THIRD DIVISION and, doing business in Quezon City, shall pay a franchise tax at the
rate of ten percent (10%) of one percent (1%) for 1993-1994,
G.R. No. 166408 October 6, 2008
QUEZON CITY and THE CITY TREASURER OF QUEZON CITY,
petitioners,
vs.
ABS-CBN BROADCASTING CORPORATION, respondent.
DECISION
REYES, R.T., J.:
CLAIMS for tax exemption must be based on language in law too plain to be
mistaken. It cannot be made out of inference or implication.
The principle is relevant in this petition for review on certiorari of the Decision1
of the Court of Appeals (CA) and that2 of the Regional Trial Court (RTC)
ordering the refund and declaring invalid the imposition and collection of local
franchise tax by the City Treasurer of Quezon City on ABS-CBN Broadcasting
Corporation (ABS-CBN).
The Facts
Petitioner City Government of Quezon City is a local government unit duly
organized and existing by virtue of Republic Act (R.A.) No. 537, otherwise
known as the Revised Charter of Quezon City. Petitioner City Treasurer of
Quezon City is primarily responsible for the imposition and collection of taxes
within the territorial jurisdiction of Quezon City.
Under Section 31, Article 13 of the Quezon City Revenue Code of 1993,3 a
franchise tax was imposed on businesses operating within its jurisdiction. The
provision states:
Section 31. Imposition of Tax. - Any provision of special laws or
grant of tax exemption to the contrary notwithstanding, any person,
corporation, partnership or association enjoying a franchise
whether issued by the national government or local government
twenty percent (20%) of one percent (1%) for 1995, and thirty
percent (30%) of one percent (1%) for 1996 and the succeeding
years thereafter, of gross receipts and sales derived from the
operation of the business in Quezon City during the preceding
calendar year.
On May 3, 1995, ABS-CBN was granted the franchise to install and operate radio
and television broadcasting stations in the Philippines under R.A. No. 7966.4
Section 8 of R.A. No. 7966 provides the tax liabilities of ABS-CBN which reads:
Section 8. Tax Provisions. - The grantee, its successors or assigns,
shall be liable to pay the same taxes on their real estate, buildings
and personal property, exclusive of this franchise, as other persons
or corporations are now hereafter may be required by law to pay.
In addition thereto, the grantee, its successors or assigns, shall pay
a franchise tax equivalent to three percent (3%) of all gross
receipts of the radio/television business transacted under this
franchise by the grantee, its successors or assigns, and the said
percentage tax shall be in lieu of all taxes on this franchise or
earnings thereof; Provided that the grantee, its successors or
assigns shall continue to be liable for income taxes under Title II of
the National Internal Revenue Code pursuant to Section 2 of
Executive No. 72 unless the latter enactment is amended or
repealed, in which case the amendment or repeal shall be
applicable thereto. (Emphasis added)
ABS-CBN had been paying local franchise tax imposed by Quezon City.
However, in view of the above provision in R.A. No. 9766 that it "shall pay a
franchise tax x x x in lieu of all taxes," the corporation developed the opinion that
it is not liable to pay the local franchise tax imposed by Quezon City.
Consequently, ABS-CBN paid under protest the local franchise tax imposed by
Quezon City on the dates, in the amounts and under the official receipts as
follows:
O.R. No. Date Amount Paid
2464274 7/18/1995 P 1,489,977.28
 2484651 10/20/1995 1,489,977.28 0048756 1-23-97 2,731,135.81
2536134 1/22/1996 2,880,975.65 0067352 4-03-97 2,731,135.81
8354906 1/23/1997 8,621,470.83 Total P19,944,672.667
48756 1/23/1997 2,731,135.81
67352 4/3/1997 2,731,135.81 Quezon City argued that the "in lieu of all taxes" provision in R.A. No. 9766
could not have been intended to prevail over a constitutional mandate which
Total P19,944,672.665
ensures the viability and self-sufficiency of local government units. Further, that
taxes collectible by and payable to the local government were distinct from taxes
On January 29, 1997, ABS-CBN filed a written claim for refund for local collectible by and payable to the national government, considering that the
franchise tax paid to Quezon City for 1996 and for the first quarter of 1997 in the Constitution specifically declared that the taxes imposed by local government
total amount of Fourteen Million Two Hundred Thirty-Three Thousand Five units "shall accrue exclusively to the local governments." Lastly, the City
Hundred Eighty-Two and 29/100 centavos (P14,233,582.29) broken down as contended that the exemption claimed by ABS-CBN under R.A. No. 7966 was
follows: withdrawn by Congress when the Local Government Code (LGC) was passed.8
Section 193 of the LGC provides:
O.R. No. Date Amount Paid
2536134 1-22-96 P 2,880,975.65 Section 193. Withdrawal of Tax Exemption Privileges. - Unless
8354906 1-23-97 8,621,470.83 otherwise provided in this Code, tax exemptions or incentives
0048756 1-23-97 2,731,135.81 granted to, or presently enjoyed by all persons, whether
natural or juridical, including government-owned or
Total P14,233,582.296 -controlled corporations, except local water districts,
cooperatives duly registered under R.A. 6938, non-stock and non-
In a letter dated March 3, 1997 to the Quezon City Treasurer, ABS-CBN profit hospitals and educational institutions, are hereby
reiterated its claim for refund of local franchise taxes paid. withdrawn upon the effectivity of this Code. (Emphasis added)

On June 25, 1997, for failure to obtain any response from the Quezon City On August 13, 1997, ABS-CBN filed a supplemental complaint adding to its
Treasurer, ABS-CBN filed a complaint before the RTC in Quezon City seeking claim for refund the local franchise tax paid for the third quarter of 1997 in the
the declaration of nullity of the imposition of local franchise tax by the City amount of Two Million Seven Hundred Thirty-One Thousand One Hundred
Government of Quezon City for being unconstitutional. It likewise prayed for the Thirty-Five and 81/100 centavos (P2,731,135.81) and of other amounts of local
refund of local franchise tax in the amount of Nineteen Million Nine Hundred franchise tax as may have been and will be paid by ABS-CBN until the resolution
Forty-Four Thousand Six Hundred Seventy-Two and 66/100 centavos of the case.
(P19,944,672.66) broken down as follows:
Quezon City insisted that the claim for refund must fail because of the absence of
O.R. No. Date Amount Paid a prior written claim for it.
2464274 7-18-95 P 1,489,977.28
2484651 10-20-95 1,489,977.28 RTC and CA Dispositions
2536134 1-22-96 2,880,975.65
On January 20, 1999, the RTC rendered judgment declaring as invalid the
8354906 1-23-97 8,621,470.83 imposition on and collection from ABS-CBN of local franchise tax paid pursuant
to Quezon City Ordinance No. SP-91, S-93, after the enactment of R.A. No. 7966,
and ordered the refund of all payments made. The dispositive portion of the RTC
decision reads:
WHEREFORE, judgment is hereby rendered declaring the
imposition on and collection from plaintiff ABS-CBN
BROADCASTING CORPORATION of local franchise taxes
pursuant to Quezon City Ordinance No. SP-91, S-93 after the
enactment of Republic Act No. 7966 to be invalid, and,
accordingly, the Court hereby orders the defendants to refund all
its payments made after the effectivity of its legislative franchise
on May 3, 1995.
SO ORDERED.9
In its decision, the RTC ruled that the "in lieu of all taxes" provision contained in
Section 8 of R.A. No. 7966 absolutely excused ABS-CBN from the payment of
local franchise tax imposed under Quezon City Ordinance No. SP-91, S-93. The
intent of the legislature to excuse ABS-CBN from payment of local franchise tax
could be discerned from the usage of the "in lieu of all taxes" provision and from
the absence of any qualification except income taxes. Had Congress intended to
exclude taxes imposed from the exemption, it would have expressly mentioned so
in a fashion similar to the proviso on income taxes.
The RTC also based its ruling on the 1990 case of Province of Misamis Oriental
v. Cagayan Electric Power and Light Company, Inc. (CEPALCO).10 In said case,
the exemption of respondent electric company CEPALCO from payment of
provincial franchise tax was upheld on the ground that the franchise of
CEPALCO was a special law, while the Local Tax Code, on which the provincial
ordinance imposing the local franchise tax was based, was a general law. Further,
it was held that whenever there is a conflict between two laws, one special and
particular and the other general, the special law must be taken as intended to
constitute an exception to the general act.
The RTC noted that the legislative franchise of ABS-CBN was granted years after
the effectivity of the LGC. Thus, it was unavoidable to conclude that Section 8 of
R.A. No. 7966 was an exception since the legislature ought to be presumed to
have enacted it with the knowledge and awareness of the existence and prior
enactment of Section 13711 of the LGC.
In addition, the RTC, again citing the case of Province of Misamis Oriental v.
Cagayan Electric Power and Light Company, Inc. (CEPALCO),12 ruled that the
imposition of the local franchise tax was an impairment of ABS-CBN's contract
with the government. The imposition of another franchise on the corporation by
the local authority would constitute an impairment of the former's charter, which
is in the nature of a private contract between it and the government.
As to the amounts to be refunded, the RTC rejected Quezon City's position that a
written claim for refund pursuant to Section 196 of the LGC was a condition sine
qua non before filing the case in court. The RTC ruled that although Fourteen
Million Two Hundred Thirty-Three Thousand Five Hundred Eighty-Two and
29/100 centavos (P14,233,582.29) was the only amount stated in the letter to the
Quezon City Treasurer claiming refund, ABS-CBN should nonetheless be also
refunded of all payments made after the effectivity of R.A. No. 7966. The
inaction of the City Treasurer on the claim for refund of ABS-CBN legally
rendered any further claims for refund on the part of plaintiff absurd and futile in
relation to the succeeding payments.
The City of Quezon and its Treasurer filed a motion for reconsideration which
was subsequently denied by the RTC. Thus, appeal was made to the CA. On
September 1, 2004, the CA dismissed the petition of Quezon City and its
Treasurer. According to the appellate court, the issues raised were purely legal
questions cognizable only by the Supreme Court. The CA ratiocinated:
For another, the issues which appellants submit for this Court's
consideration are more of legal query necessitating a legal opinion
rather than a call for adjudication on the matter in dispute.
xxxx
The first issue has earlier been categorized in Province of Misamis
Oriental v. Cagayan Electric and Power Co., Inc. to be a legal one.
There is no more argument to this.
The next issue although it may need the reexamination of the
pertinent provisions of the local franchise and the legislative
franchise given to appellee, also needs no evaluation of facts. It
suffices that there may be a conflict which may need to be
reconciled, without regard to the factual backdrop of the case.
 The last issue deals with a legal question, because whether or not
there is a prior written claim for refund is no longer in dispute.
Rather, the question revolves on whether the said requirement may
be dispensed with, which obviously is not a factual issue.13
On September 23, 2004, petitioner moved for reconsideration. The motion was,
however, denied by the CA in its Resolution dated December 16, 2004. Hence,
the present recourse.
Issues
Petitioner submits the following issues for resolution:
I.
Whether or not the phrase "in lieu of all taxes" indicated in the
franchise of the respondent appellee (Section 8 of RA 7966) serves
to exempt it from the payment of the local franchise tax imposed
by the petitioners-appellants.
II.
Whether or not the petitioners-appellants raised factual and legal issues before the
Honorable Court of Appeals.14
Our Ruling
The second issue, being procedural in nature, shall be dealt with immediately. But
there are other resultant issues linked to the first.
I. The dismissal by the CA of petitioners' appeal is in order because it raised
purely legal issues, namely:
1) Whether appellee, whose franchise expressly provides that its
payment of franchise tax shall be in lieu of all taxes in this
franchise or earnings thereof, is absolutely excused from paying
the franchise tax imposed by appellants;
2) Whether appellants' imposition of local franchise tax is a
violation of appellee's legislative franchise; and
3) Whether one can do away with the requirement on prior written
claim for refund.15
Obviously, these are purely legal questions, cognizable by this Court, to the
exclusion of all other courts. There is a question of law when the doubt or
difference arises as to what the law is pertaining to a certain state of facts.16
Section 2, Rule 50 of the Rules of Court provides that an appeal taken to the CA
under Rule 41 raising only questions of law is erroneous and shall be dismissed,
issues of pure law not being within its jurisdiction.17 Consequently, the dismissal
by the CA of petitioners' appeal was in order.
In the recent case of Sevilleno v. Carilo,18 this Court ruled that the dismissal of the
appeal of petitioner was valid, considering the issues raised there were pure
questions of law, viz.:
Petitioners interposed an appeal to the Court of Appeals but it was
dismissed for being the wrong mode of appeal. The appellate court
held that since the issue being raised is whether the RTC has
jurisdiction over the subject matter of the case, which is a question
of law, the appeal should have been elevated to the Supreme Court
under Rule 45 of the 1997 Rules of Civil Procedure, as amended.
Section 2, Rule 41 of the same Rules which governs appeals from
judgments and final orders of the RTC to the Court of Appeals,
provides:
SEC. 2. Modes of appeal. -
(a) Ordinary appeal. - The appeal to the Court of Appeals
in cases decided by the Regional Trial Court in the exercise
of its original jurisdiction shall be taken by filing a notice
of appeal with the court which rendered the judgment or
final order appealed from and serving a copy thereof upon
the adverse party. No record on appeal shall be required
except in special proceedings and other cases of multiple or
separate appeals where the law or these Rules so require. In
 such cases, the record on appeal shall be filed and served in
like manner.
(b) Petition for review. - The appeal to the Court of
Appeals in cases decided by the Regional Trial Court in the
exercise of its appellate jurisdiction shall be by petition for
review in accordance with Rule 42.
(c) Appeal by certiorari. - In all cases where only questions
of law are raised or involved, the appeal shall be to the
Supreme Court by petition for review on certiorari in
accordance with Rule 45.
In Macawili Gold Mining and Development Co., Inc. v. Court of
Appeals, we summarized the rule on appeals as follows:
(1) In all cases decided by the RTC in the exercise of its
original jurisdiction, appeal may be made to the Court of
Appeals by mere notice of appeal where the appellant
raises questions of fact or mixed questions of fact and law;
(2) In all cases decided by the RTC in the exercise of its
original jurisdiction where the appellant raises only
questions of law, the appeal must be taken to the Supreme
Court on a petition for review on certiorari under Rule 45;
(3) All appeals from judgments rendered by the RTC in the
exercise of its appellate jurisdiction, regardless of whether
the appellant raises questions of fact, questions of law, or
mixed questions of fact and law, shall be brought to the
Court of Appeals by filing a petition for review under Rule
42.
It is not disputed that the issue brought by petitioners to the Court
of Appeals involves the jurisdiction of the RTC over the subject
matter of the case. We have a long standing rule that a court's
jurisdiction over the subject matter of an action is conferred only
by the Constitution or by statute. Otherwise put, jurisdiction of a
court over the subject matter of the action is a matter of law.
Consequently, issues which deal with the jurisdiction of a court
over the subject matter of a case are pure questions of law. As
petitioners' appeal solely involves a question of law, they should
have directly taken their appeal to this Court by filing a petition
for review on certiorari under Rule 45, not an ordinary appeal
with the Court of Appeals under Rule 41. Clearly, the appellate
court did not err in holding that petitioners pursued the wrong
mode of appeal.
Indeed, the Court of Appeals did not err in dismissing petitioners'
appeal. Section 2, Rule 50 of the same Rules provides that an
appeal from the RTC to the Court of Appeals raising only
questions of law shall be dismissed; and that an appeal
erroneously taken to the Court of Appeals shall be dismissed
outright, x x x.19 (Emphasis added)
However, to serve the demands of substantial justice and equity, the Court opts to
relax procedural rules and rule upon on the merits of the case. In Ong Lim Sing
Jr. v. FEB Leasing and Finance Corporation,20 this Court stated:
Courts have the prerogative to relax procedural rules of even the
most mandatory character, mindful of the duty to reconcile both
the need to speedily put an end to litigation and the parties' right to
due process. In numerous cases, this Court has allowed liberal
construction of the rules when to do so would serve the demands of
substantial justice and equity. In Aguam v. Court of Appeals, the
Court explained:
"The court has the discretion to dismiss or not to dismiss an
appellant's appeal. It is a power conferred on the court, not
a duty. The "discretion must be a sound one, to be
exercised in accordance with the tenets of justice and fair
play, having in mind the circumstances obtaining in each
case." Technicalities, however, must be avoided. The law
abhors technicalities that impede the cause of justice. The
court's primary duty is to render or dispense justice. "A
litigation is not a game of technicalities." "Lawsuits unlike
duels are not to be won by a rapier's thrust. Technicality,
when it deserts its proper office as an aid to justice and
 becomes its great hindrance and chief enemy, deserves
scant consideration from courts." Litigations must be
decided on their merits and not on technicality. Every party
litigant must be afforded the amplest opportunity for the
proper and just determination of his cause, free from the
unacceptable plea of technicalities. Thus, dismissal of
appeals purely on technical grounds is frowned upon where
the policy of the court is to encourage hearings of appeals
on their merits and the rules of procedure ought not to be
applied in a very rigid, technical sense; rules of procedure
are used only to help secure, not override substantial
justice. It is a far better and more prudent course of action
for the court to excuse a technical lapse and afford the
parties a review of the case on appeal to attain the ends of
justice rather than dispose of the case on technicality and
cause a grave injustice to the parties, giving a false
impression of speedy disposal of cases while actually
resulting in more delay, if not a miscarriage of justice.21
II. The "in lieu of all taxes" provision in its franchise does not exempt ABS-
CBN from payment of local franchise tax.
A. The present controversy essentially boils down to a dispute between the
inherent taxing power of Congress and the delegated authority to tax of local
governments under the 1987 Constitution and effected under the LGC of 1991.
The power of the local government of Quezon City to impose franchise tax is
based on Section 151 in relation to Section 137 of the LGC, to wit:
Section 137. Franchise Tax. - Notwithstanding any exemption
granted by any law or other special law, the province may impose
a tax on businesses enjoying a franchise, at the rate not exceeding
fifty percent (50%) of one percent (1%) of the gross annual
receipts for the preceding calendar year based on the incoming
receipt, or realized within its territorial jurisdiction. x x x
xxxx
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 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. (Emphasis supplied)
Such taxing power by the local government, however, is limited in the sense that
Congress can enact legislation granting exemptions. This principle was upheld in
City Government of Quezon City, et al. v. Bayan Telecommunications, Inc.22 Said
this Court:
This thus raises the question of whether or not the City's Revenue
Code pursuant to which the city treasurer of Quezon City levied
real property taxes against Bayantel's real properties located within
the City effectively withdrew the tax exemption enjoyed by
Bayantel under its franchise, as amended.
Bayantel answers the poser in the negative arguing that once again
it is only "liable to pay the same taxes, as any other persons or
corporations on all its real or personal properties, exclusive of its
franchise."
Bayantel's posture is well-taken. While the system of local
government taxation has changed with the onset of the 1987
Constitution, the power of local government units to tax is still
limited. As we explained in Mactan Cebu International Airport
Authority:
"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 be 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. x x x"
Clearly then, while a new slant on the subject of local taxation now
prevails in the sense that the former doctrine of local government
units' delegated power to tax had been effectively modified with
Article X, Section 5 of the 1987 Constitution now in place, the
basic doctrine on local taxation remains essentially the same. For
as the Court stressed in Mactan, "the power to tax is [still]
primarily vested in the Congress."
This new perspective is best articulated by Fr. Joaquin G. Bernas,
S.J., himself a Commissioner of the 1986 Constitutional
Commission which crafted the 1987 Constitution, thus:
"What is the effect of Section 5 on the fiscal position of
municipal corporations? Section 5 does not change the
doctrine that municipal corporations do not possess
inherent powers of taxation. What it does is to confer
municipal corporations a general power to levy taxes and
otherwise create sources of revenue. They no longer have
to wait for a statutory grant of these powers. The power of
the legislative authority relative to the fiscal powers of
local governments has been reduced to the authority to
impose limitations on municipal powers. Moreover, these
limitations must be "consistent with the basic policy of
local autonomy." The important legal effect of Section 5 is
thus to reverse the principle that doubts are resolved against
municipal corporations. Henceforth, in interpreting
statutory provisions on municipal fiscal powers, doubts will
be resolved in favor of municipal corporations. It is
understood, however, that taxes imposed by local
government must be for a public purpose, uniform within a
locality, must not be confiscatory, and must be within the
jurisdiction of the local unit to pass."
In the case under review, the Philippine Congress enacted R.A. No. 7966 on
March 30, 1995, subsequent to the effectivity of the LGC on January 1, 1992.
In net effect, the controversy presently before the Court involves,
at bottom, a clash between the inherent taxing power of the
legislature, which necessarily includes the power to exempt, and
the local government's delegated power to tax under the aegis of
the 1987 Constitution.
Now to go back to the Quezon City Revenue Code which imposed
real estate taxes on all real properties within the city's territory and
removed exemptions theretofore "previously granted to, or
presently enjoyed by all persons, whether natural or juridical [x x
x]" there can really be no dispute that the power of the Quezon
City Government to tax is limited by Section 232 of the LGC which
expressly provides that "a province or city or 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." Under this
law, the Legislature highlighted its power to thereafter exempt
certain realties from the taxing power of local government units.
An interpretation denying Congress such power to exempt would
reduce the phrase "not hereinafter specifically exempted" as a pure
jargon, without meaning whatsoever. Needless to state, such
absurd situation is unacceptable.
For sure, in Philippine Long Distance Telephone Company, Inc.
(PLDT) vs. City of Davao, this Court has upheld the power of
Congress to grant exemptions over the power of local government
units to impose taxes. There, the Court wrote:
"Indeed, the grant of taxing powers to local government
units under the Constitution and the LGC does not affect
the power of Congress to grant exemptions to certain
persons, pursuant to a declared national policy. The legal
effect of the constitutional grant to local governments
simply means that in interpreting statutory provisions on
municipal taxing powers, doubts must be resolved in favor
of municipal corporations."23 (Emphasis supplied)
Under it, ABS-CBN was granted the franchise to install and operate radio and
television broadcasting stations in the Philippines. Likewise, Section 8 imposed
on ABS-CBN the duty of paying 3% franchise tax. It bears stressing, however,
that payment of the percentage franchise tax shall be "in lieu of all taxes" on the
said franchise.24
Congress has the inherent power to tax, which includes the power to grant tax
exemptions. On the other hand, the power of Quezon City to tax is prescribed by
Section 151 in relation to Section 137 of the LGC which expressly provides that
notwithstanding any exemption granted by any law or other special law, the City
may impose a franchise tax. It must be noted that Section 137 of the LGC does
not prohibit grant of future exemptions. As earlier discussed, this Court in City
Government of Quezon City v. Bayan Telecommunications, Inc.25 sustained the
power of Congress to grant tax exemptions over and above the power of the local
government's delegated power to tax.
B. The more pertinent issue now to consider is whether or not by passing R.A.
No. 7966, which contains the "in lieu of all taxes" provision, Congress intended to
exempt ABS-CBN from local franchise tax.
Petitioners argue that the "in lieu of all taxes" provision in ABS-CBN's franchise
does not expressly exempt it from payment of local franchise tax. They contend
that a tax exemption cannot be created by mere implication and that one who
claims tax exemptions must be able to justify his claim by clearest grant of
organic law or statute.
Taxes are what civilized people pay for civilized society. They are the lifeblood of
the nation. Thus, statutes granting tax exemptions are construed stricissimi juris
against the taxpayer and liberally in favor of the taxing authority. A claim of tax
exemption must be clearly shown and based on language in law too plain to be
mistaken. Otherwise stated, taxation is the rule, exemption is the exception.26 The
burden of proof rests upon the party claiming the exemption to prove that it is in
fact covered by the exemption so claimed.27
The basis for the rule on strict construction to statutory provisions granting tax
exemptions or deductions is to minimize differential treatment and foster
impartiality, fairness and equality of treatment among taxpayers.28 He who claims
an exemption from his share of common burden must justify his claim that the
legislature intended to exempt him by unmistakable terms. For exemptions from
taxation are not favored in law, nor are they presumed. They must be expressed in
the clearest and most unambiguous language and not left to mere implications. It
has been held that "exemptions are never presumed, the burden is on the claimant
to establish clearly his right to exemption and cannot be made out of inference or
implications but must be laid beyond reasonable doubt. In other words, since
taxation is the rule and exemption the exception, the intention to make an
exemption ought to be expressed in clear and unambiguous terms.29
Section 8 of R.A. No. 7966 imposes on ABS-CBN a franchise tax equivalent to
three (3) percent of all gross receipts of the radio/television business transacted
under the franchise and the franchise tax shall be "in lieu of all taxes" on the
franchise or earnings thereof.
The "in lieu of all taxes" provision in the franchise of ABS-CBN does not
expressly provide what kind of taxes ABS-CBN is exempted from. It is not clear
whether the exemption would include both local, whether municipal, city or
provincial, and national tax. What is clear is that ABS-CBN shall be liable to pay
three (3) percent franchise tax and income taxes under Title II of the NIRC. But
whether the "in lieu of all taxes provision" would include exemption from local
tax is not unequivocal.
As adverted to earlier, the right to exemption from local franchise tax must be
clearly established and cannot be made out of inference or implications but must
be laid beyond reasonable doubt. Verily, the uncertainty in the "in lieu of all
taxes" provision should be construed against ABS-CBN. ABS-CBN has the
burden to prove that it is in fact covered by the exemption so claimed. ABS-CBN
miserably failed in this regard.
ABS-CBN cites the cases Carcar Electric & Ice Plant v. Collector of Internal
Revenue,30 Manila Railroad v. Rafferty,31 Philippine Railway Co. v. Collector of
Internal Revenue,32 and Visayan Electric Co. v. David33 to support its claim that
that the "in lieu of all taxes" clause includes exemption from all taxes.
However, a review of the foregoing case law reveals that the grantees' respective
franchises expressly exempt them from municipal and provincial taxes. Said the
Court in Manila Railroad v. Rafferty:34
On the 7th day of July 1906, by an Act of the Philippine
Legislature, a special charter was granted to the Manila Railroad
 Company. Subsection 12 of Section 1 of said Act (No. 1510)
provides that:
"In consideration of the premises and of the granting of this
concession or franchise, there shall be paid by the grantee
to the Philippine Government, annually, for the period of
thirty (30) years from the date hereof, an amount equal to
one-half (1/2) of one per cent of the gross earnings of the
grantee in respect of the lines covered hereby for the
preceding year; after said period of thirty (30) years, and
for the fifty (50) years thereafter, the amount so to be paid
annually shall be an amount equal to one and one-half (1
1/2) per cent of such gross earnings for the preceding year;
and after such period of eighty (80) years, the percentage
and amount so to be paid annually by the grantee shall be
fixed by the Philippine Government.
Such annual payments, when promptly and fully made by
the grantee, shall be in lieu of all taxes of every name and
nature - municipal, provincial or central - upon its capital
stock, franchises, right of way, earnings, and all other
property owned or operated by the grantee under this
concession or franchise."35 (Underscoring supplied)
In the case under review, ABS-CBN's franchise did not embody an exemption
similar to those in Carcar, Manila Railroad, Philippine Railway, and Visayan
Electric. Too, the franchise failed to specify the taxing authority from whose
jurisdiction the taxing power is withheld, whether municipal, provincial, or
national. In fine, since ABS-CBN failed to justify its claim for exemption from
local franchise tax, by a grant expressed in terms "too plain to be mistaken" its
claim for exemption for local franchise tax must fail.
C. The "in lieu of all taxes" clause in the franchise of ABS-CBN has become
functus officio with the abolition of the franchise tax on broadcasting companies
with yearly gross receipts exceeding Ten Million Pesos.
In its decision dated January 20, 1999, the RTC held that pursuant to the "in lieu
of all taxes" provision contained in Section 8 of R.A. No. 7966, ABS-CBN is
exempt from the payment of the local franchise tax. The RTC further pronounced
that ABS-CBN shall instead be liable to pay a franchise tax of 3% of all gross
receipts in lieu of all other taxes.
On this score, the RTC ruling is flawed. In keeping with the laws that have been
passed since the grant of ABS-CBN's franchise, the corporation should now be
subject to VAT, instead of the 3% franchise tax.
At the time of the enactment of its franchise on May 3, 1995, ABS-CBN was
subject to 3% franchise tax under Section 117(b) of the 1977 National Internal
Revenue Code (NIRC), as amended, viz.:
SECTION 117. Tax on franchises. - Any provision of general or
special laws to the contrary notwithstanding, there shall be levied,
assessed and collected in respect to all franchise, upon the gross
receipts from the business covered by the law granting the
franchise, a tax in accordance with the schedule prescribed
hereunder:
(a) On electric utilities, city gas, and water supplies Two
(2%) percent
(b) On telephone and/or telegraph systems, radio and/or
broadcasting stations Three (3%) percent
(c) On other franchises Five (5%) percent. (Emphasis
supplied)
On January 1, 1996, R.A. No. 7716, otherwise known as the Expanded Value
Added Tax Law,36 took effect and subjected to VAT those services rendered by
radio and/or broadcasting stations. Section 3 of R.A. No. 7716 provides:
Section 3. Section 102 of the National Internal Revenue Code, as
amended is hereby further amended to read as follows:
SEC. 102. Value-added tax on sale of services and use or
lease of properties. - (a) Rate and base of tax. - There shall
be levied, assessed and collected, as value-added tax
equivalent to 10% of gross receipts derived from the sale or
 exchange of services, including the use or lease of
properties.
The phrase "sale or exchange of services" means the
performance of all kinds of services in the Philippines, for
others for a fee, remuneration or consideration, including
those performed or rendered by construction and service
contractors; x x x services of franchise grantees of
telephone and telegraph, radio and television broadcasting
and all other franchise grantees except those under Section
117 of this Code; x x x (Emphasis supplied)
Notably, under the same law, "telephone and/or telegraph systems, broadcasting
stations and other franchise grantees" were omitted from the list of entities subject
to franchise tax. The impression was that these entities were subject to 10% VAT
but not to franchise tax. Only the franchise tax on "electric, gas and water
utilities" remained. Section 12 of R.A. No. 7716 provides:
Section 12. Section 117 of the National Internal Revenue Code, as
amended, is hereby further amended to read as follows:
SEC. 117. Tax on Franchises. - Any provision of general or
special law to the contrary notwithstanding there shall be
levied, assessed and collected in respect to all franchises
on electric, gas and water utilities a tax of two percent
(2%) on the gross receipts derived from the business
covered by the law granting the franchise. (Emphasis
added)
Subsequently, R.A. No. 824137 took effect on January 1, 199738 containing more
amendments to the NIRC. Radio and/or television companies whose annual gross
receipts do not exceed P10,000,000.00 were granted the option to choose between
paying 3% national franchise tax or 10% VAT. Section 9 of R.A. No. 8241
provides:
SECTION 9. Section 12 of Republic Act No. 7716 is hereby amended to read as
follows:
"Sec. 12. Section 117 of the National Internal Revenue Code, as
amended, is hereby further amended to read as follows:
"Sec. 117. Tax on franchise. - Any provision of general or
special law to the contrary, notwithstanding, there shall be
levied, assessed and collected in respect to all franchises
on radio and/or television broadcasting companies whose
annual gross receipts of the preceding year does not
exceed Ten million pesos (P10,000,000.00), subject to
Section 107(d) of this Code, a tax of three percent (3%) and
on electric, gas and water utilities, a tax of two percent
(2%) on the gross receipts derived from the business
covered by the law granting the franchise: Provided,
however, That radio and television broadcasting
companies referred to in this section, shall have an option
to be registered as a value-added tax payer and pay the tax
due thereon: Provided, further, That once the option is
exercised, it shall not be revoked. (Emphasis supplied)
On the other hand, radio and/or television companies with yearly gross receipts
exceeding P10,000,000.00 were subject to 10% VAT, pursuant to Section 102 of
the NIRC.
On January 1, 1998, R.A. No. 842439 was passed confirming the 10% VAT
liability of radio and/or television companies with yearly gross receipts exceeding
P10,000,000.00.
R.A. No. 9337 was subsequently enacted and became effective on July 1, 2005.
The said law further amended the NIRC by increasing the rate of VAT to 12%.
The effectivity of the imposition of the 12% VAT was later moved from January
1, 2006 to February 1, 2006.
In consonance with the above survey of pertinent laws on the matter, ABS-CBN
is subject to the payment of VAT. It does not have the option to choose between
the payment of franchise tax or VAT since it is a broadcasting company with
yearly gross receipts exceeding Ten Million Pesos (P10,000,000.00).
VAT is a percentage tax imposed on any person whether or not a franchise
grantee, who in the course of trade or business, sells, barters, exchanges, leases,
goods or properties, renders services. It is also levied on every importation of
goods whether or not in the course of trade or business. The tax base of the VAT
is limited only to the value added to such goods, properties, or services by the
seller, transferor or lessor. Further, the VAT is an indirect tax and can be passed
on to the buyer.

The franchise tax, on the other hand, is a percentage tax imposed only on
franchise holders. It is imposed under Section 119 of the Tax Code and is a direct
liability of the franchise grantee.

The clause "in lieu of all taxes" does not pertain to VAT or any other tax. It
cannot apply when what is paid is a tax other than a franchise tax. Since the
franchise tax on the broadcasting companies with yearly gross receipts exceeding
ten million pesos has been abolished, the "in lieu of all taxes" clause has now
become functus officio, rendered inoperative.

In sum, ABS-CBN's claims for exemption must fail on twin grounds. First, the "in
lieu of all taxes" clause in its franchise failed to specify the taxes the company is
sought to be exempted from. Neither did it particularize the jurisdiction from
which the taxing power is withheld. Second, the clause has become functus officio
because as the law now stands, ABS-CBN is no longer subject to a franchise tax.
It is now liable for VAT.

WHEREFORE, the petition is GRANTED and the appealed Decision

REVERSED AND SET ASIDE. The petition in the trial court for refund of local
franchise tax is DISMISSED.

SO ORDERED.

EN BANC
G.R. No. 156040 December 11, 2008
DIGITAL TELECOMMUNICATIONS PHILIPPINES, INC., petitioner,
vs.
CITY GOVERNMENT OF BATANGAS represented by HON. ANGELITO
DONDON A. DIMACUHA, Batangas City Mayor, MR. BENJAMIN S.
PARGAS, Batangas City Treasurer, and ATTY. TEODULFO A. DEQUITO,
Batangas City Legal Officer, respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for review on certiorari1 assailing the Regional Trial Court’s
Order2 dated 2 May 2002 in Civil Case No. 5343 as well as the 19 November
2002 Order denying the Motion for Reconsideration. In the assailed orders,
Branch 8 of the Regional Trial Court (RTC) of Batangas City (RTC-Branch 8)
reversed the 28 March 2001 Order3 issued by Branch 3 of RTC-Batangas City
(RTC-Branch 3). RTC-Branch 8 declared that under its legislative franchise,
Digital Telecommunications Philippines, Inc. (petitioner) is not exempt from
paying real property tax assessed by the Batangas City Government (respondent).
The Facts
On 17 February 1994, Republic Act No. 7678 (RA 7678)4 granted petitioner a 25-
year franchise to install, operate and maintain telecommunications systems
throughout the Philippines. Section 5 of RA 7678 reads:
Sec. 5. Tax Provisions. - The grantee shall be liable to pay the same
taxes on its real estate, buildings, and personal property exclusive of
this franchise as other persons or corporations are now or hereafter
may be required by law to pay. In addition thereto, the grantee shall pay
to the Bureau of Internal Revenue each year, within thirty (30) days after
the audit and approval of the accounts, a franchise tax as may be
prescribed by law of all gross receipts of the telephone or other
telecommunications businesses transacted under this franchise by the
grantee; Provided, That the grantee shall continue to be liable for income
taxes payable under Title II of the National Internal Revenue Code
pursuant to Section 2 of Executive Order No. 72 unless the latter
enactment is amended or repealed, in which case the amendment or repeal
shall be applicable thereto.
The grantee shall file the return with and pay the tax due thereon to the
Commissioner of Internal Revenue or his duly authorized representative in
accordance with the National Internal Revenue Code and the return shall
be subject to audit by the Bureau of Internal Revenue. (Boldfacing and
underscoring supplied)
Sometime in 1997, respondent issued a building permit for the installation of
petitioner’s telecommunications facilities in Batangas City. After the installation
of the facilities, petitioner applied with the Mayor’s office of Batangas City for a
permit to operate. Because of a discrepancy in the actual investment costs used in
computing the prescribed fees for the clearances and permits, petitioner was not
able to secure a Mayor’s Permit for the year 1998. Petitioner was also advised to
settle its unpaid realty taxes. However, petitioner claimed exemption from the
payment of realty tax, citing the first sentence of Section 5 of RA 7678, the
Letter-Opinion of the Bureau of Local Government Finance (BLGF) dated 8 April
1997,5 and the letter of the Office of the President dated 12 March 1996.6
In 1999, respondent refused to issue a Mayor’s Permit to petitioner without
payment of its realty taxes.
On 22 June 1999, petitioner paid P68,890.39 under protest as fees for the permit
to operate, but respondent refused to accept the payment unless petitioner also
paid the realty taxes.7
On 2 July 1999, respondent threatened to close down petitioner’s operations.
Hence, on 3 July 1999, petitioner instituted a complaint for prohibition and
mandamus with prayer for a temporary restraining order or writ of preliminary
injunction. This case was raffled to RTC-Branch 3. On the same date, respondent
served a Cease and Desist Order on petitioner.8
On 20 January 2000, during the pendency of the complaint, petitioner paid its
realty taxes of P2,043,265 under protest.9 Petitioner resumed its business,
rendering the other issues raised in petitioner’s complaint moot. Consequently, the
only issue left for resolution is whether petitioner is exempt from the realty tax
under Section 5 of RA 7678.
The Ruling of RTC-Branch 3
On 28 March 2001, RTC-Branch 3 issued the following Order:
WHEREFORE, premises considered, the Court hereby declares that the
real estate, buildings and personal property of plaintiff Digital
Telecommunications Philippines, Inc. which are used in the operation of
its franchise are exempt from payment of real property taxes, but those not
so used should be held liable thereto.10
RTC-Branch 3 reasoned that the phrase "exclusive of this franchise" in the first
sentence of Section 5 of RA 7678 limits the real properties that are subject to
realty tax only to those which are not used in petitioner’s telecommunications
business. In short, petitioner’s real properties used in its telecommunications
business are not subject to realty tax.11
On 1 May 2001, respondent moved for reconsideration. Before acting on the
motion, the Presiding Judge of RTC-Branch 3 voluntarily inhibited himself
because the newly-elected mayor of Batangas City was his kumpadre.12 The case
was re-raffled to RTC-Branch 8.
The Ruling of RTC-Branch 8
On 2 May 2002, RTC-Branch 8 issued an Order which reads:
WHEREFORE, the defendants’ Motion for Reconsideration is hereby
granted. The Order of this Court dated March 21, 2001 is hereby set aside
and, in lieu thereof, judgment is hereby rendered in favor of the defendants
and against the plaintiff:
- DISMISSING the Amended Complaint;
- DECLARING that the plaintiff Digital Telecommunications
Philippines, Inc., under its legislative franchise RA No. 7678, is not
exempted from the payment of real property tax being collected by the
defendant City of Batangas and, accordingly,
- ORDERING said plaintiff to pay the City of Batangas real estate taxes
in the amount of Ph4,620,683.33 which was due as of January, 2000, as
well as those due thereafter, plus corresponding interest and penalties.13
On 29 May 2002, petitioner moved for reconsideration. On 19 November 2002,
RTC-Branch 8 denied petitioner’s motion for reconsideration.
Hence, this petition.
The Issue
The sole issue for resolution is whether, under the first sentence of Section 5 of
RA 7678, petitioner’s real properties used in its telecommunications business are
exempt from the realty tax.
Petitioner’s Contentions
Petitioner contends that its exemption from realty tax is based on the first
sentence of Section 5 of RA 7678. Petitioner claims that the evident purpose of
the phrase "exclusive of this franchise" is to limit the real properties that are
subject to realty tax only to properties that are not used in petitioner’s
telecommunications business.14 Petitioner asserts that the phrase "exclusive of this
franchise" must not be construed as a useless surplusage. Petitioner points out that
its exemption from realty tax was affirmed in two separate opinions, one rendered
by the Office of the President on 12 March 1996 and the other by the BLGF on 8
April 1997 and reaffirmed on 4 January 1999.15 The BLGF declared that "the real
properties of Digitel, which are used in the operation of its franchise are x x x
found to be exempt from the payment of real property taxes beginning 1 January
1993. However, all other properties of that company not used in connection with
the operation of its franchise shall remain taxable."16
Petitioner further argues that under the Local Government Code, the realty tax is
imposed on all lands, buildings, machineries and other improvements attached to
real property. A franchise is an incorporeal being, a special privilege granted by
the legislature. Hence, to read the first sentence of Section 5 of RA 7678 to mean
that the franchisee shall pay taxes on its real properties used in its
telecommunications business would render the phrase "exclusive of this
franchise" meaningless.
Petitioner admits that the franchise granted under RA 7678 is a personal property,
but the franchise is not the "personal property" referred to in the first sentence of
Section 5. Petitioner asserts that the phrase "real estate, buildings, and personal
property" in the first sentence of Section 5 refers solely to real properties and does
not include personal properties. Petitioner explains thus:
For PTEs (public telecommunication entities), these personal properties
include the switches which were installed in the exchange buildings as
well as the outside and inside plant equipment. Initially, these
telecommunications materials and equipment were personal property in
character. But, having been installed and made operational by being
attached to the exchange building, they are now converted into
immovables or real property. That being the case, the phrase "real
estate, buildings and personal property" actually refer[s] to properties
that are liable for real estate tax. And, Congress having made the
qualification with the phrase "exclusive of this franchise," only such real
properties that are not used in furtherance of the franchise are subject to
real property tax.17 (Emphasis supplied)
Respondent’s Contentions
Respondent contends that the phrase "exclusive of this franchise" does not mean
that petitioner is exempt from the realty tax on its real properties used in its
telecommunications business. The first sentence of Section 5 of RA 7678 makes
petitioner "liable to pay the same taxes for its real estate, buildings, and personal
property exclusive of this franchise as other persons or corporations are or
hereafter may be required by law to pay." This shows the clear intent of Congress
to tax petitioner’s real and personal properties.18 Respondent asserts that the
phrase "exclusive of this franchise" is a qualification of the broad declaration on
the franchisee’s liability for taxes which is the main thrust of the first sentence of
Section 5. Respondent points out that petitioner is paying taxes and fees on all its
motor vehicles, which are personal properties, without distinction.19 Respondent
also points out that petitioner admits that the first sentence of Section 5 of RA
7678 is ambiguous with respect to the phrase "exclusive of this franchise,"20 thus
petitioner resorted to the rules on statutory construction.21
Respondent adds that the legislative franchises granted to other
telecommunications companies contain the same phrase "exclusive of this
franchise." This shows the intent of Congress to make franchisees liable for the
realty tax rather than exempt them even if the real properties are used in their
telecommunications business.22
The Office of the Solicitor General (OSG), appearing for respondent, contends
that the first sentence of Section 5 provides for petitioner’s general liability to pay
taxes and does not provide for petitioner’s exemption from realty tax. The OSG
invokes the doctrine of last antecedent which is an aid in statutory construction.
The OSG argues that under this doctrine, the qualifying word or phrase only
restricts the word or phrase to which the qualifying word or phrase is immediately
associated and not the word or phrase which is distantly or remotely located. In
the first sentence of Section 5, the phrase "exclusive of this franchise" restricts
only the words "personal property" which immediately precede the phrase
"exclusive of this franchise." This means that the franchise, an intangible personal
property, should be excluded from the personal properties that are subject to taxes
under the first sentence of Section 5. The OSG adds that the use of the comma to
separate "real estate, buildings" from "personal property" exerts a dominant
influence in the application of the doctrine of last antecedent. Further, the OSG
reiterates that laws granting exemption from tax are to be construed strictissimi
juris against the taxpayer and liberally in favor of the taxing power.
The Ruling of the Court
The petition has no merit.
Section 5 of RA 7678 imposes taxes
and does not exempt from realty tax
The issue in this case involves the interpretation of the phrase "exclusive of this
franchise" in the first sentence of Section 5 of RA 7678.
Section 5 of RA 7678 states:
 Sec. 5. Tax Provisions. - The grantee shall be liable to pay the same
taxes on its real estate, buildings, and personal property exclusive of
this franchise as other persons or corporations are now or hereafter
may be required by law to pay. In addition thereto, the grantee shall pay
to the Bureau of Internal Revenue each year, within thirty (30) days after
the audit and approval of the accounts, a franchise tax as may be
prescribed by law of all gross receipts of the telephone or other
telecommunications businesses transacted under this franchise by the
grantee; Provided, That the grantee shall continue to be liable for income
taxes payable under Title II of the National Internal Revenue Code
pursuant to Section 2 of Executive Order No. 72 unless the latter
enactment is amended or repealed, in which case the amendment or repeal
shall be applicable thereto.
The grantee shall file the return with and pay the tax due thereon to the
Commissioner of Internal Revenue or his duly authorized representative in
accordance with the National Internal Revenue Code and the return shall
be subject to audit by the Bureau of Internal Revenue. (Boldfacing and
underscoring supplied)
The first sentence of Section 5 of RA 7678 is the same provision found in almost
all legislative franchises in the telecommunications industry dating back to 1905.23
It is also the same provision that appears in the legislative franchises of other
telecommunications companies like Philippine Long Distance Telephone
Company,24 Smart Information Technologies, Inc.,25 and Globe Telecom.26 Since
1905, no telecommunications company has claimed exemption from realty tax
based on the phrase "exclusive of this franchise," until petitioner filed the present
case on 3 July 1999.27
The first sentence of Section 5 clearly states that the legislative franchisee shall be
liable to pay the following taxes: (1) "the same taxes on its real estate, buildings,
and personal property exclusive of this franchise as other persons or
corporations are now or hereafter may be required by law to pay"; (2) "franchise
tax as may be prescribed by law of all gross receipts of the telephone or other
telecommunications businesses transacted under this franchise";28 and (3) "income
taxes payable under Title II of the National Internal Revenue Code."
The crux of the controversy lies in the interpretation of the phrase "exclusive of
this franchise" in the first sentence of Section 5. Petitioner interprets the phrase to
mean that its real properties that are used in its telecommunications business shall
not be subject to realty tax. Respondent interprets the same phrase to mean that
the term "personal property" shall not include petitioner’s franchise, which is an
intangible personal property.
We rule that the phrase "exclusive of this franchise" simply means that
petitioner’s franchise shall not be subject to the taxes imposed in the first sentence
of Section 5. The first sentence lists the properties that are subject to taxes, and
the list excludes the franchise. Thus, the first sentence provides:
The grantee shall be liable to pay the same taxes on its real estate,
buildings, and personal property exclusive of this franchise as other
persons or corporations are now or hereafter may be required by law to
pay. (Emphasis supplied)
A plain reading shows that the phrase "exclusive of this franchise" is meant to
exclude the legislative franchise from the properties subject to taxes under the
first sentence. In effect, petitioner’s franchise, which is a personal property, is not
subject to the taxes imposed on properties under the first sentence of Section 5.
However, petitioner’s gross receipts from its franchise are subject to the
"franchise tax" under the second sentence of Section 5. Thus, the second sentence
provides:
In addition thereto, the grantee shall pay to the Bureau of Internal Revenue
each year, within thirty (30) days after the audit and approval of the
accounts, a franchise tax as may be prescribed by law of all gross receipts
of the telephone or other telecommunications businesses transacted under
this franchise by the grantee; x x x (Emphasis supplied)
In short, petitioner’s franchise is excluded from the properties taxable under the
first sentence of Section 5 but the gross receipts from its franchise are expressly
taxable under the second sentence of the same Section.
The first sentence of Section 5 imposes on the franchisee the "same taxes" that
non-franchisees are subject to with respect to real and personal properties. The
clear intent is to put the franchisees and non-franchisees in parity in the taxation
of their real and personal properties. Since non-franchisees have obviously no
franchises, the franchise must be excluded from the list of properties subject to tax
to maintain the parity between the franchisees and non-franchisees. However, the
franchisee is taxable separately from its franchise. Thus, the second sentence of
Section 5 imposes the "franchise tax" on gross receipts, which under Republic Act
No. 7716 has been replaced by the 10% Valued Added Tax effective 1 January
1996.29
Section 5 can be divided into three parts. First is the first sentence which imposes
taxes on real and personal properties, excluding one property, that is, the
franchise. This puts in parity the franchisees and non-franchisees in the taxation
of real and personal properties. Second is the second sentence which imposes the
franchise tax, which is applicable solely to the franchisee. And third is the proviso
in the second sentence that imposes the income tax on the franchisee, the same
income tax payable by non-franchisees.
Petitioner claims that the first sentence refers only to real properties, and that the
phrase "exclusive of this franchise" exempts petitioner from realty tax on its real
properties used in its telecommunications business. This claim has no basis in the
language of the law as written in the first sentence of Section 5. First, the first
sentence expressly refers to taxes on "real estate" and on "personal property."
Clearly, the first sentence does not refer only to taxes on real properties, but also
to taxes on personal properties. The trial court correctly observed that petitioner
pays taxes on its motor vehicles,30 which are personal properties, that are used in
its telecommunications business.31 There is also the documentary stamp tax on
transactions involving real and personal properties, which petitioner and other
taxpayers are liable for.32
A franchise granted by Congress to operate a private radio station for the
franchisee’s communications in deep-sea fishing shows that the first sentence of
Section 5 of RA 7678 does not refer to real properties alone. Section 6 of
Republic Act No. 3218 (RA 3218), entitled An Act Granting Batas Riego De Dios
A Franchise To Construct, Maintain And Operate Private Radio Stations For
Radio Communications In Its Deep-Sea Fishing Industry, provides:
SECTION 6. The grantee shall be liable (1) to pay the same taxes on its
real estate, building, fishing boats and personal property, exclusive of
this franchise as other persons or corporations are now, or hereafter may
be required by law to pay, and shall further be liable (2) to pay all other
taxes that may be imposed by the National Internal Revenue Code by
reason of this franchise. (Emphasis supplied)
The inclusion of "fishing boats," personal properties that can never be attached to
a land or building so as to make them real properties, demonstrates that Section 6
of RA 3218, like the first sentence of Section 5 of RA 7678, not only applies to
real properties but also to personal properties.
Second, there is no language in the first sentence of Section 5 expressly or even
impliedly exempting petitioner from the realty tax. The phrases "exemption from
real estate tax," "free from real estate tax" or "not subject to real estate tax" do not
appear in the first sentence. No matter how one reads the first sentence, there is no
grant of exemption, express or implied, from realty tax. In fact, the first sentence
expressly imposes taxes on both real and personal properties, excluding only the
intangible personal property that is the franchise.
A tax exemption cannot arise from vague inference. The first sentence of Section
5 does not grant any express or even implied exemption from realty tax. On the
contrary, the first sentence categorically states that the franchisee is subject to the
"same taxes currently imposed, and those taxes that may be subsequently
imposed, on other persons or corporations," taxpayers that admittedly are all
subject to realty tax. The first sentence does not limit the imposition of the "same
taxes" to realty tax only but even to "those taxes" that may in the future be
imposed on other taxpayers, which future taxes shall also be imposed on
petitioner. Thus, the first sentence of Section 5 imposes on petitioner not only
realty tax but also other taxes.
The phrase "personal property exclusive of this franchise" merely means that
"personal property" does not include the franchise even if the franchise is an
intangible personal property. Stated differently, the first sentence of Section 5
provides that petitioner shall pay tax on its real properties as well as on its
personal properties but the franchise, which is an intangible personal property,
shall not be deemed personal property.
The historical usage of the phrase "exclusive of this franchise" in franchise laws
enacted by Congress indubitably shows that the phrase is not a grant of tax
exemption, but an exclusion of one type of personal property subject to taxes, and
the excluded personal property is the franchise. Thus, the franchises of
telecommunications companies in Republic Act Nos. 4137,33 5692,34 5739,35
5785,36 5790,37 5791,38 5795,39 5810,40 5847,41 5848,42 5856,43 5857,44 5913,45
5914,46 5929,47 5937,48 5958,49 5959,50 5974,51 5993,52 5994,53 6002,54 6006,55
6007,56 6013,57 6024,58 6097,59 6510,60 6536,61 and 653062 contain the following
common tax provision:
The grantee shall be liable to pay the same taxes, unless exempted
therefrom, on its business, real estate, buildings, and personal property,
exclusive of this franchise, as other persons or corporations are now or
hereafter may be required by law to pay. (Emphasis supplied)
The phrase "unless exempted therefrom" in the common provision clearly
clarifies that the phrase "exclusive of this franchise" does not grant any tax
exemption. To claim tax exemption, there must be an express exemption from tax
in another provision of law. On the other hand, the deletion of the phrase "unless
exempted therefrom" from the common provision does not give rise to any tax
exemption.
Bayantel and Digitel Cases
In City Government of Quezon City v. Bayan Telecommunications, Inc.,63 this
Court’s Second Division held that "all realties which are actually, directly and
exclusively used in the operation of its franchise are ‘exempted’ from any
property tax." The Second Division added that Bayantel’s franchise being national
in character, the "exemption" granted applies to all its real and personal properties
found anywhere within the Philippines. The Second Division reasoned in this
wise:
The legislative intent expressed in the phrase ‘exclusive of this franchise’
cannot be construed other than distinguishing between two (2) sets of
properties, be they real or personal, owned by the franchisee, namely, (a)
those actually, directly and exclusively used in its radio or
telecommunications business, and (b) those properties which are not so
used. It is worthy to note that the properties subject of the present
controversy are only those which are admittedly falling under the first
category.
To the mind of the Court, Section 14 of Rep. Act No. 3259 effectively
works to grant or delegate to local governments of Congress’ inherent
power to tax the franchisee’s properties belonging to the second group of
properties indicated above, that is, all properties which, "exclusive of this
franchise," are not actually and directly used in the pursuit of its franchise.
As may be recalled, the taxing power of local governments under both the
1935 and the 1973 Constitutions solely depended upon an enabling law.
Absent such enabling law, local government units were without authority
to impose and collect taxes on real properties within their respective
territorial jurisdictions. While Section 14 of Rep. Act No. 3259 may be
validly viewed as an implied delegation of power to tax, the delegation
under that provision, as couched, is limited to impositions over properties
of the franchisee which are not actually, directly and exclusively used in
the pursuit of its franchise. Necessarily, other properties of Bayantel
directly used in the pursuit of its business are beyond the pale of the
delegated taxing power of local governments. In a very real sense,
therefore, real properties of Bayantel, save those exclusive of its franchise,
are subject to realty taxes. Ultimately, therefore, the inevitable result
was that all realties which are actually, directly and exclusively used
in the operation of its franchise are "exempted" from any property
tax. (Emphasis supplied)
In Digital Telecommunications Philippines, Inc. (Digitel) v. Province of
Pangasinan,64 this Court’s Third Division ruled that Digitel’s real properties
located within the territorial jurisdiction of Pangasinan that are actually, directly
and exclusively used in its franchise are exempt from realty tax under the first
sentence of Section 5 of RA 7678. The Third Division explained thus:
The more pertinent issue to consider is whether or not, by passing
Republic Act No. 7678, Congress intended to exempt petitioner
DIGITEL’s real properties actually, directly and exclusively used by the
grantee in its franchise.
The fact that Republic Act No. 7678 was a later piece of legislation can be
taken to mean that Congress, knowing fully well that the Local
Government Code had already withdrawn exemptions from real property
taxes, chose to restore such immunity even to a limited degree.
Accordingly:
The Court views this subsequent piece of legislation as an express
and real intention on the part of Congress to once again remove
from the LGC’s delegated taxing power, all of the franchisee’s x x
x properties that are actually, directly and exclusively used in the
pursuit of its franchise.
 In view of the unequivocal intent of Congress to exempt from real
property tax those real properties actually, directly and exclusively used
by petitioner DIGITEL in the pursuit of its franchise, respondent Province
of Pangasinan can only levy real property tax on the remaining real
properties of the grantee located within its territorial jurisdiction not part
of the above-stated classification. Said exemption, however, merely
applies from the time of the effectivity of petitioner DIGITEL’s legislative
franchise and not a moment sooner.
Nowhere in the language of the first sentence of Section 5 of RA 7678 does it
expressly or even impliedly provide that petitioner’s real properties that are
actually, directly and exclusively used in its telecommunications business are
exempt from payment of realty tax. On the contrary, the first sentence of Section
5 specifically states that the petitioner, as the franchisee, shall pay the "same taxes
on its real estate, buildings, and personal property exclusive of this franchise as
other persons or corporations are now or hereafter may be required by law to
pay."
The heading of Section 5 is "Tax Provisions," not Tax Exemptions. To reiterate,
the phrase "exemption from real estate tax" or other words conveying exemption
from realty tax do not appear in the first sentence of Section 5. The phrase
"exclusive of this franchise" in the first sentence of Section 5 merely qualifies the
phrase "personal property" to exclude petitioner’s legislative franchise, which is
an intangible personal property. Petitioner’s franchise is subject to tax in the
second sentence of Section 5 which imposes the "franchise tax." Thus, there is no
grant of tax exemption in the first sentence of Section 5.
The interpretation of the phrase "exclusive of this franchise" in the Bayantel and
Digitel cases goes against the basic principle in construing tax exemptions. In
PLDT v. City of Davao,65 the Court held that "tax exemptions should be granted
only by clear and unequivocal provision of law on the basis of language too plain
to be mistaken. They cannot be extended by mere implication or inference."
Tax exemptions must be clear and unequivocal. A taxpayer claiming a tax
exemption must point to a specific provision of law conferring on the taxpayer, in
clear and plain terms, exemption from a common burden. Any doubt whether a
tax exemption exists is resolved against the taxpayer.66
RCPI case
In Radio Communications of the Philippines, Inc. (RCPI) v. Provincial Assessor
of South Cotabato,67the Court’s First Division held that RCPI’s radio relay station
tower, radio station building, and machinery shed are real properties and are
subject to real property tax. The Court added that:
RCPI cannot also invoke the equality of treatment clause under Section 23
of Republic Act No. 7925. The franchises of Smart, Islacom, TeleTech,
Bell, Major Telecoms, Island Country, and IslaTel,68 all expressly
declare that the franchisee shall pay the real estate tax, using words similar
to Section 14 of RA 2036, as amended. The provisions of these subsequent
telecommunication franchises imposing the real estate tax on franchisees
only confirm that RCPI is subject to the real estate tax. Otherwise, RCPI
will stick out like a sore thumb, being the only telecommunications
company exempt from the real estate tax, in mockery of the spirit of
equality of treatment that RCPI is invoking, not to mention the violation of
the constitutional rule on uniformity of taxation.
It is an elementary rule in taxation that exemptions are strictly construed
against the taxpayer and liberally in favor of the taxing authority. It is the
taxpayer’s duty to justify the exemption by words too plain to be mistaken
and too categorical to be misinterpreted. (Emphasis supplied)
In RCPI, the Court emphasized that telecommunications companies which were
granted legislative franchise are liable to realty tax. The intent to grant realty tax
exemption cannot be discerned from Republic Act No. 405469 and neither from
the legislative franchises of other telecommunications companies. Tax
exemptions granted to one or more, but not to all, telecommunications companies
similarly situated will violate the constitutional rule on uniformity of taxation.70
The intent of Congress is to make
legislative franchisees liable to tax
In PLDT v. City of Davao,71 it was observed that after the imposition of VAT on
telecommunications companies, Congress refused to grant any tax exemption to
telecommunications companies that sought new franchises from Congress, except
the exemption from specific tax.72 More importantly, the uniform tax provision in
these new franchises expressly states that the franchisee shall pay not only all
taxes, except specific tax, under the National Internal Revenue Code, but also all
taxes under "other applicable laws,"73 one of which is the Local Government
Code which imposes the realty tax.74
In fact, Section 12 of Republic Act No. 9180 (RA 9180),75 the legislative
franchise of Digitel Mobile, a 100%-owned subsidiary of petitioner, states that the
franchisee, its successors or assigns shall be subject to the payment of "all taxes,
duties, fees or charges and other impositions under the National Internal Revenue
Code of 1997, as amended, and other applicable laws."76 Section 12 of RA 9180
provides:
On 25 October 2004, the BLGF issued Memorandum Circular No. 15-2004.79
This circular reversed the BLGF’s Letter-Opinion dated 8 April 1997 recognizing
realty tax exemption under the phrase "exclusive of this franchise." This later
circular states that the real properties owned by Globe and Smart
Telecommunications and all other telecommunications companies similarly
situated are subject to the realty tax. The BLGF has reversed its opinion on the
realty tax exemption of telecommunications companies. Hence, petitioner’s claim
of tax exemption based on BLGF’s opinion does not hold water. Besides, the
BLGF has no authority to rule on claims for exemption from the realty tax.80

SECTION 12. Tax Provisions. \emdash The grantee, its successors or WHEREFORE, we DENY the petition. We AFFIRM the 2 May 2002 and 19
assigns, shall be subject to the payment of all taxes, duties, fees or November 2002 Orders of the Regional Trial Court, Branch 8, Batangas City, in
charges and other impositions under the National Internal Revenue Civil Case No. 5343.
Code of 1997, as amended, and other applicable laws: Provided, That
nothing herein shall be construed as repealing any specific tax exemptions, SO ORDERED.
incentives, or privileges granted under any relevant law: Provided, further,
That all rights, privileges, benefits and exemptions accorded to existing
and future telecommunications franchises shall likewise be extended to the
grantee.

The grantee shall file the return with the city or province where its facility
is located and pay the income tax due thereon to the Commissioner of
Internal Revenue or his duly authorized representatives in accordance with
the National Internal Revenue Code and the return shall be subject to audit
by the Bureau of Internal Revenue. (Emphasis supplied)

Thus, Digitel Mobile is subject to tax on its real estate and personal properties,
whether or not used in its telecommunications business.

In Compagnie Financiere Sucres et Denrees v. Commissioner of Internal

Revenue,77 the Court ruled that "the governing principle is that tax exemptions are
to be construed in strictissimi juris against the taxpayer and liberally in favor of
the taxing authority \endash he who claims an exemption must be able to justify
his claim by the clearest grant of statute." A person claiming an exemption has the
burden of justifying the exemption by words too plain to be mistaken and too
categorical to be misinterpreted. Tax exemptions are never presumed and the
burden lies with the taxpayer to clearly establish his right to exemption.78

BLGF Opinions
 SECOND DIVISION After much wrangling in the Court of Tax Appeals (CTA) and
the Court of Appeals, Fortune Tobacco Corporation (Fortune
COMMISSIONER OF INTERNAL G.R. Nos. 167274-75
Tobacco) was granted a tax refund or tax credit representing specific
REVENUE,
Petitioner, Present: taxes erroneously collected from its tobacco products. The tax refund
is being re-claimed by the Commissioner of Internal Revenue
QUISUMBING, J.,
Chairperson, (Commissioner) in this petition.
YNARES-SANTIAGO,
- versus - CARPIO MORALES,
The following undisputed facts, summarized by the Court of
TINGA, and
VELASCO, JR., JJ. Appeals, are quoted in the assailed Decisioni[1] dated 28 September
2004:
FORTUNE TOBACCO
CORPORATION, Promulgated:
CAG.R. SP No. 80675
Respondent.
July 21, 2008
xxxx
x---------------------------------------------------------------------------x Petitionerii[2] is a domestic corporation duly organized and
existing under and by virtue of the laws of the Republic of the
Philippines, with principal address at Fortune Avenue, Parang,
Marikina City.
DECISION
Petitioner is the manufacturer/producer of, among others,
TINGA, J.: the following cigarette brands, with tax rate classification based on
net retail price prescribed by Annex “D” to R.A. No. 4280, to wit:

Brand Tax Rate

Simple and uncomplicated is the central issue involved, yet
Champion M 100 P1.00
whopping is the amount at stake in this case.
Salem M 100 P1.00
Salem M King P1.00
 Camel F King P1.00
Camel Lights Box 20’s P1.00
Camel Filters Box 20’s P1.00
Winston F Kings P5.00
Winston Lights P5.00
Immediately prior to January 1, 1997, the above-mentioned
cigarette brands were subject to ad valorem tax pursuant to then
Section 142 of the Tax Code of 1977, as amended. However, on
January 1, 1997, R.A. No. 8240 took effect whereby a shift from
the ad valorem tax (AVT) system to the specific tax system was
made and subjecting the aforesaid cigarette brands to specific tax
under [S]ection 142 thereof, now renumbered as Sec. 145 of the
Tax Code of 1997, pertinent provisions of which are quoted thus:
Section 145. Cigars and Cigarettes-
(A) Cigars. – There shall be levied, assessed and
collected on cigars a tax of One peso (P1.00) per cigar.
“(B) Cigarettes packed by hand. – There shall be
levied, assessesed and collected on cigarettes packed by
hand a tax of Forty centavos (P0.40) per pack.
(C) Cigarettes packed by machine. – There shall
be levied, assessed and collected on cigarettes packed by
machine a tax at the rates prescribed below:
(1) If the net retail price (excluding the excise tax
and the value-added tax) is above Ten pesos (P10.00) per
pack, the tax shall be Twelve (P12.00) per pack;
(2) If the net retail price (excluding the excise tax
and the value added tax) exceeds Six pesos and Fifty
centavos (P6.50) but does not exceed Ten pesos (P10.00)
per pack, the tax shall be Eight Pesos (P8.00) per pack.
(3) If the net retail price (excluding the excise tax
and the value-added tax) is Five pesos (P5.00) but does not
exceed Six Pesos and fifty centavos (P6.50) per pack, the
tax shall be Five pesos (P5.00) per pack;
(4) If the net retail price (excluding the excise tax
and the value-added tax) is below Five pesos (P5.00) per
pack, the tax shall be One peso (P1.00) per pack;
“Variants of existing brands of cigarettes which are
introduced in the domestic market after the effectivity
of R.A. No. 8240 shall be taxed under the highest
classification of any variant of that brand.
The excise tax from any brand of cigarettes within
the next three (3) years from the effectivity of R.A. No.
8240 shall not be lower than the tax, which is due from
each brand on October 1, 1996. Provided, however, that in
cases were (sic) the excise tax rate imposed in paragraphs
(1), (2), (3) and (4) hereinabove will result in an increase in
excise tax of more than seventy percent (70%), for a brand
of cigarette, the increase shall take effect in two tranches:
fifty percent (50%) of the increase shall be effective in
1997 and one hundred percent (100%) of the increase shall
be effective in 1998.
Duly registered or existing brands of cigarettes or
new brands thereof packed by machine shall only be
packed in twenties.
The rates of excise tax on cigars and cigarettes
under paragraphs (1), (2) (3) and (4) hereof, shall be
increased by twelve percent (12%) on January 1, 2000.
(Emphasis supplied)
New brands shall be classified according to their
current net retail price.
For the above purpose, ‘net retail price’ shall mean
the price at which the cigarette is sold on retail in twenty
(20) major supermarkets in Metro Manila (for brands of
cigarettes marketed nationally), excluding the amount
 intended to cover the applicable excise tax and value-added
tax. For brands which are marketed only outside Metro excise) exceeds
[M]anila, the ‘net retail price’ shall mean the price at P10.00 per pack
which the cigarette is sold in five (5) major supermarkets in P8.00/pack P8.96/pack
the region excluding the amount intended to cover the (2) Exceeds P10.00
applicable excise tax and the value-added tax. per pack

The classification of each brand of cigarettes based (3) Net retail price P5.00/pack P5.60/pack
on its average retail price as of October 1, 1996, as set forth (excluding VAT and
in Annex “D,” shall remain in force until revised by excise) is P5.00 to
Congress. P6.50 per pack

Variant of a brand shall refer to a brand on which (4) Net Retail Price
a modifier is prefixed and/or suffixed to the root name of (excluding VAT and P1.00/pack P1.12/pack
the brand and/or a different brand which carries the same excise) is below
logo or design of the existing brand. P5.00 per pack

To implement the provisions for a twelve percent (12%)

increase of excise tax on, among others, cigars and cigarettes
packed by machines by January 1, 2000, the Secretary of Finance,
upon recommendation of the respondent Commissioner of Internal
Revenue Regulations No. 17-99 likewise provides in the
Revenue, issued Revenue Regulations No. 17-99, dated December
last paragraph of Section 1 thereof, “(t)hat the new specific tax
16, 1999, which provides the increase on the applicable tax rates
rate for any existing brand of cigars, cigarettes packed by
on cigar and cigarettes as follows:
machine, distilled spirits, wines and fermented liquor shall
not be lower than the excise tax that is actually being paid
prior to January 1, 2000.”
SECTION DESCRIPTION OF PRESENT NEW
SPECIFIC TAX SPECIFIC For the period covering January 1-31, 2000, petitioner
ARTICLES RATE PRIOR TAX RATE allegedly paid specific taxes on all brands manufactured and
TO JAN. 1, 2000 EFFECTIVE removed in the total amounts of P585,705,250.00.
JAN. 1, 2000
On February 7, 2000, petitioner filed with respondent’s
145 (A) P1.00/cigar P1.12/cigar Appellate Division a claim for refund or tax credit of its
purportedly overpaid excise tax for the month of January 2000 in
(B)Cigarettes packed the amount of P35,651,410.00
by machine
On June 21, 2001, petitioner filed with respondent’s
(1) Net retail price Legal Service a letter dated June 20, 2001 reiterating all the
(excluding VAT and P12.00/pack P13.44/ pack claims for refund/tax credit of its overpaid excise taxes filed on
various dates, including the present claim for the month of
January 2000 in the amount of P35,651,410.00.
As there was no action on the part of the respondent,
petitioner filed the instant petition for review with this Court on
December 11, 2001, in order to comply with the two-year period
for filing a claim for refund.
In his answer filed on January 16, 2002, respondent
raised the following Special and Affirmative Defenses;
4. Petitioner’s alleged claim for refund is subject to
administrative routinary investigation/examination
by the Bureau;
5. The amount of P35,651,410 being claimed by
petitioner as alleged overpaid excise tax for the
month of January 2000 was not properly
documented.
6. In an action for tax refund, the burden of proof is
on the taxpayer to establish its right to refund, and
failure to sustain the burden is fatal to its claim for
refund/credit.
7. Petitioner must show that it has complied with the
provisions of Section 204(C) in relation [to]
Section 229 of the Tax Code on the prescriptive
period for claiming tax refund/credit;
8. Claims for refund are construed strictly against the
claimant for the same partake of tax exemption
from taxation; and
9. The last paragraph of Section 1 of Revenue
Regulation[s] [No.]17-99 is a valid implementing
regulation which has the force and effect of law.”
1
CA G.R. SP No. 83165
The petition contains essentially similar facts, except that
the said case questions the CTA’s December 4, 2003 decision in
CTA Case No. 6612 granting respondent’s1[3] claim for refund of
the amount of P355,385,920.00 representing erroneously or
illegally collected specific taxes covering the period January 1,
2002 to December 31, 2002, as well as its March 17, 2004
Resolution denying a reconsideration thereof.
xxxx
In both CTA Case Nos. 6365 & 6383 and CTA No. 6612, the
Court of Tax Appeals reduced the issues to be resolved into two as
stipulated by the parties, to wit: (1) Whether or not the last paragraph
of Section 1 of Revenue Regulation[s] [No.] 17-99 is in accordance
with the pertinent provisions of Republic Act [No.] 8240, now
incorporated in Section 145 of the Tax Code of 1997; and (2)
Whether or not petitioner is entitled to a refund of P35,651,410.00 as
alleged overpaid excise tax for the month of January 2000.
xxxx
Hence, the respondent CTA in its assailed October 21, 2002
[twin] Decisions[s] disposed in CTA Case Nos. 6365 & 6383:
WHEREFORE, in view of the foregoing, the court finds the
instant petition meritorious and in accordance with law. Accordingly,
respondent is hereby ORDERED to REFUND to petitioner the amount of
P35,651.410.00 representing erroneously paid excise taxes for the period
January 1 to January 31, 2000.
SO ORDERED.
Herein petitioner sought reconsideration of the above-quoted
decision. In [twin] resolution[s] [both] dated July 15, 2003, the Tax Court, in an
apparent change of heart, granted the petitioner’s consolidated motions for
reconsideration, thereby denying the respondent’s claim for refund.

However, on consolidated motions for reconsideration filed
by the respondent in CTA Case Nos. 6363 and 6383, the July 15,
2002 resolution was set aside, and the Tax Court ruled, this time with
a semblance of finality, that the respondent is entitled to the refund
claimed. Hence, in a resolution dated November 4, 2003, the tax
court reinstated its December 21, 2002 Decision and disposed as
follows:
WHEREFORE, our Decisions in CTA Case Nos.
6365 and 6383 are hereby REINSTATED.
Accordingly, respondent is hereby ORDERED to
REFUND petitioner the total amount of
P680,387,025.00 representing erroneously paid
excise taxes for the period January 1, 2000 to
January 31, 2000 and February 1, 2000 to
December 31, 2001.
SO ORDERED.
Meanwhile, on December 4, 2003, the Court of Tax Appeals
rendered decision in CTA Case No. 6612 granting the prayer for the
refund of the amount of P355,385,920.00 representing overpaid
excise tax for the period covering January 1, 2002 to December 31,
2002. The tax court disposed of the case as follows:
IN VIEW OF THE FOREGOING, the Petition for
Review is GRANTED. Accordingly, respondent is
hereby ORDERED to REFUND to petitioner the
amount of P355,385,920.00 representing overpaid
excise tax for the period covering January 1, 2002 to
December 31, 2002.
SO ORDERED.
Petitioner sought reconsideration of the decision, but the
same was denied in a Resolution dated March 17, 2004.2[4] (Emphasis
supplied) (Citations omitted)
2 4
The Commissioner appealed the aforesaid decisions of the CTA.
The petition questioning the grant of refund in the amount of
P680,387,025.00 was docketed as CA-G.R. SP No. 80675,
whereas that assailing the grant of refund in the amount of
P355,385,920.00 was docketed as CA-G.R. SP No. 83165. The
petitions were consolidated and eventually denied by the Court of
Appeals. The appellate court also denied reconsideration in its
Resolution3[5] dated 1 March 2005.
In its Memorandum4[6] 22 dated November 2006, filed on behalf
of the Commissioner, the Office of the Solicitor General (OSG) seeks
to convince the Court that the literal interpretation given by the CTA
and the Court of Appeals of Section 145 of the Tax Code of 1997
(Tax Code) would lead to a lower tax imposable on 1 January 2000
than that imposable during the transition period. Instead of an
increase of 12% in the tax rate effective on 1 January 2000 as
allegedly mandated by the Tax Code, the appellate court’s ruling
would result in a significant decrease in the tax rate by as much as
66%.
The OSG argues that Section 145 of the Tax Code admits of
several interpretations, such as:
1. That by January 1, 2000, the excise tax on cigarettes should be
the higher tax imposed under the specific tax system and the tax imposed
3
under the ad valorem tax system plus the 12% increase imposed by par. 5,
Sec. 145 of the Tax Code;
2. The increase of 12% starting on January 1, 2000 does not
apply to the brands of cigarettes listed under Annex “D” referred to in
par. 8, Sec. 145 of the Tax Code;
3. The 12% increment shall be computed based on the net retail
price as indicated in par. C, sub-par. (1)-(4), Sec. 145 of the Tax Code
even if the resulting figure will be lower than the amount already being
paid at the end of the transition period. This is the interpretation followed
by both the CTA and the Court of Appeals.5[7]
This being so, the interpretation which will give life to the legislative
intent to raise revenue should govern, the OSG stresses.
Finally, the OSG asserts that a tax refund is in the nature of a
tax exemption and must, therefore, be construed strictly against the
taxpayer, such as Fortune Tobacco.
In its Memorandum6[8] dated 10 November 2006, Fortune
Tobacco argues that the CTA and the Court of Appeals merely
followed the letter of the law when they ruled that the basis for the
12% increase in the tax rate should be the net retail price of the
cigarettes in the market as outlined in paragraph C, sub paragraphs
(1)-(4), Section 145 of the Tax Code. The Commissioner allegedly
has gone beyond his delegated rule-making power when he
5 7
6 8
promulgated, enforced and implemented Revenue Regulation No. 17-
99, which effectively created a separate classification for cigarettes
based on the excise tax “actually being paid prior to January 1,
2000.”7[9]
It should be mentioned at the outset that there is no dispute
between the fact of payment of the taxes sought to be refunded and
the receipt thereof by the Bureau of Internal Revenue (BIR). There is
also no question about the mathematical accuracy of Fortune
Tobacco’s claim since the documentary evidence in support of the
refund has not been controverted by the revenue agency. Likewise, the
claims have been made and the actions have been filed within the two
(2)-year prescriptive period provided under Section 229 of the Tax
Code.
The power to tax is inherent in the State, such power being
inherently legislative, based on the principle that taxes are a grant of
the people who are taxed, and the grant must be made by the
immediate representatives of the people; and where the people have
laid the power, there it must remain and be exercised.8[10]
 This entire controversy revolves around the interplay between
Section 145 of the Tax Code and Revenue Regulation 17-99. The
main issue is an inquiry into whether the revenue regulation has
exceeded the allowable limits of legislative delegation.
For ease of reference, Section 145 of the Tax Code is again
reproduced in full as follows:
Section 145. Cigars and Cigarettes-
(A) Cigars.—There shall be levied, assessed and collected
on cigars a tax of One peso (P1.00) per cigar.
(B). Cigarettes packed by hand.—There shall be levied,
assessed and collected on cigarettes packed by hand a tax of Forty
centavos (P0.40) per pack.
(C) Cigarettes packed by machine.—There shall be
levied, assessed and collected on cigarettes packed by machine a
tax at the rates prescribed below:
(1) If the net retail price (excluding the excise tax and the
value-added tax) is above Ten pesos (P10.00) per pack, the tax
shall be Twelve pesos (P12.00) per pack;
(2) If the net retail price (excluding the excise tax and the
value added tax) exceeds Six pesos and Fifty centavos (P6.50) but
does not exceed Ten pesos (P10.00) per pack, the tax shall be
Eight Pesos (P8.00) per pack.
(3) If the net retail price (excluding the excise tax and the
value-added tax) is Five pesos (P5.00) but does not exceed Six
Pesos and fifty centavos (P6.50) per pack, the tax shall be Five
pesos (P5.00) per pack;
(4) If the net retail price (excluding the excise tax and the
value-added tax) is below Five pesos (P5.00) per pack, the tax
shall be One peso (P1.00) per pack;
Variants of existing brands of cigarettes which are
introduced in the domestic market after the effectivity of R.A. No.
8240 shall be taxed under the highest classification of any variant
of that brand.
The excise tax from any brand of cigarettes within the next
three (3) years from the effectivity of R.A. No. 8240 shall not be
lower than the tax, which is due from each brand on October 1,
1996. Provided, however, That in cases where the excise tax rates
imposed in paragraphs (1), (2), (3) and (4) hereinabove will result
in an increase in excise tax of more than seventy percent (70%),
for a brand of cigarette, the increase shall take effect in two
tranches: fifty percent (50%) of the increase shall be effective in
1997 and one hundred percent (100%) of the increase shall be
effective in 1998.
Duly registered or existing brands of cigarettes or new
brands thereof packed by machine shall only be packed in
twenties.
The rates of excise tax on cigars and cigarettes under
paragraphs (1), (2) (3) and (4) hereof, shall be increased by
twelve percent (12%) on January 1, 2000.
New brands shall be classified according to their current
net retail price.
For the above purpose, ‘net retail price’ shall mean the
price at which the cigarette is sold on retail in twenty (20) major
supermarkets in Metro Manila (for brands of cigarettes marketed
nationally), excluding the amount intended to cover the applicable
excise tax and value-added tax. For brands which are marketed
only outside Metro Manila, the ‘net retail price’ shall mean the
 price at which the cigarette is sold in five (5) major intended to
cover the applicable excise tax and the value-added tax. (1) Net Retail Price
(excluding VAT and
The classification of each brand of cigarettes based on its Excise) exceeds P12.00/pack P13.44/pack
average retail price as of October 1, 1996, as set forth in Annex P10.00 per pack
“D,” shall remain in force until revised by Congress.
(2) Net Retail Price
Variant of a brand’ shall refer to a brand on which a (excluding VAT and
modifier is prefixed and/or suffixed to the root name of the brand Excise) is P6.51 up
and/or a different brand which carries the same logo or design of to P10.00 per pack P8.00/pack P8.96/pack
the existing brand.9[11](Emphasis supplied)
(3) Net Retail Price
(excluding VAT and
P5.00/pack P5.60/pack
excise) is P5.00 to
Revenue Regulation 17-99, which was issued pursuant to the P6.50 per pack
unquestioned authority of the Secretary of Finance to promulgate (4) Net Retail Price
(excluding VAT and
rules and regulations for the effective implementation of the Tax excise) is below P1.00/pack P1.12/pack
Code, 10[12]
interprets the above-quoted provision and reflects the 12% P5.00 per pack)

increase in excise taxes in the following manner:

This table reflects Section 145 of the Tax Code insofar as it

SECTION DESCRIPTION OF PRESENT NEW mandates a 12% increase effective on 1 January 2000 based on the
SPECIFIC TAX SPECIFIC
ARTICLES RATES PRIOR TAX RATE taxes indicated under paragraph C, sub-paragraph (1)-(4). However,
TO JAN. 1, 2000 Effective Jan..
1, 2000 Revenue Regulation No. 17-99 went further and added that “[T]he

145 (A) Cigars P1.00/cigar P1.12/cigar

new specific tax rate for any existing brand of cigars, cigarettes
packed by machine, distilled spirits, wines and fermented liquor shall
(B)Cigarettes packed
by Machine
9

10
not be lower than the excise tax that is actually being paid prior to as increased by 12%—a situation not supported by the plain wording
January 1, 2000.”11[13] of Section 145 of the Tax Code.

Parenthetically, Section 145 states that during the transition This is not the first time that national revenue officials had
period, i.e., within the next three (3) years from the effectivity of the ventured in the area of unauthorized administrative legislation.
Tax Code, the excise tax from any brand of cigarettes shall not be
In Commissioner of Internal Revenue v. Reyes,12[14] respondent
lower than the tax due from each brand on 1 October 1996. This
was not informed in writing of the law and the facts on which the
qualification, however, is conspicuously absent as regards the 12%
assessment of estate taxes was made pursuant to Section 228 of the
increase which is to be applied on cigars and cigarettes packed by
1997 Tax Code, as amended by Republic Act (R.A.) No. 8424. She
machine, among others, effective on 1 January 2000. Clearly and
was merely notified of the findings by the Commissioner, who had
unmistakably, Section 145 mandates a new rate of excise tax for
simply relied upon the old provisions of the law and Revenue
cigarettes packed by machine due to the 12% increase effective on 1
Regulation No. 12-85 which was based on the old provision of the
January 2000 without regard to whether the revenue collection
law. The Court held that in case of discrepancy between the law as
starting from this period may turn out to be lower than that collected
amended and the implementing regulation based on the old law, the
prior to this date.
former necessarily prevails. The law must still be followed, even
By adding the qualification that the tax due after the 12% though the existing tax regulation at that time provided for a different
increase becomes effective shall not be lower than the tax actually procedure.13[15]
paid prior to 1 January 2000, Revenue Regulation No. 17-99
In Commissioner of Internal Revenue v. Central Luzon Drug
effectively imposes a tax which is the higher amount between the ad
Corporation,14[16] the tax authorities gave the term “tax credit” in
valorem tax being paid at the end of the three (3)-year transition
Sections 2(i) and 4 of Revenue Regulation 2-94 a meaning utterly
period and the specific tax under paragraph C, sub-paragraph (1)-(4),
12
13

11 14
disparate from what R.A. No. 7432 provides. Their interpretation
muddled up the intent of Congress to grant a mere discount privilege
and not a sales discount. The Court, striking down the revenue
regulation, held that an administrative agency issuing regulations may
not enlarge, alter or restrict the provisions of the law it administers,
and it cannot engraft additional requirements not contemplated by the
legislature. The Court emphasized that tax administrators are not
allowed to expand or contract the legislative mandate and that the
“plain meaning rule” or verba legis in statutory construction should be
applied such that where the words of a statute are clear, plain and free
from ambiguity, it must be given its literal meaning and applied
without attempted interpretation.
As we have previously declared, rule-making power must be
confined to details for regulating the mode or proceedings in order to
carry into effect the law as it has been enacted, and it cannot be
extended to amend or expand the statutory requirements or to embrace
matters not covered by the statute. Administrative regulations must
always be in harmony with the provisions of the law because any
resulting discrepancy between the two will always be resolved in
favor of the basic law.15[17]
15
In Commissioner of Internal Revenue v. Michel J. Lhuillier
Pawnshop, Inc.,16[18] Commissioner Jose Ong issued Revenue
Memorandum Order (RMO) No. 15-91, as well as the clarificatory
Revenue Memorandum Circular (RMC) 43-91, imposing a 5%
lending investor’s tax under the 1977 Tax Code, as amended by
Executive Order (E.O.) No. 273, on pawnshops. The Commissioner
anchored the imposition on the definition of lending investors
provided in the 1977 Tax Code which, according to him, was broad
enough to include pawnshop operators. However, the Court noted
that pawnshops and lending investors were subjected to different tax
treatments under the Tax Code prior to its amendment by the
executive order; that Congress never intended to treat pawnshops in
the same way as lending investors; and that the particularly involved
section of the Tax Code explicitly subjected lending investors and
dealers in securities only to percentage tax. And so the Court affirmed
the invalidity of the challenged circulars, stressing that
“administrative issuances must not override, supplant or modify the
law, but must remain consistent with the law they intend to carry
out.”17[19]
16
17
 In Philippine Bank of Communications v. Commissioner of
Internal Revenue,18[20] the then acting Commissioner issued RMC 7-
85, changing the prescriptive period of two years to ten years for
claims of excess quarterly income tax payments, thereby creating a
clear inconsistency with the provision of Section 230 of the 1977 Tax
Code. The Court nullified the circular, ruling that the BIR did not
simply interpret the law; rather it legislated guidelines contrary to the
statute passed by Congress. The Court held:
It bears repeating that Revenue memorandum-circulars are
considered administrative rulings (in the sense of more specific
and less general interpretations of tax laws) which are issued from
time to time by the Commissioner of Internal Revenue. It is
widely accepted that the interpretation placed upon a statute by the
executive officers, whose duty is to enforce it, is entitled to great
respect by the courts. Nevertheless, such interpretation is not
conclusive and will be ignored if judicially found to be erroneous.
Thus, courts will not countenance administrative issuances that
override, instead of remaining consistent and in harmony with, the
law they seek to apply and implement.19[21]
20[22]
In Commissioner of Internal Revenue v. CA, et al.,
central issue was the validity of RMO 4-87 which had construed the
amnesty coverage under E.O. No. 41 (1986) to include only
assessments issued by the BIR after the promulgation of the executive
18
19
20
order on 22 August 1986 and not assessments made to that date.
Resolving the issue in the negative, the Court held:
x x x all such issuances must not override, but must remain
consistent and in harmony with, the law they seek to apply and
implement. Administrative rules and regulations are intended to
carry out, neither to supplant nor to modify, the law.21[23]
xxx
If, as the Commissioner argues, Executive Order No. 41
had not been intended to include 1981-1985 tax liabilities already
assessed (administratively) prior to 22 August 1986, the law could
have simply so provided in its exclusionary clauses. It did not. The
conclusion is unavoidable, and it is that the executive order has
been designed to be in the nature of a general grant of tax amnesty
subject only to the cases specifically excepted by it.22[24]
In the case at bar, the OSG’s argument that by 1 January 2000,
the excise tax on cigarettes should be the higher tax imposed under the
specific tax system and the tax imposed under the ad valorem tax
system plus the 12% increase imposed by paragraph 5, Section 145 of
the
the Tax Code, is an unsuccessful attempt to justify what is clearly an
impermissible incursion into the limits of administrative legislation.
Such an interpretation is not supported by the clear language of the
law and is obviously only meant to validate the OSG’s thesis that
21
22
Section 145 of the Tax Code is ambiguous and admits of several
interpretations.
The contention that the increase of 12% starting on 1 January
2000 does not apply to the brands of cigarettes listed under Annex
“D” is likewise unmeritorious, absurd even. Paragraph 8, Section
145 of the Tax Code simply states that, “[T]he classification of each
brand of cigarettes based on its average net retail price as of October
1, 1996, as set forth in Annex ‘D’, shall remain in force until revised
by Congress.” This declaration certainly does not lend itself to the
interpretation given to it by the OSG. As plainly worded, the average
net retail prices of the listed brands under Annex “D,” which classify
cigarettes according to their net retail price into low, medium or high,
obviously remain the bases for the application of the increase in
excise tax rates effective on 1 January 2000.
The foregoing leads us to conclude that Revenue Regulation
No. 17-99 is indeed indefensibly flawed. The Commissioner cannot
seek refuge in his claim that the purpose behind the passage of the
Tax Code is to generate additional revenues for the government.
Revenue generation has undoubtedly been a major consideration in
the passage of the Tax Code. However, as borne by the legislative
record,23[25] the shift from the ad valorem system to the specific tax
system is likewise meant to promote fair competition among the
players in the industries concerned, to ensure an equitable
distribution of the tax burden and to simplify tax administration by
classifying cigarettes, among others, into high, medium and low-
priced based on their net retail price and accordingly graduating tax
rates.
At any rate, this advertence to the legislative record is merely
gratuitous because, as we have held, the meaning of the law is clear
on its face and free from the ambiguities that the Commissioner
imputes. We simply cannot disregard the letter of the law on the
pretext of pursuing its spirit.24[26]
Finally, the Commissioner’s contention that a tax refund
partakes the nature of a tax exemption does not apply to the tax refund
to which Fortune Tobacco is entitled. There is parity between tax
refund and tax exemption only when the former is based either on a
tax exemption statute or a tax refund statute. Obviously, that is not
the situation here. Quite the contrary, Fortune Tobaccos claim for
23
24
refund is premised on its erroneous payment of the tax, or better still
the government’s exaction in the absence of a law.
Tax exemption is a result of legislative grace. And he who
claims an exemption from the burden of taxation must justify his
claim by showing that the legislature intended to exempt him by
words too plain to be mistaken.25[27] The rule is that tax exemptions
must be strictly construed such that the exemption will not be held to
be conferred unless the terms under which it is granted clearly and
distinctly show that such was the intention.26[28]
A claim for tax refund may be based on statutes granting tax
exemption or tax refund. In such case, the rule of strict interpretation
against the taxpayer is applicable as the claim for refund partakes of
the nature of an exemption, a legislative grace, which cannot be
allowed unless granted in the most explicit and categorical language.
The taxpayer must show that the legislature intended to exempt him
from the tax by words too plain to be mistaken.27[29]
25
26
27
Tax refunds (or tax credits), on the other hand, are not founded
principally on legislative grace but on the legal principle which
underlies all quasi-contracts abhorring a person’s unjust enrichment at
the expense of another.28[30] The dynamic of erroneous payment of tax
fits to a tee the prototypic quasi-contract, solutio indebiti, which
covers not only mistake in fact but also mistake in law.29[31]
The Government is not exempt from the application of solutio
indebiti.30[32] Indeed, the taxpayer expects fair dealing from the
Government, and the latter has the duty to refund without any
unreasonable delay what it has erroneously collected.31[33] If the State
expects its taxpayers to observe fairness and honesty in paying their
taxes, it must hold itself against the same standard in refunding excess
(or erroneous) payments of such taxes. It should not unjustly enrich
itself at the expense of taxpayers.32[34] And so, given its essence, a
claim for tax refund necessitates only preponderance of evidence for
its approbation like in any other ordinary civil case.
Under the Tax Code itself, apparently in recognition of the
pervasive quasi-contract principle, a claim for tax refund may be
28
29
30
31
32
based on the following: (a) erroneously or illegally assessed or not be unduly exacted nor assumed beyond the plain meaning of the
collected internal revenue taxes; (b) penalties imposed without tax laws.35[37]
authority; and (c) any sum alleged to have been excessive or in any
WHEREFORE, the petition is DENIED. The Decision of the
manner wrongfully collected.33[35]
Court of Appeals in CA G.R. SP No. 80675, dated 28 September
2004, and its Resolution, dated 1 March 2005, are AFFIRMED. No
What is controlling in this case is the well-settled doctrine of
pronouncement as to costs.
strict interpretation in the imposition of taxes, not the similar doctrine
as applied to tax exemptions. The rule in the interpretation of tax laws SO ORDERED.
is 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. 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.34[36] As burdens, taxes should

FIRST DIVISION

33

34 35
G.R. No. 170574 January 30, 2009
PHILIPPINE BANKING CORPORATION (NOW: GLOBAL BUSINESS
BANK, INC.), Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
CARPIO, J.:
The Case
The Philippine Banking Corporation, now, Global Business Bank, Inc.,
(petitioner) filed this Petition for Review1 to reverse the Court of Tax Appeals’
Decision2 dated 23 November 2005 in CTA EB No. 63 (C.T.A. Case No. 6395).
In the assailed decision, the Court of Tax Appeals En Banc ordered petitioner to
pay P17,595,488.75 and P47,767,756.24 as deficiency documentary stamp taxes
for the taxable years 1996 and 1997, respectively, on its bank product called
"Special/Super Savings Deposit Account" (SSDA).
The Facts
3
Petitioner is a domestic corporation duly licensed as a banking institution. For the
taxable years 1996 and 1997, petitioner offered its SSDA to its depositors. The
SSDA is a form of a savings deposit evidenced by a passbook and earning a
higher interest rate than a regular savings account. Petitioner believes that the
SSDA is not subject to Documentary Stamp Tax (DST) under Section 180 of the
1977 National Internal Revenue Code (NIRC), as amended.4
On 10 January 2000, the Commissioner of Internal Revenue (respondent) sent
petitioner a Final Assessment Notice assessing deficiency DST based on the
outstanding balances of its SSDA, including increments, in the total sum of
P17,595,488.75 for 1996 and P47,767,756.24 for 1997. These assessments were
based on the outstanding balances of the SSDA appearing in the schedule attached
to petitioner’s audited financial statements for the taxable years 1996 and 1997.5
Petitioner claims that the SSDA is in the nature of a regular savings account since
both types of accounts have the following common features:
a. They are both evidenced by a passbook;
b. The depositors can make deposits or withdrawals anytime which
are not subject to penalty; and
c. Both can have an Automatic Transfer Agreement (ATA) with
the depositor’s current or checking account.6
Petitioner alleges that the only difference between the regular savings account and
the SSDA is that the SSDA is for depositors who maintain savings deposits with a
substantial average daily balance, and as an incentive, they are given higher
interest rates than regular savings accounts. These deposits are classified
separately in petitioner’s financial statements in order to maintain a separate
record for savings deposits with substantial balances entitled to higher interest
rates.7
Petitioner maintains that the tax assessments are erroneous because Section 180 of
the 1977 NIRC does not include deposits evidenced by a passbook among the
enumeration of instruments subject to DST. Petitioner asserts that the language of
the law is clear and requires no interpretation.8 Section 180 of the 1977 NIRC, as
amended,9 provides:
Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of
exchange, drafts, instruments and securities issued by the government or any
of its instrumentalities, certificates of deposit bearing interest and others not
payable on sight or demand. — On all loan agreements signed abroad wherein
the object of the contract is located or used in the Philippines; bills of exchange
(between points within the Philippines), drafts, instruments and securities issued
by the Government or any of its instrumentalities or certificates of deposits
drawing interest, or orders for the payment of any sum of money otherwise than
at the sight or on demand, or on all promissory notes, whether negotiable or non-
negotiable, except bank notes issued for circulation, and on each renewal of any
such note, there shall be collected a documentary stamp tax of Thirty centavos
(P0.30) on each Two hundred pesos, or fractional part thereof, of the face value of
any such agreement, bill of exchange, draft, certificate of deposit, or note:
provided, that only one documentary stamp tax shall be imposed on either loan
agreement, or promissory note issued to secure such loan, whichever will yield a
higher tax: provided, however, that loan agreements or promissory notes the
aggregate of which does not exceed Two hundred fifty thousand pesos (P250,000)
executed by an individual for his purchase on installment for his personal use or
that of his family and not for business, resale, barter or hire of a house, lot, motor
vehicle, appliance or furniture shall be exempt from the payment of the
documentary stamp tax provided under this section. (Boldfacing supplied)
Petitioner insists that the SSDA, being issued in the form of a passbook, cannot be
construed as a certificate of deposit subject to DST under Section 180 of the 1977
NIRC. Petitioner explains that the SSDA is a necessary offshoot of the
deregulated interest rate regime in bank deposits.10 Petitioner elucidates:
With the removal of the respective interest rate ceilings on savings and time
deposit, banks are enabled to legitimately offer higher rates on savings account
which may even be at par with rates on time deposit. Practically, the distinction
between a savings and a time deposit was removed insofar as interest rates are
concerned. This being so, and for the legitimate purpose of further enticing
deposits for savings account, banks have evolved a product – the Super/Special
Savings Account – which offers the flexibility of a savings deposit but does away
with the rigidity of a time deposit account and with interest rate at par with the
latter. This is offered as an incentive for depositors who maintain or who wish to
maintain deposits with substantial average daily balance. Such depositors will be
entitled to an attractive interest rate, a rate higher than that to which the regular
savings account is entitled. Just like an ordinary savings, Super/Special Savings
Deposits can be withdrawn anytime. Of course, to be entitled to preferential
interest rate, such account must conform to a stated minimum deposit balance
within a specified holding period. Otherwise, the depositor will lose the incentive
of a higher interest rate and the account will revert to an ordinary savings account
and be entitled only to prevailing rates of interest applicable to regular savings
account. And unlike a time deposit account, the Super/Special Savings Account
comes in the form of a passbook, hence need not be formally renewed in the
manner that a time deposit certificate has to be formally surrendered and renewed
upon maturity.11
Petitioner argues that the DST is imposed on the basis of a mere inference or
perceived implication of what the SSDA is supposed to be and not on the basis of
what the law specifically states. Petitioner points out the differences between the
SSDA and time deposits:12
Time Deposits SSDA
1. The holding period is fixed beforehand. 1. The holding period floats at the option of
the depositor. It can be 30, 60, 90 or 120
days or more and as an incentive for
maintaining a longer holding period, the
depositor earns higher interest.
2. There is pre-termination because there is 2. No pre-termination and the passbook
no partial withdrawal of a certificate. Pre- account is simply reverted to an ordinary
termination results in the surrender and savings status in case of early or partial
cancellation of the certificate of deposit. withdrawal or if the required holding
period is not met.
Petitioner also argues that even on the assumption that a passbook evidencing the
SSDA is a certificate of deposit, no DST will be imposed because only negotiable
certificates of deposits are subject to tax under Section 180 of the 1977 NIRC.13
Petitioner reasons that a savings passbook is not a negotiable instrument and it
cannot be denied that savings passbooks have never been taxed as certificates of
deposits.14
Petitioner alleges that prior to the passage of Republic Act No. 924315 (RA 9243),
there was no law subjecting SSDA to DST during the taxable years 1996 and
1997. The amendatory provision in RA 9243 now specifically includes
"certificates or other evidences of deposits that are either drawing interest
significantly higher than the regular savings deposit taking into consideration the
size of the deposit and the risks involved or drawing interest and having a specific
maturity date."16 Petitioner admits that with this new taxing clause, its SSDA is
now subject to DST. However, the fact remains that this provision was non-
existent during the taxable years 1996 and 1997 subject of the assessments in the
present case.17
Respondent, through the Office of the Solicitor General, contends that the SSDA
is substantially the same and identical to that of a time deposit account because in
order to avail of the SSDA, one has to deposit a minimum of P50,000 and this
amount must be maintained for a required period of time to earn higher interest
rates.18 In a time deposit account, the minimum deposit requirement is P20,000
and this amount must be maintained for the agreed period to earn the agreed
interest rate. If a time deposit is pre-terminated, a penalty will be imposed
resulting in a lower interest income. In a regular savings account, the interest rate
is fixed and there is no penalty imposed for as long as the required minimum
balance is maintained. Thus, respondent asserts that the SSDA is a time deposit
account, albeit in the guise of a regular savings account evidenced by a
passbook.19
Respondent explains that under Section 180 of the 1977 NIRC, certificates of
deposits deriving interest are subject to the payment of DST. Petitioner’s
passbook evidencing its SSDA is considered a certificate of deposit, and being
very similar to a time deposit account, it should be subject to the payment of
DST.20
Respondent also argues that Section 180 of the 1977 NIRC categorically states
that certificates of deposit deriving interest are subject to DST without limiting
the enumeration to negotiable certificates of deposit. Based on the definition of a
certificate of deposit in Far East Bank and Trust Company v. Querimit,21 a
certificate of deposit may or may not be negotiable, since it may be payable only
to the depositor.22
The Ruling of the Court of Tax Appeals
On 23 November 2005, the Court of Tax Appeals En Banc (CTA) affirmed the
Decision and Resolution of the CTA’s Second Division. The dispositive portion
reads:
WHEREFORE, the instant petition is DENIED for lack of merit. Accordingly,
the petitioner is hereby ORDERED to PAY the amounts of P17,595,488.75 and
P47,767,756.24 as deficiency documentary stamp taxes for the taxable years 1996
and 1997, plus 25% surcharge for late payment and 20% annual delinquency
interest for late payment from January 20, 2002 until fully paid pursuant to
Sections 248 and 249 of the Tax Code.23
The CTA ruled that a deposit account with the same features as a time deposit,
i.e., a fixed term in order to earn a higher interest rate, is subject to DST imposed
in Section 180 of the 1977 NIRC.24 It is clear that "certificates of deposit drawing
interest" are subject to DST. The CTA, citing Far East Bank and Trust Company
v. Querimit,25 defined a certificate of deposit as "a written acknowledgment by a
bank or banker of the receipt of a sum of money on deposit which the bank or
banker promises to pay to the depositor, to the order of the depositor, or some
other person or his order, whereby the relation of debtor and creditor between the
bank and the depositor is created."26
The CTA pointed out that this Court neither referred to a particular form of
deposit nor limited the coverage to time deposits only. This Court used the term
"written acknowledgment" which means that for as long as there is some written
memorandum of the fact that the bank accepted a deposit of a sum of money from
a depositor, the writing constitutes a certificate of deposit. The CTA held that a
passbook representing an interest-earning deposit account issued by a bank
qualifies as a certificate of deposit drawing interest.27
The CTA emphasized that Section 180 of the 1977 NIRC imposes DST on
documents, whether the documents are negotiable or non-negotiable.28 The CTA
held that petitioner’s argument that Section 180 of the 1977 NIRC imposes the
DST only on negotiable certificates of deposit as implied from the old tax
provision is erroneous.29 Section 217 of Commonwealth Act No. 466, as amended
(old NIRC) reads:
Sec. 217. Stamp tax on negotiable promissory notes, bills of exchange, drafts,
certificate of deposit bearing interest and others not payable on sight or
demand. - On all bills of exchange (between points within the Philippines), drafts
or certificates of deposit drawing interest, or orders for the payment of any sum of
money otherwise than at sight or on demand, or all negotiable promissory notes,
except bank notes issued for circulation, and on each renewal of any such note,
there shall be collected a documentary stamp tax of four centavos on each two
hundred pesos, or fractional part thereof, of the face value of any such bill of
exchange, draft, certificate of deposit, or note. (As amended by Sec. 6, Republic
Act No. 40)30 (Emphasis in the original)
The CTA observed that the requirement of negotiability pertains to promissory
notes only. Such intention is disclosed by the fact that the word negotiable was
written before promissory notes followed by a comma, hence, the word
negotiable modifies promissory notes only. Therefore, with respect to all other
documents mentioned in Section 217 of the old NIRC, the attribute of
negotiability is not required.31 The CTA added that the applicable provision is
Section 180 of the 1977 NIRC and not Section 217 of the old NIRC.32 Section 180
of the 1977 NIRC provides that the following are subject to DST, to wit: (1) Loan
Agreements; (2) Bills of Exchange; (3) Drafts; (4) Instruments and Securities
issued by the Government or any of its instrumentalities; (5) Certificates of
Deposits drawing interest; (6) Orders for the payment of any sum of money
otherwise than at sight or on demand; and (7) Promissory Notes, whether
negotiable or non-negotiable. Therefore, the DST is imposed on all certificates of
deposit drawing interest without any qualification.33
The CTA held that a certificate of time deposit, a type of a certificate of deposit
drawing interest, is subject to DST. The CTA observed that the SSDA has the
same nature and characteristics as a time deposit.34 The CTA discussed the
similarities of a time deposit account with an SSDA:
In order for the depositor to earn the agreed higher interest rate in a Special/Super
Savings Account, the required minimum amount of deposit must not only be met
but should also be maintained for a definite period. Thus, the Special/Super
Savings Account is a deposit with a fixed term. Withdrawal before the expiration
of said fixed term results to the reduction of the interest rate. The fixed term and
reduction of interest rate in case of pre-termination are essentially the features of a
time deposit. Hence, this Court concurs with the conclusion reached in the
assailed Decision that petitioner’s Special/Super Savings Deposits and certificates
of time deposit are substantially the same, if not one and the same product, and
therefore both are subject to the DST on certificates of deposit.35
The CTA stated that the fact that the SSDA is evidenced by a passbook is
immaterial because in determining whether certain instruments are subject to
DST, substance would control over form and labels.36
On 14 December 2005, petitioner appealed to this Court the CTA decision.37
The Issue
Petitioner submits this sole issue for our consideration: whether petitioner’s
product called Special/Super Savings Account is subject to DST under Section
180 of the 1977 NIRC prior to the passage of RA 9243 in 2004.38
The Ruling of the Court
The issue in the present case is whether petitioner’s SSDAs are "certificates of
deposits drawing interest" as used in Section 180 of the 1977 NIRC. If they are,
then the SSDAs are subject to DST. If not, then they are merely regular savings
account which concededly are not subject to DST. So what are "certificates of
deposits drawing interest," and how do they differ from a regular savings
account?
Section 180 of the 1977 NIRC, as amended, provides:
Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of
exchange, drafts, instruments and securities issued by the government or any
of its instrumentalities, certificates of deposit bearing interest and others not
payable on sight or demand. — On all loan agreements signed abroad wherein
the object of the contract is located or used in the Philippines; bills of exchange
(between points within the Philippines), drafts, instruments and securities issued
by the Government or any of its instrumentalities or certificates of deposits
drawing interest, or orders for the payment of any sum of money otherwise than
at the sight or on demand, or on all promissory notes, whether negotiable or non-
negotiable, except bank notes issued for circulation, and on each renewal of any
such note, there shall be collected a documentary stamp tax of Thirty centavos
(P0.30) on each Two hundred pesos, or fractional part thereof, of the face value of
any such agreement, bill of exchange, draft, certificate of deposit, or note:
provided, that only one documentary stamp tax shall be imposed on either loan
agreement, or promissory note issued to secure such loan, whichever will yield a
higher tax: provided, however, that loan agreements or promissory notes the
aggregate of which does not exceed Two hundred fifty thousand pesos (P250,000)
executed by an individual for his purchase on installment for his personal use or
that of his family and not for business, resale, barter or hire of a house, lot, motor
vehicle, appliance or furniture shall be exempt from the payment of the
documentary stamp tax provided under this section. lavvphil.zw+(Boldfacing and
underscoring supplied)
In Far East Bank and Trust Company v. Querimit,39 the Court defined a certificate
of deposit as "a written acknowledgment by a bank or banker of the receipt of a
sum of money on deposit which the bank or banker promises to pay to the
depositor, to the order of the depositor, or to some other person or his order,
whereby the relation of debtor and creditor between the bank and the depositor is
created." A certificate of deposit is also defined as "a receipt issued by a bank for
an interest-bearing time deposit coming due at a specified future date."40
 The deposit operations of a bank as listed in the Bangko Sentral ng Pilipinas
Holding Period None Yes Yes
Manual of Regulations for Banks41 consist of the following:
Withdrawal Allowed Withdrawal amounts Allowed provided the
1. Demand Deposits – are deposits, subject to withdrawal either by to pre-termination minimum amount to
check or thru the automated tellering machines which are earn the higher
otherwise known as current or checking accounts. The Bank may interest rate is
or may not pay interest on these accounts.42 maintained,
otherwise, the regular
2. Savings Deposits – are interest-bearing deposits which are savings interest rate
withdrawable either upon presentation of a properly accomplished will apply.
withdrawal slip together with the corresponding passbook or thru
the automated tellering machines.43
Based on the definition and comparison, it is clear that a certificate of deposit
3. Negotiable Order of Withdrawal Accounts – are interest-bearing drawing interest as used in Section 180 of the 1977 NIRC refers to a time deposit
savings deposit which are withdrawable by means of Negotiable account. As the Bureau of Internal Revenue (BIR) explained in Revenue
Orders of Withdrawal.44 Memorandum Circular No. 16-2003,46 the distinct features of a certificate of
deposit from a technical point of view are as follows:
4. Time Deposits – are interest-bearing deposits with specific
maturity dates and evidenced by certificates issued by the bank.45 a. Minimum deposit requirement;

Petitioner treats the SSDA as a regular savings deposit account since it is b. Stated maturity period;
evidenced by a passbook and allows withdrawal. Respondent treats the SSDA as a
time deposit account because of the higher interest rates and holding period. It is c. Interest rate is higher than the ordinary savings account;
then significant to differentiate a regular savings deposit and a time deposit vis-à-
vis the SSDA to determine if the SSDA is a certificate of deposit drawing interest d. Not payable on sight or demand, but upon maturity or in case of
referred to in Section 180 of the 1977 NIRC. A comparison of a savings account, pre-termination, prior notice is required; and
time deposit account, and SSDA is shown in the table below:
e. Early withdrawal penalty in the form of partial loss or total loss
of interest in case of pre-termination.
Savings Account Time Deposit SSDA
The SSDA is for depositors who maintain savings deposits with substantial
Interest rate Regular savings interest Higher interest rate Higher interest rate
average daily balance and which earn higher interest rates. The holding period of
Period None Fixed Term Fixed Term an SSDA floats at the option of the depositor at 30, 60, 90, 120 days or more and
for maintaining a longer holding period, the depositor earns higher interest rates.
Evidenced by: Passbook Certificate of Time Passbook There is no pre-termination of accounts in an SSDA because the account is simply
Deposit reverted to an ordinary savings status in case of early or partial withdrawal or if
the required holding period is not met. Based on the foregoing, the SSDA has all
Pre-termination None With penalty With penalty of the distinct features of a certificate of deposit.
Petitioner argues that a deposit account evidenced by a passbook cannot be
construed as a certificate of deposit subject to DST under Section 180 of the 1977
NIRC. In International Exchange Bank v. Commissioner of Internal Revenue,47
this Court categorically ruled that a passbook representing an interest earning
deposit account issued by a bank qualifies as a certificate of deposit drawing
interest and should be subject to DST. The Court added that "a document to be
deemed a certificate of deposit requires no specific form as long as there is some
written memorandum that the bank accepted a deposit of a sum of money from a
depositor."48
Petitioner also argues that prior to the passage of RA 9243, there was no law
subjecting SSDA to DST. In International Exchange Bank v. Commissioner of
Internal Revenue,49 the Court held that the amendment to include "other evidences
of deposits that are drawing interest significantly higher than the regular savings
deposit" was intended to eliminate the ambiguity. The Court explained:
If at all, the further amendment was intended to eliminate precisely the scheme
used by banks of issuing passbooks to "cloak" its time deposits as regular savings
deposits. This is reflected from the following exchanges between Mr. Miguel
Andaya of the Bankers Association of the Philippines and Senator Ralph Recto,
Senate Chairman of the Committee on Ways and Means, during the deliberations
on Senate Bill No. 2518 which eventually became RA 9243:
MR. MIGUEL ANDAYA (Bankers Association of the Philippines). Just to
clarify. Savings deposit at the present is not subject to DST.
THE CHAIRMAN. That’s right.
MR. ANDAYA. Time deposit is subject. I agree with you in principle that if we
are going to encourage deposits, whether savings or time...
THE CHAIRMAN. Uh-huh.
MR. ANDAYA. ...it’s questionable whether we should tax it with DST at all,
even the question of imposing final withholding tax has been raised as an issue.
THE CHAIRMAN. If I had it my way, I'll cut it by half.
MR. ANDAYA. Yeah, but I guess concerning the constraint of government
revenue, even the industry itself right now is not pushing in that direction, but in
the long term, when most of us in this room are gone, we hope that DST will
disappear from the face of this earth, no.
Now, I think the move of the DOF to expand the coverage of or to add that
phrase, "Other evidence of indebtedness," it just removed ambiguity. When we
testified earlier in the House on this very same bill, we did not interpose any
objections if only for the sake of avoiding further ambiguity in the
implementation of DST on deposits. Because of what has happened so far is, we
don't know whether the examiner is gonna come in and say, "This savings deposit
is not savings but it’s time deposit." So, I think what DOF has done is to eliminate
any confusion. They said that a deposit that has a maturity...
THE CHAIRMAN. Uh-huh.
MR. ANDAYA. ...which is time, in effect, regardless of what form it takes should
be subject to DST.
THE CHAIRMAN. Would you include savings deposit now?
MR. ANDAYA. So that if we cloaked a deposit as savings deposit but it has got a
fixed maturity...
THE CHAIRMAN. Uh-huh.
MR. ANDAYA. ..that would fall under the purview. (Italics in the original)
DST is imposed on Certificates of Deposits Bearing Interest
including a special savings account evidenced by a passbook.
Documentary stamp tax is a tax on documents, instruments, loan agreements, and
papers evidencing the acceptance, assignment, sale or transfer of an obligation,
right or property incident thereto. A DST is actually an excise tax because it is
imposed on the transaction rather than on the document.50 A DST is also levied on
the exercise by persons of certain privileges conferred by law for the creation,
revision, or termination of specific legal relationships through the execution of
specific instruments.51 Hence, in imposing the DST, the Court considers not only
the document but also the nature and character of the transaction.
Section 180 of the 1977 NIRC imposes a DST of P0.30 on each P200 of the face
value of any certificate of deposit drawing interest. As correctly observed by the
CTA, a certificate of deposit is a written acknowledgment by a bank of the receipt
of a sum of money on deposit which the bank promises to pay to the depositor, to
the order of the depositor, or to some other person or his order, whereby the
relation of debtor or creditor between the bank and the depositor is created.52
Petitioner’s SSDA has the following features:
1. Although the money placed in the SSDA can be withdrawn
anytime, the money is subject to a holding period in order to earn a
higher interest rate. Otherwise, in case of premature withdrawal,
the depositor will not earn the preferred interest ranging from 8%
or higher but only the normal interest rate on regular savings
deposit.
2. In order to qualify for an SSDA, the depositor must place a
substantial amount of money of not less than P50,000. This amount
is even larger than what is needed to open a time deposit which is
P20,000. Aside from the substantial amount of money required,
this amount must be maintained within a certain period just like a
time deposit.
3. On the issue of penalty, in an SSDA, if the depositor withdraws
the money and the balance falls below the "minimum balance" of
P50,000, the interest is reduced. This condition is identical to that
imposed on a time deposit that is withdrawn before maturity. 53
Based on these features, it is clear that the SSDA is a certificate of deposit
drawing interest subject to DST even if it is evidenced by a passbook and non-
negotiable in character. In International Exchange Bank v. Commissioner of
Internal Revenue,54 we held that:
A document to be deemed a certificate of deposit requires no specific form as
long as there is some written memorandum that the bank accepted a deposit of a
sum of money from a depositor. What is important and controlling is the nature or
meaning conveyed by the passbook and not the particular label or nomenclature
attached to it, inasmuch as substance, not form, is paramount.lavvph!l.net
Moreover, a certificate of deposit may be payable to the depositor, to the order of
the depositor, or to some other person or his order. From the use of the
conjunction or, instead of and, the negotiable character of a certificate of deposit
is immaterial in determining the imposition of DST.55
In Banco de Oro Universal Bank v. Commissioner of Internal Revenue,56 this
Court upheld the CTA’s decision and ruled:
The CTA en banc likewise declared that in practice, a time deposit transaction is
covered by a certificate of deposit while petitioner's Investment Savings Account
(ISA) transaction is through a passbook. Despite the differences in the form of
any documents, the CTA en banc ruled that a time deposit and ISA have
essentially the same attributes and features. It explained that like time deposit,
ISA transactions bear a fixed term or maturity because the bank acknowledges
receipt of a sum of money on deposit which the bank promises to pay the
depositor, bearer or to the order of a bearer on a specified period of time. Section
180 of the 1997 NIRC does not prescribed the form of a certificate of deposit. It
may be any 'written acknowledgment by a bank of the receipt of money on
deposit.' The definition of a certificate of deposit is all encompassing to
include a savings account deposit such as ISA. (Emphasis supplied)
Availment of the Tax Amnesty Program
On 24 May 2007, during the pendency of this case before this Court, Republic
Act No. 9480 or "An Act Enhancing Revenue Administration and Collection by
Granting an Amnesty on All Unpaid Internal Revenue Taxes Imposed by the
National Government for Taxable Year 2005 and Prior Years" (RA 9480), lapsed
into law.
The pertinent provisions of RA 9480 are:
Section 1. Coverage. There is hereby authorized and granted a tax amnesty which
shall cover all national internal revenue taxes for the taxable year 2005 and
prior years, with or without assessments duly issued therefor, that have remained
unpaid as of December 31, 2005: Provided, however, That the amnesty hereby
authorized and granted shall not cover persons or cases enumerated under Section
8 hereof.
xxx
Sec. 6. Immunities and Privileges. Those who availed themselves of the tax
amnesty under Section 5 hereof, and have fully complied with all its conditions
shall be entitled to the following immunities and privileges:
1. The taxpayer shall be immune from the payment of taxes, as well as
addition thereto, and the appurtenant civil, criminal or administrative
penalties under the National Internal Revenue Code of 1997, as amended,
arising from the failure to pay any and all internal revenue taxes for taxable
year 2005 and prior years.
xxx
Sec. 8. Exceptions. The tax amnesty provided in Section 5 hereof shall not extend
to the following persons or cases existing as of the effectivity of this Act:
1. Withholding agents with respect to their withholding tax
liabilities;
2. Those with pending cases falling under the jurisdiction of the
Presidential Commission on Good Government;
3. Those with pending cases involving unexplained or unlawfully
acquired wealth or under the Anti-Graft and Corrupt Practices Act;
4. Those with pending cases filed in court involving violation of
the Anti-Money Laundering Law;
5. Those with pending criminal cases for tax evasion and other
criminal offenses under Chapter II of Title X of the National
Internal Revenue Code of 1997, as amended, and the felonies of
frauds, illegal exactions and transactions, and malversation of
public funds and property under Chapters III and IV of Title VII of
the Revised Penal Code; and
6. Tax cases subject of final and executory judgment by the
courts. (Emphasis supplied)
The Department of Finance (DOF) issued DOF Department Order No. 29-07 (DO
29-07).57 Section 6 of DO 29-07 provides:
SEC. 6. Method of Availment of Tax Amnesty. -
1. Forms/Documents to be filed. - To avail of the general tax amnesty, concerned
taxpayers shall file the following documents/requirements:
a. Notice of Availment in such form as may be prescribed by the
BIR;
b. Statements of Assets, Liabilities and Networth (SALN) as of
December 31, 2005 in such form, as may be prescribed by the BIR;
c. Tax Amnesty Return in such form as may be prescribed by the
BIR.
xxx
The Acceptance of Payment Form, the Notice of Availment, the SALN, and the
Tax Amnesty Return shall be submitted to the RDO, which shall be received only
after complete payment. The completion of these requirements shall be
deemed full compliance with the provisions of RA 9480. (Emphasis supplied)
The BIR issued Revenue Memorandum Circular No. 19-2008 (RMC 19-2008).58
The pertinent provisions are:
Who may avail of the amnesty?
The following taxpayers may avail of the Tax Amnesty Program:
P Individuals
P Estates and Trusts
P Corporations
P Cooperatives and tax-exempt entities that have become taxable as of December
31, 2005
P Other juridical entities including partnerships.
Ø Fiscal year taxpayers may likewise avail of the tax amnesty using their
Financial Statement ending in any month of 2005.
EXCEPT:
Q Withholding agents with respect to their withholding tax liabilities
Q Those with pending cases:
Q Under the jurisdiction of the PCGG
Q Involving violations of the Anti-Graft and Corrupt Practices Act
Q Involving violations of the Anti-Money Laundering Law
Q For tax evasion and other criminal offenses under the NIRC and/or the RPC
Q Issues and cases which were ruled by any court (even without finality) in
favor of the BIR prior to amnesty availment of the taxpayer. (e.g. Taxpayers
who have failed to observe or follow BOI and/or PEZA rules on entitlement to
Income Tax Holiday Incentives and other incentives)
Q Cases involving issues ruled with finality by the Supreme Court prior to
the effectivity of RA 9480 (e.g. DST on Special Savings Account)
Q Taxes passed on and collected from customers for remittance to the BIR
Q Delinquent Accounts/Accounts Receivable considered as assets of the
BIR/Government, including self-assessed tax. (Emphasis supplied)
The BIR also issued Revenue Memorandum Circular No. 69-2007 (RMC 69-
2007).59 The pertinent portion provides:
Q-32 May surviving or new corporations avail of the tax amnesty in behalf of
the corporations absorbed or dissolved pursuant to a merger or consolidation
that took effect prior to Taxable Year 2005? Can they avail of the Tax Amnesty?
A-32 Yes, these companies can avail of the tax amnesty for purposes of obtaining
tax clearances for the dissolved or absorbed corporations. (Emphasis supplied)
On 21 September 2007, Metropolitan Bank and Trust Company (Metrobank), the
surviving entity that absorbed petitioner’s banking business, filed a Tax Amnesty
Return,60 paid the amnesty tax and fully complied with all the requirements61 of
the Tax Amnesty Program under RA 9480. Petitioner alleges that by virtue of this
availment, petitioner is now deemed "immune from the payment of taxes as well
as additions thereto," and is statutorily discharged from paying all internal
revenue tax liabilities for the taxable year 2005 and prior years. Petitioner
contends that the availment includes all deficiency tax assessments of the BIR
subject of this petition.
A tax amnesty is a general pardon or the intentional overlooking by the State of
its authority to impose penalties on persons otherwise guilty of violation of a tax
law. It partakes of an absolute waiver by the government of its right to collect
what is due it and to give tax evaders who wish to relent a chance to start with a
clean slate. A tax amnesty, much like a tax exemption, is never favored nor
presumed in law. The grant of a tax amnesty, similar to a tax exemption, must be
construed strictly against the taxpayer and liberally in favor of the taxing
authority.62
The DST is one of the taxes covered by the Tax Amnesty Program under RA
9480.63 As discussed above, petitioner is clearly liable to pay the DST on its
SSDA for the years 1996 and 1997. However, petitioner, as the absorbed
corporation, can avail of the tax amnesty benefits granted to Metrobank.
Records show that Metrobank, a qualified tax amnesty applicant,64 has duly
complied with the requirements enumerated in RA 9480, as implemented by DO
29-07 and RMC 19-2008.65 Considering that the completion of these requirements
shall be deemed full compliance with the tax amnesty program,66 the law
mandates that the taxpayer shall thereafter be immune from the payment of taxes,
and additions thereto, as well as the appurtenant civil, criminal or administrative
penalties under the NIRC of 1997, as amended, arising from the failure to pay any
and all internal revenue taxes for taxable year 2005 and prior years.67
The BIR’s inclusion of "issues and cases which were ruled by any court (even
without finality) in favor of the BIR prior to amnesty availment of the taxpayer"
as one of the exceptions in RMC 19-2008 is misplaced. RA 9480 is specifically
clear that the exceptions to the tax amnesty program include "tax cases subject of
final and executory judgment by the courts." The present case has not become
final and executory when Metrobank availed of the tax amnesty program.

Wherefore, we GRANT the petition, and SET ASIDE the Court of Tax
Appeals’ Decision dated 23 November 2005 in CTA EB No. 63 solely in view of
petitioner’s availment of the Tax Amnesty Program.

SO ORDERED.

ANTONIO T. CARPIO
Associate Justice
 THIRD DIVISION seeking the reversal and setting aside of the
Decision36[1] dated 21 May 2007 and Resolution37[2]
METROPOLITAN BANK G.R. No. 178797 dated 9 July 2007 of the Court of Tax Appeals (CTA) en
AND TRUST CO.,
banc in C.T.A. E.B. No. 247. The CTA en banc affirmed
Pet Present:
itioner, the assessment by the Bureau of Internal Revenue (BIR)
YNARES-SANTIAGO, J.,
against petitioner Metropolitan Bank and Trust Co.
Chairperson,
CHICO-NAZARIO, (Metrobank) for deficiency Documentary Stamp Tax
VELASCO, JR.,
- versus - NACHURA, and (DST) for taxable year 1999.
PERALTA, JJ.
There is no dispute as to the antecedent facts of
Promulgated: this case.
COMMISSIONER OF
INTERNAL REVENUE, August 4, 2009
Respondent. Metrobank is a domestic corporation and a duly
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
- - - - - - - - - - -x licensed banking institution. It offers to the public a
product called the Universal Savings Account (UNISA).

DECISION UNISA is for a depositor able to maintain a savings

CHICO-NAZARIO, J.:
Before this Court is a Petition for Review on
Certiorari under Rule 45 of the Revised Rules of Court
deposit with Metrobank with substantial average daily
balance. A depositor is entitled to a higher interest rate
in a UNISA, than in a regular savings account. When a
depositor opens a UNISA, he/she is issued a passbook
by Metrobank. The depositor may withdraw from
36

37
his/her UNISA anytime. However, to be entitled to the
preferential interest rate, the depositor must be able to Special Savings Account or 170,980,990,473
UNISA .33
conform to the stated minimum deposit balance for the Rate of Tax (Sec. 180 0.15%
NIRC)
specified holding period for the UNISA, otherwise, Basic DST Due 256,471,485.71
Add: Surcharge 64,117,871.4
his/her account will revert to a regular savings account. 3
Interest until 152,618,100. 216,735,971.97
12/31/02 54
TOTAL AMOUNT DUE 473,207,457.97
Pursuant to Letter of Authority No. LOA 2000
00052501 dated 26 June 2001, the BIR investigated
Metrobank filed with ACIR-LTS Abella on 11
Metrobank for its Gross Receipts Tax (GRT), Final
December 2002 a protest to the PAN.39[4] Metrobank
Withholding Tax (FWT), and DST liabilities for 1999. As
argued that its UNISA should not be subject to DST and
a result of said investigation, respondent Commissioner
it should not be made liable for the 25% surcharge on
of Internal Revenue (CIR), through Edwin R. Abella
its alleged deficiency DST for 1999.
(Abella), Assistant Commissioner of the Large
Taxpayers Service (ACIR-LTS) of the BIR, issued on 30
On 7 January 2003, ACIR-LTS Abella issued
September 2002, a Pre-Assessment Notice (PAN)38[3]
Assessment No. DST-2-99-000022 and a Formal Letter
assessing Metrobank for deficiency DST on its UNISA for
of Demand40[5] to Metrobank, requesting the latter to
1999, based on Section 180 of the National Internal
pay the deficiency DST on the UNISA for 1999, together
Revenue Code (NIRC). Said DST deficiency of
with surcharge, interest, and compromise penalty, in
Metrobank for 1999, together with surcharge and
the total amount of P477,588,959.62, computed as
interest, amounted to P473,207,457.97, per the
follows:
following calculation in the PAN:
39

38 40
 ASSESSMENT NO. DST-2-99-000022 Petitioner filed a Petition for Review with the CTA
Universal Savings Account (UNISA) Php on 21 April 2004. The Petition was docketed as C.T.A.
(Gross Amount) 170,980,990,473.3
3 Case No. 6955, and raffled to the CTA Second Division.
Rate of Tax (Sec. 180 NIRC) 0.15%
Basic DST Due 256,471,485.71 The CTA Second Division failed to find merit in the
Add:
Surcharge Php Petition of Metrobank and, thus, decreed in its
64,117,871.42
Interest (1/10/00-1/31/03) 156,974,602.49 Decision42[7] dated 1 September 2006:
Compromise Penalty 25,000.00 221,117,473.91
Total DST Deficiency Php 477,588,959.62

WHEREFORE, the Petition for Review is hereby

Metrobank filed with the CIR on 17 January 2003 a
protest against Assessment No. DST-2-99-000022. Said
protest was denied by the CIR in a Decision41[6] dated 2
March 2004, the fallo of which reads:
WHEREFORE, predicated on all the foregoing,
METROBANK’s protest against Assessment Notice No.
DST-2-99-000022 is hereby DENIED. Consequently,
METROBANK is hereby ordered to pay the total amount of
P477,588,959.62, as deficiency documentary stamp tax
for the taxable year 1999, plus increments that have
legally accrued thereon until the actual date of payment,
to the Large Taxpayer’s Service, BIR National Office
Building, Diliman, Quezon City, within thirty (30) days
from receipt hereof; otherwise, collection thereof will be
effected through the summary remedies provided by law.
This constitutes the Final Decision of this Office on
the matter.
41
DISMISSED for lack of merit. The Decision of the [CIR]
dated March 2, 2004 is hereby AFFIRMED with
modifications. The compromise penalty of P25,000.00 is
hereby CANCELLED there being no mutual agreement
arrived at between the parties.
Accordingly, [Metrobank] is ORDERED TO PAY the
[CIR] the amount of P477,563,959.62 representing
deficiency documentary stamp taxes for the taxable year
1999, computed as follows:
Basic Tax P 256,471,485.71
Add: 25% Surcharge 64,117,871.42
Interest 156,974,602.49
P 477,563,959.62
In addition, [Metrobank] is ORDERED TO PAY 20%
delinquency interest on the amount of P477,563,959.62
computed from April 26, 2004 until full payment thereof,
pursuant to Section 249(C) of the National Internal
Revenue Code of 1997.
42
 The Motion for Reconsideration of Metrobank was
denied by the CTA Second Division in a Resolution43[8] The CTA en banc denied the Motion for
dated 3 January 2007. Reconsideration of Metrobank in a Resolution dated 9
July 2007.
Metrobank thereafter filed a Petition for Review
with the CTA en banc, docketed as C.T.A. E.B. No. 247. Hence, Metrobank comes before this Court via the
In a Decision promulgated on 21 May 2007, the CTA en present Petition, raising the sole issue of whether the
banc affirmed the Decision dated 1 September 2006 UNISA was subject to DST in 1999 under Section 180 of
and Resolution dated 3 January 2007 of the CTA Second the NIRC, prior to the amendment thereof by Republic
Division in C.T.A. Case No. 6955, and dismissed the Act No. 9243, which took effect on 20 May 2004.
Petition of Metrobank. According to the CTA en banc,
the decisive issue of whether special savings accounts I
evidenced by passbooks, such as the UNISA of
Metrobank, were subject to DST under Section 180 of Prior to Republic Act No. 9243, Section 180 of the
the NIRC, had already been resolved in the affirmative NIRC imposed DST on the following documents or
by this Court in its Resolution dated 15 January 2007 in instruments:
Banco de Oro Universal Bank v. Commissioner of
Internal Revenue (BDO case)44[9] and its Decision dated SEC. 180. Stamp Tax on all Bonds, Loan
Agreements, Promissory Notes, Bills of Exchange, Drafts,
4 April 2007 in International Exchange Bank v. Instruments and Securities Issued by the Government or
Any of its Instrumentalities, Deposit Substitute Debt
Commissioner of Internal Revenue (IEB case).45[10] Instruments, Certificates of Deposits Bearing
Interest and Others Not Payable on Sight or
43
Demand. – On all bonds, loan agreements, including
44
those signed abroad, wherein the object of the contract is
45
located or used in the Philippines, bills of exchange
 (between points within the Philippines), drafts,
instruments and securities issued by the Government or
any of its instrumentalities, deposit substitute debt
instruments, certificates of deposits drawing
interest, orders for the payment of any sum of money
otherwise than at sight or on demand, on all promissory
notes, whether negotiable or non-negotiable, except bank
notes issued for circulation, and on each renewal of any
such note, there shall be collected a documentary stamp
tax of Thirty centavos (P0.30) on each Two hundred pesos
(P200), or fractional part thereof, of the face value of any
such agreement, bill of exchange, draft, certificate of
deposit, or note: x x x (Emphases ours.)
It is beyond question that a certificate of deposit
issued by a bank for a time deposit was subject to DST
under Section 180 of the NIRC. The CIR treated the
UNISA of Metrobank like a time deposit, although a
passbook is issued for the former, rather than a
certificate of deposit. The CIR pointed out that in order
to be entitled to the premium rate for UNISA, the
depositor, just like in a time deposit, must wait for the
holding period to expire before making the withdrawal.
This constitutes a restriction on the depositor’s right to
withdraw from his deposit prior to the expiration of the
holding period. Although the passbook issued by
Metrobank for UNISA is not in the form of certificate nor
is it labeled as such, it has a fixed maturity date and
earns premium interest. Given the nature and
substance of the passbook issued by Metrobank for
UNISA, it is, for all intents and purposes, a certificate of
deposit earning interest, which is subject to DST.
Metrobank opposes the assessment against it for
deficiency DST on the UNISA for 1999 because the
passbook issued for such an account was not among
the documents subject to DST enumerated in Section
180 of the NIRC, prior to its amendment by Republic Act
No. 9243. Section 180 of the NIRC imposed DST only
on a certificate of deposit bearing interest that is not
payable on sight or demand, such as the certificate
issued by a bank for a time deposit.
Metrobank explains that a UNISA is not the same
as a time deposit account. It is a new product
developed by Metrobank after the removal of interest
ceilings on both savings and time deposits. It offers the
flexibility of a savings deposit account by doing away
with the rigidity of a time deposit account, but with
interest rate on par with the latter. A time deposit can
be distinguished from a UNISA by the following
features: (1) in a time deposit account, the depositor
agrees that the bank shall keep the money for a fixed
period; in a UNISA, the depositor can make withdrawals
anytime, just like an ordinary savings account; to be
entitled to the preferential interest rate for UNISA,
however, the depositor must maintain the required
minimum deposit balance within the specified holding
period; (2) a time deposit account is evidenced by a
certificate of deposit; on the other hand, a UNISA is
covered by a passbook; (3) for renewal, the certificate
issued for a time deposit has to be formally surrendered
upon maturity, while the passbook issued for UNISA
need not be renewed in the same manner; and (4) the
withdrawal of the money from a time deposit account
before the expiration of the fixed period would mean
the pretermination of said account; in comparison,
there can be no pretermination of a UNISA, since the
account simply reverts to an ordinary savings account
in case the depositor makes a withdrawal, which would
result in non-compliance with the required maintaining
balance or holding period for UNISA.
Metrobank further insists that to be taxable under
Section 180 of the NIRC, the certificate of deposit must
be negotiable. It must be payable to the depositor, to
his order, or to some other person or his order. A
passbook, by all accounts, is not negotiable. It is
merely a paper book issued by a bank or savings
institution to a depositor to record deposits to,
withdrawals from, and interest earned by a savings
account.
Finally, Metrobank refers to the deliberations of
both Houses of Congress on the precursor bills for
Republic Act No. 9243. According to Metrobank,
records of said deliberations reveal that the legislators
acknowledged the existence of a loophole in Section
180 of the NIRC, as it was then worded, by virtue of
which, banks offering special savings accounts, with
high interest rates and specified holding periods,
evidenced by passbooks instead of certificates of
deposit, escape payment of DST. Thus, the legislators
deemed it necessary to amend Section 180 of the NIRC
through Republic Act No. 9243. Re-numbered as UNISA of Metrobank become subject to DST under the
Section 179, the amended provision now reads: aforequoted Section 179.

SEC. 179. Stamp Tax on All Debt Instruments. – On every The Court agrees with the CTA en banc that the
original issue of debt instruments, there shall be collected a
documentary stamp tax on One peso (P1.00) on each Two hundred pivotal issue in this case had been squarely resolved in
pesos (P200), or fractional part thereof, of the issue price of any such
debt instruments: Provided, That for such debt instruments with terms the BDO case and the IEB case, which involved
of less than one (1) year, the documentary stamp tax to be collected
shall be of a proportional amount in accordance with the ratio of its assessments issued by the BIR against the banks BDO
term in number of days to three hundred sixty-five (365) days:
Provided, further, That only one documentary stamp tax shall be and IEB for DST on their respective special savings
imposed on either loan agreement, or promissory notes issued to
secure such loan. accounts, closely similar to the UNISA of Metrobank.
For purposes of this section, the term debt
instrument shall mean instruments representing
borrowing and lending transactions including but not
limited to debentures, certificates of indebtedness, due In the BDO case, this Court dismissed the Petition
bills, bonds, loan agreements, including those signed
abroad wherein the object of contract is located or used in for Review on Certiorari of BDO for the latter’s failure to
the Philippines, instruments and securities issued by the
government of any of its instrumentalities, deposit submit a verified statement of the dates of receipt of
substitute debt instruments, certificates or other
evidences of deposits that are either drawing the assailed judgment and filing of the motion for
interest significantly higher than the regular
savings deposit taking into consideration the size reconsideration, as required by Sections 4(b) and 5,
of the deposit and the risks involved or drawing
interest and having a specific maturity date, orders Rule 45, in relation to Section 5(d), Rule 56, of the
for payment of any sum of money otherwise than at sight
or on demand, promissory notes, whether negotiable or Revised Rules of Court. Yet, the Court also declared
non-negotiable, except bank notes issued for circulation.
(Emphasis ours.)
that even without the technical lapse of BDO, the
Petition of said bank should still be denied, there being
Metrobank posits that only after Republic Act No. no reversible error committed by the CTA en banc when
9243 amended the NIRC on 20 March 2004, did the the latter ruled as follows:
 On April 7, 2006[,] the CTA en banc rendered the declaration made by the Court on the merits of the
herein challenged decision affirming the findings of its
First Division that petitioner’s ISA is the equivalent of same constitutes obiter dictum,47[12] which should not
the certificate of deposit and which would make it
subject to documentary stamp tax under Section bind the Court in its resolution of the case at bar.
180 of the NIRC.

The CTA en banc likewise declared [t]hat in

practice, a time deposit transaction is covered by a The Court is not persuaded. The Court resolved
certificate of deposit while petitioner’s ISA transaction is
through a passbook. Despite the differences in the the BDO case on both procedural and substantive
form of the documents, the CTA en banc ruled that
a time deposit and ISA have essentially the same grounds. The declaration of the Court in the BDO case
attributes and features. It explained that like time
deposit, ISA transactions bear a fixed term or maturity – that the Petition therein should be denied because the
because the bank acknowledges receipt of a sum of
money on deposit which the bank promises to pay the
CTA en banc committed no reversible error in rendering
depositor, bearer or to the order of a bearer on a specified its assailed decision – was purposely and categorically
period of time. Section 180 of the 1997 NIRC does not
prescribed the form of a certificate of deposit. It may be made. An additional reason in a decision (or in this
any “written acknowledgement by a bank of the receipt of
money on deposit.” The definition of a certificate of case, a resolution), brought forward after the case has
deposit is all encompassing to include a savings
account deposit such as ISA. been disposed of on one ground, is not to be regarded
xxxx as dicta. So, also, where a case presents two or more
Dedicated exclusively to the study and points, any one of which is sufficient to determine the
consideration of tax problems, the CTA has necessarily
developed an expertise in the subject of taxation that this ultimate issue, but the court actually decides all such
Court has recognized time and again. For this reason, the
findings of fact of a division of the CTA, particularly when points, the case becomes an authoritative precedent as
affirmed en banc, are generally conclusive on this Court
absent grave abuse of discretion or palpable error, which to every point decided; none of such points can be
are not present in this case.46[11] (Emphases ours.)
regarded as having the status of a dictum, and one
point should not be denied authority merely because
Metrobank avers that the Petition in the BDO case
another point was more dwelt on and more fully argued
was dismissed on a matter of procedure, and that the
46 47
and considered; nor does a decision on one proposition
make statements of the court regarding other The Court, in the IEB case, referred to the definition of a
propositions dicta.48[13] certificate of deposit in Far East Bank and Trust Company v.
Querimit,50[15] viz:
Hence, if according to the BDO case, the special savings
account of BDO (i.e., Investment Savings Account [ISA], covered by A certificate of deposit is defined as a written
acknowledgment by a bank or banker of the receipt of a
a passbook), is a certificate of deposit bearing interest, which is sum of money on deposit which the bank or banker
promises to pay to the depositor, to the order of the
subject to DST under Section 180 of the NIRC; then the identical depositor, or to some other person or his order, whereby
the relation of debtor and creditor between the bank and
product of Metrobank (i.e., UNISA) should likewise be subject to the depositor is created. x x x.

DST.
The Court then proceeded to elucidate even
further in the IEB case on what constitutes a certificate
The Court was able to more thoroughly consider
of deposit:
and address in the IEB case the very same arguments
raised herein by Metrobank.
A document to be deemed a certificate of deposit requires no
specific form as long as there is some written memorandum that the
bank accepted a deposit of a sum of money from a depositor. What
Just as in the BDO case, the Court held in the IEB is important and controlling is the nature or meaning conveyed by
the passbook and not the particular label or nomenclature attached to
case that a passbook issued by a bank, representing an it, inasmuch as substance, not form, is paramount.

interest-earning deposit account, qualifies as a Contrary to petitioner’s claim, not all certificates of deposit
are negotiable. A certificate of deposit may or may not be negotiable
certificate of deposit drawing interest, which is subject as gathered from the use of the conjunction or, instead of and, in its
definition. A certificate of deposit may be payable to the depositor, to
to DST.49[14] the order of the depositor, or to some other person or his order.

In any event, the negotiable character of any and all

documents under Section 180 is immaterial for purposes of imposing
48

49 50
 DST.
Orders for the payment of sum of money payable at sight or
on demand are of course explicitly exempted from the payment of
DST. Thus, a regular savings account with a passbook which is
withdrawable at any time is not subject to DST, unlike a time deposit
which is payable on a fixed maturity date.51[16]
The Court rejected the claim of IEB in the IEB case that
its special savings account, i.e., Fixed-Savings Deposit (FSD),
was more akin to a regular savings account than a time deposit
account, ratiocinating that:
The FSD, like a time deposit, provides for a higher interest
rate when the deposit is not withdrawn within the required fixed
period; otherwise, it earns interest pertaining to a regular savings
deposit. Having a fixed term and the reduction of interest rates in
case of pre-termination are essential features of a time deposit. Thus
explains the CTA En Banc:
It is well-settled that certificates of time
deposit are subject to the DST and that a certificate of
time deposit is but a type of a certificate of deposit
drawing interest. Thus, in resolving the issue before
Us, it is necessary to determine whether petitioner’s
Savings Account-Fixed Savings Deposit (SA-FSD)
has the same nature and characteristics as a time
deposit. In this regard, the findings of fact stated in
the assailed Decision [of the CTA Division] are as
follows:
"In this case, a depositor of a savings deposit-
FSD is required to keep the money with the bank for
at least thirty (30) days in order to yield a higher
interest rate. Otherwise, the deposit earns interest
pertaining only to a regular savings deposit.
51
The same feature is present in a time deposit.
A depositor is allowed to withdraw his time deposit
even before its maturity subject to bank charges on its
pre[-]termination and the depositor loses his
entitlement to earn the interest rate corresponding to
the time deposit. Instead, he earns interest pertaining
only to a regular savings deposit. Thus, petitioner’s
argument that the savings deposit-FSD is
withdrawable anytime as opposed to a time deposit
which has a maturity date, is not tenable. In both
cases, the deposit may be withdrawn anytime but the
depositor gets to earn a lower rate of interest. The
only difference lies on the evidence of deposit, a
savings deposit-FSD is evidenced by a passbook,
while a time deposit is evidenced by a certificate of
time deposit."
In order for a depositor to earn the agreed
higher interest rate in a SA-FSD, the amount of
deposit must be maintained for a fixed period. Such
being the case, We agree with the finding that the SA-
FSD is a deposit account with a fixed term.
Withdrawal before the expiration of said fixed term
results in the reduction of the interest rate. Having a
fixed term and reduction of interest rate in case of
pre-termination are essentially the features of a time
deposit. Hence, this Court concurs with the
conclusion reached in the assailed Decision that
petitioner’s SA-FSD and time deposit are substantially
the same. . . . (Italics in the original; underscoring
supplied)
The findings and conclusions reached by the CTA which, by
the very nature of its function, is dedicated exclusively to the
consideration of tax problems and has necessarily developed an
expertise on the subject, and unless there has been an abuse or
improvident exercise of authority, and none has been shown in the
present case, deserves respect.
It bears emphasis that DST is levied on the exercise by
persons of certain privileges conferred by law for the creation,
revision, or termination of specific legal relationships through the
execution of specific instruments. It is an excise upon the privilege,
 opportunity or facility offered at exchanges for the transaction of the
business.
While tax avoidance schemes and arrangements are not
prohibited, tax laws cannot be circumvented in order to evade
payment of just taxes. To claim that time deposits evidenced by
passbooks should not be subject to DST is a clear evasion of the rule
on equality and uniformity in taxation that requires the imposition of
DST on documents evidencing transactions of the same kind, in this
particular case, on all certificates of deposits drawing interest.52[17]
The amendment of Section 180 of the NIRC and its re-
numbering as Section 179 by Republic Act No. 9243 in 2004 do
not mean that prior thereto, special savings deposits evidenced
by passbooks were exempted from payment of DST.
Court determined in the IEB case that:
If at all, the further amendment was intended to eliminate
precisely the scheme used by banks of issuing passbooks to "cloak"
its time deposits as regular savings deposits. This is reflected from
the following exchanges between Mr. Miguel Andaya of the Bankers
Association of the Philippines and Senator Ralph Recto, Senate
Chairman of the Committee on Ways and Means, during the
deliberations on Senate Bill No. 2518 which eventually became R.A.
9243:
MR. MIGUEL ANDAYA (Bankers Association of the
Philippines). Just to clarify. Savings deposit at the
present time is not subject to DST.
THE CHAIRMAN. That’s right.
MR. ANDAYA. Time deposit is subject. I agree with
you in principle that if we are going to encourage
deposits, whether savings or time…
THE CHAIRMAN. Uh-huh.
52
MR. ANDAYA. . .it’s questionable whether we should
tax it with DST at all, even the question of imposing
final withholding tax has been raised as an issue.
THE CHAIRMAN. If I had it my way, I’ll cut it by half.
MR. ANDAYA. Yeah, but I guess concerning the
constraint of government revenue, even the industry
itself right now is not pushing in that direction, but in
the long term, when most of us in this room are gone,
we hope that DST will disappear from the face of this
earth, ‘no.
Now, I think the move of the DOF to expand the
coverage of or to add that phrase, "Other evidence of
indebtedness," it just removed ambiguity. When we
testified earlier in the House on this very same bill, we
The did not interpose any objections if only for the sake of
avoiding further ambiguity in the implementation of
DST on deposits. Because of what has happened so
far is, we don’t know whether the examiner is gonna
come in and say, "This savings deposit is not savings
but it’s time deposit." So, I think what DOF has done
is to eliminate any confusion. They said that a deposit
that has a maturity. . .
THE CHAIRMAN. Uh-huh.
MR. ANDAYA. . . . which is time, in effect, regardless
of what form it takes should be subject to DST.
THE CHAIRMAN. Would that include savings deposit
now?
MR. ANDAYA. So that if we cloaked a deposit as
savings deposit but it has got a fixed maturity . . .
THE CHAIRMAN. Uh-huh.
MR. ANDAYA. . . that would fall under the purview.53
[18]
(Underscoring supplied.)
53
 no doubt that the UNISA – the special savings account of
Given that the IEB case and the present case
Metrobank, granting a higher tax rate to depositors able to
substantially involve the same facts and arguments, then the 4
maintain the required minimum deposit balance for the
April 2007 Decision in the former serves as a judicial precedent
specified holding period, and evidenced by a passbook – is a
in the latter. The averment of Metrobank in the instant Petition
certificate of deposit bearing interest, already subject to DST
that the judgment in the IEB case is still not final, since IEB filed
even under the then Section 180 of the NIRC. Hence, the
a Motion for Reconsideration of the same, is no longer true.
assessment by the CIR against Metrobank for deficiency DST
The Court denied with finality the Motion for Reconsideration of
on the UNISA for 1999 was only proper.
IEB in a Resolution dated 1 August 2007 and, accordingly,
entry of judgment has been made in the IEB case on 15
II
January 2008.

Nevertheless, the Court takes note of an intervening

In a more recent case, Philippine Banking Corporation
event, which significantly affects its resolution of the Petition at
(Now: Global Business Bank, Inc.) v. Commissioner of Internal
bar.
Revenue (PBC case),54[19] the Court again considered the
Special/Super Savings Deposit Account (SSDA) of PBC,
On 17 April 2008, during the pendency of the present
evidenced by a passbook, as a certificate of deposit bearing
Petition, Metrobank filed a Manifestation before this Court.
interest on which DST under Section 180 of the NIRC could be
Metrobank manifested that it had availed itself of the Tax
imposed, citing both the BDO case and the IEB case.
Amnesty Program under Republic Act No. 9480, which lapsed
into law on 24 May 2007.55[20] Metrobank claimed that it was
In the absence of any compelling reason, the Court
qualified to avail itself of the Tax Amnesty Program, and that it
cannot depart from the foregoing jurisprudence. There can be
54 55
had fully complied with the requirements for the same. As a
result, it became entitled to immunity from the payment of any
and all taxes due from it for the taxable year 2005 and prior
years, including the deficiency DST on the UNISA for 1999. On
the basis of the tax amnesty, Metrobank again prayed for the
reversal and setting aside of the 21 May 2007 Decision and 9
July 2007 Resolution of the CTA en banc in C.T.A. E.B. No.
247, and the cancellation of Final Assessment No. DST-2-99-
000022.
A tax amnesty is a general pardon or the intentional
overlooking by the State of its authority to impose penalties on
persons otherwise guilty of violation of a tax law. It partakes of
an absolute waiver by the government of its right to collect
what is due it and to give tax evaders who wish to relent a
chance to start with a clean slate. A tax amnesty, much like a
tax exemption, is never favored or presumed in law. The grant
of a tax amnesty, similar to a tax exemption, must be construed
strictly against the taxpayer and liberally in favor of the taxing
authority.56[21]
56
The coverage of Republic Act No. 9480 is laid down in
Section 1 thereof:
SECTION 1. Coverage. — There is hereby authorized and
granted a tax amnesty which shall cover all national internal
revenue taxes for the taxable year 2005 and prior years, with or
without assessments duly issued therefore, that have remained
unpaid as of December 31, 2005: Provided, however, That the
amnesty hereby authorized and granted shall not cover persons or
cases enumerated under Section 8 hereof. (Emphases ours.)
Section 8 of Republic Act No. 9480 enumerates persons
or cases which cannot be covered by the tax amnesty:
SEC. 8. Exceptions. — The tax amnesty provided in Section
5 hereof shall not extend to the following persons or cases existing as
of the effectivity of this Act:
(a) Withholding agents with respect to their withholding
tax liabilities;
(b) Those with pending cases falling under the jurisdiction of
the Presidential Commission on Good Government;
(c) Those with pending cases involving unexplained or
unlawfully acquired wealth or under the Anti-Graft and Corrupt
Practices Act;
(d) Those with pending cases filed in court involving violation
of the Anti-Money Laundering Law;
(e) Those with pending criminal cases for tax evasion and
other criminal offenses under Chapter II of Title X of the National
Internal Revenue Code of 1997, as amended, and the felonies of
frauds, illegal exactions and transactions, and malversation of public
funds and property under Chapters III and IV of Title VII of the
Revised Penal Code; and

(f) Tax cases subject of final and executory judgment by
the courts. (Emphases supplied.)
In his Comment on the Manifestation of Metrobank, the
CIR asserts that: (1) Metrobank is merely a withholding agent
for the depositors with respect to the DST on the UNISA, so it is
disqualified from availing itself of the tax amnesty following
Section 8(a) of Republic Act No. 9480; (2) the assessment
against Metrobank for the deficiency DST for 1999 already
attained finality, and it no longer qualifies for tax amnesty
pursuant to Section 8(f) of Republic Act No. 9480; and (3)
deficiency in DST is not covered by the tax amnesty under
Republic Act No. 9480.
The reliance by the CIR on paragraphs (a) and (f) of
Section 8 of Republic Act No. 9480 to oppose the availment by
Metrobank of the Tax Amnesty Program is untenable.
This is the first time that the CIR has alleged that
Metrobank is only a withholding agent for the DST on the
UNISA. As pointed out by Metrobank, it was assessed by the
CIR, not as a withholding agent that failed to withhold and/or
remit the DST on the UNISA for 1999, but as one that was
directly liable for the said tax and failed to pay the same.
The CIR did not provide the basis, whether in law or
administrative issuances, for its averment that Metrobank was a
withholding agent for the DST on the UNISA. In contrast, it is
clear from Section 3 of Revenue Regulations No. 9-200057[22]
that a bank shall be responsible for the payment and remittance
of the DST prescribed under Title VII of the NIRC; and unless it
is exempt from said tax, then it shall remit the same only as a
collecting agent of the CIR. The pertinent provisions of
Revenue Regulations No. 9-2000 are quoted hereunder:
SECTION 3. Mode of Payment and Remittance of the Tax. –
(a) In general. – Unless otherwise provided in these
Regulations, any of the aforesaid parties to the taxable transaction
shall pay and remit the full amount of the tax in accordance with the
provisions of Section 200 of the Code.
(b) Exceptions. –
(1) If one of the parties to the taxable transaction is
exempt from the tax, the other party who is not exempt shall be the
one directly liable for the tax, in which case, the tax shall be paid
and remitted by the said non-exempt party, unless otherwise
provided in these Regulations.
(2) If the said tax-exempt party is one of the persons
enumerated in Section 3(c)(4) hereof, he shall be constituted as
57
 agent of the Commissioner for the collection of the tax, in which Neither is there any merit in the insistence of the
case, he shall remit the tax so collected in the same manner and in
accordance with the provisions of Section 200 of the Code: Provided, CIR that Assessment No. DST-2-99-000022 is already
however, that if he fails to collect and remit the same as herein
required, he shall be treated personally liable for the tax, in addition final and executory in light of the failure of Metrobank,
to the penalties prescribed under Title X of the Code for failure to pay
the tax on time. firstly, to submit all the relevant supporting documents
xxxx within 60 days from filing of its protest with the CIR;
(c) Persons liable to remit the DST. – In general, the full and, secondly, to appeal to the CTA the inaction of the
amount of the tax imposed under Title VII of the Code may be
remitted by any of the party or parties to the taxable transaction, CIR on its protest within 30 days from the lapse of the
except in the following cases:
180-day period as provided in Section 228 of the
xxxx
NIRC.58[23]
(4) When one of the parties to the taxable document or
transaction is included in any of the entities enumerated below, such
entity shall be responsible for the remittance of the stamp tax
prescribed under Title VII of the Code: Provided, however, that if
such entity is exempt from the tax herein imposed, it shall remit the
The Court cannot simply accept the allegation of
tax as a collecting agent, pursuant to the preceding paragraph
Section 3(b)(2) hereof, any provision of these Regulations to the
the CIR that Metrobank failed to submit the relevant
contrary notwithstanding:
supporting documents within 60 days from the filing of
(a) A bank, a quasi-bank or non-bank financial intermediary,
a finance company, or an insurance, a surety, a fidelity, or annuity
its protest on 17 January 2003, when the CIR does not
company. (Emphases ours.)
even identify what these documents are. If the Court
does not know what particular documents Metrobank
There has never been any allegation made in this
purportedly failed to submit in support of its protest,
case that Metrobank is exempt from the DST on the
then the Court likewise cannot make a determination
UNISA and, thus, it is tasked to remit the said tax only
on the relevance of such documents. In addition, there
as a collecting agent. The standing presumption,
appear to be sufficient documents submitted by
therefore, is that Metrobank is directly liable for the
Metrobank to the CIR to have enabled the latter to
payment and remittance of the DST on the UNISA.
58
render on 2 March 2004 a Decision on the protest of the
former.
This brings the Court to its next point. Per the
computation of the CIR, the 180-day period for the CIR
to act on the protest of Metrobank ended on 13
September 2003, and the 30-day period for Metrobank
to file an appeal with the CTA ended on 13 October
2003. If, indeed, Assessment No. DST-2-99-000022
became final and executory when the bank failed to file
an appeal with the CTA by 13 October 2003, why then
did the CIR even bother with resolving the protest of
Metrobank against the said assessment and rendering a
Decision thereon on 2 March 2004? That the CIR issued
a Decision on 2 March 2004 denying the protest of
Metrobank belies its own assertion herein that the
assessment subject of the protest became final and
executory after 13 October 2003. It also bears to stress
that both the CTA Second Division and the CTA en banc
took cognizance of the successive appeals of
Metrobank, resolving both appeals on their merits
without regard to the supposed finality of the appealed
assessment. As argued by Metrobank, the very fact
that the instant case is still subject of the present
proceedings is proof enough that it has not reached a
final and executory stage as to be barred from the tax
amnesty under Republic Act No. 9480.
The assertion of the CIR that deficiency DST is not
covered by the Tax Amnesty Program under Republic
Act No. 9480 is downright specious.
To avail itself of the tax amnesty, Metrobank paid
5% of the resulting increase in its networth, following
the amendment of its statement of assets and liabilities
as of 31 December 2005, to include therein previously
undeclared assets and/or liabilities.59[24] The submission
of the CIR that the foregoing payment by Metrobank of
the amnesty tax “relates only to a determination of
[Metrobank]’s revised taxable income, and does not
delve on its unrecognized documentary stamp tax
liabilities”60[25] is rebuffed by the all-encompassing
words of Republic Act No. 9480 that those who availed
59
60
themselves of the tax amnesty, by paying the amnesty
tax and complying with all of its conditions, “shall be
immune from the payment of taxes, as well as
addition thereto, and the appurtenant civil, criminal
or administrative penalties under the National Internal
Revenue Code of 1997, as amended, arising from the
failure to pay any and all internal revenue taxes
for taxable year 2005 and prior years.”61[26] The
Court has absolutely no basis to limit the immunity,
resulting from the payment by Metrobank of the
amnesty tax, only to income tax, and to exclude DST
therefrom.
Finally, the CIR never questioned or rebutted that
Metrobank had fully complied with the requirements for
tax amnesty under Republic Act No. 9480. Still,
Metrobank calls the attention of this Court to the
developments in another case before the CTA en banc,
also between said bank and the CIR, docketed as C.T.A.
EB No. 269, entitled Metropolitan Bank and Trust
Company v. Commissioner of Internal Revenue.
61
C.T.A. EB No. 269 involved the assessment by the
CIR against Metrobank for deficiency DST on the UNISA
for 1995 to 1998, as well as on its Interbank Call Loans
for 1998. The CTA en banc already promulgated on 30
March 2007 a Decision in C.T.A. EB No. 269 against
Metrobank, prompting the latter to file a Motion to
Suspend Collection of Taxes and/or Enjoin the Issuance
of Warrant of Distraint, Garnishment and Levy and
Motion for Waiver of Posting of Bond. While said
Motions were pending before the CTA en banc,
Metrobank applied for tax amnesty under Republic Act
No. 9480. In its Resolution62[27] dated 28 March 2008 in
C.T.A. EB No. 269, the CTA en banc found that:
An examination of the records shows that
being a qualified tax amnesty applicant,
[Metrobank] duly complied with the requisites
enumerated in R.A. No. 9480, as implemented by
RMC No. 19-2008. The law mandates that a tax
amnesty compliant applicant shall be exempt from the
payment of taxes, including the civil, criminal, or
administrative penalties under the Tax Code, pursuant to
Section 6 of R.A. No. 9480 which states:
Section 6. Immunities and Privileges.
– Those who availed themselves of the tax
62
 amnesty under Section 5 hereof, and have
fully complied with all its conditions shall be
entitled to the following immunities and
privileges:
(a) The taxpayers shall be immune
from the payment of taxes, as well as
additions thereto, and the appurtenant civil,
criminal or administrative penalties under
the National Internal Revenue Code of 1997,
as amended, arising from the failure to pay
any and all internal revenue taxes for
taxable year 2005 and prior years.
Considering that the [Metrobank] satisfied the
requisites of the tax amnesty law, and is duly
qualified tax amnesty applicant under R.A. No.
9480, the Court sees no cogent reason to resolve
[Metrobank]’s Motion to Suspend Collection of Taxes
and/or Enjoin the Issuance of Warrant of Distraint,
Garnishment and Levy, and its Motion for Waiver of
Posting of Bond, for being moot.
Given [Metrobank]’s compliance with the tax
amnesty law, the subject tax deficiencies are
extinguished.
WHEREFORE, premises considered, C.T.A. EB Case
No. 269 is hereby considered CLOSED and
TERMINATED. (Emphases ours.)
Also worthy of note is the fact that this Court, in
the PBC case, made its own determination that
Metrobank was entitled to the tax amnesty under
Republic Act No. 9480. PBC and Metrobank merged,
with Metrobank as the surviving entity.
liabilities of PBC for 2005 and prior years were
absorbed by Metrobank and were, thus, deemed
included in the application for tax amnesty filed by
Metrobank. The Court found in the PBC case that:
Records show that Metrobank, a qualified tax
amnesty applicant, has duly complied with the
requirements enumerated in RA 9480, as
implemented by DO 29-07 and RMC 19-2008.
Considering that the completion of these requirements
shall be deemed full compliance with the tax amnesty
program, the law mandates that the taxpayer shall
thereafter be immune from the payment of taxes, and
additions thereto, as well as the appurtenant civil,
criminal or administrative penalties under the NIRC of
1997, as amended, arising from the failure to pay any and
all internal revenue taxes for taxable year 2005 and prior
years.63[28]
Metrobank filed only one application for tax
amnesty under Republic Act No. 9480, since it already
covered all national internal revenue taxes for 2005
and prior years. Hence, the factual determination
made by the CTA en banc in C.T.A. EB No. 269 and by
this Court in the PBC case – that Metrobank had
complied with the requirements for its application and
was qualified for the tax amnesty under Republic Act
No. 9480 – is binding on this Court, involving as it does
The tax
63
the very same application for tax amnesty of Metrobank COMMISSIONER OF G.R. No. 180066
INTERNAL REVENUE,
being invoked herein. Therefore, by virtue of the
Petitioner Present:
availment by Metrobank of the Tax Amnesty Program ,
YNARES-SANTIAGO, J.,
under Republic Act No. 9480, it is already immune from
Chairperson,
the payment of taxes, including the deficiency DST on CHICO-NAZARIO,
VELASCO, JR.,
the UNISA for 1999, as well as the addition thereto.
- versus - NACHURA, and
WHEREFORE, the instant Petition is GRANTED. The PERALTA, JJ.
Decision dated 21 May 2007 and Resolution dated 9
Promulgated:
July 2007 of the Court of Tax Appeals en banc in C.T.A.
PHILIPPINE AIRLINES, _____________________
E.B. No. 247 is REVERSED and SET ASIDE, and
INC.,
Assessment No. DST-2-99-000022 is CANCELLED, Respondent.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
solely in view of the availment by petitioner - - - - - - - - -x
Metropolitan Bank and Trust Co. of the Tax Amnesty
Program under Republic Act No. 9480. DECISION
SO ORDERED.

CHICO-NAZARIO, J.:

Before this Court is a Petition for Review on

THIRD DIVISION Certiorari, under Rule 45 of the Revised Rules of Court,
seeking the reversal and setting aside of the
Decision64[1] dated 9 August 2007 and Resolution65[2]
dated 11 October 2007 of the Court of Tax Appeals
(CTA) en banc in CTA E.B. No. 246. The CTA en banc
affirmed the Decision66[3] dated 31 July 2006 of the CTA
Second Division in C.T.A. Case No. 7010, ordering the
cancellation and withdrawal of Preliminary Assessment
Notice (PAN) No. INC FY-3-31-01-000094 dated 3
September 2003 and Formal Letter of Demand dated
12 January 2004, issued by the Bureau of Internal
Revenue (BIR) against respondent Philippine Airlines,
Inc. (PAL), for the payment of Minimum Corporate
Income Tax (MCIT) in the amount of P272,421,886.58.
There is no dispute as to the antecedent facts of
this case.
PAL is a domestic corporation organized under the
corporate laws of the Republic of the Philippines;
64 [1]
Penned by Associate Justice Erlinda P. Uy with Presiding Justice
Ernesto D. Acosta and Associate Justices Juanito C. Castañeda, Jr.,
Lovell R. Bautista, Caesar A. Casanova, and Olga Palanca-Enriquez,
concurring; rollo, pp. 43-56.
65 [2]
Id. at 67-68.
66 [3]
Penned by Associate Justice Juanito C. Castañeda with Associate
Justices Erlinda P. Uy and Olga Palanca-Enriquez, concurring, id. at 70-
90.
declared the national flag carrier of the country; and
the grantee under Presidential Decree No. 159067[4] of a
franchise to establish, operate, and maintain transport
services for the carriage of passengers, mail, and
property by air, in and between any and all points and
places throughout the Philippines, and between the
Philippines and other countries.68[5]
For its fiscal year ending 31 March 2001 (FY 2000-
2001), PAL allegedly incurred zero taxable income,69[6]
which left it with unapplied creditable withholding
tax70[7] in the amount of P2,334,377.95. PAL did not pay
any MCIT for the period.
In a letter dated 12 July 2002, addressed to
petitioner Commissioner of Internal Revenue (CIR), PAL
67 [4]
An Act Granting a New Franchise to Philippine Airlines, Inc. to
Establish, Operate, and Maintain Air-Transport Services in the
Philippines and Other Countries.
68[5]
Section 1 of Presidential Decree No. 1590.
69 [6]
According to the Annual Income Tax Return of PAL for the fiscal
year in question, its allowable deductions exactly equalled its total
gross income of P39,470,862,232.00, thus, leaving zero taxable
income.
70 [7]
Withheld at source, meaning, it was previously deducted and
withheld by various withholding agents from the income payments
made to PAL.
requested for the refund of its unapplied creditable
withholding tax for FY 2000-2001. PAL attached to its BIR officers and PAL representatives attended the
letter the following: (1) Schedule of Creditable Tax scheduled informal conference, during which the former
Withheld at Source for FY 2000-2001; (2) Certificates of relayed to the latter that the BIR was denying the claim
Creditable Taxes Withheld; and (3) Audited Financial for refund of PAL and, instead, was assessing PAL for
Statements. deficiency MCIT for FY 2000-2001. The PAL
representatives argued that PAL was not liable for MCIT
Acting on the aforementioned letter of PAL, the under its franchise. The BIR officers then informed the
Large Taxpayers Audit and Investigation Division 1 PAL representatives that the matter would be referred
(LTAID 1) of the BIR Large Taxpayers Service (LTS), to the BIR Legal Service for opinion.
issued on 16 August 2002, Tax Verification Notice No.
00201448, authorizing Revenue Officer Jacinto Cueto, The LTAID 1 issued, on 3 September 2003, PAN
Jr. (Cueto) to verify the supporting documents and No. INC FY-3-31-01-000094, which was received by PAL
pertinent records relative to the claim of PAL for refund on 23 October 2003. LTAID 1 assessed PAL for
of its unapplied creditable withholding tax for FY 2000- P262,474,732.54, representing deficiency MCIT for FY
20001. In a letter dated 19 August 2003, LTAID 1 Chief 2000-2001, plus interest and compromise penalty,
Armit S. Linsangan invited PAL to an informal computed as follows:
conference at the BIR National Office in Diliman,
Quezon City, on 27 August 2003, at 10:00 a.m., to Sales/Revenues from Operation P 38,798,721,685.00
Less: Cost of Services 30,316,679,013.00
discuss the results of the investigation conducted by Gross Income from Operation 8,482,042,672.00
Add: Non-operating income 465,111,368.00
Total Gross Income for MCIT purposes 9,947,154,040.0071[8]
Revenue Officer Cueto, supervised by Revenue Officer Rate of Tax 2%
Madelyn T. Sacluti.
71[8]
Should be P8,947,154,040.00.
 Tax Due 178,943,080.80 Compromise Penalty 25,000.00
Add: 20% interest (8-16-00 to 10-31-03) 83,506,651.74 Total MCIT due and demandable P
Compromise Penalty 25,000.00 271,421,886.58 73[10]
Total Amount Due P
262,474,732.5472[9]

PAL received the foregoing Formal Letter of

PAL protested PAN No. INC FY-3-31-01-000094 Demand on 12 February 2004, prompting it to file with
through a letter dated 4 November 2003 to the BIR LTS. the BIR LTS a formal written protest dated 13 February
2004.
On 12 January 2004, the LTAID 1 sent PAL a
Formal Letter of Demand for deficiency MCIT for FY The BIR LTS rendered on 7 May 2004 its Final
2000-2001 in the amount of P271,421,88658, based on Decision on Disputed Assessment, which was received
the following calculation: by PAL on 26 May 2004. Invoking Revenue
Memorandum Circular (RMC) No. 66-2003, the BIR LTS
Sales/Revenues from P 38,798,721,685.00
Operation
denied with finality the protest of PAL and reiterated
Less: Cost of Services the request that PAL immediately pay its deficiency
Direct Costs - P
30,749,761,017. MCIT for FY 2000-2001, inclusive of penalties incident to
00
Less: Non- delinquency.
deductible
interest 433,082,004.00 30,316,679,013.00
expense PAL filed a Petition for Review with the CTA, which
Gross Income from P 8,482,042,672.00
Operation was docketed as C.T.A. Case No. 7010 and raffled to
Add: Non-operating 465,111,368.00
Income the CTA Second Division. The CTA Second Division
Total Gross Income for MCIT purposes P 9,947,154,040.00
MCIT tax due P 178,943,080.80 promulgated its Decision on 31 July 2006, ruling in favor
Interest – 20% per annum – 7/16/01 to 92,453,805.78
02/15/04
72[9]
Rollo, p. 105. 73[10]
Id. at 114.
of PAL. The dispositive portion of the judgment of the
CTA Second Division reads:
WHEREFORE, premises considered, the instant
Petition for Review is hereby GRANTED. Accordingly,
Assessment Notice No. INC FY-3-31-01-000094 and
Formal Letter of Demand for the payment of deficiency
Minimum Corporate Income Tax in the amount of
P272,421,886.58 are hereby CANCELLED and
WITHDRAWN. 74[11]
In a Resolution dated 2 January 2007, the CTA
Second Division denied the Motion for Reconsideration
of the CIR.
It was then the turn of the CIR to file a Petition for
Review with the CTA en banc, docketed as C.T.A. E.B.
No. 246. The CTA en banc found that “the cited legal
provisions and jurisprudence are teeming with life with
respect to the grant of tax exemption too vivid to pass
unnoticed,” and that “the Court in Division correctly
ruled in favor of the respondent [PAL] granting its
petition for the cancellation of Assessment Notice No.
INC FY-3-31-01-000094 and Formal Letter of Demand
74[11]
Id. at 89.
for the deficiency MCIT in the amount of
P272,421,886.58.”75[12] Consequently, the CTA en banc
denied the Petition of the CIR for lack of merit. The CTA
en banc likewise denied the Motion for Reconsideration
of the CIR in a Resolution dated 11 October 2007.
Hence, the CIR comes before this Court via the
instant Petition for Review on Certiorari, based on the
grounds stated hereunder:
THE COURT OF TAX APPEALS ERRED ON A QUESTION OF
LAW IN ITS ASSAILED DECISION BECAUSE:
(1) [PAL] CLEARLY OPTED TO BE COVERED BY THE
INCOME TAX PROVISION OF THE NATIONAL INTERNAL
REVENUE CODE OF 1997 (NIRC OF 1997). (sic) AS
AMENDED; HENCE, IT IS COVERED BY THE MCIT
PROVISION OF THE SAME CODE.
(2) THE MCIT DOES NOT BELONG TO THE CATEGORY
OF “OTHER TAXES” WHICH WOULD ENABLE RESPONDENT
TO AVAIL ITSELF OF THE “IN LIEU” (sic) OF ALL OTHER
TAXES” CLAUSE UNDER SECTION 13 OF P.D. NO. 1590
(“CHARTER”).
(3) THE MCIT PROVISION OF THE NIRC OF 1997 IS NOT
AN AMENDMENT OF [PAL’S] CHARTER.
(4) PAL IS NOT ONLY GIVEN THE PRIVILEGE TO CHOOSE
BETWEEN WHAT WILL GIVE IT THE BENEFIT OF A LOWER
TAX, BUT ALSO THE RESPONSIBILITY OF PAYING ITS
75[12]
Id. at 55.
 SHARE OF THE TAX BURDEN, AS IS EVIDENT IN SECTION
22 OF RA NO. 9337.
(5) A CLAIM FOR EXEMPTION FROM TAXATION IS
NEVER PRESUMED; [PAL] IS LIABLE FOR THE DEFICIENCY
MCIT.76[13]
There is only one vital issue that the Court must
resolve in the Petition at bar, i.e., whether PAL is liable
for deficiency MCIT for FY 2000-2001.
The Court answers in the negative.
Presidential Decree No. 1590, the franchise of PAL,
contains provisions specifically governing the taxation
of said corporation, to wit:
Section 13. In consideration of the franchise and rights
hereby granted, the grantee shall pay to the Philippine Government
during the life of this franchise whichever of subsections (a) and
(b) hereunder will result in a lower tax:
(a) The basic corporate income tax based on the grantee's
annual net taxable income computed in accordance with the
provisions of the National Internal Revenue Code; or
(b) A franchise tax of two per cent (2%) of the gross
revenues derived by the grantee from all sources, without distinction
as to transport or nontransport operations; provided, that with respect
to international air-transport service, only the gross passenger, mail,
76[13]
Id. at 17-18.
and freight revenues from its outgoing flights shall be subject to this
tax.
The tax paid by the grantee under either of the above
alternatives shall be in lieu of all other taxes, duties, royalties,
registration, license, and other fees and charges of any kind, nature,
or description, imposed, levied, established, assessed, or collected
by any municipal, city, provincial, or national authority or government
agency, now or in the future, including but not limited to the following:
1. All taxes, duties, charges, royalties, or fees due on local
purchases by the grantee of aviation gas, fuel, and oil, whether
refined or in crude form, and whether such taxes, duties, charges,
royalties, or fees are directly due from or imposable upon the
purchaser or the seller, producer, manufacturer, or importer of said
petroleum products but are billed or passed on to the grantee either
as part of the price or cost thereof or by mutual agreement or other
arrangement; provided, that all such purchases by, sales or deliveries
of aviation gas, fuel, and oil to the grantee shall be for exclusive use
in its transport and nontransport operations and other activities
incidental thereto;
2. All taxes, including compensating taxes, duties, charges,
royalties, or fees due on all importations by the grantee of aircraft,
engines, equipment, machinery, spare parts, accessories,
commissary and catering supplies, aviation gas, fuel, and oil, whether
refined or in crude form and other articles, supplies, or materials;
provided, that such articles or supplies or materials are imported for
the use of the grantee in its transport and nontransport operations
and other activities incidental thereto and are not locally available in
reasonable quantity, quality, or price;
3. All taxes on lease rentals, interest, fees, and other charges
payable to lessors, whether foreign or domestic, of aircraft, engines,
equipment, machinery, spare parts, and other property rented,
leased, or chartered by the grantee where the payment of such taxes
is assumed by the grantee;
4. All taxes on interest, fees, and other charges on foreign
loans obtained and other obligations incurred by the grantee where
the payment of such taxes is assumed by the grantee;
 5. All taxes, fees, and other charges on the registration,
licensing, acquisition, and transfer of aircraft, equipment, motor
vehicles, and all other personal and real property of the grantee; and
6. The corporate development tax under Presidential Decree
No. 1158-A.
The grantee, shall, however, pay the tax on its real property
in conformity with existing law.
The term "gross revenues" is herein defined as the total
gross income earned by the grantee from; (a) transport, nontransport,
and other services; (b) earnings realized from investments in money-
market placements, bank deposits, investments in shares of stock
and other securities, and other investments; (c) total gains net of total
losses realized from the disposition of assets and foreign-exchange
transactions; and (d) gross income from other sources. (Emphases
ours.)

For purposes of computing the basic corporate income tax

as provided herein, the grantee is authorized: According to the afore-quoted provisions, the
(a) To depreciate its assets to the extent of not more than taxation of PAL, during the lifetime of its franchise, shall
twice as fast the normal rate of depreciation; and
be governed by two fundamental rules, particularly: (1)
(b) To carry over as a deduction from taxable income any
net loss incurred in any year up to five years following the year of PAL shall pay the Government either basic corporate
such loss.
income tax or franchise tax, whichever is lower; and (2)
Section 14. The grantee shall pay either the franchise tax or
the basic corporate income tax on quarterly basis to the the tax paid by PAL, under either of these alternatives,
Commissioner of Internal Revenue. Within sixty (60) days after the
end of each of the first three quarters of the taxable calendar or fiscal shall be in lieu of all other taxes, duties, royalties,
year, the quarterly franchise or income-tax return shall be filed and
payment of either the franchise or income tax shall be made by the registration, license, and other fees and charges,
grantee.
except only real property tax.
A final or an adjustment return covering the operation of the
grantee for the preceding calendar or fiscal year shall be filed on or
before the fifteenth day of the fourth month following the close of the
calendar or fiscal year. The amount of the final franchise or income The basic corporate income tax of PAL shall be based on
tax to be paid by the grantee shall be the balance of the total
franchise or income tax shown in the final or adjustment return after its annual net taxable income, computed in accordance with the
deducting therefrom the total quarterly franchise or income taxes
already paid during the preceding first three quarters of the same National Internal Revenue Code (NIRC). Presidential Decree
taxable year.
No. 1590 also explicitly authorizes PAL, in the computation of
Any excess of the total quarterly payments over the actual
annual franchise of income tax due as shown in the final or its basic corporate income tax, to (1) depreciate its assets twice
adjustment franchise or income-tax return shall either be refunded to
the grantee or credited against the grantee's quarterly franchise or
income-tax liability for the succeeding taxable year or years at the
option of the grantee.
as fast the normal rate of depreciation;77[14] and (2) carry over as
a deduction from taxable income any net loss incurred in any
year up to five years following the year of such loss.78[15]
Franchise tax, on the other hand, shall be two per
cent (2%) of the gross revenues derived by PAL from all
sources, whether transport or nontransport operations.
However, with respect to international air-transport
service, the franchise tax shall only be imposed on the
gross passenger, mail, and freight revenues of PAL from
its outgoing flights.
In its income tax return for FY 2000-2001, filed
with the BIR, PAL reported no net taxable income for
the period, resulting in zero basic corporate income tax,
which would necessarily be lower than any franchise
tax due from PAL for the same period.
77 [14]
As a general rule, there shall be allowed as a depreciation
deduction a reasonable allowance for the exhaustion, wear and tear
(including reasonable allowance for obsolescence) of property used in
the trade or business. (Section 34(F)(1) of the NIRC of 1997)
78 [15]
In general, losses shall be deducted from gross income in the
same taxable year said losses were incurred. The recognized
exception under Section 39(D) of the NIRC of 1997, allowing net capital
loss carryover, may only be availed of by a taxpayer “other than a
corporation.”
The CIR, though, assessed PAL for MCIT for FY
2000-2001. It is the position of the CIR that the MCIT is
income tax for which PAL is liable. The CIR reasons that
Section 13(a) of Presidential Decree No. 1590 provides
that the corporate income tax of PAL shall be computed
in accordance with the NIRC. And, since the NIRC of
1997 imposes MCIT, and PAL has not applied for relief
from the said tax, then PAL is subject to the same.
The Court is not persuaded. The arguments of the
CIR are contrary to the plain meaning and obvious
intent of Presidential Decree No. 1590, the franchise of
PAL.
Income tax on domestic corporations is covered by
Section 27 of the NIRC of 1997,79[16] pertinent provisions
of which are reproduced below for easy reference:
SEC. 27. Rates of Income Tax on Domestic
Corporations. –
79 [16]
Prior to its amendment by Republic Act No. 9337, which was
signed into law on 24 May 2005 and took effect on 1 July 2005.
 (A) In General – Except as otherwise provided in rule in determining the income tax due from a domestic
this Code, an income tax of thirty-five percent (35%) is
hereby imposed upon the taxable income derived corporation under the NIRC of 1997, it can only be
during each taxable year from all sources within and
without the Philippines by every corporation, as defined in applied to PAL to the extent allowed by the provisions
Section 22(B) of this Code and taxable under this Title as
a corporation, organized in, or existing under the laws of in the franchise of PAL specifically governing its
the Philippines: Provided, That effective January 1, 1998,
the rate of income tax shall be thirty-four percent (34%); taxation.
effective January 1, 1999, the rate shall be thirty-three
percent (33%); and effective January 1, 2000 and
thereafter, the rate shall be thirty-two percent (32%).
After a conscientious study of Section 13 of
xxxx
Presidential Decree No. 1590, in relation to Sections
(E) Minimum Corporate Income Tax on Domestic
Corporations. –
27(A) and 27(E) of the NIRC of 1997, the Court, like the
CTA en banc and Second Division, concludes that PAL
(1) Imposition of Tax. – A minimum corporate
income tax of two percent (2%) of the gross income cannot be subjected to MCIT for FY 2000-2001.
as of the end of the taxable year, as defined herein, is
hereby imposed on a corporation taxable under this Title,
beginning on the fourth taxable year immediately
following the year in which such corporation commenced First, Section 13(a) of Presidential Decree No.
its business operations, when the minimum income tax is
greater than the tax computed under Subsection (A) of 1590 refers to “basic corporate income tax.” In
this Section for the taxable year.
Commissioner of Internal Revenue v. Philippine Airlines,

Hence, a domestic corporation must pay Inc.,80[17] the Court already settled that the “basic

whichever is higher of: (1) the income tax under Section corporate income tax,” under Section 13(a) of

27(A) of the NIRC of 1997, computed by applying the Presidential Decree No. 1590, relates to the general

tax rate therein to the taxable income of the rate of 35% (reduced to 32% by the year 2000) as

corporation; or (2) the MCIT under Section 27(E), also of stipulated in Section 27(A) of the NIRC of 1997.

the NIRC of 1997, equivalent to 2% of the gross income

of the corporation. Although this may be the general 80[17]
G.R. No. 160528, 9 October 2006, 504 SCRA 90, 100.
 Section 13(a) of Presidential Decree No. 1590
requires that the basic corporate income tax be
computed in accordance with the NIRC. This means
that PAL shall compute its basic corporate income tax
using the rate and basis prescribed by the NIRC of 1997
for the said tax. There is nothing in Section 13(a) of
Presidential Decree No. 1590 to support the contention
of the CIR that PAL is subject to the entire Title II of the
NIRC of 1997, entitled “Tax on Income.”
Second, Section 13(a) of Presidential Decree No.
1590 further provides that the basic corporate income
tax of PAL shall be based on its annual net taxable
income. This is consistent with Section 27(A) of the
NIRC of 1997, which provides that the rate of basic
corporate income tax, which is 32% beginning 1
January 2000, shall be imposed on the taxable income
of the domestic corporation.
Taxable income is defined under Section 31 of the
NIRC of 1997 as the pertinent items of gross
income specified in the said Code, less the
deductions and/or personal and additional
exemptions, if any, authorized for such types of
income by the same Code or other special laws.
The gross income, referred to in Section 31, is
described in Section 32 of the NIRC of 1997 as income
from whatever source, including compensation for
services; the conduct of trade or business or the
exercise of profession; dealings in property; interests;
rents; royalties; dividends; annuities; prizes and
winnings; pensions; and a partner’s distributive share in
the net income of a general professional partnership.
Pursuant to the NIRC of 1997, the taxable income
of a domestic corporation may be arrived at by
subtracting from gross income deductions authorized,
not just by the NIRC of 1997,81[18] but also by special
laws. Presidential Decree No. 1590 may be considered
as one of such special laws authorizing PAL, in
computing its annual net taxable income, on which its
basic corporate income tax shall be based, to deduct
81 [18]
Section 34 of the NIRC of 1997 enumerates the allowable
deductions, while Section 35 identifies the personal and additional
exemptions.
from its gross income the following: (1) depreciation of facilities directly utilized in providing the service, such
assets at twice the normal rate; and (2) net loss carry- as depreciation or rental of equipment used and cost of
over up to five years following the year of such loss. supplies.82[19] Noticeably, inclusions in and
exclusions/deductions from gross income for MCIT
In comparison, the 2% MCIT under Section 27(E) of purposes are limited to those directly arising from the
the NIRC of 1997 shall be based on the gross income conduct of the taxpayer’s business. It is, thus, more
of the domestic corporation. The Court notes that gross limited than the gross income used in the computation
income, as the basis for MCIT, is given a special of basic corporate income tax.
definition under Section 27(E)(4) of the NIRC of 1997,
different from the general one under Section 34 of the In light of the foregoing, there is an apparent
same Code. distinction under the NIRC of 1997 between taxable
income, which is the basis for basic corporate income
According to the last paragraph of Section 27(E)(4) tax under Section 27(A); and gross income, which is the
of the NIRC of 1997, gross income of a domestic basis for the MCIT under Section 27(E). The two terms
corporation engaged in the sale of service means gross have their respective technical meanings, and cannot
receipts, less sales returns, allowances, be used interchangeably. The same reasons prevent
discounts and cost of services. “Cost of services” this Court from declaring that the basic corporate
refers to all direct costs and expenses necessarily income tax, for which PAL is liable under Section 13(a)
incurred to provide the services required by the of Presidential Decree No. 1590, also covers MCIT under
customers and clients including (a) salaries and Section 27(E) of the NIRC of 1997, since the basis for
employee benefits of personnel, consultants, and
specialists directly rendering the service; and (b) cost of
82[19]
Section 27(E)(4) of the NIRC of 1997.
the first is the annual net taxable income, while the
basis for the second is gross income.
Third, even if the basic corporate income tax and
the MCIT are both income taxes under Section 27 of the
NIRC of 1997, and one is paid in place of the other, the
two are distinct and separate taxes.
The Court again cites Commissioner of Internal
Revenue v. Philippine Airlines, Inc.,83[20] wherein it held
that income tax on the passive income84[21] of a
domestic corporation, under Section 27(D) of the NIRC
of 1997, is different from the basic corporate income
tax on the taxable income of a domestic corporation,
imposed by Section 27(A), also of the NIRC of 1997.
Section 13 of Presidential Decree No. 1590 gives PAL
the option to pay basic corporate income tax or
83[20]
Supra note 17at 98, 100.
84 [21]
Passive income includes interest from deposits and yield or any
other monetary benefit from deposit substitutes and from trust funds
and similar arrangements and royalties [Section 27(D)(1) of the Tax
Code of 1997]; capital gains from the sale of shares of stock not traded
in the stock exchange [Section 27(D)(2); income derived under the
Expanded Foreign Currency Deposit System [Section 27(D)(3)];
intercorporate dividends [Section 27(D)(4)]; and capital gains realized
from sale, exchange or disposition of lands and/or buildings [Section
27(D)(5)].
franchise tax, whichever is lower; and the tax so paid
shall be in lieu of all other taxes, except real property
tax. The income tax on the passive income of PAL falls
within the category of “all other taxes” from which PAL
is exempted, and which, if already collected, should be
refunded to PAL.
The Court herein treats MCIT in much the same
way. Although both are income taxes, the MCIT is
different from the basic corporate income tax, not just
in the rates, but also in the bases for their computation.
Not being covered by Section 13(a) of Presidential
Decree No. 1590, which makes PAL liable only for basic
corporate income tax, then MCIT is included in “all
other taxes” from which PAL is exempted.
That, under general circumstances, the MCIT is
paid in place of the basic corporate income tax, when
the former is higher than the latter, does not mean that
these two income taxes are one and the same. The
said taxes are merely paid in the alternative, giving the
Government the opportunity to collect the higher
amount between the two. The situation is not much
different from Section 13 of Presidential Decree No.
1590, which reversely allows PAL to pay, whichever is
lower of the basic corporate income tax or the franchise
tax. It does not make the basic corporate income tax
indistinguishable from the franchise tax.
Given the fundamental differences between the
basic corporate income tax and the MCIT, presented in
the preceding discussion, it is not baseless for this
Court to rule that, pursuant to the franchise of PAL, said
corporation is subject to the first tax, yet exempted
from the second.
Fourth, the evident intent of Section 13 of
Presidential Decree No. 1520 is to extend to PAL tax
concessions not ordinarily available to other domestic
corporations. Section 13 of Presidential Decree No.
1520 permits PAL to pay whichever is lower of the
basic corporate income tax or the franchise tax; and
the tax so paid shall be in lieu of all other taxes,
except only real property tax. Hence, under its
franchise, PAL is to pay the least amount of tax
possible.
Section 13 of Presidential Decree No. 1520 is not
unusual. A public utility is granted special tax
treatment (including tax exceptions/exemptions) under
its franchise, as an inducement for the acceptance of
the franchise and the rendition of public service by the
said public utility.85[22] In this case, in addition to being
a public utility providing air-transport service, PAL is
also the official flag carrier of the country.
The imposition of MCIT on PAL, as the CIR insists,
would result in a situation that contravenes the
objective of Section 13 of Presidential Decree No. 1590.
In effect, PAL would not just have two, but three tax
alternatives, namely, the basic corporate income tax,
MCIT, or franchise tax. More troublesome is the fact
that, as between the basic corporate income tax and
the MCIT, PAL shall be made to pay whichever is
higher, irrefragably, in violation of the avowed
85 [22]
See Carcar Electric and Ice Plant Co., Inc. v. Collector of Internal
Revenue, 100 Phil. 50, 54 (1956).
intention of Section 13 of Presidential Decree No. 1590
to make PAL pay for the lower amount of tax.
Fifth, the CIR posits that PAL may not invoke in the
instant case the “in lieu of all other taxes” clause in
Section 13 of Presidential Decree No. 1520, if it did not
pay anything at all as basic corporate income tax or
franchise tax. As a result, PAL should be made liable
for “other taxes” such as MCIT. This line of reasoning
has been dubbed as the Substitution Theory, and this is
not the first time the CIR raised the same. The Court
already rejected the Substitution Theory
Commissioner of Internal Revenue v. Philippine Airlines,
Inc.,86[23] to wit:
“Substitution Theory”
of the CIR Untenable
A careful reading of Section 13 rebuts the
argument of the CIR that the “in lieu of all other
taxes” proviso is a mere incentive that applies only
when PAL actually pays something. It is clear that PD
1590 intended to give respondent the option to avail itself
of Subsection (a) or (b) as consideration for its franchise.
Either option excludes the payment of other taxes and
dues imposed or collected by the national or the local
government. PAL has the option to choose the alternative
86[23]
Supra note 17 at 100-101.
that results in lower taxes. It is not the fact of tax
payment that exempts it, but the exercise of its
option.
Under Subsection (a), the basis for the tax rate is
respondent’s annual net taxable income, which (as earlier
discussed) is computed by subtracting allowable
deductions and exemptions from gross income. By basing
the tax rate on the annual net taxable income, PD 1590
necessarily recognized the situation in which taxable
income may result in a negative amount and thus
translate into a zero tax liability.
Notably, PAL was owned and operated by the
government at the time the franchise was last amended.
It can reasonably be contemplated that PD 1590 sought to
assist the finances of the government corporation in the
form of lower taxes. When respondent operates at a loss
(as in the instant case), no taxes are due; in this
instances, it has a lower tax liability than that provided by
Subsection (b).
in
The fallacy of the CIR’s argument is evident
from the fact that the payment of a measly sum of
one peso would suffice to exempt PAL from other
taxes, whereas a zero liability arising from its
losses would not. There is no substantial
distinction between a zero tax and a one-peso tax
liability. (Emphasis ours.)
Based on the same ratiocination, the Court finds
the Substitution Theory unacceptable in the present
Petition.
The CIR alludes as well to Republic Act No. 9337,
for reasons similar to those behind the Substitution
Theory. Section 22 of Republic Act No. 9337, more
popularly known as the Expanded Value Added Tax (E-
VAT) Law, abolished the franchise tax imposed by the
charters of particularly identified public utilities,
including Presidential Decree No. 1590 of PAL. PAL may
no longer exercise its options or alternatives under
Section 13 of Presidential Decree No. 1590, and is now
liable for both corporate income tax and the 12% VAT
on its sale of services. The CIR alleges that Republic
Act No. 9337 reveals the intention of the Legislature to
make PAL share the tax burden of other domestic
corporations.
The CIR seems to lose sight of the fact that the
Petition at bar involves the liability of PAL for MCIT for
the fiscal year ending 31 March 2001. Republic Act
No. 9337, which took effect on 1 July 2005, cannot be
applied retroactively87[24] and any amendment
introduced by said statute affecting the taxation of PAL
is immaterial in the present case.
87 [24]
Article 4 of the Civil Code provides that “Laws shall have no
retroactive effect, unless the contrary is provided.”
And sixth, Presidential Decree No. 1590 explicitly
allows PAL, in computing its basic corporate income
tax, to carry over as deduction any net loss incurred in
any year, up to five years following the year of such
loss. Therefore, Presidential Decree No. 1590 does not
only consider the possibility that, at the end of a
taxable period, PAL shall end up with zero annual net
taxable income (when its deductions exactly equal its
gross income), as what happened in the case at bar,
but also the likelihood that PAL shall incur net loss
(when its deductions exceed its gross income). If PAL is
subjected to MCIT, the provision in Presidential Decree
No. 1590 on net loss carry-over will be rendered
nugatory. Net loss carry-over is material only in
computing the annual net taxable income to be used as
basis for the basic corporate income tax of PAL; but PAL
will never be able to avail itself of the basic corporate
income tax option when it is in a net loss position,
because it will always then be compelled to pay the
necessarily higher MCIT.
 Consequently, the insistence of the CIR to subject
PAL to MCIT cannot be done without contravening
Presidential Decree No. 1520.
Between Presidential Decree No. 1520, on one
hand, which is a special law specifically governing the
franchise of PAL, issued on 11 June 1978; and the NIRC
of 1997, on the other, which is a general law on
national internal revenue taxes, that took effect on 1
January 1998, the former prevails. The rule is that on a
specific matter, the special law shall prevail over the
general law, which shall be resorted to only to supply
deficiencies in the former. In addition, where there are
two statutes, the earlier special and the later general –
the terms of the general broad enough to include the
matter provided for in the special – the fact that one is
special and the other is general creates a presumption
that the special is to be considered as remaining an
exception to the general, one as a general law of the
land, the other as the law of a particular case. It is a
canon of statutory construction that a later statute,
general in its terms and not expressly repealing a prior
special statute, will ordinarily not affect the special
provisions of such earlier statute.88[25]
Neither can it be said that the NIRC of 1997
repealed or amended Presidential Decree No. 1590.
While Section 16 of Presidential Decree No. 1590
provides that the franchise is granted to PAL with the
understanding that it shall be subject to amendment,
alteration, or repeal by competent authority when the
public interest so requires, Section 24 of the same
Decree also states that the franchise or any portion
thereof may only be modified, amended, or repealed
expressly by a special law or decree that shall
specifically modify, amend, or repeal said franchise or
any portion thereof. No such special law or decree
exists herein.
The CIR cannot rely on Section 7(B) of Republic Act
No. 8424, which amended the NIRC in 1997 and reads
as follows:
88 [25]
Commissioner of Internal Revenue v. Central Luzon Drug
Corporation, G.R. No. 159647, 15 April 2005, 456 SCRA 414, 449.

Section 7. Repealing Clauses. –
xxxx
(B) The provisions of the National Internal Revenue
Code, as amended, and all other laws, including
charters of government-owned or controlled
corporations, decrees, orders, or regulations or parts
thereof, that are inconsistent with this Act are hereby
repealed or amended accordingly.
The CIR reasons that PAL was a government-owned and
controlled corporation when Presidential Decree No.
1590, its franchise or charter, was issued in 1978.
Since PAL was still operating under the very same
charter when Republic Act No. 8424 took effect in 1998,
then the latter can repeal or amend the former by
virtue of Section 7(B).
The Court disagrees.
A brief recount of the history of PAL is in order.
PAL was established as a private corporation under the
general law of the Republic of the Philippines in
February 1941. In November 1977, the government,
through the Government Service Insurance System
(GSIS), acquired the majority shares in PAL. PAL was
privatized in January 1992 when the local consortium
PR Holdings acquired a 67% stake therein.89[26]
It is true that when Presidential Decree No. 1590
was issued on 11 June 1978, PAL was then a
government-owned and controlled corporation; but
when Republic Act No. 8424, amending the NIRC, took
effect on 1 January 1998, PAL was already a private
corporation for six years. The repealing clause under
Section 7(B) of Republic Act No. 8424 simply refers to
charters of government-owned and controlled
corporations, which would simply and plainly mean
corporations under the ownership and control of the
government at the time of effectivity of said statute.
It is already a stretch for the Court to read into said
provision charters, issued to what were then
government-owned and controlled corporations that are
now private, but still operating under the same
charters.
89[26]
http://www.philippineairlines.com/about_pal/milestones/milestones.jsp
 That the Legislature chose not to amend or repeal
Presidential Decree No. 1590, even after PAL was
privatized, reveals the intent of the Legislature to let
PAL continue enjoying, as a private corporation, the
very same rights and privileges under the terms and
conditions stated in said charter. From the moment
PAL was privatized, it had to be treated as a private
corporation, and its charter became that of a private
corporation. It would be completely illogical to say that
PAL is a private corporation still operating under a
charter of a government-owned and controlled
corporation.
The alternative argument of the CIR – that the
imposition of the MCIT is pursuant to the amendment of
the NIRC, and not of Presidential Decree No. 1590 – is
just as specious. As has already been settled by this
Court, the basic corporate income tax under Section
13(a) of Presidential Decree No. 1590 relates to the
general tax rate under Section 27(A) of the NIRC of
1997, which is 32% by the year 2000, imposed on
taxable income. Thus, only provisions of the NIRC of
1997 necessary for the computation of the basic
corporate income tax apply to PAL. And even though
Republic Act No. 8424 amended the NIRC by
introducing the MCIT, in what is now Section 27(E) of
the said Code, this amendment is actually irrelevant
and should not affect the taxation of PAL, since the
MCIT is clearly distinct from the basic corporate income
tax referred to in Section 13(a) of Presidential Decree
No. 1590, and from which PAL is consequently exempt
under the “in lieu of all other taxes” clause of its
charter.
The CIR calls the attention of the Court to RMC No.
66-2003, on “Clarifying the Taxability of Philippine
Airlines (PAL) for Income Tax Purposes As Well As Other
Franchise Grantees Similarly Situated.” According to
RMC No. 66-2003:
Section 27(E) of the Code, as implemented by
Revenue Regulations No. 9-98, provides that MCIT of two
percent (2%) of the gross income as of the end of the
taxable year (whether calendar or fiscal year, depending
on the accounting period employed) is imposed upon any
domestic corporation beginning the 4th taxable year
immediately following the taxable year in which such
 corporation commenced its business operations. The MCIT
shall be imposed whenever such corporation has zero or
negative taxable income or whenever the amount of MCIT It is significant to note that RMC No. 66-2003 was
is greater than the normal income tax due from such
corporation. issued only on 14 October 2003, more than two years
With the advent of such provision beginning after FY 2000-2001 of PAL ended on 31 March 2001.
January 1, 1998, it is certain that domestic corporations
subject to normal income tax as well as those choose to This violates the well-entrenched principle that
be subject thereto, such as PAL, are bound to pay income
tax regardless of whether they are operating at a profit or statutes, including administrative rules and regulations,
loss.
operate prospectively only, unless the legislative intent
Thus, in case of operating loss, PAL may either opt
to subject itself to minimum corporate income tax or to to the contrary is manifest by express terms or by
the 2% franchise tax, whichever is lower. On the other
hand, if PAL is operating at a profit, the income tax
necessary implication.91[28]
liability shall be the lower amount between:

(1) normal income tax or MCIT whichever is higher;
and
(2) 2% franchise tax.
The CIR attempts to sway this Court to adopt RMC
No. 66-2003 since the “[c]onstruction by an executive
branch of government of a particular law although not
binding upon the courts must be given weight as the
construction comes from the branch of the government
called upon to implement the law.”90[27]
But the Court is unconvinced.
Moreover, despite the claims of the CIR that RMC
No. 66-2003 is just a clarificatory and internal issuance,
the Court observes that RMC No. 66-2003 does more
than just clarify a previous regulation and goes beyond
mere internal administration. It effectively increases
the tax burden of PAL and other taxpayers who are
similarly situated, making them liable for a tax for
which they were not liable before. Therefore, RMC No.
66-2003 cannot be given effect without previous notice
or publication to those who will be affected thereby. In

90[27]
Memorandum of the CIR, rollo, p. 264. 91[28]
BPI Leasing Corporation v. Court of Appeals, 461 Phil. 451, 460 (2003).
Commissioner of Internal Revenue v. Court of Appeals,92
[29]
the Court ratiocinated that:
It should be understandable that when an
administrative rule is merely interpretative in nature, its
applicability needs nothing further than its bare issuance
for it gives no real consequence more than what the law
itself has already prescribed. When, upon the other
hand, the administrative rule goes beyond merely
providing for the means that can facilitate or
render least cumbersome the implementation of
the law but substantially adds to or increases the
burden of those governed, it behooves the agency
to accord at least to those directly affected a
chance to be heard, and thereafter to be duly
informed, before that new issuance is given the
force and effect of law.
A reading of RMC 37-93, particularly considering
the circumstances under which it has been issued,
convinces us that the circular cannot be viewed simply as
a corrective measure (revoking in the process the
previous holdings of past Commissioners) or merely as
construing Section 142(c)(1) of the NIRC, as amended, but
has, in fact and most importantly, been made in order to
place "Hope Luxury," "Premium More" and "Champion"
within the classification of locally manufactured cigarettes
bearing foreign brands and to thereby have them covered
by RA 7654. Specifically, the new law would have its
amendatory provisions applied to locally manufactured
cigarettes which at the time of its effectivity were not so
classified as bearing foreign brands. Prior to the issuance
of the questioned circular, "Hope Luxury," "Premium
More," and "Champion" cigarettes were in the category of
locally manufactured cigarettes not bearing foreign brand
subject to 45% ad valorem tax. Hence, without RMC 37-
93, the enactment of RA 7654, would have had no new
tax rate consequence on private respondent's products.
92[29]
329 Phil. 987, 1007-1009 (1996).
Evidently, in order to place "Hope Luxury," "Premium
More," and "Champion" cigarettes within the scope of the
amendatory law and subject them to an increased tax
rate, the now disputed RMC 37-93 had to be issued. In so
doing, the BIR not simply interpreted the law;
verily, it legislated under its quasi-legislative
authority. The due observance of the requirements
of notice, of hearing, and of publication should not
have been then ignored.
Indeed, the BIR itself, in its RMC 10-86, has
observed and provided:
"RMC NO. 10-86
Effectivity of Internal Revenue Rules
and Regulations "It has been observed that
one of the problem areas bearing on
compliance with Internal Revenue Tax rules
and regulations is lack or insufficiency of due
notice to the tax paying public. Unless
there is due notice, due compliance
therewith may not be reasonably
expected. And most importantly, their strict
enforcement could possibly suffer from legal
infirmity in the light of the constitutional
provision on 'due process of law' and the
essence of the Civil Code provision
concerning effectivity of laws, whereby due
notice is a basic requirement (Sec. 1, Art. IV,
Constitution; Art. 2, New Civil Code).
"In order that there shall be a just
enforcement of rules and regulations, in
conformity with the basic element of
due process, the following procedures
are hereby prescribed for the drafting,
issuance and implementation of the said
Revenue Tax Issuances:
"(1). This Circular shall apply only
to (a) Revenue Regulations; (b)
Revenue Audit Memorandum Orders; and (c)
 Revenue Memorandum Circulars and effect and should have been strictly complied with by
Revenue Memorandum Orders bearing on
internal revenue tax rules and regulations. PAL for its fiscal year which ended on 31 March 2001.
"(2). Except when the law otherwise
expressly provides, the aforesaid internal
revenue tax issuances shall not begin to Even conceding that the construction of a statute
be operative until after due notice
thereof may be fairly presumed. by the CIR is to be given great weight, the courts, which
"Due notice of the said issuances may include the CTA, are not bound thereby if such
be fairly presumed only after the following
procedures have been taken: construction is erroneous or is clearly shown to be in

"xxx xxx xxx "(5). Strict compliance conflict with the governing statute or the Constitution
with the foregoing procedures is enjoined.13
or other laws. "It is the role of the Judiciary to refine
Nothing on record could tell us that it was either and, when necessary, correct constitutional (and/or
impossible or impracticable for the BIR to observe and
comply with the above requirements before giving effect statutory) interpretation, in the context of the
to its questioned circular. (Emphases ours.)
interactions of the three branches of the
The Court, however, stops short of ruling on the government."93[30] It is furthermore the rule of long
validity of RMC No. 66-2003, for it is not among the standing that this Court will not set aside lightly the
issues raised in the instant Petition. It only wishes to conclusions reached by the CTA which, by the very
stress the requirement of prior notice to PAL before nature of its functions, is dedicated exclusively to the
RMC No. 66-2003 could have become effective. Only resolution of tax problems and has, accordingly,
after RMC No. 66-2003 was issued on 14 October 2003 developed an expertise on the subject, unless there has
could PAL have been given notice of said circular, and been an abuse or improvident exercise of authority.94[31]
only following such notice to PAL would RMC No. 66- 93 [30]
Philippine Scout Veterans Security and Investigation Agency,
Inc. v. National Labor Relations Commission, 330 Phil. 665, 676 (1996).
2003 have taken effect. Given this sequence, it is not 94 [31]
Commissioner of Internal Revenue v. Philippine National Bank,
G.R. No. 161997, 25 October 2005, 474 SCRA 303, 320; Commissioner
possible to say that RMC No. 66-2003 was already in of Internal Revenue v. Manila Mining Corporation, G.R. No. 153204, 31
August 2005, 468 SCRA 571, 593-594.
In the Petition at bar, the CTA en banc and in division applies with peculiar strictness to tax laws and the
provisions of a taxing act are not to be extended by
both adjudged that PAL is not liable for MCIT under implication.” Parenthetically, in answering the
question of who is subject to tax statutes, it is
Presidential Decree No. 1590, and this Court has no basic that “in case of doubt, such statutes are to
be construed most strongly against the
sufficient basis to reverse them. 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.” (Emphases ours.)
As to the assertions of the CIR that exemption
from tax is not presumed, and the one claiming it must For two decades following the grant of its
be able to show that it indubitably exists, the Court franchise by Presidential Decree No. 1590 in 1978, PAL
recalls its pronouncements in Commissioner of Internal was only being held liable for the basic corporate
95[32]
Revenue v. Court of Appeals : income tax or franchise tax, whichever was lower; and
its payment of either tax was in lieu of all other taxes,
We disagree. Petitioner Commissioner of Internal
Revenue erred in applying the principles of tax exemption except real property tax, in accordance with the plain
without first applying the well-settled doctrine of strict
interpretation in the imposition of taxes. It is language of Section 13 of the charter of PAL.
obviously both illogical and impractical to
determine who are exempted without first Therefore, the exemption of PAL from “all other taxes”
determining who are covered by the aforesaid
provision. The Commissioner should have determined
was not just a presumption, but a previously
first if private respondent was covered by Section 205, established, accepted, and respected fact, even for the
applying the rule of strict interpretation of laws imposing
taxes and other burdens on the populace, before asking BIR.
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, The MCIT was a new tax introduced by Republic
expressly, and unambiguously. x x x (A) tax cannot be
imposed without clear and express words for that Act No. 8424. Under the doctrine of strict
purpose. Accordingly, the general rule of requiring
adherence to the letter in construing statutes interpretation, the burden is upon the CIR to primarily
95[32]
338 Phil. 322, 330-331 (1997). prove that the new MCIT provisions of the NIRC of 1997,
clearly, expressly, and unambiguously extend and SO ORDERED.
apply to PAL, despite the latter’s existing tax
exemption. To do this, the CIR must convince the Court
that the MCIT is a basic corporate income tax,96[33] and
is not covered by the “in lieu of all other taxes” clause
of Presidential Decree No. 1590. Since the CIR failed in
this regard, the Court is left with no choice but to
consider the MCIT as one of “all other taxes,” from
which PAL is exempt under the explicit provisions of its
charter.
CERTIFICATION

Not being liable for MCIT in FY 2000-2001, it
necessarily follows that PAL need not apply for relief
from said tax as the CIR maintains.
WHEREFORE, premises considered, the instant
Petition for Review is hereby DENIED, and the Decision
dated 9 August 2007 and Resolution dated 11 October
2007 of the Court of Tax Appeals en banc in CTA E.B.
No. 246 is hereby AFFIRMED. No costs.
Pursuant to Article VIII, Section 13 of the
Constitution, and the Division Chairman’s Attestation, it
is hereby certified that the conclusions in the above
Decision were reached in consultation before the case
was assigned to the writer of the opinion of the Court’s
Division.
REYNATO S. PUNO
Chief Justice

96[33]
Since it is readily apparent that the MCIT does not constitute the
alternative franchise tax.
 CHICO-NAZARIO, J.:

This is a Petition for Review assailing the

Decision97[1] dated 29 April 2005 and the Resolution

THIRD DIVISION dated 20 April 2007 of the Court of Appeals in CA-G.R.

SP No. 77655, which annulled and set aside the

COMMISSIONER OF G.R. No. 178490 Decision dated 12 March 2003 of the Court of Tax
INTERNAL REVENUE, Appeals (CTA) in CTA Case No. 6276, wherein the CTA
Present:
Petitioner, held that respondent Bank of the Philippine Islands (BPI)
YNARES-SANTIAGO, J., already exercised the irrevocable option to carry over
Chairperson,
CHICO-NAZARIO, its excess tax credits for the year 1998 to the
VELASCO, JR., succeeding years 1999 and 2000 and was, therefore,
- versus - NACHURA, and
PERALTA, JJ. no longer entitled to claim the refund or issuance of a
tax credit certificate for the amount thereof.
Promulgated:

BANK OF THE On 15 April 1999, BPI filed with the Bureau of

PHILIPPINE ISLANDS, July 7, 2009
Respondent. Internal Revenue (BIR) its final adjusted Corporate
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Annual Income Tax Return (ITR) for the taxable year
- - - - - - - - - - -x
ending on 31 December 1998, showing a taxable

DECISION
97 [1]
Penned by Associate Justice Bienvenido L. Reyes with Associate
Justices Godardo A. Jacinto and Rosalinda Asuncion-Vicente concurring.
Rollo, pp. 25-33.
income of P1,773,236,745.00 and a total tax due of amount of P33,947,101.00. The computation of BPI is
P602,900,493.00. reproduced below:

For the same taxable year 1998, BPI already made Total Income Taxes Due
P602,900,493.00
income tax payments for the first three quarters, which Less: Tax Credits:
Prior year’s tax credits P59,424,222.00
amounted to P563,547,470.46.98[2] The bank also Quarterly payments 563,547,470.46
received income in 1998 from various third persons, Creditable taxes withheld 7,685,887.90
Foreign tax credit 6,190,014.00
which, were already subjected to expanded withholding 636,847,594.00
-------------------
taxes amounting to P7,685,887.90. BPI additionally -------------------
Net Tax Payable/(Refundable)
acquired foreign tax credit when it paid the United P(33,947,101.00)
States government taxes in the amount of
$151,467.00, or the equivalent of P6,190,014.46, on BPI opted to carry over its 1998 excess tax credit,
the operations of former’s New York Branch. Finally, in the amount of P33,947,101.00, to the succeeding
respondent BPI had carried over excess tax credit from taxable year ending 31 December 1999.99[3] For 1999,
the prior year, 1997, amounting to P59,424,222.00. however, respondent BPI ended up with (1) a net loss in
the amount of P615,742,102.00; (2) its still unapplied
Crediting the aforementioned amounts against the excess tax credit carried over from 1998, in the amount
total tax due from it at the end of 1998, BPI computed of P33,947,101.00; and (3) more excess tax credit,
an overpayment to the BIR of income taxes in the acquired in 1999, in the sum of P12,975,750.00. So in
1999, the total excess tax credits of BPI increased to
98[2]
Computed as follows:
Quarter coveredDate filedQuarterly Income Tax Paid1st Quarter06-01-
98378,564,898.342nd Quarter08-31-98184,982,572.123rd Quarter11-27-98---
Total563,547,470.46 99[3]
Exhibit “A-2.”
P46,922,851.00, which it once more opted to carry The CIR failed to act on the claim for tax refund of
over to the following taxable year. BPI. Hence, BPI filed a Petition for Review before the
CTA, docketed as CTA Case No. 6276.
For the taxable year ending 31 December 2000,
respondent BPI declared in its Corporate Annual ITR: (1) The CTA promulgated its Decision in CTA Case No.
zero taxable income; (2) excess tax credit carried over 6276 on 12 March 2003, ruling therein that since BPI
from 1998 and 1999, amounting to P46,922,851.00; had opted to carry over its 1998 excess tax credit to
and (3) even more excess tax credit, gained in 2000, in 1999 and 2000, it was barred from filing a claim for the
the amount of P25,207,939.00. This time, BPI failed refund of the same.
to indicate in its ITR its choice of whether to carry over
its excess tax credits or to claim the refund of or The CTA relied on the irrevocability rule laid down
issuance of a tax credit certificate for the amounts in Section 76 of the National Internal Revenue Code
thereof. (NIRC) of 1997, which states that once the taxpayer
opts to carry over and apply its excess income tax to
On 3 April 2001, BPI filed with petitioner succeeding taxable years, its option shall be irrevocable
Commissioner of Internal Revenue (CIR) an for that taxable period and no application for tax refund
administrative claim for refund in the amount of or issuance of a tax credit shall be allowed for the
P33,947,101.00, representing its excess creditable same.
income tax for 1998.
The CTA Decision adjudged:
 A close scrutiny of the 1998 income tax return In the end, the CTA decreed:
of [BPI] reveals that it opted to carry over its excess
tax credits, the amount subject of this claim, to the
succeeding taxable year by placing an “x” mark on IN VIEW OF ALL THE FOREGOING, the instant
the corresponding box of said return (Exhibits A-2 & petition for review is hereby DENIED for lack of
3-a). For the year 1999, [BPI] again manifested its merit.101[5]
intention to carry over to the succeeding taxable
period the subject claim together with the current
excess tax credits (Exhibit J). Still unable to apply its
prior year’s excess credits in 1999 as it ended up in a BPI filed a Motion for Reconsideration of the
net loss position, petitioner again carried over the
said excess credits in the year 2000 (Exhibit K). foregoing Decision, but the CTA denied the same in a
The court already categorically ruled in a Resolution dated 3 June 2003.
number of cases that once the option to carry-over
and apply the excess quarterly income tax against
the income tax due for the taxable quarters of the BPI filed an appeal with the Court of Appeals,
succeeding taxable years has been made, such
option shall be considered irrevocable and no docketed as CA-G.R. SP No. 77655. On 29 April 2005,
application for cash refund or issuance of a tax credit
certificate shall be allowed therefore (Pilipinas the Court of Appeals rendered its Decision, reversing
Transport Industries vs. Commissioner of Internal
Revenue, CTA Case No. 6073, dated March 1, 2002; that of the CTA and holding that BPI was entitled to a
Pilipinas Hino, Inc. vs. Commissioner of Internal refund of the excess income tax it paid for 1998.
Revenue, CTA Case No. 6074, dated April 19, 2002;
Philam Asset Management, Inc. vs. Commissioner of
Internal Revenue, CTA Case No. 6210, dated May 2,
2002; The Philippine Banking Corporation (now The Court of Appeals conceded that BPI indeed
known as Global Business Bank, Inc.) vs.
Commissioner of Internal Revenue, CTA Resolution, opted to carry over its excess tax credit in 1998 to
CTA Case No. 6280, August 16, 2001. Since [BPI] 1999 by placing an “x” mark on the corresponding box
already exercised the irrevocable option to carry
over its excess tax credits for the year 1998 to the of its 1998 ITR. Nonetheless, there was no actual
succeeding years 1999 and 2000, it is, therefore, no
longer entitled to claim for a refund or issuance of a carrying over of the excess tax credit, given that BPI
tax credit certificate.100[4]
suffered a net loss in 1999, and was not liable for any
100[4]
CA rollo, pp. 28-29. 101[5]
CA rollo, p. 29.
income tax for said taxable period, against which the
1998 excess tax credit could have been applied.
The Court of Appeals added that even if Section 76
was to be construed strictly and literally, the
irrevocability rule would still not bar BPI from seeking a
tax refund of its 1998 excess tax credit despite
previously opting to carry over the same. The phrase
“for that taxable period” qualified the irrevocability of
the option of BIR to carry over its 1998 excess tax
credit to only the 1999 taxable period; such that, when
the 1999 taxable period expired, the irrevocability of
the option of BPI to carry over its excess tax credit from
1998 also expired.
The Court of Appeals further reasoned that the
government would be unjustly enriched should the
Finally, the appellate court cited BPI-Family
Savings Bank, Inc. v. Court of Appeals102[6] wherein this
Court held that if a taxpayer suffered a net loss in a
year, thus, incurring no tax liability to which the tax
credit from the previous year could be applied, there
was no reason for the BIR to withhold the tax refund
which rightfully belonged to the taxpayer.103[7]
In a Resolution dated 20 April 2007, the Court of
Appeals denied the Motion for Reconsideration of the
CIR.104[8]
Hence, the CIR filed the instant Petition for
Review, alleging that:
I

appellate court hold that the irrevocability rule barred THE COURT OF APPEALS COMMITTED A REVERSIBLE
ERROR IN HOLDING THAT THE “IRREVOCABILITY
the claim for refund of a taxpayer, who previously RULE” UNDER SECTION 76 OF THE TAX CODE DOES
opted to carry-over its excess tax credit, but was not NOT OPERATE TO BAR PETITIONER FROM ASKING
FOR A TAX REFUND.
able to use the same because it suffered a net loss in
102[6]
386 Phil. 719 (2000).
the succeeding year. 103[7]
Id. at 727.
104[8]
Rollo, pp. 34-39.

II
THE COURT OF APPEALS COMMITTED GRAVE ERROR
WHEN IT REVERSED AND SET ASIDE THE DECISION
OF THE COURT OF TAX APPEALS AND HELD THAT
RESPONDENT IS ENTITLED TO THE CLAIMED TAX
REFUND.
The Court finds merit in the instant Petition.
The Court of Appeals erred in relying on BPI-
Family, missing significant details that rendered said
case inapplicable to the one at bar.
In BPI-Family, therein petitioner BPI-Family
declared in its Corporate Annual ITR for 1989 excess
tax credits of P185,001.00 from 1988 and P112,491.00
from 1989, totaling P297,492.00. BPI-Family clearly
indicated in the same ITR that it was carrying over said
excess tax credits to the following year. But on 11
October 1990, BPI-Family filed a claim for refund of its
P112,491.00 tax credit from 1989. When no action
from the BIR was forthcoming, BPI-Family filed its claim
with the CTA. The CTA denied the claim for refund of
BPI-Family on the ground that, since the bank declared
in its 1989 ITR that it would carry over its tax credits to
the following year, it should be presumed to have done
so. In its Motion for Reconsideration filed with the CTA,
BPI-Family submitted its final adjusted ITR for 1989
showing that it incurred P52,480,173.00 net loss in
1990. Still, the CTA denied the Motion for
Reconsideration of BPI-Family. The Court of Appeals
likewise denied the appeal of BPI-Family and merely
affirmed the judgment of the CTA. The Court, however,
reversed the CTA and the Court of Appeals.
This Court decided to grant the claim for refund of
BPI-Family after finding that the bank had presented
sufficient evidence to prove that it incurred a net loss in
1990 and, thus, had no tax liability to which its tax
credit from 1989 could be applied. The Court stressed
in BPI Family that “the undisputed fact is that [BPI-
Family] suffered a net loss in 1990; accordingly, it
incurred no tax liability to which the tax credit could be
applied. Consequently, there is no reason for the BIR
and this Court to withhold the tax refund which
rightfully belongs to the [BPI-Family].” It was on the
basis of this fact that the Court granted the appeal of
BPI-Family, brushing aside all procedural and technical
objections to the same through the following
pronouncements:
Finally, respondents argue that tax refunds are
in the nature of tax exemptions and are to be
construed strictissimi juris against the claimant.
Under the facts of this case, we hold that [BPI-
Family] has established its claim. [BPI-Family] may
have failed to strictly comply with the rules of
procedure; it may have even been negligent. These
circumstances, however, should not compel the
Court to disregard this cold, undisputed fact: that
petitioner suffered a net loss in 1990, and that it
could not have applied the amount claimed as tax
credits.
Substantial justice, equity and fair play are on
the side of [BPI-Family]. Technicalities and legalisms,
however exalted, should not be misused by the
government to keep money not belonging to it and
thereby enrich itself at the expense of its law-abiding
citizens. If the State expects its taxpayers to
observe fairness and honesty in paying their taxes,
so must it apply the same standard against itself in
refunding excess payments of such taxes. Indeed,
the State must lead by its own example of honor,
dignity and uprightness.105[9]
105[9]
BPI-Family Savings Bank, Inc. v. Court of Appeals, supra note 6 at 728-
729.
It is necessary for this Court, however, to
emphasize that BPI-Family involved tax credit acquired
by the bank in 1989, which it initially opted to carry
over to 1990. The prevailing tax law then was the
NIRC of 1985, Section 79106[10] of which provided:
Sec. 79. Final Adjustment Return. - Every
corporation liable to tax under Section 24 shall file a
final adjustment return covering the total net income
for the preceding calendar or fiscal year. If the sum of
the quarterly tax payments made during the said
taxable year is not equal to the total tax due on the
entire taxable net income of that year the corporation
shall either:
(a) Pay the excess tax still due; or
(b) Be refunded the excess amount paid, as
the case may be.
In case the corporation is entitled to a refund
of the excess estimated quarterly income taxes-paid,
the refundable amount shown on its final adjustment
return may be credited against the estimated
quarterly income tax liabilities for the taxable
quarters of the succeeding taxable year. (Emphases
ours.)
106 [10]
The provision was erroneously cited as Section 69 in BPI-Family.
While the said provision was indeed Section 69 of the NIRC of 1977, it
was already re-numbered as Section 79 of the NIRC of 1985.
 By virtue of the afore-quoted provision, the
taxpayer with excess income tax was given the option
to either (1) refund the amount; or (2) credit the same
to its tax liability for succeeding taxable periods.
Section 79 of the NIRC of 1985 was reproduced as
Section 76 of the NIRC of 1997,107[11] with the addition
of one important sentence, which laid down the
irrevocability rule:
Section 76. Final Adjustment Return. - Every
corporation liable to tax under Section 24 shall file a
final adjustment return covering the total net income
for the preceding calendar or fiscal year. If the sum
of the quarterly tax payments made during the said
taxable year is not equal to the total tax due on the
entire taxable net income of that year the
corporation shall either:
(a) Pay the excess tax still due; or
(b) Be refunded the excess amount paid, as the
case may be.
In case the corporation is entitled to a refund
of the excess estimated quarterly income taxes paid,
the refundable amount shown on its final adjustment
return may be credited against the estimated
quarterly income tax liabilities for the taxable
107[11]
Took effect on 1 January 1998.
quarters of the succeeding taxable years. Once the
option to carry-over and apply the excess
quarterly income tax against income tax due
for the taxable quarters of the succeeding
taxable years has been made, such option shall
be considered irrevocable for that taxable
period and no application for tax refund or
issuance of a tax credit certificate shall be
allowed therefor. (Emphases ours.)
When BPI-Family was decided by this Court, it did
not yet have the irrevocability rule to consider. Hence,
BPI-Family cannot be cited as a precedent for this case.
The factual background of Philam Asset
Management, Inc. v. Commissioner of Internal
Revenue,108[12] cited by the CIR, is closer to the instant
Petition. Both involve tax credits acquired and claims
for refund filed more than a decade after those in BPI-
Family, to which Section 76 of the NIRC of 1997 already
apply.
The Court, in Philam, recognized the two options
offered by Section 76 of the NIRC of 1997 to a taxable
corporation whose total quarterly income tax payments
108[12]
G.R. No. 156637 and No. 162004, 14 December 2005, 477 SCRA 761.
in a given taxable year exceeds its total income tax The Court categorically declared in Philam that:
due. These options are: (1) filing for a tax refund or (2) “Section 76 remains clear and unequivocal. Once
availing of a tax credit. The Court further explained: the carry-over option is taken, actually or
constructively, it becomes irrevocable.” It
The first option is relatively simple. Any tax on mentioned no exception or qualification to the
income that is paid in excess of the amount due the
government may be refunded, provided that a irrevocability rule.
taxpayer properly applies for the refund.

The second option works by applying the
refundable amount, as shown on the [Final
Adjustment Return (FAR)] of a given taxable year,
against the estimated quarterly income tax liabilities
of the succeeding taxable year.
Hence, the controlling factor for the operation of
the irrevocability rule is that the taxpayer chose an
option; and once it had already done so, it could no

These two options under Section 76 are longer make another one. Consequently, after the
alternative in nature. The choice of one taxpayer opts to carry-over its excess tax credit to the
precludes the other. Indeed, in Philippine Bank of
Communications v. Commissioner of Internal following taxable period, the question of whether or not
Revenue, the Court ruled that a corporation must
signify its intention -- whether to request a tax refund it actually gets to apply said tax credit is irrelevant.
or claim a tax credit -- by marking the corresponding
option box provided in the FAR. While a taxpayer is Section 76 of the NIRC of 1997 is explicit in stating that
required to mark its choice in the form provided by once the option to carry over has been made, “no
the BIR, this requirement is only for the purpose of
facilitating tax collection. application for tax refund or issuance of a tax credit
One cannot get a tax refund and a tax credit at certificate shall be allowed therefor.”
the same time for the same excess income taxes
paid.109[13] x x x
The last sentence of Section 76 of the NIRC of
1997 reads: “Once the option to carry-over and apply
the excess quarterly income tax against income tax due
109[13]
Id. at 772.
for the taxable quarters of the succeeding taxable
years has been made, such option shall be
considered irrevocable for that taxable period
and no application for tax refund or issuance of a tax
credit certificate shall be allowed therefor.” The phrase
“for that taxable period” merely identifies the excess
income tax, subject of the option, by referring to the
taxable period when it was acquired by the taxpayer.
In the present case, the excess income tax credit,
which BPI opted to carry over, was acquired by the said
bank during the taxable year 1998. The option of BPI to
carry over its 1998 excess income tax credit is
irrevocable; it cannot later on opt to apply for a refund
of the very same 1998 excess income tax credit.
The Court of Appeals mistakenly understood the
phrase “for that taxable period” as a prescriptive period
for the irrevocability rule. This would mean that since
the tax credit in this case was acquired in 1998, and BPI
opted to carry it over to 1999, then the irrevocability of
the option to carry over expired by the end of 1999,
leaving BPI free to again take another option as regards
its 1998 excess income tax credit. This construal
effectively renders nugatory the irrevocability rule. The
evident intent of the legislature, in adding the last
sentence to Section 76 of the NIRC of 1997, is to keep
the taxpayer from flip-flopping on its options, and avoid
confusion and complication as regards said taxpayer’s
excess tax credit. The interpretation of the Court of
Appeals only delays the flip-flopping to the end of each
succeeding taxable period.
The Court similarly disagrees in the declaration of
the Court of Appeals that to deny the claim for refund
of BPI, because of the irrevocability rule, would be
tantamount to unjust enrichment on the part of the
government. The Court addressed the very same
argument in Philam, where it elucidated that there
would be no unjust enrichment in the event of denial of
the claim for refund under such circumstances, because
there would be no forfeiture of any amount in favor of
the government. The amount being claimed as a
refund would remain in the account of the taxpayer
until utilized in succeeding taxable years,110[14] as
provided in Section 76 of the NIRC of 1997. It is worthy
to note that unlike the option for refund of excess
income tax, which prescribes after two years from the
filing of the FAR, there is no prescriptive period for the
carrying over of the same. Therefore, the excess
income tax credit of BPI, which it acquired in 1998 and
opted to carry over, may be repeatedly carried over to
succeeding taxable years, i.e., to 1999, 2000, 2001,
and so on and so forth, until actually applied or credited
to a tax liability of BPI.
Finally, while the Court, in Philam, was firm in its
position that the choice of option as regards the excess
income tax shall be irrevocable, it was less rigid in the
determination of which option the taxpayer actually
chose. It did not limit itself to the indication by the
taxpayer of its option in the ITR.
Thus, failure of the taxpayer to make an
appropriate marking of its option in the ITR does not
110[14]
Philam Asset Management, Inc. v. Commissioner of Internal Revenue,
supra note 12 at 768.
automatically mean that the taxpayer has opted for a
tax credit. The Court ratiocinated in G.R. No.
156637111[15] of Philam:
One cannot get a tax refund and a tax credit at
the same time for the same excess income taxes
paid. Failure to signify one’s intention in the
FAR does not mean outright barring of a valid
request for a refund, should one still choose
this option later on. A tax credit should be
construed merely as an alternative remedy to a tax
refund under Section 76, subject to prior verification
and approval by respondent.
The reason for requiring that a choice be
made in the FAR upon its filing is to ease tax
administration, particularly the self-assessment
and collection aspects. A taxpayer that makes a
choice expresses certainty or preference and thus
demonstrates clear diligence. Conversely, a
taxpayer that makes no choice expresses uncertainty
or lack of preference and hence shows simple
negligence or plain oversight.
111 [15]
Philam actually involved two consolidated cases, G.R. No.
156637 and G.R. No. 162004. In G.R. No. 156637, therein petitioner
Philam paid excess income tax for 1997. It did not indicate its option to
carry over or refund said excess income tax in its ITR for 1997. On 11
September 1998, however, it filed a claim for refund of the same. In
G.R. No. 162004, Philam incurred a net loss in 1998 and had
unapplied excess creditable income tax for the same period in the
amount of P459,756.07. In its ITR for the succeeding year of 1999,
Philam reported a tax due of only P80,042.00, creditable withholding
tax of P915,995.00, and excess credit carried over from 1998 of
P459,756.07. On 14 November 2000, Philam filed a claim for tax
refund, alleging that its tax liability for 1999 was deducted from its
creditable withholding tax for the same taxable period; leaving its
excess tax credit carried over from 1998 still unapplied.
 thereby enrich itself at the expense of its law-abiding
xxxx
citizens.”
x x x Despite the failure of [Philam] to make
the appropriate marking in the BIR form, the filing
of its written claim effectively serves as an Therefore, as to which option the taxpayer chose
expression of its choice to request a tax
refund, instead of a tax credit. To assert that any is generally a matter of evidence. It is axiomatic that a
future claim for a tax refund will be instantly
hindered by a failure to signify one’s intention in the claimant has the burden of proof to establish the
FAR is to render nugatory the clear provision that
factual basis of his or her claim for tax credit or refund.
allows for a two-year prescriptive period.112[16]
(Emphases ours.) Tax refunds, like tax exemptions, are construed strictly
against the taxpayer.113[17]
Philam reveals a meticulous consideration by the
Court of the evidence submitted by the parties and the
In the Petition at bar, BPI was unable to discharge
circumstances surrounding the taxpayer’s option to
the burden of proof necessary for the grant of a refund.
carry over or claim for refund. When circumstances
BPI expressly indicated in its ITR for 1998 that it was
show that a choice has been made by the taxpayer to
carrying over, instead of refunding, the excess income
carry over the excess income tax as credit, it should be
tax it paid during the said taxable year. BPI
respected; but when indubitable circumstances clearly
consistently reported the said amount in its ITRs for
show that another choice – a tax refund – is in order, it
1999 and 2000 as credit to be applied to any tax
should be granted. “Technicalities and legalisms,
liability the bank may incur; only, no such opportunity
however exalted, should not be misused by the
arose because it suffered a net loss in 1999 and
government to keep money not belonging to it and
incurred zero tax liability in 2000. In G.R. No. 162004
of Philam, the Court found:
112 [16]
Philam Asset Management, Inc. v. Commissioner of Internal
Revenue, supra note 12 at 772, 776. See also Commissioner of Internal 113 [17]
Paseo Realty and Development Corporation v. Court of Appeals,
Revenue v. PERF Realty Corporation, G.R. No. 163345, 4 July 2008. G.R. No. 119286, 13 October 2004, 440 SCRA 235, 247.
 First, the fact that it filled out the portion “Prior
Year’s Excess Credits” in its 1999 FAR means that it
categorically availed itself of the carry-over option.
In fact, the line that precedes that phrase in the BIR
form clearly states “Less: Tax Credits/Payments.”
The contention that it merely filled out that portion
because it was a requirement – and that to have
done otherwise would have been tantamount to
falsifying the FAR – is a long shot.
The FAR is the most reliable firsthand evidence
of corporate acts pertaining to income taxes. In it
are found the itemization and summary of additions
to and deductions from income taxes due. These
entries are not without rhyme or reason. They are
required, because they facilitate the tax
administration process.114[18]
BPI itself never denied that its original intention
was to carry over the excess income tax credit it
acquired in 1998, and only chose to refund the said
amount when it was unable to apply the same to any
tax liability in the succeeding taxable years. There can
be no doubt that BPI opted to carry over its excess
income tax credit from 1998; it only subsequently
changed its mind – which it was barred from doing by
the irrevocability rule.
114[18]
Philam Asset Management, Inc. v. Commissioner of Internal Revenue,
supra note 12 at 778.
The choice by BPI of the option to carry over its
1998 excess income tax credit to succeeding taxable
years, which it explicitly indicated in its 1998 ITR, is
irrevocable, regardless of whether it was able to
actually apply the said amount to a tax liability. The
reiteration by BPI of the carry over option in its ITR for
1999 was already a superfluity, as far as its 1998
excess income tax credit was concerned, given the
irrevocability of the initial choice made by the bank to
carry over the said amount. For the same reason, the
failure of BPI to indicate any option in its ITR for 2000
was already immaterial to its 1998 excess income tax
credit.
WHEREFORE, the instant Petition for Review of
the Commissioner for Internal Revenue is GRANTED.
The Decision dated 29 April 2005 and the Resolution
dated 20 April 2007 of the Court of Appeals in CA-G.R.
SP No. 77655 are REVERSED and SET ASIDE. The
Decision dated 12 March 2003 of the Court of Tax
Appeals in CTA Case No. 6276, denying the claim of
respondent Bank of the Philippine Islands for the refund
of its 1998 excess income tax credits, is REINSTATED. Republic of the Philippines

No costs. Supreme Court

Manila
THIRD DIVISION

SO ORDERED.
QUEZON CITY and THE CITY G.R. No. 166408
TREASURER OF QUEZON CITY,
Petitioners,
Present:

YNARES-
SANTIAGO, J.,
Chairper
son,
- versus - AUSTRIA-
MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
REYES, JJ.

ABS-CBN BROADCASTING Promulgated:

CORPORATION,
Respondent. October 6, 2008

x-----------------------------------------------
---x

DECISION
 as the Revised Charter of Quezon City. Petitioner City
REYES, R.T., J.:
Treasurer of Quezon City is primarily responsible for the
imposition and collection of taxes within the territorial
CLAIMS for tax exemption must be based on
jurisdiction of Quezon City.
language in law too plain to be mistaken. It cannot be
made out of inference or implication.
Under Section 31, Article 13 of the Quezon City
Revenue Code of 1993,117[3] a franchise tax was imposed
The principle is relevant in this petition for review
on businesses operating within its jurisdiction. The
on certiorari of the Decision 115[1]
of the Court of Appeals
provision states:
(CA) and that 116[2]
of the Regional Trial Court (RTC)
ordering the refund and declaring invalid the imposition Section 31. Imposition of Tax. – Any provision of
special laws or grant of tax exemption to the contrary
and collection of local franchise tax by the City notwithstanding, any person, corporation, partnership or
Treasurer of Quezon City on ABS-CBN Broadcasting association enjoying a franchise whether issued by the
national government or local government and, doing
Corporation (ABS-CBN). business in Quezon City, shall pay a franchise tax at the
rate of ten percent (10%) of one percent (1%) for 1993-
1994, twenty percent (20%) of one percent (1%) for
1995, and thirty percent (30%) of one percent (1%) for
The Facts 1996 and the succeeding years thereafter, of gross
receipts and sales derived from the operation of the
business in Quezon City during the preceding calendar
year.
Petitioner City Government of Quezon City is a
local government unit duly organized and existing by On May 3, 1995, ABS-CBN was granted the
virtue of Republic Act (R.A.) No. 537, otherwise known franchise to install and operate radio and television
115[1]
Rollo, pp. 56-67. Dated August 31, 2004. Penned by Associate Justice
Magdangal M. De Leon, with Associate Justices Romeo A. Brawner and
broadcasting stations in the Philippines under R.A. No.
Mariano C. Del Castillo, concurring.
116[2]
Id. at 46-54. Dated January 20, 1999. Penned by then Judge, now CA
Associate Justice, Lucas P. Bersamin. 117[3]
Quezon City Ordinance No. SP-91, S-93.
7966.118[4] Section 8 of R.A. No. 7966 provides the tax Consequently, ABS-CBN paid under protest the local
liabilities of ABS-CBN which reads: franchise tax imposed by Quezon City on the dates, in
the amounts and under the official receipts as follows:
Section 8. Tax Provisions. – The grantee, its
successors or assigns, shall be liable to pay the same
taxes on their real estate, buildings and personal O.R. No. Date Amount Paid
property, exclusive of this franchise, as other persons or 2464274 07-18-95 P 1,489,977.28
corporations are now hereafter may be required by law to 2484651 10-20-95 1,489,977.28
pay. In addition thereto, the grantee, its successors or 2536134 1-22-96 2,880,975.65
assigns, shall pay a franchise tax equivalent to three 8354906 1-23-97 8,621,470.83
percent (3%) of all gross receipts of the
radio/television business transacted under this 0048756 1-23-97 2,731,135.81
franchise by the grantee, its successors or assigns, 0067352 4-03-97 2,731,135.81
and the said percentage tax shall be in lieu of all Total P19,944,672.66119[5]
taxes on this franchise or earnings thereof; Provided
that the grantee, its successors or assigns shall continue
to be liable for income taxes under Title II of the National On January 29, 1997, ABS-CBN filed a written claim
Internal Revenue Code pursuant to Section 2 of Executive
No. 72 unless the latter enactment is amended or for refund for local franchise tax paid to Quezon City for
repealed, in which case the amendment or repeal shall be
applicable thereto. (Emphasis added) 1996 and for the first quarter of 1997 in the total
amount of Fourteen Million Two Hundred Thirty-Three
ABS-CBN had been paying local franchise tax
Thousand Five Hundred Eighty-Two and 29/100
imposed by Quezon City. However, in view of the centavos (P14,233,582.29) broken down as follows:
above provision in R.A. No. 9766 that it “shall pay a
franchise tax x x x in lieu of all taxes,” the corporation O.R. No Date Amount Paid
2536134 1-22-96 P 2,880,975.65
developed the opinion that it is not liable to pay the 8354906 1-23-97 8,621,470.83
local franchise tax imposed by Quezon City. 0048756 1-23-97 2,731,135.81
Total P14,233,582.29120[6]
118[4]
“An Act Granting the ABS-CBN Broadcasting Corporation a Franchise to
Construct, Install, Operate and Maintain Television and Radio Broadcasting
Stations in the Philippines, and for Other Purposes.” Enacted on March 30, 119[5]
Rollo, p. 17.
1995 and date of effectivity on May 3, 1995. 120[6]
Id.
 In a letter dated March 3, 1997 to the Quezon City Quezon City argued that the “in lieu of all taxes”
Treasurer, ABS-CBN reiterated its claim for refund of provision in R.A. No. 9766 could not have been
local franchise taxes paid. intended to prevail over a constitutional mandate which
ensures the viability and self-sufficiency of local
On June 25, 1997, for failure to obtain any government units. Further, that taxes collectible by
response from the Quezon City Treasurer, ABS-CBN and payable to the local government were distinct from
filed a complaint before the RTC in Quezon City seeking taxes collectible by and payable to the national
the declaration of nullity of the imposition of local government, considering that the Constitution
franchise tax by the City Government of Quezon City for specifically declared that the taxes imposed by local
being unconstitutional. It likewise prayed for the refund government units “shall accrue exclusively to the local
of local franchise tax in the amount of Nineteen Million governments.” Lastly, the City contended that the
Nine Hundred Forty-Four Thousand Six Hundred exemption claimed by ABS-CBN under R.A. No. 7966
Seventy-Two and 66/100 centavos (P19,944,672.66) was withdrawn by Congress when the Local
broken down as follows: Government Code (LGC) was passed.122[8] Section 193 of
the LGC provides:
O.R. No. Date Amount Paid
2464274 7-18-95 P 1,489,977.28
2484651 10-20-95 1,489,977.28 Section 193. Withdrawal of Tax Exemption
2536134 1-22-96 2,880,975.65 Privileges. – Unless otherwise provided in this Code, tax
8354906 1-23-97 8,621,470.83 exemptions or incentives granted to, or presently
enjoyed by all persons, whether natural or juridical,
0048756 1-23-97 2,731,135.81 including government-owned or -controlled
0067352 4-03-97 2,731,135.81 corporations, except local water districts, cooperatives
Total P19,944,672.66121[7] duly registered under R.A. 6938, non-stock and non-profit
hospitals and educational institutions, are hereby
121[7]
Id. at 17-18. 122[8]
Id. at 46-60.
 withdrawn upon the effectivity of this Code. (Emphasis
added)
On August 13, 1997, ABS-CBN filed a supplemental
complaint adding to its claim for refund the local
franchise tax paid for the third quarter of 1997 in the
amount of Two Million Seven Hundred Thirty-One
Thousand One Hundred Thirty-Five and 81/100
centavos (P2,731,135.81) and of other amounts of local
franchise tax as may have been and will be paid by
ABS-CBN until the resolution of the case.
Quezon City insisted that the claim for refund
must fail because of the absence of a prior written
claim for it.
RTC and CA Dispositions
On January 20, 1999, the RTC rendered judgment
declaring as invalid the imposition on and collection
from ABS-CBN of local franchise tax paid pursuant to
Quezon City Ordinance No. SP-91, S-93, after the
enactment of R.A. No. 7966, and ordered the refund of
all payments made. The dispositive portion of the RTC
decision reads:
WHEREFORE, judgment is hereby rendered
declaring the imposition on and collection from plaintiff
ABS-CBN BROADCASTING CORPORATION of local franchise
taxes pursuant to Quezon City Ordinance No. SP-91, S-93
after the enactment of Republic Act No. 7966 to be
invalid, and, accordingly, the Court hereby orders the
defendants to refund all its payments made after the
effectivity of its legislative franchise on May 3, 1995.
SO ORDERED.123[9]
In its decision, the RTC ruled that the “in lieu of all
taxes” provision contained in Section 8 of R.A. No. 7966
absolutely excused ABS-CBN from the payment of local
franchise tax imposed under Quezon City Ordinance No.
SP-91, S-93. The intent of the legislature to excuse
ABS-CBN from payment of local franchise tax could be
discerned from the usage of the “in lieu of all taxes”
provision and from the absence of any qualification
except income taxes. Had Congress intended to
exclude taxes imposed from the exemption, it would
have expressly mentioned so in a fashion similar to the
proviso on income taxes.
123[9]
Id. at 54.

The RTC also based its ruling on the 1990 case of
Province of Misamis Oriental v. Cagayan Electric Power
and Light Company, Inc. (CEPALCO).124[10] In said case,
the exemption of respondent electric company
CEPALCO from payment of provincial franchise tax was
upheld on the ground that the franchise of CEPALCO
was a special law, while the Local Tax Code, on which
the provincial ordinance imposing the local franchise
tax was based, was a general law. Further, it was held
that whenever there is a conflict between two laws, one
special and particular and the other general, the special
law must be taken as intended to constitute an
exception to the general act.
The RTC noted that the legislative franchise of
ABS-CBN was granted years after the effectivity of the
LGC. Thus, it was unavoidable to conclude that Section
8 of R.A. No. 7966 was an exception since the
legislature ought to be presumed to have enacted it
124[10]
G.R. No. 45355, January 12, 1990, 181 SCRA 38.
with the knowledge and awareness of the existence and
prior enactment of Section 137125[11] of the LGC.
In addition, the RTC, again citing the case of
Province of Misamis Oriental v. Cagayan Electric Power
and Light Company, Inc. (CEPALCO),126[12] ruled that the
imposition of the local franchise tax was an impairment
of ABS-CBN’s contract with the government. The
imposition of another franchise on the corporation by
the local authority would constitute an impairment of
the former’s charter, which is in the nature of a private
contract between it and the government.
As to the amounts to be refunded, the RTC
rejected Quezon City’s position that a written claim for
refund pursuant to Section 196 of the LGC was a
condition sine qua non before filing the case in court.
The RTC ruled that although Fourteen Million Two
125[11]
Section 137. Franchise Tax. – Notwithstanding any exemption granted
by any law or other special law, the province may impose a tax on business is
enjoying a franchise, at the rate not exceeding fifty percent (50%) of one
percent (1%) of the gross annual receipts for the preceding calendar year
based on the incoming receipt, or realized, within its territorial jurisdiction. x x
x
126[12]
Supra.
Hundred Thirty-Three Thousand Five Hundred Eighty-
Two and 29/100 centavos (P14,233,582.29) was
only amount stated in the letter to the Quezon City
Treasurer claiming refund, ABS-CBN should nonetheless
be also refunded of all payments made after the
effectivity of R.A. No. 7966. The inaction of the City
Treasurer on the claim for refund of ABS-CBN legally
rendered any further claims for refund on the part of
plaintiff absurd and futile in relation to the succeeding
payments.
The City of Quezon and its Treasurer filed a motion
for reconsideration which was subsequently denied by
the RTC. Thus, appeal was made to the CA.
September 1, 2004, the CA dismissed the petition of
Quezon City and its Treasurer. According to
appellate court, the issues raised were purely legal
questions cognizable only by the Supreme Court. The
CA ratiocinated:
For another, the issues which appellants submit for
this Court’s consideration are more of legal query
necessitating a legal opinion rather than a call for
adjudication on the matter in dispute.
the
xxxx
The first issue has earlier been categorized in
Province of Misamis Oriental v. Cagayan Electric and
Power Co., Inc. to be a legal one. There is no more
argument to this.
The next issue although it may need the
reexamination of the pertinent provisions of the local
franchise and the legislative franchise given to appellee,
also needs no evaluation of facts. It suffices that there
may be a conflict which may need to be reconciled,
without regard to the factual backdrop of the case.
The last issue deals with a legal question, because
whether or not there is a prior written claim for refund is
no longer in dispute. Rather, the question revolves on
whether the said requirement may be dispensed with,
which obviously is not a factual issue.127[13]
On September 23, 2004, petitioner moved for
On
reconsideration. The motion was, however, denied by
the CA in its Resolution dated December 16, 2004.
the
Hence, the present recourse.
Issues
Petitioner submits the following issues for
resolution:
127[13]
Rollo, pp. 64-65.
 this franchise or earnings thereof, is
I. absolutely excused from paying the
Whether or not the phrase “in lieu of all taxes”
indicated in the franchise of the respondent appellee franchise tax imposed by appellants;
(Section 8 of RA 7966) serves to exempt it from the
payment of the local franchise tax imposed by the
petitioners-appellants.
2) Whether appellants’ imposition of local
II.
Whether or not the petitioners-appellants raised franchise tax is a violation of appellee’s
factual and legal issues before the Honorable Court of
Appeals.128[14] legislative franchise; and

Our Ruling

3) Whether one can do away with the

The second issue, being procedural in nature, shall requirement on prior written claim for
be dealt with immediately. But there are other refund.129[15]
resultant issues linked to the first.

Obviously, these are purely legal questions,

I. The dismissal by the CA of petitioners’ cognizable by this Court, to the exclusion of all other
appeal is in order because it raised purely legal courts. There is a question of law when the doubt or
issues, namely: difference arises as to what the law is pertaining to a
certain state of facts.130[16]
1) Whether appellee, whose franchise
expressly provides that its payment of
franchise tax shall be in lieu of all taxes in
129[15]
Id. at 65.
130[16]
Calvo v. Vergara, G.R. No. 134741, December 19, 2001, 372 SCRA 650,
128[14]
Id. at 23. as cited in Lavides v. Pre, G.R. No. 127830, October 17, 2001, 367 SCRA 382.
 Section 2, Rule 50 of the Rules of Court provides
SEC. 2. Modes of appeal. –
that an appeal taken to the CA under Rule 41 raising
(a) Ordinary appeal. – The appeal to the
only questions of law is erroneous and shall be Court of Appeals in cases decided by the
Regional Trial Court in the exercise of its
dismissed, issues of pure law not being within its original jurisdiction shall be taken by

jurisdiction.131[17] Consequently, the dismissal by the CA

of petitioners’ appeal was in order.

In the recent case of Sevilleno v. Carilo,132[18] this

Court ruled that the dismissal of the appeal of
petitioner was valid, considering the issues raised there
were pure questions of law, viz.:

Petitioners interposed an appeal to the Court of

Appeals but it was dismissed for being the wrong mode of
appeal. The appellate court held that since the issue
being raised is whether the RTC has jurisdiction over the
subject matter of the case, which is a question of law, the
appeal should have been elevated to the Supreme Court
under Rule 45 of the 1997 Rules of Civil Procedure, as
amended. Section 2, Rule 41 of the same Rules which
governs appeals from judgments and final orders of the
RTC to the Court of Appeals, provides:
131[17]
Rule 50, Sec. 2. Dismissal of improper appeal to the Court of Appeals. –
An appeal under Rule 41 taken from the Regional Trial Court to the Court of
Appeals raising only questions of law shall be dismissed, issues of pure law
not being reviewable by said court. Similarly, an appeal by notice of appeal
instead of by petition for review from the appellate judgment of a Regional
Trial Court shall be dismissed.
An appeal erroneously taken to the Court of Appeals shall not be
transferred to the appropriate court but shall be dismissed outright.
132[18]
G.R. No. 146454, September 14, 2007.
 filing a notice of appeal with the court which
rendered the judgment or final order
appealed from and serving a copy
thereof upon the adverse party. No
record on appeal shall be required
except in special proceedings and other
cases of multiple or separate appeals
where the law or these Rules so require.
In such cases, the record on appeal shall
be filed and served in like manner.
(b) Petition for review. – The appeal to the
Court of Appeals in cases decided by the
Regional Trial Court in the exercise of its
appellate jurisdiction shall be by petition
for review in accordance with Rule 42.
(c) Appeal by certiorari. – In all cases where
only questions of law are raised or
involved, the appeal shall be to the
Supreme Court by petition for review on
certiorari in accordance with Rule 45.
In Macawili Gold Mining and Development Co., Inc.
v. Court of Appeals, we summarized the rule on appeals
as follows:
(1) In all cases decided by the RTC in the
exercise of its original jurisdiction, appeal
may be made to the Court of Appeals by
mere notice of appeal where the
appellant raises questions of fact or
mixed questions of fact and law;
(2) In all cases decided by the RTC in the
exercise of its original jurisdiction where
the appellant raises only questions of
law, the appeal must be taken to the
Supreme Court on a petition for review
on certiorari under Rule 45;
133[19]
Sevilleno v. Carilo, id.
(3) All appeals from judgments rendered by
the RTC in the exercise of its appellate
jurisdiction, regardless of whether the
appellant raises questions of fact,
questions of law, or mixed questions of
fact and law, shall be brought to the
Court of Appeals by filing a petition for
review under Rule 42.
It is not disputed that the issue brought by
petitioners to the Court of Appeals involves the
jurisdiction of the RTC over the subject matter of the case.
We have a long standing rule that a court’s jurisdiction
over the subject matter of an action is conferred only by
the Constitution or by statute. Otherwise put, jurisdiction
of a court over the subject matter of the action is a matter
of law. Consequently, issues which deal with the
jurisdiction of a court over the subject matter of a case
are pure questions of law. As petitioners’ appeal solely
involves a question of law, they should have directly
taken their appeal to this Court by filing a petition for
review on certiorari under Rule 45, not an ordinary appeal
with the Court of Appeals under Rule 41. Clearly, the
appellate court did not err in holding that petitioners
pursued the wrong mode of appeal.
Indeed, the Court of Appeals did not err in
dismissing petitioners’ appeal. Section 2, Rule 50 of the
same Rules provides that an appeal from the RTC to the
Court of Appeals raising only questions of law shall be
dismissed; and that an appeal erroneously taken to the
Court of Appeals shall be dismissed outright, x x x.133[19]
(Emphasis added)
 However, to serve the demands of substantial opportunity for the proper and just
determination of his cause, free from the
justice and equity, the Court opts to relax procedural unacceptable plea of technicalities. Thus,
dismissal of appeals purely on technical
rules and rule upon on the merits of the case. In Ong grounds is frowned upon where the policy of
the court is to encourage hearings of appeals
Lim Sing Jr. v. FEB Leasing and Finance Corporation,134[20] on their merits and the rules of procedure
ought not to be applied in a very rigid,
this Court stated: technical sense; rules of procedure are used
only to help secure, not override substantial
justice. It is a far better and more prudent
course of action for the court to excuse a
Courts have the prerogative to relax procedural
technical lapse and afford the parties a
rules of even the most mandatory character, mindful of
review of the case on appeal to attain the
the duty to reconcile both the need to speedily put an end
ends of justice rather than dispose of the
to litigation and the parties’ right to due process. In
case on technicality and cause a grave
numerous cases, this Court has allowed liberal
injustice to the parties, giving a false
construction of the rules when to do so would serve the
impression of speedy disposal of cases while
demands of substantial justice and equity. In Aguam v.
actually resulting in more delay, if not a
Court of Appeals, the Court explained:
miscarriage of justice.135[21]
“The court has the discretion to
dismiss or not to dismiss an appellant’s
appeal. It is a power conferred on the court, II. The “in lieu of all taxes” provision in its
not a duty. The “discretion must be a sound
one, to be exercised in accordance with the franchise does not exempt ABS-CBN from
tenets of justice and fair play, having in mind
the circumstances obtaining in each case.”
payment of local franchise tax.
Technicalities, however, must be avoided.
The law abhors technicalities that impede
the cause of justice. The court’s primary A. The present controversy essentially boils down
duty is to render or dispense justice. “A
litigation is not a game of technicalities.” to a dispute between the inherent taxing power of
“Lawsuits unlike duels are not to be won by a
rapier’s thrust. Technicality, when it deserts Congress and the delegated authority to tax of local
its proper office as an aid to justice and
becomes its great hindrance and chief governments under the 1987 Constitution and effected
enemy, deserves scant consideration from
courts.” Litigations must be decided on their under the LGC of 1991.
merits and not on technicality. Every party
litigant must be afforded the amplest
134[20]
G.R. No. 168115, June 8, 2007, 524 SCRA 333. 135[21]
Ong Lim Sing Jr. v. FEB Leasing and Finance Corporation, id. at 343-344.
 The power of the local government of Quezon City
to impose franchise tax is based on Section 151 in
relation to Section 137 of the LGC, to wit:
Section 137. Franchise Tax. – Notwithstanding any
exemption granted by any law or other special law, the
province may impose a tax on businesses enjoying a
franchise, at the rate not exceeding fifty percent (50%) of
one percent (1%) of the gross annual receipts for the
preceding calendar year based on the incoming receipt,
or realized within its territorial jurisdiction. x x x
xxxx
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 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.
(Emphasis supplied)
Such taxing power by the local government,
however, is limited in the sense that Congress can
enact legislation granting exemptions. This principle
was upheld in City Government of Quezon City, et al. v.
Bayan Telecommunications, Inc.136[22] Said this Court:
This thus raises the question of whether or not the
City’s Revenue Code pursuant to which the city treasurer
of Quezon City levied real property taxes against
Bayantel’s real properties located within the City
effectively withdrew the tax exemption enjoyed by
Bayantel under its franchise, as amended.
Bayantel answers the poser in the negative arguing
that once again it is only “liable to pay the same taxes, as
any other persons or corporations on all its real or
personal properties, exclusive of its franchise.”
Bayantel’s posture is well-taken. While the system
of local government taxation has changed with the onset
of the 1987 Constitution, the power of local government
units to tax is still limited. As we explained in Mactan
Cebu International Airport Authority:
“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 be 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. x x x”
136[22]
G.R. No. 162015, March 6, 2006, 484 SCRA 169.
 Clearly then, while a new slant on the subject of
local taxation now prevails in the sense that the former
doctrine of local government units’ delegated power to
tax had been effectively modified with Article X, Section 5
of the 1987 Constitution now in place, the basic doctrine
on local taxation remains essentially the same. For as the
Court stressed in Mactan, “the power to tax is [still]
primarily vested in the Congress.”
This new perspective is best articulated by Fr.
Joaquin G. Bernas, S.J., himself a Commissioner of the
1986 Constitutional Commission which crafted the 1987
Constitution, thus:
“What is the effect of Section 5 on the
fiscal position of municipal corporations?
Section 5 does not change the doctrine that
municipal corporations do not possess
inherent powers of taxation. What it does is
to confer municipal corporations a general
power to levy taxes and otherwise create
sources of revenue. They no longer have to
wait for a statutory grant of these powers.
The power of the legislative authority
relative to the fiscal powers of local
governments has been reduced to the
authority to impose limitations on municipal
powers. Moreover, these limitations must be
“consistent with the basic policy of local
autonomy.” The important legal effect of
Section 5 is thus to reverse the principle that
doubts are resolved against municipal
corporations. Henceforth, in interpreting
statutory provisions on municipal fiscal
powers, doubts will be resolved in favor of
municipal corporations. It is understood,
however, that taxes imposed by local
government must be for a public purpose,
uniform within a locality, must not be
confiscatory, and must be within the
jurisdiction of the local unit to pass.”
In net effect, the controversy presently before the
Court involves, at bottom, a clash between the inherent
taxing power of the legislature, which necessarily includes
the power to exempt, and the local government’s
delegated power to tax under the aegis of the 1987
Constitution.
Now to go back to the Quezon City Revenue Code
which imposed real estate taxes on all real properties
within the city’s territory and removed exemptions
theretofore “previously granted to, or presently enjoyed
by all persons, whether natural or juridical [x x x]” there
can really be no dispute that the power of the Quezon
City Government to tax is limited by Section 232 of the
LGC which expressly provides that “a province or city or
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.” Under this law, the
Legislature highlighted its power to thereafter exempt
certain realties from the taxing power of local government
units. An interpretation denying Congress such power to
exempt would reduce the phrase “not hereinafter
specifically exempted” as a pure jargon, without meaning
whatsoever. Needless to state, such absurd situation is
unacceptable.
For sure, in Philippine Long Distance Telephone
Company, Inc. (PLDT) vs. City of Davao, this Court has
upheld the power of Congress to grant exemptions over
the power of local government units to impose taxes.
There, the Court wrote:
“Indeed, the grant of taxing powers to
local government units under the
Constitution and the LGC does not affect the
power of Congress to grant exemptions to
certain persons, pursuant to a declared
national policy. The legal effect of the
constitutional grant to local governments
simply means that in interpreting statutory
provisions on municipal taxing powers,
 doubts must be resolved in favor of
municipal corporations.”137[23] (Emphasis
supplied)
In the case under review, the Philippine Congress
enacted R.A. No. 7966 on March 30, 1995, subsequent
to the effectivity of the LGC on January 1, 1992. Under
it, ABS-CBN was granted the franchise to install and
operate radio and television broadcasting stations in
the Philippines. Likewise, Section 8 imposed on ABS-
CBN the duty of paying 3% franchise tax.
stressing, however, that payment of the percentage
franchise tax shall be “in lieu of all taxes” on the said
franchise.138[24]
Congress has the inherent power to tax, which
includes the power to grant tax exemptions. On the
other hand, the power of Quezon City to tax is
prescribed by Section 151 in relation to Section 137 of
the LGC which expressly provides that notwithstanding
any exemption granted by any law or other special law,
the City may impose a franchise tax. It must be noted
that Section 137 of the LGC does not prohibit grant of
future exemptions. As earlier discussed, this Court in
It bears
City Government of Quezon City v. Bayan
Telecommunications, Inc.139[25] sustained the power of
Congress to grant tax exemptions over and above the
power of the local government’s delegated power to
tax.

137[23]
City Government of Quezon City v. Bayan Telecommunications, Inc., id.
B. The more pertinent issue now to consider is
at 183-186.
138[24]
Section 8. Tax Provisions. – The grantee, its successors or assigns, shall
whether or not by passing R.A. No. 7966, which
be liable to pay the same taxes on their real estate, buildings and personal
property, exclusive of this franchise, as other persons or corporations are now contains the “in lieu of all taxes” provision, Congress
hereafter may be required by law to pay. In addition thereto, the grantee, its
successors or assigns, shall pay a franchise tax equivalent to three percent intended to exempt ABS-CBN from local franchise tax.
(3%) of all gross receipts of the radio/television business transacted under this
franchise by the grantee, its successors or assigns, and the said percentage
shall be in lieu of all taxes on this franchise or earnings thereof; Provided that
the grantee, its successors or assigns shall continue to be liable for income
taxes under Title II of the National Internal Revenue Code pursuant to Section
2 of Executive Order No. 72 unless the latter enactment is amended or
repealed, in which case the amendment or repeal shall be applicable thereto. 139[25]
Supra note 20.
 Petitioners argue that the “in lieu of all taxes” The basis for the rule on strict construction to
provision in ABS-CBN’s franchise does not expressly statutory provisions granting tax exemptions or
exempt it from payment of local franchise tax. They deductions is to minimize differential treatment and
contend that a tax exemption cannot be created by foster impartiality, fairness and equality of treatment
mere implication and that one who claims tax among taxpayers.142[28] He who claims an exemption
exemptions must be able to justify his claim by clearest from his share of common burden must justify his claim
grant of organic law or statute. that the legislature intended to exempt him by
unmistakable terms. For exemptions from taxation are
Taxes are what civilized people pay for civilized not favored in law, nor are they presumed. They must
society. They are the lifeblood of the nation. Thus, be expressed in the clearest and most unambiguous
statutes granting tax exemptions are construed language and not left to mere implications. It has been
stricissimi juris against the taxpayer and liberally in held that “exemptions are never presumed, the burden
favor of the taxing authority. A claim of tax exemption is on the claimant to establish clearly his right to
must be clearly shown and based on language in law exemption and cannot be made out of inference or
too plain to be mistaken. Otherwise stated, taxation is implications but must be laid beyond reasonable doubt.
the rule, exemption is the exception.140[26] The burden of In other words, since taxation is the rule and exemption
proof rests upon the party claiming the exemption to the exception, the intention to make an exemption
prove that it is in fact covered by the exemption so ought to be expressed in clear and unambiguous
claimed.141[27] terms.143[29]

140[26]
Mactan Cebu International Airport Authority v. Marcos, G.R. No. 120082, 142[28]
Maceda v. Macaraeg, Jr., G.R. No. 88291, May 31, 1991, 197 SCRA 771,
September 11, 1996, 261 SCRA 667, 680. 799, citing Sands, C.D., Statutes and Statutory Construction, Vol. 3, p. 207.
141[27]
Agpalo, R.E., Statutory Construction, 2003 ed., p. 301. 143[29]
See note 27, at 302.
 Section 8 of R.A. No. 7966 imposes on ABS-CBN a uncertainty in the “in lieu of all taxes” provision should
franchise tax equivalent to three (3) percent of all be construed against ABS-CBN. ABS-CBN has the
gross receipts of the radio/television business burden to prove that it is in fact covered by the
transacted under the franchise and the franchise tax exemption so claimed. ABS-CBN miserably failed in this
shall be “in lieu of all taxes” on the franchise or regard.
earnings thereof.
ABS-CBN cites the cases Carcar Electric & Ice
The “in lieu of all taxes” provision in the franchise Plant v. Collector of Internal Revenue,144[30] Manila
of ABS-CBN does not expressly provide what kind of Railroad v. Rafferty,145[31] Philippine Railway Co. v.
taxes ABS-CBN is exempted from. It is not clear Collector of Internal Revenue,146[32] and Visayan Electric
whether the exemption would include both local, Co. v. David147[33] to support its claim that that the “in
whether municipal, city or provincial, and national tax. lieu of all taxes” clause includes exemption from all
What is clear is that ABS-CBN shall be liable to pay taxes.
three (3) percent franchise tax and income taxes under
Title II of the NIRC. But whether the “in lieu of all taxes However, a review of the foregoing case law
provision” would include exemption from local tax is reveals that the grantees’ respective franchises
not unequivocal. expressly exempt them from municipal and provincial
taxes. Said the Court in Manila Railroad v. Rafferty:148[34]
As adverted to earlier, the right to exemption from
local franchise tax must be clearly established and
144[30]
53 O.G. (No. 4) 1068.
cannot be made out of inference or implications but 145[31]
40 Phil 224 (1919).
146[32]
91 Phil 35 (1952).
must be laid beyond reasonable doubt. Verily, the 147[33]
92 Phil. 969 (1953).
148[34]
Supra.
 On the 7th day of July 1906, by an Act of the Electric. Too, the franchise failed to specify the taxing
Philippine Legislature, a special charter was granted to
the Manila Railroad Company. Subsection 12 of Section 1 authority from whose jurisdiction the taxing power is
of said Act (No. 1510) provides that:
withheld, whether municipal, provincial, or national. In
“In consideration of the premises and
of the granting of this concession or fine, since ABS-CBN failed to justify its claim for
franchise, there shall be paid by the grantee
to the Philippine Government, annually, for exemption from local franchise tax, by a grant
the period of thirty (30) years from the date
hereof, an amount equal to one-half (1/2) of expressed in terms “too plain to be mistaken” its claim
one per cent of the gross earnings of the
grantee in respect of the lines covered for exemption for local franchise tax must fail.
hereby for the preceding year; after said
period of thirty (30) years, and for the fifty
(50) years thereafter, the amount so to be
paid annually shall be an amount equal to
C. The “in lieu of all taxes” clause in the franchise
one and one-half (1½) per cent of such gross of ABS-CBN has become functus officio with the
earnings for the preceding year; and after
such period of eighty (80) years, the abolition of the franchise tax on broadcasting
percentage and amount so to be paid
annually by the grantee shall be fixed by the companies with yearly gross receipts exceeding Ten
Philippine Government.
Million Pesos.
Such annual payments, when
promptly and fully made by the grantee,
shall be in lieu of all taxes of every name and
nature – municipal, provincial or central – In its decision dated January 20, 1999, the RTC
upon its capital stock, franchises, right of
way, earnings, and all other property owned held that pursuant to the “in lieu of all taxes” provision
or operated by the grantee under this
concession or franchise.”149[35] (Underscoring contained in Section 8 of R.A. No. 7966, ABS-CBN is
supplied)
exempt from the payment of the local franchise tax.

In the case under review, ABS-CBN’s franchise did The RTC further pronounced that ABS-CBN shall instead

not embody an exemption similar to those in Carcar, be liable to pay a franchise tax of 3% of all gross

Manila Railroad, Philippine Railway, and Visayan receipts in lieu of all other taxes.

149[35]
Manila Railroad v. Rafferty, id. at 226.
 On this score, the RTC ruling is flawed. In keeping
with the laws that have been passed since the grant of
ABS-CBN’s franchise, the corporation should now be
subject to VAT, instead of the 3% franchise tax.
At the time of the enactment of its franchise on
May 3, 1995, ABS-CBN was subject to 3% franchise tax
under Section 117(b) of the 1977 National Internal
Revenue Code (NIRC), as amended, viz.:
SECTION 117. Tax on franchises. – Any provision of
general or special laws to the contrary notwithstanding,
there shall be levied, assessed and collected in respect to
all franchise, upon the gross receipts from the business
covered by the law granting the franchise, a tax in
accordance with the schedule prescribed hereunder:
(a) On electric utilities, city gas, and water
supplies Two (2%) percent
(b) On telephone and/or telegraph systems,
radio and/or broadcasting stations Three
(3%) percent
(c) On other franchises Five (5%) percent.
(Emphasis supplied)
On January 1, 1996, R.A. No. 7716, otherwise
known as the Expanded Value Added Tax Law,150[36] took
effect and subjected to VAT those services rendered by
radio and/or broadcasting stations. Section 3 of R.A.
No. 7716 provides:
Section 3. Section 102 of the National Internal
Revenue Code, as amended is hereby further amended to
read as follows:
SEC. 102. Value-added tax on sale of
services and use or lease of properties. – (a)
Rate and base of tax. – There shall be levied,
assessed and collected, as value-added tax
equivalent to 10% of gross receipts derived
from the sale or exchange of services,
including the use or lease of properties.
The phrase “sale or exchange of
services” means the performance of all kinds
of services in the Philippines, for others for a
fee, remuneration or consideration, including
those performed or rendered by construction
and service contractors; x x x services of
franchise grantees of telephone and
telegraph, radio and television broadcasting
and all other franchise grantees except those
under Section 117 of this Code; x x x
(Emphasis supplied)
Notably, under the same law, “telephone and/or
telegraph systems, broadcasting stations and other
150[36]
Approved on May 5, 1994.
franchise grantees” were omitted from the list of were granted the option to choose between paying 3%
entities subject to franchise tax. The impression was national franchise tax or 10% VAT. Section 9 of R.A.
that these entities were subject to 10% VAT but not to No. 8241 provides:
franchise tax. Only the franchise tax on “electric, gas
and water utilities” remained. Section 12 of R.A. No. SECTION 9. Section 12 of Republic Act No. 7716 is
hereby amended to read as follows:
7716 provides:
“Sec. 12. Section 117 of the National
Internal Revenue Code, as amended, is
hereby further amended to read as follows:
Section 12. Section 117 of the National Internal
Revenue Code, as amended, is hereby further amended “Sec. 117. Tax on franchise. – Any
to read as follows: provision of general or special law to the
contrary, notwithstanding, there shall be
SEC. 117. Tax on Franchises. – Any levied, assessed and collected in respect to
provision of general or special law to the all franchises on radio and/or television
contrary notwithstanding there shall be broadcasting companies whose annual gross
levied, assessed and collected in respect to receipts of the preceding year does not
all franchises on electric, gas and water exceed Ten million pesos
utilities a tax of two percent (2%) on the (P10,000,000.00), subject to Section 107(d)
gross receipts derived from the business of this Code, a tax of three percent (3%) and
covered by the law granting the franchise. on electric, gas and water utilities, a tax of
(Emphasis added) two percent (2%) on the gross receipts
derived from the business covered by the
law granting the franchise: Provided,
Subsequently, R.A. No. 8241151[37] took effect on however, That radio and television
broadcasting companies referred to in this
January 1, 1997152[38] containing more amendments to section, shall have an option to be registered
as a value-added tax payer and pay the tax
the NIRC. Radio and/or television companies whose due thereon: Provided, further, That once the
option is exercised, it shall not be revoked.
annual gross receipts do not exceed P10,000,000.00 (Emphasis supplied)
151[37]
Entitled “An Act Amending Republic Act No. 7716, Otherwise Known as
the Expanded Value-Added Tax Law and Other Pertinent Provisions of the On the other hand, radio and/or television
National Internal Revenue Code, as Amended.” Approved on December 20,
1996.
152[38]
companies with yearly gross receipts exceeding
Published in the Philippine Star on January 9, 1997. Published in the
Official Gazette, Vol. 93, No. 6, p. 1463, on March 10, 1997.
P10,000,000.00 were subject to 10% VAT, pursuant to
Section 102 of the NIRC.
On January 1, 1998, R.A. No. 8424153[39] was passed confirming
the 10% VAT liability of radio and/or television companies with
yearly gross receipts exceeding P10,000,000.00.
R.A. No. 9337 was subsequently enacted and became effective
on July 1, 2005. The said law further amended the NIRC by
increasing the rate of VAT to 12%. The effectivity of the imposition
of the 12% VAT was later moved from January 1, 2006 to February 1,
2006.
In consonance with the above survey of pertinent
laws on the matter, ABS-CBN is subject to the payment
of VAT. It does not have the option to choose between
the payment of franchise tax or VAT since it is a
broadcasting company with yearly gross receipts
exceeding Ten Million Pesos (P10,000,000.00).
153[39]
Otherwise known as the Tax Reform Act of 1997, amended some
provisions of the 1977 NIRC by renumbering Section 117 as 119 and Section
102 as 108.
VAT is a percentage tax imposed on any person
whether or not a franchise grantee, who in the course
of trade or business, sells, barters, exchanges, leases,
goods or properties, renders services. It is also levied
on every importation of goods whether or not in the
course of trade or business. The tax base of the VAT is
limited only to the value added to such goods,
properties, or services by the seller, transferor or
lessor. Further, the VAT is an indirect tax and can be
passed on to the buyer.
The franchise tax, on the other hand, is a
percentage tax imposed only on franchise holders. It is
imposed under Section 119 of the Tax Code and is a
direct liability of the franchise grantee.
The clause “in lieu of all taxes” does not pertain
to VAT or any other tax. It cannot apply when what is
paid is a tax other than a franchise tax. Since the
franchise tax on the broadcasting companies with
yearly gross receipts exceeding ten million pesos has
been abolished, the “in lieu of all taxes” clause has now
become functus officio, rendered inoperative.
 G.R. No. 124557 May 21, 2009

In sum, ABS-CBN’s claims for exemption must fail INTERNAL REVENUE, Petitioner,
vs.
on twin grounds. First, the “in lieu of all taxes” clause COMMISSIONER OF COURT OF APPEALS, COURT OF TAX
APPEALS, ADAMSON MANAGEMENT CORPORATION, LUCAS G.
in its franchise failed to specify the taxes the company
ADAMSON, THERESE JUNE D. ADAMSON, and SARA S. DE LOS
is sought to be exempted from. Neither did it REYES, Respondents.

particularize the jurisdiction from which the taxing DECISION

power is withheld. Second, the clause has become PUNO, C.J.:
functus officio because as the law now stands, ABS-CBN
Before the Court are the consolidated cases of G.R. No. 120935 and G.R. No.
is no longer subject to a franchise tax. It is now liable 124557.

for VAT. G.R. No. 120935 involves a petition for review on certiorari filed by petitioners
LUCAS G. ADAMSON, THERESE JUNE D. ADAMSON, and SARA S. DE
WHEREFORE, the petition is GRANTED and the LOS REYES (private respondents), in their respective capacities as president,
treasurer and secretary of Adamson Management Corporation (AMC) against
appealed Decision REVERSED AND SET ASIDE. The then Commissioner of Internal Revenue Liwayway Vinzons-Chato
petition in the trial court for refund of local franchise (COMMISSIONER), under Rule 45 of the Revised Rules of Court. They seek to
review and reverse the Decision promulgated on March 21, 1995 and Resolution
tax is DISMISSED. issued on July 6, 1995 of the Court of Appeals in CA-G.R. SP No. 35488
(Liwayway Vinzons-Chato, et al. v. Hon. Judge Erna Falloran-Aliposa, et al.).
SO ORDERED.
G.R. No. 124557 is a petition for review on certiorari filed by the Commissioner,
FIRST DIVISION assailing the Decision dated March 29, 1996 of the Court of Appeals in CA-G.R.
SP No. 35520, titled Commissioner of Internal Revenue v. Court of Tax Appeals,
G.R. No. 120935 May 21, 2009 Adamson Management Corporation, Lucas G. Adamson, Therese June D.
Adamson and Sara S. de los Reyes. In the said Decision, the Court of Appeals
LUCAS G. ADAMSON, THERESE JUNE D. ADAMSON, and SARA S. DE upheld the Resolution promulgated on September 19, 1994 by the Court of Tax
LOS REYES, in their capacities as President, Treasurer and Secretary of Appeals (CTA) in C.T.A. Case No. 5075 (Adamson Management Corporation,
Adamson Management Corporation, Petitioners, Lucas G. Adamson, Therese Adamson and Sara de los Reyes v. Commissioner of
vs. Internal Revenue).
COURT OF APPEALS and LIWAYWAY VINZONS-CHATO, in her
capacity as Commissioner of the Bureau of Internal Revenue, Respondents. The facts, as culled from the findings of the appellate court, follow:

x - - - - - - - - - - - - - - - - - - - - - - -x
On June 20, 1990, Lucas Adamson and AMC sold 131,897 common shares of
stock in Adamson and Adamson, Inc. (AAI) to APAC Holding Limited (APAC).
The shares were valued at P7,789,995.00.1 On June 22, 1990, P159,363.21 was
paid as capital gains tax for the transaction.
On October 12, 1990, AMC sold to APAC Philippines, Inc. another 229,870
common shares of stock in AAI for P17,718,360.00. AMC paid the capital gains
tax of P352,242.96.
On October 15, 1993, the Commissioner issued a "Notice of Taxpayer" to AMC,
Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes,
informing them of deficiencies on their payment of capital gains tax and Value
Added Tax (VAT). The notice contained a schedule for preliminary conference.
The events preceding G.R. No. 120935 are the following:
On October 22, 1993, the Commissioner filed with the Department of Justice
(DOJ) her Affidavit of Complaint2 against AMC, Lucas G. Adamson, Therese
June D. Adamson and Sara S. de los Reyes for violation of Sections 45 (a) and
(d)3 , and 1104 , in relation to Section 1005 , as penalized under Section 255,6 and
for violation of Section 2537 , in relation to Section 252 (b) and (d) of the National
Internal Revenue Code (NIRC).8
AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes
filed with the DOJ a motion to suspend proceedings on the ground of prejudicial
question, pendency of a civil case with the Supreme Court, and pendency of their
letter-request for re-investigation with the Commissioner. After the preliminary
investigation, State Prosecutor Alfredo P. Agcaoili found probable cause. The
Motion for Reconsideration against the findings of probable cause was denied by
the prosecutor.
On April 29, 1994, Lucas G. Adamson, Therese June D. Adamson and Sara S. de
los Reyes were charged before the Regional Trial Court (RTC) of Makati, Branch
150 in Criminal Case Nos. 94-1842 to 94-1846. They filed a Motion to Dismiss or
Suspend the Proceedings. They invoked the grounds that there was yet no final
assessment of their tax liability, and there were still pending relevant Supreme
Court and CTA cases. Initially, the trial court denied the motion. A Motion for
Reconsideration was however filed, this time assailing the trial court’s lack of
jurisdiction over the nature of the subject cases. On August 8, 1994, the trial court
granted the Motion. It ruled that the complaints for tax evasion filed by the
Commissioner should be regarded as a decision of the Commissioner regarding
the tax liabilities of Lucas G. Adamson, Therese June D. Adamson and Sara S. de
los Reyes, and appealable to the CTA. It further held that the said cases cannot
proceed independently of the assessment case pending before the CTA, which has
jurisdiction to determine the civil and criminal tax liability of the respondents
therein.
On October 10, 1994, the Commissioner filed a Petition for Review with the
Court of Appeals assailing the trial court’s dismissal of the criminal cases. She
averred that it was not a condition prerequisite that a formal assessment should
first be given to the private respondents before she may file the aforesaid criminal
complaints against them. She argued that the criminal complaints for tax evasion
may proceed independently from the assessment cases pending before the CTA.
On March 21, 1995, the Court of Appeals reversed the trial court’s decision and
reinstated the criminal complaints. The appellate court held that, in a criminal
prosecution for tax evasion, assessment of tax deficiency is not required because
the offense of tax evasion is complete or consummated when the offender has
knowingly and willfully filed a fraudulent return with intent to evade the tax.9 It
ruled that private respondents filed false and fraudulent returns with intent to
evade taxes, and acting thereupon, petitioner filed an Affidavit of Complaint with
the Department of Justice, without an accompanying assessment of the tax
deficiency of private respondents, in order to commence criminal action against
the latter for tax evasion.10
Private respondents filed a Motion for Reconsideration, but the trial court denied
the motion on July 6, 1995. Thus, they filed the petition in G.R. No. 120935,
raising the following issues:
1. WHETHER OR NOT THE RESPONDENT HONORABLE COURT OF
APPEALS ERRED IN APPLYING THE DOCTRINE IN UNGAB V. CUSI
(Nos. L-41919-24, May 30, 1980, 97 SCRA 877) TO THE CASE AT BAR.
2. WHETHER OR NOT AN ASSESSMENT IS REQUIRED UNDER THE
SECOND CATEGORY OF THE OFFENSE IN SECTION 253 OF THE NIRC.
3. WHETHER OR NOT THERE WAS A VALID ASSESSMENT MADE BY
THE COMMISSIONER IN THE CASE AT BAR.
4. WHETHER OR NOT THE FILING OF A CRIMINAL COMPLAINT
SERVES AS AN IMPLIED ASSESSMENT ON THE TAX LIABILITY OF
THE TAXPAYER.
5. WHETHER OR NOT THE FILING OF THE CRIMINAL INFORMATION
FOR TAX EVASION IN THE TRIAL COURT IS PREMATURE BECAUSE
THERE IS YET NO BASIS FOR THE CRIMINAL CHARGE OF WILLFULL
INTENT TO EVADE THE PAYMENT OF A TAX.
6. WHETHER OR NOT THE DOCTRINES LAID DOWN IN THE CASES OF
YABES V. FLOJO (No. L-46954, July 20, 1982, 115 SCRA 286) AND CIR V.
UNION SHIPPING CORP. (G.R. No. 66160, May 21, 1990, 185 SCRA 547)
ARE APPLICABLE TO THE CASE AT BAR.
7. WHETHER OR NOT THE COURT OF TAX APPEALS HAS
JURISDICTION OVER THE DISPUTE ON WHAT CONSTITUTES THE
PROPER TAXES DUE FROM THE TAXPAYER.
In parallel circumstances, the following events preceded G.R. No. 124557:
On December 1, 1993, AMC, Lucas G. Adamson, Therese June D. Adamson and
Sara S. de los Reyes filed a letter request for re-investigation with the
Commissioner of the "Examiner’s Findings" earlier issued by the Bureau of
Internal Revenue (BIR), which pointed out the tax deficiencies.
On March 15, 1994 before the Commissioner could act on their letter-request,
AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes
filed a Petition for Review with the CTA. They assailed the Commissioner’s
finding of tax evasion against them. The Commissioner moved to dismiss the
petition, on the ground that it was premature, as she had not yet issued a formal
assessment of the tax liability of therein petitioners. On September 19, 1994, the
CTA denied the Motion to Dismiss. It considered the criminal complaint filed by
the Commissioner with the DOJ as an implied formal assessment, and the filing of
the criminal informations with the RTC as a denial of petitioners’ protest
regarding the tax deficiency.
The Commissioner repaired to the Court of Appeals on the ground that the CTA
acted with grave abuse of discretion. She contended that, with regard to the
protest provided under Section 229 of the NIRC, there must first be a formal
assessment issued by the Commissioner, and it must be in accord with Section 6
of Revenue Regulation No. 12-85. She maintained that she had not yet issued a
formal assessment of tax liability, and the tax deficiency amounts mentioned in
her criminal complaint with the DOJ were given only to show the difference
between the tax returns filed and the audit findings of the revenue examiner.
The Court of Appeals sustained the CTA’s denial of the Commissioner’s Motion
to Dismiss. Thus, the Commissioner filed the petition for review under G.R. No.
124557, raising the following issues:
1. WHETHER OR NOT THE INSTANT PETITION SHOULD BE DISMISSED
FOR FAILURE TO COMPLY WITH THE MANDATORY REQUIREMENT
OF A CERTIFICATION UNDER OATH AGAINST FORUM SHOPPING;
2. WHETHER OR NOT THE CRIMINAL CASE FOR TAX EVASION IN THE
CASE AT BAR CAN PROCEED WITHOUT AN ASSESSMENT;
3. WHETHER OR NOT THE COMPLAINT FILED WITH THE
DEPARTMENT OF JUSTICE CAN BE CONSTRUED AS AN IMPLIED
ASSESSMENT; and
4. WHETHER OR NOT THE COURT OF TAX APPEALS HAS
JURISDICTION TO ACT ON PRIVATE RESPONDENTS’ PETITION FOR
REVIEW FILED WITH THE SAID COURT.
The issues in G.R. No. 124557 and G.R. No. 120935 can be compressed into
three:
1. WHETHER THE COMMISSIONER HAS ALREADY RENDERED AN
ASSESSMENT (FORMAL OR OTHERWISE) OF THE TAX LIABILITY OF
AMC, LUCAS G. ADAMSON, THERESE JUNE D. ADAMSON AND SARA
S. DE LOS REYES;
2. WHETHER THERE IS BASIS FOR THE CRIMINAL CASES FOR TAX
EVASION TO PROCEED AGAINST AMC, LUCAS G. ADAMSON,
THERESE JUNE D. ADAMSON AND SARA S. DE LOS REYES; and
3. WHETHER THE COURT OF TAX APPEALS HAS JURISDICTION TO
TAKE COGNIZANCE OF BOTH THE CIVIL AND THE CRIMINAL
ASPECTS OF THE TAX LIABILITY OF AMC, LUCAS G. ADAMSON,
THERESE JUNE D. ADAMSON AND SARA S. DE LOS REYES.
The case of CIR v. Pascor Realty, et al.11 is relevant. In this case, then BIR
Commissioner Jose U. Ong authorized revenue officers to examine the books of
accounts and other accounting records of Pascor Realty and Development
Corporation (PRDC) for 1986, 1987 and 1988. This 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 filed a criminal complaint before the DOJ
against 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 filed an Urgent Request for Reconsideration/Reinvestigation
disputing the tax assessment and tax liability.
The Commissioner denied the urgent request for reconsideration/reinvestigation
because she had not yet issued a formal assessment.
Private respondents then elevated the Decision of the Commissioner to the CTA
on a petition for review. The Commissioner 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 yet no formal assessment issued against the petitioners. The
CTA denied the said motion to dismiss and ordered the Commissioner to file an
answer within thirty (30) days. The Commissioner did not file an answer nor did
she move to reconsider the resolution. Instead, the Commissioner filed a petition
for review of the CTA decision with the Court of Appeals. The Court of Appeals
upheld the CTA order. However, this Court reversed the Court of Appeals
decision and the CTA order, and ordered the dismissal of the petition. We held:
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.
Neither the NIRC nor the revenue regulations governing the protest of
assessments12 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.13
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
20314 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 222,15 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 22816 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.17
In the present case, the revenue officers’ Affidavit merely contained a
computation of respondents’ tax liability.lawphil.net 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."18
"Fixes the liability of the taxpayer and ascertains the facts and furnishes the data
for the proper presentation of tax rolls."19
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.
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.
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.
In the cases at bar, the Commissioner denied that she issued a formal assessment
of the tax liability of AMC, Lucas G. Adamson, Therese June D. Adamson and
Sara S. de los Reyes. She admits though that she wrote the recommendation
letter22 addressed to the Secretary of the DOJ recommending the filing of criminal
complaints against AMC and the aforecited persons for fraudulent returns and tax
evasion.
The first issue is whether the Commissioner’s recommendation letter can be
considered as a formal assessment of private respondents’ tax liability.
In the context in which it is used in the NIRC, an assessment is a written notice
and demand made by the BIR on the taxpayer for the settlement of a due tax
liability that is there definitely set and fixed. A written communication containing
a computation by a revenue officer of the tax liability of a taxpayer and giving
him an opportunity to contest or disprove the BIR examiner’s findings is not an
assessment since it is yet indefinite.23
We rule that the recommendation letter of the Commissioner cannot be
considered a formal assessment. Even a cursory perusal of the said letter would
reveal three key points:
1. It was not addressed to the taxpayers.
2. There was no demand made on the taxpayers to pay the tax liability, nor
a period for payment set therein.
3. The letter was never mailed or sent to the taxpayers by the
Commissioner.
In fine, the said recommendation letter served merely as the prima facie basis for
filing criminal informations that the taxpayers had violated Section 45 (a) and (d),
and 110, in relation to Section 100, as penalized under Section 255, and for
violation of Section 253, in relation to Section 252 9(b) and (d) of the Tax Code.24
The next issue is whether the filing of the criminal complaints against the private
respondents by the DOJ is premature for lack of a formal assessment.
Section 269 of the NIRC (now Section 222 of the Tax Reform Act of 1997)
provides:
Sec. 269. Exceptions as to period of limitation of assessment and collection of
taxes.-(a) In the case of a false or fraudulent return with intent to evade tax or of
failure to file a return, the tax may be assessed, or a proceeding in court after the
collection of such tax may be begun without assessment, at any time within ten
years after the discovery of the falsity, fraud or omission: Provided, That in a
fraud assessment which has become final and executory, the fact of fraud shall be
judicially taken cognizance of in the civil or criminal action for collection
thereof…
The law is clear. When fraudulent tax returns are involved as in the cases at bar, a
proceeding in court after the collection of such tax may be begun without
assessment. Here, the private respondents had already filed the capital gains tax
return and the VAT returns, and paid the taxes they have declared due therefrom.
Upon investigation of the examiners of the BIR, there was a preliminary finding
of gross discrepancy in the computation of the capital gains taxes due from the
sale of two lots of AAI shares, first to APAC and then to APAC Philippines,
Limited. The examiners also found that the VAT had not been paid for VAT-
liable sale of services for the third and fourth quarters of 1990. Arguably, the
gross disparity in the taxes due and the amounts actually declared by the private
respondents constitutes badges of fraud.
Thus, the applicability of Ungab v. Cusi25 is evident to the cases at bar. In this
seminal case, this Court ruled that there was no need for precise computation and
formal assessment in order for criminal complaints to be filed against him. It
quoted Merten’s Law of Federal Income Taxation, Vol. 10, Sec. 55A.05, p. 21,
thus:
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.
This hoary principle still underlies Section 269 and related provisions of the
present Tax Code.
We now go to the issue of whether the CTA has no jurisdiction to take cognizance
of both the criminal and civil cases here at bar.1avvphi1
Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals) as
amended, the rulings of the Commissioner are appealable to the CTA, thus:
SEC. 7. Jurisdiction. – The Court of Tax Appeals shall exercise 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 imposed in relation thereto, or other matters arising under the National
Internal Revenue Code or other laws or part of law administered by the Bureau of
Internal Revenue;
Republic Act No. 8424, titled "An Act Amending the National Internal Revenue
Code, As Amended, And For Other Purposes," later expanded the jurisdiction of
the Commissioner and, correspondingly, that of the CTA, thus:
SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax
Cases. – The power to interpret the provisions of this Code and other tax laws
shall be under the exclusive and original jurisdiction of the Commissioner, subject
to review by the Secretary of Finance.
The power to decide disputed assessments, refunds of internal revenue taxes, fees
or other charges, penalties imposed in relation thereto, or other matters arising
under this Code or other laws or portions thereof administered by the Bureau of
Internal Revenue is vested in the Commissioner, subject to the exclusive appellate
jurisdiction of the Court of Tax Appeals.
The latest statute dealing with the jurisdiction of the CTA is Republic Act No.
9282.26 It provides:
SEC. 7. Section 7 of the same Act is hereby amended to read as follows:
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;
(3) Decisions, orders or resolutions of the Regional Trial Courts in local
tax cases originally decided or resolved by them in the exercise of their
original or appellate jurisdiction;
xxx
(b) Jurisdiction over cases involving criminal offenses as herein provided:
(1) Exclusive original jurisdiction over all criminal offenses arising from
violations of the National Internal Revenue Code or Tariff and Customs
Code and other laws administered by the Bureau of Internal Revenue or
the Bureau of Customs: Provided, however, That offenses or felonies
mentioned in this paragraph where the principal amount of taxes and fees,
exclusive of charges and penalties, claimed is less than One million pesos
(P1,000,000.00) or where there is no specified amount claimed shall be
tried by the regular courts and the jurisdiction of the CTA shall be
appellate. Any provision of law or the Rules of Court to the contrary
notwithstanding, the criminal action and the corresponding civil action for
the recovery of civil liability for taxes and penalties shall at all times be
simultaneously instituted with, and jointly determined in the same
proceeding by the CTA, the filing of the criminal action being deemed to
necessarily carry with it the filing of the civil action, and no right to
reserve the filling of such civil action separately from the criminal action
will be recognized.
(2) Exclusive appellate jurisdiction in criminal offenses:
(a) Over appeals from the judgments, resolutions or orders of the Regional
Trial Courts in tax cases originally decided by them, in their respected
territorial jurisdiction.
(b) Over petitions for review of the judgments, resolutions or orders of the
Regional Trial Courts in the exercise of their appellate jurisdiction over
tax cases originally decided by the Metropolitan Trial Courts, Municipal
Trial Courts and Municipal Circuit Trial Courts in their respective
jurisdiction.
(c) Jurisdiction over tax collection cases as herein provided:
 (1) Exclusive original jurisdiction in tax collection cases involving
final and executory assessments for taxes, fees, charges and
penalties: Provided, however, That collection cases where the
principal amount of taxes and fees, exclusive of charges and
penalties, claimed is less than One million pesos (P1,000,000.00)
shall be tried by the proper Municipal Trial Court, Metropolitan
Trial Court and Regional Trial Court.
(2) Exclusive appellate jurisdiction in tax collection cases:
(a) Over appeals from the judgments, resolutions or orders
of the Regional Trial Courts in tax collection cases
originally decided by them, in their respective territorial
jurisdiction.
1. In G.R. No. 120935, AFFIRMING the CA decision dated March 21,
1995, which set aside the Regional Trial Court’s Order dated August 8,
1994, and REINSTATING Criminal Case Nos. 94-1842 to 94-1846 for
further proceedings before the trial court; and
2. In G.R. No. 124557, REVERSING and SETTING ASIDE the Decision
of the Court of Appeals dated March 29, 1996, and ORDERING the
dismissal of C.T.A. Case No. 5075.
No costs.
SO ORDERED.

(b) Over petitions for review of the judgments, resolutions

or orders of the Regional Trial Courts in the exercise of
their appellate jurisdiction over tax collection cases
originally decided by the Metropolitan Trial Courts,
Municipal Trial Courts and Municipal Circuit Trial Courts,
in their respective jurisdiction.

These laws have expanded the jurisdiction of the CTA. However, they did not
change the jurisdiction of the CTA to entertain an appeal only from a final
decision or assessment of the Commissioner, or in cases where the Commissioner
has not acted within the period prescribed by the NIRC. In the cases at bar, the
Commissioner has not issued an assessment of the tax liability of private
respondents.

Finally, we hold that contrary to private respondents’ stance, the doctrines laid
down in CIR v. Union Shipping Co. and Yabes v. Flojo are not applicable to the
cases at bar. In these earlier cases, the Commissioner already rendered an
assessment of the tax liabilities of the delinquent taxpayers, for which reason the
Court ruled that the filing of the civil suit for collection of the taxes due was a
final denial of the taxpayers’ request for reconsideration of the tax assessment.

IN VIEW WHEREOF, premises considered, judgment is rendered:

 protests 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.

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 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.

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
G.R. No. 128315 June 29, 1999 books of accounts and other accounting records of Pascor Realty
and Development Corporation. (PRDC) for the years ending 1986,
COMMISSIONER OF INTERNAL REVENUE, petitioner, 1987 and 1988. The said examination resulted in a recommendation
vs. for the issuance of an assessment in the amounts of P7,498,434.65
PASCOR REALTY AND DEVELOPMENT CORPORATION, ROGELIO A. DIO and and P3,015,236.35 for the years 1986 and 1987, respectively.
VIRGINIA S. DIO, respondents.
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,
PANGANIBAN, J.: alleging evasion of taxes in the total amount of P10,513,671 .00.
Private respondents PRDC, et. al. filed an Urgent Request for
An assessment contains not only a computation of tax liabilities, but also a demand Reconsideration/Reinvestigation disputing the tax assessment and
for payment within a prescribed period. It also signals the time when penalties 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. 1âwphi1.nêt
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 of the 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.
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 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 anassessment. 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:
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 v. 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.
Issues
Petitioners submit for the consideration of this Court 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 criminal revenue Complaint filed 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.
We agree with petitioner. Neither the NIRC nor the 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 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 rates as
may be prescribed by rules and regulations, is to be collected form 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.
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 NLRC, 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 ESGUERRA, J.:p
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. Petitioner, as administrator of the estate of the deceased, Matias H. Aznar, seeks a
The criminal charge is filed directly with the DOJ. Thereafter, the taxpayer is notified review and nullification of the decision of the Court of Tax Appeals in C.T.A. Case No.
that a criminal case had been filed against him, not that the commissioner has issued 109, modifying the decision of respondent Commissioner of Internal Revenue and
an assessment. It must be stressed that a criminal complaint is instituted not to ordering the petitioner to pay the government the sum of P227,691.77 representing
deficiency income taxes for the years 1946 to 1951, inclusive, with the condition that if the
demand payment, but to penalize the taxpayer for violation of the Tax Code. said amount is not paid within thirty days from the date the decision becomes final, there
shall be added to the unpaid amount the surcharge of 5%, plus interest at the rate of 12%
WHEREFORE, the petition is hereby GRANTED. The assailed Decision is per annum from the date of delinquency to the date of payment, in accordance with
REVERSED and SET ASIDE. CTA Case No. 5271 is likewise DISMISSED. No Section 51 of the National Internal Revenue Code, plus costs against the petitioner.
costs.
It is established that the late Matias H. Aznar who died on May 18, 1958, predecessor in
interest of herein petitioner, during his lifetime as a resident of Cebu City, filed his income
SO ORDERED. tax returns on the cash and disbursement basis, reporting therein the following:
Y Net Amo Ex
Vitug, Purisima and Gonzaga-Reyes, JJ., concur. ea Income unt hibi
r
of t
Romero, J., abroad on official business. Tax
Paid

1 P12,82 P11 pp.

9 2.00 4.66 85-
4 88
5 B.I.
R.
rec.

1 9,910.9 114. 38-

9 4 66 A
4 (pp
6 .
329
G.R. No. L-20569 August 23, 1974
-
332
JOSE B. AZNAR, in his capacity as Administrator of the Estate of the deceased, B.I.
Matias H. Aznar, petitioner, R
vs. rec.
COURT OF TAX APPEALS and COLLECTOR OF INTERNAL REVENUE, respondents. )

Sato, Enad Garcia for petitioner. 1 10,200. 132. 39

9 00 00 (pp
4 .
Office of the Solicitor General Arturo A. Alafriz, Solicitor Alejandro B. Afurong and Special
7 75-
Attorney Librada R. Natividad for respondents.
78
B.I.
R
rec.
 Based on the above findings of Examiner Guerrero, respondent Commissioner, in his letter dated
)
November 28, 1952, notified the taxpayer (Matias H. Aznar) of the assessed tax delinquency to the
amount of P723,032.66, plus compromise penalty. The taxpayer requested a reinvestigation which
1 9,148.3 68.9 40
was granted for the purpose of verifying the merits of the various objections of the taxpayer to the
9 4 0 (pp
deficiency income tax assessment of November 28, 1952.
4 .
8 70-
73 After the reinvestigation, another deficiency assessment to the reduced amount of P381,096.07
B.I. dated February 16, 1955, superseded the previous assessment and notice thereof was received by
R. Matias H. Aznar on March 2, 1955.
rec.
) The new deficiency assessment was based on the following computations:

1 8,990.6 59.7 41
1946
9 6 2 (pp
4 .
9 64- Net income per return ........................ P9,910.94
67 Add: Under declared income .............. 22,559.94
B.I. Net income per investigation............... 32,470.45
R.
rec. Deduct: Income tax liability
) per return as assessed ...................................................... 114.66
Balance of tax due ........................................................... P3,687.10
1 8,364.5 28.2 42 Add: 50% surcharge ........................................................ 1,843.55
9 0 2 (pp DEFICIENCY INCOME TAX ...................................... P5,530.65
5 .
0 59-
1947
62,
BIR
rec. Net income per return ..................................................... P10,200.00
) Add: Under declared income ............................................ 90,413.56
Net income per reinvestigation ....................................... P100,613.56
1 6,800.0 non 43 Deduct: Personal and additional exemption ...................... 7,000.00
9 0 e (pp Amount of income subject to tax ...................................... P93,613.56
5 . Total tax liability ............................................................... P24,753.15
1 54- Deduct: Income tax liability per return as assessed ............ 132.00
57 Balance of tax due ........................................................... P24,621.15
BIR Add: 50% surcharge ........................................................ 12,310.58 DEFICIENCY INCOME
rec. TAX ...................................... P36,931.73
).
1948
The Commissioner of Internal Revenue having his doubts on the veracity of the reported income of
one obviously wealthy, pursuant to the authority granted him by Section 38 of the National Internal Net income per return ...................................................... P9,148.34
Revenue Code, caused B.I.R. Examiner Honorio Guerrero to ascertain the taxpayer's true income Add: Under declared income ............................................. 15,624.63
for said years by using the net worth and expenditures method of tax investigation. The assets and Net income per reinvestigation .......................................... P24,772.97
liabilities of the taxpayer during the above-mentioned years were ascertained and it was discovered Deduct: Personal and additional exemptions ...................... 7,000.00
that from 1946 to 1951, his net worth had increased every year, which increases in net worth was Amount of income subject to tax ....................................... P17,772.97
very much more than the income reported during said years. The findings clearly indicated that the Total tax liability ............................................................... 2,201.40
taxpayer did not declare correctly the income reported in his income tax returns for the aforesaid Deduct: Income tax liability per return as assessed ............ 68.90
years. Balance of tax due ........................................................... P2,132.500
Add: 50% surcharge ........................................................ 1,066.25 DEFICIENCY INCOME
TAX ...................................... P3,198.75
 1949
Net income per return ....................................................... P9,990.66
Add: Under declared income ............................................. 105,418.53
Net income per reinvestigation .......................................... 114,409.19
Deduct: Personal and additional exemptions ...................... P7,000.00
Amount of income subject to tax ....................................... P107,409.19
Total tax liability ............................................................... P30,143.68
Deduct: Income tax liability per return as assessed ............. 59.72
Balance of tax due ............................................................ P30,083.96
Add: 50% surcharge ......................................................... 15,041.98 DEFICIENCY INCOME
TAX ....................................... P45,125.94
1950
Net income per return ....................................................... P8,364.50
Add: Under declared income ............................................. 365,578.76
Net income per reinvestigation .......................................... P373,943.26
Deduct: Personal and additional exemptions ...................... 7,800.00
Amount of income subject to tax ....................................... P366,143.26
Total tax liability ............................................................... P185,883.00
Deduct: Income tax liability per return as assessed ............. 28.00
Balance of tax due ............................................................ P185,855.00
Add: 50% surcharge ......................................................... 92,928.00 DEFICIENCY INCOME
TAX ....................................... P278,783.00
1951
Net income per return ........................................................ P6,800.00
Add: Under declared income ............................................... 33,355.80
Net income per reinvestigation ............................................ P40,155.80
Deduct: Personal and additional exemptions ........................ 7,200.00
Amount of income subject to tax ......................................... P32,955.80
Total tax liability .................................................................. P7,684.00
Deduct: Income tax liability per return as assessed ............... - o - .
Balance of tax due .............................................................. P7,684.00
Add: 50% surcharge ........................................................... 3,842.00 DEFICIENCY INCOME
TAX .......................................... P11,526.00
SUMMARY
1946
.... P5,530.65
1947 .... 36,931.73
1948 .... 3,198.75
1949 .... 45,125.94
1950 .... 278,783.00
1951 .... 11,526.00
Total .... P381,096.07
In determining the unreported income, the respondent Commissioner of Internal Revenue resorted
to the networth method which is based on the following computations:
1945
Real estate inventory ................................ P64,738.00
Other assets ............................................. 37,606.87
Total assets ............................................ P102,344.87
Less: Depreciation allowed ...................... 2,027.00
Networth as of Dec. 31, 1945 ................ P100,316.97
1946
Real estate inventory ................................. P86,944.18
Other assets ............................................. 60,801.65
Total assets ............................................. P147,745.83
Less: Depreciation allowed ...................... 4,875.41
Net assets ................................................ P142,870.42
Less: Liabilities .................. P17,000.00
Net Worth as of
Jan. 1, 1946 ................... P100,316.97 P117,316.97
Increase in networth ................................. 25,553.45
Add: Estimated living expenses ................. 6,917.00
Net income .............................................. P32,470.45
1947
Real estate inventory .................................. P237,824.18
Other assets ............................................... 54,495.52
Total assets ............................................... P292,319.70
Less: Depreciation allowed ......................... 12,835.72
Net assets .................................................. 279,483.98
Less: Liabilities ................... P60,000.00
Networth as of
Jan. 1, 1947 ........................ 125,870.42 P185,870.42
Increase in networth ................................... P93,613.56
Add: Estimated living expenses ................... 7,000.00
Net income ................................................P100,613.56
1948
Real estate inventory .................................. P244,824.18
Other assets .............................................. 118,720.60
Total assets ............................................... P363,544.78
Less: Depreciation allowed ........................ 20,936.03
Net assets ................................................. P342,608.75
Less: Liabilities ................... P105,351.80
Networth as of
Jan. 1, 1948 ...................... 219,483.98 P324,835.78
Increase in networth ................................... P17,772.97
Add: Estimated living expenses ................... 7,000.00
Net income ................................................ P24,772.97
1949
Real estate inventory ................................. P400,515.52
Investment in schools and other colleges .... 23,105.29
Other assets ............................................. 70,311.00
Total assets ............................................... P493,931.81
Less: Depreciation allowed ........................ 32,657.08
Net assets ................................................. P461.274.73
Less; Liabilities .................. P116,608.59
Networth as of
Jan. 1, 1949 ...................... 237,256.95 P353,865.54
Increase in networth .................................. P107,409.19
Add: Estimated living expenses .................. 7,000.00
Net income ............................................... P114,409.19
1950
Real estate inventory .................................. P412,465.52
Investment in Schools and
other colleges ................................ 193,460.99
October assets .......................................... 310,788.87
Total assets ............................................... P916,715.38
Less; Depreciation allowed ........................ 47,561.99
Net assets ................................................. P869,153.39
Less: Liabilities .................. P158,343.99
Networth as of Jan. 1, 1950 ... 344,666.14 P503,010.13
Increase in networth ................................... P366,143.26
Add: Estimated living expenses ................... 7,800.00
Net income ................................................. P373,943.26
1951
Real estate inventory ................................... P412,465.52
Investment in schools and other colleges ..... 214,016.21
Other assets ............................................... 320,209.40
Total assets ................................................ P946,691.13
Less: Depreciation allowed ......................... 62,466.90
Net assets .................................................. P884,224.23
Less: Liabilities ........................................... P140,459.03
Networth as of
Jan. 1, 1951 ................ 710,809.40 P851,268.43
Increase in networth .................................... P32,955.80
Add: Estimated living expenses .................... 7,200.00
Net income ................................................. P40,155.80
(Exh. 45-B, BIR rec. p. 188)
On February 20, 1953, respondent Commissioner of Internal Revenue, thru the City Treasurer of
Cebu, placed the properties of Matias H. Aznar under distraint and levy to secure payment of the
deficiency income tax in question. Matias H. Aznar filed his petition for review of the case with the
Court of Tax Appeals on April 1, 1955, with a subsequent petition immediately thereafter to restrain
respondent from collecting the deficiency tax by summary method, the latter petition being granted
on February 8, 1956, per C.T.A. resolution, without requiring petitioner to file a bond. Upon review,
this Court set aside the C.T.A. resolution and required the petitioner to deposit with the Court of
Tax Appeals the amount demanded by the Commissioner of Internal Revenue for the years 1949 to
1951 or furnish a surety bond for not more than double the amount.
On March 5, 1962, in a decision signed by the presiding judge and the two associate judges of the
Court of Tax Appeals, the lower court concluded that the tax liability of the late Matias H. Aznar for
the year 1946 to 1951, inclusive should be P227,788.64 minus P96.87 representing the tax credit
for 1945, or P227,691.77, computed as follows:
1946
Net income per return .............................................. P9,910.94
Add: Under declared income ..................................... 22,559.51
Net income ............................................................ P32,470.45
Less: Personal and additional exemptions .................. 6,917.00
Income subject to tax ............................................. P25,553.45
Tax due thereon ...................................................... P3,801.76
Less: Tax already assessed ...................................... 114.66
Balance of tax due .................................................... P3,687.10
Add: 50% surcharge ................................................. 1,843.55
Deficiency income tax ................................................ P5,530.65
1947
Net income per return ............................................ P10,200.00
Add: Under declared income .................................. 57,551.19
Net income ........................................................... P67,751.19
Less: Personal and additional exemptions ............... 7,000.00
Income subject to tax ............................................. P60,751.19
Tax due thereon ..................................................... P13,420.38
Less: Tax already assessed ..................................... P132.00
Balance of tax due ................................................... P13,288.38
Add: 50% surcharge ................................................ 6,644.19
Deficiency income tax .............................................. P19,932.57
 1948
Net income per return .............................................. P9,148.34
Add: Under declared income ..................................... 8,732.10
Net income ............................................................ P17,880.44
Less: Personal and additional exemptions ................. 7,000.00
Income subject to tax .............................................. P10,880.44
Tax due thereon ...................................................... P1,029.67
Less: Tax already assessed ....................................... 68.90
Balance of tax due .................................................... 960.77
Add: 50% surcharge ................................................. 480.38
Deficiency income tax ............................................... P1,441.15
1949
Net income per return ................................................. P8,990.66
Add: under declared income ......................................... 43,718.53
Net income ............................................................... P52,709.19
Less: Personal and additional exemptions .................... 7,000.00
Income subject to tax ................................................. P45,709.19
Tax due thereon ......................................................... P8,978.57
Less: Tax already assessed ......................................... 59.72
Balance of tax due ....................................................... P8,918.85
Add: 50% surcharge .................................................... 4,459.42
Deficiency income tax ................................................. P13,378.27
1950
Net income per return .................................................. P6,800.00
Add: Under declared income ......................................... 33,355.80
Net income ................................................................. P40,155.80
Less: Personal and additional exemptions ...................... 7,200.00
Income subject to tax .................................................. P32,955.80
Tax due thereon ........................................................... P7,684.00
Less: Tax already assessed ........................................... -o- .
Balance of tax due ........................................................ P7,684.00
Add: 50% surcharge .................................................... 3,842.00
Deficiency income tax .................................................. P11,526.00
1951
Net income per return ................................................... P8,364.50
Add: Under declared income ........................................ 246,449.06
Net income ............................................................... P254.813.56
Less: Personal and additional exemptions .................... 7,800.00
Income subject to tax ................................................ P247,013.56
Tax due thereon ........................................................ P117,348.00
Less: Tax already assessed ........................................ 28.00
Balance of tax due ..................................................... P117,320.00
Add: 50% surcharge .................................................. 58,660.00
Deficiency income tax ................................................ P175 980.00
SUMMARY
1946 P5,530.65
1947 19,932.57
1948 1,441.15
1949 13,378.27
1950 175,980.00
1951 11,526.00
P227,788.64.
I
The first vital issue to be decided here is whether or not the right of the Commissioner of Internal
Revenue to assess deficiency income taxes of the late Matias H. Aznar for the years 1946, 1947,
and 1948 had already prescribed at the time the assessment was made on November 28, 1952.
Petitioner's contention is that the provision of law applicable to this case is the period of five years
limitation upon assessment and collection from the filing of the returns provided for in See. 331 of
the National Internal Revenue Code. He argues that since the 1946 income tax return could be
presumed filed before March 1, 1947 and the notice of final and last assessment was received by
the taxpayer on March 2, 1955, a period of about 8 years had elapsed and the five year period
provided by law (Sec. 331 of the National Internal Revenue Code) had already expired. The same
argument is advanced on the taxpayer's return for 1947, which was filed on March 1, 1948, and the
return for 1948, which was filed on February 28, 1949. Respondents, on the other hand, are of the
firm belief that regarding the prescriptive period for assessment of tax returns, Section 332 of the
National Internal Revenue Code should apply because, as in this case, "(a) In the case of a false or
fraudulent return with intent to evade tax or of a 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" (Sec. 332 (a) of the NIRC).
Petitioner argues that Sec. 332 of the NIRC does not apply because the taxpayer did not file false
and fraudulent returns with intent to evade tax, while respondent Commissioner of Internal
Revenue insists contrariwise, with respondent Court of Tax Appeals concluding that the very
"substantial under declarations of income for six consecutive years eloquently demonstrate the
falsity or fraudulence of the income tax returns with an intent to evade the payment of tax."
To our minds we can dispense with these controversial arguments on facts, although we do not
deny that the findings of facts by the Court of Tax Appeals, supported as they are by very
 substantial evidence, carry great weight, by resorting to a proper interpretation of Section 332 of
the NIRC. We believe that the proper and reasonable interpretation of said provision should be that
in the three different cases of (1) false return, (2) fraudulent return with intent to evade tax, (3)
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 (1)
falsity, (2) fraud, (3) omission. Our stand that the law should be interpreted to mean a separation of
the three different situations of false return, fraudulent return with intent to evade tax, and failure to
file a return is strengthened immeasurably by the last portion of the provision which segregates the
situations into three different classes, namely "falsity", "fraud" and "omission". That there is a
difference between "false return" and "fraudulent return" cannot be denied. While the first merely
implies deviation from the truth, whether intentional or not, the second implies intentional or
deceitful entry with intent to evade the taxes due.
The ordinary period of prescription of 5 years within which to assess tax liabilities under Sec. 331 of
the NIRC should be applicable to normal circumstances, but whenever the government is placed at
a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities due to
false returns, fraudulent return intended to evade payment of tax or failure to file returns, the period
of ten years provided for in Sec. 332 (a) NIRC, from the time of the discovery of the falsity, fraud or
omission even seems to be inadequate and should be the one enforced.
There being undoubtedly false tax returns in this case, We affirm the conclusion of the respondent
Court of Tax Appeals that Sec. 332 (a) of the NIRC should apply and that the period of ten years
within which to assess petitioner's tax liability had not expired at the time said assessment was
made.
II
As to the alleged errors committed by the Court of Tax Appeals in not deducting from the alleged
undeclared income of the taxpayer for 1946 the proceeds from the sale of jewelries valued at
P30,000; in not excluding from other schedules of assets of the taxpayer (a) accounts receivable
from customers in the amount of P38,000 for 1948, P126,816.50 for 1950, and provisions for
doubtful accounts in the amount of P41,810.56 for 1950; (b) over valuation of hospital and dental
buildings for 1949 in the amount of P32,000 and P6,191.32 respectively; (c) investment in hollow
block business in the amount of P8,603.22 for 1949; (d) over valuation of surplus goods in the
amount of P23,000 for the year 1949; (e) various lands and buildings included in the schedule of
assets for the years 1950 and 1951 in the total amount of P243,717.42 for 1950 and P62,564.00 for
1951, these issues would depend for their resolution on determination of questions of facts based
on an evaluation of evidence, and the general rule is that the findings of fact of the Court of Tax
Appeals supported by substantial evidence should not be disturbed upon review of its decision
(Section 2, Rule 44, Rules of Court).
On the question of the alleged sale of P30,000 worth of jewelries in 1946, which amount petitioner
contends should be deducted from the taxpayer's net worth as of December 31, 1946, the record
shows that Matias H. Aznar, when interviewed by B.I.R. Examiner Guerrero, stated that at the
beginning of 1945 he had P60,000 worth of jewelries inherited from his ancestors and were
disposed off as follows: 1945, P10,000; 1946, P20,000; 1947, P10,000; 1948, P10,000; 1949,
P7,000; (Report of B.I.R. Examiner Guerrero, B.I.R. rec. pp. 90-94).
During the hearing of this case in the Court of Tax Appeals, petitioner's accountant testified that on
January 1, 1945, Matias H. Aznar had jewelries worth P60,000 which were acquired by purchase
during the Japanese occupation (World War II) and sold on various occasions, as follows: 1945,
P5,000 and 1946, P30,000. To corroborate the testimony of the accountant, Mrs. Ramona
Agustines testified that she bought from the wife of Matias H. Aznar in 1946 a diamond ring and a
pair of earrings for P30,000; and in 1947 a wrist watch with diamonds, together with antique
jewelries, for P15,000. Matias H. Aznar, on the other hand testified that in 1945, his wife sold to
Sards Parino jewelries for P5,000 and question, Mr. Aznar stated that his transaction with Sards
Parino, with respect to the sale of jewelries, amounted to P15,000.
The lower court did not err in finding material inconsistencies in the testimonies of Matias H. Aznar
and his witnesses with respect to the values of the jewelries allegedly disposed off as stated by the
witnesses. Thus, Mr. Aznar stated to the B.I.R. examiner that jewelries worth P10,000 were sold in
1945, while his own accountant testified that the same jewelries were sold for only P5,000. Mr.
Aznar also testified that Mrs. Agustines purchased from his wife jewelries for P35,000, and yet Mrs.
Agustines herself testified that she bought jewelries for P30,000 and P15,000 on two occasions, or
a total of P45,000.
We do not see any plausible reason to challenge the fundamentally sound basis advanced by the
Court of Tax Appeals in considering the inconsistencies of the witnesses' testimony as material, in
the following words:
We do not say that witnesses testifying on the same transaction should give
identical testimonies. Because of the frailties and the limitations of the human
mind, witnesses' statements are apt to be inconsistent in certain points, but
usually the inconsistencies refer to the minor phases of the transaction. It is the
insignificance of the detail of an occurrence that fails to impress the human mind.
When that same mind, made to recall what actually happened, the significant
point which it failed to take note is naturally left out. But it is otherwise as regards
significant matters, for they leave indelible imprints upon the human mind.
Hence, testimonial inconsistencies on the minor details of an occurrence are
dismissed lightly by the courts, while discrepancies on significant points are
taken seriously and weigh adversely to the party affected thereby.
There is no sound basis for deviating from the lower court's conclusion that: "Taxwise in view of the
aforesaid inconsistencies, which we deem material and significant, we dismiss as without factual
basis petitioner's allegation that jewelries form part of his inventory of assets for the purpose of
establishing his net worth at the beginning of 1946."
As to the accounts receivable from the United States government for the amount of P38,254.90,
representing a claim for goods commandered by the U.S. Army during World War II, and which
amount petitioner claimed should be included in his net worth as of January 1, 1946, the Court of
Tax Appeals correctly concluded that the uncontradicted evidence showed that "the collectible
accounts of Mr. Aznar from the U.S. Government in the sum of P38,254.90 should be added to his
assets (under accounts receivable) as of January 1, 1946. As of December 31, 1947, and
December 31, 1948, the years within which the accounts were paid to him, the 'accounts receivable
shall decrease by P31,362.37 and P6,892.53, respectively."
Regarding a house in Talisay Cebu, (covered by Tax Declaration No. 8165) which was listed as an
asset during the years 1945 and 1947 to 1951, but which was not listed as an asset in 1946
because of a notation in the tax declaration that it was reconstructed in 1947, the lower court
correctly concluded that the reconstruction of the property did not render it valueless during the
 time it was being reconstructed and consequently it should be listed as an asset as of January 1,
1946, with the same valuation as in 1945, that is P1,500.
On the question of accounts receivable from customers in the amount of P38,000 for 1948, and
P123,816.58 for the years 1950 and 1951, which were included in the assets of Mr. Aznar for those
years by the respondent Commissioner of Internal Revenue, it is very clear that those figures were
taken from the statements (Exhs. 31 and 32) filed by Mr. Matias H. Aznar with the Philippine
National Bank when he was intending to obtain a loan. These statements were under oath and the
natural implication is that the information therein reflected must be the true and accurate financial
condition of the one who executed those statements. To believe the petitioner's argument that the
late Mr. Aznar included those figures in his sworn statement only for the purpose of obtaining a
bigger credit from the bank is to cast suspicion on the character of a man who can no longer
defend himself. It would be as if pointing the finger of accusation on the late Mr. Aznar that he
intentionally falsified his sworn statements (Exhs. 31 and 32) to make it appear that there were
non-existent accounts receivable just to increase his assets by fictitious entries so that his credit
with the Philippine National Bank could be enhanced. Besides, We do not lose sight of the fact that
those statements (Exhs. 31 and 32) were executed before this tax controversy arose and the
disputable presumptions that a person is innocent of crime or wrong; that a person intends the
ordinary consequences of his voluntary act; that a person takes ordinary care of his concerns; that
private transaction have been fair and regular; that the ordinary course of business has been
followed; that things have happened according to the ordinary course of nature and the ordinary
habits of life; that the law has been obeyed (Sec. 5, (a), (c), (d), (p), (q), (z), (ff), Rule 131 of the
Rules of Court), together with the conclusive presumption that "whenever a party has, by his own
declaration, act, or omission, intentionally and deliberately led another to believe a particular thing
true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act or
omission, be permitted to falsify it" (Sec. 3 (a), Rule 131, Rules of Court), convincingly indicate that
the accounts receivable stated by Mr. Aznar in Exhibits 31 and 32 were true, in existence, and
accurate to the very amounts mentioned.
There is no merit to petitioners argument that those statements were only for the purpose of
obtaining a bigger credit from the bank (impliedly stating that those statements were false) and
those accounts were allegedly back accounts of students of the Southwestern Colleges and were
worthless, and if collected, would go to the funds of the school. The statement of the late Mr. Aznar
that they were accounts receivable from customers should prevail over the mere allegation of
petitioner, unsupported as they are by convincing evidence. There is no reason to disturb the lower
court's conclusion that the amounts of P38,000 and P123,816.58 were accounts receivable from
customers and as such must be included as petitioner's assets for the years indicated.
As to the questions of doubtful accounts (bad debts), for the amount of P41,810.56, it is clear that
said amount is taken from Exhibit 31, the sworn statement of financial condition filed by Mr. Matias
H. Aznar with the Philippine National Bank. The lower court did not commit any error in again giving
much weight to the statement of Mr. Aznar and in concluding that inasmuch as this is an item
separate and apart from the taxpayer's accounts receivable and non-deductible expense, it should
be reverted to the accounts receivable and, consequently, considered as an asset in 1950.
On the alleged over valuation of two buildings (hospital building which respondent Commissioner of
Internal Revenue listed as an asset from 1949-1951 at the basic valuation of P130,000, and which
petitioner claims to be over valued by P32,000; dentistry building valued by respondent
Commissioner of Internal Revenue at P36,191.34, which petitioner claims to be over valued by
P6,191.34), We find no sufficient reason to alter the conclusion of respondent Court of Tax Appeals
sustaining the respondent Commissioner of Internal Revenue's valuation of both properties.
Respondent Commissioner of Internal Revenue based his valuation of the hospital building on the
representation of Mr. Matias H. Aznar himself who, in his letter (Exh. 35) to the Philippine National
Bank dated September 5, 1949, stated that the hospital building cost him P132,000. However in
view of the effect of a typhoon in 1949 upon the building, the value allowed was P130,000. Exhibit
35, contrary to petitioner's contention, should be given probative value because, although it is an
unsigned plain copy, that exhibit was taken by the investigating examiner of the B.I.R. from the files
of the Southwestern Colleges and formed part of his report of investigation as a public official. The
estimates of an architect and a civil engineer who agreed that a value of P84,240 is fair for the
hospital building, made years after the building was constructed, cannot prevail over the petitioner's
own estimate of his property's value.
Respondent Commissioner of Internal Revenue's valuation of P36,191.34 of the Dentistry Building
is based on the letter of Mr. and Mrs. Matias H. Aznar to the Southwestern Colleges, dated
December 15, 1950, which is embodied in the minutes of the meeting of the Board of Trustees of
the Southwestern Colleges held on May 7, 1951 (Exhibit G-1). In Exhibit 26 A, which is the cash
book of the Southwestern Colleges, this building was listed as of the same amount. Petitioner's
estimate of P30,000 for this building, based on Architect Paca's opinion, cannot stand against the
owner's estimate and that which appears in the cash book of the Southwestern Colleges, if we take
into consideration that the owner's (Mr. Matias H. Aznar) letter was written long before this tax
proceeding was initiated, while architect Paca's estimate was made upon petitioner's request solely
for the purpose of evidence in this tax case.
In the inventory of assets of petitioner, respondent Commissioner of Internal Revenue included the
administrative building valued at P19,200 for the years 1947 and 1948, and P16,700 for the years
1949 to 1951; and a high school building valued at P48,000 for 1947 and 1948, and P45,000 for
1949, 1950 and 1951. The reduced valuation for the latter years are due to allowance for partial
loss resulting from the 1949 typhoon. Petitioner did not question the inclusion of these buildings in
the inventory for the years prior to 1950, but objected to their inclusion as assets as of January 1,
1950, because both buildings were destroyed by a typhoon in November of 1949. There is
sufficient evidence (Exh. G-1, affidavit of Jesus S. Intan, employee in the office of City Assessor of
Cebu City, Exh. 18, Mr. Intan's testimony, a copy of a letter of the City Assessor of Cebu City) to
prove that the two buildings were really destroyed by typhoon in 1949 and, therefore, should be
eliminated from the petitioner's inventory of assets beginning December 31, 1949.
On the issue of investment in the hollow blocks business, We see no compelling reason to alter the
lower court's conclusion that "whatever was spent in the hollow blocks business is an investment,
and being an investment, the same should be treated as an asset. With respect to the amount
representing the value of the building, there is no duplication in the listing as the inventory of real
property does not include the building in question."
Respondent Commissioner of Internal Revenue included in the inventory, under the heading of
other asset, the amount of P8,663.22, treated as investment in the hollow block business.
Petitioner objects to the inclusion of P1,683.42 which was spent on the building and in the business
and of P674.35 which was spent for labor, fuel, raw materials, office supplies etc., contending that
the former amount is a duplication of inventory (included among the list of properties) and the latter
is a business expense which should be eliminated from the list of assets.
 The inclusion of expenses (labor and raw materials) as part of the hollow block business is
sanctioned in the inventory method of tax verification. It is a sound accounting practice to include
raw materials that will be used for future manufacture. Inclusion of direct labor is also proper, as all
these items are to be embodied in a summary of assets (investment by the taxpayer credited to his
capital account as reflected in Exhibit 72-A, which is a working sheet with entries taken from the
journal of the petitioner concerning his hollow blocks business). There is no evidence to show that
there was duplication in the inclusion of the building used for hollow blocks business as part of
petitioner's investment as this building was not included in the listing of real properties of petitioner
(Exh. 45-C p. 187 B.I.R. rec.).
As to the question of the real value of the surplus goods purchased by Mr. Matias H. Aznar from
the U.S. Army, the best evidence, as observed correctly by the lower court, is the statement of Mr.
Matias H. Aznar, himself, as appearing Exh. 35 (copy of a letter dated September 5, 1949 to the
Philippine National Bank), to the effect "as part of my assets I have different merchandise from
Warehouse 35, Tacloban, Leyte at a total cost of P43,000.00 and valued at no less than P20,000 at
present market value." Petitioner's claim that the goods should be valued at only P20,000 in
accordance with an alleged invoice is not supported by evidence since the invoice was not
presented as exhibit. The lower court's act in giving more credence to the statement of Mr. Aznar
cannot be questioned in the light of clear indications that it was never controverted and it was given
at a time long before the tax controversy arose.
The last issue on propriety of inclusion in petitioner's assets made by respondent Commissioner of
Internal Revenue concerns several buildings which were included in the list of petitioner's assets as
of December 31, 1950. Petitioner contends that those buildings were conveyed and ceded to
Southwestern Colleges on December 15, 1950, in consideration of P100,723.99 to be paid in cash.
The value of the different buildings are listed as: hospital building, P130,000; gymnasium, P43,000;
dentistry building, P36,191.34; bodega 1, P781.18; bodega 2, P7,250; college of law, P10,950;
laboratory building, P8,164; home economics, P5,621; morgue, P2,400; science building, P23,600;
faculty house, P5,760. It is suggested that the value of the buildings be eliminated from the real
estate inventory and the sum of P100,723.99 be included as asset as of December 31, 1950.
The lower court could not find any evidence of said alleged transfer of ownership from the taxpayer
to the Southwestern Colleges as of December 15, 1950, an allegation which if true could easily be
proven. What is evident is that those buildings were used by the Southwestern Colleges. It is true
that Exhibit G-1 shows that Mr. and Mrs. Matias H. Aznar offered those properties in exchange for
shares of stocks of the Southwestern Colleges, and Exhibit "G" which is the minutes of the meeting
of the Board of Trustees of the Southwestern Colleges held on August 6, 1951, shows that Mr.
Aznar was amenable to the value fixed by the board of trustees and that he requested to be paid in
cash instead of shares of stock. But those are not sufficient evidence to prove that transfer of
ownership actually happened on December 15, 1950. Hence, the lower court did not commit any
error in sustaining the respondent Commissioner of Internal Revenue's act of including those
buildings as part of the assets of petitioner as of December 31, 1950.
Petitioner also contends that properties allegedly ceded to the Southwestern Colleges in 1951 for
P150,000 worth of shares of stocks, consisting of: land, P22,684; house, P13,700; group of
houses, P8,000; building, P12,000; nurses home, P4,100; nurses home, P2,080, should be
excluded from the inventory of assets as of December 31, 1951. The evidence (Exh. H), however,
clearly shows that said properties were formally conveyed to the Southwestern Colleges only on
September 25, 1952. Undoubtedly, petitioner was the owner of those properties prior to September
25, 1952 and said properties should form part of his assets as of December 31, 1951.
The uncontested portions of the lower court's decision consisting of its conclusions that library
books valued at P7,041.03, appearing in a journal of the Southwestern Colleges marked as' Exhibit
25-A, being an investment, should be treated as an asset beginning December 31, 1950; that the
expenses for construction to the amount of P113,353.70, which were spent for the improvement of
the buildings appearing in Exhibit 24 are deemed absorbed in the increased value of the buildings
as appraised by respondent Commissioner of Internal Revenue at cost after improvements were
made, and should be taken out as additional assets; that the amount receivable of P5,776 from a
certain Benito Chan should be treated as petitioner's asset but the amount of P5,776 representing
the value of a house and lot given as collateral to secure said loan should not be considered as an
asset of petitioner since to do so would result in a glaring duplication of items, are all affirmed.
There seems to be no controversy as to the rest of the items listed in the inventory of assets.
III
The second issue which appears to be of vital importance in this case centers on the lower court's
imposition of the fraud penalty (surcharge of 50% authorized in Section 72 of the Tax Code). The
petitioner insists that there might have been false returns by mistake filed by Mr. Matias H. Aznar
as those returns were prepared by his accountant employees, but there were no proven fraudulent
returns with intent to evade taxes that would justify the imposition of the 50% surcharge authorized
by law as fraud penalty.
The lower court based its conclusion that the 50% fraud penalty must be imposed on the following
reasoning: .
It appears that Matias H. Aznar declared net income of P9,910.94, P10,200,
P9,148.34, P8,990.66, P8,364.50 and P6,800 for the years 1946, 1947, 1948,
1949, 1950 and 1951, respectively. Using the net worth method of determining
the net income of a taxpayer, we find that he had net incomes of P32,470.45,
P67,751.19, P17,880.44, P52,709.11, P254,813.56 and P40,155.80 during the
respective years 1946, 1947, 1948, 1949, 1950, and 1951. In consequence, he
underdeclared his income by 227% for 1946, 564% for 1947, 95%, for 1948,
486% for 1949, 2,946% for 1950 and 490% for 1951. These substantial under
declarations of income for six consecutive years eloquently demonstrate the
falsity or fraudulence of the income tax return with an intent to evade the
payment of tax. Hence, the imposition of the fraud penalty is proper (Perez vs.
Court of Tax Appeals, G.R. No. L-10507, May 30, 1958). (Emphasis supplied)
As could be readily seen from the above rationalization of the lower court, no distinction has been
made between false returns (due to mistake, carelessness or ignorance) and fraudulent returns
(with intent to evade taxes). The lower court based its conclusion on the petitioner's alleged
fraudulent intent to evade taxes on the substantial difference between the amounts of net income
on the face of the returns as filed by him in the years 1946 to 1951 and the net income as
determined by the inventory method utilized by both respondents for the same years. The lower
court based its conclusion on a presumption that fraud can be deduced from the very substantial
disparity of incomes as reported and determined by the inventory method and on the similarity of
consecutive disparities for six years. Such a basis for determining the existence of fraud (intent to
evade payment of tax) suffers from an inherent flaw when applied to this case. It is very apparent
here that the respondent Commissioner of Internal Revenue, when the inventory method was
resorted to in the first assessment, concluded that the correct tax liability of Mr. Aznar amounted to
P723,032.66 (Exh. 1, B.I.R. rec. pp. 126-129). After a reinvestigation the same respondent, in
 another assessment dated February 16, 1955, concluded that the tax liability should be reduced to 1951 7,684.00
P381,096.07. This is a crystal-clear, indication that even the respondent Commissioner of Internal P151,859.10
Revenue with the use of the inventory method can commit a glaring mistake in the assessment of
petitioner's tax liability. When the respondent Court of Tax Appeals reviewed this case on appeal, it The total sum of P151,859.10 should be decreased by P96.87 representing the tax credit for 1945,
concluded that petitioner's tax liability should be only P227,788.64. The lower court in three thereby leaving a balance of P151,762.23.
instances (elimination of two buildings in the list of petitioner's assets beginning December 31,
1949, because they were destroyed by fire; elimination of expenses for construction in petitioner's
assets as duplication of increased value in buildings, and elimination of value of house and lot in WHEREFORE, the decision of the Court of Tax Appeals is modified in so far as the imposition of
petitioner's assets because said property was only given as collateral) supported petitioner's stand the 50% fraud penalty is concerned, and affirmed in all other respects. The petitioner is ordered to
on the wrong inclusions in his lists of assets made by the respondent Commissioner of Internal pay to the Commissioner of Internal Revenue, or his duly authorized representative, the sum of
Revenue, resulting in the very substantial reduction of petitioner's tax liability by the lower court. P151,762.23, representing deficiency income taxes for the years 1946 to 1951, inclusive, within 30
The foregoing shows that it was not only Mr. Matias H. Aznar who committed mistakes in his report days from the date this decision becomes final. If the said amount is not paid within said period,
of his income but also the respondent Commissioner of Internal Revenue who committed mistakes there shall be added to the unpaid amount the surcharge of 5%, plus interest at the rate of 12% per
in his use of the inventory method to determine the petitioner's tax liability. The mistakes committed annum from the date of delinquency to the date of payment, in accordance with Section 51 of the
by the Commissioner of Internal Revenue which also involve very substantial amounts were also National Internal Revenue Code.
repeated yearly, and yet we cannot presume therefrom the existence of any taint of official fraud.
With costs against the petitioner.
From the above exposition of facts, we cannot but emphatically reiterate the well established
doctrine that fraud cannot be presumed but must be proven. As a corollary thereto, we can also Makalintal, C.J, Castro, Teehankee, Makasiar and Muñoz Palma, JJ., concur
state that fraudulent intent could not be deduced from mistakes however frequent they may be,
especially if such mistakes emanate from erroneous entries or erroneous classification of items in
accounting methods utilized for determination of tax liabilities The predecessor of the petitioner
undoubtedly filed his income tax returns for "the years 1946 to 1951 and those tax returns were
prepared for him by his accountant and employees. It also appears that petitioner in his lifetime and
during the investigation of his tax liabilities cooperated readily with the B.I.R. and there is no
indication in the record of any act of bad faith committed by him.

The lower court's conclusion regarding the existence of fraudulent intent to evade payment of taxes
was based merely on a presumption and not on evidence establishing a willful filing of false and
fraudulent returns so as to warrant the imposition of the fraud penalty. The fraud contemplated by
law is actual and not constructive. It must be intentional fraud, consisting of deception willfully and
deliberately done or resorted to in order to induce another to give up some legal right. Negligence,
whether slight or gross, is not equivalent to the fraud with intent to evade the tax contemplated by
the law. It must amount to intentional wrong-doing with the sole object of avoiding the tax. It
necessarily follows that a mere mistake cannot be considered as fraudulent intent, and if both
petitioner and respondent Commissioner of Internal Revenue committed mistakes in making entries
in the returns and in the assessment, respectively, under the inventory method of determining tax
liability, it would be unfair to treat the mistakes of the petitioner as tainted with fraud and those of
the respondent as made in good faith.

We conclude that the 50% surcharge as fraud penalty authorized under Section 72 of the Tax Code
should not be imposed, but eliminated from the income tax deficiency for each year from 1946 to
1951, inclusive. The tax liability of the petitioner for each year should, therefore, be:

1946 P 3,687.10
1947 13,288.38
1948 960.77
1949 8,918.85
1950 117,320.00
 In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner
Commissioner of Internal Revenue (CIR) assails the November 24, 2004 decision1 of
the Court of Appeals (CA) annulling the formal assessment notice issued by the CIR
against respondent Enron Subic Power Corporation (Enron) for failure to state the
legal and factual bases for such assessment.

Enron, a domestic corporation registered with the Subic Bay Metropolitan Authority
as a freeport enterprise,2 filed its annual income tax return for the year 1996 on April
12, 1997. It indicated a net loss of P7,684,948. Subsequently, the Bureau of Internal
Revenue, through a preliminary five-day letter,3 informed it of a proposed
assessment of an alleged P2,880,817.25 deficiency income tax.4 Enron disputed the
proposed deficiency assessment in its first protest letter.5

On May 26, 1999, Enron received from the CIR a formal assessment notice6
requiring it to pay the alleged deficiency income tax of P2,880,817.25 for the taxable
year 1996. Enron protested this deficiency tax assessment.7

Due to the non-resolution of its protest within the 180-day period, Enron filed a
petition for review in the Court of Tax Appeals (CTA). It argued that the deficiency tax
assessment disregarded the provisions of Section 228 of the National Internal
Revenue Code (NIRC), as amended,8and Section 3.1.4 of Revenue Regulations
(RR) No. 12-999 by not providing the legal and factual bases of the assessment.
Enron likewise questioned the substantive validity of the assessment.10

In a decision dated September 12, 2001, the CTA granted Enron’s petition and
ordered the cancellation of its deficiency tax assessment for the year 1996. The CTA
reasoned that the assessment notice sent to Enron failed to comply with the
requirements of a valid written notice under Section 228 of the NIRC and RR No. 12-
99. The CIR’s motion for reconsideration of the CTA decision was denied in a
resolution dated November 12, 2001.

EN BANC The CIR appealed the CTA decision to the CA but the CA affirmed it. The CA held
that the audit working papers did not substantially comply with Section 228 of the
G.R. No. 166387 January 19, 2009 NIRC and RR No. 12-99 because they failed to show the applicability of the cited law
to the facts of the assessment. The CIR filed a motion for reconsideration but this
was deemed abandoned when he filed a motion for extension to file a petition for
COMMISSIONER OF INTERNAL REVENUE, Petitioners,
review in this Court.
vs.
ENRON SUBIC POWERCORPORATION, Respondents.
The CIR now argues that respondent was informed of the legal and factual bases of
the deficiency assessment against it.
RESOLUTION
We adopt in toto the findings of fact of the CTA, as affirmed by the CA. In
CORONA, J.:
Compagnie Financiere Sucres et Denrees v. CIR,11 we held:
We reiterate the well-established doctrine that as a matter of practice and principle,
[we] will not set aside the conclusion reached by an agency, like the CTA, especially
if affirmed by the [CA]. By the very nature of its function, it has dedicated itself 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, which is not present here.
The CIR errs in insisting that the notice of assessment in question complied with the
requirements of the NIRC and RR No. 12-99.
A notice of assessment is:
[A] declaration of deficiency taxes issued to a [t]axpayer who fails to respond to a
Pre-Assessment Notice (PAN) within the prescribed period of time, or whose reply to
the PAN was found to be without merit. The Notice of Assessment shall inform the
[t]axpayer of this fact, and that the report of investigation submitted by the Revenue
Officer conducting the audit shall be given due course.
The formal letter of demand calling for payment of the taxpayer’s deficiency tax or
taxes shall state the fact, the law, rules and regulations or jurisprudence on
which the assessment is based, otherwise the formal letter of demand and the
notice of assessment shall be void. (emphasis supplied)12
Section 228 of the NIRC provides that the taxpayer shall be informed in writing of the
law and the facts on which the assessment is made. Otherwise, the assessment is
void. To implement the provisions of Section 228 of the NIRC, RR No. 12-99 was
enacted. Section 3.1.4 of the revenue regulation reads:
3.1.4. Formal Letter of Demand and Assessment Notice. – The formal letter of
demand and assessment notice shall be issued by the Commissioner or his duly
authorized representative. The letter of demand calling for payment of the
taxpayer’s deficiency tax or taxes shall state the facts, the law, rules and
regulations, or jurisprudence on which the assessment is based, otherwise,
the formal letter of demand and assessment notice shall be void. The same
shall be sent to the taxpayer only by registered mail or by personal delivery. xxx
(emphasis supplied)
It is clear from the foregoing that a taxpayer must be informed in writing of the legal
and factual bases of the tax assessment made against him. The use of the word
“shall” in these legal provisions indicates the mandatory nature of the requirements
laid down therein. We note the CTA’s findings:
In [this] case, [the CIR] merely issued a formal assessment and indicated therein the
supposed tax, surcharge, interest and compromise penalty due thereon. The
Revenue Officers of the [the CIR] in the issuance of the Final Assessment Notice did
not provide Enron with the written bases of the law and facts on which the subject
assessment is based. [The CIR] did not bother to explain how it arrived at such an
assessment. Moreso, he failed to mention the specific provision of the Tax Code or
rules and regulations which were not complied with by Enron.13
Both the CTA and the CA concluded that the deficiency tax assessment merely
itemized the deductions disallowed and included these in the gross income. It also
imposed the preferential rate of 5% on some items categorized by Enron as costs.
The legal and factual bases were, however, not indicated.
The CIR insists that an examination of the facts shows that Enron was properly
apprised of its tax deficiency. During the pre-assessment stage, the CIR advised
Enron’s representative of the tax deficiency, informed it of the proposed tax
deficiency assessment through a preliminary five-day letter and furnished Enron a
copy of the audit working paper14 allegedly showing in detail the legal and factual
bases of the assessment. The CIR argues that these steps sufficed to inform Enron
of the laws and facts on which the deficiency tax assessment was based.
We disagree. The advice of tax deficiency, given by the CIR to an employee of
Enron, as well as the preliminary five-day letter, were not valid substitutes for the
mandatory notice in writing of the legal and factual bases of the assessment. These
steps were mere perfunctory discharges of the CIR’s duties in correctly assessing a
taxpayer.15 The requirement for issuing a preliminary or final notice, as the case may
be, informing a taxpayer of the existence of a deficiency tax assessment is markedly
different from the requirement of what such notice must contain. Just because the
CIR issued an advice, a preliminary letter during the pre-assessment stage and a
final notice, in the order required by law, does not necessarily mean that Enron was
informed of the law and facts on which the deficiency tax assessment was made.
The law requires that the legal and factual bases of the assessment be stated in the
formal letter of demand and assessment notice. Thus, such cannot be presumed.
Otherwise, the express provisions of Article 228 of the NIRC and RR No. 12-99
would be rendered nugatory. The alleged “factual bases” in the advice, preliminary
letter and “audit working papers” did not suffice. There was no going around the
mandate of the law that the legal and factual bases of the assessment be stated in
writing in the formal letter of demand accompanying the assessment notice.
We note that the old law merely required that the taxpayer be notified of the
assessment made by the CIR. This was changed in 1998 and the taxpayer must now
be informed not only of the law but also of the facts on which the assessment is
made.16 Such amendment is in keeping with the constitutional principle that no
person shall be deprived of property without due process.17 In view of the absence of
a fair opportunity for Enron to be informed of the legal and factual bases of the
assessment against it, the assessment in question was void. We reiterate our ruling
in Reyes v. Almanzor, et al.:18

Verily, taxes are the lifeblood of the Government and so should be collected without
unnecessary hindrance. However, such collection should be made in accordance
with law as any arbitrariness will negate the very reason for the Government itself.

WHEREFORE, the petition is hereby DENIED. The November 24, 2004 decision of
the Court of Appeals isAFFIRMED.

No costs.

SO ORDERED.

RENATO C. CORONA
Associate Justice
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