines.
Section 22. Transfer of Existing Facilities and Intangible Assets. All existing
public airport facilities, runways, lands, buildings and other property, movable or immovable,
belonging to the Airport, and all assets, powers rights, interests and privileges belonging to the Bureau
of Air Transportation relating to airport works or air operations, including all equipment which are
necessary for the operation of crash fire and rescue facilities, are hereby transferred to the Authority.
On the other hand, MCIAA's charter (Rep. Act No. 6958) provides:
Section 15. Transfer of Existing Facilities and Intangible Assets. All existing

public airport facilities, runways, lands, buildings and other properties, movable or immovable,
belonging to or presently administered by the airports, and all assets, powers, rights, interest and
privileges relating to airport works or air operations, including all equipment which are necessary for
the operation of air navigation, aerodrome control towers, crash, fire, and rescue facilities are hereby
transferred to the Authority: Provided, however, That the operational control of all equipment necessary
for the operation of radio aids to air navigation, airways communication, the approach control office
and the area control center shall be retained by the Air Transportation Office. . . .
54.
See Section 3, E.O. 903 (as amended), infra note 140; and Section 4(c), Rep. Act No. 6958,
which qualifies the power of the MCIAA to sell its properties, providing that "any asset located in the
Mactan International Airport important to national security shall not be subject to alienation or
mortgage by the Authority nor to transfer to any entity other than the National Government."
55.
See Section 16, E.O. 903 (as amended) and Section 13, Rep. Act No. 6958.
56.
See Articles 40 to 43, Civil Code.
57.
See Articles 44 to 47, Civil Code.
58.
This is apparent from such assertions as "When the law vests in a government instrumentality
corporate powers, the instrumentality does not become a corporation. Unless the government
instrumentality is organized as a stock or non-stock corporation, it remains a government
instrumentality exercising not only governmental but also corporate powers." See Decision, p. 9-10.
59.
Decision, p. 9.
60.
See Section 2(10), E.O. 292.
61.
See Section 2(4), E.O No. 292.
62.
50 Phil. 259 (1927).
63.
Id., at 288.
64.
See Sec. 5, Rep. Act No. 6395.
65.
Section 3, Corporation Code.
66.
See Section 13, Rep. Act No. 6395.
67.
See Section 1, Rep. Act No. 7875.
68.
See Section 16(i), Rep. Act No. 7875.
69.
See Section 3, Rep. Act 8282.
70.
Supra note 14.
71.
See Section 2(b), Rep. Act No. 7656, which defines GOCCs as "corporations organized as a
stock or non-stock corporation . . ."
72.
See Rep. Act No. 7656, the pertinent provisions of which read:
c.3.
Dividends. All government-owned or -controlled corporations shall declare
and remit at least fifty percent (50%) of their annual net earnings as cash, stock or property dividends
to the National Government. This section shall also apply to those government-owned or -controlled
corporations whose profit distribution is provided by their respective charters or by special law, but
shall exclude those enumerated in Section 4 hereof: Provided, That such dividends accruing to the
National Government shall be received by the National Treasury and recorded as income of the General
Fund.
Sec. 4. Exemptions. The provisions of the preceding section notwithstanding,
government-owned or -controlled corporations created or organized by law to administer real or
personal properties or funds held in trust for the use and the benefit of its members, shall not be
covered by this Act such as, but not limited to: the Government Service Insurance System, the Home
Development Mutual Fund, the Employees Compensation Commission, the Overseas Workers Welfare
Administration, and the Philippine Medical Care Commission.
73.
See Pres. Decree No. 857 (as amended).
74.
See Section 10, Pres. Decree No. 857.
75.
See Section 11, Pres. Decree No. 857.

76.
See Rep. Act No. 7227.
77.
See Section 6, Rep. Act No. 7227.
78.
See Rep. Act No. 7916.
79.
See Section 47, Rep. Act No. 7916 in relation to Section 5, Pres. Decree No. 66.
80.
See Executive Order No. 603, as amended.
81.
See Article 6, Section 15 of Executive Order No. 603, as amended.
82.
See Rep. Act No. 7653. If there is any doubt whether the BSP was intended to be covered by
Rep. Act No. 7656, see Section 2(b), Rep. Act No. 7656, which states that "This term [GOCCs] shall
also include financial institutions, owned or controlled by the National Government, but shall exclude
acquired asset corporations, as defined in the next paragraphs, state universities, and colleges."
83.
See Section 2, Rep. Act No. 7653.
84.
See Sections 43 & 44, Rep. Act No. 7653.
85.
See Rep. Act No. 6395.
86.
Supra note 35.
87.
See Decision, p. 10.
88.
Id. at 10-11.
89.
Id.
90.
See Rep. Act No. 3034.
91.
See Rep. Act No. 4132.
92.
See Rep. Act No. 6070.
93.
See Rep. Act No. 5920.
94.
See Rep. Act No. 4071.
95.
See e.g., Sections 1 & 2, Rep. Act No. 6070.
Section 1. Declaration of Policy. It is hereby declared to be the policy of the Congress
to foster the accelerated and balanced growth of the Province of Ilocos Sur, within the context of
national plans and policies for social and economic development, through the leadership, guidance, and
support of the government. To achieve this end, it is recognized that a government corporation should
be created for the purpose of drawing up the necessary plans of provincial development; . . .
Sec. 2. Ilocos Sur Development Authority created. There is hereby created a body
corporate to be known as the Ilocos Sur Development Authority . . . . The Authority shall execute the
powers and functions herein vested and conferred upon it in such manner as will in its judgment, aid to
the fullest possible extent in carrying out the aims and purposes set forth below."
96.
See Art. 37, Civil Code, which provides in part, "Juridical capacity, which is the fitness to be the
subject of legal relations . . ."
97.
See rollo, p. 18. "Petitioner [MIAA] is a government-owned and controlled corporation with
original charter as it was created by virtue of Executive Order No. 903 issued by then President
Ferdinand E. Marcos on July 21, 1983, as amended by Executive Order No. 298 issued by President
Corazon C. Aquino on July 26, 1987, and with office address at the MIAA Administration Bldg
Complex, MIAA Road, Pasay City." (emphasis supplied).
98.
See "Department of Budget and Management Web Linkages," http://www.dbm.
gov.ph/web_linkages.htm (Last visited 25 February 2005).
99.
G.R. No. 104217, 5 December 1994, 238 SCRA 714; per Quiazon, J.. "Petitioner MIAA is a
government-owned and controlled corporation for the purpose, among others, of encouraging and
promoting international and domestic air traffic in the Philippines as a means of making the Philippines
a center of international trade and tourism and accelerating the development of the means of
transportation and communications in the country". Id. at 716.
100. See Section 23, Chapter 6, Title XV, Book IV, Administrative Code of 1987.
101. Supra note 60.
102. Supra note 8.

103. Supra note 6.

104. Assuming that there is conflict between Section 133(o), Section 193, Section 232 and Section
234 of the Local Government Code, the rule in statutory construction is, "If there be no such ground for
choice between inharmonious provisions or sections, the latter provision or section, being the last
expression of the legislative will, must, in construction, vacate the former to the extent of the
repugnancy. It has been held that in case of irreconcilable conflict between two provisions of the same
statute, the last in order of position is frequently held to prevail, unless it clearly appears that the intent
of the legislature is otherwise." R. AGPALO, STATUTORY CONSTRUCTION (3rd ed., 1995), p. 201;
citing Lichauco & Co. v. Apostol, 44 Phil. 138 (1922); Cuyegkeng v. Cruz, 108 Phil. 1147 (1960);
Montenegro v. Castaeda, 91 Phil. 882 (1952).
105. Decision, p. 12.
106. Supra note 6.
107. Id. at 261-262.
108. Id., at 248-250.
109. Supra note 38.
110. Id, at 102; citing National Power Corp. v. Presiding Judge, RTC, Br. XXV, 190 SCRA 477
(1990).
111. Decision, p. 25.
112. "Unless otherwise expressed in the tax law, the government and its political subdivisions are
exempt therefrom." J. VITUG AND E. ACOSTA, TAX LAW AND JURISPRUDENCE (2nd ed.,
2000), at 36.
113. Supra note 9.
114. See P.D. No. 1423.
115. R. AGPALO, STATUTORY CONSTRUCTION (3rd ed., 1995), at 199; citing Javellana v. Tayo,
G.R. No. 18919, 29 December 1982, 6 SCRA 1042 (1962); Radiola-Toshiba Phil., Inc. v. IAC, 199
SCRA 373 (1991).
116. PPA v. City of Iloilo, supra note 42.
117. Id., at 186-187.
118. Supra note 15.
119. Id. at 869.
120. Id. at 871.
121. Id. at 872.
122. See Section 10, E.O. No. 903.
123. R. LOPEZ, I THE CORPORATION CODE OF THE PHILIPPINES ANNOTATED, pp. 15-16
(1994).
124. See Section 5, E.O. No. 903.
125. See Section 1, Article X of the Constitution, which reads: "The territorial and political
subdivisions of the Republic of the Philippines are the provinces, cities, municipalities and
barangays . . ."
126. Romualdez-Yap v. CSC, G.R. No. 104226, 12 August 1993, 225 SCRA 285, 294.
127. 100 Phil. 468. (1956)
128. Id., at 471-473.
129. Lopez, supra note 123 at 67.
130. G.R. No. L-49930, 7 August 1985, 138 SCRA 63.
131. "Did the State act in a sovereign capacity or in a corporate capacity when it organized the PNR
for the purpose of engaging in transportation? Did it act differently when it organized the PNR as
successor of the Manila Railroad Company? . . . We hold that in the instant case the State divested itself
of its sovereign capacity when it organized the PNR which is no different from its predecessor, the
Manila Railroad Company." Id, at 66.

132. Supra note 17.

133. Id., at 206.
134. Section 32(24), Rep. Act No. 776. See CAA v. Court of Appeals, supra note 18, at 36.
135. Supra note 18.
136. Id., at 36.
137. Teodoro v. National Airports Commission, supra note 17, at 207.
138. See Article XII, Section 11, CONST.
139. Vitug & Acosta, supra note 112, at 35; citing Bisaya Land Transportation Co., Inc. v. Collector
of Internal Revenue, L-11812, 29 May 1959, 105 Phil. 1338.
140. See Section 3, E.O. 903, as amended.
141. Indeed, last 4 February 2005, the MIAA filed a Manifestation before this Court stating that its
new General Manager had been conferring with the newly elected local government of Paraaque with
the end of settling the case at mutually acceptable terms. See rollo, pp. 315-316. While this
Manifestation was withdrawn a few weeks later, see rollo, pp. 320-322, it still stands as proof that the
parties are nevertheless willing to explore an extrajudicial settlement of this case.
142. See Section 17, Article VII, Constitution. "The President shall have control of all the executive
departments. He shall ensure that the laws be faithfully executed."
143. See note 141.
144. See Section 5, Rep. Act No. 8423.
145. See Section 6(s), Rep. Act No. 8423.
146. See Section 6(r), Rep. Act No. 8423.
147. See Section 2, Rep. Act No. 8423.
148. See Section 3(b), Rep. Act No. 8423.
149. See Section 4(d), Rep. Act No. 8423.

SECOND DIVISION
[G.R. No. 134114. July 6, 2001.]
NESTLE PHILIPPINES, INC., (FORMERLY FILIPRO, INC.) petitioner, vs. HONORABLE COURT
OF APPEALS, COURT OF TAX APPEALS and COMMISSIONER OF CUSTOMS, respondents.
Dennis M. Taningco for petitioner.
The Solicitor General for respondents.
SYNOPSIS
Petitioner Nestle Philippines, Inc. transacted sixteen separate importations of milk and milk products
from different countries between the period of July and November 1984. It paid the corresponding
customs duties and advance sales taxes to the Collector of Customs of Manila for each transaction
based on the published Home Consumption Value (HCV) as indicated in the Bureau of Customs
Revision Orders, but it seasonably filed the corresponding protests before the said Collector of
Customs. In the said protests, petitioner claimed for the refund of the alleged overpaid import duties
and advance sales taxes. With regards to the advance sales taxes, the Court of Tax Appeals eventually
ruled in favor of the petitioner. However, the Collector of Customs failed to render a decision on the
sixteen protest cases for almost six years for the alleged overpaid customs duties. In order to prevent
the claims from becoming stale on the ground of prescription, petitioner immediately filed a petition for
review with the Court of Tax Appeals (CTA). The CTA dismissed the said petition for want of
jurisdiction. The issue was raised to the Court of Appeals by way of petition for review, but it was also
dismissed for failure to exhaust administrative remedies. Hence, this petition. cDCIHT
The Court ruled that the remand of this case to the CTA is warranted for the proper verification and
determination of the factual basis and merits of the petition and in order that the ends of substantial
justice and fair play may be subserved. In the light of Sections 2308 and 2309 of the Tariff and
Customs Code, it appeared that in all cases subject to protest, the claim for refund of customs duties
may be foreclosed only when the interested party claiming refund fails to file a written protest before
the Collector of Customs. Accordingly, once a written protest is seasonably filed with the Collector of
Customs the failure or inaction of the latter to promptly perform his mandated duty under the Tariff and
Customs Code should not be allowed to prejudice the right of the party adversely affected thereby.
Technicalities and legalisms, however exalted, should not be misused by the government to keep
money not belonging to it, if any is proven, and thereby enrich itself at the expense of the taxpayers. If
the State expects its taxpayers to observe fairness and honesty in paying their taxes, so must it apply the
same standard against itself in refunding excess payments, if any, of such taxes. Indeed the state must
lead by its own example of honor, dignity and uprightness. Thus, in order for the rule on solutio
indebiti to apply, it is an essential condition that petitioner must first show that its payment of the
customs duties was in excess of what was required by the law at the time when the subject sixteen (16)
importations of milk and milk products were made. Unless shown otherwise, the disputable
presumption of regularity of performance of duty lies in favor of the Collector of Customs.
SYLLABUS
1.
TAXATION; TARIFF AND CUSTOMS CODE; CLAIM FOR REFUND AND DUTIES;
PROPER PROCEDURE. It is clear from [Section 1708] of the Tariff and Customs Code that in all
claims for refund of customs duties, the Collector to whom such customs duties are paid and upon
receipt of such claim is mandated to verify the same by the records of his Office. If such claim is found
correct and in accordance with law, the Collector shall certify the same to the Commissioner with his
recommendation together with all the necessary papers and documents.
2.
ID.; ID.; ID.; CTA'S JURISDICTION IS NOT CONCURRENT WITH THE COMMISSIONER
OF CUSTOMS. This is precisely one of the reasons why the Court of Appeals upheld the dismissal
of the case on the ground that the CTA's jurisdiction under the Tariff and Customs Code is not
concurrent with that of the respondent Commissioner of Customs due to the absence of any
certification from the Collector of Customs of Manila. Accordingly, petitioner's contention that its

claims for refund of alleged overpayment of customs duties may be deemed established from the
findings of the tax court in C.T.A. Case No. 4114 on the Advance Sales Tax is not necessarily correct in
the light of the above-cited provision of the Tariff and Customs Code. EHaDIC
3.
ID.; ID.; ID.; MUST BE STRICTLY CONSTRUED AGAINST THE CLAIMANTS.
"Customs duties" is "the name given to taxes on the importation and exportation of commodities, the
tariff or tax assessed upon merchandise imported from, or exported to, a foreign country. Any claim for
refund of customs duties, therefore, take the nature of tax exemptions that must be construed
strictissimi juris against the claimants and liberally in favor of the taxing authority. This power of
taxation being a high prerogative of sovereignty, its relinquishment is never presumed. Any reduction
or diminution thereof with respect to its mode or its rate must be strictly construed, and the same must
be couched in clear and unmistakable terms in order that it may be applied.
4.
ID.; ID.; ID.; OUTRIGHT AWARD FOR THE REFUND OF OVERPAID CUSTOMS DUTIES
IS NOT FAVORED. [A]ny outright award for the refund of allegedly overpaid customs duties in
favor of petitioner on its subject sixteen (16) importations is not favored in this jurisdiction unless there
is a direct and clear finding thereon. The fact alone that the tax court, in C.T.A. Case No. 4114, has
awarded in favor of the petitioner the refund of overpaid Advance Sales Tax involving the same sixteen
(16) importations does not in any way excuse the petitioner from proving its claims for refund of
alleged overpayment of customs duties. We have scrutinized the decision rendered by the tax court in
C.T.A. Case No. 4114 and found no clear indication therein that the tax court has ruled on petitioner's
claims for alleged overpayment of customs duties.
5.
ID.; ID.; ID.; NOT GOVERNED BY RULES ON QUASI-CONTRACT OR SOLUTIO
INDEBITI. The petitioner is mistaken in its contention that its claims for refund of allegedly
overpaid customs duties are governed by Article 2154 of the New Civil Code on quasi-contract, or the
rule on solutio indebiti, which prescribes in six (6) years pursuant to Article 1145 of the same Code.
6.
ID.; ID.; ID.; ID.; FOR SOLUTIO INDEBITI TO APPLY IT IS ESSENTIAL THAT
PETITIONER MUST FIRST SHOW THAT THE PAYMENT OF THE CUSTOMS DUTIES WAS IN
EXCESS OF WHAT WAS REQUIRED BY LAW. In order for the rule on solutio indebiti to apply it
is an essential condition that petitioner must first show that its payment of the customs duties was in
excess of what was required by the law at the time when the subject sixteen (16) importations of milk
and milk products were made. Unless shown otherwise, the disputable presumption of regularity of
performance of duty lies in favor of the Collector of Customs. CHcESa
7.
ID.; ID.; ID.; ID.; ID.; NOT PRESENT IN CASE AT BAR. In the present case, there is no
factual showing that the collection of the alleged overpaid customs duties was more than what is
required of the petitioner when it made the aforesaid separate importations. There is no factual finding
yet by the government agency concerned that petitioner is indeed entitled to its claim of overpayment
and, if true, for how much it is entitled. It bears stress that in determining whether or not petitioner is
entitled to refund of alleged overpayment of customs duties, it is necessary to determine exactly how
much the Government is entitled to collect as customs duties on the importations. Thus, it would only
be just and fair that the petitioner-taxpayer and the Government alike be given equal opportunities to
avail of the remedies under the law to contest or defeat each other's claim and to determine all matters
of dispute between them in one single case. If the State expects its taxpayers to observe fairness and
honesty in paying their taxes, so must it apply the same standard against itself in refunding excess
payments, if truly proven, of such taxes. Indeed, the State must lead by its own example of honor,
dignity and uprightness.
8.
ID.; ID.; ID.; MAY BE FORECLOSED WHEN THE INTERESTED PARTY FAILED TO
FILE A WRITTEN PROTEST BEFORE THE COLLECTOR OF CUSTOMS. In the light of
[Sections 2308 and 2309] of the Tariff and Customs Code, it appears that in all cases subject to protest,
the claim for refund of customs duties may be foreclosed only when the interested party claiming
refund fails to file a written protest before the Collector of Customs. This written protest which must

set forth the claimant's objection to the ruling or decision in question together with the reasons therefor
must be made either at the time when payment of the amount claimed to be due the government is
made or within fifteen (15) days thereafter. In conjunction with this right of the claimant is the duty of
the Collector of Customs to hear and decide such protest in accordance and within the period of time
prescribed by the law.
9.
ID.; ID.; ID.; ONCE A WRITTEN PROTEST IS SEASONABLY FILED, INACTION OF THE
COLLECTOR OF CUSTOMS WILL NOT PREJUDICE THE RIGHT OF CLAIMANT.
Accordingly, once a written protest is seasonably filed with the Collector of Customs the failure or
inaction of the latter to promptly perform his mandated duty under the Tariff and Customs Code should
not be allowed to prejudice the right of the party adversely affected thereby. Technicalities and
legalisms, however exalted, should not be misused by the government to keep money not belonging to
it, if any is proven, and thereby enrich itself at the expense of the taxpayers. If the State expects its
taxpayers to observe fairness and honesty in paying their taxes, so must it apply the same standard
against itself in refunding excess payments, if any, of such taxes. Indeed the State must lead by its own
example of honor, dignity and uprightness. SEIaHT
DECISION
DE LEON, JR., J p:
Challenged in this petition for review on certiorari is the Decision 1 in CA-G.R. SP. No. 43188 2 dated
September 23, 1997 of the Court of Appeals which affirmed the Decision 3 dated May 30, 1995 of the
Court of Tax Appeals in C.T.A. Case No. 4478 4 dismissing petitioner's petition for review to compel
the Commissioner of Customs to grant it a refund of allegedly overpaid import duties, on its various
importations of milk and milk products, amounting to Five Million Eight Thousand and Twenty-Nine
Pesos (P5,008,029.00). aETASc
Petitioner's motion for reconsideration thereof was denied by the Court of Appeals in a Resolution 5
dated June 9, 1998.
The antecedent facts are as follows.
Petitioner is a duly organized domestic corporation engaged in the importations of milk and milk
products for processing, distribution and sale in the Philippines. Between July and November 1984,
petitioner transacted sixteen (16) separate importations of milk and milk products from different
countries. Petitioner was assessed customs duties and advance sales taxes by the Collector of Customs
of Manila for each of these separate importations on the basis of the published Home Consumption
Value (HCV) indicated in the Bureau of Customs Revision Orders. Petitioner paid the same but
seasonably filed the corresponding protests before the said Collector of Customs from October 25 to
December 5, 1984, uniformly alleging therein that the latter erroneously applied higher home
consumption values in determining the dutiable value for each of these separate importations. In the
said protests, petitioner claims for refund of both the alleged overpaid import duties amounting to Five
Million Eight Thousand and Twenty-Nine Pesos (P5,008,029.00) and advance sales taxes aggregating
to Four Million Five Hundred Sixty-Four Thousand One Hundred Seventy-Nine Pesos and Thirty
Centavos (P4,564,179.30). cTAaDC
On October 14, 1986, petitioner formally filed a claim for refund of allegedly overpaid advance sales
taxes with the Bureau of Internal Revenue (BIR) amounting to Four Million Five Hundred Sixty-Four
Thousand One Hundred Seventy-Nine Pesos and Thirty Centavos (P4,564,179.30) covering the same
sixteen (16) importations of milk and milk products from different countries. Not long after, on October
15, 1986 and within the two-year prescriptive period provided for under the National Internal Revenue
Code (NIRC) for claiming a tax refund, petitioner filed the corresponding petition for review with the
Court of Tax Appeals (CTA) which was docketed therein as C.T.A. Case No. 4114. On January 3, 1994,
the tax court ruled in favor of petitioner and forthwith ordered the BIR to refund to the petitioner the
sum of Four Million Four Hundred Eighty-Nine Thousand Six Hundred Sixty-One Pesos and NinetyFour Centavos (P4,489,661.94) representing the overpaid Advance Sales Taxes on the aforesaid

importations.
On the other hand, the sixteen (16) protest cases for refund of alleged overpaid customs duties
amounting to Five Million Eight-Thousand Twenty-Nine Pesos (P5,008,029.00) were left with the
Collector of Customs of Manila. However, the said Collector of Customs failed to render his decision
thereon after almost six (6) years since petitioner paid under protest the customs duties on the said
sixteen (16) importations of milk and milk products and filed the corresponding protests.
Consequently, in order to prevent these claims from becoming stale on the ground of prescription,
petitioner immediately filed a petition for review docketed as C.T.A. Case No. 4478, with the Court of
Tax Appeals on August 2, 1990 despite the absence of a ruling on its protests from both the Collector of
Customs of Manila and the Commissioner of Customs.
On May 30, 1995, the CTA rendered judgment dismissing C.T.A. Case No 4478 for want of
jurisdiction. 6 The subsequent motion for reconsideration filed by the petitioner on July 11, 1995 was
denied for lack of merit in a Resolution 7 dated January 6, 1997.
Aggrieved, petitioner appealed on February 10, 1999 the said judgment and resolution of the CTA in
C.T.A. Case No. 4478 to the Court of Appeals by way of petition for review on certiorari under Rule 45
of the Rules of Court. However, this appeal was later dismissed by the appellate court on September
23, 1997 for lack of merit. The Court of Appeals opined, inter alia, that the CTA's jurisdiction is not
concurrent with the appellate jurisdiction of the Commissioner of Customs since there was no decision
or ruling yet of the Collector of Customs of Manila on the matter; that the petition does not fall under
any of the recognized exceptions on exhaustion of administrative remedies to justify petitioner's
immediate resort to the CTA; that the petitioner failed to move for the early resolution of its claims for
refund nor was there any notice given that the said Collector of Customs' continued inaction on its
claims would be deemed a denial of its claims; and that petitioner also neglected to cite any law or
jurisprudence which prescribes a period for filing an appeal in the CTA even if there was no action yet
by the Commissioner of Customs.
On June 9, 1998, the appellate court issued a Resolution 8 denying petitioner's motion for
reconsideration for lack of merit.
Hence, this petition.
Petitioner assigns the following as errors, to wit:
1.
RESPONDENT COURT OF APPEALS ACTED WITH GRAVE ABUSE OF DISCRETION IN
HOLDING THAT THE FILING OF PROTEST CASES BEFORE THE COLLECTOR OF CUSTOMS
HAD EFFECTIVELY INTERRUPTED THE RUNNING OF THE SIX-YEAR PRESCRIPTIVE
PERIOD;
2.
RESPONDENT COURTS COMMITTED FUNDAMENTAL ERRORS AND ACTED WITH
GRAVE ABUSE OF DISCRETIONS IN HOLDING THAT PETITIONER HAD FAILED TO
EXHAUST ADMINISTRATIVE REMEDIES, NOTWITHSTANDING ALMOST 6 YEARS OF
PROTRACTED HEARINGS OF THE 16 PROTEST CASES WITH THE CUSTOMS COLLECTOR,
AND FILING OF THE PETITION ONLY WHEN THE SIX-YEAR PRESCRIPTIVE PERIOD WAS
ABOUT TO EXPIRE TO AVOID NULLIFICATION OF CLAIMS ON GROUND OF
PRESCRIPTION; EICDSA
3.
THE RESPONDENT COURTS GRAVELY ERRED IN DISMISSING ON SHEER
TECHNICALITIES PETITIONER'S CLAIMS FOR THE REFUND OF P5,008,029.08 (SIC)
OVERPAID DUTIES, WHEN THE FACTS OF OVERPAYMENTS HAD BEEN EARLIER
RESOLVED IN CTA CASE NO. 4114, HOLDING THAT THE WRONG APPLICATION OF THE
HIGHER HOME CONSUMPTION VALUES RESULTED IN THE OVERPAYMENTS OF DUTIES
AND TAXES, AND UPON WHICH, IT ORDERED THE REFUND OF P4,489,661.94 IN
OVERPAID TAXES. THERE IS NO VALID REASON THEREFORE WHY THE
CORRESPONDING OVERPAYMENTS IN CUSTOMS DUTIES CAN NOT ALSO BE REFUNDED
TO ITS RIGHTFUL OWNER, THE PETITIONER HEREIN.

In this petition, petitioner asserts that tax refunds are based on quasi-contract or solutio indebiti, which
under Article 1145 9 of the Civil Code, prescribes in six (6) years. Consequently, the pendency of its
protest cases before the office of the Collector of Customs of Manila did not interrupt the running of
the prescriptive period under the aforesaid provision of law considering that it is only an administrative
body performing only quasi-judicial function and not a regular court of justice. 10 Thus, in like manner
the thirty-day period for appealing to the CTA must be made within the six-year prescriptive period.
Petitioner further contends that the fact of overpayment of customs duties has been duly established
and resolved with finality by the Court of Tax Appeals on January 3, 1994 in C.T.A. Case No. 4114. 11
In that case, the tax court found that the Bureau of Customs erroneously used the wrong home
consumption value in assessing the petitioner the Advance Sales Tax on its subject sixteen (16)
importations. The tax court then ordered the Commissioner of Internal Revenue to refund to the
petitioner the sum of Four Million Four Hundred Eighty-Nine Thousand Six Hundred Sixty-One Pesos
and Ninety-Four Centavos (P4,489,661.94), representing overpaid advance sales tax covering the same
sixteen (16) importations. It is also from the same sixteen (16) separate importations of milk and milk
products that petitioner based its claims for refund of overpayment of customs duties. Thus, petitioner
avers that its claims for refund of overpaid customs duties must likewise be granted and awarded in its
favor.
In lieu of Comment, 12 the Solicitor General manifested that there is merit in petitioner's argument
considering that petitioner's cause of action to recover a tax erroneously paid is based on solutio
indebiti which is expressly classified as a quasi-contract under the Civil Code; that petitioner's cause of
action would have prescribed on August 2, 1990 if it did not bring the matter before the CTA; and that
the Collector of Customs has not even acted or resolved the petitioner's several protests it had filed
before his office within six (6) years after it made the earliest payment of advance customs duties on its
importations.
There was also no violation of the principle of exhaustion of administrative remedies in this case. This
doctrine does not apply to the case at bar since its observance would only result in the nullification of
the claim for refund being asserted nor would it provide a plain, speedy and adequate remedy under the
circumstances. This notwithstanding, however, the Solicitor General further opined that this case
should be remanded to the CTA in order for the tax court to determine the veracity of petitioner's claim.
On the other hand, respondent Commissioner of Customs, in his Comment 13 dated August 21, 2000,
admitted with regret, their official inaction adverted to by the petitioner. Respondent Commissioner
expressed the view that petitioner's claim for refund of customs duties should not outrightly be denied
by virtue of the strict adherence to the rules to prevent grave injustice to hapless taxpayers; that this
does not justify, however, an outright award of the refund of alleged overpayment of customs duties in
favor of petitioner; and that there is no definite factual determination yet that the customs duties and
taxes in question were overpaid and refundable, and if refundable how much is the refundable amount.
The fact that the Collector of Customs of Manila failed to act or decide on the petitioner's protest cases
filed before his Office does not relieve the petitioner of its burden to prove that it is entitled to the
refund sought for. Thus, respondent Commissioner of Customs, thru his special counsel, recommended
that this case be remanded to the court of origin, namely, the CTA.
The recommendations of both the Solicitor General and the respondent Commissioner of Customs are
well taken. After a meticulous consideration of this case, we find that the recommended remand of this
case to the CTA is warranted for the proper verification and determination of the factual basis and
merits of this petition and in order that the ends of substantial justice and fair play may be subserved.
We are of the view that the said recommendation is in accord with the provisions of the Tariff and
Customs Code as hereinafter discussed.
The right to claim for refund of customs duties is specifically governed by Section 1708 of the Tariff
and Customs Code, which provides that
"SECTION 1708.
Claim for Refund of Duties and Taxes and Mode of Payment. All claims for

refund of duties shall be made in writing and forwarded to the Collector to whom such duties are paid,
who upon receipt of such claim, shall verify the same by the records of his Office, and if found to be
correct and in accordance with law, shall certify the same to the Commissioner with his
recommendation together with all necessary papers and documents. Upon receipt by the Commissioner
of such certified claim he shall cause the same to be paid if found correct."
It is clear from the foregoing provision of the Tariff and Customs Code that in all claims for refund of
customs duties, the Collector to whom such customs duties are paid and upon receipt of such claim is
mandated to verify the same by the records of his Office. If such claim is found correct and in
accordance with law, the Collector shall certify the same to the Commissioner with his
recommendation together with all the necessary papers and documents. This is precisely one of the
reasons why the Court of Appeals upheld the dismissal of the case on the ground that the CTA's
jurisdiction 14 under the Tariff and Customs Code is not concurrent with that of the respondent
Commissioner of Customs due to the absence of any certification from the Collector of Customs of
Manila. Accordingly, petitioner's contention that its claims for refund of alleged overpayment of
customs duties may be deemed established from the findings of the tax court in C.T.A. Case No. 4114
on the Advance Sales Tax is not necessarily correct in the light of the above-cited provision of the
Tariff and Customs Code. cTEICD
"Customs duties" is 'the name given to taxes on the importation and exportation of commodities, the
tariff or tax assessed upon merchandise imported from, or exported to, a foreign country.' 15 Any claim
for refund of customs duties, therefore, take the nature of tax exemptions that must be construed
strictissimi juris against the claimants and liberally in favor of the taxing authority. 16 This power of
taxation being a high prerogative of sovereignty, its relinquishment is never presumed. Any reduction
or diminution thereof with respect to its mode or its rate must be strictly construed, and the same must
be couched in clear and unmistakable terms in order that it may be applied. 17
Thus, any outright award for the refund of allegedly overpaid customs duties in favor of petitioner on
its subject sixteen (16) importations is not favored in this jurisdiction unless there is a direct and clear
finding thereon. The fact alone that the tax court, in C.T.A. Case No. 4114, has awarded in favor of the
petitioner the refund of overpaid Advance Sales Tax involving the same sixteen (16) importations does
not in any way excuse the petitioner from proving its claims for refund of alleged overpayment of
customs duties. We have scrutinized the decision rendered by the tax court in C.T.A. Case No. 4114
and found no clear indication therein that the tax court has ruled on petitioner's claims for alleged
overpayment of customs duties.
The petitioner is mistaken in its contention that its claims for refund of allegedly overpaid customs
duties are governed by Article 2154 18 of the New Civil Code on quasi-contract, or the rule on solutio
indebiti, which prescribes in six (6) years pursuant to Article 1145 of the same Code.
Sections 2308 and 2309 of the Tariff and Customs Code provide that:
"SECTION 2308.
Protest and Payment upon Protest in Civil Matter. When a ruling or decision
of the collector is made whereby liability for duties, taxes, fees, or other charges are determined, except
the fixing of fines in seizure cases, the party adversely affected may protest such ruling or decision by
presenting to the Collector at the time when payment of the amount claimed to be due the government
is made, or within fifteen (15) days thereafter, a written protest setting forth his objection to the ruling
or decision in question, together with the reasons therefor. No protest shall be considered unless
payment of the amount due after final liquidation has first been made and the corresponding docket fee,
as provided for in Section 3301."
"SECTION 2309.
Protest Exclusive Remedy in Protestable Case. In all cases subject to protest,
the interested party who desires to have the action of the collector reviewed, shall make a protest,
otherwise, the action of the collector shall be final and conclusive against him, . . ."
"SECTION 2312.
Decision or Action by the collector in Protest and Seizure Cases. When a
protest in a proper form is presented in a case where protest is required, the collector shall issue an

order for hearing within fifteen (15) days from receipt of the protest and hear the matter thus presented.
Upon termination of the hearing, the Collector shall render a decision within thirty (30) days, and if the
protest is sustained, in whole or in part, he shall make the appropriate order, the entry reliquidated
necessary. . ."
In the light of the above-cited provisions of the Tariff and Customs Code, it appears that in all cases
subject to protest, the claim for refund of customs duties may be foreclosed only when the interested
party claiming refund fails to file a written protest before the Collector of Customs. This written protest
which must set forth the claimant's objection to the ruling or decision in question together with the
reasons therefor must be made either at the time when payment of the amount claimed to be due the
government is made or within fifteen (15) days thereafter. In conjunction with this right of the claimant
is the duty of the Collector of Customs to hear and decide such protest in accordance and within the
period of time prescribed by the law.
Accordingly, once a written protest is seasonably filed with the Collector of Customs the failure or
inaction of the latter to promptly perform his mandated duty under the Tariff and Customs Code should
not be allowed to prejudice the right of the party adversely affected thereby. Technicalities and
legalisms, however exalted, should not be misused by the government to keep money not belonging to
it, if any is proven, and thereby enrich itself at the expense of the taxpayers. If the State expects its
taxpayers to observe fairness and honesty in paying their taxes, so must it apply the same standard
against itself in refunding excess payments, if any, of such taxes. Indeed the State must lead by its own
example of honor, dignity and uprightness.
Here, it is undisputed that the inaction of the Collector of Customs of Manila for nearly six (6) years on
the protests seasonably filed by the petitioner has caused the latter to immediately resort to the CTA.
The petitioner did so on the mistaken belief that its claims are governed by the rule on quasi-contract or
solutio indebiti which prescribes in six (6) years under Article 1145 of the New Civil Code.
This belief or contention of the petitioner is misplaced. In order for the rule on solutio indebiti to apply
it is an essential condition that petitioner must first show that its payment of the customs duties was in
excess of what was required by the law at the time when the subject sixteen (16) importations of milk
and milk products were made. Unless shown otherwise, the disputable presumption of regularity of
performance of duty lies in favor of the Collector of Customs.
In the present case, there is no factual showing that the collection of the alleged overpaid customs
duties was more than what is required of the petitioner when it made the aforesaid separate
importations. There is no factual finding yet by the government agency concerned that petitioner is
indeed entitled to its claim of overpayment and, if true, for how much it is entitled. It bears stress that
in determining whether or not petitioner is entitled to refund of alleged overpayment of customs duties,
it is necessary to determine exactly how much the Government is entitled to collect as customs duties
on the importations. Thus, it would only be just and fair that the petitioner-taxpayer and the
Government alike be given equal opportunities to avail of the remedies under the law to contest or
defeat each other's claim and to determine all matters of dispute between them in one single case. 19 If
the State expects its taxpayers to observe fairness and honesty in paying their taxes, so must it apply the
same standard against itself in refunding excess payments, if truly proven, of such taxes. Indeed, the
State must lead by its own example of honor, dignity and uprightness. HcACTE
The ratiocination of the Court of Appeals is in accord with a ruling of this Court which is applicable to
the case at bar, to wit:
"As stated by the respondent court in its Resolution dated January 6, 1997, the petitioner's claim cannot
be deemed to prescribe because the Collector of Customs has not acted on the protest, and the period
for filing an appeal to the Commissioner of Customs has not commenced to run. Moreover, delay or
inaction of a subordinate official, does not constitute an exception to the afore-cited principle as the
delay should be brought to the attention of a superior administrative officer for immediate adjudication
(Commissioner of Immigration vs. Vamenta, Jr., 54 SCRA 342; Barte vs. Dichoso, 47 SCRA 77)."

WHEREFORE, the assailed Decision dated September 23, 1997 of the Court of Appeals in CA-G.R.
SP. No. 43188 is hereby SET ASIDE; and C.T.A. Case No. 4478 is REINSTATED and REMANDED
to the Court of Tax Appeals for hearing and reception of evidence relative to petitioner's claims for
refund of alleged overpayment of customs duties. The Court of Tax Appeals is directed to dispose of
the said case with dispatch.
SO ORDERED. CaTcSA
Bellosillo, Mendoza and Buena, JJ., concur.
Quisumbing, J., is on official leave.
Footnotes
1.
Seventh Division, J. Minerva Gonzaga-Reyes (now an Associate Justice of the Supreme Court)
ponente, and concurred in by Associate Justices Eubulo G. Versola and Maximiano C. Asuncion.
2.
Rollo, pp. 65-73.
3.
Penned by Associate Judge Manuel K. Gruba and concurred in by Ernesto D. Acosta, Presiding
Judge, and Ramon O. de Veyra, Associate Judge.
4.
Rollo, pp. 112-121.
5.
Rollo, pp. 94-96.
6.
Rollo, pp. 112-121.
7.
Rollo, pp. 135-141.
8.
Supra, note no. 5.
9.
ART. 1145 The following actions must be commenced within six years:
1.
Upon an oral contract;
2.
Upon a quasi-contract
10.
ART. 1155. The prescription of actions is interrupted when they are filed before the court, when
there is a written extrajudicial demand by the creditors, and when there is any written acknowledgment
of the debt by the debtor.
11.
Rollo, pp. 169-179.
12.
Rollo, pp. 200-212.
13.
Rollo, pp. 241-245.
14.
Sec. 2402. Review by Court of Tax Appeals. The party aggrieved by a ruling of the
Commissioner in any matter brought before him upon protest or by his action or ruling in any case of
seizure may appeal to the Court of Tax Appeals, in the manner and within the period prescribed by law
and regulations.
Unless an appeal is made to the Court of Tax Appeals in the manner and within the
period prescribed by laws and regulations, the action or ruling of the Commissioner shall be final and
conclusive.
15.
Garcia v. Executive Secretary, 211 SCRA 219, 227 (1992) citing U.S. v. Sischo, 262 Fed. 1001
(1919); Flint v. Stone Tracey Company, 220 US 107 (1910); Keller-Dorian Corp. v. Commissioner of
Internal Revenue, 153 F2d 1006 (1946) and Pollock v. Farmers' Loan and Trust Company, 158 US 601;
39 Law Ed. 1108 (1895).
16.
See Commissioner of Internal Revenue v. Tokyo Shipping Co., Ltd., 244 SCRA 332, 336
(1995), Esso Standard Eastern, Inc. v. Acting Commissioner of Customs, 18 SCRA 488 (1966).
17.
Philippine Telegraph and Telephone Corp. v. COA, 146 SCRA 190, 196-197 (1986).
18.
Art. 2154.
If something is received when there is no right to demand it, and it was unduly
delivered through mistake, the obligation to return it arises.
19.
Commissioner of Internal Revenue v. Court of Tax Appeals, 234 SCRA 348, 358 (1994).

THIRD DIVISION
[G.R. No. 135253. December 9, 2004.]
COMMISSIONER OF CUSTOMS, petitioner, vs. MILWAUKEE INDUSTRIES CORPORATION,
respondent.
The Solicitor General for petitioner.
Armando S. Padilla for respondent.
SYNOPSIS
For alleged violation of Section 2530 (f) and (l) 3,4 and 5 of the Tariff and Customs Code, the
District Collector of Customs ordered that the respondent's shipment be seized and forfeited in favor of
the government. It was alleged that the respondent's shipment was discharged from the vessel and taken
to the warehouse of the consignee without legal documentation as required by laws and regulations and
without payment of duties and taxes. The decision of the District Collector was affirmed by the
petitioner Commissioner of Customs. On appeal, the Court of Tax Appeals (CTA) reversed and set
aside the petitioner's Decision ruling that petitioner erred in ordering the seizure of the shipment
because (1) at the time the shipment was transported to respondent's warehouse in Apalit, Pampanga,
the same was "not released" from the Customs' custody "but was merely transferred or discharged
under continuous customs guarding"; and (2) after respondent had fully paid the customs duties and
taxes due on the shipment, the same should have been released by petitioner to respondent. The Court
of Appeals affirmed the decision of the CTA. ITDHcA
Hence, this petition.
The Supreme Court found the petition devoid of merit. Petitioner's contention that when the shipment
in question was transported to respondent's warehouse in Apalit, Pampanga, the same was "released"
from the custody of the Customs authorities, was misplaced. It bears stressing that such transfer of the
shipment was made by virtue of the Boat Notes issued by Customs Inspector. He made a specific
instruction in the Boat Notes that the shipment should be "under continuous guarding" by the Customs
guard "until released by the Customs authorities," obviously because the customs duties and taxes due
thereon have not yet been paid. Clearly, the physical and legal custody over the shipment remained
with the Customs authorities. Furthermore, the order of release of the shipment came about only after
the respondent's consultant presented to petitioner the import entry document covering the shipment
and two checks as full payment of the duties and taxes thereon. In fact, the respondent's payment of the
customs duties and taxes on the shipment was duly accepted by the Bureau of Customs on March 17,
1994. Hence, this legally terminated the importation of goods or articles as provided under Section
1202 of the Tariff and Customs Code. As regards the legal permit for withdrawal of the imported
articles, petitioner's order of release upon payment of taxes and duties on the shipment was a sufficient
legal permit for the official release of the shipment transferred to respondent's warehouse.
SYLLABUS
1.
REMEDIAL LAW; EVIDENCE; WHEN FACTUAL FINDINGS MAY BE REVIEWED BY
THE SUPREME COURT. Obviously, these issues entail a reevaluation of factual circumstances, a
matter that normally cannot be undertaken by this Court as it is not a trier of facts. However, we are
constrained to resolve the issues raised since the findings of both petitioner and the District Collector of
Customs on the one hand, are in conflict with those of the CTA and Court of Appeals, on the other.
ISHCcT
2.
ID.; ID.; FACTUAL DETERMINATION OF BOTH THE COURT OF TAX APPEALS AND
THE COURT OF APPEALS IS GENERALLY BINDING IF SUFFICIENTLY SUPPORTED BY
EVIDENCE AND ABSENT ANY PALPABLE ERROR. We sustain the findings of both the CTA
and the Court of Appeals. It is axiomatic that their factual determination is generally binding upon this
Court where, as here, it is sufficiently supported by the evidence on record and there is no clear
showing of any palpable error.
3.
TAXATION; TARIFF AND CUSTOM DUTIES; IMPORTATION OF GOODS OR ARTICLES

WHEN DEEMED TERMINATED; CASE AT BAR. The order of release of the shipment came
about only after Alfredo Gloria, respondent's consultant, presented to petitioner the import entry
document covering the shipment and two checks as full payment of the duties and taxes due thereon.
The undisputed fact is that it was petitioner who instructed Atty. Aaron Redubla, his Special Assistant,
to direct District Collector of Customs Oscar Brillo to further process respondent's payment of the
customs duties and taxes due on the shipment and to release the same upon full payment thereof. It is
likewise undisputed that respondent's payment of the customs duties and taxes on the shipment was
duly accepted by the Bureau of Customs on March 17, 1994. Hence, this legally terminated the
importation of goods or articles as provided under Section 1202 of the Tariff and Customs Code, viz:
"SECTION 1202. When Importation Begins and Deemed Terminated. Importation begins when the
carrying vessel or aircraft enters the jurisdiction of the Philippines with intention to unlade therein.
Importation is deemed terminated upon payment of the duties, taxes and other charges due upon the
articles, or secured to be paid, at a port of entry and the legal permit for withdrawal shall have been
granted, or in case said articles are free of duties, taxes and other charges, until they have legally left
the jurisdiction of the customs." As regards the legal permit for withdrawal of the imported articles
mentioned in the above provision, petitioner's order of release upon payment of taxes and duties on the
shipment, indicated in the notation (Exhibit "M-1") made by his Special Assistant Atty. Redubla
mentioned earlier, is a sufficient legal permit for the official release of the shipment transferred to
respondent's warehouse. SEACTH
DECISION
SANDOVAL-GUTIERREZ, J p:
Assailed in this petition for review on certiorari 1 are the Decision 2 dated July 8, 1998 and Resolution
dated August 24, 1998 of the Court of Appeals in CA-G.R. SP No. 44496, affirming the Decision of the
Court of Tax Appeals (CTA) in C.T.A. Case No. 5160. The CTA Decision reversed and set aside the
Commissioner of Customs' Decision ordering the forfeiture of respondent's shipment of imported steel
billets.
Milwaukee Industries Corporation, respondent, is a domestic corporation engaged in the importation of
steel billets, with principal office at No. 130 Amorsolo Street, Legaspi Village, Makati City. It has a
warehouse/factory in Apalit, Pampanga where it manufactures and molds the street billets into finished
products, such as plates, sheets, pipes, rods and bars for the local market. STaCcA
On November 5, 1993, the Far East Bank and Trust Company (FEBTC) issued to respondent a
commercial letter of credit in the amount of US$2,071,000.00, in favor of Klockner & Co. of Germany
for the importation of 11,985 pieces of secondary steel billets weighing 9,500 metric tons. At about the
same time, respondent, through its customs broker, Schmitz Transport and Brokerage Corporation
(Schmitz), filed with the FEBTC an Import Entry Declaration and deposited the amount of
P1,863,598.00 representing the advance deposit for customs duties and taxes due on the importation.
The Bureau of Customs then issued the corresponding Official Receipt No. 30277274 on the deposit. 3
On February 1, 1994, the shipment of steel billets arrived at the port of Manila aboard the vessel "S/S
SOLSYN." Forthwith, Jimmy Pastoriza, customs inspector, and Generoso Mirallo and Lucas
Almendras, customs guards, who were tasked to supervise the unloading of the cargo, boarded the
vessel. Jose Garcia, a supervisor of Schmitz, also boarded the vessel and presented to Inspector
Pastoriza a Permit to Discharge Shipside (or "Shipside Permit"), he obtained from the Bureau of
Customs, authorizing the discharge of the cargo from the vessel to the barges/lighters of Transport
Venture, Inc. It took six days (from February 1 to 6, 1994) to discharge the cargo.
Inspector Pastoriza then issued thirteen Boat Notes on the entire shipment authorizing its transfer, with
the instruction that the same should be "under guard" by the Bureau of Customs, and that the "(g)uard
remain in continuous duty until released by Customs Authorities or upon presentation of a Valid
Delivery Permit or PDIG." 4 Thus, the cargo was loaded into the trucks of Schmitz and transported to
the warehouse of respondent, the consignee, in Apalit, Pampanga. 5

Subsequently, the Customs Intelligence and Investigation Division (CIID) of the Bureau of Customs
received information that the transfer of the shipment to respondent's warehouse was questionable.
Upon investigation, the CIID found that the shipment was transported without an Import Entry having
been filed and without payment of the duties and taxes due thereon.
Consequently, on March 14, 1994, the CIID filed with the District Collector of Customs, Port of
Manila, an application for the issuance of a warrant of seizure and detention against the cargo, docketed
as Seizure Identification No. 94-055. The following day, the warrant of seizure and detention was
issued.
Meanwhile, prior to the return of the warrant, Alfredo S. Gloria, respondent's consultant, conferred with
the Commissioner of Customs, herein petitioner, concerning respondent's shipment. As a result of the
conference, Gloria sent petitioner a letter dated March 16, 1994, 6 attaching therewith the required
Import Entry document covering the shipment and two checks, one for the amount of P5,000,000.00
and another for P4,944,864.00 representing the full payment of the duties and taxes due. HCTaAS
On March 17, 1994, petitioner instructed its Special Assistant, Atty. Aaron Redubla, to accept the
payment and to process the release of the shipment to respondent. 7 Accordingly, Atty. Redubla made a
notation 8 on Gloria's letter that "per instruction," the shipment is "for further processing and release
upon payment of taxes and duties." 9 Atty. Redubla then went to the Office of District Customs
Collector Oscar Brillo and the Cash Division to implement petitioner's instruction. 10 In turn, District
Collector Brillo scribbled a note on Gloria's letter ordering the processing of respondent's payment. 11
That same day (March 17, 1994), respondent's checks were duly received by the Bureau of Customs of
Manila per Official Receipts Nos. 45981887 and 46051162. 12
Notwithstanding the Bureau of Customs' acceptance of respondent's full payment of duties and taxes,
District Collector Brillo still proceeded with the seizure and forfeiture proceedings. On August 3, 1994,
he rendered a Decision 13 holding that "a violation of Section 2530 (f) and (1) 3, 4 and 5 of the
Tariff and Customs Code 14 was committed from the time the shipment was discharged from the vessel
and taken to the warehouse of the consignee without legal documentation as required by laws and
regulations for the same and without payment of duties and taxes due thereon." 15 Thus, the shipment
was ordered "forfeited in favor of the Government, to be disposed of in the manner provided by law."
The dispositive portion of the Decision reads:
"WHEREFORE, it is hereby ordered and decreed that the shipment of 11,985 pieces of secondary steel
billets subject of this seizure case be, as it is hereby, FORFEITED in favor of the Government, to be
disposed of in the manner provided for by law.
Let copies of this Decision be furnished all parties and offices concerned for their information and
guidance.
SO ORDERED."
Respondent appealed to the Office of petitioner Commissioner of Customs, docketed as Customs Case
No. 94-09. On September 8, 1994, Deputy Commissioner Licerio C. Evangelista, "by authority of the
Commissioner of Customs," rendered a Decision 16 affirming the District Collector's Decision.
Respondent's motion for reconsideration was likewise denied.
Aggrieved, respondent filed with the Court of Tax Appeals (CTA) a petition for review, docketed as
C.T.A. Case No. 5160. In its Decision 17 dated April 8, 1997, the CTA reversed and set aside
petitioner's Decision. The CTA ruled that petitioner erred in ordering the seizure of the shipment
because (1) at the time the shipment was transported to respondent's warehouse in Apalit, Pampanga,
the same was "not released" from the Customs' custody "but was merely transferred or discharged
under continuous customs guarding;" and (2) after respondent had fully paid the customs duties and
taxes due on the shipment, the same should have been released by petitioner to respondent. The
dispositive portion of the CTA Decision reads:
"WHEREFORE, in view of the foregoing, the instant petition for review is hereby GRANTED. The
assailed Decision of the respondent in Customs Case No. 94-09 (Manila Seizure Identification No. 94-

055) is hereby REVERSED and SET ASIDE. Accordingly, the Surety Bond (PGA Bond No. HQ
34515-95/G[16] No. 17997 as amended under Endorsement No. HQ-E-09398-96 in the total amount of
P75,000,000.00) posted by the petitioner is ordered CANCELLED. IEHDAT
SO ORDERED."
Petitioner's motion for reconsideration was also denied in the CTA Resolution dated May 23, 1997. 18
On appeal by petitioner to the Court of Appeals, the latter affirmed the CTA Decision in its Decision
dated July 8, 1998. 19 Petitioner filed a motion for reconsideration but was denied in a Resolution
dated August 24, 1998. 20
Hence, this petition.
Petitioner contends that
"THE COURT OF APPEALS ERRED IN DISREGARDING THE FOLLOWING PROPOSITIONS:
I
THE SHIPMENT OF STEEL BILLETS WAS RELEASED TO RESPONDENT MILWAUKEE
INDUSTRIES CORPORATION AND NOT MERELY TRANSFERRED OR DISCHARGED UNDER
CONTINUOUS CUSTOMS GUARDING; and
II
CONSIDERING THAT AT THE TIME THE SHIPMENT WAS RELEASED, RESPONDENT
FAILED TO COMPLY WITH THE REQUIREMENTS OF THE TARIFF AND CUSTOMS CODE,
THE IMPORTATION IS UNAUTHORIZED OR ILLEGAL, HENCE SUBJECT TO SEIZURE." 21
Petitioner wants us to resolve (1) whether the shipment in question was released to respondent from the
custody of the Customs authorities, as held by both petitioner and the District Collector of Customs,
and not merely transferred to respondent's warehouse, as found by the CTA and affirmed by the Court
of Appeals; and (2) whether respondent failed to comply with the customs requirements to justify the
seizure and forfeiture of the shipment. EaIDAT
Obviously, these issues entail a reevaluation of factual circumstances, a matter that normally cannot be
undertaken by this Court as it is not a trier of facts. 22 However, we are constrained to resolve the
issues raised since the findings of both petitioner and the District Collector of Customs on the one
hand, are in conflict with those of the CTA and Court of Appeals, on the other.
We have reviewed the records and we find the petition devoid of merit. HaSEcA
Petitioner's contention that when the shipment in question was transported to respondent's warehouse in
Apalit, Pampanga, the same was "released" from the custody of the Customs authorities is misplaced. It
bears stressing that such transfer of the shipment was made by virtue of the Boat Notes issued by
Customs Inspector Jimmy Pastoriza. He made a specific instruction in the Boat Notes that the shipment
should be "under continuous guarding" by the Customs guard "until released by the Customs
authorities," obviously because the customs duties and taxes due thereon have not yet been paid.
Clearly, the physical and legal custody over the shipment remained with the Customs authorities. As
ruled by the Court of Appeals:
"In the Decision under review, public respondent CTA found and held inter alia that at the time of the
transfer of the subject shipment to Milwaukee's factory, the same was not 'released' but merely
transferred or discharged under 'continuous customs guarding.' The said factual finding of the CTA was
based, among others, on the following corroborating evidence which belie petitioner's claim:
(a)
Boat Notes (Exhibits 'S' to 'S-12' and their submarkings) signed by then Discharging Customs
Inspector Pastoriza, majority of which contain a remark to wit:
'NOTE:
Shipside discharge unto lighter under guard. Guard to remain in continuous duty until released by
Customs proper authorities or upon proper presentation of a valid delivery permit or PDIG.'
b)
Bill and/or statement demanding payment of overtime services rendered by Customs Guard in
guarding the subject shipment of steel billets submitted by Customs Guard In-charge Oscar Almendras
and certified to by Discharging Inspector Pastoriza; and

(c)
Copy of Solidbank Check No. 08275 issued to Almendras (Exhibit 'O') and the dorsal part
thereof showing the encashment and receipt of the check (Exhibit 'O-1') [as payment for services].
This court is not inclined to disturb public respondent CTA's factual finding, not only because the same
is clearly and sufficiently supported by the above-enumerated evidence, but more importantly, said
finding was categorically admitted by petitioner Commissioner of Customs in its motion for
reconsideration to the CTA's Decision, to wit:
'It is not enough that duties and taxes are paid so that an importation may be considered legally
terminated; it is also required that a legal permit for withdrawal shall have been granted. Such situation
does not obtain in the case at bar. On the contrary, customs guards were posted at petitioner's premises
in Apalit, Pampanga, thereby showing that respondent never released the shipment to petitioner.'
In view of such admission on the part of petitioner, there is no question by now that at the time the
subject shipment of steel billets was transferred to the factory of private respondent Milwaukee, said
shipment was not released but allowed only to be transferred 'under continuous customs guarding' to
the premises of private respondent by authority of the boat notes signed by Discharging Inspector
Pastoriza. Simply put, since the said shipment was merely transferred 'under guard,' not released, the
same then remained under the custody of the Bureau of Customs for all legal intents and purposes." 23
(Emphasis supplied)
We sustain the findings of both the CTA and the Court of Appeals. It is axiomatic that their factual
determination is generally binding upon this Court where, as here, it is sufficiently supported by the
evidence on record and there is no clear showing of any palpable error. 24
Significantly, the District Collector of Customs contradicted himself when he categorically stated in his
Decision that the shipment in question was never released to respondent, thus:
". . . it is not enough that duties and taxes are paid for an importation to be considered legally
terminated; it is also required that a legal permit for withdrawal shall have been granted, which is not
true in this case. On the contrary, . . . the Bureau of Customs posted guards at the premises of the
consignee showing that the Bureau never released the shipment to the claimant/importer." 25
(Emphasis supplied)
The order of release of the shipment came about only after Alfredo Gloria, respondent's consultant,
presented to petitioner the import entry document covering the shipment and two checks as full
payment of the duties and taxes due thereon. The undisputed fact is that it was petitioner who instructed
Atty. Aaron Redubla, his Special Assistant, to direct District Collector of Customs Oscar Brillo to
further process respondent's payment of the customs duties and taxes due on the shipment and to
release the same upon full payment thereof. IaTSED
It is likewise undisputed that respondent's payment of the customs duties and taxes on the shipment
was duly accepted by the Bureau of Customs on March 17, 1994. Hence, this legally terminated the
importation of goods or articles as provided under Section 1202 of the Tariff and Customs Code, viz:
"SECTION 1202.
When Importation Begins and Deemed Terminated. Importation begins when
the carrying vessel or aircraft enters the jurisdiction of the Philippines with intention to unlade therein.
Importation is deemed terminated upon payment of the duties, taxes and other charges due upon the
articles, or secured to be paid, at a port of entry and the legal permit for withdrawal shall have been
granted, or in case said articles are free of duties, taxes and other charges, until they have legally left
the jurisdiction of the customs." (Emphasis supplied)
As regards the legal permit for withdrawal of the imported articles mentioned in the above provision,
petitioner's order of release upon payment of taxes and duties on the shipment, indicated in the notation
(Exhibit "M-1") made by his Special Assistant Atty. Redubla mentioned earlier, is a sufficient legal
permit for the official release of the shipment transferred to respondent's warehouse. HATICc
WHEREFORE, the petition is hereby DENIED. The assailed Decision of the Court of Appeals in CAG.R. SP No. 44496 is AFFIRMED.
SO ORDERED.

Panganiban, Carpio-Morales and Garcia, JJ ., concur.

Corona, J ., is on leave.
Footnotes
1.
Filed under Rule 45 of the 1997 Rules of Civil Procedure, as amended.
2.
Penned by Justice Quirino D. Abad Santos, Jr. (ret.) and concurred in by Justice Conrado M.
Vasquez, Jr. and Justice Teodoro P. Regino (ret.).
3.
CTA Decision, Rollo at 71.
4.
Id. at 98.
5.
Id. at 72; see also Decision of District Collector of Customs, Port of Manila, in Seizure
Identification No. 94-055, Rollo at 43.
6.
Exhibit "M", CTA Decision, Rollo at 73.
7.
Decision of District Collector of Customs, Rollo at 37, 4041.
8.
Exhibit "M-1", cited in CTA Decision, Rollo at 73; see also Exhibit "10", cited in the Decision
of District Collector of Customs, Rollo at 37, 40.
9.
Exhibit "10-A", id. at 40.
10.
Decision of District Collector of Customs, Rollo at 4041.
11.
Exhibit "10-B", id. at 4041, 44.
12.
Exhibits "H" and "I", cited in CTA Decision, Rollo at 74, and in Decision of District Collector
of Customs, Rollo at 44.
13.
Annex "C", Petition, Rollo at 37.
14.
"Section 2530. Property Subject to Forfeiture Under Tariff and Customs Laws. Any vehicle,
vessel or aircraft, cargo, article and objects shall, under the following conditions be subject to
forfeiture:
xxx
xxx
xxx
(f)
Any article the importation or exportation of which is effected or attempted
contrary to law, or any article of prohibited importation or exportation, and all other articles which, in
the opinion of the Collector, have been used, are or were entered to be used as instruments in the
importation or exportation of the former;
xxx
xxx
xxx
(l)
Any article sought to be imported or exported;
xxx
xxx
xxx
(3)
On the strength of a false declaration or affidavit executed by the owner,
importer, exporter or consignee concerning the importation of such article;
(4)
On the strength of a false invoice or other document executed by the owner,
importer, exporter or consignee concerning the importation or exportation of such article; and
(5)
Through any other practice or device contrary to law by means of which such
articles was entered through a customhouse to the prejudice of the government."
15.
Rollo at 4647.
16.
Annex "D", Petition, Rollo at 50.
17.
Annex "G", id. at 70104.
18.
Annex "H", id. at 105106.
19.
Annex "A", id. at 2532.
20.
Annex "B", id. at 3436.
21.
Petition, Rollo at 1314.
22.
Republic vs. Court of Tax Appeals, G.R. No. 139050, October 2, 2001, 366 SCRA 489, 496
497, citing Hervas vs. Court of Appeals, 319 SCRA 776 (1999).
23.
CA Decision, Rollo at 2930.
24.
Republic vs. Court of Tax Appeals, supra, citing Ceremonia vs. Court of Appeals, 314 SCRA
731 (1999); Guerrero vs. Court of Appeals, 285 SCRA 670 (1998); Commissioner of Internal Revenue

vs. Court of Appeals, 298 SCRA 83 (1998); Afisco Insurance Corporation vs. Court of Appeals, 302
SCRA 1, 19 (1999).
25.
Decision of the District Collector of Customs, Rollo at 4748.

SECOND DIVISION
[G.R. No. L-28782. September 12, 1974.]
AUYONG HIAN (HONG WHUA HANG), petitioner, vs. COURT OF TAX APPEALS, COLLECTOR
OF CUSTOMS, COMMISSIONER OF CUSTOMS, CONSOLIDATED INDUSTRIES OF THE
PHILIPPINES, INC. (CTIP), and LUZON STEVEDORING CORPORATIONS, respondents.
Pedro C . Geling for petitioner.
Francisco T . Koh for respondent Consolidated Industries of the Philippines.
Pelaez, Jalandoni & Jamir for respondent Luzon Stevedoring Corp.
Office of the Solicitor General for Collector of Customs, etc.
DECISION
ZALDIVAR, J p:
This is the fifth time that a case involving the 600 hogsheads of Virginia leaf tobacco is before this
Court. The first case was the case of "Cesar Climaco, et al., vs. Hon. Manuel Barcelona," G.R. No. L19597, July 31, 1962, 1 hereinafter referred to as the Barcelona case; the second, the case of Collector
of Customs, et al., vs. Hon. Francisco Arca, et al.," G.R. No. L-21839, July 17, 1964, 2 hereinafter
referred to as the Arca case; the third, the case of Auyong Hian vs. Judge Gaudencio Cloribel, et al.,"
G.R. No. L-24704, July 10, 1967 3 hereinafter referred to as the Cloribel case; and the fourth, "Auyong
Hian vs. Court of Tax Appeals, et al.," G.R. No. L-25181, January 11, 1967, 4 which was an appeal
from the resolution of the Court of Tax Appeals in CTA Case No. 1560, dismissing Auyong Hian's
petition for review of the decision of the Commissioner of Customs that affirmed the decision of the
Collector of Customs upon the ground of lack of jurisdiction, and which will be hereinafter referred to
as the "First CTA Case".
The instant case, the fifth, is a petition for review of the decision of the Court of Tax Appeals in its CTA
Case No. 1560, dated January 31, 1968, finding without merit petitioner's appeal from the decision of
the Commissioner of Customs that affirmed the decision of the Collector of Customs of Manila which
ordered the seizure and forfeiture of the 600 hogsheads of Virginia Leaf tobacco imported by petitioner
from the United States. The instant case may well be called the "Second CTA Case".
The antecedent facts, and the proceedings that spawned the instant case, briefly stated, are as follows:
On June 29, 1953, the Import Control Commission approved petitioner Auyong Hian's application for
four no-dollar remittance licenses to import Virginia leaf tobacco with an aggregate value of two
million dollars, of which approval petitioner was advised on the following day, June 30, 1953 the
day when the effectivity of the Import Control Law (Republic Act No. 650) expired. In October, 1961,
the Office of the President approved the use of the aforesaid licenses, and petitioner paid the license
fees on November 2, 1961. On December 30, 1961 600 hogsheads of Virginia leaf tobacco arrived in
the Port of Manila aboard the "SS Fernstate", consigned to petitioner.
Inasmuch as the Collector of Customs in Manila, apparently doubting the legality of the importation,
refused to release the shipment of said Virginia leaf tobacco, petitioner filed in the Court of First
Instance of Manila an action for mandamus (Civil Case No. 49639), to compel the Collector of
Customs and the Commissioner of Customs to release the tobacco to petitioner. On March 19, 1962
Judge Barcelona issued an order to release the tobacco shipment to petitioner. The Collector of
Customs and the Commissioner of Customs then filed with the Supreme Court a petition for certiorari
to annul the order of release. This was the Barcelona case. On July 31, 1962 this Court, in its decision,
ruled that the Court of First Instance of Manila had no jurisdiction to issue the (questioned) order
releasing the tobacco shipment; and this Court incidentally declared that the importation of the tobacco,
notwithstanding the alleged approval of the importation by the President of the Philippines, was illegal
upon the ground that the importation was made long after the expiration of the effectivity of the Import
Control Law, and that the importation contravened the government policy as declared in Republic Acts
Nos. 698 and 1194. 5
On November 8, 1962, the Collector of Customs instituted seizure proceedings against the 600

hogsheads of tobacco, and issued a warrant of seizure and detention, in Seizure Identification Case No.
6669. On April 23, 1963 the Collector of Customs rendered a decision declaring the tobacco forfeited
to the government, and ordering the sale thereof at public auction on June 10, 1963. Petitioner received
copy of the decision on May 7, 1963. From this decision petitioner filed, on May 21, 1963, his notice of
appeal to the commissioner of Customs. On December 7, 1964, the Commissioner of Customs affirmed
the decision of the Collector of Customs. cdasia
On January 8, 1965 petitioner filed in the Court of Tax Appeals, in CTA Case No. 1560, a petition for
review by way of appeal from the decision of the Commissioner of Customs. On June 22, 1965 the
Court of Tax Appeals dismissed the petition upon the ground that it had no jurisdiction to entertain the
appeal because the Supreme Court had already decided in the Barcelona and Arca cases that the
importation in question was illegal. From this resolution Auyong Hian appealed to the Supreme Court.
This was the "First CTA Case" that We have earlier adverted to. This Court, on January 11, 1967 6
remanded the case to the Court of Tax Appeals for further proceedings, and for decision, on matters that
this Court had refrained from deciding.
After the case has been remanded to the Court of Tax Appeals, petitioner filed in said court an amended
petition for review to include the Consolidated Tobacco Industries of the Philippines (hereinafter
referred to as CTIP) and the Luzon Stevedoring Corporation, as parties-respondents.
After hearing, respondent Court of Tax Appeals, in its decision dated January 31, 1968, found the
appeal to be without merit and dismissed the same, with costs against petitioner. This is the decision
that is now sought to be reviewed in the instant petition for review before this Court.
While this case was pending decision, the Solicitor General, on February 22, 1972, filed a "motion for
leave", praying that pending final determination of the case, respondents Collector of Customs and
Commissioner of Customs be authorized to refund to the CTIP the storage charges of the tobacco in
question pursuant to Section 2605-c of the Tariff and Customs Code. In a resolution dated February 28,
1972 this Court deferred action on the petition of the Solicitor General until the case is considered on
the merits.
In the present appeal, petitioner Auyong Hian assigns twelve (12) errors allegedly committed by the
Court of Tax Appeals in its decision of January 31, 1968 dismissing the appeal from the decision of the
Commissioner of Customs. The points raised in the assignment of errors boil down to the question of
whether or not the Court of Tax Appeals had correctly sustained the decision of the Commissioner of
Customs which affirmed the decision of the Collector of Customs in connection with the seizure,
forfeiture and the sale of the 600 hogsheads of Virginia leaf tobacco that were imported into the country
at the instance of petitioner Auyong Hian. It must be recalled that in the Barcelona and Arca cases,
supra, this Court had categorically held that the importation of the 600 hogsheads of Virginia leaf
tobacco was illegal. It was for this reason that the Court of Tax Appeals, in its resolution of June 22,
1965, in CTA Case No. 1560 (First CTA Case), dismissed the appeal of Auyong Hian from the decision
of the Commissioner of Customs. But this Court, in the first CTA Case held that the Court of Tax
Appeals, had jurisdiction to pass upon the appeal of Auyong Hian from the decision of the
Commissioner of Customs because the appeal involved matters related to the administrative
proceedings in connection with the seizure, forfeiture and sale of the tobacco in question. Here is what
this Court said:
. . . "It appears to Us that the Court of Tax Appeals had overlooked the fact that the appeal of Auyong
Hian from the decision of the Commissioner of Customs had raised not only the question of the legality
of the importation but also other matters which called for a ruling by the Court of Tax Appeals in the
exercise of its appellate jurisdiction especially the question of whether the tobacco thus imported
were goods the importation of which was relatively prohibited or absolutely prohibited, and also the
question regarding the disposal of the tobacco that was thus seized. The declaration by this Court, in
the Barcelona and Arca cases, supra, that the importation of the tobacco in question was illegal was not
intended to stop the course of the administrative proceedings in relation to the importation of said

tobacco. Let it be noted that when the Barcelona case was decided on July 31, 1962 the seizure
proceedings against the 600 hogsheads of tobacco in question had not yet been instituted by the
Collector of Customs. It was not until November 8, 1962 when Seizure Identification No. 6669 was
instituted. . . ." aisa dc
And so this Court, in the First CTA case, declared the Court of Tax Appeals as possessed of jurisdiction
to pass upon the questions raised by Auyong Hian in his appeal from the decision of the Commissioner
of Customs regarding administrative matters relating to the seizure proceedings of the 600 hogsheads
of tobacco in question.
(1)
Auyong Hian claims that he was not given a chance to be heard in the seizure proceedings. He
claims that he filed a motion for postponement of the hearing scheduled for November 26, 1962 based
on some valid reasons, that said motion for postponement was not acted upon by the hearing officer, or
if it was acted upon at all the hearing officer did not notify him of the action taken on said motion, and
that he was not notified about the subsequent hearing because he was declared in default by the hearing
officer. Auyong Hian maintains that there can not be a declaration of default in purely administrative
proceedings. In short, it is the contention of Auyong Hian that in the seizure proceedings of the 600
hogsheads of tobacco in question he was not afforded the benefits of due process of law.
It is a settled doctrine that due process is applicable to administrative proceedings (Asprec vs. Itchon, et
al., L-21685, April 30, 1966, 16 SCRA 921, 925; Cornejo vs. Gabriel, 41 Phil. 188, 193); that the
essence of due process is the requirement of notice and hearing (Algabre vs. Court of Appeals, L24458-64, July 31, 1969, 26 SCRA 1130, 1140); that the presence of a party at a trial is not always of
the essence of due process, and all that due process requires is an opportunity to be heard (Asprec vs.
Itchon, et al., supra).
In this connection, the Court of Tax Appeals made the following findings:
"The records show that petitioner was given a notice of hearing in Seizure Identification No. 6669 (re
the 600 hogsheads of Virginia leaf tobacco); that on the date of hearing petitioner filed a motion for
indefinite postponement, which was not acted upon or resolved by the proper Customs officials; that
upon failure of petitioner to appear on the date of hearing, the hearing officer declared petitioner in
default; and that the hearing was conducted thereafter in the absence of petitioner." (Decision CTA
Case No. 1560; Record, pp. 32-33)
Petitioner's having filed a motion for postponement, even if the motion is not entirely groundless,
confers on him no right either to assume that the motion for postponement would be granted or to be
absent at, and shy away from, the hearing. Petitioner was consequently guilty of carelessness and
neglect when he failed to appear at the trial. He cannot rightfully claim that the hearing officer was
guilty of abuse of discretion in refusing to grant the postponement (Sarreal vs. Hon. Tan, et al., 92 Phil.
689, 692). And after a party has been declared in default, he is not entitled to notice of the order placing
him in default; neither is he entitled to notice of proceedings subsequent to default (Lim Toco v. Go
Fay, 80 Phil. 166, 168). Petitioner, therefore, has no cause to complain that he was not afforded a
chance to be heard or that he was denied his day in court.
The contention of petitioner that in administrative proceedings a party can not be declared in default is
untenable. If a respondent in an administrative proceeding cannot be declared in default when he fails
to appear, as required, the continuance of an administrative proceeding would be dependent on the will
and caprice of said party to the proceedings, and would render helpless the officer or board conducting
an administrative proceeding. We hold that if the party duly summoned, or duly notified, to appear at
an administrative investigation, refuses to appear, he may be declared in default, and the investigation
may proceed without his presence.
Petitioner's first assignment of error is not only not sustained by the facts. It is furthermore negated by
the pronouncements of this Court which has already passed directly on the issue of whether or not
petitioner Auyong Hian was deprived of due process of law in the seizure proceedings. In the Arca
case, respondent therein claimed that the decision in the seizure proceedings was arbitrary because the

hearing officer and the Collector of Customs declared Auyong Hian in default without notifying him of
the action taken on his motion to postpone the seizure proceedings.
This Court rejected the contention saying:
"The record shows that Auyong Hian received on November 21, 1963 notice of hearing on the seizure
proceedings scheduled for November 26, 1962. It is true that he filed a motion to postpone the hearing,
but it was for an indefinite period of time and only in the morning of the date of hearing. He did not
bother to find out what action the Collector of Customs would take on his motion. Continuation of the
seizure proceedings was made on December 6, and December 10, 1962, yet Auyong Hian did not take
the trouble to find out about its status. The facts, therefore, show that Auyong Hian was not deprived of
due process of law, but that he is guilty of abandonment or gross negligence in the protection of his
rights, for which he alone is to blame."
This pronouncement, though found only in the opinion, cannot be accurately called, as contended by
petitioner, an obiter dictum just because it was not incorporated in the dispositive portion of the
decision. This Court has already remarked that the dispositive part does not always constitute a
judgment and that the judicial pronouncements in the body of the decision must be considered.
(Millare, et al. vs. Millare, et al., 106 Phil. 298-299.) An obiter dictum has been defined as an opinion
expressed by a court upon some question of law which is not necessary to the decision of the case
before it (Bouvier's Law Dictionary, third revision, Vol. I, p. 863). Although the question of whether
petitioner Auyong Hian was deprived of due process in the seizure proceedings was not the precise
issue in the Arca case, for this Court itself said that the legal question posed in that case was:
"Who has a better right to the tobacco in question, petitioner Collector of Customs who has ordered the
seizure and declared the forfeiture thereof as a result of Manila Seizure Identification No. 6669, or
respondent Tomas Cloma in whose favor a writ of attachment was issued by the Court of First Instance
of Manila covering said shipment in Civil Case No. 53874, brought by Cloma against Auyong Hian for
services rendered to the latter?" (Collector of Customs v. Arca, L-21389, July 17, 1964, 11 SCRA 529,
534-535).
Yet, the pronouncement made by this Court upon said question cannot be said to be totally extraneous,
and was not necessary, to the adjudication of the case before it, for to arrive at the conclusion that the
Collector of Customs had a better right, by virtue of the seizure proceedings, that had already been
terminated before Cloma's action was brought, the validity and legality of the seizure proceedings, and
necessarily the issue of the deprivation of due process, had to be passed upon. With respect to a court of
last resort, all that is needed to render its decision authoritative is that there was an application of the
judicial mind to the precise question adjudged, and that the point was investigated with care and
considered in its fullest extent (Alexander v. Worthington, 5 Md. 488, cited in Bouvier's Law
Dictionary, third revision, Vol. I, p. 864). A perusal of the decision in the Arca case shows that the
precise question of deprivation of due process was extensively and explicitly discussed with a view to
settle it, and consequently the pronouncement on said point cannot be considered a dictum.
2.
Petitioner anchors the alleged invalidity of the seizure proceedings on his having been deprived
his day in court. This basis has been shown to be untenable.
Petitioner, however, tried to emasculate respondents' argument by asserting that the declaration of the
illegality of the tobacco importation was incidentally made; hence it has no binding force.
An analysis of the Barcelona case shows that even if the pronouncement therein made regarding the
illegality of the importation was incidentally made, it did not and could not mean that the
pronouncement was extraneous to the subject matter and that it was, therefore, unauthoritative.
The Barcelona case was a petition for certiorari to set aside a writ of preliminary mandatory injunction
issued by the Hon. Judge Manuel P. Barcelona in Civil Case No. 49639 of the Court of First Instance of
Manila, ordering the respondents therein, Cesar Climaco and Teotimo Roja, to allow entry of the 600
hogsheads of Virginia leaf tobacco imported under authority of licenses Nos. 17166, 17169, 17196, and
17199 issued by the defunct Import Control Commission on May 8, 1953 under the provisions of

Republic Act No. 650. Respondents therein opposed the issuance of the writ of preliminary injunction,
alleging among other things that the Court of First Instance had no jurisdiction to order the release of
the importation on the ground that the importer Auyong Hian was not entitled as a matter of right and
equity to import the tobacco, for the licenses, under which the importation was made, were issued
under a law that ceased to exist eight years before the importation, and that the importation was a
violation of Rep. Act No. 1194 at the time of importation; and that the imported tobacco, being under
customs custody, could not be ordered released by the Court of First Instance which had no jurisdiction
to review the actuations of customs authorities in any case involving the seizure, detention or release of
any property.
One of the reasons given by the respondent court therein for granting the writ of preliminary mandatory
injunction was that the importation was legal on the ground that the President had issued the licenses in
accordance with the supposed opinions of the Secretary of Justice Nos. 32 and 145, series of 1961.
Although the principal question therein was the court's jurisdiction and the primary relief prayed for by
petitioners was to set aside the preliminary mandatory injunction dated March 20, 1962, the resolution
thereof hinged on another question, which was, to quote the Court:
"The question that is, therefore squarely presented for the decision of this Court is whether, under the
facts and circumstances above indicated, the petitioner has the clear legal right to make the importation
in question and the respondents the clear legal duty to allow entry and release of said importation."
The above question in turn depended on whether the importation was legally made.
This Court in the dispositive portion of its decision in said case ruled for the reasons therein given that:
". . . We are constrained to declare, as we hereby declare, that the importation in question has been
illegally made . . . And We, therefore, hereby grant the petition and set aside the order of the court
below on March 19, 1962 and the writ of preliminary injunction issued in accordance therewith . . ."
Said ruling regarding the illegality of the importation, contained in the dispositive portion cannot be
said, as claimed by petitioner, unauthoritative and not binding.
Said declaration of illegality was reiterated in the Arca case thus:
"There is no question that the importation of the tobacco leaf in question was illegal, having been made
in clear violation of the policy contained in Republic Acts Nos. 698 and 1194." (Collector of Customs
v. Arca, L-21389, July 17, 1964, 11 SCRA 529, 535.)
3.
Petitioner's insistence that the tobacco importation was valid and legal together with the grounds
asserted to sustain the same is not tenable.
This Court already had occasion to examine in the Barcelona case the import licenses claimed to be
valid by petitioner. To the petition in said case were appended copies of the licenses and the receipt
evidencing payment of the fees thereon in November, 1961. The alleged reason that said licenses were
valid because the President had issued them in accordance with the supposed opinions of the Secretary
of Justice No. 32 and 145, series of 1961 was already passed upon. This Court said that:
"An examination of the licenses shows that the same were approved by the Import Control Commission
on June 29, 1953. The following statement is contained in each of the licenses:
'This license is valid from date of issue until fully consummated, provided that this license must be
presented to an Authorized Agent (Negotiating Bank) of the Central Bank, and Bank Credit established
within thirty (30) days after date of release. It is not transferable/assignable without authority from the
Import Control Commission and is subject to revocation for cause. Commodities covered by this
license must be shipped from the country of origin before the expiry date of the license, and are subject
to Sec. 13 of Republic Act No. 650.'
"The following provision of Republic Act No. 650 is to be noted:
'Sec. 8.Unless extended in accordance with the rules and regulations, import licenses issued under this
Act and which are not used within thirty days after the issue by the opening of a letter of credit or a
similar transaction shall be null and void. Import licenses are non-transferable.'
"The petitioner has not shown that steps were ever taken to open the corresponding letters of credit

amounting to $500,000 to cover the payment of the Virginia leaf tobacco to be imported, as required by
the above-quoted provision of the law. Neither is it shown that immediately, or within a reasonable time
after the approval of the licenses and their issuance, steps were taken to order the tobacco to be shipped
to the Philippines. Certainly this was not done because the licenses were not fully completed until
November 2, 1961, when the corresponding fees chargeable on the licenses were paid to the Office of
the President." (Climaco vs. Barcelona, L-19597, July 31, 1962, 5 SCRA 850-851.)
and after discussing why the decision in Commissioner of Customs v. Auyong Hian, G.R. No. L-11719,
April 29, 1959 could not be applied to the said case, this Court concluded that:
"The importation [of the tobacco] in question, therefore, is a gross violation of the policy contained in
Republic Acts Nos. 698 and 1194, limiting the Virginia leaf tobacco importation only to such amounts
as could not be met with by the local production of Virginia leaf tobacco, hence clearly illegal."
"The supposed approval of the licenses by the President has been alleged as a ground for the validity of
the importation. The President may not extend the life of licenses issued under Republic Act No. 650;
he cannot make the illegal importation valid; he has no legal authority to do so and his act would be
clearly violative of the express provisions of Republic Act 1194." (Climaco v. Barcelona, L-19597, July
31, 1962, 5 SCRA 846, 848, 850, 853.)
In the Arca case, this Court again said:
"There is no question that the importation was illegal having been made in clear violation of the policy
contained in Republic Acts Nos. 698 and 1194. To this effect is the decision of this Court in Climaco
vs. Judge Barcelona, et al., G.R. No. L-19597, July 31, 1962." (Collector of Customs vs. Arca, No. L21389, July 17, 1964, 11 SCRA 529, 535.)
Petitioner's claim that the Government is estopped to deny the validity of the license cannot be
seriously defended. Time and again, this Court has ruled that the doctrine of estoppel is not applicable
against the Government suing in its capacity as sovereign or asserting governmental rights; the
Government is never estopped by mistake or errors on the part of its agents. (Republic v. Go Bon Lee,
L-11499, April 29, 1961, 1 SCRA 1166, 1170; Republic vs. Philippine Rabbit Bus Lines, Inc., L-26862,
March 30, 1970, 32 SCRA 211, 218; Luciano vs. Estrella, L-31622, August 31, 1970, 34 SCRA 769,
776.) Moreover, estoppel cannot give validity to an act that is prohibited by law or is against public
policy. (Republic v. Go Bon Lee, supra.)
The tobacco importation in question was, therefore, subject to seizure and forfeiture in accordance with
Section 2530 of the Tariff and Customs Code and the Collector of Customs had the power to order the
seizure in accordance with the provisions of Section 2205 of the Tariff and Customs Code, as has
already been ruled by this Court in the Arca case.
But the Court of Tax Appeals, insists petitioner, should have decided whether the importation was
absolutely prohibited or merely prohibited, on the ground that in this Court's decision in the Court of
Tax Appeals case, it was said that "the question of whether the tobacco thus imported were goods the
importation of which was relatively prohibited or absolutely prohibited" "called for a ruling of the
Court of Tax Appeals in the exercise of its appellate jurisdiction," (19 SCRA 10, 22). Petitioner also
claims that the respondent Court of Tax Appeals erred when it did not hold that the importation was at
worst, only relatively prohibited. In the decision of the Court of Tax Appeals sought to be reviewed, it
appears that the Tax Court discussed the classification of articles subject to forfeiture under the
Customs Law, and the rights of the importer to the delivery of the imported article under Sections 2301
and 2307 of the same Code, and it concluded that the failure to declare the tobacco imported as merely
qualifiedly prohibited did not affect the substantive rights of petitioner. Said the Tax Court:
"There is no evidence of record to show that petitioner herein exercised or attempted to exercise any of
the rights afforded an importer under Sections 2301 and 2307 of the Tariff and Customs Code. . . . At
any rate, even if he sought the release of said tobacco by filing a bond for its appraised value or by
paying the redemption price, it is evident that the same could not have been granted because the
delivery of said tobacco to him would be contrary to law. . . . It is quite plain that the failure of

respondents to declare said tobacco as an article which merely qualifiedly prohibited has not adversely
affected the substantive right of petitioner." (Decision CTA Case No. 1560, Record, pp. 47-48.)
The Court of Tax Appeals did not commit a reversible error on this point. There is no question, as this
Court has declared, that the importation made in December, 1961, of tobacco leaf in question was
illegal. The same was made in clear violation of the policy enunciated in Republic Act No. 698,
approved May 9, 1952 limiting the importation of foreign leaf tobacco, and also of its amendatory Act,
Republic Act No. 1194, approved August 25, 1954. These statutes not only limit the importation of
Virginia leaf tobacco but also provide that the "Virginia-type leaf tobacco authorized to be imported
therein shall be allocated and distributed by the Monetary Board of the Central Bank among legitimate
manufacturers of Virginia-type cigarettes; that the licenses for such importation shall be issued . . . by
the Central Bank . . . that the leaf-tobacco imported without the necessary license issued under said Act
shall be forfeited to the Government" (Sec. 2). Said importation is also subject to forfeiture under Sec.
2530 of the Tariff and Customs Code. cdta
The substantive right of petitioner is not affected, as declared by the Tax Court, by the failure to declare
whether the importation was absolutely or qualifiedly prohibited.
Although the illegally imported subject tobacco may not be absolutely prohibited, but only qualifiedly
prohibited under Sec. 102 (K) of the Tariff and Customs Code, for it may be imported subject to certain
conditions, it is nonetheless prohibited and is a contraband (Comm. of Customs vs. CTA & Dichoco, L33471, Jan. 31, 1972), and the legal effects of the importation of qualifiedly prohibited articles are the
same as those of absolutely prohibited articles (Geotina vs. Court of Tax Appeals, No. L-33500, August
30, 1971, 40 SCRA 362, 379, 383; Comm. of Customs vs. CTA & Dichoco, supra).
Under Sec. 2301 of the Tariff and Customs Code, upon making any seizure, the Collector of Customs
shall issue a warrant for the detention of property; and if the owner or importer desires to secure the
release of the property for legitimate use, the Collector may surrender it upon the filing of a sufficient
bond, in an amount to be fixed by him, conditioned for the payment of the appraised value of the article
and/or any fine, expenses and costs which may be adjudged in the case, provided, the articles the
importation of which is prohibited by law shall not be released under bond. Pursuant, thereto, the
importer of the subject tobacco, the importation of which is prohibited by law, has no right that the
tobacco be released to him even if he puts up a bond to be determined by the Collector of Customs.
Sec. 2307 of the Tariff and Customs Code, which authorizes in a seizure case the settlement of the case
by payment of fine or the redemption of forfeited property, also provides that:
"Redemption of forfeited property shall not be allowed in any case where the importation is absolutely
prohibited or where the surrender of the property to the persons offering to redeem the same would be
contrary to law." (Emphasis supplied.)
Petitioner Auyong Hian would, accordingly, not even be entitled to redeem, even if he wanted to, the
forfeited tobacco, for the surrender to him of said tobacco would be contrary to law, because petitioner
could not really be legally entitled to import it inasmuch as he was not a legitimate manufacturer of
Virginia-type cigarettes, among whom alone shall be allocated and distributed by the Monetary Board
of the Central Bank the Virginia-type leaf tobacco authorized to be imported. (Sec. 2, Rep. Act No.
1194.)
What has been said above would have applied even if petitioner had attempted to exercise the right of
redemption under Sec. 2307 of the Tariff and Customs Code. The fact, however, as found by the Court
of Tax Appeals is
"There is no evidence or record to show that petitioner herein exercised or attempted to exercise any of
the rights afforded an importer under Section 2307 of the Tariff and Customs Code. All that he sought
'was the release of tobacco in question upon payment of the duties and taxes due thereon because of his
insistence that the importation was made in accordance with law.' "
4.
What has been said in the third assignment of error suffices to dispose of the fourth and fifth
assignments. Therein it was shown that pursuant to the provisions of Republic Acts Nos. 650 and 1194,

petitioner was disqualified to import the Virginia-leaf tobacco, he not being a legitimate manufacturer
of this type of cigarette, and under the provisions of Secs. 2301 and 2307 of the Tariff and Customs
Code, the tobacco could not be delivered to him, even if he had made attempts to put up a bond.
Neither could the tobacco be legally delivered to him even if he had attempted to redeem it. Hence, the
alleged error committed by the Court of Tax Appeals in finding that petitioner did not attempt to
exercise any of the rights afforded an importer under Section 2307 of the Tariff and Customs Code,
even if sustained, would not affect the outcome of the instant petition.
5.
Petitioner's contention that the sale to the CTIP was invalid cannot be upheld.
It has been shown in the previous discussion that the decision of the Collector of Customs in ordering
the forfeiture and sale of the subject tobacco was correct and legal. Seized property, other than
contraband, pursuant to Sections 2601 and 2602 of the Tariff and Customs Code, shall be sold, or
otherwise disposed of, upon the order of the Collector of the port where the property in question is
found. The property shall be sold at public auction after ten days notice conspicuously posted at the
port and such other advertisements as may appear to the Collector to be advisable in the particular case
(Sec. 2603). If the article seized, however, is perishable, the Collector may proceed to advertise and sell
the same at auction upon notice as he shall deem to be reasonable (Sec. 2607).
Implementing his decision dated May 9, 1963, to have the seized tobacco sold to buyers who could
meet certain qualifications and conditions, and after having created a Committee to implement the
decision, the Collector of Customs issued a notice of sale (Exhibit 6 Customs), setting the public
auction sale "at June 10, 1963 at 9:00 A.M. and every morning thereafter until terminated." which
notice of sale was given the requisite publication at least ten days before the auction sale (before June
10, 1963) in accordance with Section 2603 of the Tariff and Customs Code. The sale, therefore, could
not have been invalid, for lack of public notice.
Two prospective bidders the respondent CTIP and the Philippine Associated Resources registered
with the Special Bidding Committee but only the CTIP was found to be a qualified bidder.
On June 10, 1963, the date set for the public auction sale, the Collector of Customs was served the writ
of preliminary injunction issued by Judge Francisco Arca in Civil Case No. 53824 directing the former
to desist from holding the auction sale. This writ was served upon him at 8:55 A.M. (pp. 270-272, 329,
360 t.s.n., Brief for Respondent CTIP, p. 48), but before the writ was served, the CTIP had submitted its
bid at around 8:00 A.M. (Ibid., p. 48), and these facts were not impugned by petitioner (See Petitioner's
Reply Brief, pp. 26-27). At any rate, even if the bid were submitted after the Collector had been served
with the writ of preliminary injunction, his act would not constitute a violation of the writ for the
submission and reception of a bid could not constitute a consummated sale. But on June 17, 1963 the
Supreme Court issued a preliminary injunction in L-21389 (Arca case) prohibiting Judge Arca from
executing or enforcing the writ of preliminary injunction issued by him against the petitioner in Civil
Case No. 53874 (11 SCRA 529, 532-533).
On June 26, 1963, the bid of the CTIP was finally approved and the tobacco was awarded to it. This
took place before 5:00 p.m. However, at 5:38 p.m. of the same day another restraining order from the
Supreme Court in the Arca case directed the Collector to desist temporarily from continuing with the
public auction of the tobacco until July 3, 1963. Before the Collector received the restraining order,
CTIP had already paid P500,000 on account of its approved and accepted bid of P1,500,000.00 and had
filed the required surety bond of P1,000,000 to guarantee the exportation of the locally grown tobacco.
It is clear, therefore, that at the time the bid of the CTIP was approved and at the time payment was
made, there was no restraining order either of the CFI or of the Supreme Court enjoining the sale.
But even assuming arguendo that at the time the sale was made there was already a restraining order
enjoining it, the sale would still not be null and void. A restraining order like injunction operates upon a
person as it is granted in exercise of equity jurisdiction, and an injunction has no in rem effect to
invalidate an act done in contempt of an order of the court except where by statutory authorization the
decree is so framed as to act in rem on property. (Town of Fond Du Lac v. City of Fond Du Lac, 22

Wis. 2d 525, 126 NW 2d 206). In 42 Am. Jur. 2d, pp. 1144-1145, we read:
"Where an injunction is granted and the decree operates in personam, an act done in violation of
injunction is not a nullity. On the contrary, the act is ordinarily valid and legally effective, except as to
the person who obtained the injunction and those claiming under him, and as to them, the act is valid
unless and until they attack it in a proper manner. If an injunction prohibits the defendant from
transferring property, but he transfers the property in violation of the injunction, and the transfer is
made to an innocent third person, the transferee obtains good title and the injunction does not affect his
rights." cdt
Neither may petitioner's contention that the continuation of the sale for more than three days, i.e. from
June 10 to June 26, 1963 would render the sale void, because it is violative of Section 2607 of the Tariff
and Customs Code, be sustained. Said section in part provides:
"Section 2607.
Disposition of article liable to deterioration. Perishable articles shall not be
deposited in a bonded warehouse; and, if not immediately entered for export or for transportation from
the vessel or aircraft in which imported or entered for consumption and the duties and taxes paid
thereon, such articles may be sold at auction, after such public notice, not exceeding three days, as the
necessities of the case permit."
The three days mentioned in said section refers to the period of public notice, not to continuation of the
sale as contended by petitioner.
Untenable also is petitioner's contention that the Collector had no right to have the tobacco sold
because the Bureau of Customs was not yet the owner of the tobacco at the time of the sale. This
contention loses sight of the fact that the Collector of Customs when sitting in forfeiture proceedings,
constitutes a tribunal upon which the law confers jurisdiction to determine all questions touching the
forfeiture and further disposition of the illegally imported merchandise. (Commissioner of Customs v.
Cloribel, L-20266, Jan. 31, 1967, 19 SCRA 234; Auyong Hian vs. Court of Tax Appeals, L-25181,
January 11, 1967, 19 SCRA 10). The Tariff and Customs Code requires the Collector, upon making any
seizure to issue a warrant for the detention of the property (Section 2301); to make in writing, after
hearing, a declaration of forfeiture (Section 2312), and to sell or otherwise dispose of the property
under customs custody (Sec. 2602). The forfeiture constitutes a statutory transfer of the right of
property. Title is vested in the government by administrative forfeiture, although such title may not be
absolute, but resoluble subject to the right of redemption on the part of the owner of the forfeited
merchandise (Sec. 1388 Administrative Code). The consequence of this forfeiture was already declared
by this Court in the Arca case when it said:
"It is to be noted that the seizure proceedings had already been terminated and the tobacco shipment
declared forfeited to the Government, thereby ceasing to be the property of Auyong Hian . . . The
seizure proceedings were taken by the Collector of Customs in the exercise of its jurisdiction of the
customs law (Secs. 2205 and 2530, Tariff and Customs Code) . . ." (11 SCRA 529, 537).
And this Court continued:
"Auyong Hian, therefore, had lost all his rights to the shipment, not only because we declared the
licenses void and the shipment illegal in the case of Climaco vs. Barcelona, G.R. No. L-19597, but also
because the seizure proceedings have been found to be regular and had deprived Auyong Hian of his
rights to the shipment as importer; at least while the order of seizure has not been set aside." (11 SCRA
529, 538.)
Petitioner, however, insists that the Collector could not sell the forfeited tobacco after he lost
jurisdiction thereof upon the perfection of the appeal on May 21, 1963 to the Commissioner of
Customs. Petitioner seems to imply that the sale, if any, should have been made by, or at least with, the
approval of the Commissioner of Customs. This is what happened. When the Collector of Customs
approved, on June 26, 1963, the offer of the CTIP, his action was backed by prior approval of the
Commissioner of Customs. To this effect we read in the appealed decision, thus:
"Apparently, to preclude any doubt as to the regularity of the sale, the Collector of Customs, on June

11, 1963, sought the advice of the Secretary of Finance, and the latter referred the matter to the
Secretary of Justice, who, at that time, was the Chairman of the Cabinet Committee on Public Bidding
of Tobacco. In an indorsement dated June 24, 1963, signed by the Secretary of Justice and all the
members of the said Cabinet Committee, the sale was approved. The indorsement of the Cabinet
Committee was transmitted to the Secretary of Finance and the Commissioner of Customs, who
informed the Collector of Customs of such approval (See Exhs. "E", "F" and "G", CTIP, pp. 205-211,
CTA Records). When, therefore, the Collector of Customs approved on June 26, 1963, the
recommendation 'of the Special Bidding Committee to accept the offer of Consolidated Tobacco
Industries of the Philippines, his action had the prior approval of the Commissioner of Customs, the
Secretary of Finance and the Cabinet Committee.' " (Brief for Petitioner, pp. 140-141.)
Neither can the inadequate consideration, even if true, invalidate the sale to the CTIP.
The other factor which, according to petitioner, militates against the validity of the sale is the measly
sum of P1,500,000 paid by the CTIP for the tobacco which had a value, according to petitioner, of
P7,000,000. What is really the value of the imported tobacco? According to the Tax Court, the records
show that when the tobacco arrived in the Philippines, petitioner filed an Affidavit and Pro Forma
Invoice giving the invoice value of the tobacco as $103,453 and an appraised value, for tax purposes, of
P227,675. Petitioner contends that this declaration was merely its invoice value and does not include
the other expenses incurred in the importation. Because of these different declarations, the Tax Court
confessed it was at a loss as to which of petitioner's declaration was to be believed. When it suits
petitioner's purpose he claims that the tobacco was worth P227,675.00. For other purposes the value
was P7,000,000. If the claim of petitioner that the tobacco was really worth P7,000,000.00, then there
will be another cause for forfeiture which would be petitioner's filing a false declaration under section
2530 (m) of the Tariff and Customs Code.
We cannot say that the appraisal of the value of the tobacco was incorrect. According to the Tax Court,
the Collector of Customs took precautionary measures to insure a correct appraisal of the tobacco. The
appraisal was made by a competent appraiser of the Bureau of Customs, and both the Commissioner of
Customs and the Secretary of Finance, who exercise supervisory authority over the Collector of
Customs and who were consulted on the matter, approved the sale, or at least, interposed no objection
to the sale. Anent this matter it has been said that an appraisal made by the Commissioner of Customs
under Section 1377 of the Revised Administrative Code is presumed to be correct, unless the contrary
is proven by the importer. (Lazaro vs. Commissioner of Customs, L-22511 and L-22343, May 16,
1966, 17 SCRA 36, 41 and cases cited therein.)
But, assuming arguendo, that the consideration paid for the forfeited tobacco was inadequate, such
inadequate consideration is not a ground for the invalidity of a contract. Anent this matter Article 1355
of the Civil Code provides:
"Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract, unless
there has been fraud, mistake or undue influence."
Petitioner has not shown that the instant sale is a case exempted by law from the operation of Art. 1355;
neither has petitioner shown that there was fraud, mistake or undue influence in the sale. Hence, this
Court cannot but conclude with the Court of Tax Appeals that "In these circumstances, we find no
reason to invalidate the sale of said tobacco to Consolidated Tobacco Industries of the Philippines."
The Court of Tax Appeals is claimed to have erred also in holding that the subject tobacco was
deteriorating. We note, that the imported tobacco has a very unique nature. According to petitioner, it is
highly perishable, but in spite of the lapse of several years, it has not deteriorated. In Civil Case No.
49639 of the Court of First Instance of Manila, petitioner herein averred that the Virginia leaf tobacco
imported is highly perishable in nature so that delay in the release thereof would cause him irreparable
injury (Climaco v. Barcelona, L-19597, July 31, 1962, 5 SCRA 846, 848). In his "petition to release
tobacco under bond" dated March 14, 1967, filed with respondent court, he alleged that:
"16. That considering the time that has elapsed since the arrival in Manila of the 600 hogsheads of

Virginia leaf tobacco same may be deteriorated unless sooner disposed of . . ."
Now he claims that the tobacco has not deteriorated.
But let us give petitioner the benefit of the doubt. We do not see, however, how the deterioration or not
of the tobacco will affect the outcome of this petition. Hence, it is unnecessary to deal on it further.
Petitioner's contention that the Court of Tax Appeals erred in holding that he had no legal personality to
question the legality of the sale, should be sustained. Even if petitioner had lost all his rights to the
tobacco shipment after the same has been seized and forfeited, such loss of right was still subject to a
contingency that is, "at least while the order of seizure has not been set aside." It is unwarranted to
conclude that the loss of his rights to the tobacco while the seizure has not been set aside carried with it
the loss of his legal personality to question the legality of the sale. The Tariff and Customs Code itself
expressly gives to any person aggrieved by the decision or action of the Collector of Customs in any
case of seizure, the right to have the decision reviewed by the Commissioner of Customs (Section
2313), and from the decision of the latter, he has a right to appeal to the Court of Tax Appeals (Section
2402), and from the latter's decision to the Supreme Court.
Neither can it be accurately said that petitioner has no right to have the contract of sale to the CTIP
annulled, on the ground that he was not a party bound either principally or subsidiarily by the contract.
(Art. 1397 Civil Code.) Petitioner seeks the declaration of the nullity of the sale not as a party to the
sale, but because he had an interest that was affected by the sale. This Court has held that a person who
is not a party obliged principally or subsidiarily in a contract may exercise an action for nullity of the
contract if he is prejudiced in his rights with respect to one of the contracting parties, and can show the
detriment which would positively result to him from the contract in which he had no intervention.
(Ibaez v. Hongkong and Shanghai Bank, 22 Phil. 572, 584-585; Teves vs. People's Homesite and
Housing Corporation, et al., L-21498, June 27, 1968, 23 SCRA 1141, 1147-1148). It would be stating
the obvious that in the instant case the petitioner will suffer detriment as a consequence of the sale, in
case it is not set aside.
As a matter of fact, this Court has recognized the personality of petitioner to question the legality of the
sale when in the Court of Appeals case, L-25181, this Court remanded the case to the Court of Tax
Appeals to decide the validity of the administrative proceedings and the question regarding the disposal
and sale of the tobacco that was seized. It was therein implied that petitioner had personality to
question the sale.
The error assigned regarding the amount of warehousing charges that had accumulated is immaterial to
the decision of the instant case, and whether the Court of Tax Appeals did commit the error or not, will
not affect the result of the case. This point, therefore, need not be commented on.
This Court recognizes that petitioner has the right to take all legal steps to enforce his legal and/or
equitable rights to the tobacco in question. One who makes use of his own legal right does no injury.
Qui jure suo utitur mullum damnum facit. If damage results from a person's exercising his legal rights,
it is damnum absque injuria. The consequent delay in the delivery of the tobacco is an incident to said
exercise of his rights. But, again, whatever might be petitioner's motive in this regard will hardly affect
the outcome of this case.
6.
The property, subject of litigation is not by that fact aline, in custodia legis. "When property is
lawfully taken, by virtue of legal process, it is in the custody of the law, and not otherwise." (Gilman v.
Williams, Wis. 334, 76 Am. Dec. 219.)
In the case of Millare et al., vs. Millare et al., 106 Phil. 203, 299 a motion for contempt was filed in this
Court by appellant charging respondents with having committed contempt by selling or otherwise
disposing the land in question pending the appeal. This Court held that there being no attachment,
injunction or receivership issued with respect to the land, and in view of the conclusion reached on the
merits of the case, there was no reason to declare the respondents guilty of contempt. This ruling is in
point in the instant case. At the time the CTIP took possession of the tobacco and disposed it on
September 12, 1967, there was no existing order of the Court of Tax Appeals restraining such

possession and disposition. By specific order of the Court of Tax Appeals, it declared that the
restraining order previously issued by it was of no further effect on September 12, 1967 due to
appellants' failure to post the bond required.
It has been shown above, furthermore, that petitioner herein was not entitled to the tobacco,
consequently he had no right to the proceeds of the sale, and to have the proceeds thereof deposited.
7.
Regarding the "Motion for Leave" filed by the Solicitor General's Office praying authority to
refund the storage charges of the subject tobacco to the CTIP, this Court notes that the same is not in
issue in the instant case, and, therefore, abstains from making any resolution regarding the matter. The
claim of the CTIP for refund must be prosecuted administratively.
WHEREFORE, the instant petition for review is dismissed, and the decision of the Court of Tax
Appeals, appealed from is affirmed. cdtai
It is so ordered.
Fernando, Barredo, Antonio, Fernandez and Aquino, JJ ., concur.
Footnotes
1.
5 SCRA 846.
2.
11 SCRA 529.
3.
20 SCRA 631.
4.
19 SCRA 10.
5.
5 SCRA 846, 853.
6.
19 SCRA 10.

FIRST DIVISION
[G.R. No. L-28809. May 16, 1983.]
JULIO LLAMADO, petitioner-appellant, vs. COMMISSIONER OF CUSTOMS, respondent-appellee.
Armando S. Padilla for petitioner.
The Solicitor General for respondent.
SYLLABUS
1.
ADMINISTRATIVE LAW; TARIFF AND CUSTOMS CODE; FORFEITURE; VESSEL OR
AIRCRAFT UNLAWFULLY USED FOR IMPORTATION OR EXPORTATION, NOT REQUIRED
BY LAW TO CARRY CONTRABAND GOODS ITSELF. The issue thus raised is whether or not
the Cessna plane was used in the unlawful importation of cigarettes within the meaning of Section
2530(a) of the Tariff and Customs Code, which reads: "Any vessel or aircraft, cargo or articles and
other objects shall, under the following conditions, be subject to forfeiture: "(a) Any vessel or aircraft,
including cargo, which shall be used unlawfully in the importation or exportation of articles into or
from any Philippine ports or place except a port of entry; and any vessel which, being of less than thirty
tons capacity shall be used in the importation of articles into any Philippine port or place except into a
port of the Sulu sea where importation in such vessel may be authorized by the Commissioner, with the
approval of the department head." Under the foregoing legal provision, in order to warrant forfeiture, it
is not necessary that the vessel or aircraft must itself carry the contraband. There is nothing in the law
that so requires.
2.
ID.; ID.; ID.; ID.; COMPLEMENTARY USE OF AIRCRAFT FOR SMUGGLING
OPERATION CONSTITUTIVE ACTIVE INVOLVEMENT IN SMUGGLING OR ILLEGAL
IMPORTATION. In the case at bar, it is undeniable that the Alabat adventure was entirely and solely
a smuggling operation; and the Cessna was deliberately used to insure its successful prosecution. It
brought the smugglers to Alabat and subsequently delivered the necessary lighting paraphernalia to
citable the cargo plane to take off without peril and transport the smuggled cigarettes to Luzon . In our
view, this complementary if collateral, use of the Cessna for smuggling operation is sufficient for it to
be deemed to have been used unlawfully in the importation or smuggling of blue seal cigarettes. The
participation of the Cessna as above described, was legally an active involvement of the said plane in,
and constituted an unlawful use thereof for smuggling or illegal importation within the meaning of
Section 2530 (a) of the Tariff and Customs Code. cdasia
3.
ID.; ID.; IMPORTATION; COMMENCEMENT AND TERMINATION; LEGAL CONCEPT.
Note that "importation," by law, commences when the carrying vessel or aircraft enters the
jurisdiction of the Philippines with intention to unload; and it is "deemed terminated (only) upon
payment of the duties taxes and other charges due upon the articles, or (the same has been) secured to
be paid . . . and the legal permit for withdrawal shall have been granted." (Tariff and Customs Code,
Section 1202).
DECISION
PLANA, J p:
The facts are undisputed. On April 9, 1966, at about 11:00 o'clock A.M., Cessna plane P.I. C-494
landed at the Alabat airship, Quezon Province, with four persons on board, namely: Romeo Palencia,
Osias Mission, Jacob Lim, and one identified only as a Chinese mestizo. A few minutes later the plane
took off, piloted by Osias Mission, leaving behind his three companions who told CAA employees at
Alabat that they would have a picnic. The Chinese mestizo later told Francisco de Leon, a CAA
employee, that his group would use the airstrip in landing contraband good and offered P1,500.00 to de
Leon which the latter refused. Romeo Palencia, Jacob Lim, and the Chinese mestizo were picked up by
the same Cessna plane at about 1:00 P.M. LLjur
At about 5:00 P.M. of the same day, a DC-3 plane (P.I. C-718) landed at the Alabat airstrip. On board
were Jesus Granda and Osias Mission. It was followed by Cessna plane P.I. C-494, which unloaded two
boxes containing "de gaza" lamps and two cases of kerosene, after which it took off leaving the DC-3.

At about 11:00 o'clock of that night, a motorized banca unloaded cases of "FORTUNE" blue seal
cigarettes at the tip of the Alabat airstrip, making several trips between the shore and a vessel lying
offshore from where the cigarettes were taken. From the shore, the cigarettes were loaded on board the
DC-3 plane by laborers hired by the Chinese mestizo. Some four hours later, after about 300 cases of
blue seal cigarettes had been loaded, the DC-3 took off, guided by the lighted "de gaza" lamps brought
earlier by the Cessna plane.
The following day, the DC-3 returned to Alabat, loaded the remaining cases of "FORTUNE" blue seal
cigarettes, and took off for Porac, Pampanga.
All the landings and take off of the planes were not recorded in the logbook at Alabat because their
pilots refused to sign the same.
A warrant of seizure and detention of the Cessna plane, P.I. C-494, was issued on June 1, 1966 by the
Collector of Customs of the Port of Siain, Quezon Province, for violation of Section 2530 of the Tariff
and Customs Code. After hearing, a decision was rendered by the Collector of Customs declaring the
forfeiture of the Cessna plane pursuant to Section 2530 (a) of the said Code, which was later affirmed
by the Commissioner of Customs. Subsequently, upon the filing by petitioner of a P30,000.00 surety
bond, the Cessna plane was released to him.
On appeal the Court of Tax Appeals sustained the decision of the Commissioner of Customs, thus:
"WHEREFORE, the decision appealed from is hereby affirmed. The forfeited Cessna plane P.I. C-494
having been released to petitioner and secured by the Philippine Motor Assurance Corporation (PMAC)
Bond No. 267 . . ., said bond is hereby forfeited in favor of the Government. Petitioner Julio Llamado
and the Philippine Motor Assurance Corporation are hereby ordered to pay, jointly and severally, to the
Collector of Customs of Siain, or any of his authorized representatives, the amount of P30,000.00
corresponding to the appraised value of the forfeited Cessna plane within thirty days from the date this
decision becomes final." cdasia
Dissatisfied, petitioner has appealed to this Court by way of petition for review.
Petitioner-owner of the Cessna plane contends that the plane cannot be forfeited under Section 2530 (a)
of the Tariff and Customs Code for it did not come from a foreign country nor did it carry or unload
cigarettes in any place in the Philippines. While not claiming ignorance of the smuggling operation for
which his plane was used, petitioner further argues that the Cessna plane cannot be deemed to have
been "used" in smuggling since it was not actually used in transporting the cigarettes but was merely
used to bring the "de gaza" lamps to the Alabat airstrip. As averred in petitioner's brief
"The Cessna plane was used in the bringing of the "de Gaza" lanterns at Alabat Airstrip. That was its
purpose and nothing more. The "de Gaza" lanterns were used to light the airstrip so that the DC-3 plane
P.I. C-718 may be able to take off that was the purpose of the lanterns. The DC-3 plane P.I. C-718 was
used to carry the cigarettes from Alabat Island to Porac, Pampanga. That was its purpose. What was
used unlawfully in the importation of the blue seal cigarettes from outside the territorial jurisdiction of
the Philippine waters with intention to unload. . . .
"The most that can be said of the Cessna plane in connection with this case is that it was used or
employed to aid in or facilitate the unlawful importation of the cigarettes. But unfortunately, vehicles,
vessels, or aircrafts used or employed to aid in or facilitate the unlawful importations of articles into the
Philippines are not subject to forfeiture under Philippine laws." (pp. 12-13.)
The issue thus raised is whether or not the Cessna plane was used in the unlawful importation of
cigarettes within the meaning of Section 2530 (a) of the Tariff and Customs Code, which reads:
"Any vessel or aircraft, cargo or articles and other objects shall. under the following conditions, be
subject to forfeiture:
(a)
Any vessel or aircraft, including cargo, which shall be used unlawfully in the importation or
exportation of articles into or from any Philippine ports or place except a port of entry, and any vessel
which, being of less than thirty tons capacity shall be used in the importation of articles into any
Philippine port or place except into a port of the Sulu sea where importation in such vessel may be

authorized by the Commissioner, with the approval of the department head."

Under the foregoing legal provision, in order to warrant forfeiture, it is not necessary that the vessel or
aircraft must itself carry the contraband. There is nothing in the law that so requires.
Nor is it essential that the vessel or aircraft must come from a foreign country, as argued by the
petitioner. The same contention was urged without success by the owner of the forfeited vessel in C.F.
Sharp & Co., Inc., vs. Commissioner of Customs, 22 SCRA 760. LLjur
"It is contended that the M/L Cheton should not be ordered forfeited because . . . it was not used to
transport said cigarettes from a foreign port to any port or place in the Philippines.
"C.F. Sharp & Co., Inc. maintains further that paragraph a., Section 2530 of the Tariff and Customs
Code does not apply to the instant case inasmuch as it was not proved that M/L Cheton was unlawfully
used in the importation of articles into any Philippine port.
"There is no question that M/L Cheton was apprehended carrying untaxed cigarettes of foreign origin
without the necessary papers showing that they were entered lawfully through a port of entry. There is
no question also that said cigarettes were liable for forfeiture pursuant to the Customs and Tariff Code.
On the basis of the aforestated facts, the conclusion is inevitable that the M/L Cheton was used in
connection with unlawful importation of said cigarettes. The burden was therefore shifted to the boat's
owner to show that the carriage by M/L Cheton of the smuggled cigarettes was lawful. No such
showing was made. Hence, the Court of Tax Appeals committed no error in ordering the forfeiture of
the launch in question." (pp. 762-764.)
In the case at bar, it is undeniable that the Alabat adventure was entirely and solely a smuggling
operation; and the Cessna was deliberately used to insure its successful prosecution. It brought the
smugglers to Alabat and subsequently delivered the necessary lightning paraphernalia to enable the
cargo plane to take off without peril and transport the smuggled cigarettes to Luzon.
In our view, this complementary, if collateral, use of the Cessna for smuggling operation is sufficient
for it to be deemed to have been used unlawfully in the importation or smuggling of blue seal
cigarettes. Note that "importation"', by law, commences when the carrying vessel or aircraft enters the
jurisdiction of the Philippines with intention to unload; and it is "deemed terminated (only) upon
payment of the duties, taxes and other charges due upon the articles, or (the same has been) secured to
be paid . . . and the legal permit for withdrawal shall have been granted." (Tariff and Customs Code,
Section 1202.) The participation of the Cessna, as above described, was legally an active involvement
of the said plane in, and constituted an unlawful use thereof for, smuggling or illegal importation within
the meaning of Section 2530 (a) of the Tariff and Customs Code. LLpr
WHEREFORE, the decision of the Court of Tax Appeals under review is hereby affirmed. Costs
against the petitioner.
SO ORDERED.
Teehankee, Escolin, Vasquez and Gutierrez, Jr., JJ ., concur.
Melencio-Herrera and Relova, JJ ., concur.

EN BANC
[G.R. No. L-10935. April 28, 1958.]
SILVERIO BLAQUERA, as Collector of Internal Revenue, petitioner, vs. HON. JUDGE JOSE S.
RODRIGUEZ, ETC., and HAO GIOK SAN, ETC., respondents.
Provincial Fiscal Jose C. Borromeo and Asst. Provincial Fiscal Anunias V. Mariano for petitioner.
Nazario R. Pacquiao, Nicolas Jumapao and Vitaliano E. Badana for respondents.
SYLLABUS
1.
COURT OF TAX APPEALS; EXCLUSIVE APPELLATE JURISDICTION OVER DISPUTED
ASSESSMENTS. The determination of the correctness or incorrectness of a tax assessment to
which the taxpayer is not agreeable, falls within the jurisdiction of the Court of Tax Appeals and not of
the Court of First Instance, for under the provision of Section 7 of Republic Act No. 1125, the Court of
Tax Appeals has exclusive appellate jurisdiction to review, on appeal any decision of the Collector of
Internal Revenue in cases involving disputed assessments and other matters arising under the National
Internal Revenue Code or other law or part of law administered by the Bureau of Internal Revenue.
DECISION
ENDENCIA, J p:
On May 10, 1956 respondent Hao Giok San filed with the Court of First Instance of Cebu, 14th Judicial
District, then presided by respondent Hon. Judge Jose S. Rodriguez, a complaint against the petitioner
herein, docketed as Civil Case No. R-4514, to secure an order enjoining the petitioner, his agents,
subordinates and other persons acting in his behalf, to perpetually refrain from affecting the collection
of the deficiency percentage taxes, surcharges or penalties and compromise in the total amount of
P3,625 and from levying on execution any of his property to satisfy the aforesaid deficiency percentage
taxes, surcharges and compromise and, after trial, to make the writ of preliminary injunction issued
during the pendency of the proceeding permanent and perpetual. On the same date, pursuant to the
prayer of the complaint and upon filing by the plaintiff therein of a bond in the amount of P3,625, the
respondent Judge issued, ex-parte, a writ of preliminary injunction. Thereupon, on May 26, 1956,
petitioner herein filed a motion to dismiss the complaint on the ground that the Court of First Instance
of Cebu lacked jurisdiction to try it, and prayed for the lifting of the preliminary injunction issued
thereunder. Upon opposition of Hao Giok San, this motion was denied by the respondent Judge.
Petition for reconsideration was filed, but it was likewise dismissed. Hence petitioner initiated the
present petition to secure from this Court a writ of prohibition (a) to restrain respondent Judge, Hon.
Jose S. Rodriguez, from taking cognizance of the aforesaid Civil Case No. R- 4514, for lack of
jurisdiction over its subject matter; (b) to secure a preliminary injunction to prevent said respondent
Judge from enforcing the preliminary injunction issued in said civil case; and (c) after hearing, to make
permanent the writ of preliminary injunction which may be permanent the writ of preliminary
injunction which may be issued by this Court.
The record shows that on November 12, 1955, the Deputy Collector of Internal Revenue, Jose Araas,
sent to herein respondent the following communication:
"From the report submitted to this Office, it appears that you have short paid the correct percentage
taxes covered by Official Receipts Nos. 218120, 704226, 699013, and 709019, dated April 20, 1955,
July 20, 1954, April 20, 1954 and October 20, 1954, respectively, in the total amount of P2,900. Adding
thereto the 25% surcharge for late payment, there is, therefore, due from you the sum of P3,625.
"You are hereby demanded to pay the said amount of P3,625, together with the sum of P50.00 as
compromise for late payment, or a total of P3,675 within ten days from your receipt of this letter.
"Please be warned that your failure to pay the aforementioned tax and surcharge in the total amount of
P3,625 together with the suggested compromise of P50 within the period indicated above will constrain
this office to enforce the collection of the tax and surcharge by the summary remedies provided for by
law and at the same time recommend your prosecution in court for violation of section 183, penalized
under section 209, both of the National Internal Revenue Code."

On November 21, 1955, respondent Hao Giok San, thru counsel, wrote the Deputy Collector that he
had paid in full the correct percentage taxes for the period referred to in the aforequoted letter, and
denied any outstanding liability or deficiency in the payment of said percentage taxes. On December
19, Deputy Collector Araas wrote back demanding payment of the deficiency taxes, to which
respondent Hao Giok San answered insisting that he has paid religiously all his taxes to the government
starting from the date he engaged in business up to the date of his letter, and reiterated his contention
that he owes nothing to the Government of the Philippines by way of taxes; and in order to prevent the
herein petitioner from collecting the disputed deficiency taxes and levying or distraining any property
of the respondent Hao Giok San in satisfaction of said taxes, the latter initiated the aforesaid Civil Case
No. R-4514 in the Court of First Instance of Cebu.
As could be readily seen, the main question we are called upon to decide is whether the respondent
Judge, or more exactly, the Court of First Instance of Cebu, has jurisdiction to try the aforesaid civil
case where the matter involved is the collection of the deficiency percentage taxes from respondent
Hao Giok San and its enforcement by means of levy and distraint of respondent's properties in
accordance with the National Internal Revenue Code. Essentially, in said civil case, respondent Hao
Giok San sought to review the actuation of the herein petitioner on the aforesaid collection of taxes
and, for this reason, petitioner claims that the Court of First Instance of Cebu has no jurisdiction to take
cognizance of said civil case, contending that the question involved therein should be brought on
appeal, not to the Court of First Instance of Cebu, but to the Court of Tax Appeals in view of Section 7
of Republic Act No. 1125, which provides:
"Sec. 7.
Jurisdiction. The Court of Tax Appeals shall exercise exclusive appellate jurisdiction
to review by appeal, as herein provided
"(1) Decisions of the Collector of Internal Revenue in cases involving disputed assessments, refunds
of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters
arising under the National Internal Revenue Code or other law or part of law administered by the
Bureau of Internal Revenue;"
Upon careful examination of Appendix A of the petition, which is the complaint filed by Hao Giok San
in Civil Case No. R-4514, we clearly find that therein Hao Giok San seeks not only to contest the right
of petitioner to collect the deficiency percentage taxes, surcharges and compromise in question, but
also the legality or propriety of the levy by distraint on his properties, if same is resorted to, all of
which should really be brought on appeal to the Court of Tax Appeals, in view of the aforequoted
Section 7 of Republic Act No. 1125.
It is our considered opinion that the determination of the correctness or incorrectness of a tax
assessment to which the taxpayer is not agreeable falls within the jurisdiction of the Court of Tax
Appeals and not of the Court of First Instance, for under the aforequoted provision of law, the Court of
Tax Appeals has exclusive appellate jurisdiction to review on appeal any decision of the Collector of
Internal Revenue in cases involving disputed assessments and other matter arising under the National
Internal Revenue Code or other law or part of law administered by the Bureau of Internal Revenue.
Wherefore, petition is granted and the respondent Judge, Hon. Jose S. Rodriguez, is hereby prohibited
from further taking cognizance of Civil Case No. R-4514; his orders mentioned in the petition are
hereby set aside, and the preliminary injunction issued in this case made permanent, with costs against
the respondent Hao Giok San.
Paras, Bengzon, Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes, J. B. L. and
Felix, JJ., concur.

SECOND DIVISION
[G.R. No. L-27733. December 3, 1980.]
RENATO RAYMUNDO, petitioner, vs. HONORABLE ALBERTO R. DE JOYA, and HONORABLE
PEDRO PACIS, in their capacity as Commissioner of Customs and Acting Collector of Customs,
respectively, respondents.
SYNOPSIS
Rafael Cavanna, to escape the payment of duties and taxes on the car he bought in 1959, registered the
same in his name at the Motor Vehicles Office by using an import entry showing payment thereof but
which actually pertained to another importation. In 1963, after discovery of the fraud, he executed a
deed of sale in favor of his wife, paying the taxes thereon in the amount much less than what should
have been collected in 1959. As there was some anomaly in the informal entry number for such car, a
warrant of seizure and detention was subsequently issued. The Collector of Customs ordered the
payment of deficiency taxes due the government. During the pendency of the case, Paz Alcantara sold
the car to petitioner-appellant Renato G. Raymundo who filed with the Court of Tax Appeals a petition
for review of the order for the payment of deficiency taxes. Failing to get relief, he filed this present
action.
The Supreme Court, citing settled decisions on the matter, reiterated the doctrine that the finding of
facts of the Court of Tax Appeals is entitled to the highest respect.
SYLLABUS
1.
APPEALS; PETITION FOR REVIEW OF DECISION OF THE COURT OF TAX APPEALS;
FINDING OF FACTS OF THE TAX COURT NOT TO BE DISTURBED ON APPEAL;
JURISPRUDENCE. Time and again, the Supreme Court had made clear in categorical language that
the findings of facts of the Court of Tax Appeals is entitled to the highest respect. So it has been since
Sanchez v. Commissioner of Customs (102 Phil. 37 [1957]). The latest case in point is Nilsen where, in
addition to Sanchez, sixteen other decision were cited, starting from Commissioner v. Priscila Estate,
120 Phil. 125 (1964) and ending with Commissioner of Internal Revenue v. Ayala Securities Corp. (L29485, March 31, 1976).
2.
ID.; ID.; ID.; DENIAL OF PROCEDURAL DUE PROCESS NOT EVIDENT IN INSTANT
CASE. The allegation of denial of due process on the ground that the Commissioner of Customs as
well as the Court of Tax Appeals could not reverse what it considered to be a finding of the then
Collector of Customs lacks persuasiveness as the very concept of an appeal implies that the authority to
which the matter is elevated could by an exercise of independent judgment reach the conclusion it did.
The mere fact that there was a difference of point of view between subordinate and the official of a
higher category who can properly entertain such an appeal does not suffice to warrant a disregard of
what under the law is impressed with a decisive effect. The findings of facts by the Court of Tax
Appeals is not to be disturbed. Only by a showing that there was no substantial evidence could a due
process question be raised which element is not present in the case at bar.
DECISION
FERNANDO, C .J p:
On the authority of Nilsen v. Commissioner of Customs 1 as to the finality of a finding of facts by the
Court of Tax Appeals, 2 this petition for review of its decision ordering petitioner to pay a deficiency
tax in the amount of P3,676.00 must fail. It was shown that a certain Rafael Cavanna on June 12, 1959
acquired from one Anastacio Teodoro, Jr., a Pontiac Car, Chieftain, Model 1957 Sedan, for P6,000.00
with the former assuming whatever tax liability was due to the Bureau of Customs. In registering such
car, Cavanna made it appear that the amount of P7,295.06 was paid to the government by way of
customs duties. Cavanna then on February 4, 1963 executed a deed of sale of such car in favor of his
wife, Paz Alcantara. According to such deed, the car was purchased only on February 4, 1963, resulting
in the payment of P2,428.00 to the Bureau of Customs. As there was some anomaly in the informal
entry number for such car, a Warrant of Seizure and Detention was issued on September 16, 1964. The

seizure was carried out by the National Bureau of Investigation. The seizure proceedings then took
place. The Collector of Customs rendered a decision on November 5, 1964, with this dispositive
portion: "[Wherefore], pursuant to the provision of Section 2312 of the Tariff and Customs Code, it is
hereby ordered and decreed that the present owner-claimant Paz V. Alcantara should, within thirty (30)
days from receipt of this decision, pay to the Bureau of Customs the amount of P3,775.00, after which
this seizure proceeding shall be dismissed, otherwise, the said car shall be sold at public auction to
satisfy the lien of the Government in the amount mentioned." The Commissioner of Customs sustained
the Collector. During the pendency of such case before the Commissioner of Customs, Paz Alcantara
sold the car to the petitioner-appellant Renato G. Raymundo. llcd
It was he who filed with the Court of Tax Appeals a petition for review, dated February 3, 1965. As was
mentioned, he was unsuccessfully. Hence his resort to this Court. The answer of then Solicitor General,
now Justice, Antonio P. Barredo reiterated the special and affirmative defense that fraud attended the
transfer and registration of the car in question. He was sustained by the Court of Tax Appeals. Thus:
"The petitioner does not question the correctness of the computation of the deficiency customs duty and
taxes assessed against the car in question. However, he contends that the car is not one of those subject
to seizure and/or forfeiture under Section 2530 (m) 1 and 5 of the Tariff and Customs Code as no
fraud was committed. The evidence, oral and documentary, presented in the seizure proceedings at the
Bureau of Customs (S.I. No. 8309) evinces fraud on the part of Rafael Cavanna and his wife to the
prejudice of the Government. They were aware that the car was still liable for customs duties and taxes
at the time it was purchased from Anastacio Teodoro, Jr. The provision in the sales agreement which
states that the 'Seller (Anastacio Teodoro, Jr.) does not assume any tax liabilities due the Bureau of
Customs' served notice to them that taxes were due on the car. In order to escape the payment of duties
and taxes, Rafael Cavanna registered the car in his name at the Motor Vehicles Office in 1959 by using
an import entry (No. 670567) which purportedly show that he had paid the duties and taxes to the
Government, but which actually pertained to another importation. Later, when the authorities
uncovered the deception, Cavanna executed on February 4, 1963, a deed of sale of the car in favor of
his wife. The sale was apparently made to the wife to make it appear that the car was acquired by her
only in 1963. On the basis of the deed of sale to the wife, only the amount of P2,428.00, instead of
P5,203.00, was levied and collected as duty and taxes. These circumstances demonstrates without any
shadow of doubt the intention to defraud the Government." 3
To repeat, this petition cannot succeed.
1.
The language used by the Court of Tax Appeals as to the existence of fraud must be given its
due weight and force. It found such nefarious intent on the part of the vendor from whom petitioner
obtained this vehicle not merely proved by preponderance of evidence but "without any shadow of
doubt." Time and time again, this Court had made clear in categorical language that the finding of facts
of the Court of Tax Appeals is entitled to the highest respect. So it has been since Sanchez v.
Commissioner of Customs. 4 The latest case in point is Nilsen where, in addition to Sanchez, sixteen
other decisions were cited, starting from Commissioner v. Priscila Estate, 5 and ending with
Commissioner of Internal Revenue v. Ayala Securities Corp. 6 We do so again. LexLib
2.
An attempt to demonstrate that an affirmance of the appealed decision could be denial of
procedural due process on the ground that the Commissioner of Customs as well as the Court of Tax
Appeals could not reverse what it considered to be a finding of the then Collector of Customs lacks
persuasiveness. The very concept of an appeal implies that the authority to which the matter is elevated
could by an exercise of independent judgment reach the conclusion it did. The mere fact that there was
a difference of point of view between the subordinate and the official of a higher category who can
properly entertain such an appeal does not suffice to warrant a disregard of what under the law is
impressed with a decisive effect. It would be a task of superfluity to repeat anew what had been so
clearly and categorically set forth above in the finding of facts by the Court of Tax Appeals. Only by a
showing that there was no substantial evidence could a due process question be raised in accordance

with the Ang Tibay case. 7 That element is not present in this case.
WHEREFORE, the petition for review is dismissed for lack of merit. Costs against petitioner. prLL
Aquino, Concepcion, Jr., Abad Santos and De Castro, JJ ., concur.
Barredo, J ., took no part.
Footnotes
1.
L-27149, March 14, 1979, 89 SCRA 43.
2.
The then Commissioner of Customs was respondent Alberto R. de Joya.
3.
Decision of the Court of Tax Appeals, Annex C to Petition, 5-7.
4.
102 Phil. 37 (1957).
5.
120 Phil. 125 (1964).
6.
L-29485, March 31, 1976, 70 SCRA 204.
7.
Ang Tibay v. Court of Industrial Relations, 69 Phil. 635 (1940).

THIRD DIVISION
[G.R. No. 115349. April 18, 1997.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE COURT OF APPEALS, THE
COURT OF TAX APPEALS and ATENEO DE MANILA UNIVERSITY, respondents.
The Solicitor General for petitioner.
Bengzon Zarraga Narciso Cudala Pecson and Bengson for private respondent.
SYLLABUS
1.
TAXATION; TAX IMPOSITION; AS A RULE, A STATUTE WILL NOT BE CONSTRUED
AS IMPOSING A TAX UNLESS IT DOES SO CLEARLY, EXPRESSLY, AND UNAMBIGUOUSLY.
The Court takes this occasion to reiterate the hornbook doctrine in the interpretation of tax laws that
"(a) statute will not be construed as imposing a tax unless it does so clearly, expressly, and
unambiguously. . . (A) tax cannot be imposed without clear and express words for that purpose.
Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with
peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication."
Parenthetically, in answering the question of who is subject to tax statutes, it is basics that "in case of
doubt, such statutes are to be construed most strongly against the government and in favor of the
subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond what
statutes expressly and clearly import.
2.
ID.; ID.; SEC. 20 OF THE NATIONAL INTERNAL REVENUE CODE; APPLICATION;
EXEMPTION; NOT PRESENT IN CASE AT BAR. The Commissioner should have determined
first if private respondent was covered by Section 205, applying the rule of strict interpretation of laws
imposing taxes and other burdens on the populace, before asking Ateneo to prove its exemption
therefrom. To fall under its coverage, Section 205 of the National Internal Revenue Code requires that
the independent contractor be engaged in the business of selling its services. Hence, to impose the three
percent contractor's tax on Ateneo's Institute of Philippine Culture, it should be sufficiently proven that
the private respondent is indeed selling its services for a fee in pursuit of an independent business. And
it is only after private respondent has been found clearly to be subject to the provisions of Sec. 205 that
the question of exemption therefrom would arise. Only after such coverage is shown does the rule of
construction that tax exemptions are to be strictly construed against the taxpayer come into play.
After reviewing the records of this case, we find no evidence that Ateneo's Institute of Philippine
Culture ever sold its services for a free to anyone or was ever engaged in a business apart from and
independently of the academic purposes of the university. The petitioner has presented no evidence to
prove its bare contention that, indeed, contracts for sale of services were ever entered into by the
private respondent.
3.
ID.; ID.; ID.; EXEMPTION OF GIFTS OR DONATIONS TO AN EDUCATIONAL
INSTITUTION; APPLICATION IN CASE AT BAR. The Court of Tax Appeals accurately and
correctly declared that the "funds received by Ateneo de Manila University are technically not a fee.
They may however fall as gifts or donations which are tax-exempt" as shown by private respondent's
compliance with the requirement of Section 123 of the National Internal Revenue Code providing for
the exemption of such gifts to an educational institution. It is, clear that the funds received by Ateneo's
Institute of Philippine Culture are not given in the concept of a fee or price in exchange for the
performance of a service or delivery of an object. Rather, the amounts are in the nature of an
endowment or donation given by IPC's benefactors solely for the purpose of sponsoring or funding the
research with no strings attached. As found by the two courts below, such sponsorships are subject to
IPC's terms and conditions. No proprietary or commercial research is done, and IPC retains the
ownership of the results of the research, including the absolute right to publish the same. The
copyrights over the results of the research are owned by Ateneo and, consequently, no portion thereof
may be reproduced without its permission. The amount., given to IPC, therefore. may not be deemed, it
bears stressing. as fees or gross receipts that can be subjected to the three percent contractor's tax.

4.
CIVIL LAW; CONTRACTS; CONTRACT OF SALE AND FOR A PIECE OF WORK
REQUIRE TRANSFER OF OWNERSHIP; NOT PRESENT IN CASE AT BAR. The questioned
transactions of Ateneo's Institute of Philippine Culture cannot be deemed either as a contract of sale or
a contract for a piece of work. "By the contract of sale, one of the contracting parties obligates himself
to transfer the ownership of and to deliver a determinate thing, and the other to pay therefor a price
certain in money or its equivalents." By its very nature, a contract of sale requires a transfer of
ownership. Thus, Article 1458 of the Civil Code "expressly makes the obligation to transfer ownership
as an essential element of the contract of sale, following modern codes, such as the German and the
Swiss. Even in the absence of this express requirement, however, most writers, including Sanchez
Roman, Gayoso, Valverde, Ruggiero, Colin and Capitant, have considered such transfer of ownership
as the primary purpose of sale. Perez and Alguer follow the same view, stating that the delivery of the
thing does not mean a mere physical transfer, but is a means of transmitting ownership. Transfer of title
or an agreement to transfer it for a price paid or promised to be paid is the essence of sale." In the case
of a contract for a piece of work, "the contractor binds himself to execute a piece of work for the
employer, in consideration of a certain price or compensation. . . If the contractor agrees to produce the
work from materials furnished by him, he shall deliver the thing produced to the employer and transfer
dominion over the thing. . ." (Articles 1713 and 1714 of the Civil Code of the Philippines). Ineludably,
whether the contract be one of sale or one for a piece of work, a transfer of ownership is involved and a
party necessarily walks away with an object. In the case at bench, it is clear from the evidence on
record that there was no sale either of objects or services because. as adverted to earlier, there was no
transfer of ownership over the research data obtained or the results of research projects undertaken by
the Institute of Philippine Culture. Furthermore, it is clear that the research activity of the Institute of
Philippine Culture is done in pursuance of maintaining Ateneo's university status and not in the course
of an independent business of selling such research with profit in mind.
5.
REMEDIAL LAW; EVIDENCE; FACTUAL FINDINGS AND CONCLUSIONS OF THE
COURT OF TAX APPEALS; GENERALLY CONCLUSIVE; CASE AT BAR. We reiterate that the
"Court of Tax Appeals is a highly specialized body specifically created for the purpose of reviewing tax
cases. Through its expertise, it is undeniably competent to determine the issue of whether" Ateneo de
Manila University may be deemed a subject of the three percent contractor's tax "through the evidence
presented before it." Consequently, "as a matter of principle, this Court will not set aside the conclusion
reached by . . . the Court of Tax Appeals which is, by the very nature of its function, dedicated
exclusively to the study and consideration of tax problems and has necessarily developed an expertise
on the subject unless there has been an abuse or improvident exercise of authority . . ." This point
becomes more evident in the case before us where the findings and conclusions of both the Court of
Tax Appeals and the Court of Appeals appear untainted by any abuse of authority, much less grave
abuse of discretion. Thus, we find the decision of the latter affirming that of the former free from any
palpable error.
DECISION
PANGANIBAN, J p:
In conducting researches and studies of social organizations and cultural values thru its Institute of
Philippine Culture, is the Ateneo de Manila University performing the work of an independent
contractor and thus taxable within the purview of then Section 205 of the National Internal Revenue
Code levying a three percent contractor's tax? This question is answered by the Court in the negative as
it resolves this petition assailing the Decision 1 of the Respondent Court of Appeals 2 in CA-G.R. SP
No. 31790 promulgated on April 27, 1994 affirming that of the Court of Tax Appeals. 3
The Antecedent Facts
The antecedents as found by the Court of Appeals are reproduced hereinbelow, the same being largely
undisputed by the parties. cdtech
"Private respondent is a non-stock, non-profit educational institution with auxiliary units and branches

all over the Philippines. One such auxiliary unit is the Institute of Philippine Culture (IPC), which has
no legal personality separate and distinct from that of private respondent. The IPC is a Philippine unit
engaged in social science studies of Philippine society and culture. Occasionally, it accepts
sponsorships for its research activities from international organizations, private foundations and
government agencies.
On July 8, 1983, private respondent received from petitioner Commissioner of Internal Revenue a
demand letter dated June 3, 1983, assessing private respondent the sum of P174,043.97 for alleged
deficiency contractor's tax, and an assessment dated June 27, 1983 in the sum of P1,141,837 for alleged
deficiency income tax, both for the fiscal year ended March 31, 1978. Denying said tax liabilities,
private respondent sent petitioner a letter-protest and subsequently filed with the latter a memorandum
contesting the validity of the assessments.
On March 17, 1988, petitioner rendered a letter-decision canceling the assessment for deficiency
income tax but modifying the assessment for deficiency contractor's tax by increasing the amount due
to P193,475.55. Unsatisfied, private respondent requested for a reconsideration or reinvestigation of the
modified assessment. At the same time, it filed in the respondent court a petition for review of the said
letter-decision of the petitioner. While the petition was pending before the respondent court, petitioner
issued a final decision dated August 3, 1988 reducing the assessment for deficiency contractor's tax
from P193,475.55 to P46,516.41, exclusive of surcharge and interest.
On July 12, 1993, the respondent court rendered the questioned decision which dispositively reads:
'WHEREFORE, in view of the foregoing, respondent's decision is SET ASIDE. The deficiency
contractor's tax assessment in the amount of P46,516.41 exclusive of surcharge and interest for the
fiscal year ended March 31, 1978 is hereby CANCELED. No pronouncement as to cost.
SO ORDERED.'
Not in accord with said decision, petitioner has come to this Court via the present petition for review
raising the following issues:
'1)
WHETHER OR NOT PRIVATE RESPONDENT FALLS UNDER THE PURVIEW OF
INDEPENDENT CONTRACTOR PURSUANT TO SECTION 205 OF THE TAX CODE; and
2)
WHETHER OR NOT PRIVATE RESPONDENT IS SUBJECT TO 3% CONTRACTOR'S TAX
UNDER SECTION 205 OF THE TAX CODE'.
The pertinent portions of Section 205 of the National Internal Revenue Code, as amended, provide:
'Sec. 205.
Contractor, proprietors or operators of dockyards, and others. A contractor's tax of
three per centum of the gross receipts is hereby imposed on the following:
xxx
xxx
xxx
(16) Business agents and other independent contractors except persons, associations and
corporations under contract for embroidery and apparel for export, as well as their agents and
contractors and except gross receipts of or from a pioneer industry registered with the Board of
Investments under Republic Act No. 5186:
xxx
xxx
xxx
The term 'independent contractors' include persons (juridical or natural) not enumerated above (but not
including individuals subject to the occupation tax under Section 12 of the Local Tax Code) whose
activity consists essentially of the sale of all kinds of services for a fee regardless of whether or not the
performance of the service calls for the exercise or use of the physical or mental faculties of such
contractors or their employees.
xxx
xxx
xxx
Petitioner contends that the respondent court erred in holding that private respondent is not an
"independent contractor" within the purview of Section 205 of the Tax Code. To petitioner, the term
"independent contractor", as defined by the Code, encompasses all kinds of services rendered for a fee
and that the only exceptions are the following:
'a.
Persons, association and corporations under contract for embroidery and apparel for export and

gross receipts of or from pioneer industry registered with the Board of Investment under R.A. No.
5186; cdtai
b.
Individuals occupation tax under Section 12 of the Local Tax Code (under the old Section 182
[b] of the Tax Code); and
c.
Regional or area headquarters established in the Philippines by multinational corporations,
including their alien executives, and which headquarters do not earn or derive income from the
Philippines and which act as supervisory, communication and coordinating centers for their affiliates,
subsidiaries or branches in the Asia Pacific Region (Section 205 of the Tax Code).'
Petitioner thus submits that since private respondent falls under the definition of an "independent
contractor" and is not among the aforementioned exceptions, private respondent is therefore subject to
the 3% contractor's tax imposed under the same Code." 4
The Court of Appeals disagreed with the Petitioner Commissioner of Internal Revenue and affirmed the
assailed decision of the Court of Tax Appeals. Unfazed, petitioner now asks us to reverse the CA
through this petition for review.
The Issues
Petitioner submits before us the following issues:
"1.
Whether or not private respondent falls under the purview of independent contractor pursuant to
Section 205 of the Tax Code
2.
Whether or not private respondent is subject to 3% contractor's tax under Section 205 of the Tax
Code." 5
In fine, these may be reduced to a single issue: Is Ateneo de Manila University, through its auxiliary
unit or branch the Institute of Philippine Culture performing the work of an independent
contractor and, thus, subject to the three percent contractor's tax levied by then Section 205 of the
National Internal Revenue Code?
The Court's Ruling
The petition is unmeritorious.
Interpretation of Tax Laws
The parts of then Section 205 of the National Internal Revenue Code germane to the case before us
read:
"SEC. 205. Contractors, proprietors or operators of dockyards, and others. A contractor's tax of
three per centum of the gross receipts is hereby imposed on the following:
xxx
xxx
xxx
(16) Business agents and other independent contractors, except persons, associations and
corporations under contract for embroidery and apparel for export, as well as their agents and
contractors, and except gross receipts of or from a pioneer industry registered with the Board of
Investments under the provisions of Republic Act No. 5186;
xxx
xxx
xxx
The term 'independent contractors' include persons (juridical or natural) not enumerated above (but not
including individuals subject to the occupation tax under Section 12 of the Local Tax Code) whose
activity consists essentially of the sale of all kinds of services for a fee regardless of whether or not the
performance of the service calls for the exercise or use of the physical or mental faculties of such
contractors or their employees.
The term 'independent contractor' shall not include regional or area headquarters established in the
Philippines by multinational corporations, including their alien executives, and which headquarters do
not earn or derive income from the Philippines and which act as supervisory, communications and
coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region.
The term 'gross receipts' means all amounts received by the prime or principal contractor as the total
contract price, undiminished by amount paid to the subcontractor, shall be excluded from the taxable
gross receipts of the subcontractor."

Petitioner Commissioner of Internal Revenue contends that Private Respondent Ateneo de Manila
University "falls within the definition" of an independent contractor and "is not one of those mentioned
as excepted"; hence, it is properly a subject of the three percent contractor's tax levied by the foregoing
provision of law. 6 Petitioner states that the "term 'independent contractor' is not specifically defined so
as to delimit the scope thereof, so much so that any person who . . . renders physical and mental service
for a fee, is now indubitably considered an independent contractor liable to 3% contractor's tax." 7
According to petitioner, Ateneo has the burden of proof to show its exemption from the coverage of the
law. cdrep
We disagree. Petitioner Commissioner of Internal Revenue erred in applying the principles of tax
exemption without first applying the well-settled doctrine of strict interpretation in the imposition of
taxes. It is obviously both illogical and impractical to determine who are exempted without first
determining who are covered by the aforesaid provision. The Commissioner should have determined
first if private respondent was covered by Section 205, applying the rule of strict interpretation of laws
imposing taxes and other burdens on the populace, before asking Ateneo to prove its exemption
therefrom. The Court takes this occasion to reiterate the hornbook doctrine in the interpretation of tax
laws that "(a) statute will not be construed as imposing a tax unless it does so clearly, expressly, and
unambiguously. . . . (A) tax cannot be imposed without clear and express words for that purpose.
Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with
peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication."
8 Parenthetically, in answering the question of who is subject to tax statutes, it is basic that "in case of
doubt, such statutes are to be construed most strongly against the government and in favor of the
subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond what
statutes expressly and clearly import." 9
To fall under its coverage, Section 205 of the National Internal Revenue Code requires that the
independent contractor be engaged in the business of selling its services. Hence, to impose the three
percent contractor's tax on Ateneo's Institute of Philippine Culture, it should be sufficiently proven that
the private respondent is indeed selling its services for a fee in pursuit of an independent business. And
it is only after private respondent has been found clearly to be subject to the provisions of Sec. 205 that
the question of exemption therefrom would arise. Only after such coverage is shown does the rule of
construction that tax exemptions are to be strictly construed against the taxpayer come into play,
contrary to petitioner's position. This is the main line of reasoning of the Court of Tax Appeals in its
decision, 10 which was affirmed by the CA.
The Ateneo de Manila University Did Not Contract
for the Sale of the Services of its Institute of Philippine Culture
After reviewing the records of this case, we find no evidence that Ateneo's Institute of Philippine
Culture ever sold its services for a fee to anyone or was ever engaged in a business apart from and
independently of the academic purposes of the university.
Stressing that "it is not the Ateneo de Manila University per se which is being taxed," Petitioner
Commissioner of Internal Revenue contends that "the tax is due on its activity of conducting researches
for a fee. The tax is due on the gross receipts made in favor of IPC pursuant to the contracts the latter
entered to conduct researches for the benefit primarily of its clients. The tax is imposed on the exercise
of a taxable activity. . . . [T]he sale of services of private respondent is made under a contract and the
various contracts entered into between private respondent and its clients are almost of the same terms,
showing, among others, the compensation and terms of payment." 11 (Emphasis supplied.)
In theory, the Commissioner of Internal Revenue may be correct. However, the records do not show
that Ateneo's IPC in fact contracted to sell its research services for a fee. Clearly then, as found by the
Court of Appeals and the Court of Tax Appeals, petitioner's theory is inapplicable to the established
factual milieu obtaining in the instant case.
In the first place, the petitioner has presented no evidence to prove its bare contention that, indeed

contracts for sale of services were ever entered into by the private respondent. As appropriately pointed
out by the latter:
"An examination of the Commissioner's Written Formal Offer of Evidence in the Court of Tax Appeals
shows that only the following documentary evidence was presented:
Exhibit1
BIR letter of authority no. 331844
2
Examiner's Field Audit Report
3
Adjustments to Sales/Receipts
4
Letter-decision of BIR Commissioner
Bienvenido A. Tan Jr.
None of the foregoing evidence even comes close to purport to be contracts between private respondent
and third parties." 12
Moreover, the Court of Tax Appeals accurately and correctly declared that the " funds received by the
Ateneo de Manila University are technically not a fee. They may however fall as gifts or donations
which are tax-exempt" as shown by private respondent's compliance with the requirement of Section
123 of the National Internal Revenue Code providing for the exemption of such gifts to an educational
institution. 13
Respondent Court of Appeals elucidated on the ruling of the Court of Tax Appeals:
"To our mind, private respondent hardly fits into the definition of an 'independent contractor'. prcd
For one, the established facts show that IPC, as a unit of the private respondent, is not engaged in
business. Undisputedly, private respondent is mandated by law to undertake research activities to
maintain its university status. In fact, the research activities being carried out by the IPC is focused not
on business or profit but on social sciences studies of Philippine society and culture. Since it can only
finance a limited number of IPC's research projects, private respondent occasionally accepts
sponsorship for unfunded IPC research projects from international organizations, private foundations
and governmental agencies. However, such sponsorships are subject to private respondent's terms and
conditions, among which are, that the research is confined to topics consistent with the private
respondent's academic agenda; that no proprietary or commercial purpose research is done; and that
private respondent retains not only the absolute right to publish but also the ownership of the results of
the research conducted by the IPC. Quite clearly, the aforementioned terms and conditions belie the
allegation that private respondent is a contractor or is engaged in business.
For another, it bears stressing that private respondent is a non-stock, non-profit educational corporation.
The fact that it accepted sponsorship for IPC's unfunded projects is merely incidental. For, the main
function of the IPC is to undertake research projects under the academic agenda of the private
respondent. Moreover, the records do not show that in accepting sponsorship of research work, IPC
realized profits from such work. On the contrary, the evidence shows that for about 30 years, IPC had
continuously operated at a loss, which means that sponsored funds are less than actual expenses for its
research projects. That IPC has been operating at a loss loudly bespeaks of the fact that education and
not profit is the motive for undertaking the research projects.
Then, too, granting arguendo that IPC made profits from the sponsored research projects, the fact still
remains that there is no proof that part of such earnings or profits was ever distributed as dividends to
any stockholder, as in fact none was so distributed because they accrued to the benefit of the private
respondent which is a non-profit educational institution."14
Therefore, it is clear that the funds received by Ateneo's Institute of Philippine Culture are not given in
the concept of a fee or price in exchange for the performance of a service or delivery of an object.
Rather, the amounts are in the nature of an endowment or donation given by IPC's benefactors solely
for the purpose of sponsoring or funding the research with no strings attached. As found by the two
courts below, such sponsorships are subject to IPC's terms and conditions. No proprietary or
commercial research is done, and IPC retains the ownership of the results of the research, including the
absolute right to publish the same. The copyrights over the results of the research are owned by Ateneo

and, consequently, no portion thereof may be reproduced without its permission. 15 The amounts given
to IPC, therefore, may not be deemed, it bears stressing, as fees or gross receipts that can be subjected
to the three percent contractor's tax.
It is also well to stress that the questioned transactions of Ateneo's Institute of Philippine Culture
cannot be deemed either as a contract of sale or a contract for a piece of work. "By the contract of sale,
one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate
thing, and the other to pay therefor a price certain in money or its equivalent." 16 By its very nature, a
contract of sale requires a transfer of ownership. Thus, Article 1458 of the Civil Code "expressly makes
the obligation to transfer ownership as an essential element of the contract of sale, following modern
codes, such as the German and the Swiss. Even in the absence of this express requirement, however,
most writers, including Sanchez Roman, Gayoso, Valverde, Ruggiero, Colin and Capitant, have
considered such transfer of ownership as the primary purpose of sale. Perez and Alguer follow the same
view, stating that the delivery of the thing does not mean a mere physical transfer, but is a means of
transmitting ownership. Transfer of title or an agreement to transfer it for a price paid or promised to be
paid is the essence of sale." 17 In the case of a contract for a piece of work, "the contractor binds
himself to execute a piece of work for the employer, in consideration of a certain price or
compensation. . . . If the contractor agrees to produce the work from materials furnished by him, he
shall deliver the thing produced to the employer and transfer dominion over the thing. . . ." 18
Ineludably, whether the contract be one of sale or one for a piece of work, a transfer of ownership is
involved and a party necessarily walks away with an object. 19 In the case at bench, it is clear from the
evidence on record that there was no sale either of objects or services because, as adverted to earlier,
there was no transfer of ownership over the research data obtained or the results of research projects
undertaken by the Institute of Philippine Culture.
Furthermore, it is clear that the research activity of the Institute of Philippine Culture is done in
pursuance of maintaining Ateneo's university status and not in the course of an independent business of
selling such research with profit in mind. This is clear from a reading of the regulations governing
universities:
'31.
In addition to the legal requisites an institution must meet, among others, the following
requirements before an application for university status shall be considered: cda
xxx
xxx
xxx
(e)
The institution must undertake research and operate with a competent qualified staff at least
three graduate departments in accordance with the rules and standards for graduate education. One of
the departments shall be science and technology. The competence of the staff shall be judged by their
effective teaching, scholarly publications and research activities published in its school journal as well
as their leadership activities in the profession.
(f)
The institution must show evidence of adequate and stable financial resources and support, a
reasonable portion of which should be devoted to institutional development and research. (emphasis
supplied)
xxx
xxx
xxx'
'32.
University status may be withdrawn, after due notice and hearing, for failure to maintain
satisfactorily the standards and requirements therefor." 20
Petitioner's contention that it is the Institute of Philippine Culture that is being taxed and not the Ateneo
is patently erroneous because the former is not an independent juridical entity that is separate and
distinct from the latter.
Factual Findings and Conclusions of the Court of Tax Appeals
Affirmed by the Court of Appeals Generally Conclusive
In addition, we reiterate that the "Court of Tax Appeals is a highly specialized body specifically created
for the purpose of reviewing tax cases. Through its expertise, it is undeniably competent to determine
the issue of whether" 21 Ateneo de Manila University may be deemed a subject of the three percent

contractor's tax "through the evidence presented before it." Consequently, "as a matter of principle, this
Court will not set aside the conclusion reached by . . . the Court of Tax Appeals which is, by the very
nature of its function, dedicated exclusively to the study and consideration of tax problems and has
necessarily developed an expertise on the subject unless there has been an abuse or improvident
exercise of authority . . ." 22 This point becomes more evident in the case before us where the findings
and conclusions of both the Court of Tax Appeals and the Court of Appeals appear untainted by any
abuse of authority, much less grave abuse of discretion. Thus, we find the decision of the latter
affirming that of the former free from any palpable error.
Public Service, Not Profit, is the Motive
The records show that the Institute of Philippine Culture conducted its research activities at a huge
deficit of P1,624,014.00 as shown in its statements of fund and disbursements for the period 1972 to
1985. 23 In fact, it was Ateneo de Manila University itself that had funded the research projects of the
institute, and it was only when Ateneo could no longer produce the needed funds that the institute
sought funding from outside. The testimony of Ateneo's Director for Accounting Services, Ms. Leonor
Wijangco, provides significant insight on the academic and nonprofit nature of the institute's research
activities done in furtherance of the university's purposes, as follows:
"Q
Now it was testified to earlier by Miss Thelma Padero (Office Manager of the Institute of
Philippine Culture) that as far as grants from sponsored research it is possible that the grant sometimes
is less than the actual cost. Will you please tell us in this case when the actual cost is a lot less than the
grant who shoulders the additional cost?
A
The University.
Q
Now, why is this done by the University?
A
Because of our faculty development program as a university, because a university has to have its
own research institute." 24
So, why is it that Ateneo continues to operate and conduct researches through its Institute of Philippine
Culture when it undisputedly loses not an insignificant amount in the process? The plain and simple
answer is that private respondent is not a contractor selling its services for a fee but an academic
institution conducting these researches pursuant to its commitments to education and, ultimately, to
public service. For the institute to have tenaciously continued operating for so long despite its
accumulation of significant losses, we can only agree with both the Court of Tax Appeals and the Court
of Appeals that "education and not profit is [IPC's] motive for undertaking the research projects." 25
WHEREFORE, premises considered, the petition is DENIED and the assailed Decision of the Court of
Appeals is hereby AFFIRMED in full. cdasia
SO ORDERED.
Narvasa, C .J ., Davide, Jr., Melo and Francisco, JJ ., concur.
Footnotes
1.
Rollo, pp. 37-42.
2.
Penned by J. Cancio C. Garcia and concurred in by JJ. Pedro A. Ramirez, Chairman, and Hector
L. Hofilea.
3.
In CTA Case No. 4280, penned by Associate Judge Ramon O. de Veyra and concurred in by
Presiding Judge Ernesto D. Acosta and Associate Judge Manuel K. Gruba; rollo, pp. 43-55.
4.
CA Decision, pp. 1-4; Rollo, pp. 37-40.
5.
Petition, p. 8; Rollo, p. 13.
6.
Petitioner's Reply, pp. 1-2; Rollo, pp. 79-80.
7.
Petition, pp. 11-12; Rollo, pp. 16-17.
8.
Marinduque Iron Mines Agents, Inc. vs. Municipal Council of the Municipality of Hinabangan,
Samar, 11 SCRA 416, 420, June 30, 1964, citing 82 C.J.S. 956, 30 Am. Jur. 153, and McQuillin on
Municipal Corp., Vol. 16, p. 267. See also Benjamin B. Aban, Law of Basic Taxation in the Philippines,
p. 93, First Edition, (1994).

9.
Commissioner of Internal Revenue vs. Fireman's Fund Ins. Co., 148 SCRA 315, 324, March 9,
1987; citing Manila Railroad Co. vs. Collector of Customs, 52 Phil. 950, (1929).
10.
Rollo, pp. 49-50.
11.
Petition, pp. 20-22; Rollo, pp. 25-27.
12.
Comment, p. 10; Rollo, p. 71.
13.
Rollo, p. 54.
14.
Ibid., p. 41.
15.
Comment, pp. 6-7; Rollo, pp. 67-68.
16.
Paragraph 1, Article 1458, Civil Code of the Philippines.
17.
Tolentino, Arturo M., Commentaries and Jurisprudence on the Civil Code of the Philippines,
Volume V, pp. 1-2, (1992); citing 3 Castan 12-13, Kerr & Co. vs. Lingad, 38 SCRA 524, April 30,
1971, and Schmid & Oberly vs. RJL Martinez Fishing Corp., 166 SCRA 493, October 18, 1988.
18.
Articles 1713 and 1714 of the Civil Code of the Philippines.
19.
Villanueva, Cesar L., Philippine Law on Sales, pp. 7-9. (1995); citing Celestino Co vs. Collector
of Internal Revenue, 99 Phil. 841 (1956).
20.
The Manual for Private Schools (adopted pursuant to the provisions of Act No. 2706, as
amended by Act No. 3075 and Commonwealth Act No. 180), cited in private respondent's comment,
pp. 4-5; Rollo, pp. 65-66.
21.
Philippine Refining Company vs. Court of Appeals, Court of Tax Appeals and Commissioner of
Internal Revenue, 256 SCRA 667, 675-676, May 8, 1996; citing Commissioner of Internal Revenue vs.
Wander Philippines, Inc., et al., 160 SCRA 573, April 15, 1988.
22.
Commissioner of Internal Revenue vs. Wander Philippines, Inc., et al., supra; citing Reyes vs.
Commissioner of Internal Revenue, 24 SCRA 198, July 29, 1968.
23.
Comment, p. 7; Rollo, p. 68.
24.
Ibid., p. 8; citing TSN, pp. 12-13, August 25, 1989.
25.
Court of Tax Appeals Decision, p. 10, and Court of Appeals Decision, p. 5 (quoted above);
Rollo, pp. 52 and 41.

THIRD DIVISION
[G.R. No. 116820. March 23, 1995.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ATLAS CONSOLIDATED MINING
AND DEVELOPMENT CORPORATION, COURT OF TAX APPEALS, and COURT OF APPEALS,
respondents.
The Solicitor General for petitioner.
Siguion Reyna Montecillo & Ongsiako for private respondent.
SYLLABUS
1.
TAXATION; AD VALOREM TAX FOR MINING PRIVILEGES; UNIT DEDUCTION;
ELABORATED IN CASE AT BAR. Whether Atlas is liable for deficiency ad valorem tax for 1977
lies in the clarification of the concept of the "unit deduction" and its role and utility in the mining
industry. We begin with a description of the process of producing copper. We are aware that the precise
process employed by Atlas may, in some degree, be different from the procedures generally outlined
below. Nonetheless, for purposes of clarifying the function or utility of the "unit deduction," we
consider a generalized description of the copper-making process useful. The extraction of copper from
ore is commonly carried out in three (3) major phases: mineral processing, smelting or leaching, and
refining. The first step, mineral processing, involves the separation of copper minerals from the raw ore
and the removal of waste constituents, initially through milling and then through a wet chemical
(flotation) process, resulting in the concentration of the copper and other nonferrous minerals into a
product containing approximately twenty to thirty percent (20-30%) copper. The second step, smelting
or leaching, involves the further removal of impurities, giving rise to a mineral product with
approximately forty-five to seventy (45-70%) percent copper. The final step, refining, entails the
removal of most of the remaining traces of impurities resulting in a refined copper metal product that is
close to (but not quite) a hundred percent (100%) pure. Common to all these stages of production of
high grade copper is the extraction and removal of impurities by machinery or facilities using
mechanical and chemical processes. In mineral processing, a machine is used to crush ore in order to
separate copper minerals and gangue, while large vats with chemical reagents are used to produce
flotation concentrates from the finely ground material. In the smelting of copper, either a furnace or a
converter is used. Finally, in the refining of the copper, facilities utilizing electrolytic processes are
used. Machines, however, are not one hundred percent (100%) efficient. The inability of a machine to
attain 100% efficiency may be largely due to friction. Thus, in computing the efficiency with which a
mechanical system performs, it is commonly recognized that, because of friction, the resulting ratio is
always less than one, i.e., always less than one hundred percent (100%). Similarly, equipment or
facilities employing electrical or chemical processes are not one hundred percent (100%) efficient due
to operating constraints or limitations. Coming to the instant case, the point that bears stressing is the
fact that the processes Atlas employs in crushing and treating copper-bearing raw ore and producing
copper concentrates, inherently involve the use of machinery and equipment. Like all other machines
and equipment, the milling and concentrating facilities of Atlas are not one hundred percent (100%)
efficient. The inability of the facilities of Atlas and those of the purchaser-smelter or refinery to
perform at 100% efficiency translates into quantitative as well as qualitative losses. Qualitatively, the
copper metal produced is not one hundred percent (100%) pure copper: Despite having undergone
extensive concentrating and refining measures aimed at removing impurities the copper metal produced
will never be absolutely pure or completely free of chemical impurities. Quantitatively, the amount of
copper metal, in terms of the weight or tonnage, actually derivable from copper concentrates of a given
chemical assay is never the same as, but is instead always smaller than, the quantity of copper
theoretically, i.e., chemically present in the concentrates sold by Atlas to the buyer. The output, i.e., the
amount of refined copper metal eventually produced is not equivalent to and will always be less than
the input, i.e., the amount of copper in the concentrates sold, which amount is in turn less than the
amount of copper minerals associated with the raw ore severed from the earth and subjected to lengthy

processing and refining. The reality of unavoidable losses occurring ill the processing and refining of
copper gave rise to the mechanism called "unit deduction." The "unit deduction" is the device utilized
by the mining industry, both here and abroad, including Atlas and its buyer(s) to recognize and offset
the inevitable quantitative losses that take place in the processing and refining of copper. The "unit
deduction," deducted from the final assay represents the diminution, in terms of percentage, in the
quantity of copper minerals, theoretically, chemically or "naturally" present in the raw ore extracted by
the time such ore is processed and ultimately refined into high-grade copper metal. This was the gist of
the testimonies of Messrs. Teodorico Parco and Deogracias Madrid, witnesses for Atlas on which both
the Court of Tax Appeals and Court of Appeals relied in reaching the following characterization: "x x x.
It is simply a deduction intended to cover unavoidable losses when the copper concentrate is physically
processed because no smelter or refining company can recover 100% intake of the metal, a portion of
which is lost or stays with the waste To be truly reflective of the quantity to be purchased by the buyer,
the said unavoidable losses resulting therefrom are taken out of the amount of the copper concentrate."
2.
ID.; ID.; ID.; ACTUAL MARKET VALUE OF GROSS OUTPUT OF MINERALS (COPPER
CONCENTRATE), DETERMINED IN CASE AT BAR. The Commissioner of Internal Revenue
attempts to distinguish between the "actual market value of the quantity as removed" from the "actual
market value of the quantity as sold." This argument has a certain logical attractiveness to it; but that
attractiveness may be seen to be more apparent than real upon close examination. The precise reference
of the Commissioner in distinguishing "actual market value of the quantity as removed" from the
"actual market value of the quantity as sold," is ambiguous. His intended reference could be to (a) the
raw ore which is "removed" or severed from the matrix of the earth, or to (b) the copper concentrates
which, upon production, are removed from Atlas' premises and shipped to its buyer(s) abroad. If the
reference of the Commissioner is to the raw ore, we are bound to note that such raw ore is not at all
marketable at this stage, especially if Atlas' ore is of the widely disseminated type. Such raw ore simply
has no market value and is in fact not sold by Atlas. If the reference, upon the other hand, of the
Commissioner is to the copper concentrates which are produced and sold by Atlas, then we are also
bound to note that there is no market quotation anywhere in the world of prices for copper concentrates,
qua concentrates. This being so, the actual market value of copper concentrates must be measured in
terms of the actual market value of the refined metal content of such concentrates less the expenses of,
e.g., smelting and refining the copper concentrates. It is the price of refined copper that is quoted in the
metals market of the world, e.g., the London Metal Exchange and the New York Commodities
Exchange. Succinctly put, the market value of the "minerals or mineral products or bullion" existing in
the form of copper concentrates at the time of removal from Atlas' premises is measured by the market
value of the refined metals that would emerge at the completion of the final process of refining. It
follows, therefore, that the Commissioner's attempted distinction between the actual market value of
the quantity of copper concentrates as removed from Atlas' premises from the actual market value of
the quantity of copper concentrates as sold by Atlas, is unreal and meaningless. In the very recent case
of Commissioner of Internal Revenue v. Court of Appeals et al., (G.R. No. 104151, and G.R. No.
105563, 10 March 1995) this Court had before it the related contention of the Commissioner that the
actual market value of the mineral products sold by Atlas should be the gross sales realized from
copper concentrates without deducting therefrom mining, milling, refining, transporting, handling,
marketing, or any other expenses. In rejecting this contention, the Court restated the general principle
involved in the following terms: "Therefore, the imposable ad valorem tax should be based on the
selling price of the quarried minerals, which is its actual market value, and not on the price of the
manufactured product. If the market value chosen for the reckoning is the value of the manufactured or
finished product, as in the case at bar, then all expenses of processing or manufacturing should be
deducted in order to approximate as closely as is humanly possible the actual market value of the raw
mineral at the mine site." The Court quoted with approval (and we do so again here) from the decision
of the CTA in an earlier (23 January 1981) case also entitled "Atlas Consolidated Mining and

Development Corporation v. Commissioner of Internal Revenue" (CTA Case No. 2842): "In resume: 1.
The mineral or mineral product of petitioner the extraction or severance from the soil of which the ad
valorem tax is directed is copper concentrate. 2. The ad valorem tax is computed on the basis of the
actual market value of the copper concentrate in its condition at the time of removal from the earth
[should be: shipment from Atlas' premises] and before it is substantially changed by chemical or
manufacturing process without any deduction from mining, milling, refining, transporting, handling,
marketing, or any other expenses. However, since the copper concentrate is sold abroad by petitioner
under C.I.F. terms, the actual cost of ocean freight and insurance is deductible. 3. There being no
market price quotation of copper concentrate locally or in the commodity exchanges or markets of the
world, the London Metal Exchange price quotation of copper wire bar, which is used by petitioner and
Mitsubishi Metal Corporation as reference to determine the selling price of copper concentrate, may
likewise be employed in this case as reference point in ascertaining the actual market value of copper
concentrate for ad valorem tax purposes. By deducting from the London Metal Exchange price
quotation of copper wire bar all charges and costs incurred after the copper concentrate has been
shipped from Toledo City to the time the same has been manufactured into wire bar namely, smelting,
electrolytic refining and fabricating, the remainder represents to a reasonable degree the actual market
value of the copper concentrate in its condition at the time of extraction or removal from its bed [should
be: shipment from Atlas premises] in Toledo City for the purposes of the ad valorem tax." Returning to
the "unit deduction," the Court notes that the utilization of the "unit deduction" has been customary
practice in the copper industry and is a standard feature of copper concentrates sales contracts. Thus,
when the "unit deduction" as deducted from gross output, the market value of the remaining quantity is
in fact the "actual market value of the gross output." Put a little differently, the amount of metal
embraced by the "unit deduction" is physically lost in the process of producing refined copper metal.
That amount of metal is accordingly not in fact received eventually by the purchaser in a copper
concentrates sales contract. This being so as a matter of physics, chemistry and metallurgy, the amount
of metal embraced in or represented by the "unit deduction" has in fact no market value. From the
foregoing, we consider it clear that the "unit deduction" is a component element in the determination of
the quantity of copper ("minerals or mineral products or bullion") which is taxable. The buyer (smelter)
attaches no value to the metal equivalent of the "unit deduction" since he will never receive that metal
equivalent. Upon the other hand, the seller (Atlas) does not expect to be remunerated for the metal
equivalent of the "unit deduction"; he neither sells it nor retains it. The copper industry simply does not
attribute market value to the refined metal equivalent of the "unit deduction." That metal equivalent has
effectively no more than a notional existence. It appears to the Court at once unfair and unreal to
impose an ad valorem tax on the privilege of extracting and producing a notional article. We conclude,
therefore that the Court of Appeals did not err when it ruled: "x x x. Accordingly, the quantity of the
copper concentrates minus this unit deduction is now the actual market value of the gross output from
where the ad valorem tax should be based. We should perhaps add the caveat that the "unit deduction"
must be a realistic one, that is, it must, in reasonably faithful terms, reflect the limitations of the
physical, chemical and metallurgical processes actually employed in the copper mining industry. In
particular, the "unit deduction" cannot, by mere contractual stipulation, exceed what is, in general and
bonafide engineering and industrial practice, recognize as the amount of copper metal lost in the course
of production such copper metal. It would also follow that should the average efficiency of current
production processes used in concentrating, smelting and refining metals significantly improve in the
future, it may be expected that the "unit deduction," in percentage terms would correspondingly be
reduced, efficiency being inversely proportional to the amount of the "unit deduction." The metal
content used as the basis for computing the tax due would thereupon increase.
DECISION
FELICIANO, J p:
In this Petition for Review, the Commissioner of Internal Revenue asks us to reverse and set aside the

decision of the Court of Appeals in CA-G.R. SP No. 31187 dated 12 August 1994 and to order the Atlas
Consolidated Mining and Development Corporation ("Atlas") to pay deficiency ad valorem tax for
1977 amounting to P1,059,063.47, including surcharge, plus interest.
On 15 April 1983, the Commissioner of Internal Revenue ("CIR") issued against Atlas assessments for
(a) deficiency ad valorem tax plus surcharge amounting to P1,059,063.47 for the year 1977 and (b)
deficiency income taxes for 1977 and 1978 in the amounts of P883,460.76 and P16,937.51
respectively.
On 27 April 1983, Atlas seasonably protested the assessments.
On 14 April 1988, the CIR denied the protests and served upon Atlas warrants of distraint and levy. The
warrants were later lifted upon the filing by Atlas of a surety bond in the amount of P3,640,831.61.
Atlas appealed the decision of the CIR before the Court of Tax Appeals ("CTA"). 1 During the course
of the proceedings in the CTA, the CIR and Atlas entered into a compromise settlement insofar as the
deficiency income taxes for 1977 and 1978 were concerned.
On 13 May 1993, the CTA rendered its decision declaring null and void the assessment against Atlas
for deficiency ad valorem tax plus surcharge for 1977. cdphil
On petition for review, the Court of Appeals dismissed the CIR's petition for lack of merit.
In asserting once more before this Court that private respondent Atlas is liable for deficiency ad
valorem tax, petitioner CIR contends:
(a)
Under section 254 of the 1977 Tax Code, the base of the royalty or ad valorem tax for the
privilege of exploring, developing, mining, extracting and disposing of minerals from mineral lands is
the actual market value of the gross output of minerals. The tax rate is one and a half percent (1-1/2%)
of the actual market value of the gross output for gold and two percent (2%) on all other minerals
including copper and silver. 2
(b)
The term "gross output" is defined in Section 257 of the 1977 Tax Code as the "actual market
value of minerals or mineral products, or of bullion from each mine or mineral lands operated as a
separate entity without any deduction [for] mining, milling, refining, transporting, handling, marketing,
or any other expenses." 3
(c)
Under section 256 of the 1977 Tax Code, the ad valorem tax is due and payable upon removal
of mineral products from the locality where mined or within twenty (20) days after the close of each
quarter during which the mineral products were removed, in which case a quarterly return of the
quantity and market value of the output of the mine removed during each calendar quarter shall be
filed. 4
(d)
The ad valorem tax is a tax not on the mineral but upon the privilege of severing or extracting
the same from the earth. The right of the government to exact the tax springs from the Regalian Theory
that to the State belongs its natural resources. 5
(e)
The basis for the assessment of a deficiency ad valorem tax against private respondent Atlas is
its understatement of the market value of the copper metals shipped by it abroad. The understatement
comes from Atlas' deduction of certain units or a percentage from the quantity of the metals determined
in the final assay. 6
(f)
According to the public respondent Court of Appeals and the CTA, the unit deduction is not part
of the gross output of the copper mineral the actual market value of which is the base of the ad valorem
tax. This ruling is erroneous. The base of the ad valorem tax is the actual market value of the gross
output of minerals. Gross output refers to production, that is, the quantity of the minerals as removed
from the mineral land. Gross output does not refer to sale, that is, the quantity of the minerals as sold. It
is the actual market value of the quantity as removed which serves as the base of the ad valorem tax. It
is not the actual market value of the quantity as sold. Public respondents, in excluding the unit
deduction from the gross output, erroneously based the ad valorem tax on the actual market, value of
the minerals as sold. 7
(g)
The unit deduction is in fact a refining expense prohibited by section 257 of the 1977 Tax Code

to be deducted. 8
(h)
While it is true that the unit deduction is intended to cover the unavoidable losses in the
processing of copper concentrates, still the deduction is considered in determining the price of copper
concentrates. 9
(i)
Public respondent Court of Appeals erroneously relied on Batas Pambansa Blg. 84 which
amended section 257 of the 1977 Tax Code insofar as it allows the deduction of smelting, refining and
other charges incurred in the process of converting mineral concentrates into refined metal. Batas
Pambansa Blg. 84 was approved on 19 September 1980 and is therefore not applicable to an
assessment made in 1977. 10 (Emphasis supplied).
In traversing the assessment for deficiency ad valorem tax for 1977, Atlas avers that:
(a)
Section 257 of the Tax Code of 1977, which prohibits the deduction of expenses to be incurred
in mining, milling, refining as well as transporting, marketing, etc. of copper concentrates, is not
applicable in the case at bar since there is actually no expense item that is deducted from the price or
value of the copper concentrates produced and sold by Atlas. 11
(b)
The "unit deduction" deducted in the final assay represents the portion of copper concentrates
that is unavoidably lost in the processing thereof . In effect, the quantity or amount of copper
concentrates less the "unit deduction" is the amount that is actually purchased by the buyer from Atlas.
12
(c)
The "unit deduction" has nothing to do with the price of copper concentrates. Rather, it pertains
to the quantity of the copper concentrates. It merely recognizes the reduction of the copper contents
subject of the sale. 13
(d)
Assuming arguendo that the "unit deduction" is an expense, it would still be deductible. Section
257 provides an exception, i.e., expenses which may be deducted. The "unit deduction" falls under
these exceptions. 14
(e)
The "unit deduction" is used as a matter of industry practice. It is a factor considered by the
industry in determining the actual market value of copper concentrates. 15
(f)
Petitioner merely cannot use as a basis the price agreed upon for the sale of copper concentrates
without factoring in the "unit deduction" since the latter is an integral aspect of the sale in the same
manner that the price of the copper is. 16 (Emphasis supplied).
The resolution of whether Atlas is liable for deficiency ad valorem tax for 1977, to the mind of the
Court, lies in the clarification of the concept of the "unit deduction" and its role and utility in the
mining industry.
We begin with a description of the process of producing copper. We are aware that the precise process
employed by Atlas may, in some degree, be different from the procedures generally outlined below.
Nonetheless, for purposes of clarifying the function or utility of the "unit deduction," we consider a
generalized description of the copper-making process useful. llcd
The extraction of copper from ore is commonly carried out in three (3) major phases: mineral
processing, smelting or leaching, and refining. The first step, mineral processing, involves the
separation of copper minerals from the raw ore and the removal of waste constituents, initially through
milling and then through a wet chemical (flotation) process, resulting in the concentration of the copper
and other nonferrous minerals into a product containing approximately twenty to thirty percent (2030%) copper.
"Mineral processing. In the ore-dressing plant, the material received from the mine is crushed in several
stages and finely ground to a size which ensures that copper minerals are liberated from the waste
materials or gangue. . . ." 17
The second step, smelting or leaching, involves the further removal of impurities, giving rise to a
mineral product with approximately forty-five to seventy (45-70%) percent copper.
"Roasting, smelting and converting. Once a concentrate has been produced containing copper and other
metals of value (such as gold and silver), the next step is to remove impure elements. In older

processes, the concentrate containing between 5 and 10 percent water, is first roasted in a cylindrical,
refractory-lined furnace of either the hearth or fluidized-bed type. As concentrate is fed into the roaster,
it is heated by a stream of hot air. . . . Volatile impurities such as arsenic, mercury, and some of the
sulfur are driven off, the sulfur being removed as sulfur dioxide. What remains is an oxidized product
containing a percentage of sulfur that is sufficiently low for smelting. This is traditionally done in a
reverberatory or electric-arc furnace, into which concentrate is fed along with a suitable amount of flux.
. . . These are heated by combusted fuel or electric current . . ., producing an artificial copper-iron
sulfide that settles in a molten pool at the bottom of the furnace. The sulfide material, known as matte,
contains 45 to 70 percent copper, . . . . Gangue minerals and oxidized impurities, including most of the
iron, react with the flux and form a light, fluid layer of slag over the matte. A certain percentage of the
volatile impurities, such as sulfur is oxidized and leaves with the process gas stream.
The traditional two-stage process described above has to a large extent been replaced by newer flash or
bath smelting processes. These begin with a dry concentrate containing less than 1 percent water,
which, along with flux, is contacted in a furnace by a blast of oxygen or oxygen enriched air. Iron and
sulfur are oxidized, and the heat generated by these exothermic reactions is sufficient to smelt the
concentrate to liquid. . . . New smelters are designed to capture 90 percent or more of the sulfur
contained in the feed materials.
After the slag, which contains a large percentage of the impurity elements, is removed from the matte,
the remaining iron and sulfur are removed in the conversion process. . . . After being charged with
matte, flux, and copper scrap (to control temperature), the converter is rotated in order to immerse
tuyeres in the molten bath. Air or oxygen-enriched air is then blown through the tuyeres into the fluid.
Iron and sulfur are converted to oxides and are removed in either the gas stream or the flux . . . leaving
a "blister" copper containing between 98.5 and 99.5 percent copper and up to 0.8 percent oxygen. The
converter is rotated for skimming the slag and pouring the blister copper." 18
The final step, refining, entails the removal of most of the remaining traces of impurities resulting in a
refined copper metal product that is close to (but not quite) a hundred percent (100%) pure.
"The final step consists of fire refining the blister copper to reduce the sulfur and oxygen to even lower
levels. This oxidation-reduction process is usually carried out in a separate furnace to ensure that the
final smelter product reaches the level of 99.5 percent copper that is required for electrolytic refining.
At this point, the copper is cast into anodes, the shape and weight of which are dictated by the
particular electrolytic refinery." 19
Common to all these stages of production of high grade copper is the extraction and removal of
impurities by machinery or facilities using mechanical and chemical processes. In mineral processing, a
machine is used to crush ore in order to separate copper minerals and gangue, 20 while large vats with
chemical reagents are used to produce flotation concentrates from the finely ground material. In the
smelting of copper, either a furnace or a converter is used. Finally, in the refining of the copper,
facilities utilizing electrolytic processes are used. cdll
Machines, however, are not one hundred percent (100%) efficient. The inability of a machine to attain
100% efficiency may be largely due to friction. 21 Thus, in computing the efficiency with which a
mechanical system performs, it is commonly recognized that, because of friction, the resulting ratio is
always less than one, i.e., always less than one hundred percent (100%). 22 Similarly, equipment or
facilities employing electrical or chemical processes are not one hundred percent (100%) efficient due
to operating constraints or limitations.
Coming to the instant case, the point that bears stressing is the fact that the processes Atlas employs in
crushing and treating copper-bearing raw ore and producing copper concentrates, inherently involve the
use of machinery and equipment. Like all other machines and equipment, the milling and concentrating
facilities of Atlas are not one hundred percent (100%) efficient.
The inability of the facilities of Atlas and those of the purchaser-smelter or refinery to perform at 100%
efficiency translates into quantitative as well as qualitative losses. Qualitatively, the copper metal

produced is not one hundred percent (100%) pure copper. Despite having undergone extensive
concentrating and refining measures aimed at removing impurities, the copper metal produced will
never be absolutely pure or completely free of chemical impurities. 23 Quantitatively, the amount of
copper metal, in terms of weight or tonnage, actually derivable from copper concentrates of a given
chemical assay is never the same as, but is instead always smaller than, the quantity of copper
theoretically, i.e., chemically present in the concentrates sold by Atlas to the buyer. The output, i.e., the
amount of refined copper metal eventually produced is not equivalent to and will always be less than
the input, i.e., the amount of copper in the concentrates sold, which amount is in turn less than the
amount of copper minerals associated with the raw ore severed from the earth and subjected to lengthy
processing and refining.
The reality of unavoidable losses occurring in the processing and refining of copper gave rise to the
mechanism called "unit deduction." The "unit deduction" is the device utilized by the mining industry,
both here and abroad, including Atlas and its buyer(s) to recognize and offset the inevitable quantitative
losses that take place in the processing and refining of copper. The "unit deduction," deducted from the
final assay 24 represents the diminution, in terms of percentage, in the quantity of copper minerals,
theoretically, chemically or "naturally" present in the raw ore extracted by the time such ore is
processed and ultimately refined into high-grade copper metal. This was the gist of the testimonies of
Messrs. Teodorico Parco and Deogracias Madrid, witnesses for Atlas on which both the Court of Tax
Appeals and Court of Appeals relied in reaching the following characterization:
". . . . It is simply a deduction intended to cover unavoidable losses when the copper concentrate is
physically processed because no smelter or refining company can recover 100% intake of the metal, a
portion of which is lost or stays with the waste. To be truly reflective of the quantity to be purchased by
the buyer, the said unavoidable losses resulting therefrom are taken out of the amount of the copper
concentrate." 25
The Commissioner of Internal Revenue seeks to avoid the force of the above considerations by
attempting to distinguish between the "actual market value of the quantity as removed" from the "actual
market value of the quantity as sold." This argument has a certain logical attractiveness to it; but that
attractiveness may be seen to be more apparent than real upon close examination.
The precise reference of the Commissioner in distinguishing "actual market value of the quantity as
removed" from the "actual market value of the quantity as sold," is ambiguous. His intended reference
could be to (a) the raw ore which is "removed" or severed from the matrix of the earth, or to (b) the
copper concentrates which, upon production, are removed from Atlas' premises and shipped to its
buyer(s) abroad.
If the reference of the Commissioner is to the raw ore, we are bound to note that such raw ore is not at
all marketable at this stage, especially if Atlas' ore is of the widely disseminated type. Such raw ore
simply has no market value and is in fact not sold by Atlas. If the reference, upon the other hand, of the
Commissioner is to the copper concentrates which are produced and sold by Atlas, then we are also
bound to note that there is no market quotation anywhere in the world of prices for copper concentrates,
qua concentrates. This being so, the actual market value of copper concentrates must be measured in
terms of the actual market value of the refined metal content of such concentrates less the expenses of,
e.g., smelting and refining the copper concentrates. It is the price of refined copper that is quoted in the
metals markets of the world, e.g., the London Metal Exchange and the New York Commodities
Exchange. Succinctly put, the market value of the "minerals or mineral products or bullion" existing in
the form of copper concentrates at the time of removal from Atlas' premises is measured by the market
value of the refined metals that would emerge at the completion of the final process of refining. It
follows, therefore, that the Commissioner's attempted distinction between the actual market value of
the quantity of copper concentrates as removed from Atlas' premises from the actual market value of
the quantity of copper concentrates as sold by Atlas, is unreal and meaningless. cdrep
In the very recent case of Commissioner of Internal Revenue v. Court of Appeals, et al., 26 this court

had before it the related contention of the commissioner that the actual market value of the mineral
products sold by Atlas should be the gross sales realized from copper concentrates without deducting
therefrom mining, milling, refining, transporting, handling, marketing, or any other expenses. In
rejecting this contention, the Court restated the general principle involved in the following terms:
"Therefore, the imposable ad valorem tax should be based on the selling price of the quarried minerals,
which is its actual market value, and not on the price of the manufactured product. If the market value
chosen for the reckoning is the value of the manufactured or finished product, as in the case at bar, then
all expenses of processing or manufacturing should be deducted in order to approximate as closely as is
humanly possible the actual market value of the raw mineral at the mine site." 27 (Emphasis supplied)
The Court quoted with approval (and we do so) here again from the decision of the CTA in an earlier
(23 January 1981) case also entitled "Atlas Consolidated Mining and Development Corporation v.
Commissioner of Internal Revenue" (CTA Case No. 2842):
"In resume:
1.
The mineral or mineral product of petitioner the extraction or severance from the soil of which
the ad valorem tax is directed is copper concentrate.
2.
The ad valorem tax is computed on the basis of the actual market value of the copper
concentrate in its condition at the time of removal from the earth [should be: shipment from Atlas'
premises] and before it is substantially changed by chemical or manufacturing process without any
deduction from mining, milling, refining, transporting, handling, marketing, or any other expenses.
However, since the copper concentrate is sold abroad by petitioner under C.I.F. terms, the actual cost of
ocean freight and insurance is deductible.
3.
There being no market price quotation of copper concentrate locally or in the commodity
exchanges or markets of the world, the London Metal Exchange price quotation of copper wire bar,
which is used by petitioner and Mitsubishi Metal Corporation as reference to determine the selling
price of copper concentrate, may likewise be employed in this case as reference point in ascertaining
the actual market value of copper concentrate for ad valorem tax purposes. By deducting from the
London Metal Exchange price quotation of copper wire bar all charges and costs incurred after the
copper concentrate has been shipped from Toledo City to the time the same has been manufactured into
wire bar, namely, smelting, electrolytic refining and fabricating, the remainder represents to a
reasonable degree the actual market value of the copper concentrate in its condition at the time of
extraction or removal from its bed [should be: shipment from Atlas' premises] in Toledo City for the
purposes of the ad valorem tax." 28 (Emphasis and brackets supplied)
Returning to the "unit deduction," the Court notes that the utilization of the "unit deduction" has been
customary practice in the copper industry and is a standard feature of copper concentrates sales
contracts. Thus, when the "unit deduction" is deducted from gross output, the market value of the
remaining quantity is in fact the "actual market value of the gross output." Put a little differently, the
amount of metal embraced by the "unit deduction" is physically lost in the process of producing refined
copper metal. That amount of metal is accordingly not in fact received eventually by the purchaser in a
copper concentrates sales contract. This being so as a matter of physics, chemistry and metallurgy, the
amount of metal embraced in or represented by the "unit deduction" has in fact no market value.
LibLex
From the foregoing, we consider it clear that the "unit deduction" is a component element in the
determination of the quantity of copper ("minerals or mineral products or bullion") which is taxable.
The buyer (smelter) attaches no value to the metal equivalent of the "unit deduction" since he will
never receive that metal equivalent. Upon the other hand, the seller (Atlas) does not expect to be
remunerated for the metal equivalent of the "unit deduction;" he neither sells it nor retains it. The
copper industry simply does not attribute market value to the refined metal equivalent of the "unit
deduction." That metal equivalent has effectively no more than a notional existence. It appears to the
Court at once unfair and unreal to impose an ad valorem tax on the privilege of extracting and

producing a notional article. We conclude, therefore, that the Court of Appeals did not err when it
ruled:
". . . . Accordingly, the quantity of the copper concentrates minus this unit deduction is now the actual
market value of the gross output from where the ad valorem tax should be based." 29
We should perhaps add the caveat that the "unit deduction" must be a realistic one, that is, it must, in
reasonably faithful terms, reflect the limitations of the physical, chemical and metallurgical processes
actually employed in the copper mining industry. In particular, the "unit deduction" cannot, by mere
contractual stipulation, exceed what is, in general and bona fide engineering and industrial practice,
recognized as the amount of copper metal lost in the course of producing such copper metal. It would
also follow that should the average efficiency of current production processes used in concentrating,
smelting and refining metals significantly improve in the future, it may be expected that the "unit
deduction," in percentage terms would correspondingly be reduced, efficiency being inversely
proportional to the amount of the "unit deduction." The metal content used as the basis for computing
the tax due would thereupon increase.
WHEREFORE, the Petition for Review is hereby DENIED. The Decision of the Court of Appeals in
C.A.-G.R. SP No. 31187 dated 12 August 1994 is hereby AFFIRMED. No pronouncement as to costs.
SO ORDERED.
Romero, Melo, Vitug and Francisco, JJ ., concur.
Footnotes
1.
Court of Tax Appeals Case No. 4264.
2.
Petition, Rollo, pp. 16-17; Section 254 of the Tax Code reads:
Sec. 254.
Rentals and royalties on mineral lands under lease. For the privilege of
exploring, developing, mining, extracting, and disposing of the minerals from the lands covered by
lease, there is hereby imposed upon the lessee rentals and royalties as follows:
xxx
xxx
xxx
(b)
Royalties
xxx
xxx
xxx
(2)
On gold, a royalty of one and one-half per centum of the actual market value of
the annual gross output thereof .
(3)
On all other minerals, extracted from, or mineral products of, mineral lands of
the first, second, fourth and fifth groups as provided in the Mining Act, a royalty of two per centum of
the actual market value of the gross output thereof .
xxx
xxx
xxx
(Emphasis supplied)
3.
Petition, Rollo, p. 17.
4.
Petition, Rollo, p. 17.
5.
Petition, Rollo, p. 19.
6.
Id.
7.
Petition, Rollo, pp. 21-23.
8.
Id., p. 24.
9.
Id., p. 25.
10.
Id., pp. 29-30.
11.
Comment, Rollo, pp. 65-66.
12.
Id., p. 66.
13.
Id.
14.
Id., p. 67.
15.
Id., p. 71.
16.
Id., p. 73.
17.
Encyclopaedia Britannica (Macropaedia), Industries, Extraction and Processing, p. 451 [1992].

18.
Id., pp. 451-452; The processes of smelting and leaching are separate and distinct purification
processes. See Encyclopaedia Britannica (Macropaedia), Industries, Extraction and Processing, supra.
19.
Encyclopaedia Britannica (Macropaedia), Industries, Extraction and Processing, p. 452 [1992].
20.
Associated with ore minerals in an ore deposit are worthless materials called gangue. Gangue
consists of rock and unwanted minerals which is mined with the ore minerals, subsequently separated
in the milling process and discarded as dumps of waste. (Encyclopaedia Britannica [Macropaedia],
Industries, Extraction and Processing, p. 386 [1992]).
21.
Encyclopaedia Britannica (Macropaedia), Machines, p. 630 (1992):
"In the science of mechanics, 'work' is something that forces do when they move in the
direction in which they are acting, and it is equal to the product of the average force and the distance
moved. . . . . Mathematically, if F equals the force (in pounds or kilograms) and S equals distance (in
feet or meters), work is then equal to the applied force F multiplied by the distance this force moves S;
or WORK = F x S.
When a force causes a body to rotate about a fixed axis, or pivot, the work done is
obtained by multiplying the torque (T) by the angle of rotation.
Calculating efficiency. These concepts of work are fundamental in defining the
mechanical work function of machines in terms of force and motions, and they bring out the
inseparability of forces and motions in machines. Because of friction, the work output from a machine
is always less than the work input, and the efficiency, which is the ratio of the two), is always less than
100 percent. (Emphasis supplied).
22.
Id., Mechanical Efficiency, p. 994 [1992].
23.
In the preparation and purification of compounds as well as determining the level of impurity of
the compound, "[i]t is probably fair to say that no ordinary compound is ever entirely free of foreign
molecules as impurities. The degree of purity of any particular substance depends on the effort that is
made to remove the last traces of impurities, and the effort expended generally depends on the use to be
made of the compound. . . . Once a compound is obtained as homomolecular (that is, in a form in
which all the molecules present are identical) as is reasonably possible it may be analyzed
quantitatively for each element to determine the relative amount of it in the molecule. The final step in
establishing the molecular formula of the compound in question is the determination of the molecular
weight. . . ." (Emphasis supplied; Encyclopaedia Britannica [Macropaedia], Chemical Compounds, pp.
764-765 [1992])
24.
When copper concentrates are shipped and sold to smelters or buyers abroad, the ad valorem
taxes paid by the seller are based on the provisional assay of the concentrates at the prevailing price of
the metals at the London Metal Exchange or New York Comex Quotations. When the copper
concentrates reach the buyer-smelter or refinery, the provisional assay is redetermined by the assayers
of the buyer and seller in order to arrive at a "Final Assay for Settlement." Should the assayers of the
parties disagree on the "final assay for settlement," the difference is settled by a third party or the
umpire assayer. The final assay for settlement is commonly reached at the plant premises of the buyersmelter.
25.
Court of Appeals Decision, Rollo, p. 51; The testimony of Mr. Parco reads in part:
"Q.
Will you please illustrate concretely for our benefit you[r] concept of unit
deduction.
A.
Unit deduction is intended to cover unavoidable losses of metal contents in the
processing of copper concentrates.
Q.
What losses are you referring to?
A.
When I say losses, they are losses when copper concentrate is processed. A
portion of that always stays with the waste and some of them could even be losses in the cases that
evaporates therefor. As a normal thing the custom smelters always provided for unit deduction intended
to cover unavoidable losses. This is true not only in copper concentrates but also in other metals as gold

bullion which we deliver to Central Bank. They do not pay us one hundred percent."
On the other hand, the testimony of Mr. Madrid reads in part:
Q.
Where is this unit deduction used?
A.
It is usually found in copper concentrates supply contracts.
Q.
Can you explain to the court the meaning of this phrase 'unit deduction'?
A.
Unit deductions are allowances for process losses that are deducted from the
metal content of the copper concentrates taken in various smelters like us. There is a gross metal
content and then you deduct this unit deduction and you come up with what we call in the industry
'payable content' which is the basis under which mine or the supplier is paid."
26.
The full title of which is G.R. No. 104151, Commissioner of Internal Revenue v. Court of
Appeals, Atlas Consolidated Mining and Development Corporation and Court of Tax Appeals, and G.R.
No. 105563, Atlas Consolidated Mining and Development Corporation v. Court of Appeals, et al.,
promulgated 10 March 1995.
27.
G.R. Nos. 104151 & 105563, pp. 10-11.
28.
Id., pp. 14-15.
29.
Rollo, p. 51.

SECOND DIVISION
[G.R. No. 104151. March 10, 1995.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF APPEALS, ATLAS
CONSOLIDATED MINING AND DEVELOPMENT CORPORATION and COURT OF TAX
APPEALS, respondents.
[G.R. No. 105563. March 10, 1995.]
ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION, petitioner, vs.
COURT OF APPEALS, COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX
APPEALS, respondents.
The Solicitor General for petitioner.
M.L. Gadioma Law Office for Atlas.
SYLLABUS
1.
TAXATION; NATIONAL INTERNAL REVENUE CODE; AD VALOREM TAX; 2% TAX ON
ACTUAL MARKET VALUE OF ANNUAL GROSS OUTPUT OF MINERALS AND MINERAL
PRODUCTS; "GROSS OUTPUT"; CONSTRUED. Under Section 243 of the National Internal
Revenue Code, the ad valorem tax of 2% is imposed on the actual market value of the annual gross
output of the minerals or mineral products extracted or produced from all mineral lands not covered by
lease. In computing the tax, the term "gross output" shall be the actual market value of minerals or
mineral products, or of bullion from each mine or mineral lands operated as a separate entity, without
any deduction for mining, milling, refining, transporting, handling, marketing or any other expenses. If
the minerals or mineral products are sold or consigned abroad by the lessee or owner of the mine under
C.I.F. terms, the actual cost of ocean freight and insurance shall be deducted. In other words, the
assessment shall be based, not upon the cost of production or extraction of said minerals or mineral
products, but on the price which the same before or without undergoing process of manufacture
would command in the ordinary course of business.
2.
ID.; ID.; ID.; ID.; DEDUCTION FOR SMELTING AND REFINING ASSESSED ON THE
BASIS OF ACTUAL MARKET OF MANUFACTURED COPPER, NOT PROHIBITED. In the
instant case, the allowance by the tax court of smelting and refining charges as deductions is not
contrary to the above-mentioned provisions of the tax code which ostensibly prohibit any form of
deduction except freight and insurance charges. A review of the record will show that it was the
London Metal Exchange price on wire bar which was used as tax base by ACMDC for purposes of the
2% ad valorem tax on copper concentrates since there was no available market price quotation in the
commodity exchange or markets of the world for copper concentrates nor was there any market
quotation locally obtainable. Hence, the charges for smelting and refining were assessed not on the
basis of the price of the copper extracted at the mine site which is prohibited by law, but on the basis of
the actual market value of the manufactured copper which in this case is the price quoted for copper
wire bar by the London Metal Exchange.
3.
ID.; ID.; ID.; SHOULD BE BASED ON THE VALUE UPON EXTRACTION OF RAW
MATERIALS OR MINERALS USED IN THE MANUFACTURED OF SAID FINISHED
PRODUCTS. The issue of whether the ad valorem tax should be based upon the value of the
finished product, or the value upon extraction of the raw materials or minerals used in the manufacture
of said finished products, has been passed upon by us in several cases wherein we held that the ad
valorem tax is to be computed on the basis of the market value of the mineral in its condition at the
time of such removal and before it undergoes a chemical change through manufacturing process, as
distinguished from a purely physical process which does not necessarily involve the change or
transformation of the raw material into a composite distinct product. Therefore, the imposable ad
valorem tax should be based on the selling price of the quarried minerals, which is its actual market
value, and not on the price of the manufactured product. If the market value chosen for the reckoning is
the value of the manufactured or finished product, as in the case at bar, then all expenses of processing

or manufacturing should be deducted in order to approximate as closely as is humanly possible the

actual market value of the raw mineral at the mine site.
4.
ID.; ID.; ID.; ID.; COPPER WIRE BAR, A MANUFACTURED COPPER. The copper wire
bar is the manufactured copper. It is not the mineral extracted from the mine site nor can it be
considered a mineral product since it has undergone a manufacturing process, to wit: Significantly, the
finding that copper wire bar is a product of a manufacturing process finds support in the definition of a
"manufacturer" in Section 194 (x) of the aforesaid tax code. Moreover, it is also worth noting at this
point that the decision of the tax court was based on its previous ruling in the case of Atlas
Consolidated Mining and Development Corporation vs. Commissioner of Internal Revenue, dated
January 23, 1981.
5.
REMEDIAL LAW; COURTS; COURT OF TAX APPEALS; REGULAR COURT VESTED
WITH EXCLUSIVE JURISDICTION OVER CASES ARISING UNDER THE NATIONAL
INTERNAL REVENUE CODE; TARIFF AND CUSTOMS CODE AND THE ASSESSMENT LAW;
DECISIONS THEREON BIND THE COMMISSIONER OF INTERNAL REVENUE. The
Commissioner of Internal Revenue argues that the ruling in the case above stated is not binding,
considering that the incumbent Commissioner of Internal Revenue is not bound by decisions or rulings
of his predecessor when he finds that a different construction of the law should be adopted, invoking
therefor the doctrine enunciated in Hilado vs. Collector of Internal Revenue, et al. This trenches on
specious reasoning. What was involved in the Hilado case was a previous ruling of a former
Commissioner of Internal Revenue. In the case at bar, the Commissioner based his findings on a
previous decision rendered by the Court of Tax Appeals itself. The Court of Tax Appeals is not a mere
superior administrative agency or tribunal but is a part of the judicial system of the Philippines. It was
created by Congress pursuant to Republic Act No. 1125, effective June 16, 1954, as a centralized court
specializing in tax cases. It is a regular court vested with exclusive appellate jurisdiction over cases
arising under the National Internal Revenue Code, the Tariff and Customs Code, and the Assessment
Law.
6.
ID.; ID.; DECISIONS OF SUBORDINATE COURTS HAVE PERSUASIVE EFFECT AND
MAY SERVE AS JUDICIAL GUIDE. Although only the decisions of the Supreme Court establish
jurisprudence or doctrines in this jurisdiction, nonetheless the decisions of subordinate courts have a
persuasive effect and may serve as judicial guides. It is even possible that such a conclusion or
pronouncement can be raised to the status of a doctrine if, after it has been subjected to test in the
crucible of analysis and revision the Supreme Court should find that it has merits and qualities
sufficient for its consecration as a rule of jurisprudence.
7.
ID.; EVIDENCE; CONCLUSIONS OF THE COURT OF TAX APPEALS GENERALLY
UPHELD ON APPEAL. As a matter of practice and principle, the Supreme Court will not set aside
the conclusion reached by an agency such as the Court of Tax Appeals, which is, by the very nature of
its function, dedicated exclusively to the study and consideration of tax problems and has necessarily
developed an expertise on the subject, unless there has been an abuse or improvident exercise of
authority on its part.
8.
TAXATION; NATIONAL INTERNAL REVENUE CODE; AD VALOREM TAX; 25%
SURCHARGE ON LATE PAYMENT; BAD FAITH, NOT ESSENTIAL. Prefatorily, it must not be
lost sight of that bad faith is not essential for the imposition of the 25% surcharge for late payment of
the ad valorem tax. Hence, the justification given is not sufficient to relieve ACMDC of its liability to
pay the 25% surcharge for late payment. Also, the 25% surcharge prescribed in Section 245 for late
payment of royalties and ad valorem tax, when contrasted with the 50% surcharge imposed "where a
false or fraudulent return is made," strongly suggests that bad faith is not essential for the imposition of
the 25% surcharge.
9.
ID.; ID.; ID.; ID.; PAYMENT THEREOF IS MANDATORY AND CANNOT BE WAIVED BY
THE COMMISSIONER OF INTERNAL REVENUE. The law requiring the payment of the 25%

surcharge in case the ad valorem tax is not seasonably paid is mandatory. It provides a plan which
works out automatically. The Commissioner of Internal Revenue is not vested with any authority to
waive or dispense with the collection thereof.
10.
REMEDIAL LAW; ACTIONS; ESTOPPEL; A PARTY IS ESTOPPED FROM RAISING THE
ISSUE OF PAYMENT OF THE AD VALOREM TAX BY CLAIMING THAT THERE WAS NO
REMOVAL OF PYRITE FROM THE MINE SITE WHERE IT HAD PAID THE SAME FOR THE
TAX YEAR. The other allegation of ACMDC is that there was no removal of pyrite from the mine
site because the pyrite was delivered to its sister company, Atlas Fertilizer Corporation, whose plant is
located inside the mineral concession of ACMDC in Sangi, Toledo City. ACMDC, however, is already
barred by estoppel in pais from putting that matter in issue. An ad valorem tax on pyrite for the same
tax year was already declared and paid by ACMDC. In fact, that payment was used as the basis for
computing the 25% surcharge. It was only when ACMDC was assessed for the 25% surcharge that said
issue was raised by it. Also, the evidence shows that deliveries of pyrite were not exclusively made to
its sister company, Atlas Fertilizer Corporation. There were shipments of pyrite to other companies
located outside of its mine site, in addition to those delivered to its aforesaid sister company.
11.
TAXATION; NATIONAL INTERNAL REVENUE CODE; PRIVILEGE TAXES
ESSENTIALLY EXCISE TAXES. Sections 186 (Percentage tax on sales of other articles) and 191
(Contractor's tax) fall under Title V of the tax code, entitled "Privilege Taxes on Business and
Occupation." These "privilege taxes on business" are taxes imposed upon the privilege of engaging in
business. They are essentially excise taxes. To be held liable for the payment of a privilege tax, the
person or entity must be engaged in business, as shown by the fact that the drafters of the tax code had
purposely grouped said provisions under the general heading adverted to above.
12.
ID.; ID.; ID.; "TO ENGAGE" IN BUSINESS; DEFINED. "To engage" is to embark on a
business or to employ oneself therein. The word "engaged" connotes more than a single act or a single
transaction; it involves some continuity of action. "To engage in business" is uniformly construed as
signifying an employment or occupation which occupies one's time, attention, and labor for the purpose
of a livelihood or profit. The expressions "engage in business," "carrying on business" or "doing
business" do not have different meanings, but separately or connectedly convey the idea of progression,
continuity, or sustained activity. "Engaged in business" means occupied or employed in business;
"carrying on business" does not mean the performance of a single disconnected act, but means
conducting, prosecuting, and continuing business by performing progressively all the acts normally
incident thereto; while "doing business" conveys the idea of business being done, not from time to
time, but all the time.
13.
ID.; ID.; ID.; WHEN ONE ACT MAY BE SUFFICIENT TO CONSTITUTE CARRYING ON
A BUSINESS. The foregoing notwithstanding, it has likewise been ruled that one act may be
sufficient to constitute carrying on a business according to the intent with which the act is done. A
single sale of liquor by one who intends to continue selling is sufficient to render him liable for
"engaging in or carrying on" the business of a liquor dealer.
14.
ID.; ID.; ID.; ID.; THERE MAY BE A BUSINESS WITHOUT ANY SEQUENCE OF ACTS;
REQUISITE. There may be a business without any sequence of acts, for if an isolated transaction,
which if repeated would be a transaction in a business, is proved to have been undertaken with the
intent that it should be the first of several transactions, that is, with the intent of carrying on a business,
then it is a first transaction in an existing business.
15.
ID.; ID.; ID.; ID.; RESTRICTED TO ACTIVITIES OR AFFAIRS WHERE PROFIT IS A
PURPOSE OR LIVELIHOOD IN THE MOTIVE. Thus, where the end sought is to make a profit,
the act constitutes "doing business." This is not without basis. The term "business," as used in the law
imposing a license tax on business, trades and so forth, ordinarily means business in the trade or
commercial sense only, carried on with a view to profit or livelihood. It is thus restricted to activities or
affairs where profit is the purpose, or livelihood is the motive. Since the term "business" is being used

without any qualification in our aforecited tax code, it should therefore be construed in its plain and
ordinary meaning, restricted to activities for profit or livelihood.
16.
ID.; ID.; ID.; CORPORATION NOT ENGAGED IN BUSINESS OF SELLING GRINDING
STEEL BALL, NOT LIABLE TO PAYMENT OF MANUFACTURER'S TAX; CASE AT BAR. In
the case at bar, ACMDC claims exemptions from the payment of manufacturer's tax. It asserts that it is
not engaged in the business of selling grinding steel balls, but it only produces grinding steel balls
solely for its own use or consumption. However, it admits having lent its grinding steel balls to other
entities but only in very isolated cases. After a careful review of the records and on the basis of the
legal concept of "engaging in business" hereinbefore discussed, we are inclined to agree with ACMDC
that it should not and cannot be held liable for the payment of the manufacturer's tax. It cannot be
legally asserted, for purposes of this particular assessment only, that ACMDC was engaged in the
business of selling grinding steel balls on the basis of the isolated transaction entered into by it in 1975.
There is no showing that said transaction was undertaken by ACMDC with a view to gaining profit
therefrom and with the intent of carrying on a business therein. On the contrary, what is clear to us is
that the sale was more of an accommodation to the other mining companies, and that ACMDC was
subsequently replaced by other suppliers shortly thereafter. At most, whatever profit ACMDC may
have realized from that single transaction was just incidental to its primordial purpose of
accommodating other mining companies. Well-settled is the rule that anything done as a mere incident
to, or as a necessary consequence of, the principal business is not ordinarily taxed as an independent
business in itself. Where a person or corporation is engaged in a distinct business and, as a feature
thereof, in an activity merely incidental which serves no other person or business, the incidental and
restricted activity is not to be considered as intended to be separately taxed. In fine, on this particular
aspect, we are consequently of the considered opinion and so hold that ACMDC was not a
manufacturer subject to the percentage tax imposed by Section 186 of the tax code.
17.
ID.; ID.; CONTRACTOR'S TAX; HABITUAL LEASING OF PERSONAL PROPERTIES.
The same conclusion however, cannot be made with respect to the contractor's tax being imposed on
ACMDC. It cannot validly claim that the leasing out of its personal properties was merely an isolated
transaction. Its book of accounts shows that several distinct payments were made for the use of its
personal properties such as its plane, motor boat and dump truck. The series of transactions engaged in
by ACMDC for the lease of its aforesaid properties could also be deduced from the fact that for the tax
years 1975 and 1976 there were profits earned and reported therefor. It received a rental income of
P630,171.56 for tax year 1975 and P2,450,218.62 for tax year 1976. Considering that there was a series
of transactions involved, plus the fact that there was an apparent and protracted intention to profit from
such activities, it can be safely concluded that ACMDC was habitually engaged in the leasing out of its
plane, motor boat and dump truck, and is perforce subject to the contractor's tax.
18.
ID.; ID.; ASSESSMENT; PRESUMED CORRECT AND MADE IN GOOD FAITH; FAILURE
TO PRESENT PROOF OF ERROR IN ASSESSMENT WILL JUSTIFY JUDICIAL AFFIRMANCE
OF ASSESSMENT. Assessments are prima facie presumed correct and made in good faith. Contrary
to the theory of ACMDC, it is the taxpayer and not the Bureau of Internal Revenue who has the duty of
proving otherwise. It is an elementary rule that in the absence of proof of any irregularities in the
performance of official duties, an assessment will not be disturbed. All presumptions are in favor of tax
assessments. Verily, failure to present proof of error in the assessment will justify judicial affirmance of
said assessment.
19.
STATUTORY CONSTRUCTION; TAX STATUTES; REASONABLY CONSTRUED WITH A
VIEW OF CARRYING OUT THEIR PURPOSE AND INTENT. Finally, we deem it opportune to
emphasize the oft-repeated rule that tax statutes are to receive a reasonable construction with a view to
carrying out their purposes and intent. They should not be construed as to permit the taxpayer to easily
evade the payment of the tax. On this note, and under the confluence of the weighty considerations and
authorities earlier discussed, the challenged assessment against ACMDC for contractor's tax must be

upheld.
DECISION
REGALADO, J p:
Before us for joint adjudication are two petitions for review on certiorari separately filed by the
Commissioner of Internal Revenue in G.R. No. 104151, and by Atlas Consolidated Mining and
Development Corporation in G.R. No. 105563, which respectively seek the reversal and setting aside of
the judgments of respondent Court of Appeals in CA-G.R. SP No. 25945 promulgated on February 12,
1992 1 and in CA-G.R. SP No. 26087 promulgated on May 22, 1992. 2
Atlas Consolidated Mining and Development Corporation (herein also referred to as ACMDC) is a
domestic corporation which owns and operates a mining concession at Toledo City, Cebu, the products
of which are exported to Japan and other foreign countries. On April 9, 1980, the Commissioner of
Internal Revenue (also Commissioner, for brevity), acting on the basis of the report of the examiners of
the Bureau of Internal Revenue (BIR), caused the service of an assessment notice and demand for
payment of the amount of P12,391,070.51 representing deficiency ad valorem percentage and fixed
taxes, including increments, for the taxable year 1975 against ACMDC. 3
Likewise, on the basis of the BIR examiner's report in another investigation separately conducted, the
Commissioner had another assessment notice, with a demand for payment of the amount of
P13,531,466.80 representing the 1976 deficiency ad valorem and business taxes with P5,000.00
compromise penalty, served on ACMDC on September 23, 1980. 4
ACMDC protested both assessments but the same were denied, hence it filed two separate petitions for
review in the Court of Tax Appeals (also, tax court) where they were docketed as C.T.A. Cases Nos.
3467 and 3825. These two cases, being substantially identical in most respects except for the taxable
periods and the amounts involved, were eventually consolidated. prLL
On May 31, 1991, the Court of Tax Appeals rendered a consolidated decision holding, inter alia, that
ACMDC was not liable for deficiency ad valorem taxes on copper and silver for 1975 and 1976 in the
respective amounts of P11,276,540.79 and P12,882,760.80, thereby effectively sustaining the theory of
ACMDC that in computing the ad valorem tax on copper mineral, the refining and smelting charges
should be deducted, in addition to freight and insurance charges, from the London Metal Exchange
(LME) price of manufactured copper.
However, the tax court held ACMDC liable for the amount of P1,572,637.48, exclusive of interest,
consisting of 25% surcharge for late payment of the ad valorem tax and late filing of notice of removal
of silver, gold and pyrite extracted during certain periods, and for alleged deficiency manufacturer's
sales tax and contractor's tax.
The particulars of the reduced amount of said tax obligation is enumerated in detail in the dispositive
portion of the questioned judgment of the tax court, thus:
"WHEREFORE, petitioner should and is hereby ORDERED to pay the total amount of the following:
a)
P297,900.39 as 25% surcharge on silver extracted during the period November 1, 1974 to
December 31, 1975.
b)
P161,027.53 as 25% surcharge on silver extracted for the taxable year 1976.
c)
P315,027.30 as 25% surcharge on gold extracted during the period November 1, 1974 to
December 31, 1975.
d)
P260,180.55 as 25% surcharge on gold during the taxable year 1976.
e)
P53,585.30 as 25% surcharge on pyrite extracted during the period November 1, 1974 to
December 31, 1975.
f)
P53,283.69 as 25% surcharge on pyrite extracted during the taxable year 1976.
g)
P316,117.53 as deficiency manufacturer's sales tax and surcharge during the taxable year 1975;
plus 14% interest from January 21, 1976 until fully paid as provided under Section 183 of P.D. No. 69.
h)
P23,631.44 as deficiency contractor's tax and surcharge on the lease of personal property during
the taxable year 1975; plus 14% interest from January 21, 1976 until fully paid as provided under

Section 183 of P.D. 69. LLpr

i)
P91,883.75 as deficiency contractor's tax and surcharge on the lease of personal property during
the taxable year 1976; plus 14% interest from April 21, 1976 until fully paid as provided under Section
183 of P.D. No. 69.
With costs against petitioner." 5
As a consequence, both parties elevated their respective contentions to respondent Court of Appeals in
two separate petitions for review. The petition filed by the Commissioner, which was docketed as CAG.R. SP No. 25945, questioned the portion of the judgment of the tax court deleting the ad valorem tax
on copper and silver, while the appeal filed by ACMDC and docketed as CA-G.R. SP No. 26087
assailed that part of the decision ordering it to pay P1,572,637.48 representing alleged deficiency
assessment.
On February 12, 1992, judgment was rendered by respondent Court of Appeals in CA-G.R. SP No.
25945, dismissing the petition and affirming the tax court's decision on the manner of computing the ad
valorem tax. 6 Hence, the Commissioner of Internal Revenue filed a petition before us in G.R. No.
104151, raising the sole issue of whether or not, in computing the ad valorem tax on copper, charges
for smelting and refining should also be deducted, in addition to freight and insurance costs, from the
price of copper concentrates.
On May 22, 1992, judgment was likewise rendered by the same respondent court in CA-G.R. SP No.
26087, modifying the judgment of the tax court and further reducing the tax liability of ACMDC by
deleting therefrom the following items:
"(1) the award under paragraph (a) of P297,900.39 as 25% surcharge on silver extracted during the
period November 1, 1974 to December 31, 1975;
"(2) the award under paragraph (c) thereof of P315,027.30 as 25% surcharge on gold extracted
during the period November 1, 1974 to December 31, 1975; and
"(3) the award under paragraph (e) thereof of P53,585.30 as 24% (sic, 25%) surcharge on pyrite
extracted during the period November 1, 1974 to December 31, 1975." 7
Still not satisfied with the said judgment which had reduced its tax liability to P906,124.49, as a final
recourse ACMDC came to this Court on a petition for review on certiorari in G.R. No. 105563,
claiming that it is not liable at all for any deficiency tax assessments for 1975 and 1976. In our
resolution of September 1, 1993, G.R. No. 104151 was ordered consolidated with G.R. No. 105563. 8
I.
G.R. No. 104151
The Commissioner of Internal Revenue claims that the Court of Appeals and the tax court erred in
allowing the deduction of refining and smelting charges from the price of copper concentrates. It is the
contention of the Commissioner that the actual market value of the mineral products should be the
gross sales realized from copper concentrates, deducting therefrom mining, milling, refining,
transporting, handling, marketing or any other expenses. He submits that the phrase "or any other
expenses" includes smelting and refining charges and that the law allows deductions for actual cost of
ocean freight and insurance only in instances where the minerals or mineral products are sold or
consigned abroad by the lessees or owner of the mine under C.I.F. terms, hence it is error to allow
smelting and refining charges as deductions. LLpr
We are not persuaded by his postulation and find the arguments adduced in support thereof untenable.
The pertinent provisions of the National Internal Revenue Code (tax code, for facility) at the time
material to this controversy, read as follows:
"SEC. 243. Ad valorem taxes on output of mineral lands not covered by lease. There is hereby
imposed on the actual market value of the annual gross output of the minerals or mineral products
extracted or produced from all mineral lands not covered by lease, an ad valorem tax in the amount of
two per centum of the value of the output, except gold which shall pay one and one-half per centum.
Before the minerals or mineral products are removed from the mines, the Commissioner of Internal
Revenue or his representatives shall first be notified of such removal on a form prescribed for the

purpose. (As amended by Rep. Act No. 6110.)

"SEC. 246. Definitions of the terms 'gross output,' 'minerals' and 'mineral products.' Disposition
of royalties and ad valorem taxes. The term 'gross output' shall be interpreted as the actual market
value of minerals or mineral products, or of bullion from each mine or mineral lands operated as a
separate entity without any deduction from mining, milling, refining, transporting, handling, marketing,
or any other expenses: Provided, however, That if the minerals or mineral products are sold or
consigned abroad by the lessee or owner of the mine under C.I.F. terms, the actual cost of ocean freight
and insurance shall be deducted. The output of any group of contiguous mining claim shall not be
subdivided. The word 'minerals' shall mean all inorganic substances found in nature whether in solid,
liquid, gaseous, or any intermediate state. The term 'mineral products' shall mean things produced by
the lessee, concessionaire or owner of mineral lands, at least eighty per cent of which things must be
minerals extracted by such lessee, concessionaire, or owner of mineral lands. Ten per centum of the
royalties and ad valorem taxes herein provided shall accrue to the municipality and ten per centum to
the province where the mines are situated, and eighty per centum to the National Treasury. (As
amended by Rep. Acts Nos. 834, 1299, and by Rep. Act No. 1510, approved June 16, 1956)."
To rephrase, under the aforequoted provisions, the ad valorem tax of 2% is imposed on the actual
market value of the annual gross output of the minerals or mineral products extracted or produced from
all mineral lands not covered by lease. In computing the tax, the term "gross output" shall be the actual
market value of minerals or mineral products, or of bullion from each mine or mineral lands operated
as a separate entity, without any deduction for mining, milling, refining, transporting, handling,
marketing or any other expenses. If the minerals or mineral products are sold or consigned abroad by
the lessee or owner of the mine under C.I.F. terms, the actual cost of ocean freight and insurance shall
be deducted. In other words, the assessment shall be based, not upon the cost of production or
extraction of said minerals or mineral products, but on the price which the same before or without
undergoing a process of manufacture would command in the ordinary course of business. 9
In the instant case, the allowance by the tax court of smelting and refining charges as deductions is not
contrary to the above-mentioned provisions of the tax code which ostensibly prohibit any form of
deduction except freight and insurance charges. A review of the records will show that it was the
London Metal Exchange price on wire bar which was used as tax base by ACMDC for purposes of the
2% ad valorem tax on copper concentrates since there was no available market price quotation in the
commodity exchange or markets of the world for copper concentrates nor was there any market
quotation locally obtainable. 10 Hence, the charges for smelting and refining were assessed not on the
basis of the price of the copper extracted at the mine site which is prohibited by law, but on the basis of
the actual market value of the manufactured copper which in this case is the price quoted for copper
wire bar by the London Metal Exchange.
The issue of whether the ad valorem tax should be based upon the value of the finished product, or the
value upon extraction of the raw materials or minerals used in the manufacture of said finished
products, has been passed upon by us in several cases wherein we held that the ad valorem tax is to be
computed on the basis of the market value of the mineral in its condition at the time of such removal
and before it undergoes a chemical change through manufacturing process, as distinguished from a
purely physical process which does not necessarily involve the change or transformation of the raw
material into a composite distinct product. 11
Thus, in the case of Cebu Portland Cement Co. vs. Commissioner of Internal Revenue, 12 this Court
ruled:
". . . ad valorem tax is a tax not on the minerals, but upon the privilege of severing or extracting the
same from the earth, the government's right to exact the said impost springing from the Regalian theory
of State ownership of its natural resources. cdll
". . . While Cement is composed of 80% minerals, it is not merely an admixture or blending of raw
materials, as lime, silica, shale and others. It is the result of a definite process the crushing of

minerals, grinding, mixing, calcining, cooling, adding of retarder or raw gypsum. In short, before
cement reaches its saleable form, the minerals had already undergone a chemical change through
manufacturing process. This could not have been the state of 'mineral products' that the law
contemplates for purposes of imposing the ad valorem tax. . . . This tax is imposed on the privilege of
extracting or severing the minerals from the mines. To our minds, therefore, the inclusion of the term
mineral products is intended to comprehend cases where the mined or quarried elements may not be
usable in its original state without application of simple treatments . . . which process does not
necessarily involve the change or transformation of the raw materials into a composite, distinct product.
. . . While the selling price of cement may reflect the actual market value of cement, said selling price
cannot be taken as the market value also of the minerals composing the cement. And it was not the
cement that was mined, only the minerals composing the finished product."
This view was subsequently affirmed in the resolution of the Court denying the motion for
reconsideration of its aforesaid decision, 13 the pertinent part of which reiterated that
". . . the ad valorem tax in question should be based on the actual market value of the quarried minerals
used in producing cement, . . . the law intended to impose the ad valorem tax upon the market value of
the component mineral products in their original state before processing into cement. . . . The law does
not impose a tax on cement qua cement, but on mineral products at least 80% of which must be
minerals extracted by the lessee, concessionaire or owner of mineral lands.
"The Court did not, and could not, rule that cement is a manufactured product subject to sales tax, for
the reason that such liability had never been litigated by the parties. What it did declare is that, while
cement is a mineral product, it is no longer in the state or condition contemplated by the law; hence the
market value of the cement could not be the basis for computing the ad valorem tax, since the ad
valorem tax is a severance tax, i.e., a charge upon the privilege of severing or extracting minerals from
the earth, (Dec. p. 4) and is due and payable upon removal of the mineral product from its bed or mine
(Tax Code s. 245)."
Therefore, the imposable ad valorem tax should be based on the selling price of the quarried minerals,
which is its actual market value, and not on the price of the manufactured product. If the market value
chosen for the reckoning is the value of the manufactured or finished product, as in the case at bar, then
all expenses of processing or manufacturing should be deducted in order to approximate as closely as is
humanly possible the actual market value of the raw mineral at the mine site. llcd
It was copper ore that was extracted by ACMDC from its mine site which, through a simple physical
process of removing impurities therefrom, was converted into copper concentrate. In return, this copper
concentrate underwent the process of smelting and refining, and the finished product is called copper
cathode or copper wire bar.
The copper wire bar is the manufactured copper. It is not the mineral extracted from the mine site nor
can it be considered a mineral product since it has undergone a manufacturing process, to wit:
"I.
The physical processes involved in the production of copper concentrate are the following (p.
19, BIR records; Exh. 'H', p. 43, Folder I of Exhibits.)
A.
Mining Process
(1)
Blasting The ore body is broken up by blasting.
(2)
Loading The ore averaging about 1/2 percent copper is loaded into ore trucks by electric
shovels.
(3)
Hauling The trucks of ore are hauled to the mill.
B.
Milling Process
(1)
Crushing The ore is crushed to pieces the size of peanuts.
(2)
Grinding The crushed ore is ground to powder form.
(3)
Concentrating The mineral bearing particles in the powdered ore are concentrated. prcd
The ores or rocks, transported by conveyors, are crushed repeatedly by steel balls into size of peanuts,
when they are ground and pulverized. The powder is fed into concentrators where it is mixed with

water and other reagents. This is known in the industry as a flotation phase. The copper-bearing
materials float while the non-copper materials in the rock sink. The material that floats is scooped and
dried and piled. This is known as copper concentrate. The material at the bottom is waste, and is known
in the industry as tailings. In Toledo City, tailings are disposed of through metal pipes from the flotation
mills to the open sea. Copper concentrate of petitioner contains 28-31% copper. The concentrate is
loaded in ocean vessels and shipped to Mitsubishi Metal Corporation mills in Japan, where the
smelting, refining and fabricating processes are done. (Memorandum of petitioner, p. 71, CTA records.)
II.
The chemical or manufacturing process in the production of wire bar is as follows: (Exh. 'H', p.
43, Folder I of exhibits.)
A.
Smelting
(1)
Drying The copper concentrates (averaging about 30 percent copper) are dried.
(2)
Flash Furnace The dried concentrate is smelted autogenously and a matte containing 65
percent is produced.
(3)
Converter The matte is converted into blister copper with a purity of about 99 percent.
B.
Refining
(1)
Casting Wheel Blister copper is treated in an anode furnace where copper requiring further
treatment is sent to the casting wheel to produce anode copper.
(2)
Electrolytic Refining Anode copper is further refined by electrolytic refining to produce
cathode copper.
C.
Fabricating
(1)
Rolling Fire refined or electrolytic copper and/or brass (a mixture of copper and zinc) is
made into tubes, sheets, rods and wire.
(2)
Extruding Sheet, tubes, rods and wire are further fabricated into the copper articles in
everyday use.
The records show that cathodes, with purity of 99.985% are cast or fabricated into various shapes,
depending on their industrial destination. Cathodes are metal sheets of copper 1 meter x 1 meter x 1616 millimeter thick and 160 kilograms in weight, although this thickness is not uniform for all the
sheets. Cathodes sheets are not suitable for direct fabrication, hence, are further fabricated into the
desired shape, like wire bar, billets and cakes. (p. 1, deposition, London,) Wire bars are rectangular
pieces, 100 millimeter x 100 millimeter x 1.37 meters long and weigh some 125 kilos. They are suited
for copper wires and copper rods. Billets are fabricated into tubes and heavy electric sections. Cakes
are in the form of thick sheets and strips. (pp. 13, 18-21, deposition, Japan, Exhs. 'C' & 'G', Japan, pp.
1-2, deposition, London, see pp. 70-72, CTA records. )" 14
Significantly, the finding that copper wire bar is a product of a manufacturing process finds support in
the definition of a "manufacturer" in Section 194 (x) of the aforesaid tax code which provides:
"'Manufacturer' includes every person who by physical or chemical process alters the exterior texture or
form or inner substance of any raw material or manufactured or partially manufactured product in such
a manner as to prepare it for a special use or uses to which it could not have been put in its original
condition, or who by any such process alters the quality of any such raw material or manufactured or
partially manufactured product so as to reduce it to marketable shape or prepare it for any of the uses of
industry, or who by any such process combines any such raw material or manufactured or partially
manufactured products with other materials or products of the same or different kinds and in such
manner that the finished product of such process or manufacture can be put to a special use or uses to
which such raw material or manufactured or partially manufactured products, or combines the same to
produce such finished products for the purpose of their sale or distribution to others and not for his own
use or consumption."
Moreover, it is also worth noting at this point that the decision of the tax court was based on its
previous ruling in the case of Atlas Consolidated Mining and Development Corporation vs.
Commissioner of Internal Revenue, 15 dated January 23, 1981, which we quote with approval:

". . . The controlling law is clear and specific; it should therefore be applied as worded. Since the
mineral or mineral product removed from its bed or mine at Toledo City by petitioner is copper
concentrate as admitted by respondent himself, not copper wire bar, the actual market value of such
copper concentrate in its condition at the time of such removal without any deduction from mining,
milling, refining, transporting, handling, marketing, or any other expenses should be the basis of the
2% ad valorem tax. LLphil
"The conclusion reached is rendered clearer when it is taken into consideration that the ad valorem tax
is a severance tax, i.e., a charge upon the privilege of severing or extracted minerals from the earth, and
is due and payable upon removal of the mineral product from its bed or mine, the tax being computed
on the basis of the market value of the mineral in its condition at the time of such removal and before
its being substantially changed by chemical or manufacturing (as distinguished from purely physical)
processing. (Cebu Portland Cement Co. vs. Commissioner of Internal Revenue, supra.) Copper wire
bars, as discussed above, have already undergone chemical or manufacturing processing in Japan, they
are not extracted or produced from the earth by petitioner in its mine site at Toledo City. Since the ad
valorem tax is computed on the basis of the actual market value of the mineral in its condition at the
time of its removal from the earth, which in this case is copper concentrate, there is no basis therefore
for an assertion that such tax should be measured on the basis of the London Metal Exchange price
quotation of the manufactured wire bars without any deduction of smelting and refining charges.
"In resume:
1.
The mineral or mineral product of petitioner the extraction or severance from the soil of which
the ad valorem tax is directed is copper concentrate.
2.
The ad valorem tax is computed on the basis of the actual market value of the copper
concentrate in its condition at the time of removal from the earth and before it is substantially changed
by chemical or manufacturing process without any deduction from mining, milling, refining,
transporting, handling, marketing, or any other expenses. However, since the copper concentrate is sold
abroad by petitioner under C.I.F. terms, the actual cost of ocean freight and insurance is deductible.
3.
There being no market price quotation of copper concentrate locally or in the commodity
exchanges or markets of the world, the London Metal Exchange price quotation of copper wire bar,
which is used by petitioner and Mitsubishi Metal Corporation as reference to determine the selling
price of copper concentrate, may likewise be employed in this case as reference point in ascertaining
the actual market value of copper concentrate for ad valorem tax purposes. By deducting from the
London Metal Exchange price quotation of copper wire bar all charges and costs incurred after the
copper concentrate has been shipped from Toledo City to the time the same has been manufactured into
wire bar, namely, smelting, electrolytic refining and fabricating, the remainder represents to a
reasonable degree the actual market value of the copper concentrate in its condition at the time of
extraction or removal from its bed in Toledo City for the purposes of the ad valorem tax."
The Commissioner of Internal Revenue argues that the ruling in the case above stated is not binding,
considering that the incumbent Commissioner of Internal Revenue is not bound by decisions or rulings
of his predecessor when he finds that a different construction of the law should be adopted, invoking
therefor the doctrine enunciated in Hilado vs. Collector of Internal Revenue, et al. 16 This trenches on
specious reasoning. What was involved in the Hilado case was a previous ruling of a former
Commissioner of Internal Revenue. In the case at bar, the Commissioner based his findings on a
previous decision rendered by the Court of Tax Appeals itself.
The Court of Tax Appeals is not a mere superior administrative agency or tribunal but is a part of the
judicial system of the Philippines. 17 It was created by Congress pursuant to Republic Act No. 1125,
effective June 16, 1954, as a centralized court specializing in tax cases. It is a regular court vested with
exclusive appellate jurisdiction over cases arising under the National Internal Revenue Code, the Tariff
and Customs Code, and the Assessment Law. 18
Although only the decisions of the Supreme Court establish jurisprudence or doctrines in this

jurisdiction, nonetheless the decisions of subordinate courts have a persuasive effect and may serve as
judicial guides. It is even possible that such a conclusion or pronouncement can be raised to the status
of a doctrine if, after it has been subjected to test in the crucible of analysis and revision the Supreme
Court should find that it has merits and qualities sufficient for its consecration as a rule of
jurisprudence. 19
Furthermore, as a matter of practice and principle, the Supreme Court will not set aside the conclusion
reached by an agency such as the Court of Tax Appeals, which is, by the very nature of its function,
dedicated exclusively to the study and consideration of tax problems and has necessarily developed an
expertise on the subject, unless there has been an abuse or improvident exercise of authority on its part.
20
II.
G.R. No. 105563
The petition herein raises the following issues for resolution:
"A.
Whether or not petitioner is liable for payment of the 25% surcharge for alleged late filing of
notice of removal/late payment of the ad valorem tax on silver, gold and pyrite extracted during the
taxable year 1976.
B.
Whether or not petitioner is liable for payment of the manufacturer's sales tax and surcharge
during the taxable year 1975, plus interest, on grinding steel balls borrowed by its competitor; and
C.
Whether or not petitioner is liable for payment of the contractor's tax and surcharge on the
alleged lease of personal property during the taxable years 1975 and 1976 plus interest." 21
A.
Surcharge on Silver, Gold and Pyrite
ACMDC argues that the Court of Appeals erred in holding it liable to pay 25% surcharge on silver,
gold and pyrite extracted by it during tax year 1976.
Sec. 245 of the then tax code states:
"SEC. 245. Time and manner of payment of royalties or ad valorem taxes. The royalties or ad
valorem taxes as the case may be, shall be due and payable upon the removal of the mineral products
from the locality where mined. However, the output of the mine may be removed from such locality
without the pre-payment of such royalties or ad valorem taxes if the lessee, owner, or operator shall file
a bond in the form and amount and with such sureties as the Commissioner of Internal Revenue may
require, conditioned upon the payment of such royalties or ad valorem taxes, in which case it shall be
the duty of every lessee, owner, or operator of a mine to make a true and complete return in duplicate
under oath setting forth the quantity and the actual market value of the output of his mine removed
during each calendar quarter and pay the royalties or ad valorem taxes due thereon within twenty days
after the close of said quarter.
In case the royalties or ad valorem taxes are not paid within the period prescribed above, there shall be
added thereto a surcharge of twenty-five per centum. Where a false or fraudulent return is made, there
shall be added to the royalties or ad valorem taxes a surcharge of fifty per centum of their amount. The
surcharge so added shall be collected in the same manner and as part of the royalties or ad valorem
taxes, as the case may be."
Under the aforesaid provision, the payment of the ad valorem tax shall be made upon removal of the
mineral products from the mine site or if payment cannot be made, by filing a bond in the form and
amount to be approved by the Commissioner conditioned upon the payment of the said tax.
In the instant case, the records show that the payment of the ad valorem tax on gold, silver and pyrite
was belatedly made. ACMDC, however, maintains that it should not be required to pay the 25%
surcharge because the correct quantity of gold and silver could be determined only after the copper
concentrates had gone through the process of smelting and refining in Japan, while the amount of pyrite
cannot be determined until after the flotation process separating the copper mineral from the waste
material was finished.
Prefatorily, it must not be lost sight of that bad faith is not essential for the imposition of the 25%
surcharge for late payment of the ad valorem tax. Hence, the justification given is not sufficient to

relieve ACMDC of its liability to pay the 25% surcharge for late payment. Also, the 25% surcharge
prescribed in Section 245 for late payment of royalties and ad valorem tax, when contrasted with the
50% surcharge imposed "where a false or fraudulent return is made," strongly suggests that bad faith is
not essential for the imposition of the 25% surcharge. 22
The law requiring the payment of the 25% surcharge in case the ad valorem tax is not seasonably paid
is mandatory. It provides a plan which works out automatically. The Commissioner of Internal Revenue
is not vested with any authority to waive or dispense with the collection thereof. 23
Furthermore, the claim of ACMDC that it is impossible to determine in the Philippines the quantity of
silver and gold involved is belied by its own witness, Francisco Antonio, who testified:
"Q.
Now, how do you test, let us say, there is a truck-load of copper concentrate. Now, for purposes
of testing that truck-load, about how much quantity do you bring to the laboratory?
A.
For each truck-load, we get about 40 to 50 kilos.
Q.
Now, what do you do with the 40 to 50 kilos?
A.
This 40 and 50 kilos is dried in the laboratory then reduced in size so that there is about 100
grams of copper concentrate that is being brought to the laboratory for analysis. Now, out of this 100
grams we take more or less about 50 grams where we analyze for gold, silver, and copper. LLpr
Q.
Now, what do you do with the result of your analysis?
A.
These are tabulated and then averaged out to represent one shipment.
Q.
Will you tell this Honorable Court whether in that laboratory testing you physically separate the
gold, you physically separate the silver and you physically separate the copper content of that 40 to 50
kilos?
A.
No, no, we analyze this in one sample. This sample is analyzed for gold, silver, and copper, but
there is no recovery made.
Q.
You mean there is no physical separation?
A.
No, no physical separation.
Q.
So these three minerals copper, gold and silver are in that same powder that you have
tested?
A.
Yes, it is in the same powder.
Q.
Now how do you reflect the results of the testing?
A.
You mean in analysis?
Q.
In the analysis, yes.
A.
Copper is reported in percent.
Q.
Percentage?
A.
Yes.
Q.
How about gold?
A.
Gold and silver part is represented as grams per dmt or parts per million.
Q.
Based on the results of your data gathered in the laboratory?
A.
Yes.
Q.
Now where do you submit the results of the laboratory testing?
A.
When a shipment is made we prepare a certificate of analysis signed by me and then which (sic)
is sent to Manila.
Q.
Now, as far as you know in connection with your duty do you know what Manila . . . what do
you say, Manila, ACMDC?
A.
Makati.
Q.
Makati. What does Makati ACMDC do with your assay report?
A.
As far as I know it is used as the basis for the payment of ad valorem tax." 24
The above-quoted testimony accordingly supports these findings of the tax court in its decision in this
case:
"We see it (sic) that even if the silver and gold cannot as yet be physically separated from the copper

concentrate until the process of smelting and refining was completed, the estimated commercial
quantity of the silver and gold could have been determined in much the same way that petitioner is able
to estimate the commercial quantity of copper during the assay. If, as stated by petitioner, it is able to
estimate the grade of the copper ore, and it has determined the grade not only of the copper but also
those of the gold and silver during the assay (Petitioner's Memorandum, p. 207, Record), ergo, the
estimated commercial quantity of the silver and gold subject to ad valorem tax could have also been
determined and provisionally paid as for copper." 25
The other allegation of ACMDC is that there was no removal of pyrite from the mine site because the
pyrite was delivered to its sister company, Atlas Fertilizer Corporation, whose plant is located inside
the mineral concession of ACMDC in Sangi, Toledo City. ACMDC, however, is already barred by
estoppel in pais from putting that matter in issue.
An ad valorem tax on pyrite for the same tax year was already declared and paid by ACMDC. In fact,
that payment was used as the basis for computing the 25% surcharge. It was only when ACMDC was
assessed for the 25% surcharge that said issue was raised by it. Also, the evidence shows that deliveries
of pyrite were not exclusively made to its sister company, Atlas Fertilizer Corporation. There were
shipments of pyrite to other companies located outside of its mine site, in addition to those delivered to
its aforesaid sister company. 26
B.
Manufacturer's Tax and Contractor's Tax
The manufacturer's tax is imposed under Section 186 of the tax code then in force which provides:
"SEC. 186. Percentage tax on sales of other articles. There shall be levied, assessed and collected
once only on every original sale, barter, exchange, or similar transaction either for nominal or valuable
consideration, intended to transfer ownership of, or title to, the articles not enumerated in sections one
hundred and eighty-four-A, one hundred and eighty five, one hundred and eighty-five-A, one hundred
eighty-five-B, and one hundred eighty-six-B, a tax equivalent to seven per centum of the gross selling
price or gross value in money of the articles so sold, bartered, exchanged, or transferred, such tax to be
paid by the manufacturer or producer: Provided, That where the articles subject to tax under this
section are manufactured out of materials likewise subject to tax under this section and section one
hundred eighty-nine, the total cost of such materials, as duly established, shall be deductible from the
gross selling price or gross value in money of such manufactured articles. (As amended by Rep. Act
No. 6110 and by Pres. Decree No. 69.)" cdll
On the other hand, the contractor's tax is provided for under Section 191 of the same code, paragraph
17 of which declares that lessors of personal property shall be subject to a contractor's tax of 3% of the
gross receipts.
Sections 186 and 191 fall under Title V of the tax code, entitled "Privilege Taxes on Business and
Occupation." These "privilege taxes on business" are taxes imposed upon the privilege of engaging in
business. They are essentially excise taxes. 27 To be held liable for the payment of a privilege tax, the
person or entity must be engaged in business, as shown by the fact that the drafters of the tax code had
purposely grouped said provisions under the general heading adverted to above.
"To engage" is to embark on a business or to employ oneself therein. The word "engaged" connotes
more than a single act or a single transaction; it involves some continuity of action. "To engage in
business" is uniformly construed as signifying an employment or occupation which occupies one's
time, attention, and labor for the purpose of a livelihood or profit. The expressions "engage in
business," "carrying on business" or "doing business" do not have different meanings, but separately or
connectedly convey the idea of progression, continuity, or sustained activity. "Engaged in business"
means occupied or employed in business; "carrying on business" does not mean the performance of a
single disconnected act, but means conducting, prosecuting, and continuing business by performing
progressively all the acts normally incident thereto; while "doing business" conveys the idea of
business being done, not from time to time, but all the time." 28
The foregoing notwithstanding, it has likewise been ruled that one act may be sufficient to constitute

carrying on a business according to the intent with which the act is done. A single sale of liquor by one
who intends to continue selling is sufficient to render him liable for "engaging in or carrying on" the
business of a liquor dealer. 29
There may be a business without any sequence of acts, for if an isolated transaction, which if repeated
would be a transaction in a business, is proved to have been undertaken with the intent that it should be
the first of several transactions, that is, with the intent of carrying on a business, then it is a first
transaction in an existing business. 30
Thus, where the end sought is to make a profit, the act constitutes "doing business." This is not without
basis. The term "business," as used in the law imposing a license tax on business, trades, and so forth,
ordinarily means business in the trade or commercial sense only, carried on with a view to profit or
livelihood. 31 It is thus restricted to activities or affairs where profit is the purpose, or livelihood is the
motive. Since the term "business" is being used without any qualification in our aforecited tax code, it
should therefore be construed in its plain and ordinary meaning, restricted to activities for profit or
livelihood. 32
In the case at bar, ACMDC claims exemptions from the payment of manufacturer's tax. It asserts that it
is not engaged in the business of selling grinding steel balls, but it only produces grinding steel balls
solely for its own use or consumption. However, it admits having lent its grinding steel balls to other
entities but only in very isolated cases.
After a careful review of the records and on the basis of the legal concept of "engaging in business"
hereinbefore discussed, we are inclined to agree with ACMDC that it should not and cannot be held
liable for the payment of the manufacturer's tax.
First, under the tax code then in force, the 7% manufacturer's sales tax is imposed on the manufacturer
for every original sale, barter, exchange and other similar transaction intended to transfer ownership of
articles. As hereinbefore quoted, and we repeat the same for facility of reference, the term
"manufacturer" is defined in the tax code as including "every person who by physical or chemical
process alters the exterior texture or form or inner substance of any raw material or manufactured or
partially manufactured product in such manner as to prepare it for a special use or uses to which it
could not have been put in its original condition, or who by any such process alters the quality of any
such raw material or manufactured or partially manufactured product so as to reduce it to marketable
shape or prepare it for any of the uses of industry, or who by any such process combines any such raw
material or manufactured or partially manufactured products with other materials or products of the
same or of different kinds and in such manner that the finished product of such process or manufacture
can be put to a special use or uses to which such raw materials or manufactured or partially
manufactured products in their original condition could not have been put, and who in addition alters
such raw material or manufactured or partially manufactured products, or combines the same to
produce such finished products for the purpose of their sale or distribution to others and not for his own
use or consumption." 33
Thus, a manufacturer, in order to be subjected to the necessity of paying the percentage tax imposed by
Section 186 of the tax code, must be 'engaged' in the sale, barter or exchange of personal property.
Under a statute which imposes a tax on persons engaged in the sale, barter or exchange of merchandise,
a person must be occupied or employed in the sale, barter or exchange of personal property. A person
can hardly be considered as occupied or employed in the sale, barter or exchange of personal property
when he has made one purchase and sale only. 34
Second, it cannot be legally asserted, for purposes of this particular assessment only, that ACMDC was
engaged in the business of selling grinding steel balls on the basis of the isolated transaction entered
into by it in 1975. There is no showing that said transaction was undertaken by ACMDC with a view to
gaining profit therefrom and with the intent of carrying on a business therein. On the contrary, what is
clear to us is that the sale was more of an accommodation to the other mining companies, and that
ACMDC was subsequently replaced by other suppliers shortly thereafter.

This finding is strengthened by the investigation report, dated March 11, 1980, of the B.I.R.
Investigation Team itself which found that
"ACMDC has a foundry shop located at Sangi, Toledo City, and manufactures grinding steel balls for
use in its ball mills in pulverizing the minerals before they go to the concentrators. For the grinding
steel balls manufactured by ACMDC and used in its operation, we found it not subject to any business
tax. But there were times in 1975 when other mining companies were short of grinding steel balls and
ACMDC supplied them with these materials manufactured in its foundry shop. According to the
informant, these were merely accommodations and they were replaced by the other suppliers." 35
At most, whatever profit ACMDC may have realized from that single transaction was just incidental to
its primordial purpose of accommodating other mining companies. Well-settled is the rule that anything
done as a mere incident to, or as a necessary consequence of, the principal business is not ordinarily
taxed as an independent business in itself. 36 Where a person or corporation is engaged in a distinct
business and, as a feature thereof, in an activity merely incidental which serves no other person or
business, the incidental and restricted activity is not to be considered as intended to be separately taxed.
37
In fine, on this particular aspect, we are consequently of the considered opinion and so hold that
ACMDC was not a manufacturer subject to the percentage tax imposed by Section 186 of the tax code.
The same conclusion however, cannot be made with respect to the contractor's tax being imposed on
ACMDC. It cannot validly claim that the leasing out of its personal properties was merely an isolated
transaction. Its book of accounts shows that several distinct payments were made for the use of its
personal properties such as its plane, motor boat and dump truck. 38 The series of transactions engaged
in by ACMDC for the lease of its aforesaid properties could also be deduced from the fact that for the
tax years 1975 and 1976 there were profits earned and reported therefor. It received a rental income of
P630,171.56 for tax year 1975 39 and P2,450,218.62 for tax year 1976. 40
Considering that there was a series of transactions involved, plus the fact that there was an apparent and
protracted intention to profit from such activities, it can be safely concluded that ACMDC was
habitually engaged in the leasing out of its plane, motor boat and dump truck, and is perforce subject to
the contractor's tax. LLpr
The allegation of ACMDC that it did not realize any profit from the leasing out of its said personal
properties, since its income therefrom covered only the costs of operation such as salaries and fuel, is
not supported by any documentary or substantial evidence. We are not, therefore, convinced by such
disavowal.
Assessments are prima facie presumed correct and made in good faith. Contrary to the theory of
ACMDC, it is the taxpayer and not the Bureau of Internal Revenue who has the duty of proving
otherwise. It is an elementary rule that in the absence of proof of any irregularities in the performance
of official duties, an assessment will not be disturbed. All presumptions are in favor of tax assessments.
41 Verily, failure to present proof of error in the assessment will justify judicial affirmance of said
assessment. 42
Finally, we deem it opportune to emphasize the oft-repeated rule that tax statutes are to receive a
reasonable construction with a view to carrying out their purposes and intent. 43 They should not be
construed as to permit the taxpayer to easily evade the payment of the tax. 44 On this note, and under
the confluence of the weighty considerations and authorities earlier discussed, the challenged
assessment against ACMDC for contractor's tax must be upheld.
WHEREFORE, the impugned judgment of respondent Court of Appeals in CA-G.R. SP No. 25945,
subject of the present petition in G.R. No. 104151, is hereby AFFIRMED; and its assailed judgment in
CA-G.R. SP No. 26087 is hereby MODIFIED by exempting Atlas Consolidated Mining and
Development Corporation, petitioner in G.R. No. 105563 of this Court, from the payment of
manufacturer's sales tax, surcharge and interest during the taxable year 1975.
SO ORDERED.

Narvasa, C.J., Bidin, Puno and Mendoza, JJ., concur.

Footnotes
1.
Penned by Justice Luis C. Victor, with Justices Santiago M. Kapunan and Segundino G. Chua
concurring (Third Division).
2.
Per Justice Nathanael P. de Pano, Jr., with the concurrence of Justices Jesus M. Elbinias and
Angelina S. Gutierrez (Eleventh Division).
3.
Original Record, C.T.A. Case No. 3465, 21-22.
4.
Id., C.T.A. Case No. 3828, 222.
5.
Rollo, G.R. No. 105563, 80-82.
6.
Id., G.R. No. 104151, 46-50.
7.
Id., G.R. No. 105563, 57-58.
8.
Id., Id., 163.
9.
Republic Cement Corporation vs. Commissioner of Internal Revenue, et al., L-20660, June 13,
1968, 23 SCRA 967.
10.
Memorandum dated April 11, 1978 of Renato L. Manalili, Supervising Revenue Examiner II;
Original Record, C.T.A. No. 3467, Folder IV, 117-118.
11.
See Cebu Portland Cement Co. vs. Commissioner of Internal Revenue (Resolution on Motion
for Reconsideration), L-18649, December 29, 1967, 21 SCRA 1425; Republic Cement Corporation vs.
Commissioner of Internal Revenue, supra, Fn. 9.
12.
L-18649, February 27, 1965, 13 SCRA 333.
13.
Supra, Fn. 11.
14.
Decision, C.T.A. Case No. 2842 citing p. 19, BIR Records; Exh. 'H', p. 43, Folder I of Exhibits,
Original Record, C.T.A. Case No. 3467, 99-102.
15.
C.T.A. Case No. 2842, ante.
16.
100 Phil. 288 (1956).
17.
See Ursal, etc. vs. Court of Tax Appeals, et al., 101 Phil. 209 (1957).
18.
Collector of Internal Revenue vs. Yuseco, et al., L-12518, October 28, 1961, 3 SCRA 313;
Auyong Hian vs. Court of Tax Appeals, et al., L-25181, January 11, 1967, 19 SCRA 10.
19.
Paras, E., Civil Code of the Philippines Annotated, Vol. 1, Twelfth Edition, 58-59, citing Vda.
de Miranda, et al. vs. Imperial, et al., 77 Phil. 1066 (1947).
20.
Luzon Stevedoring Corporation vs. Court of Tax Appeals, et al., L-30232, July 29, 1988, 163
SCRA 647.
21.
Rollo, G.R. No. 105563, 16.
22.
Republic Cement Corporation vs. Commissioner of Internal Revenue, et al., supra, Fn. 9.
23.
Lim Co Chui vs. Posadas, Jr., etc., 47 Phil. 460 (1925); Republic vs. Luzon Industrial
Corporation, et al., 102 Phil. 189 (1957); Republic Cement Corporation vs. Commissioner, et al., supra.
24.
TSN, November 26, 1985, Direct Examination of Francisco Antonio, 16-18.
25.
Rollo, G.R. No. 105563, 70.
26.
Folder I, BIR Record, as cited in the decision in C.T.A Cases Nos. 3467 and 3825, 14; Rollo,
G.R. No. 105563, 73.
27.
Matic, T., Taxation in the Philippines, 1973 ed., 332.
28.
Alejandro, J., The Law on Taxation, 1966, 489-490, citing Imperial vs. Collector of Internal
Revenue, L-7924, September 30, 1955.
29.
Abel vs. State, 8 So. 760, 80 Ala. 631, 633.
30.
In re Griffin, 60 L.J.Q.B. 235, 237, cited in 9 C.J., Business, 1103.
31.
Cuzner vs. California Club, 155 Cal. 303.
32.
Collector of Internal Revenue vs. Manila Lodge No. 761 of the Benevolent and Protective
Order of Elks, et al., 105 Phil. 983 (1959); Collector of Internal Revenue vs. Sweeney, et al., 106 Phil.
59 (1959); see also Collector of Internal Revenue vs. Club Filipino, Inc. de Cebu, L-12719, May 31,

1962, 5 SCRA 321, and cases cited therein.

33.
Sec. 194 (x), National Internal Revenue Code.
34.
Whitaker vs. Rafferty, etc., 38 Phil. 508 (1918); Boada vs. Posadas, etc., 58 Phil. 184 (1933);
Imperial vs. Collector of Internal Revenue, 97 Phil. 992, 1002, unpub., (1955).
35.
BIR Records, Folder III, 306.
36.
Smith, Bell & Co. vs. Municipality of Zamboanga, et al., 55 Phil. 466 (1930); Standard-Vacuum
Oil Co. vs. M.D. Antigua, etc., et al., 96 Phil. 909 (1955); City of Manila vs. Fortune Enterprises, Inc.,
108 Phil. 1058 (1960).
37.
Standard-Vacuum Oil Company vs. M.D. Antigua, etc., et al., supra, citing Craig vs. Ballard &
Ballard Co., 196 So. 238.
38.
BIR Records, Folder III, 295.
39.
BIR Records, Folder III, 306.
40.
Original Record, C.T.A. Case No. 3825, 213.
41.
Interprovincial Autobus Co., Inc. vs. Collector of Internal Revenue, 98 Phil. 290 (1956); Sy Po
vs. Court of Tax Appeals, et al., G.R. No. 81446, August 18, 1988, 164 SCRA 524; Dayrit, et al. vs.
Cruz, et al., L-39910, September 26, 1988, 165 SCRA 571.
42.
Aban, B., Law of Basic Taxation in the Philippines, 1994 ed., 109, citing Delta Motors Co. vs.
Commissioner of Internal Revenue, C.T.A. Case No. 3782, May 21, 1986.
43.
51 Am. Jur., Legislative Intention, 361.
44.
Carbon Steel Co. vs. Lewellyn, 251 U.S. 501.

FIRST DIVISION
[G.R. No. 106913. May 10, 1994.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. HON. COURT OF APPEALS and
ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION, respondents.
The Solicitor General for petitioner.
M.L. Gadioma Law Office for private respondent.
SYLLABUS
1.
TAXATION; SPECIFIC TAXES; REFUND; WHEN AVAILABLE; BASIS THEREOF; CASE
AT BAR. The Court rules, that since Atlas claims for refund cover specific taxes paid before 1985, it
should be granted the refund based on the rates specified by Sections 1 and 2 of R.A. No. 1435 and not
on the increased rates under Sections 153 and 156 of the Tax Code of 1977, provided the claims are not
yet barred by prescription. The claim for refund on the specific tax paid prior to 21 July 1976 had
already prescribed because claims for refund should be made within two years from the date of
payment of the tax sought to be refunded (Section 230, National Internal Revenue Code) and Atlas'
judicial claim for refund was made only on 21 July 1978.
2.
REMEDIAL LAW; SUPREME COURT; REVIEW POWER OVER JUDGMENT OF THE
COURT OF APPEALS; WHEN PROPER; CASE AT BAR. The Court cannot subscribe to the view
of Atlas that the petitioner cannot raise the new theory in its petition that the 25% tax refund should be
based on the rates prescribed in Sections 1 and 2 of R.A. No. 1435 and not on the increased rates
prescribed under Sections 153 and 156 of the Tax Code of 1977. The petitioner merely asks the Court
to consider and apply the rule enunciated in the Resolution of 25 march 1992 in Rio Tuba, (207 SCRA
549 [1992]) that modified the 30 September 1991 Decision therein, which decision the petitioner had
invoked in his motion to reconsider the judgment of the Court of Appeals. Since the modification took
place after the filing of the motion for reconsideration and it was likely that the Court of Appeals was
unaware of such modification when it promulgated on 4 September 1992 its resolution denying the
motion for reconsideration, it is by no means improper for the petitioner to subsequently invoke that
modificatory resolution. Furthermore, even if it be conceded ex gratia that the theory is new, the rule
involved by Atlas is not without exceptions. The Supreme Court may review such matters as may be
necessary to serve the interest of justice (De Leon vs. Court of Appeals, 205 SCRA 612 [1992]; Asset
Privatization Trust vs. Court of Appeals, 214 SCRA 400 [1992]); it has ample authority to review and
resolve matters not specifically raised or assigned as error by the parties if it finds that the
consideration and determination of the same is necessary in arriving at a just resolution of a case.
(Sociedad Europea de Financiacion S.A. vs. Court of Appeals, 193 SCRA 105 [1991]). Where the
issues already raised also rest on other issues not specifically presented, as long as the latter issues bear
relevance and close relation to the former and as long as they arise from matters on record, the Court
has the authority to include them in its discussion of the controversy as well as to pass upon them.
(Insular Life Assurance Co., Ltd. Employees Association vs. Insular Life Assurance Co., Ltd., 76
SCRA 50 [1977])
DECISION
DAVIDE, J p:
The petitioner seeks the modification of the 19 February 1992 Decision 1 of the Court of Appeals in
CA-G.R. SP No. 20005 2 which affirmed the decision of the Court of Appeals granting the claims of
private respondent Atlas Consolidated Mining and Development Corporation (Atlas) for tax refund
under Section 5 of R.A. No. 1435. 3
The facts of the case are summarized by the respondent Court of Appeals as follows:
"'It appears that petitioner mining corporation, organized and existing under and by virtue of the laws
of the Philippines, operates a concession in Toledo City, Cebu. It actually used and/or consumed tax
paid extra gasoline and diesel fuel for the mining operation purchased on various dates from Mobil Oil
Philippines as follows:

PERIOD
SPECIFIC TAXES 25%
July-Dec.
P1,008,648.15 P252,162.04
1976
Jan.-Dec.
P1,834,357.27 P458,589.32
1977
Jan.-May
P798,573.60 P199,643.40
1978

P3,641,579.02 P910,394.76
On July 19, 1978 (pp. 9-10, CTA rec.) petitioner filed with the respondent [Commissioner of Internal
Revenue] a written claim for tax credit of the total amount of P910,394.76 representing 25% of the
specific taxes paid on said fuel oils pursuant to Sec. 5 of Republic Act No. 1435, infra, in relation to
Secs. 142 and 145 of the Tax Code. llcd
There being no action taken on its claim for refund on July 21, 1978, petitioner filed the instant judicial
claim for refund.' (CTA Decision, pp. 68-69, Rollo).
On November 28, 1986, the Court of Tax Appeals rendered its decision, stating to wit:
'WHEREFORE, finding the judicial claim for refund by petitioner well-taken, it is hereby GRANTED.
The Commissioner of Internal Revenue is hereby ordered to refund and/or credit petitioner in the
amount of P910,394.76.
No pronouncement as to costs.
SO ORDERED.' (CTA Decision, p. 78, Rollo)." 4
From the decision of the Court of Tax Appeals, petitioner Commissioner of Internal Revenue appealed
to the Court of Appeals raising the question of whether or not the privilege of a partial refund for
specific tax paid on oils used in mining operations as provided under Section 5 of R.A. No. 1435 still
subsists.
The petitioner argued before the Court of Appeals that private respondent Atlas is not entitled to the tax
refund because no additional tax was imposed on it under any city or municipal ordinance as provided
under Section 4 of R.A. No. 1435. It further contended that tax refunds provided to concessionaires
under Section 5 of R.A. No. 1435 were deemed repealed by: (1) P.D. No. 314 issued on 20 October
1973, (2) the Local Tax Code effective 1 July 1973, (3) P.D. No. 426 effective 30 March 1974, (4)
Local Tax Regulations No. 1-74 issued on 18 April 1974, (5) P.D. No. 711 effective 1 July 1975, and
(6) P.D. Nos. 1158 and 1158-A issued on 3 June 1977.
In its Decision of 19 February 1992, the Court of Appeals affirmed the decision of the Court of Tax
Appeals and disregarded the petitioner's theory of repeal. It held that there is no evident conflict
between R.A. No. 1435 and subsequent legislations. It decreed, however, that the claim for refund of
specific taxes paid before 21 July 1976 had already prescribed. Thus:
"We disagree with the contention of the petitioner-appellant that the privilege granted by R.A. 1435
was subsequently abrogated by the issuance of the previously enumerated decrees. The refund
privilege, expressly provided by law, can not be presumed to have been repealed by other subsequent
legislations when there was no evident conflict between them and R.A. 1435; implied repeal cannot be
construed herein. Neither do We agree that the promulgation of P.D. No. 231, as amended by P.D. 426,
or the Local Tax Code had affected the refund privilege granted by R.A. 1435 for this Act does not
involve the imposition by any local government of any separate specific tax on manufactured oils. R.A.
1435 itself, had provided the imposition of additional specific tax on manufactured oils being
purchased so as to realize an increased highway fund. The Act is separate and distinct from the Local
Tax Code. LexLib
The refund on the specific tax paid prior to July 21, 1976 for the amount of P779,283.89 has already
prescribed. The claim for refund should be made within two years from the date of payment of the tax
sought to be refunded. The enactment of P.D. 69 in 1973 disregards the supervening cause rule hence

the two year period is reckoned from the time of payment of the said tax. Consequently, payments
made by the Atlas Mining Corporation two years prior to the commencement of its claim for refund or
before July 21, 1976, has already prescribed. The refund that can be availed of are those that accrued
from the payments made after July 21, 1976, which, in this case, amounted to P910,394.76.
Premises considered, the decision of the Court of Tax Appeals granting the refund and/or tax credit in
favor of Atlas Consolidated Mining and Development Corporation for the sum of P910,394.76 is
hereby AFFIRMED and the instant petition is DISMISSED.
SO ORDERED." 5
The petitioner moved for the reconsideration of the above decision 6 and brought to the attention of the
Court of Appeals our Decision of 30 September 1991 in Commissioner of Internal Revenue vs. Rio
Tuba Nickel Mining Corporation 7 wherein we held that the tax refunds under Section 5 of R.A. No.
1435 claimed by a mining firm for specific taxes paid in the purchase of manufactured oils were no
longer allowed because of the repeal of such privilege by P.D. No. 711. He alternatively argued: Cdpr
"8.
Assuming arguendo that private respondent is entitled to the refund, the whole amount of
P910,394.76 is not refundable. This Honorable Court ruled that the claim for refund should be made
within two years from the date of payment of the tax sought to be refunded and that, consequently,
payments made by private respondent before July 21, 1976 has already prescribed (Decision, page 4).
This is because the petition seeking the refund was filed with the Tax Court on July 21, 1978.
9.
In the petition for review (page 30), we pointed out that the following payments were made
before July 21, 1976:
O.R. No.
Date of
Payment
Amount
1.
Exh. "E"
2950387
July 1, 1976 P838,221.71
2.
Exh. "E-1"
2950384
June 25, 1976 779,283.89
3.
Exh. "E-2"
2950394
July 1, 1976 209,600.00
4.
Exh. "E-3"
2950393
July 1, 1976 17,522.59
5.
Exh. "E-4"
2950411
July 12, 1976 293,500.00
6.
Exh. "E-5"
2950401
July 7, 1976 714,569.93
7.
Exh. "E-7"
2951271
July 19, 1976 267,600.00
Since the amount of P910,394.76 sought to be refunded includes specific tax payments made before
July 21, 1976 as indicated above, the entire amount of P910,394.76 is not refundable." 8
The Court of Appeals denied the motion in its Resolution of 4 September 1992. 9
On 19 October 1992, the petitioner filed the instant petition. He concedes therein that Atlas is entitled
to a tax refund of 25% of the specific taxes paid for manufactured oils or fuel oils it purchased for its
mining operations as provided under Section 5 of R.A. No. 1435 and pursuant to our 25 March 1992
Resolution in the Rio Tuba case 10 which modified our original decision therein of 30 September 1991
by declaring that the "Highway Special Fund continued its existence up to 1985" and that, accordingly,
"mining and logging companies are entitled to the refund privilege granted by R.A. No. 1435 on
specific taxes paid up to 1985 on manufactured and diesel fuel oils." The petitioner contends, however,
that the refund should be based on the tax rates fixed under Sections 1 and 2 of R.A. No. 1435 and not
on the increased rates prescribed thereafter under various decrees, particularly Sections 153 and 156 of
the 1977 Tax Code. cdll
In its Comment 11 filed on 18 March 1993, Atlas opposed the petition on the following grounds: (1) the
petitioner cannot raise for the first time a novel theory based on our aforesaid Resolution of 25 March
1992 in Rio Tuba in a petition for review on certiorari; 2) the facts and issues in Rio Tuba are not
similar to the instant case; and 3) Atlas is entitled to a refund, consistent with the ruling of 12
November 1990 in G.R. No. 93631 entitled Commissioner of Internal Revenue vs. Atlas Consolidated
Mining and Development Corporation.
The petitioner filed on 21 June 1993 a Reply 12 to the Comment alleging therein that the "novel" issue

was raised for the first time because Rio Tuba is "of recent vintage"; moreover, the rule that no new
issue may be raised on appeal is not absolute.
On 12 July 1993, we gave due course to the petition. The parties then filed their respective memoranda.
This petition is meritorious.
Our Resolution of 25 March 1992 13 modifying our 30 September 1991 Decision 14 in the Rio Tuba
case sets forth the controlling doctrine. In that Resolution, we stated:
"It is not clear why the Highway Special Fund was maintained for 10 years after the effectivity of P.D.
No. 711 or why it was abolished in 1986. The stark fact remains that it retained its status as a special
fund up to 1985.
We, therefore, modify our decision in this case and rule that mining and logging companies are entitled
to the refund privilege granted by R.A. No. 1435 on specific taxes paid up to 1985 on manufactured
and diesel fuel oils. cdrep
Since the private respondent's claim for refund covers specific taxes paid from 1980 to July 1983 then
we find that the private respondent is entitled to a refund. It should be made clear, however, that Rio
Tuba is not entitled to the whole amount it claims as refund.
The specific taxes on oils which Rio Tuba paid for the aforesaid period were no longer based on the
rates specified by Sections 1 and 2 of R.A. No. 1435 but on the increased rates mandated under
Sections 153 and 156 of the National Internal Revenue Code of 1977. We note, however, that the latter
law does not specifically provide for a refund to these mining and lumber companies of specific taxes
paid on manufactured and diesel fuel oils.
In Insular Lumber Co. v. Court of Tax Appeals, (104 SCRA 710 [1981]), the Court held that the
authorized partial refund under Section 5 of R.A. No. 1435 partakes of the nature of a tax exemption
and therefore cannot be allowed unless granted in the most explicit and categorical language. Since the
grant of refund privileges must be strictly construed against the taxpayer, the basis for the refund shall
be the amounts deemed paid under Sections 1 and 2 of R.A. No. 1435.
ACCORDINGLY, the decision in G.R. Nos. 83583-84 is hereby MODIFIED. The private respondent's
CLAIM for REFUND is GRANTED, computed on the basis of the amounts deemed paid under
Sections 1 and 2 of R.A. No. 1435, without interest." 15
We rule, therefore, that since Atlas's claims for refund cover specific taxes paid before 1985, it should
be granted the refund based on the rates specified by Sections 1 and 2 of R.A. No. 1435 and not on the
increased rates under Sections 153 and 156 of the Tax Code of 1977, provided the claims are not yet
barred by prescription. cdll
The claim for refund on the specific tax paid to 21 July 1976 had already prescribed because claims for
refund should be made within two years from the date of payment of the tax sought to be refunded 16
and Atlas' judicial claim for refund was made only on 21 July 1978. LLjur
We cannot subscribe to the view of Atlas that the petitioner cannot raise the new theory in its petition
that the 25% tax refund should be based on the rates prescribed in Sections 1 and 2 of R.A. No. 1435
and not on the increased rates prescribed under Sections 153 and 156 of the Tax Code of 1977. The
petitioner merely asks us to consider and apply the rule enunciated in the Resolution of 25 March 1992
in Rio Tuba that modified the 30 September 1991 Decision therein, which decision the petitioner had
invoked in his motion to reconsider the judgment of the Court of Appeals. Since the modification took
place after the filing of the motion for reconsideration and it was likely that the Court of Appeals was
unaware of such modification when it promulgated on 4 September 1992 its resolution denying the
motion for reconsideration, it is by no means improper for the petitioner to subsequently invoke that
modificatory resolution. Furthermore, even if it be conceded ex gratia that the theory is new, the rule
invoked by Atlas is not without exceptions. The Supreme Court may review such matters as may be
necessary to serve the interest of justice; 17 it has ample authority to review and resolve matters not
specifically raised or assigned as error by the parties if it finds that the consideration and determination
of the same is necessary in arriving at a just resolution of a case. 18 Where the issues already raised

also rest on other issues not specifically presented, as long as the latter issues bear relevance and close
relation to the former and as long as they arise from matters on record, the Court has the authority to
include them in its discussion of the controversy as well as to pass upon them. 19
WHEREFORE, the petition is GRANTED. The challenged decision of the Court of Appeals in CA-GR
SP No. 20005 is MODIFIED. As modified, the tax refund to be granted to private respondent Atlas
Consolidated Mining and Development Corporation in C.T.A. Case No. 2964 shall be computed on the
basis of the rates prescribed under Sections 1 and 2 of R.A. No. 1435 and shall be limited to the
payments made by it prior to 21 July 1976. The petitioner shall forthwith revise the computation of the
refundable amount which shall be remitted, without interest, to the private respondent within sixty (60)
days from the finality of this decision. LLphil
No pronouncements as to costs.
SO ORDERED.
Cruz, Bellosillo, Quiason and Kapunan, JJ., concur.
Footnotes
1.
Annex "B" of Petition; Rollo, 34-38. Per Associate Justice Antonio M. Martinez, concurred in
by Associate Justices Asaali S. Isnani and Regina G. Ordoez-Benitez.
2.
Entitled "Commissioner of Internal Revenue vs. Atlas Consolidated Mining and Development
Corporation and the Court of Tax Appeals."
3.
"An Act to Provide Means of Increasing the Highway Special Fund."
4.
Rollo, 34-35.
5.
Rollo, 37-38.
6.
Annex "C" of Petition; Id., 39-49.
7.
202 SCRA 137 [1991].
8.
Rollo, 47-48.
9.
Id., 51.
10.
207 SCRA 549 [1992].
11.
Rollo, 64-69.
12.
Id., 73-78.
13.
Supra footnote no. 10.
14.
Supra footnote no. 7.
15.
Supra footnote no. 10, at 551-553.
16.
Section 230, National Internal Revenue Code.
17.
De Leon vs. Court of Appeals, 205 SCRA 612 [1992]; Asset Privatization Trust vs. Court of
Appeals, 214, SCRA 400 [1992].
18.
Sociedad Europea de Financiacion S.A. vs. Court of Appeals, 193 SCRA 105 [1991].
19.
Insular Life Assurance Co., Ltd. Employees Association vs. Insular Life Assurance Co., Ltd., 76
SCRA 50 1977].

SECOND DIVISION
[G.R. No. 86785. November 21, 1991.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF APPEALS and ATLAS
CONSOLIDATED MINING AND DEVELOPMENT CORPORATION, respondents.
Redentor O. Guyala for private respondent.
M.L. Gadioma Law Office collaborating counsel for private respondent.
SYLLABUS
1.
TAXATION; RULE ON DOUBLE TAXATION APPLIED TO CASE AT BAR WHERE THE
AD VALOREM TAX IN QUESTION IS REALLY IN THE NATURE OF A PRIVILEGE TAX. We
agree, for purposes of the issue involved in the present case, with the ratiocination of respondent court
in holding that, under the factual situation obtaining herein, there is no substantial difference between
privilege taxes and mining taxes, specifically the ad valorem tax imposed in Section 243 of the old Tax
Code, insofar as the prohibition against double taxation is concerned. It calls our attention to
petitioner's own admission that said ad valorem tax is really a tax on the privilege of extracting or
producing minerals or mineral products from the earth, a principle taken from the Republic Cement
Corporation case, supra. Respondent court plausibly concludes therefrom that the ad valorem tax in
question is really in the nature of a privilege tax, hence, the aforesaid rulings in the cited cases,
involving privilege taxes and the forbiddance against the imposition of another tax on an activity
incidental to the principal business, should apply to the instant case.
2.
STATUTORY CONSTRUCTION; STATUTES LEVYING TAXES, CONSTRUED STRICTLY
AGAINST THE GOVERNMENT. Generally, statutes levying taxes or duties are to be construed
strongly against the Government and in favor of the subject or citizens, because burdens are not to be
imposed or presumed to be imposed beyond what statutes expressly and clearly declare. No person or
property is subject to taxation unless they fall within the terms or plain import of a taxing statute.
3.
REMEDIAL LAW; EVIDENCE; FINDINGS OF FACT OF QUASI-JUDICIAL AGENCIES,
ENTITLED TO GREAT RESPECT. Moreover, it has been the long standing policy and practice of
this Court to respect the conclusions of quasi-judicial agencies, such as the Court of Tax Appeals
which, by the nature of its functions, is dedicated exclusively to the study and consideration of tax
problems and has necessarily developed an expertise on the subject, unless there has been an abuse or
improvident exercise of its authority. Therefore, finding no such abuse or improvident exercise of
authority or discretion, the decision of respondent court, affirming that of the Court of Tax Appeals,
must consequently by upheld.
DECISION
REGALADO, J p:
With commendable zeal, petitioner, through the Solicitor General, assails the decision in CA-G.R. No.
15429 of the Court of Appeals, 1 promulgated on January 20, 1989, affirming the decision of the Court
of Tax Appeals in C.T.A. Case No. 2778 which granted a tax credit of P170,476.64 representing ad
valorem taxes paid by private respondent for the period from the first quarter of 1974 to the third
quarter of 1975. LLjur
The findings of fact of the Court of Tax Appeals, which were adopted by the Court of Appeals, are not
disputed by petitioner and are hereunder reproduced:
"1.
Petitioner is a mining corporation duly organized and existing under and by virtue of the laws of
the Philippines, having its offices at A Soriano Bldg., Ayala Avenue, Makati, Rizal. It is engaged
primarily in the mining of copper ore from its mines property and concessions in a barrio called Don
Andres Soriano, Toledo, Province of Cebu, and reputedly the biggest copper mine in Asia. (t.s.n., pp. 6,
18-19, hearing 10/1/82.)
"2.
Petitioner used the open pit method digging away the copper ore deposits. This consists of
removing all surface and top materials of limestone, soil and rocks to reach into the copper ore deposits
found below. (t.s.n., pp. 19-21, 10/1/82; pp. 16-17, 2/17/83.)

"3.
Petitioner is the owner of the land or surface rights of the Biga Lime Quarry located in Toledo
City containing limestone. (Exhs. G-1, H, H-1 to H-17, K; t.s.n., pp. 18, 22, 24, 31-32, 10/1/82) And as
such owner, petitioner is not required, during the years covered in this case (1973-1975), to secure a
government permit to dig out the limestone. (Sec. 67, P.D. 463; Sec. 63, Consolidated Mines
Administrative Order; t.s.n., pp. 21-24, 10/1/82.)
"4.
Beneath the surface of the Biga Lime Quary are deposits of copper ore, and to mine these
copper deposits, petitioner had to remove and dig out the surface materials of limestone, soil and rocks.
Apparently, most of the limestone was left in the mine site as waste, although a small portion thereof
was utilized by petitioner as a flotation agent in the conversion of the copper rocks into concentrates.
On the basis of the evidence, the limestone was first processed by petitioner into lime; and the lime
became a cleansing reagent, by chemical reaction with water, in the conversion of the copper ore into
copper concentrate. The effect of the lime mixed with water was to cause the copper mineral powder to
float and caused the unwanted waste like lime and other materials to sink. This waste at the bottom of
the conveyor was thrown away as tailings while the floating copper powder was accumulated and
dried, known as copper concentrate. This was the mineral ore that was exported to Japan for processing
into copper cathodes and rods. Evidently, the lime does not become part of the concentrate. (Exhs. I; J;
t.s.n., p. 16, 5/4/81; pp. 16-17, 20-27, 10/1/82.)
"5.
As shown from the records, the limestone processed into lime and used as flotation agent was
never removed from the mines concession of petitioner. Even the tailings, topsoil waste and rocks, were
left in the mines site as waste. (t.s.n., pp. 21-27, 10/1/82; p. 6, 5/14/81.)
"6.
The processing by petitioner of the limestone was done completely inside the concession. (t.s.n.,
p. 8, 10/29/83; pp. 28, 31, 10/1/82; pp. 21-22, 10/1/83.) And nobody purchased the limestone or the
lime manufactured from it. (t.s.n., p. 29, 10/1/83/.) Seemingly, neither the limestone nor the processed
'lime' possessed market value. (t.s.n., pp. 5-7, 9/29/83; pp. 7-8, 13-14, 5/14/81; Exhs. D, D-11.)
"7.
The evidence presented shows that for cost accounting and internal management control,
petitioner assigned 'cost estimates' to each and every identifiable activity or process involved in the
mining of copper from blasting and digging and hauling to loading for export. Invariably, cost was
assigned to the process of digging out the copper rocks, crushing and pulverizing them, and converting
the mineral into exportable copper concentrate to exporting the concentrate. It was from this
assignment of cost estimate to the process of producing lime from the limestone, that petitioner
established that the 'production cost' of lime, during the period involved in this case, was P72,096.25.
"8.
It was this production cost of 'lime' that petitioner used in computing the ad valorem tax of
P181,925.25 representing tax on the lime, . . . 2
On December 22, 1975, petitioner filed with the Commissioner of Internal Revenue its claim for tax
credit of the aforesaid sum of P181,925.25 which it paid as ad valorem tax. On February 18, 1976,
since no action was seasonably taken by the Commissioner of Internal Revenue on the claim, petitioner
filed a petition for review with the Court of Tax Appeals.
On February 16, 1988, the Court of Tax Appeals rendered judgment in favor of private respondent
ordering therein respondent Commissioner of Internal Revenue "to grant a tax credit to petitioner Atlas
Consolidated Mining & Development Corporation in the amount of P170,476.64 representing
erroneously paid ad valorem tax for the period from the 1st quarter of 1974 to the 3rd quarter of 1975."
3
Not satisfied therewith, petitioner filed with this Court a petition for review on certiorari, which
petition was referred to the Court of Appeals and re-docketed therein as CA-G.R. S.P. No. 15429. On
January 20, 1989, respondent Court of Appeals affirmed the decision of the Court of Tax Appeals and
dismissed the petition for lack of merit. 4
Before us, petitioner raises the sole issue of whether lime stone dug out and processed into lime used in
the production of copper concentrates to ad valorem tax imposed by Section 243 of the then applicable
National Internal Revenue Code (Section 255 of the Internal Revenue Code of 1977, as amended). It is

petitioner's submission that the aforementioned ad valorem tax is a severance tax and is due and
payable upon removal of the mineral from its bed or mine. LexLib
The petition cannot prosper.
The ad valorem tax under Section 243 of the old Tax Code is a tax not on the minerals but upon the
taxpayer's privilege of severing or extracting minerals or mineral products from the earth, the
Government's right to exact said impost springing from the Regalian theory of State ownership of its
natural resources. 5
The pertinent provisions of the old Tax Code read as follows:
"SECTION 243.
Ad valorem taxes on output of mineral lands not covered by leases. There is
hereby imposed on the actual market value of the annual gross output of the minerals or mineral
product extracted or produced from all mineral lands not covered by lease, an ad valorem tax in the
amount of two per centum of the value of the output, except gold which shall pay one-half per centum.
"Before the minerals or mineral products are removed from the mines, the Commissioner of Internal
Revenue or his representatives shall first be notified of such removal on a form prescribed for the
purpose. (As amended by Sec. 21, republic Act No. 909, and Sec. 48, Republic Act No. 6110)."
"SECTION 245.
Time and manner of payment of royalties or ad valorem taxes. The royalties
or ad valorem taxes, as the case may be, shall be due and payable upon the removal of the mineral
products from the locality where mined. . . ."
Under the aforementioned provisions, although all minerals and mineral and mineral products extracted
from the mineral lands are subject to ad valorem tax, however, the said tax becomes due and payable
only upon removal of the same from the locality where mined. In the case at bar, the limestone were
admittedly never removed from the mine site nor did they become component parts of the copper
concentrates. Moreover, it should be noted that said tax is imposed only on the actual market value of
mineral products extracted or produced. 6 This is confirmed by the second paragraph of said Section
243 which requires prior notification to the Commissioner of Internal Revenue or his representative
before the minerals or mineral products are removed from the mines. Such requirement is obviously
intended to enable him to assess and collect the proper ad valorem taxes, which necessarily
presupposes that such minerals or mineral products have an actual market value.
As found by both lower courts, in the case of private respondent the evidence shows that the limestone
removed from its mineral lands, together with other surface materials, had no actual market value. The
Court of Tax Appeals ramified that the utilization of waste limestone by herein private respondent,
which is engaged in mining copper ore, by converting such waste into lime as a cleansing reagent in the
conversion of copper into copper concentrate, was merely incidental to its mining copper ore operation
for which it is adequately taxed. 7 It is not engaged in the district business of extracting limestone in
order to serve other persons or commercial entities therewith.
Thus, respondent Court of Appeals oppositely declares:
"It is clear from the above provision that the ad valorem tax charged therein is assessed and collected
on 'actual market value' of the annual gross output of the minerals extracted or the mineral products
produced from the mineral laws of the taxpayer. But 'to extract' as pointed out by respondent Atlas,
means 'to separate an ore or mineral from a deposit' (p. 80, Rollo), so that the word 'extract' used in the
above Sec. 243, when applied to the case of Atlas, means that its taxable operation is its business or
activity of extracting copper materials or ore from the deposit in its mining lands. The presence of
limestone together with other surface materials as soil and rocks on its mineral lands is, however, only
an accident; in the words of respondent Atlas, 'in fact, as obstruction blocking the separation of the
copper sought' by it from said lands (id). Hence, the removal of these obstructions, like the removal of
other surface materials like soil and rocks, from the mineral lands where the copper ore is buried,
cannot be the 'extraction' contemplated by Sec. 243.
"'The process by which respondent Atlas extracts copper mineral ore from its mineral lands in the
course of which it digs away and removes all the surface top materials thereon including limestone, is

very well described in the decision of the respondent CTA as follows:

1.
Petitioner (Atlas Consolidated) had to dig away and remove all the surface top materials
consisting of limestone, top soil and rocks to reach into the copper ore deposits found below. As a
matter of fact, as stated above, petitioner as owner of the surface right was not even required to secure a
government permit to dig out the limestone.
2.
Most of the limestone was left in the mine site as waste, although a small portion thereof was
utilized by petitioner as a flotation agent in the conversion of the copper rocks into concentrates. The
limestone was first processed by petitioner into lime, and by chemical reaction with water, the lime
became a cleansing reagent in the conversion of the copper ore into copper concentrate. It appears that
the effect of the lime, mined with water, was to cause the copper mineral powder to float and caused
the unwanted waste like lime and other materials to sink which were thrown away as tailings. 'The
floating copper powder was accumulated and dried, known as copper concentrate which was the
mineral exported to Japan for processing into copper cathodes and rods. The lime did not become part
of the concentrate.
3.
The limestone processed into lime and used as flotation agent was never removed from the mine
concession of petitioner. And the record reveals that neither the limestone nor the processed lime
possessed market value." 8
On the premise, therefore, that the extraction or removal by private respondent of limestone from its
mineral lands is a mere incident in its copper ore mining operations for which it is already taxed, both
courts held that to impose another set of tax on said limestone which has no commercial value would
be tantamount to double taxation. Such an imposition, avers respondent court, has been repeatedly
proscribed in our decisional pronouncements to the effect that where a taxpayer is engaged in a distinct
business and, as a feature thereof, in an activity merely incidental which serves no other person or
business, the incidental activity should not be separately or additionally taxed. 9 Petitioner takes
vigorous exception thereto, stigmatizing the reliance on said cases as erroneous and misplaced since
what is involved in the case at bar is a mining tax while the cited cases deal with privilege taxes.
LLphil
We agree, for purposes of the issue involved in the present case, with the ratiocination of respondent
court in holding that, under the factual situation obtaining herein, there is no substantial difference
between privilege taxes and mining taxes, specifically the ad valorem tax imposed in Section 243 of the
old Tax Code, insofar as the prohibition against double taxation is concerned. It calls our attention to
petitioner's own admission that said ad valorem tax is really a tax on the privilege of extracting or
producing minerals or mineral products from the earth, a principle taken from the Republic Cement
Corporation case, supra. Respondent court plausibly concludes therefrom that the ad valorem tax in
question is really in the nature of a privilege tax, hence, the aforesaid rulings in the cited cases,
involving privilege taxes and the forbiddance against the imposition of another tax on an activity
incidental to the principal business, should apply to the instant case.
Generally, statutes levying taxes or duties are to be construed strongly against the Government and in
favor of the subject or citizens, because burdens are not to be imposed or presumed to be imposed
beyond what statutes expressly and clearly declare. 10 No person or property is subject to taxation
unless they fall within the terms or plain import of a taxing statute. 11
Moreover, it has been the long standing policy and practice of this Court to respect the conclusions of
quasi-judicial agencies, such as the Court of Tax Appeals which, by the nature of its functions, is
dedicated exclusively to the study and consideration of tax problems and has necessarily developed an
expertise on the subject, unless there has been an abuse or improvident exercise of its authority. 12
Therefore, finding no such abuse or improvident exercise of authority or discretion, the decision of
respondent court, affirming that of the Court of Tax Appeals, must consequently by upheld. prcd
ON THE FOREGOING CONSIDERATIONS, the petition at bar is DENIED and the judgment of
respondent Court of Appeals is hereby AFFIRMED.

SO ORDERED.
Melencio-Hererra and Paras, JJ ., concur.
Padilla, J ., took no part because of equity interest in private respondent.
Footnotes
1.
Justice Alicia V. Sempio-Dy, ponente, with Justices Josue N. Bellosillo and Alfredo Marigomen,
concurring.
2.
Rollo, 45-47.
3.
Ibid., 42.
4.
Ibid., 44-53.
5.
Portland Cement Co. vs. Commissioner of Internal Revenue, 13 SCRA 333 (1965).
6.
Republic Cement Corporation vs. Commissioner of Internal Revenue, 23 SCRA 967 (1968).
7.
Rollo, 40.
8.
Ibid., 48-49
9.
Standard-Vacuum Oil Co. vs. Antigua, etc. et al., 96 Phil. 909 (1955); City of Manila vs.
Fortune Enterprises, Inc., 108 Phil. 1058 (1960); Opon vs. Caltex Phil., Inc., 22 SCRA 755 (1968).
10.
Commissioner of Internal Revenue vs. Fireman's Fund Insurance Company, et al., 148 SCRA
315 (1987).
11.
72 Am. Jur. 2d, State and Local Taxation, 46.
12.
Reyes, et al. vs. Commissioner of Internal Revenue, et al., 24 SCRA 198 (1969); Ker & Co.,
Ltd. vs. Lingad, etc., 38 SCRA 524 (1971); Coca-Cola Export Corporation vs. Commissioner of
Internal Revenue, et al., 56 SCRA 5 (1974); Nasiad, et al. vs. Court of tax Appeals, 61 SCRA 238
(1974).

SECOND DIVISION
[G.R. No. 54908. January 22, 1990.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MITSUBISHI METAL
CORPORATION, ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION and
the COURT OF TAX APPEALS, respondents.
[G.R. No. 80041. January 22, 1990.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MITSUBISHI METAL
CORPORATION, ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION and
the COURT OF TAX APPEALS, respondents.
Gadioma Law Offices for respondents.
SYLLABUS
1.
REMEDIAL LAW; APPEAL; FINDINGS OF FACT OF COURT OF APPEALS RESPECTED;
EXCEPTION. We have ruled that findings of fact of the Court of Tax Appeals are entitled to the
highest respect and can only be disturbed on appeal if they are not supported by substantial evidence or
if there is a showing of gross error or abuse on the part of the tax court.
2.
ID.; ID.; ID.; ID.; CASE AT BAR. Ordinarily, we could give due consideration to the
holding of respondent court that Mitsubishi is a mere agent of Eximbank. Compelling circumstances
obtaining and proven in these cases, however, warrant a departure from said general rule, since we are
convinced that there is a misapprehension of facts on the part of the tax court to the extent that its
conclusions are speculative in nature.
3.
TAXATION; EXEMPTION THEREFROM; STRICTLY CONSTRUED. It is too settled a
rule in this jurisdiction, as to dispense with the need for citations, that laws granting exemption from
tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power.
Taxation is the rule and exemption is the exception. The burden of proof rests upon the party claiming
exemption to prove that it is in fact covered by the exemption so claimed.
4.
ID.; ID.; SECTION 29(b) (7) (4) OF THE TAX CODE; CASE AT BAR NOT COVERED.
The principal issue in both petitions is whether or not the interest income from the loans extended to
Atlas by Mitsubishi is excludible from gross income taxation pursuant to Section 29 (b) (7) (A) of the
tax code and, therefore, exempt from withholding tax. Apropos thereto, the focal question is whether or
not Mitsubishi is a mere conduit of Eximbank which will then be considered as the creditor whose
investments in the Philippines on loans are exempt from taxes under the code. The loan and sales
contract between Mitsubishi and Atlas does not contain any direct or inferential reference to Eximbank
whatsoever. The agreement is strictly between Mitsubishi as creditor in the contract of loan and Atlas
as the seller of the copper concentrates. From the categorical language used in the document, one
prestation was in consideration of the other. The specific terms and the reciprocal nature of their
obligations make it implausible, if not vacuous, to give credit to the cavalier assertion that Mitsubishi
was a mere agent in said transaction. Surely, Eximbank had nothing to do with the sale of the copper
concentrates since all that Mitsubishi stated in its loan application with the former was that the amount
being procured would be used as a loan to and in consideration for importing copper concentrates from
Atlas. Such an innocuous statement of purpose could not have been intended for, nor could it legally
constitute, a contract of agency. If that had been the purpose as respondent court believes, said
corporations would have specifically so stated, especially considering their experience and expertise in
financial transactions, not to speak of the amount involved and its purchasing value in 1970.
Respondents postulate that Mitsubishi had to be a conduit because Eximbank's charter prevents it from
making loans except to Japanese individuals and corporations. We are not impressed. Not only is there
a failure to establish such submission by adequate evidence but it posits the unfair and unexplained
imputation that, for reasons subject only of surmise, said financing institution would deliberately
circumvent its own charter to accommodate an alien borrower through a manipulated subterfuge, but
with it as a principal and the real obligee. Definitely, the taxability of a party cannot be blandly glossed

over on the basis of a supposed "broad, pragmatic analysis" alone without substantial supportive
evidence, lest governmental operations suffer due to diminution of much needed funds. Nor can we
close this discussion without taking cognizance of petitioner's warning, of pervasive relevance at this
time, that while international comity is invoked in this case on the nebulous representation that the
funds involved in the loans are those of a foreign government, scrupulous care must be taken to avoid
opening the floodgates to the violation of our tax laws. Otherwise, the mere expedient of having a
Philippine corporation enter into a contract for loans or other domestic securities with private foreign
entities, which in turn will negotiate independently with their governments, could be availed of to take
advantage of the tax exemption law under discussion.
DECISION
REGALADO, J p:
These cases, involving the same issue being contested by the same parties and having originated from
the same factual antecedents generating the claims for tax credit of private respondents, the same were
consolidated by resolution of this Court dated May 31, 1989 and are jointly decided herein. cSIADa
The records reflect that on April 17,1970, Atlas Consolidated Mining and Development Corporation
(hereinafter, Atlas) entered into a Loan and Sales Contract with Mitsubishi Metal Corporation
(Mitsubishi, for brevity), a Japanese corporation licensed to engage in business in the Philippines, for
purposes of the projected expansion of the productive capacity of the former's mines in Toledo, Cebu.
Under said contract, Mitsubishi agreed to extend a loan to Atlas in the amount of $20,000,000.00,
United States currency, for the installation of a new concentrator for copper production. Atlas, in turn,
undertook to sell to Mitsubishi all the copper concentrates produced from said machine for a period of
fifteen (15) years. It was contemplated that $9,000,000.00 of said loan was to be used for the purchase
of the concentrator machinery from Japan. 1
Mitsubishi thereafter applied for a loan with the Export-Import Bank of Japan (Eximbank, for short)
obviously for purposes of its obligation under said contract. Its loan application was approved on May
26, 1970 in the sum of Y4,320,000,000.00, at about the same time as the approval of its loan for
Y2,880,000,000.00 from a consortium of Japanese banks. The total amount of both loans is equivalent
to $20,000,000.00 in United States currency at the then prevailing exchange rate. The records in the
Bureau of Internal Revenue show that the approval of the loan by Eximbank to Mitsubishi was subject
to the condition that Mitsubishi would use the amount as a loan to Atlas and as a consideration for
importing copper concentrates from Atlas, and that Mitsubishi had to pay back the total amount of loan
by September 30, 1981. 2
Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by the former to
the latter totalling P13,143,966.79 for the years 1974 and 1975. The corresponding 15% tax thereon in
the amount of P1,971,595.01 was withheld pursuant to Section 24 (b) (1) and Section 53 (b) (2) of the
National Internal Revenue Code, as amended by Presidential Decree No. 131, and duly remitted to the
Government. 3
On March 5, 1976, private respondents filed a claim for tax credit requesting that the sum of
P1,971,595.01 be applied against their existing and future tax liabilities. Parenthetically, it was later
noted by respondent Court of Tax Appeals in its decision that on August 27, 1976, Mitsubishi executed
a waiver and disclaimer of its interest in the claim for tax credit in favor of Atlas. 4
The petitioner not having acted on the claim for tax credit, on April 23, 1976 private respondents filed a
petition for review with respondent court, docketed therein as CTA Case No. 2801. 5 The petition was
grounded on the claim that Mitsubishi was a mere agent of Eximbank, which is a financing institution
owned, controlled and financed by the Japanese Government. Such governmental status of Eximbank,
if it may be so called, is the basis for private respondents' claim for exemption from paying the tax on
the interest payments on the loan as earlier stated. It was further claimed that the interest payments on
the loan from the consortium of Japanese banks were likewise exempt because said loan supposedly
came from or were financed by Eximbank. The provision of the National Internal Revenue Code relied

upon is Section 29 (b) (7) (A), 6 which excludes from gross income:
"(A) Income received from their investments in the Philippines in loans, stocks, bonds or other
domestic securities, or from interest on their deposits in banks in the Philippines by (1) foreign
governments, (2) financing institutions owned, controlled, or enjoying refinancing from them, and (3)
international or regional financing institutions established by governments."
Petitioner filed an answer on July 9, 1976. The case was set for hearing on April 16, 1977 but was later
reset upon manifestation of petitioner that the claim for tax credit of the alleged erroneous payment was
still being reviewed by the Appellate Division of the Bureau of Internal Revenue. The records show
that on November 16, 1976, the said division recommended to petitioner the approval of private
respondent's claim. However, before action could be taken thereon, respondent court scheduled the case
for hearing on September 30, 1977, during which trial private respondents presented their evidence
while petitioner submitted his case on the basis of the records of the Bureau of Internal Revenue and
the pleadings. 7
On April 18, 1980, respondent court promulgated its decision ordering petitioner to grant a tax credit in
favor of Atlas in the amount of P1,971,595.01. Interestingly, the tax court held that petitioner admitted
the material averments of private respondents when he supposedly prayed "for judgment on the
pleadings without offering proof as to the truth of his allegations." 8 Furthermore, the court declared
that all papers and documents pertaining to the loan of Y4,320,000,000.00 obtained by Mitsubishi from
Eximbank's show that this was the same amount given to Atlas. It also observed that the money for the
loans from the consortium of private Japanese banks in the sum of Y2,880,000,000.00 "originated"
from Eximbank. From these, respondent court concluded that the ultimate creditor of Atlas was
Eximbank with Mitsubishi acting as a mere "arranger or conduit through which the loans flowed from
the creditor Export-Import Bank of Japan to the debtor Atlas Consolidated Mining & Development
Corporation." 9
A motion for reconsideration having been denied on August 20, 1980, petitioner interposed an appeal to
this Court, docketed herein as G.R. No. 54908.
While CTA Case No. 2801 was still pending before the tax court, the corresponding 15% tax on the
amount of P439,167.95 on the P2,927,789.06 interest payments for the years 1977 and 1978 was
withheld and remitted to the Government. Atlas again filed a claim for tax credit with the petitioner,
repeating the same basis for exemption. prLL
On June 25, 1979, Mitsubishi and Atlas filed a petition for review with the Court of Tax Appeals
docketed as CTA Case No. 3015. Petitioner filed his answer thereto on August 14, 1979, and, in a letter
to private respondents dated November 12, 1979, denied said claim for tax credit for lack of factual or
legal basis. 10
On January 15, 1981, relying on its prior ruling in CTA Case No. 2801, respondent court rendered
judgment ordering the petitioner to credit Atlas the aforesaid amount of tax paid. A motion for
reconsideration, filed on March 10, 1981, was denied by respondent court in a resolution dated
September 7, 1987. A notice of appeal was filed on September 22, 1987 by petitioner with respondent
court and a petition for review was filed with this Court on December 19, 1987. Said later case is now
before us as G.R. No. 80041 and is consolidated with G.R. No. 54908.
The principal issue in both petitions is whether or not the interest income from the loans extended to
Atlas by Mitsubishi is excludible from gross income taxation pursuant to Section 29 (b) (7) (A) of the
tax code and, therefore, exempt from withholding tax. Apropos thereto, the focal question is whether or
not Mitsubishi is a mere conduit of Eximbank which will then be considered as the creditor whose
investments in the Philippines on loans are exempt from taxes under the code.
Prefatorily, it must be noted that respondent court erred in holding in CTA Case No. 2801 that
petitioner should be deemed to have admitted the allegations of the private respondents when it
submitted the case on the basis of the pleadings and records of the bureau. There is nothing to indicate
such admission on the part of petitioner nor can we accept respondent court's pronouncement that

petitioner did not offer to prove the truth of its allegations. The records of the Bureau of Internal
Revenue relevant to the case were duly submitted and admitted as petitioner's supporting evidence.
Additionally, a hearing was conducted, with presentation of evidence, and the findings of respondent
court were based not only on the pleadings but on the evidence adduced by the parties. There could,
therefore, not have been a judgment on the pleadings, with the theorized admissions imputed to
petitioner, as mistakenly held by respondent court.
Time and again, we have ruled that findings of fact of the Court of Tax Appeals are entitled to the
highest respect and can only be disturbed on appeal if they are not supported by substantial evidence or
if there is a showing of gross error or abuse on the part of the tax court. 11 Thus, ordinarily, we could
give due consideration to the holding of respondent court that Mitsubishi is a mere agent of Eximbank.
Compelling circumstances obtaining and proven in these cases, however, warrant a departure from said
general rule, since we are convinced that there is a misapprehension of facts on the part of the tax court
to the extent that its conclusions are speculative in nature. prLL
The loan and sales contract between Mitsubishi and Atlas does not contain any direct or inferential
reference to Eximbank whatsoever. The agreement is strictly between Mitsubishi as creditor in the
contract of loan and Atlas as the seller of the copper concentrates. From the categorical language used
in the document, one prestation was in consideration of the other. The specific terms and the reciprocal
nature of their obligations make it implausible, if not vacuous, to give credit to the cavalier assertion
that Mitsubishi was a mere agent in said transaction.
Surely, Eximbank had nothing to do with the sale of the copper concentrates since all that Mitsubishi
stated in its loan application with the former was that the amount being procured would be used as a
loan to and in consideration for importing copper concentrates from Atlas. 12 Such an innocuous
statement of purpose could not have been intended for, nor could it legally constitute, a contract of
agency. If that had been the purpose as respondent court believes, said corporations would have
specifically so stated, especially considering their experience and expertise in financial transactions, not
to speak of the amount involved and its purchasing value in 1970. LibLex
A thorough analysis of the factual and legal ambience of these eases impels us to give weight to the
following arguments of petitioner:
"The nature of the above contract shows that the same is not just a simple contract of loan. It is not a
mere creditor-debtor relationship. It is more of a reciprocal obligation between ATLAS and
MITSUBISHI where the latter shall provide the funds in the installation of a new concentrator at the
former's Toledo mines in Cebu, while ATLAS in consideration of which, shall sell to MITSUBISHI, for
a term of 15 years, the entire copper concentrate that will be produced by the installed concentrator.
"Suffice it to say, the selling of the copper concentrate to MITSUBISHI within the specified term was
the consideration of the granting of the amount of $20 million to ATLAS. MITSUBISHI, in order to
fulfill its part of the contract, had to obtain funds. Hence, it had to secure a loan or loans from other
sources. And from what sources, it is immaterial as far as ATLAS in concerned. In this case,
MITSUBISHI obtained the $20 million from the EXIMBANK of Japan and the consortium of Japanese
banks financed through the EXIMBANK of Japan.
"When MITSUBISHI therefore secured such loans, it was in its own independent capacity as a private
entity and not as a conduit of the consortium of Japanese banks or the EXIMBANK of Japan. While the
loans were secured by MITSUBISHI primarily 'as a loan to and in consideration for importing copper
concentrates from ATLAS,' the fact remains that it was a loan by EXIMBANK of Japan to
MITSUBISHI and not to ATLAS.
"Thus, the transaction between MITSUBISHI and EXIMBANK of Japan was a distinct and separate
contract from that entered into by MITSUBISHI and ATLAS. Surely, in the latter contract, it is not
EXIMBANK that was intended to be benefited. It is MITSUBISHI which stood to profit. Besides, the
Loan and Sales Contract cannot be any clearer. The only signatories to the same were MITSUBISHI
and ATLAS. Nowhere in the contract can it be inferred that MITSUBISHI acted for and in behalf of

EXIMBANK of Japan nor of any entity, private or public, for that matter.
"Corollary to this, it may well be stated that in this jurisdiction, well-settled is the rule that when a
contract of loan is completed, the money ceases to be the property of the former owner and becomes
the sole property of the obligor (Tolentino and Manio vs. Gonzales Sy, 50 Phil. 558).
"In the case at bar, when MITSUBISHI obtained the loan of $20 million from EXIMBANK of Japan,
said amount ceased to be the property of the bank and became the property of MITSUBISHI.
"The conclusion is indubitable: MITSUBISHI, and NOT EXIMBANK, is the sole creditor of ATLAS,
the former being the owner of the $20 million upon completion of its loan contract with EXIMBANK
of Japan.
"The interest income of the loan paid by ATLAS to MITSUBISHI is therefore entirely different from
the interest income paid by MITSUBISHI to EXIMBANK of Japan. What was the subject of the 15%
withholding tax is not the interest income paid by MITSUBISHI to EXIMBANK but the interest
income earned by MITSUBISHI from the loan to ATLAS. . . . " 13
To repeat, the contract between Eximbank and Mitsubishi is entirely different. It is complete in itself,
does not appear to be suppletory or collateral to another contract and is, therefore, not to be distorted by
other considerations aliunde. The application for the loan was approved on May 20, 1970, or more than
a month after the contract between Mitsubishi and Atlas was entered into on April 17, 1970. It is true
that under the contract of loan with Eximbank, Mitsubishi agreed to use the amount as a loan to and in
consideration for importing copper concentrates from Atlas, but all that this proves is the justification
for the loan as represented by Mitsubishi, a standard banking practice for evaluating the prospects of
due repayment. There is nothing wrong with such stipulation as the parties in a contract are free to
agree on such lawful terms and conditions as they see fit. Limiting the disbursement of the amount
borrowed to a certain person or to a certain purpose is not unusual, especially in the case of Eximbank
which, aside from protecting its financial exposure, must see to it that the same are in line with the
provisions and objectives of its charter.
Respondents postulate that Mitsubishi had to be a conduit because Eximbank's charter prevents it from
making loans except to Japanese individuals and corporations. We are not impressed. Not only is there
a failure to establish such submission by adequate evidence but it posits the unfair and unexplained
imputation that, for reasons subject only of surmise, said financing institution would deliberately
circumvent its own charter to accommodate an alien borrower through a manipulated subterfuge, but
with it as a principal and the real obligee. prcd
The allegation that the interest paid by Atlas was remitted in full by Mitsubishi to Eximbank, assuming
the truth thereof, is too tenuous and conjectural to support the proposition that Mitsubishi is a mere
conduit. Furthermore, the remittance of the interest payments may also be logically viewed as an
arrangement in paying Mitsubishi's obligation to Eximbank. Whatever arrangement was agreed upon
by Eximbank and Mitsubishi as to the manner or procedure for the payment of the latter's obligation is
their own concern. It should also be noted that Eximbank's loan to Mitsubishi imposes interest at the
rate of 75% per annum, while Mitsubishi's contract with Atlas merely states that the "interest on the
amount of the loan shall be the actual cost beginning from and including other dates of releases against
loan." 14
It is too settled a rule in this jurisdiction, as to dispense with the need for citations, that laws granting
exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the
taxing power. Taxation is the rule and exemption is the exception. The burden of proof rests upon the
party claiming exemption to prove that it is in fact covered by the exemption so claimed, which onus
petitioners have failed to discharge. Significantly, private respondents are not even among the entities
which, under Section 29 (b) (7) (A) of the tax code, are entitled to exemption and which should
indispensably be the party in interest in this case.
Definitely, the taxability of a party cannot be blandly glossed over on the basis of a supposed "broad,
pragmatic analysis" alone without substantial supportive evidence, lest governmental operations suffer

due to diminution of much needed funds. Nor can we close this discussion without taking cognizance
of petitioner's warning, of pervasive relevance at this time, that while international comity is invoked in
this case on the nebulous representation that the funds involved in the loans are those of a foreign
government, scrupulous care must be taken to avoid opening the floodgates to the violation of our tax
laws. Otherwise, the mere expedient of having a Philippine corporation enter into a contract for loans
or other domestic securities with private foreign entities, which in turn will negotiate independently
with their governments, could be availed of to take advantage of the tax exemption law under
discussion. cdphil
WHEREFORE, the decisions of the Court of Tax Appeals in CTA Cases Nos. 2801 and 3015, dated
April 18, 1980 and January 15, 1981, respectively, are hereby REVERSED and SET ASIDE. cIHSTC
SO ORDERED.
Melencio-Herrera, Paras, Padilla and Sarmiento, JJ., concur.
Footnotes
1.
Rollo, G.R. No. 54908, 21; G.R. No. 80041, 14.
2.
Ibid., G.R. No. 80041, 15, 49.
3.
Ibid., G.R. No. 54908, 45-46.
4.
Ibid., id., 33-39.
5.
Ibid., id., 48.
6.
Now, Sec. 28 (b) (8) (A).
7.
Rollo, G.R. No. 54908, 41-42.
8.
Ibid., id., 42.
9.
Ibid., id., 51-52.
10.
Ibid., G.R. No. 80041, 17.
11.
Nasiad, et al. vs. Court of Tax Appeals, 61 SCRA 238 (1974); Raymundo vs. de Joya, et al., 101
SCRA 495 (1980); Commissioner of Internal Revenue vs. Arnoldus Carpentry Shop, Inc., et al., 159
SCRA 199 (1988).
12.
Rollo, G.R. 80041, 15.
13.
Ibid., G.R. No. 54908, 23-25.
14.
Ibid., G.R. No. 80041, 15, 27.