i. Adamson et al. v. CA and Chato,

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 courts 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 courts

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 courts 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 Examiners 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 Commissioners 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 CTAs denial of the Commissioners 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

A L R E A D Y R E N D E R E D A N A S S E S S M E N T ( F O R M A L O R 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 assessments[12] 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 203[14] 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 228[16] 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. 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 letter[22] 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 Commissioners 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 examiners 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. Cusi[25] 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 Mertens 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 governments 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.

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;

x x x

(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.

(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 col lec t ion cases originally decided by the M e t r o p o l i t a n T r i a l Courts, Municipal Trial Courts and Municipal Circuit Trial Courts, in t h e i r r e s p e c t i v e 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:

1. In G.R. No. 120935, AFFIRMING the CA decision dated March 21, 1995, which set aside the Regional Trial Courts 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. !

CIR vs NLRC !

On January 12, 1984 the Commissioner of the Internal Revenue sent two letters 3 of demand to the respondent Maritime Company of the Philippines for deficiency common carrier's tax, fixed tax, 6% Commercial Broker's tax, documentary stamp tax, income tax and withholding taxes in the total amount of P17,284,882.45.

The assessment became final and executory as private respondent did not contest it. But as private respondent did not pay its tax liability either, the Commissioner of Internal Revenue issued warrants of distraint of personal property and levy of real property of private respondent. Copies of the warrants, both dated January 23, 1985, were served on January 28, 1985 on Yoly T. Petrache, private respondent's accountant. 4

On April 16, 1985 a "Receipt for Goods, Articles, and Things Seized 5 under Authority of the National Internal Revenue Code" was executed, covering, among other things, six barges identified as MCP-1,2,3,4,5 and 6. This receipt is required by 303 (now 206) of the NIRC as proof of the constructive distraint of property. It is an undertaking by the taxpayer or person in possession of the property covered that he will preserve the property and deliver it upon order of the court or the Internal Revenue Commissioner.

The receipt was prepared by the BIR for the signature of a representative of respondent Maritime Company of the Philippines, but it was not in fact signed. Petitioner later explained that the individuals who had possession of the barges had refused to sign the receipt.

This circumstance has given rise to the question in this case as it appears that four of the barges placed under constructive distraint were levied upon execution by respondent deputy sheriff of Manila on July 20, 1985 to satisfy a judgment for unpaid wages and other benefits of employees of respondent Maritime Company of the Philippines. More specifically, the question in this case is the validity of the warrant of distraint served by the Revenue Seizure Officer against the writ of execution subsequently levied upon the same property by the deputy sheriff of Manila to satisfy the claims of employees in NLRC Case No. NCR-12-4233-84 (Domingo C. Niangar, et al. v. Maritime Company of the Philippines) for P490,749.21.

The four barges were sold by respondent deputy sheriff at a public auction on August 12, 1985. The highest bidder, Daniel C. Sabino, subsequently sold them to private respondents Fernando S. Tuliao and Tulmar Trading Corporation.

On September 4, 1985, petitioner asked the Labor Arbiter to annul the sale and to enjoin the sheriff from disposing of the proceeds of the sale or, in the alternative, to remit them to the Bureau of Internal Revenue so that the amount could be applied to the payment of private respondent Maritime Company's tax liabilities.

In an order dated September 30, 1985, Labor Arbiter Ceferina Diosana denied the motion on the ground that petitioner Commissioner of Internal Revenue failed to show that the barges which were levied upon in execution and sold at public auction had been validly placed under constructive distraint. 6 The Labor Arbiter likewise rejected petitioner's contention that the government's claim for taxes was preferred under Art. 2247, in relation to Art. 2241(1) of the Civil Code, on the ground that under this provisions only taxes and fees which are due on specific movables enjoy preference, whereas the taxes claimed by petitioner were not due on the four barges in question.

The order was appealed to the NLRC, which in resolution dated April 4, 1986, affirmed the denial of the Internal Revenue Commissioner's motion. Hence this petition for certiorari.

For reasons to be presently stated, the petition is granted.

The National Internal Revenue Code provides for the collection of delinquent taxes by any of the following remedies: (a) distraint of personal property or levy of real property of the delinquent taxpayer and (b) civil or criminal action.

With respect to the four barges in question, petitioner resorted to constructive distraint pursuant to 303 (now 206) of the NLRC. This provisions states:

Constructive distraint of the property of a taxpayer. To safeguard the interest of the Government, the Commissioner of Internal Revenue may place under constructive distraint the property of a delinquent taxpayer or any taxpayer who, in his opinion, is retiring from any business subject to tax, or intends to leave the Philippines, or remove his property therefrom, or hide or conceal his property, or perform any act tending to obstruct the proceedings, for collecting the tax due or which may be due from him.

The constructive distraint of personal property shall be effected by requiring the taxpayer or any person having possession or control of such property to sign a receipt covering the property distrained and obligate himself to preserve the same intact and unaltered and not to dispose of the same in any manner whatever without the express authority of the Commissioner of Internal Revenue.

In case the taxpayer or the person having the possession and control of the property sought to be placed under constructive distraint refuses or fails to sign the receipt herein referred to, the revenue officer effecting the constructive distraint shall proceed to prepare a list of such property and in the presence of two witnesses leave a copy thereof in the premises where the property distrained is located, after which the said property shall be deemed to have been placed under constructive distraint..

Although the warrant of distraint in this case had been issued earlier (January 23,1985) than the levy on execution in the labor case on July 20, 1985, the Labor Arbiter nevertheless held that there was no valid distraint of personal property on the ground that the receipt of property distrained had not been signed by the taxpayer as required above. In her order, which the NLRC affirmed in toto, the Labor Arbiter said:

It is claimed by the Commissioner of the Internal Revenue that on January 23, 1984, he issued a warrant of distraint of personal property on respondent to satisfy the collection of the deficiency taxes in the aggregate sum of

P17,284,882.45 and a copy of said warrant was served upon Maritime Company on January 28, 1985 and pursuant to the warrant, the Commissioner, through Revenue Seizure Agent Roland L. Bombay, issued on April 16, 1985, to Maritime Company a receipt for goods, articles and things seized pursuant to authority granted to him under the National Internal Revenue Code. Such personal properties seized includes, among others, "Six (6) units of barges MCI-6 . . . " However, his own receipts for goods attached to his motions does not show that it was received by Maritime; neither does it show any signature of any of Maritime's Officers.

Apart from the foregoing, in his affidavit of 11 September 1985, Sheriff Cachero stated that before he sold the subject four barges at public auction, he conducted an investigation on the ownership of the said four barges. In brief, he found out that the said four barges were purchased by respondent through Makati Leasing and that the whole purchase price has been paid by respondent. In fact, the corresponding deed of sale has already been signed. He did not find any lien or encumbrance on any of the said four barges. Thus it cannot be true that the Commissioner effected a valid warrant of distraint of personal property on the four barges in question. 7

However, this case arose out of the same facts involved in Republic v. Enriquez, 8 in which we sustained the validity of the distraint of the six barges, which included the four involved in this case, against the levy on execution made by another deputy sheriff of Manila in another case filed against Maritime Company. Two barges (MCP-1 and MCP-4) were the subject of a levy in the case. There we found that the "Receipt for Goods, Articles and Things Seized under Authority of the National Internal Revenue Code" covering the six barges had been duly executed, with the Headquarters, First Coast Guard District, Farola Compound Binondo, Manila acknowledging receipt of several barges, vehicles and two (2) bodegas of spare parts belonging to Maritime Company of the Philippines.

Apparently, what had been attached to the petitioner's motion filed by the government with the Labor Arbiter in this case was a copy, not the original one showing the rubber stamp of the Coast Guard and duly signed by its representative. A xerox copy of this signed receipt was submitted in the prior case. 9 This could be due to the fact that, except for Solicitor Erlinda B. Masakayan, the government lawyers who prepared the petition in the prior case were different from those who filed the present petition. They admitted that the receipt of property distrained had not been signed by the taxpayer or person in possession of the taxpayer's property allegedly because they had refused to do so. What apparently they did not know is that the receipt had been acknowledged by the Coast Guard which obviously had the barges in its possession.

In addition to the receipt duly acknowledged by the Coast Guard, the record of the prior case also shows that on October 4, 1985, the Commissioner of the Internal Revenue issued a "Notice of Seizure of Personal Property"

stating that the goods and chattels listed on its reverse side, among which were the four barges (MCP-2, MCP-3, MCP-5, and MCP-6), had been distrained by the Commissioner of Internal Revenue. 10

The "Notice of Seizure of Personal Property," a copy of which was received by Atty. Redentor R. Melo in behalf of Maritime Company of the Philippines, together with the receipt of the Coast Guard, belies the claim of respondent deputy sheriff that when he levied upon the four barges there was no indication that the barges had previously been placed under distraint by the Commissioner of Internal Revenue.

Accordingly, what we said in the prior case 11 in upholding the validity of distraint of two of the six barges (MCP Nos. 1 and 4), fully applies in this case:

It is settled that the claim of the government predicated on a tax lien is superior to the claim of a private litigant predicated on a judgment. The tax lien attaches not only from the service of the warrant of distraint of personal property but from the time the tax became due and payable. Besides, the distraint on the subject properties of the Maritime Company of the Philippines as well as the notice of their seizure were made by petitioner, through the Commissioner of the Internal Revenue, long before the writ of the execution was issued by the Regional Trial Court of Manila, Branch 31. There is no question then that at the time the writ of execution was issued, the two (2) barges, MPC-1 and MCP-4, were no longer properties of the Maritime Company of the Philippines. The power of the court in execution of judgments extends only to properties unquestionably belonging to the judgment debtor. Execution sales affect the rights of the judgment debtor only, and the purchaser in an auction sale acquires only such right as the judgment debtor had at the time of sale. It is also well-settled that the sheriff is not authorized to attach or levy on property not belonging to the judgment debtor.

Nor is there any merit in the contention of the NLRC that taxes are absolutely preferred claims only with respect to movable or immovable properties on which they are due and that since the taxes sought to be collected in this case are not due on the barges in question the government's claim cannot prevail over the claims of employees of the Maritime Company of the Philippines which, pursuant to Art. 110 of the Labor Code, "enjoy first preference."

In Republic v. Peralta 12 this Court rejected a similar contention. Through Mr. Justice Feliciano we held:

. . . [T]he claim of the Bureau of Internal Revenue for unpaid tobacco inspection fees constitutes a claim for unpaid internal revenue taxes which gives rise to a tax lien upon all the properties and assets, movable or immovable, of the insolvent as taxpayer. Clearly, under Articles 2241 No. 1,

2242 No. 1, and 2246-2249 of the Civil Code, this tax claim must be given preference over any other claim of any other creditor, in respect of any and all properties of the insolvent.

xxx xxx xxx

Article 110 of the Labor Code does not purport to create a lien in favor of workers or employees for unpaid wages either upon all of the properties or upon any particular property owned by their employer. Claims for unpaid wages do not therefore fall at all within the category of specially preferred claims established under Articles 2241 and 2242 of the Civil Code, except to the extent that such claims for unpaid wages are already covered by Article 2241, number 6: "claims for laborer's wages, on the goods manufactured or the work done," or by Article 2242, number 3: "claims of laborers and other workers engaged in the construction, reconstruction or repair of buildings, canals and other works, upon said buildings, canals or other works." To the extent that claims for unpaid wages fall outside the scope of Article 2241, number 6 and 2242, number 3, they would come with the ambit of the category of ordinary preferred credits under Article 2244.

Applying Article 2241, number 6 to the instant case, the claims of the Unions for separation pay of their members constitute liens attaching to the processed leaf tobacco, cigars and cigarettes and other products produced or manufactured by the Insolvent, but not to other assets owned by the Insolvent. And even in respect of such tobacco and tobacco products produced by the Insolvent, the claims of the Unions may be given effect only after the Bureau of Internal Revenue's claim for unpaid tobacco inspection fees shall have been satisfied out of the products so manufactured by the Insolvent.

Article 2242, number 3, also creates a lien or encumbrance upon a building or other real property of the Insolvent in favor of workmen who constructed or repaired such building or other real property. Article 2242, number 3, does not however appear relevant in the instant case, since the members of the Unions to whom separation pay is due rendered services to the Insolvent not (so far as the record of this case would show) in the construction or repair of buildings or other real property, but rather, in the regular course of the manufacturing operations of the Insolvent. The Unions' claims do not therefore constitute a lien or encumbrance upon any immovable property owned by the insolvent, but rather, as already indicated, upon the Insolvent's existing inventory (if any) of processed tobacco and tobacco products.

In addition, we have held 13 that Art. 110 of the Labor Code applies only in case of bankruptcy or judicial liquidation of the employer. This is clear from the text of the law.

Art. 110. Worker preference in case of bankruptcy. In the event of bankruptcy or liquidation of an employer's business, his workers shall enjoy first preference as regards wages due them for services rendered during the period prior to the bankruptcy or liquidation, any provision of law to the contrary notwithstanding. Unpaid wages shall be paid in full before other creditors may establish any claims to a share in the assets of the employer.

This case does not involve the liquidation of the employer's business.

WHEREFORE, the petition for certiorari is GRANTED and the resolution dated April 4, 1986 of respondent NLRC in NLRC Case No. NCR-12-4233-84 is SET ASIDE insofar as it denies the government's claim for taxes, and respondent deputy sheriff Carmelo V. Cachero or his successor is ORDERED to remit the proceeds of the auction sale to the Bureau of Internal Revenue to be applied as part payment of respondent Maritime Company's tax liabilities.

SO ORDERED.

BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellant, vs.WENCESLAO TRINIDAD, Collector of Internal Revenue, defendant-appellee.

Yeager and Armstrong for appellant. No appearance for appellee.

JOHNSON, J.:

There is a practically no dispute about the facts in this case. They are as follows:

On the 13th day of July, 1916, the defendant Collector of Internal Revenue, through his duly authorized agent at Zamboanga, seized and distrained certain personal property, consisting of machinery for sawing lumber which is particularly enumerated and described in paragraph 3 of the complaint, and advertised the same for sale, to realize the sum of P2,159.79, alleged to be due to the Government of the Philippine Islands from Pujalte and Co., as forestry charges.

The defendant claimed that said personality belonged to the said company, was used in the business on which the taxes were due, and was liable to seizure to cover said taxes.

On the other hand, the plaintiff claimed to be the owner of said property, and demanded its release. The demand being denied, the plaintiff paid to the defendant the said sum of P2,159.79 under protest to prevent the sale of said property, and immediately brought the present action in the Court of First Instance of Zamboanga to recover the said sum of P2,159.78 together with interest and costs. The lower court, after due trial, dismissed the plaintiff's complaint and absolved the defendant from all liability thereunder. From that judgment the plaintiff appealed to this court.

The property in question formerly belonged to the Taba Saw Mill Co., a copartnership formed by Pujalte and Co. and one Ramon Murga. In April, 1914, Ramon Murga sold all his rights, title, and interest in and to the said copartnership to Pujalte and Co., which thereby became the sole owner of the concern.

It appears from plaintiff's Exhibit AA, which was admitted in evidence without objection on the part of the defendant, that on the 26th day of September, 1912, the said Taba Saw Mill Co. conveyed to the plaintiff bank, by way of chattel mortgage, the property here in question together with other personalities, as security for the payment to said bank of two certain promissory notes for the sum of P180,000. Said chattel mortgage was duly registered in the office of the register of deeds of Zamboanga on the 26th day of December, 1912. On that date the property in question was free from all tax liens; at least, the plaintiff mortgagee had no notice thereof. On the 13th day of July, 1916, when the amount here in question was found to be due to the Government from Pujalte and Co. as forestry charges, and when the property in question was seized by the defendant, the said chattel mortgage was still subsisting. It is admitted that at the time of its seizure the said property was being used in the sawmill of Pujalte and Co.

Upon the foregoing facts the lower court absolved the defendant from all liability under the plaintiff's complaint, for the following reasons:

1. That the party who was liable to pay the taxes for which the property in question was distrained was not the plaintiff but Pujalte and Co.; and that the plaintiff having "voluntarily and spontaneously" paid the debt of the latter, had no cause of action against the defendant collector, and could only recover the sum so paid by it from Pujalte and Co., under article 1158 of the Civil Code (p. 15, B. of E.); that the plaintiff should have proceeded under section 141 of Act No. 2339 (now sec. 1580 of Act No. 2711), and not under section 140 of the said Act (sec. 1579 of Act No. 2711).

2. That "even supposing for a moment" that the plaintiff had a right of action against the defendant to recover the sum paid by it to the latter, yet this action must fail because the property in question, having been used by Pujalte and

Co. in its business of cutting and sawing lumber, was liable to seizure and distraint under section 149 of Act No. 2339.

We are of the opinion that neither of the foregoing reasons is sound, and that the judgment of the lower court should be revoked.

First. There is absolutely no basis for the finding of the trial court that "the plaintiff bank had voluntarily and spontaneously paid the debt of a third party, that is, that of the firm of Pujalte and Co." (p. 15, B. of E.). Paragraph 7 of the plaintiff's complaint alleges: "That thereupon, involuntarily and under due protest in writing, the plaintiff bank made payment of the required sum of P2,159.79 in order to secure the release of its seized property." These allegations were specially admitted by the defendant (par. 5, stipulation, Plaintiff's Exhibit G).

Section 140 of the Internal Revenue Law (Act No. 2339 provides as follows:

SEC. 140. Recovery of tax paid under protest. When the validity of any tax in questioned, or amount disputed, or other question raised as to liability therefor, the person against whom or against whose property the same is sought to be enforced shall pay the tax under instant protest, or upon protest within ten days, and shall thereupon request the decision of the Collector of Internal Revenue. If the decision of the Collector of Internal Revenue is adverse, or if no decision is made by him within six months from the date when his decision was requested, the taxpayer may proceed, at any time within two years after the payment of the tax, to bring an action against the Collector of Internal Revenue for the recovery of the sum alleged to have been illegally collected, the process to be served upon him, upon the provincial treasurer, or upon the officer collecting the tax.

Section 141 of the same Act provides:

SEC. 141. Action to contest forfeiture of chatted. In case of the seizure of personal property under claim of forfeiture the owner, desiring to contest the validity of the forfeiture, may at any time before sale or destruction of the property bring an action against the person seizing the property or having possession thereof to recover the same, and upon giving proper bond may enjoin the sale; or after the sale and within six months he may bring an action to recover the net proceeds realized at the sale.

The lower court was of the opinion that the plaintiff should have proceeded under the latter section above quoted and not under the former. It cannot be maintained that the personal property here in question was seized by the defendant "under claim of forfeiture;" nor could it have been legally seized under claim of forfeiture. It was seized to enforce an alleged tax lien, under section 149 of Act No. 2339 (sec.

1588, Act No. 2711), which was quoted by the lower court in its decision (p. 19 B. of E.) and which in no way provides for the forfeiture of the property on which such a lien attaches.

Forfeiture is "the divestiture of property without compensation, in consequence of an offense. The effect of such forfeiture is to transfer the title to the specific thing from the owner to the sovereign power." (12 R. C. L., 124.) There is a great difference between a seizure under forfeiture and a seizure to enforce a tax lien. In the former all the proceeds derived from the sale of the thing forfeited are turned over to the Collector of Internal Revenue (sec. 148, Act No. 2339) in the latter the residue of such proceeds over and above what is required to pay the tax sought to be realized, including expenses, is returned to the owner of the property (second paragraph, sec. 152, Act No. 2339). Clearly, the remedy applicable to the present case is that provided for in section 140, above quoted, and which the plaintiff invoked. (See Hongkong and Shanghai Banking Corporation vs. Rafferty, 39 Phil., 145, 147.)

Second. At the time of the seizure of the property here in question, the plaintiff held a valid and subsisting chattel mortgage on the same, duly registered in the registry of deeds. "A chattel mortgage is a conditional sale of personal property as security for the payment of a debt, or the performance of some other obligation specified therein, the condition being that the sale shall be void upon the seller paying the purchaser a sum of money or doing some other act named." (Sec. 3, Act No. 1508.)

"Therefore, so long as the mortgage exists, the dominion with respect to the mortgaged personal property rests with the creditor-pledgee from the time of the inscription of the mortgage in the registry, and the furniture ceases to be the property of the debtor for the reason that it has become the property of the creditor, in like manner as the domination of a thing sold is transferred to the purchaser and ceases to belong to the vendor from the moment of the delivery thereof, as a result of the sale." (Meyers vs. Thein, 15 Phil., 303, 303-309; see also Bachrach vs. Mantel, 25 Phil., 410; In re Du Tec Chuan, 34 Phil., 488, 490.) 1awph!l.net

The chattel mortgage in question was registered in the registry of deeds on the 26th day of December, 1912. The forest charges sought to be collected by the defendant were found to be due from Pujalte and Co. on the 13th day of July, 1916, and on that date the property covered by said chattel mortgage was seized by the defendant to enforce the payment of said forest charges. It is clear from these facts and from the legal provisions and jurisprudence above quoted that the plaintiff-mortgagee, and not Pujalte and Co., the mortgagor, was, and had been for more than three years, the legal owner of the property in question at the time the same was seized by the defendant. And even granting, without deciding, that the forest charges are a tax on

business or occupation within the meaning of section 149 of Act No. 2339 (sec. 1588, Act No. 2711), yet we are of the opinion and so decide that the mere fact that said property was used in the business of Pujalte and Co. could not and did not make such property liable for the payment of taxes due from said company, said property belonging as it did to an innocent third party. "The property used in the business or occupation," referred to in said section 149, can only mean property belonging to the owner of the business or occupation. Any other construction would be unwarranted and unjust.

For the foregoing reasons the judgment appealed from is hereby revoked, and it is hereby ordered and decreed that a judgment be entered in favor of the plaintiff and against the defendant, ordering the latter to refund to the former the sum of P2,159.79, with interest thereon at the legal rate from the 13th day of July, 1916, until paid, and without any finding as to costs. So ordered.

Araullo, Avancea and Villamor, JJ., concur.

! G.R. No. 44372BENITO GARCIA, plaintiff-appellee, vs.THE COLLECTOR OF INTERNAL REVENUE, defendant-appellant.

Solicitor-General Hilado for appellant. Apolonio Suntay for appellee.

CONCEPCION, J.:

The Collector of Internal Revenue, defendant herein, required Benito Garcia to pay a specific tax of P204.08 after the latter had been sentenced in a criminal case to pay a fine for having taken six hundred and sixteen liters of alcohol from the distillery of Jose B. Suntay for the purpose of removing the same to a distant store without having previously paid the corresponding specific tax therefor.

Appelle paid the tax under protest, filing afterwards a complaint to recover its amount. The court decided the case in favor of plaintiff, and the Collector of Internal Revenue appealed from the decision to this court.

Appellant, in his brief, assigned the following as errors committed by the lower court:

The lower court erred in holding that the Government had made a claim against Benito Garcia for the amount of P204.08 as specific tax, in criminal case No. 5922 of the Court of First Instance of Bulacan, and that the court, in its decision, declined to award it to the Government.

The lower court erred in holding that the manufacturer of alcohol ordinarily pays the tax and that, as the manufacturer of the alcohol in question was Jose B. Suntay, and Benito Garcia was a mere employee, the latter cannot be made to pay the tax in question.

The lower court erred in ordering the defendant to pay the plaintiff the amount of P204.08, plus costs.

The lower court erred in denying the motion for new trial filed by the defendant.

In the decision appealed from the court has proceeded upon the assumption that in the criminal case filed against plaintiff herein, the Government had sought payment from him of the amount of P204.08 as specific tax; but that the court in its decision refused to impose the same for the alleged reason that, as the alcohol in question had been confiscated an as the value of the

same was probably greater than the amount of the tax, the Government already has had an opportunity to recover it.

In truth, however, the payment of the tax was not sought in the criminal case above referred to because the object of the information was the imposition upon the offender of the corresponding penalty for violation of section 2727 of the Revised Administrative Code. The tax should have been recovered by the Collector of Internal Revenue independently of the criminal action instituted by the People of the Philippines against the accused Benito Garcia. Therefore, the fact that in the judgment rendered in said case no pronouncement whatsoever as regard said tax had been made, was no bar to the Government's recovering it afterwards, a s the Collector of Internal Revenue, appellant herein, has done in his own name.

Furthermore, the confiscation in the criminal case was an accessory penalty imposed by article 25 of the Revised Penal Code, which is entirely different from the payment of the tax.

Another ground of the appealed decision, according t the reasoning of the court, is that the payment of the tax is in reality made by the consumer, although the distiller has to pay it first, charging the same later in the price of the sale. In the present case, says the court, the plaintiff Garcia never had the opportunity to sell the alcohol and consequently would never be reimbursed for the amount of the corresponding specific tax. All this loses its apparent merit by the single consideration that one who violates the law must suffer all the consequences the law is confiscation.

According to section 1479 of the Revised Administrative Code, the tax should be paid immediately before the removal of the article from the place of production. The law does not say that the tax may be paid immediately before the sale.

The second error committed by the court consists in holding that the distiller of alcohol ordinarily is the one who pays the tax and inasmuch as Jose B. Suntay was the distiller of the alcohol in question, while Benito Garcia was mere employee, the latter could not be compelled to pay tax referred to. This is an inaccurate interpretation of the law. Section 1479 aforecited of the Revised Administrative Code provides that the specific taxes on domestic products shall be paid by the manufacturer, producer, owner or person having possession of the same. It is a fact that the six hundred and sixteen liters of alcohol were found in the possession of plaintiff when he transferred them from the factory to a distant store and there is neither allegation nor evidence that plaintiff had taken the alcohol from the distillery to remove the same to the store by order of his principal, Jose B. Suntay. In order to avoid dispute and to determine easily the person who should pay the specific tax, section 1479 of the Revised Administrative Code has farsightedly provided that the manufacturer, producer, owner or person having possession of the article shall pay the tax.

The judgment appealed from is reversed without a special pronouncement as the costs. So ordered.

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.WESTERN PACIFIC CORPORATION, respondent.

Office of the Solicitor General for petitioner.R. Melo and A. S. Velasquez for respondent.

PAREDES, J.:

On March 2, 1959, the respondent Western Pacific Corporation, was assessed for P3,731.00, as deficiency income tax for the year 1953. This assessment was brought about by the disallowance of P8,265.82, listed in respondent's return for 1953, as expense items, and P10,387.50, as written off "bad debts." The assessment was received by respondent on the same date (March 2, 1959). On March 5, 1959, the Commissioner of Internal Revenue wrote the respondent corporation a letter of demand for the payment of the amount, including therein a breakdown of said assessment. Under date of June 29, 1959, respondent corporation, thru Ruifino Melo & Company, Consulting and Examining Auditors, requested for non-assessment, claiming that there has been prescription in making the assessment, that the expense items and bad debts were allowable deduction. The letter was accompanied by a Resolution of the corporation, dated February 2, 1954, where it was resolved to write off the debts of the people appearing in another annex. The Commissioner on July 30, 1959 replied to the request, denying the same, and demanding the payment of the amount due within thirty (30) days from receipt of said demand. On September 19, 1958, respondent corporation requested that it be permitted until September 25, 1959, to submit formal objections to the assessment. The formal objections appearing in the letter of September 22, 1959, were identical to those of the June 29, 1959 communication, reason for which the Commissioner did not give any favorable action. The last letter of the Commissioner, dated October 28, 1959, among others, requested payment of the assessment within ten (10) days from receipt thereof.

On December 18, 1959, respondent Western Pacific Corporation, presented with the Court of Tax Appeals a petition for Review of assessment made by the Commissioner, on three (3) counts, to wit:

(1) whether or not the making of the assessment had prescribed;

(2) whether expenses incurred in securing IGC Licenses are capital expenditures, and, as such, not deductible from the income; and

(3) whether the bad debts written off should likewise be deducted.

When the issues were joined, by the filing of the Answer, and after hearing, the CTA rendered judgment absolving the Western Pacific Corporation from the assessment. It, however, ruled out prescription, stating that March 2, 1959, was the last day of the five (5) year period within which to make the assessment. On this point, the CTA ruled:

However, we do not agree with petitioner that the assessment in question was issued beyond the 5-year statutory limitation. February 28, 1959 fell on a

Saturday. Pursuant to Republic Act No. 1880, as, implemented by Executive Order No. 25, effective July 1, 1959, all bureaus and offices of the government, except schools, court, hospitals and health clinics, hold office only five days a week or from Monday to Friday. Saturday and Sunday, are constituted public holidays or days of exemption from labor or work as far as government offices, including that of respondent Commissioner, are concerned. The offices and bureaus concerned are officially closed on those days. So that on February 28, 1959 and March 1, 1959, which were Saturday and Sunday, respectively, the office of respondent was officially closed. And where the last day for doing an act required by law falls on a holiday, the act may be done on the next succeeding business day. (Section 31, Revised Administrative Code.) Similarly, in computing any period of time prescribed by statute, the day of the act after which the designated period of time begins to run is not included. But the last day of the period so computed is to be included, unless it is a Sunday or a legal holiday, in which event the time shall run until the end of the next day which is neither a Sunday or a holiday (Section 1, Rule 28, Rules of Court). Consequently, since February 28, 1959 was a Saturday and the next day, March 1, 1959, a Sunday, respondent had until the next succeeding business day, March 2, 1959, Monday, within which to issue the deficiency assessment. The assessment in question having been issued on March 2, 1959, it was, therefore, seasonably made.

We concur in the above findings and conclusions, convinced as We are, that they are actually and legally correct..

The above ruling notwithstanding, the Commissioner of Internal Revenue appealed against the judgment which absolved respondent Western Pacific Corporation from liability, alleging that the CTA erred:.

(1) In taking cognizance of the case, notwithstanding lack of jurisdiction; and

(2) Granting it had jurisdiction, in considering the expense items and the written off bad debts as deductible.1wph1.t

Without going into the merits of the decision absolving the respondent corporation of tax liability, We find that the assessment made by the Commissioner should be maintained, for the simple reason that when the petition for review was brought to the CTA by the respondent corporation, the said Court no longer had jurisdiction to entertain the same.

The assessment had long become final. A petition for review should be presented, within the reglementary period, as provided for in Section 11, Republic Act No. 1125, which is "thirty (30) days from receipt of the assessment." The thirty (30) day period is jurisdictional (Pangasinan Transportation Co. vs. Blaquera, L-13101, April 29, 1960).

It will be noted that the assessment was received by the respondent corporation on March 2, 1959. It was only on June 29, 1959, when said corporation formally assailed the assessment, on the grounds of prescription in making the assessment and the impropriety of the disallowance of the listed deductions. From March 3 to June 29, 1959, manifestly more than thirty (30) days had lapsed and the assessment became final, executory and demandable (Ventanilla vs. Bd. of Tax Appeals, et al., L-7384, Dec. 19, 1955). Of course, in the interim, a number of communications were exchanged between the parties, the latest of which was dated October 28, 1959. Even if this date is considered as the commencement of the thirty (30) day period, still the petition for review with the CTA was out of time, because it was only on December 18, 1959, that said petition was presented. Failure to comply with the thirty-day statutory period would bar appeal and deprive the CTA of its jurisdiction to entertain and determine the correctness of the assessment (Gibbs & Gibbs vs. Coll. of Int. Rev. & CTA, L-13453, Feb. 29, 1960).

IN VIEW OF THE FOREGOING, the decision of the CTA is hereby set aside for having been rendered without jurisdiction, the assessment in question having been already final, executory and demandable before the petition for review was presented; and another entered, ordering respondent Western Pacific Corporation to pay the assessment made by the Collector of Internal Revenue, and the further amount of 5% surcharge and 1% monthly interest on the amount assessed, from April 1, 1959 until date of full payment. Costs against the respondent corporation.

!THE COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.PHOENIX ASSURANCE CO., LTD., respondent.

-----------------------------

G.R. No. L-19903 May 20, 1965

PHOENIX ASSURANCE, CO., LTD., petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, respondent.

Office of the Solicitor General for petitioner-respondent Commissioner of Internal Revenue.Sycip, Salazar, Luna & Associates and A. S. Monzon, B. V. Abela & J. M. Castillo for respondent-petitioner Phoenix Assurance Co., Ltd.

BENGZON, J.P., J.:

From a judgment of the Court of Tax Appeals in C.T.A. Cases Nos. 305 and 543, consolidated and jointly heard therein, these two appeals were taken. Since they involve the same facts and interrelated issues, the appeals are herein decided together.

Phoenix Assurance Co., Ltd., a foreign insurance corporation organized under the laws of Great Britain, is licensed to do business in the Philippines with head office in London. Through its head office, it entered in London into worldwide reinsurance treaties with various foreign insurance companies. It agree to cede a portion of premiums received on original insurances underwritten by its head office, subsidiaries, and branch offices throughout the world, in consideration for assumption by the foreign insurance companies of an equivalent portion of the liability from such original insurances.1wph1.t

Pursuant to such reinsurance treaties, Phoenix Assurance Co., Ltd., ceded portions of the premiums it earned from its underwriting business in the Philippines, as follows:

Year Amount Ceded

1952 P316,526.75

1953 P246,082.04

1954 P203,384.69

upon which the Commissioner of Internal Revenue, by letter of May 6, 1958, assessed the following withholding tax:

Year Withholding Tax

1952 P 75,966.42

1953 59,059.68

1954 48,812.32

Total !P183,838.42

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

On April 1, 1951, Phoenix Assurance Co., Ltd. filed its Philippine income tax return for 1950, claiming therein, among others, a deduction of P37,147.04 as net addition to marine insurance reserve equivalent to 40% of the gross marine insurance premiums received during the year. The Commissioner of Internal Revenue disallowed P11,772.57 of such claim for deduction and subsequently assessed against Phoenix Assurance Co., Ltd. the sum of P1,884.00 as deficiency income tax. The disallowance resulted from the fixing by the Commissioner of the net addition to the marine insurance reserve at 100% of the marine insurance premiums received during the last three months of the year. The Commissioner assumed that "ninety and third, days are approximately the length of time required before shipments reach their destination or before claims are received by the insurance companies."

On April 1, 1953, Phoenix Assurance Co., Ltd. filed its Philippine income tax return for 1952, declaring therein a deduction from gross income of P35,912.25 as part of the head office expenses incurred for its Philippine business, computed at 5% on its gross Philippine income.

On August 30, 1955 it amended its income tax return for 1952 by excluding from its gross income the amount of P316,526.75 representing reinsurance premiums ceded to foreign reinsurers and further eliminating deductions corresponding to the coded premiums. The amended return showed an income tax due in the amount of P2,502.00. The Commissioner of Internal Revenue disallowed P15,826.35 of the claimed deduction for head office expenses and assessed a deficiency tax of P5,667.00 on July 24, 1958.

On April 30, 1954, Phoenix Assurance Co., Ltd. filed its Philippine income tax return for 1953 and claimed therein a deduction from gross income of P33,070.88 as head office expenses allocable to its Philippine business, equivalent to 5%, of its gross Philippine income. On August 30, 1955 it amended its 1953 income tax return to exclude from its gross income the amount of P246,082.04 representing reinsurance premiums ceded to foreign reinsurers. At the same time, it requested the refund of P23,409.00 as overpaid income tax for 1953. To avoid the prescriptive period provided for in Section 306 of the Tax Code, it filed a petition for review on April 11, 1956 in the Court of Tax Appeals praying for such refund. After verification of the amended income tax return the Commissioner of Internal Revenue disallowed P12,304.10 of the deduction representing head office expenses allocable to Philippine business thereby reducing the refundable amount to P20,180.00.

On April 29, 1955, Phoenix Assurance Co., Ltd. filed its Philippine income tax return for 1954 claiming therein, among others, a deduction from gross income of P99,624.75 as head office expenses allocable to its Philippine business, computed at 5% of its gross Philippine income. It also excluded

from its gross income the amount of P203,384.69 representing reinsurance premiums ceded to foreign reinsurers not doing business in the Philippines.

On August 1, 1958 the Bureau of Internal Revenue released the following assessment for deficiency income tax for the years 1952 and 1954 against Phoenix Assurance Co., Ltd.:

1952 Net income per audited return

P 12,511.61 Unallowable deduction & additional income: Overclaimed Head Office expenses:

Amount claimed . . . . . . . . . . . . P 35,912.25

Amount allowed . . . . . . . . . . . . 20,085.90

P 15,826.35 Net income per investigation !

P 28,337.96 !Tax due thereon

P 5,667.00 ===========

1954 Net income per audited

P160,320.21 Unallowable deduction & additional income: Overclaimed Head Office expenses:

Amount claimed . . . . . . . . . . . . P29,624.73

Amount allowed . . . . . . . . . . . . 19,455.50

10,16.23 Net income per investigation !

P170,489.41 !Tax due thereon

P 39,737.00 Less: amount already assessed

36,890.00 DEFICIENCY TAX DUE !

P 2,847.00 ===========

The above assessment resulted from the disallowance of a portion of the deduction claimed by Phoenix Assurance Co., Ltd. as head office expenses allocable to its business in the Philippines fixed by the Commissioner at 5% of the net Philippine income instead of 5% of the gross Philippine income as claimed in the returns.

Phoenix Assurance Co., Ltd. protested against the aforesaid assessments for withholding tax and deficiency income tax. However, the Commissioner of Internal Revenue denied such protest. Subsequently, Phoenix Assurance Co., Ltd. appealed to the Court of Tax Appeals. In a decision dated February 14, 1962, the Court of Tax Appeals allowed in full the decision claimed by Phoenix Assurance Co., Ltd. for 1950 as net addition to marine insurance reserve; determined the allowable head office expenses allocable to Philippine business to be 5% of the net income in the Philippines; declared the right of the Commissioner of Internal Revenue to assess deficiency income tax for 1952 to have prescribed; absolved Phoenix Assurance Co., Ltd. from payment of the statutory penalties for non-filing of withholding tax return; and, rendered the following judgment:

WHEREFORE, petitioner Phoenix Assurance Company, Ltd. is hereby ordered to pay the Commissioner of Internal Revenue the respective amounts of P75,966.42, P59,059.68 and P48,812.32, as withholding tax for the years 1952, 1953 and 1954, and P2,847.00 as income tax for 1954, or the total sum of P186,685.42 within thirty (30) days from the date this decision becomes final. Upon the other hand, the respondent Commissioner is ordered to refund to petitioner the sum of P20,180.00 as overpaid income tax for 1953, which sum is to be deducted from the total sum of P186,685.42 due as taxes.

If any amount of the tax is not paid within the time prescribed above, there shall be collected a surcharge of 5% of the tax unpaid, plus interest at the rate of 1% a month from the date of delinquency to the date of payment, provided that the maximum amount that may be collected as interest shall not exceed the amount corresponding to a period of three (3) years. Without pronouncement as to costs.

Phoenix Assurance Co., Ltd. and the Commissioner of Internal Revenue have appealed to this Court raising the following issues: (1) Whether or not reinsurance premiums ceded to foreign reinsurers not doing business in the Philippines pursuant to reinsurance contracts executed abroad are subject to withholding tax; (2) Whether or not the right of the Commissioner of Internal Revenue to assess deficiency income tax for the year 1952 against Phoenix Assurance Co., Ltd., has prescribed; (3) Whether or not the deduction of claimed by the Phoenix Assurance Co., Ltd.as net addition to reserve for the year 1950 is excessive; (4) Whether or not the deductions claimed by

Phoenix Assurance Co., Ltd. for head office expenses allocable to Philippine business for the years 1952, 1953 and 1954 are excessive.

The question of whether or not reinsurance premiums ceded to foreign reinsurers not doing business in the Philippines pursuant to contracts executed abroad are income from sources within the Philippines subject to withholding tax under Sections 53 and 54 of the Tax Code has already been resolved in the affirmative in British Traders' Insurance Co., Ltd.v. Commisioner of Internal Revenue, L-20501, April 30, 1965. 1

We come to the issue of prescription. Phoenix Assurance Co., Ltd. filed its income tax return for 1952 on April 1, 1953 showing a loss of P199,583.93. It amended said return on August 30, 1955 reporting a tax liability of P2,502.00. On July 24, 1958, after examination of the amended return, the Commissioner of Internal Revenue assessed deficiency income tax in the sum of P5,667.00. The Court of Tax Appeals found the right of the Commissioner of Internal Revenue barred by prescription, the same having been exercised more than five years from the date the original return was filed. On the other hand, the Commissioner of Internal Revenue insists that his right to issue the assessment has not prescribed inasmuch as the same was availed of before the 5-year period provided for in Section 331 of the Tax Code expired, counting the running of the period from August 30, 1955, the date when the amended return was filed.

Section 331 of the Tax Code, which limits the right of the Commissioner of Internal Revenue to assess income tax within five years from the Filipino of the income tax return, states:

SEC. 331. Period of limitation upon assessment and collection. Except as provided in the succeeding section internal revenue taxes shall be assessed within five years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period. For the purposes of this section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day: Provided, That this limitation shall not apply to cases already investigated prior to the approval of this Code.

The question is: Should the running of the prescriptive period commence from the filing of the original or amended return?

The Court of Tax Appears that the original return was a complete return containing "information on various items of income and deduction from which respondent may intelligently compute and determine the tax liability of petitioner, hence, the prescriptive period should be counted from the filing of said original return. On the other hand, the Commissioner of Internal Revenue maintains that:

"... the deficiency income tax in question could not possibly be determined, or assessed, on the basis of the original return filed on April 1, 1953, for considering that the declared loss amounted to P199,583.93, the mere disallowance of part of the head office expenses could not probably result in said loss being completely wiped out and Phoenix being liable to deficiency tax. Not until the amended return was filed on August 30, 1955 could the Commissioner assess the deficiency income tax in question."

Accordingly, he would wish to press for the counting of the prescriptive period from the filing of the amended return.

To our mind, the Commissioner's view should be sustained. The changes and alterations embodied in the amended income tax return consisted of the exclusion of reinsurance premiums received from domestic insurance companies by Phoenix Assurance Co., Ltd.'s London head office, reinsurance premiums ceded to foreign reinsurers not doing business in the Philippines and various items of deduction attributable to such excluded reinsurance premiums thereby substantially modifying the original return. Furthermore, although the deduction for head office expenses allocable to Philippine business, whose disallowance gave rise to the deficiency tax, was claimed also in the original return, the Commissioner could not have possibly determined a deficiency tax thereunder because Phoenix Assurance Co., Ltd. declared a loss of P199,583.93 therein which would have more than offset such disallowance of P15,826.35. Considering that the deficiency assessment was based on the amended return which, as aforestated, is substantially different from the original return, the period of limitation of the right to issue the same should be counted from the filing of the amended income tax return. From August 30, 1955, when the amended return was filed, to July 24, 1958, when the deficiency assessment was issued, less than five years elapsed. The right of the Commissioner to assess the deficiency tax on such amended return has not prescribed.

To strengthen our opinion, we believe that to hold otherwise, we would be paving the way for taxpayers to evade the payment of taxes by simply reporting in their original return heavy losses and amending the same more than five years later when the Commissioner of Internal Revenue has lost his authority to assess the proper tax thereunder. The object of the Tax Code is to impose taxes for the needs of the Government, not to enhance tax avoidance to its prejudice.

We next consider Phoenix Assurance Co., Ltd.'s claim for deduction of P37,147.04 for 1950 representing net addition to reserve computed at 40% of the marine insurance premiums received during the year. Treating said said deduction to be excessive, the Commissioner of Internal Revenue reduced the same to P25,374.47 which is equivalent to 100% of all marine insurance premiums received during the last months of the year.

Paragraph (a) of Section 32 of the Tax Code states:

SEC. 32. Special provisions regarding income and deductions of insurance companies, whether domestic or foreign. (a) Special deductions allowed to insurance companies. In the case of insurance companies, except domestic life insurance companies and foreign life insurance companies doing business in the Philippines, the net additions, if any, required by law to be made within the year to reserve funds and the sums other than dividends paid within the year on policy and annuity contracts may be deducted from their gross income: Provided, however, That the released reserve be treated as income for the year of release.

Section 186 of the Insurance Law requires the setting up of reserves for liability on marine insurance:

SEC. 186. ... Provided, That for marine risks the insuring company shall be required to charge as the liability for reinsurance fifty per centum of the premiums written in the policies upon yearly risks, and the full premiums written in the policies upon all other marine risks not terminated (Emphasis supplied.)

The reserve required for marine insurance is determined on two bases: 50% of premiums under policies on yearly risks and 100% of premiums under policies of marine risks not terminated during the year. Section 32 (a) of the Tax Code quoted above allows the full amount of such reserve to be deducted from gross income.

It may be noteworthy to observe that the formulas for determining the marine reserve employed by Phoenix Assurance Co., Ltd. and the Commissioner of Internal Revenue 40% of premiums received during the year and 100% of premiums received during the last three months of the year, respectively do not comply with Section 186. Said determination runs short of the requirement. For purposes of the Insurance Law, this Court therefore cannot countenance the same. The reserve called for in Section 186 is a safeguard to the general public and should be strictly followed not only because it is an express provision but also as a matter of public policy. However, for income tax purposes a taxpayer is free to deduct from its gross income a lesser amount, or not to claim any deduction at all. What is prohibited by the income tax law is to claim a deduction beyond the amount authorized therein.

Phoenix Assurance Co., Ltd.'s claim for deduction of P37,147.04 being less than the amount required in Section 186 of the Insurance Law, the same cannot be and is not excessive, and should therefore be fully allowed. *

We come now to the controversy on the taxpayer's claim for deduction on head office expenses incurred during 1952, 1953, and 1954 allocable to its

Philippine business computed at 5% of its gross income in the Philippines The Commissioner of Internal Revenue redetermined such deduction at 5% on Phoenix Assurance Co., Ltd's net income thereby partially disallowing the latter's claim. The parties are agreed as to the percentage 5% but differ as to the basis of computation. Phoenix Assurance Co. Lt. insists that the 5% head office expenses be determined from the gross income, while the Commissioner wants the computation to be made on the net income. What, therefore, needs to be resolved is: Should the 5% be computed on the gross or net income?

The record shows that the gross income of Phoenix Assurance Co., Ltd. consists of income from its Philippine business as well as reinsurance premiums received for its head office in London and reinsurance premiums ceded to foreign reinsurance. Since the items of income not belonging to its Philippine business are not taxable to its Philippine branch, they should be excluded in determining the head office expenses allowable to said Philippine branch. This conclusion finds support in paragraph 2, subsection (a), Section 30 of the Tax Code, quoted hereunder:

(2) Expenses allowable to non-resident alien individuals and foreign corporations. In the case of a non-resident alien individual or a foreign corporation, the expenses deductible are the, necessary expenses paid or incurred in carrying on any business or trade conducted within the Philippines exclusively. (Emphasis supplied.)

Consequently, the deficiency assessments for 1952, 1953 and 1954, resulting from partial disallowance of deduction representing head office expenses, are sustained.

Finally, the Commissioner of Internal Revenue assails the dispositive portion of the Tax Court's decision limiting the maximum amount of interest collectible for deliquency of an amount corresponding to a period of three years. He contends that since such limitation was incorporated into Section 51 of the Tax Code by Republic Act 2343 which took effect only on June 20, 1959, it must not be applied retroactively on withholding tax for the years 1952, 1953 and 1954.

The imposition of interest on unpaid taxes is one of the statutory penalties for tax delinquency, from the payments of which the Court of Tax Appeals absolved the Phoenix Assurance Co., Ltd. on the equitable ground that the latter's failure to pay the withholding tax was due to the Commissioner's opinion that no withholding tax was due. Consequently, the taxpayer could be held liable for the payment of statutory penalties only upon its failure to comply with the Tax Court's judgment rendered on February 14. 1962, after Republic Act 2343 took effect. This part of the ruling of the lower court ought not to be disturbed.

WHEREFORE, the decision appealed from is modified, Phoenix Assurance Co., Ltd. is hereby ordered to pay the Commissioner, of Internal Revenue the amount of P75,966.42, P59,059.68 and P48,812.32 as withholding tax for the years 1952, 1953 and 1954, respectively, and the sums of P5,667.00 and P2,847.00 as income tax for 1952 and 1954 or a total of P192,352.42. The Commissioner of Internal Revenue is ordered to refund to Phoenix Assurance Co., Ltd. the amount of P20,180.00 as overpaid income tax for 1953, which should be deducted from the amount of P192,352.42.

If the amount of P192,352.42 or a portion thereof is not paid within thirty (30) days from the date this judgment becomes final, there should be collected a surcharge and interest as provided for in Section 51(c) (2) of the Tax Code. No costs. It is so ordered.

Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon, Regala, Mak