Heng Tong Textiles Co., Inc. vs. Com.
of Internal Revenue 19737 and other details relative to the orders covered by these
24 SCRA 767, August 26, 1968
MAKALINTAL, J.:
In 1952 the then Collector of Internal Revenue assessed against
the petitioner deficiency sales taxes and surcharges for the year
1949 and the first four months of 1950 in the aggregate sum of
P89,123.58. The assessment was appealed to the Board of Tax
Appeals, whence the case was transferred to the Court of Tax
Appeals upon its organization in 1954, and there was affirmed in its
decision dated February 28, 1952. The matter was thereafter
elevated to this Court for review.
The deficiency taxes in question were assessed on importations of
textiles from abroad. The goods were withdrawn from Customs by
Pan-Asiatic Commercial Co., Inc., which paid, in the name of the
petitioner, the corresponding advance sales tax under section
183(b) of the Internal Revenue Code. The assessment for the
deficiency, however, was made against the petitioner, Heng Tong
Textiles Co., Inc. (now Philip Manufacturing Corporation) on the
ground that it was the real importer of the goods and did not pay
the taxes due on the basis of the gross selling prices thereof. There
is no dispute as to the amount as computed by the internal revenue
examiners and confirmed by the Collector. The only issues posed
in the instant petition for review are: (1) whether or not the
petitioner was the importer of the goods; and (2) whether or not it
was guilty of fraud so as to warrant the imposition of a penalty of
50% on the deficiency.
The Court of Tax Appeals based its decision of affirmance, finding
the petitioner the importer of the goods, on a number of evidentiary
circumstances. First, Heng Tong Textiles Co., Inc. and Pan-Asiatic
Commercial were sister corporations. This is not controverted by
the petitioner. Second, the commercial documents covering the
importations (shipping documents, insurance papers, and records
of payment of the advance sales tax in the Bureau of Customs)
were all in the name of the petitioner. Third, in connection with
advance sales tax aforesaid, Pan-Asiatic Asiatic Commercial wrote
the petitioner the following letter:
In compliance with your request regarding the 5% Sales
Tax that we paid for you for the year 1949 and the first
quarter of 1950 against the goods that you ordered from
various United States suppliers, through us, we attach
hereto a list giving a breakdown of this 5% Sales Tax,
together with the corresponding Official Receipt Numbers
In our opinion, however, the arrangement resorted to does not by
payments. itself alone justify the penalty imposed. Section 183 (a), paragraph
3, of the Internal Revenue Code, as amended by Republic Act No.
253, speaks of willful neglect to file the return or willful making of a
Fourth, there is both documentary and testimonial evidence the
false or fraudulent return. An attempt to minimize one's tax does not
latter being declarations of the petitioner's own witnesses that
necessarily constitute fraud. It is a settled principle that a taxpayer
Pan-Asiatic Commercial acted merely as indentor. Indeed the
may diminish his liability by any means which the law permits. "The
original petition for review below contains the allegation that "during
intention to minimize taxes, when used in the context of fraud, must
the taxable year 1949, Heng Tong Textiles Co., Inc. placed through
be proved to exist by clear and convincing evidence amounting to
Pan-Asiatic Commercial Co., Inc., orders for importations of textiles
more than mere preponderance, and cannot, be justified by mere
from the United States in the sum of P2,190,948.66."
speculation. This is because fraud is never lightly to be presumed."
(Yutivo Sons Hardware Co. vs. CTA, G.R. No. L-13203, and cases
Petitioner excepts to the conclusion of the Court of Tax Appeals cited). No such evidence is shown by the record in the case of the
and avers that the importation papers were placed in the name of herein petitioner. Its actuation is not incompatible with good faith on
the petitioner only for purposes of accommodation, that is, to its part, that is, with a genuine belief that by indorsing the goods to
introduce the petitioner to textile suppliers abroad; and that the Pan-Asiatic Commercial so that the latter could, as it did, take
petitioner was not in a financial position to make the importations in delivery thereof, Pan-Asiatic Commercial would in law be
considered the importer. It may even be true, as the petitioner
question, valued at over a million pesos, since its paid-up capital
insists, that it was Pan-Asiatic Commercial that financed the
was only P30,000.00. These circumstances show nothing but a
private arrangement between the petitioner and Pan-Asiatic importations but placed them in the name of the petitioner as a
matter of accommodation, in which case the element of fraud would
Commercial, which in no way affected the role of the petitioner as
be ruled out, although from the legal viewpoint and as far as the
the importer as far as the Government and its right to collect the
taxes were concerned. Pan-Asiatic Commercial might have right of the Government to collect the taxes was concerned the
petitioner was the real importer and hence must shoulder the tax
furnished the necessary financing for the importations in question,
burden.
but that did not militate against the petitioner's being the importer;
nor did the idea of building up its reputation among textile suppliers
abroad render it necessary for the withdrawal of the goods from
The decision of the Court of Tax Appeals is modified, by eliminating
customs and the payment of the advance sales tax to be made in
therefrom the penalty of 50% on the amount of deficiency sales
the petitioner's name, these being purely local operations, or for
taxes imposed, and is affirmed in all other respects. No
Pan-Asiatic Commercial to affirm, in the private communication
pronouncement as to costs.
sent by it to the petitioner, that the latter was the one that ordered
the goods from the United States.
Republic vs. Ker ,& Company, Ltd. 21609 18 SCRA 207 ,
September 29, 1966
If anything, we perceive in the entire set-up an arrangement
through which the sales taxes due could be minimized, by having
Pan-Asiatic Commercial, as indorsee of the goods, withdraw the Ker & Co., Ltd., a domestic corporation, filed its income tax returns
same from Customs upon payment of the advance sales tax and for the years 1947, 1948, 1949 and 1950 on the following dates:
then execute a sale thereof to Heng Tong Textiles at cost, or at a
negligible profit. As it turned out, according to the Court of Tax
Appeals, "the goods were made to appear as having (thus) been Year Date Filed
sold ... so that no sales tax was paid by petitioner upon the sales of
such goods ... (and) neither, was any sales tax paid on the 1947 April 12, 1948
supposed sales of said goods by the Pan-Asiatic Commercial to the 1948 April 30, 1949
petitioner as the sales were made apparently at cost." This is so
because "during the period in question," the Court of Tax Appeals 1949 May 15, 1950
added, "the sales tax on sales of imported articles was based on
the gross selling price thereof, the advance sales tax paid upon 1950 May 9, 1951
removal of the goods from the customhouse being credited against
the tax on the actual gross selling price paid by the importer. (See
Rep. Act No. 253; General Circular No. V-106, February 19, 1951.)"
It amended its income tax returns for 1948 and 1949 on May 11,
1949 and June 30, 1950, respectively.
In 1953 the Bureau of Internal Revenue examined and audited Ker
& Co., Ltd.'s returns and books of accounts and subsequently
issued the following assessments for deficiency income tax:
Year Amount Date Assessed
1947 P42,342.30 July 25, 1953
1948 18,651.87 Feb. 16, 1953
1949 139.67 Feb. 16, 1953
1950 12,813.00 Feb. 16, 1953
due and payable on dates indicated in the accompanying notices of
assessment. The assessments for 1948 and 1950 carried the
surcharge of 50% authorized under Section 72 of the Tax Code for
the filing of fraudulent returns.
Upon request of Ker & Co., Ltd., through Atty. Jose Leido, its
counsel, the Bureau of Internal Revenue reduced the assessments
for the year 1947 from P42,342.30 to P27,026.28 and for the year
1950 from P12,813.00 to P8,542.00, imposed the 50% surcharge
for the year 1947 and eliminated the same surcharge from the
assessment for the year 1950. The assessments for years 1948
and 1949 remained the same.
On March 1, 1956 Ker & Co., Ltd. filed with the Court of Tax
Appeals a petition for review with preliminary injunction. No
preliminary injunction was issued, for said court dismissed the
appeal for having been instituted beyond the 30-day period
provided for in Section 11 of Republic Act 1125. We affirmed the
order of dismissal of L-12396. 1
On March 15, 1962, the Bureau of Internal Revenue demanded
payment of the aforesaid assessments together with a surcharge of
5% for late payment and interest at the rate of 1% monthly. Ker &
Co., Ltd. refused to pay, instead in its letters dated March 28, 1962
and April 10, 1962 it set up the defense of prescription of the
Commissioner's right to collect the tax. Subsequently, the Republic
of the Philippines filed on March 27, 1962 a complaint with the
Court of First Instance of Manila seeking collection of the aforesaid
deficiency income tax for the years 1947, 1948, 1949 and 1950.
The complaint did not allege fraud in the filing of any of the income
tax returns for the years involved, nor did it pray for the payment of
the corresponding 50% surcharge, but it prayed for the payment of month should commence from the date it fell due as indicated in the
5% surcharge for late payment and interest of 1% per month assessment notices instead of on the date the complaint was filed.
without however specifying from what date interest started to
accrue.
On March 6, 1963 Ker & Co., Ltd. also filed a motion for
reconsideration reiterating its assertion that the Court of First
Summons was served not on the defendant taxpayer but upon Instance did not acquire jurisdiction over its person, and
Messrs. Leido and Associates, its counsel in the proceedings maintaining that since the complaint was filed nine years, one
before the Bureau of Internal Revenue and the Court of Tax month and eleven days after the deficiency assessments for 1948,
Appeals. 1949 and 1950 were made and since the filing of its petition for
review in the Court of Tax Appeals did not stop the running of the
period of limitations, the right of the Commissioner of Internal
On April 14, 1962 Ker & Co., Ltd. through its counsel, Leido,
Revenue to collect the tax in question has prescribed.
Andrada, Perez & Associates, moved for the dismissal of the
complaint on the ground that the court did not acquire jurisdiction
over the person of the defendant and that plaintiff's cause of action The two motions for reconsideration having been denied, both
has prescribed. This motion was denied and defendant filed a parties appealed directly to this Court.
motion for reconsideration. Resolution on said motion, however,
was deferred until trial of the case on the merits.
The issues in this case are:
On May 18, 1962, Ker & Co., Ltd. filed its answer to the complaint
1. Did the Court of First Instance acquire jurisdiction over
interposing therein the defense set up in its motion to dismiss of
the person of defendant Ker & Co., Ltd.? .
April 14, 1962.
2. Did the right of the Commissioner of Internal Revenue
On September 18, 1962 the Republic of the Philippines amended
to assess deficiency income tax for the year 1947
its complaint, in answer to which Ker & Co., Ltd. adopted the same
prescribe? .
answer which it had filed on May 18, 1962.
3. Did the filing of a petition for review by the taxpayer in
On January 30, 1963 the Court of First Instance rendered
the Court of Tax Appeals suspend the running of the
judgment, the dispositive portion of which states:
statute of limitations to collect the deficiency income for
the years 1948, 1949 and 1950?
WHEREFORE, this Court dismisses the claim for the
collection of deficiency income taxes for 1947, but orders
4. When did the delinquency interest on the deficiency
defendant taxpayer to pay the deficiency income taxes
income tax for the years 1948, 1949 and 1950 accrue?
for 1948, 1949 and 1950, in the amounts of P18,651.87,
P139.67 and P8,542.00, respectively, plus 5% surcharge
thereon on each amount and interest of 1% a month First Issue
computed from March 27, 1962 and until full payment
thereof is made, plus the costs of suit.
Ker & Co., Ltd. maintains that the court a quo did not acquire
jurisdiction over its person inasmuch as summons was not served
On February 20, 1963 the Republic of the Philippines filed a motion upon it but upon Messrs. Leido and Associates who do not come
for reconsideration contending that the right of the Commissioner of under any of the class of persons upon whom summons should be
Internal Revenue to collect the deficiency assessment for 1947 has served as enumerated in Section 13, Rule 7 of the Rules of
not prescribed by a lapse of merely five years and three months, Court, 2 which reads:
because the taxpayer's income tax return was fraudulent in which
case prescription sets in ten years from October 31, 1951, the date
of discovery of the fraud, pursuant to Section 332 (a) of the Tax SEC. 13. Service upon private domestic corporation or
partnership.If the defendant is a corporation formed
Codes and that the payment of delinquency interest of 1% per
under the laws of the Philippines or a partnership duly
 registered, service may be made on the president,
manager, secretary, cashier, agent, or any of its
directors.
Messrs. Leido and Associates acted as counsel for Ker Co., Ltd.
when this tax case was in its administrative stage. The same
counsel represented Ker & Co., Ltd., when it appealed said case to
the Court of Tax Appeals and later to this Court. Subsequently,
when the Deputy Commissioner of Internal Revenue, by letter
dated March 15, 1962, demanded the payment of the deficiency
income tax in question, it was Messrs. Leido, Andrada, Perez &
Associates who replied in behalf of Ker & Co., Ltd. in two letters,
dated March 28, 1962 and April 10, 1962, both after the complaint
in this case was filed. At least therefore on April 2, 1962 when
Messrs. Leido and Associates received the summons, they were
still acting for and in behalf of Ker & Co., Ltd. in connection with its
tax liability involved in this case. Perforce, they were the taxpayer's
agent when summons was served. Under Section 13 of Rule 7,
aforequoted, service upon the agent of a corporation is sufficient.
We observe that the motion to dismiss filed on April 14, 1962, aside
from disputing the lower court's jurisdiction over defendant's
person, prayed for dismissal of the complaint on the ground that
plaintiff's cause of action has prescribed. By interposing such
second ground in its motion to dismiss, Ker & Co., Ltd. availed of
an affirmative defense on the basis of which it prayed the court to
resolve controversy in its favor. For the court to validly decide the
said plea of defendant Ker & Co., Ltd., it necessarily had to acquire
jurisdiction upon the latter's person, who, being the proponent of
the affirmative defense, should be deemed to have abandoned its
special appearance and voluntarily submitted itself to the
jurisdiction of the court.3
Voluntary appearance cures defects of summons, if any.4 Such
defect, if any, was further cured when defendant filed its answer to
the complaint.5 A defendant can not be permitted to speculate upon
the judgment of the court by objecting to the court's jurisdiction over
its person if the judgment is adverse to it, and acceding to
jurisdiction over its person if and when the judgment sustains its
defenses.
Second Issue
Ker & Co., Ltd. contends that under Section 331 of the Tax Code
the right of the Commissioner of Internal Revenue to assess
against it a deficiency income tax for the year 1947 has prescribed
because the assessment was issued on July 25, 1953 after a lapse
of five years, three months and thirteen days from the date (April
12, 1948) it filed its income tax return. On the other hand, the It would be worth mentioning that since the assessment for
Republic of the Philippines insists that the taxpayer's income tax deficiency income tax for 1947 has become final and executory,
return was fraudulent, therefore the Commissioner of Internal Ker & Co., Ltd. may not anymore raise defenses which go into the
Revenue may assess the tax within ten years from discovery of the merits of the assessment, i.e., prescription of the Commissioner's
fraud on October 31, 1951 pursuant to Section 322(a) of the Tax right to assess the tax. Such was our ruling in previous cases.9 In
Code. this case however, Ker & Co., Ltd. raised the defense of
prescription in the proceedings below and the Republic of the
Philippines, instead of questioning the right of the defendant to
The stand of the Republic of the Philippines hinges on whether or
raise such defense, litigated on it and submitted the issue for
not taxpayer's income tax return for 1947 was fraudulent.
resolution of the court. By its actuation, the Republic of the
Philippines should be considered to have waived its right to object
The court a quo, confining itself to determining whether or not the to the setting up of such defense.
assessment of the tax for 1947 was issued within the five-year
period provided for in Section 331 of the Tax Code, ruled that the
Third Issue
right of the Commissioner of Internal Revenue to assess the tax
has prescribed. Said the lower court:
Ker & Co., Ltd. impresses upon Us that since the Republic of the
Philippines filed the complaint for the collection of the deficiency
The Court resolves the second issue in the negative,
income tax for the years 1948, 1949 and 1950 only on March 27,
because Section 331 of the Revenue Code explicitly
1962, or nine years, one month and eleven days from February 16,
provides, in mandatory terms, that "Internal
1953, the date the tax was assessed, the right to collect the same
Revenue taxes shall be assessed within 5 years after the
has prescribed pursuant to Section 332 (c) of the Tax Code. The
return was filed, and no proceedings in court without
Republic of the Philippines however contends that the running of
assessment, for the collection of such taxes, shall be
the prescriptive period was interrupted by the filing of the taxpayer's
begun after expiration of such period. The attempt by the
petition for review in the Court of Tax Appeals on March 1, 1956.
Commissioner of Internal Revenue to make an
assessment on July 25, 1953, on the basis of a return
filed on April 12, 1948, is an exercise of authority against If the period during which the case was pending in the Court of Tax
the aforequoted explicit and mandatory limitations of Appeals and in the Supreme Court were not counted in reckoning
statutory law. Settled in our system is the rule that acts the prescriptive period, less than five years would have elapsed,
committed against the provisions of mandatory or hence, the right to collect the tax has not prescribed.
prohibitory laws shall be void (Art. 5, New Civil Code). . . .
The taxpayer counters that the filing of the petition for review in the
Said court resolved the issue without touching upon fraudulence of Court of Tax Appeals could not have stopped the running of the
the return. The reason is that the complaint alleged no fraud, nor prescriptive period to collect because said court did not have
did the plaintiff present evidence to prove fraud. jurisdiction over the case, the appeal having been interposed
beyond the 30-day period set forth in Section 11 of Republic Act
1125. Precisely, it adds, the Tax Court dismissed the appeal for
In reply to the lower court's conclusion, the Republic of the
lack of jurisdiction and said dismissal was affirmed by the Supreme
Philippines maintains in its brief that Ker & Co., Ltd. filed a false
Court in L-12396 aforementioned.
return and since the fraud penalty of 50% surcharge was imposed
in the deficiency income tax assessment, which has become final
and executory, the finding of the Commissioner of Internal Revenue Under Section 333 of the Tax Code, quoted hereunder:
as to the existence of the fraud has also become final and need not
be proved. This contention suffers from a flaw in that it fails to
SEC. 333. Suspension of running of statute.The
consider the well-settled principle that fraud is a question of
running of the statute of limitations provided in Section
fact6 which must be alleged and proved.7 Fraud is a serious charge
331 or three hundred thirty-two on the making of
and, to be sustained, it must be supported by clear and convincing
assessments and the beginning, of distraint or levy or a
proof.8 Accordingly, fraud should have been alleged and proved in
proceeding in court for collection, in respect of any
the lower court. On these premises We therefore sustain the ruling
deficiency, shall be suspended for the period during
of the lower court upon the point of prescription.
 which the Collector of Internal Revenue is prohibited from
making the assessment or beginning distraint or levy or a
proceeding in court, and for sixty days thereafter.
the running of the prescriptive period to collect the tax shall be
suspended for the period during which the Commissioner of
Internal Revenue is prohibited from beginning a distraint and levy or
instituting a proceeding in court, and for sixty days thereafter.
Did the pendency of the taxpayer's appeal in the Court of Tax
Appeals and in the Supreme Court have the effect of legally
preventing the Commissioner of Internal Revenue from instituting
an action in the Court of First Instance for the collection of the tax?
Our view is that it did.
From March 1, 1956 when Ker & Co., Ltd. filed a petition for review
in the Court of Tax Appeals contesting the legality of the
assessments in question, until the termination of its appeal in the
Supreme Court, the Commissioner of Internal Revenue was
prevented, as recognized in this Court's ruling in Ledesma, et al. v.
Court of Tax Appeals, 10 from filing an ordinary action in the Court
of First Instance to collect the tax. Besides, to do so would be to
violate the judicial policy of avoiding multiplicity of suits and the rule
on lis pendens. 11
It would be interesting to note that when the Commissioner of
Internal Revenue issued the final deficiency assessments on
January 5, 1954, he had already lost, by prescription, the right to
collect the tax (except that for 1950) by the summary method of
warrant of distraint and levy. Ker & Co., Ltd. immediately thereafter
requested suspension of the collection of the tax without penalty
incident to late payment pending the filing of a memorandum in
support of its views. As requested, no tax was collected. On May
22, 1954 the projected memorandum was filed, but as of that date
the Commissioner's right to collect by warrant of distraint and levy
the deficiency tax for 1950 had already prescribed. So much so,
that on March 1, 1956 when Ker & Co., Ltd. filed a petition for
review in the Court of Tax Appeals, the Commissioner of Internal
Revenue had but one remedy left to collect the tax, that is, by
judicial action. 12 However, as stated, an independent ordinary
action in the Court of First Instance was not available to the
Commissioner pursuant to Our ruling in Ledesma, et al. v. Court of
Tax Appeals, supra, in view of the pendency of the taxpayer's
petition for review in the Court of Tax Appeals. Precisely he
urgently filed a motion to dismiss the taxpayer's petition for review
with a view to terminating therein the proceedings in the shortest
possible time in order that he could file a collection case in the
Court of First Instance before his right to do so is cut off by the
passage of time. As moved, the Tax Court dismissed the case and
Ker & Co., Ltd. appealed to the Supreme Court. By the time the
Supreme Court affirmed the order of dismissal of the Court of Tax
Appeals in L-12396 on January 31, 1962 more than five years had
elapsed since the final assessments were made on January 5,
1954. Thereafter, the Commissioner of Internal Revenue
demanded extra-judicially the payment of the deficiency tax in
question and in reply the taxpayer, by its letter dated March 28,
1962, advised the Commissioner of Internal Revenue that the right
to collect the tax has prescribed pursuant to Section 332 (c) of the
Tax Code.1awphl.nt
Thus, did the taxpayer produce the effect of temporarily staying the
hands of the Commissioner of Internal Revenue simply through a
choice of remedy. And, if We were to sustain the taxpayer's stand,
We would be encouraging taxpayers to delay the payment of taxes
in the hope of ultimately avoiding the same.
Under the circumstances, the Commissioner of Internal Revenue
was in effect prohibited from collecting the tax in question. This
being so, the provisions of Section 333 of the Tax Code will apply.
Fourth Issue
The Republic of the Philippines maintains that the delinquency
interest on the deficiency income tax for 1948, 1949 and 1950
accrued and should commence from the date of the assessments
as shown in the assessment notices, pursuant to Section 51(e) of
the Tax Code, instead of from the date the complaint was filed as
determined in the decision appealed from.
Section 51 (e) of the Tax Code states:
SEC. 51(e). Surcharge and interest in case of
delinquency.To any sum or sums due and unpaid after
the dates prescribed in subsections (b), (c) and (d) for the
payment of the same, there shall be added the sum of
five per centum on the amount of tax unpaid and interest
at the rate of one per centum a month upon said tax from
the time the same became due, except from the estates
of insane, deceased, or insolvent persons. (emphasis
supplied)
Exhibit "F" the letter of assessment shows that the deficiency
income tax for 1948 and 1949 became due on March 15, 1953 and
that for 1950 accrued on February 15, 1954 in accordance with
Section 51(d) of the Tax Code. Since the tax in question remained
unpaid, delinquency interest accrued and became due starting from
said due dates. The decision appealed from should therefore be
modified accordingly.
WHEREFORE, the decision appealed from is affirmed with the
modification that the delinquency interest at the rate of 1% per
month shall be computed from March 15, 1953 for the deficiency
income tax for 1948 and 1949 and from February 15, 1954 for the
deficiency income tax for 1950. With costs against Ker & Co., Ltd.
So ordered.
Gutierrez, et al. vs. Court of Tax Appeals, et al. 101
Phil. 713 , May 31, 1957
Maria Morales was the registered owner of an agricultural land
designated as Lot No. 724-C of the cadastral survey of Mabalacat,
Pampanga. The Republic of the Philippines, at the request of the
U.S. Government and pursuant to the terms of the Military Bases
Agreement of March 14, 1947, instituted condemnation
proceedings in the Court of First Instance of Pampanga, docketed
as Civil Case No. 148, for the purpose of expropriating the lands
owned by Maria Morales and others needed for the expansion of
the Clark Field Air Base, which project is necessary for the mutual
protection and defense of the Philippines and the United States.
Blas Gutirrez was also made a party defendant in said Civil Case
No. 148 for being the husband of the landowner Maria Morales. At
the commencement of the action, the Republic of the Philippines,
therein plaintiff, deposited with the Clerk of the Court of First
Instance of Pampanga the sum of P156,960, which was
provisionally fixed as the value of the lands sought to be
expropriated, in order that it could take immediate possession of
the same.
On January 27, 1949, upon order of the Court, the sum of P34,580
(PNB Check 721520-Exh. R) was paid by the Provincial Treasurer
of Pampanga to Maria Morales out of the original deposit of
P156,960 made by therein plaintiff. After due hearing, the Court of
First Instance of Pampanga rendered decision dated November 29,
1949, wherein it fixed as just compensation P2,500 per hectare for
some of the lots and P3,000 per hectare for the others, which
values were based on the reports of the Commission on Appraisal
whose members were chosen by both parties and by the Court,
which took into consideration the different conditions affecting the
value of the condemned properties in making their findings.
In virtue of said decision, defendant Maria Morales was to receive
the amount of P94,305.75 as compensation for Lot No. 724-C
which was one of the expropriated lands. But the Court
disapproved defendants claims for consequential damages
considering them amply compensated by the price awarded to their
said properties. In order to avoid further litigation expenses and
delay inherent to an appeal, the parties entered into a compromise
agreement on January 7, 1950, modifying in part the decision
rendered by the Court in the sense of fixing the compensation for
all the lands, without distinction, at P2,500 per hectare, which
compromise agreement was approved by the Court on January 9,
1950. This reduction of the price to P2,500 per hectare did not
affect Lot No. 724-C of defendant Maria Morales. Sometime in
1950, the spouses Blas Gutirrez and Maria Morales received the
sum of P59,785.75 representing the balance remaining in their
favor after deducting the amount of P34,580 already withdrawn
from the compensation due to them.
In a notice of assessment dated January 28, 1953, the Collector of
Internal Revenue demanded of the petitioners the payment of
P8,481 as alleged deficiency income tax for the year 1950,
inclusive of surcharges and penalties. On March 5, 1953, counsel
for petitioners sent a letter to the Collector of Internal Revenue
requesting the latter to withdraw and reconsider said assessment,
contending among others, that the compensation paid to the
spouses by the Government for their property was not "income
derived from sale, dealing or disposition of property" referred to by
section 29 of the Tax Code and therefore not taxable; that even
granting that condemnation of private properties is embraced within
the meaning of the word "sale" or "dealing", the compensation
received by the taxpayers must be considered as income for 1948
and not for 1950 since the amount deposited and paid in 1948
represented more than 25 per cent of the total compensation
awarded by the court; that the assessment was made after the
lapse of the 3-year prescriptive period provided for in section 51-(d)
of the Tax Code; that the compensation in question should be
exempted from taxation by reason of the provision of section 29 (b)-
6 of the Tax Code; that the spouses Blas Gutirrez and Maria
Morales did not realize any profit in said transaction as there were
improvements on the land already made and that the purchasing
value of the peso at the time of the expropriation proceeding had
depreciated if compared to the value of the pre-war peso; and that
penalties should not be imposed on said spouses because granting
that the assessment was correct, the omission of the compensation
awarded therein was due to an honest mistake.
This request was denied by the Collector of Internal Revenue, in a
letter dated April 26, 1954, refuting point by point the arguments
advanced by the taxpayers. The record further shows that a
warrant of distraint and levy was issued by the Collector of Internal
Revenue on the properties of Mr. & Mrs. Blas Gutirrez found in
Mabalacat, Pampanga, and a notice of tax lien was duly registered
with the Register of Deeds of San Fernando, Pampanga, on the
same date. Counsel for the spouses then requested that the matter
be referred to the Conference Staff of the Bureau of Internal
Revenue for proper hearing, to which the Collector answered in a
letter dated December 24, 1954, stating that the request would be
granted upon compliance by the taxpayers with the requirements of
Department of Finance Order No. 213, i.e., the filing of a verified
petition to that effect and that one-half of the total assessment
should be guaranteed by a bond, provided that the taxpayers would
agree in writing to the suspension of the running of the period of
prescription.
The taxpayers then served notice that the case would be brought
on appeal to the Court of Tax Appeals, which they did by filing a
petition with said Court to review the assessment made by the
Collector of Internal Revenue, docketed as C.T.A. Case No. 65. In
that instance, it was prayed that the Court render judgment
declaring that the taking of petitioners land by the Government was
not a sale or dealing in property; that the amount paid to petitioners
as just compensation for their property should not be diminished by
way of taxation; that said compensation was by law exempt from
taxation and that the period to collect the income taxes by summary
methods had prescribed; that respondent Collector of Internal
Revenue be enjoined from carrying out further steps to collect from
petitioners by summary methods the said taxes which they alleged
to be erroneously assessed and for such other remedies which
would serve the ends of law and justice.
The Solicitor General, in representation of the respondent Collector
of Internal Revenue, filed an answer on February 11, 1955,
admitting some of the allegations of petitioners and denying some
of them, and as special defenses, he advanced the contention that
the Court had no jurisdiction to entertain the petition; that the profit
realized by petitioners from the sale of the land in question was
subject to income tax; that the full compensation received by
petitioners should be included in the income received in 1950,
same having been paid in 1950 by the Government; that under the
Bases Agreement only residents of the United States are exempt
from the payment of income tax in the Philippines in respects to
profits derived under a contract with the U.S. Government in
connection with the construction, maintenance and operation of the
bases; that in the determination of the gain or loss from the sale of
property acquired on or after March 1, 1913, the cost of acquisition
and the selling price shall be taken into account without
qualification as to the purchasing power of the currency; that the
imposition of the 50 per cent surcharge was in accordance with the
Tax Code; that the Collector of Internal Revenue was empowered
to collect petitioners deficiency income tax; and prayed that the
petition for review be dismissed; petitioners be ordered to pay the
amount of P8,481 plus the delinquency penalty of 5 per cent for late
payment and monthly interest at the rate of 1 per cent from April 1,
1953, up to the date of actual payment and for such other relief that
may be deemed just and equitable in the premises.
After due hearing and after the parties had filed their respective
memoranda, the Court of Tax Appeals rendered decision on August
31, 1955, holding that it had jurisdiction to hear and determine the
case; that the gain derived by the petitioners from the expropriation
of their property constituted taxable income and as such was
capital gain; and that said gain was taxable in 1950 when it was
realized. It was also found by said Court that the evidence did not
warrant the imposition of the 50 per cent surcharge because the
petitioners acted in good faith and without intent to defraud the
Government when they failed to include in their gross income the
proceeds they received from the expropriated property, and,
therefore, modified the assessment made by respondent, requiring
petitioners to pay only the sum of P5,654. From this decision, both
parties appealed to this Court and in this instance, petitioners Blas
Gutirrez and Maria Morales, as appellants in G. R. No. L-9738,
made the following assignments of error:chanrob1es virtual 1aw
library
1. That the Court of Tax Appeals erred in holding that, for income
tax purposes, income from expropriation should be deemed as
income from sale, any profit derived therefrom is subject to income
tax as capital gain pursuant to the provisions of Section 37-(a)-(5)
in relation to Section 29-(a) of the Tax Code;
2. That the Court of Tax Appeals erred in not holding that, under
the particular circumstances in which the property of the appellants
was taken by the Philippine Government, the amount paid to them
as just compensation is exempt from income tax pursuant to
Section 29- (b)-(6) of the Tax Code;
3. That the Court of Tax Appeals erred in not holding that the
respondent Collector is definitely barred by the Statute of
Limitations from collecting the deficiency income tax in question,
whether administratively thru summary methods, or judicially thru
the ordinary court procedures;
4. That the Court of Tax Appeals erred is not holding that the
capital gain found by the respondent Collector as have been
derived by the petitioners-appellants from the expropriation of their
property is merely nominal not subject to income tax, and in not
holding that the pronouncement of the court in the expropriation
case in this respect is binding upon the respondent Collector of
Internal Revenue; and
5. That the Court of Tax Appeals erred in not pronouncing upon the
pleadings of the parties that the petitioners-appellants did not
derive any capital gain from the expropriation of their property.

The appeal of the respondent Collector of Internal Revenue was
docketed in this Court as G. R. No. L-9771, and in this case the
Solicitor General ascribed to the lower court the commission of the
following error:chanrob1es virtual 1aw library
That the Court of Tax Appeals erred in holding that respondents are
not subject to the payment of the 50 per cent surcharge in spite of
the fact that the latters income tax return for the year 1950 is false
and/or fraudulent.
The facts just narrated are not disputed and the controversy only
arose from the assertion by the Collector of Internal Revenue that
petitioners-appellants failed to include from their gross income, in
filing their income tax return for 1950, the amount of P94,305.75
which they had received as compensation for their land taken by
the Government by expropriation proceedings. It is the contention
of respondent Collector of Internal Revenue that such transfer of
property, for taxation purposes, is "sale" and that the income
derived therefrom is taxable. The pertinent provisions of the
National Internal Revenue Code applicable to the instant cases are
the following:chanrob1es virtual 1aw library
SEC. 29. GROSS INCOME. (a) General definition. "Gross
income" includes gains, profits, and income derived from salaries,
wages, or compensation for personal service of whatever kind and
in whatever form paid, or from professions, vocations, trades,
businesses, commerce, sales or dealings in property, whether real
or personal, growing out of ownership or use of or interest in such
property; also from interests, rents, dividends, securities, or the
transactions of any business carried on for gain or profit, or gains,
profits, and income derived from any source whatsoever.
SEC. 37. INCOME FROM SOURCES WITHIN THE PHILIPPINES.
(a) Gross income from sources within the Philippines. The
following items of gross income shall be treated as gross income
from sources within the Philippines:chanrob1es virtual 1aw library
x x x "(1) No member of the United States Armed Forces except Filipino
(5) SALE OF REAL PROPERTY. Gains profits, and income from
the sale of real property located in the Philippines;
x x x connection with the construction, maintenance, operation or
There is no question that the property expropriated being located in
the Philippines, compensation or income derived therefrom
ordinarily has to be considered as income from sources within the
Philippines and subject to the taxing jurisdiction of the Philippines.
However, it is to be remembered that said property was acquired by
the Government through condemnation proceedings and
appellants stand is, therefore, that same cannot be considered as
sale as said acquisition was by force, there being practically no
meeting of the minds between the parties. Consequently, the
taxpayers contend, this kind of transfer of ownership must perforce
be distinguished from sale, for the purpose of Section 29-(a) of the
Tax Code. But the authorities in the United States on the matter
sustain the view expressed by the Collector of Internal Revenue, for
it is held that:jgc:chanrobles.com.ph
"The transfer of property through condemnation proceedings is a
sale or exchange within the meaning of section 117 (a) of the 1936
Revenue Act and profit from the transaction constitutes capital
gain" (1942. Com. Int. Revenue v. Kieselbach (CCA 3) 127 F. (24)
359). "The taking of property by condemnation and the payment of
just compensation therefore is a sale or exchange within the
meaning of section 117 (a) of the Revenue Act of 1936, and profits
from that transaction is capital gain" (David S. Brown v. Comm.,
1942, 42 BTA 139).
The proposition that income from expropriation proceedings is
income from sales or exchange and therefore taxable has been
likewise upheld in the case of Lapham v. U.S. (1949, 40 AFTR
1370) and in Kneipp v. U.S. (1949, 85 F Suppl. 902). It appears
then that the acquisition by the Government of private properties
through the exercise of the power of eminent domain, said
properties being JUSTLY compensated, is embraced within the
meaning of the term "sale" or "disposition of property", and the
proceeds from said transaction clearly fall within the definition of
gross income laid down by Section 29 of the Tax Code of the
Philippines.
Petitioners-appellants also averred that granting that the
compensation thus received is "income", same is exempted under
Section 29-(b)-6 of the Tax Code, which reads as
follows:chanrob1es virtual 1aw library
SEC. 29. GROSS INCOME.
x x x dependents, shall be liable to pay income tax in the Philippines
(b) EXCLUSIONS FROM GROSS INCOME. The following items
shall not be included in gross income and shall be exempt from
taxation under this Title:chanrob1es virtual 1aw library
x x x
(6) Income exempt under treaty. Income of any kind, to the
extent required by any treaty obligation binding upon the
Government of the Philippines.
The taxpayers maintain that since, at the request of the U.S.
Government, the proceeding to expropriate the land in question
necessary for the expansion of the Clark Field Air Base was
instituted by the Philippine Government as part of its obligation
under the Military Bases Agreement, the compensation accruing
therefrom must necessarily fall under the exemption provided for by
Section 29-(b)-6 of the Tax Code. We find this stand untenable, for
the same Military Bases Agreement cited by appellants contains
the following:jgc:chanrobles.com.ph
"ARTICLE XXII
"CONDEMNATION OR EXPROPRIATION
"1. Whenever it is necessary to acquire by condemnation or
expropriation proceedings real property belonging to private
persons, association, or corporations located in bases named in
Annex A and Annex B in order to carry out the purposes of this
agreement, the Philippines will institute and prosecute such
condemnation proceedings in accordance with the laws of the
Philippines. The United States agrees to reimburse the Philippines
for all the reasonable expanses, damages, and costs thereby
incurred, including the value of the property as determined by the
Court. In addition, subject to mutual agreements of the two
governments, the United States shall reimburse the Philippines for
the reasonable costs of transportation and removal of any
occupants displaced or ejected by reason of the condemnation or
expropriation"
"ARTICLE XII
"INTERNAL REVENUE EXEMPTION
citizens, serving in the Philippines in connection with the bases and
residing in the Philippines by reason only of such service, or his
except in respect of income derived from Philippine sources.
"(2) No national of the United States serving in the Philippines in
defense of the bases and residing in the Philippines by reason only
of such employment, or his spouse and minor children and
dependent parents of either spouse, shall be liable to pay income
tax in the Philippines except in respect of income derived from
Philippine sources or sources other than the United States.
"(3) No person referred to in paragraphs 1 and 2 of this said Article
shall be liable to pay the government or local authorities of the
Philippines any poll or residence tax, or any imports or experts
duties, or any other tax on personal property imported for his own
use provided, that private owned vehicles shall be subject to
payment of the following only: when certified as being used for
military purposes by appropriate United States Authorities, the
normal license plate fee; otherwise, the normal license and
registration fees.
"(4) No national of the United States, or corporation organized
under the laws of the United States, shall be liable to pay income
tax in the Philippines in respect of any profits derived under a
contract made in the United States with the government of the
United States in connection with the construction, maintenance,
operation and defense of the bases, or any tax in the nature of a
license in respect of any service of works for the United States in
connection with the construction, maintenance, operation and
defense of the bases.
x x x return should be considered." (Mertens, Federal Income Taxation,
The facts brought about by the aforementioned terms of the said
treaty need no further elucidation. It is unmistakable that although
the condemnation or expropriation of properties was provided for,
the exemption from tax of the compensation to be paid for the
expropriation of privately owned lands located in the Philippines
was not given any attention, and the internal revenue exemptions
specifically taken care of by said Agreement applies only to
members of the U.S. Armed Forces serving in the Philippines and
U.S. nationals working in these Islands in connection with the
construction, maintenance, operation and defense of said bases.
Anent appellant taxpayers allegation that the respondent Collector
of Internal Revenue was barred from collecting the deficiency
income tax assessment, it having been made beyond the 3-year
period prescribed by section 51-(d) of the Tax Code, We have this
much to say. Although it is true that by order of the Court of First
Instance of Pampanga, the amount of P34,580 out of the original
deposit made by the Government was withdrawn in favor of
appellants on January 27, 1949, the same cannot be considered as
income for said year but for 1950 when the balance of P59,785.75
was actually received. Before that date (1950), appellant taxpayers
were still the owners of their whole property that was subject of
condemnation proceedings and said amount of P34,580 was not
paid to, but merely deposited in court and withdrawn by them.
Therefore, the payment of the value of Maria Morales Lot 724-C
was actually made by the Republic of the Philippines in 1950 and it
has to be credited as income for 1950 for it was then when title over
said property passed to the Republic of the Philippines. Appellant
tax payers cannot say that the title over the property expropriated
already passed to the Government when the latter was placed in
possession thereof, for in condemnation proceedings, title to the
land does not pass to the plaintiff until the indemnity is paid (Calvo
v. Zandueta, 49 Phil. 605), and notwithstanding possession
acquired by the expropriator, title does not actually pass to him until
payment of the amount adjudged by the Court and the registration
of the judgment with the Register of Deeds (See Visayan Refining
Company v. Camus Et. Al., 40 Phil. 550; Metropolitan Water District
v. De los Angeles, 55 Phil. 783). Now, if said amount should have
been reported as income for 1950 in the return that must have been
filed on or before March 1, 1951, the assessment made by the
Collector on January 28, 1953, is still within the 3-year prescriptive
period provided for by Section 51-d and could, therefore, be
collected either by the administrative methods of distraint and levy
or by judicial action (See Collector of Internal Revenue v. A.P.
Reyes Et. Al., 100 Phil., 822; Collector of Internal Revenue v.
Zulueta Et. Al., 100 Phil., 872; and Sambrano v. Court of Tax
Appeals Et. Al., supra, p. 1).
As to appellant taxpayers proposition that the profit derived by
them from the expropriation of their property is merely nominal and
not subject to income tax, We find Section 35 of the Tax Code
illuminating. Said section reads as follows:jgc:chanrobles.com.ph
"SEC. 35. DETERMINATION OF GAIN OR LOSS FROM THE
SALE OR OTHER DISPOSITION OF PROPERTY. The gain
derived or loss sustained from the sale or other disposition of
property, real or personal, or mixed, shall be determined in
accordance with the following schedule:chanrob1es virtual 1aw
library
(a)x x x"
(b) In the case of property acquired on or after March first, nineteen
hundred and thirteen, the cost thereof if such property was acquired
by purchase or the fair market price or value as of the date of the
acquisition if the same was acquired by gratuitous title.
x x x This is an appeal from the decision of the Court of First Instance of
The records show that the property in question was adjudicated to
Maria Morales by order of the Court of First Instance of Pampanga
on March 23, 1929, and in accordance with the aforequoted section
of the National Internal Revenue Code, only the fair market price or
value of the property as of the date of the acquisition thereof should
be considered in determining the gain or loss sustained by the
property owner when the property was disposed, without taking into
account the purchasing power of the currency used in the
transaction. The records placed the value of the said property at the
time of its acquisition by appellant Maria Morales was P28,291.73
and it is a fact that same was compensated with P94,305.75 when
it was expropriated. The resulting difference is surely a capital gain
and should be correspondingly taxed.
As to the only question raised by appellant Collector of Internal
Revenue in case L-9771, assailing the lower Courts order
exonerating petitioners from the 50 per cent surcharge imposed on
the latter, on the ground that the taxpayers income tax return for
1950 is false and/or fraudulent, it should be noted that the Court of
Tax Appeals found that the evidence did not warrant the imposition
of said surcharge because the petitioners therein acted in good
faith and without intent to defraud the Government.
"The question of fraud is a question of fact which frequently
requires a nicely balanced judgment to answer. All the facts and
circumstances surrounding the conduct of the taxpayers business
and all the facts incident to the preparation of the alleged fraudulent
Chapter 55).
The question of fraud being a question of fact and the lower court
having made the finding that "the evidence of this case does not
warrant the imposition of the 50 per cent surcharge", We are
constrained to refrain from giving any consideration to the question
raised by the Solicitor General, for it is already settled in this
jurisdiction that in passing upon petitions to review decisions of the
Court of Tax Appeals, We have to confine ourselves to questions of
law.
Wherefore, the decision appealed from by both parties is hereby
affirmed, without pronouncement as to costs. It is so ordered.
Republic vs. Gonzales 17962 13 SCRA 633 , April 30, 1965
REGALA, J.:
Manila under Civil Case No. 42912 the dispositive portion of which
provided:
 IN VIEW OF THE FOREGOING, judgment is hereby
rendered in favor of the plaintiff and against the
defendant, ordering said defendant to pay plaintiff the
sums of P106,226.75 and P37,849.58 as deficiency
income taxes for the years 1946 and 1947, respectively,
(each inclusive of the 50% surcharge) plus the 50%
surcharge and 1% monthly interest on the aforesaid
amount from June 15, 1957 until the whole amount is
fully paid, and costs of this suit.
The records of this case disclose that since 1946, the defendant-
appellant, Blas Gonzales, has been a private concessionaire in the
U.S. Military Base at Clark Field, Angeles City: He was engaged in
the manufacture of furniture and, per agreement with base
authorities, supplied them with his manufactured articles.
On March 1, 1947 and March 1, 1948, the appellant filed his
income tax returns for the years 1946 and 1947, respectively, with
the then Municipal Treasurer of Angeles, Pampanga. In the return
for 1946, he declared a net income of P9,352.84 and income tax
liability of P111.17 while for the year 1947, he declared as net
income the amount of P16,829.10 and a tax liability therefor in the
sum of P1,395.95. In the above two returns, he declared the sums
of P80,459.75 and P1,707,355.57 as his total sales for the said two
years, respectively, or an aggregate sales of P1,787,848.32 for
both years.
Upon investigation, however, the Bureau of Internal Revenue
discovered that for the years 1946 and 1947, the appellant had
been paid a total of P2,199,920.50 for furniture delivered by him to
the base authorities. The appellant do not deny the above amount
which, for the record, was furnished by the Purchasing Officer of
the Clark Field Air Base on the Bureau of Internal Revenue's
representation.
Compared against the sales figure provided by the base authorities,
therefore, the amount of P1,787,848.32 declared by the appellant
as his total sales for the two tax years in question was short or
underdeclared by some P412,072.18. Accordingly, the appellee
considered this last mentioned amount as unreported item of
income of the appellant for 1946. Further investigation into the
appellant's 1946 profit and loss statement disclosed "local sales,"
that is, sales to persons other than the United States Army, in the
amount of P124,510.43. As a result, the appellee likewise
considered the said amount as unreported income for the said year.
The full amount of P124,510.43 was considered as taxable income
because the appellant could not produce the books of account on
the same upon which any deduction could be based.
Adding up the above two items considered as unreported income with the said finding he could submit the same for study, review and
the appellee assessed the appellant the total sum of P340,179.84, decision by the Conference Staff of the Bureau of Internal
broken down as follows: Revenue. In due time, the above assessment was heard before the
said body which, subsequently, recommended a reduction of the
same to P249,289.26, as deficiency income tax for the year 1946.
Net income as per return P9,352.84 After the recommendation was approved by the Bureau, the
corresponding assessment notice for the sum of P249,289.26 as
Add: Sales, US deficiency income tax and 50% surcharge for the year 1946 and
P492,531.93 1% monthly interest and penalty incident to delinquency was
Army forthwith issued to the appellant.
Local Sales 124,510.43 536,582.61
On May 21, 1957, the above assessment was further revised by
segregating the appellant's tax liability for the two years in question.
Pursuant to a memorandum of the BIR Regional Director of San
Net income as per investigation 545,935.45 Fernando, Pampanga, another demand was made upon the
appellant for the payment of P106,226.75 and P37,849.58 as
Less: Personal & additional income taxes due from him for the years 1946 and 1947,
4,500.00
exemptions respectively, or a total of P144,076.33.
When the appellant failed to pay the above demand, the appellee
Net taxable income P541,435.45 instituted the present suit on April 7, 1960. The appellant filed his
answer on July 7, 1960 and amended it on July 19, 1960.
Tax due thereon P226,897.73
Prior to the trial of the case, the appellant filed with the court below
Less: Tax already assessed 111.17 a motion to dismiss grounded on prescription and lack of
jurisdiction. The same was, however, denied by the lower court as
unmeritorious. Moreover, for failure of the appellant or his counsel
Deficiency tax due P226,786.56 to appear at the scheduled hearing, the defendant-appellant was
declared in default. The motion for reconsideration of this last order
50% surcharge 113,393.28 declaring the appellant in default for failure to appear was also
denied by the trial court for lack of merit.
TOTAL AMOUNT DUE & On November 7, 1960, after the appellee had presented its
P340,179.84
COLLECTIBLE documentary evidence against the appellant, the lower court
========== rendered the decision under appeal.
On November 14, 1953, the Bureau of Internal Revenue sent a The appellant ascribes several errors to the decision of the court a
letter of demand to the appellant for the above amount as quo, the more fundamental of which is the claim that as a
deficiency income tax, the sum of P300.00 as compromise for his concessionaire in an American Air Base, he is not subject to
failure to keep the required journal and ledger, and finally, the sum Philippine tax laws pursuant to the United States-Philippine Military
of P153.75 as additional residence tax, all for the year 1946. Bases Agreement. In support of the claim, the following provision of
the above Bases Agreement is invoked:
On March 31, 1954, on request of the appellant, the Bureau of
Internal Revenue reinvestigated the case. At the end of this new ARTICLE XVIII.Sales and Services within the Bases
inquest, however, the appellee, thru, the then Collector of Internal
Revenue, insisted on the payment of the original assessment of
1. It is mutually agreed that the United States shall have
P340,179.84. It suggested, though, that if the appellant disagreed
the right to establish on bases, free of all license; fees;
 sales excise or other taxes or imposts; Government
agencies including concessions, such as sales
commissaries and post exchanges, messes and social
clubs, for the exclusive use of the United States military
forces and authorized civilian personnel and their
families. The merchandise or services sold or dispensed
by such agencies shall be free of all taxes, duties and
inspection by the Philippine authorities. Administrative
measures shall be taken by the appropriate authorities of
the United States to prevent the sale of goods which are
sold under the provisions of this Article to persons not
entitled to buy goods at such agencies, and, generally, to
prevent abuse of the privileges granted under this Article.
There shall be cooperation between such authorities and
the Philippines to this end.
2. Except as may be provided in any other agreements,
no persons shall habitually render any professional
services in a base except to or for the United States or to
or for the persons mentioned in the preceding paragraph.
No business shall be established in a base, it being
understood that the Government agencies mentioned in
the preceding paragraph shall not be regarded as
businesses for the purpose of this Article.
The contention is clearly unmeritorious.
The above provision of the Military Bases Agreement has already
been interpreted by this Court in at least two cases, namely: Canlas
v. Republic, G.R. No. 1,11035, May 31, 1958 and Naguiat v. J. A.
Araneta, G.R. No. L-11594, December 22, 1958. In the latter case
this Court said:
The provision relied upon by the appellant plainly
contemplates limiting the exemption from the licenses,
fees and taxes enumerated therein to the right to
establish Government agencies, including concessions,
and to the merchandise or services sold or dispensed by
such agencies. The income tax, which is certainly not on
the right to establish agencies or on the merchandise or
services sold or dispensed thereby, but on the owner or
operator of such agencies, is logically excluded. The
payment by the latter of the income tax is perfectly
content with and would not frustrate the obvious objective
of the agreement, namely, to enable the members of the
United States Military Forces and authorized civilian
personnel and their families to procure merchandise or
services within the bases at reduced prices. This
construction is unmistakably borne out by the fact that, in personal property imported for his own use;
dealing particularly with the matter of income tax, the provided that privately ovned vehicles shall be
Military Bases Agreement provides as follows: subject to the payment of the following only,
when certified as being used for military
purposes by appropriate United States
INTERNAL REVENUE TAX EXEMPTION
authorities, the normal license plate and
registration fees.
1. No member of the United States armed
forces, except Filipino citizens, serving in the
4. No national of the United States, or
Philippines in connection with the bases and
corporation organized under the laws of the
residing in the Philippines by reason only of
United States, resident in the United States,
such services, or his dependents, shall be
shall be liable to pay income tax in the
liable to pay income tax in the Philippines
Philippines in respect to any profits derived
except in respect of income derived from
under a contract made in the United States in
Philippine sources.
connection with the construction, maintenance,
operation and defense of the bases, or any tax
It is urged for the applicant that no opposition in the nature of a license in respect of any
has been registered against his petition on the service or work for the United States in
issues above-discussed. Absence of connection with the construction, maintenance,
opposition, however, does not preclude the operation and defense of the bases.
scanning of the whole record by the appellate
court, with a view to preventing the conferment
None of the above-quoted covenants shields a concessionaire, like
of citizenship to persons not fully qualified
the appellant, from the payment of the income tax. For one thing,
therefor (Lee Ng Len vs. Republic, G.R. No. L-
even the exemption in favor of members of the United States
20151, March 31, 1965). The applicant's
Armed Forces and nationals of the United States does not include
complaint of unfairness could have some
income derived from Philippine sources.
weight if the objections on appeal had been on
points not previously passed upon. But the
deficiencies here in question are not new but The appellant cannot seek refuge in the use of "excise" or "other
well-known, having been ruled upon repeatedly taxes or imposts" in paragraph 1 of Article XVIII of the Military
by this Court, and we see no excuse for failing Bases Agreement, because, as already stated, said terms are
to take them into account.1wph1.t employed with specific application to the right to establish agencies
and concessions within the bases and to the merchandise or
services sold or dispensed by such agencies or concessions.
2. No national of the United State serving or
employed in the Philippines in connection with
the maintenance, operation or defense of the The same conclusion was reached in the case of Canlas v.
bases and residing in the Philippines by reason Republic, supra.
only of such employment, or his spouse, and
minor children and dependent parents of either
The appellant maintains, however, that the rulings in the above two
spouses, shall be liable to pay income tax in
cases are inapplicable to the suit at bar because the said cases
the Philippines except in respect of income
involved the income of public utility operators in the Air Base who
derived from Philippine source or sources than
were not "concessionaires" like him.
the United States source.
The above contention is as unmeritorious as it is untrue. In the case
3. No persons referred to in paragraphs 1 and
of Araneta v. Manila Pencil Company Ins., G.R. No. L-8182, June
2 of this article shall be liable to pay the
29, 1957, this Court already ruled that operators of freight and bus
Government or local authorities of the
services are within the meaning of the word "concession" appearing
Philippines any poll or residence tax, or any
import or export duty, or any other tax on
in the Military Bases agreement. Thus, in the Canlas case above, Manila, somehow made it to the court. Under these circumstances,
We said: the trial court's ruling can hardly be considered as an abuse of his Less tax previously assessed &
1,472.08
discretion. paid
There is no dispute as to the fact that defendant Manila
Pencil Company, as successor-in-interest of the Finally, the appellant disputes the lower court's finding of fraud
Philippine Consolidated Freight Lines, Inc., was engaged against him in this incident. He argues that the facts invoked by the Deficiency tax P 28,197.14
in and duly licensed by the U.S. Military authorities to lower court do not sufficiently establish the same.
operate a freight and bus service within the Clark Field
Air Base, a military reservation established in conformity
50% surcharge 14,098.57
As rightly argued by the Solicitor General's office, since fraud is a
with the agreement concluded between the Government
state of mind, it need not be proved by direct evidence but may be
of the Philippines and the United States on March 14,
inferred from the circumstances of the case. The failure of the Total deficiency tax &
1947 (43 O.G. No. 3, p. 1020). And as such grantee of a
appellant to declare for taxation purposes his true and actual P 42,295.71
franchise, which this Court was held to be embraced surcharge
income derived from his furniture business at the Clark Field Air ===========
within the meaning of the word "concession" appearing in
Base for two consecutive years is an indication of his fraudulent
the treaty and was declared exempted from the payment
intent to cheat the Government of its due taxes. 1947
of the contractor's tax (Araneta v. Manila Pencil
Company, G.R. No. L-10507, May 30, 1958) ... .
The substantial undeclaration of income in the income Net taxable income in 1947 P 43,504.34
tax returns of the appellant for four consecutive years, ===========
It is very clear, therefore, that the rulings of this Court in the two
coupled with his intentional overstatement of deductions
cases above cited are applicable to this appeal under
made the imposition of the fraud penalty proper.
consideration.
(Eugenio Perez v. Court of Tax Appeals and Collector of Tax due on P43,504.34 P 8,361.22
Internal Revenue, G. R. No. L-10507, May 30, 1958.)
The other point raised by the appellant on this appeal pertains to Less tax previously assessed &
4,375.72.
the refusal of the trial court to reconsider its order declaring him in
IN VIEW OF ALL THE FOREGOING, judgment is hereby rendered paid
default for the failure of his counsel to appear at the scheduled trial
affirming in full the decision here appealed from, with costs against
despite due notice. He complains that when the trial proceeded in
the defendant-appellant. So ordered.
his absence, he was denied his day in court. In the premises, his
counsel insists that this absence then was for a good and Deficiency tax P 3,985.50
reasonable cause. Avelino vs. Collector of Internal Revenue 17715 8 SCRA 572 , July
31, 1963 50% surcharge 1,992.75
Suffice it to say in regard to the above that the matter complained
of is beyond this Court to disturb. The matter of adjournments, LABRADOR, J.:
Total deficiency tax &
postponements, continuances and reconsideration of orders of P 5,978.25
default lies within the discretion of courts and will not be interfered surcharge
with either by mandamus or appeal (Samson v. Naval, 41 Phil. 838) This is an appeal from a decision of the Court of Tax Appeals ===========
unless a showing of grave abuse can be made against said courts. confirming substantially the assessment of Income tax deficiencies
Moreover, where the absence of a party from the trial was due to
of the petitioner Jose Avelino for the years 1946, 1947 and 1948. 1948
his own fault, he should not be heard to complain that he was The assessments approved by the Court of Tax Appeals for the
said years are as follows:
deprived of his day in court. (Sandejas v. Robles, 81 Phil. 421; Net taxable income in 1948 P 38,885.81
Siojo v. Tecson, 88 Phil. 531) ===========
1946
The-counsel's excuse for his absence at the trial was alleged "lack Tax due on P38,885.81 P 7,090.31
of transportation facilities in his place of residence at Gagalangin,
Tondo, Manila, on that morning of August 8, when torrential rain Net taxable income in 1946 P106,223.06
Less tax previously assessed &
poured down in his locality." The lower court did not deem this as a =========== 747.51
sufficiently valid explanation because it observed that despite such paid
torrential rain, the counsel for the plaintiff-appellee, a lady attorney Tax due on P106,223.06 P 29,669.22
who was then a resident of a usually inundated area of Sampaloc,
 bank, PNB savings account and PNB current account, respectively. PROPERTIES IN DETERMINING THE PETITIONER'S NET
But petitioner claims that the cash on hand in the opening net worth WORTH FOR THE YEAR 1948.
Deficiency tax P 6,342.80 should be, on December 31, 1945 (or January 1, 1946), not
P100.00 as estimated by respondent but P47,300.00, for the
This supposed error was not committed as evidenced by an
50% surcharge 3,171.40 reason that in an income tax return submitted by the wife of the
examination of Annex I, which shows that P9,816.78 was allowed
petitioner, Mrs. Enriqueta Avelino, she made it appear that the
as deduction for 1948 under the heading "Reserve for Depreciation,
netted a profit of P55,000.00 from her business of importation of
Building".
Total deficiency tax & shoes, operation of a bar, and of a restaurant, shortly after
P 9,514.20 liberation. The income tax return submitted by her for the year 1946
surcharge was submitted in the year 1949 and was presented at the hearing IV
===========
as Exhibit "A". Petitioner asserts that his wife made a gain of
P55,000.00 during the year 1946, but the supposed copy of the
SUMMARY income tax return that she has submitted as evidence does not THE COURT OF TAX APPEALS ERRED IN FAILING TO
REFLECT OR TAKE UP IN 1947 THE IMPROVEMENTS VALUED
show how that amount had been earned. If she did actually earn
Deficiency tax & surcharge for that amount Exhibit "A" would have contained the details indicating AT P35,000.00. ERECTED IN 1947 IN THE QUEZON CITY LOT
P 42,295.71 the transactions in which the big sum was earned. Why none of that OF PETITIONER.
1946
amount or the greater part thereof appears to have been deposited
in a bank has not been explained. Apparently the court below This error again is disproved by Annex I, the yellow working sheet
Deficiency tax & surcharge for
5,978.25 considered the return as a self-serving statement, and We agree prepared by Bureau of Internal Revenue Examiner Lasquety. This
1947 that on the basis of that income tax return, without any other working sheet was adopted by the Court of Tax Appeals and it
explanation how the gains were used or invested or deposited, shows that P35,000.00 alleged to have been omitted was actually
Deficiency tax & surcharge for there is no reason to disturb the action of the court below in giving taken into account in the computation of the 1947 accounts of the
9,414.20 no credence to the said alleged existence of the cash net worth petitioner, as improvements on four buildings.
1948 existing at the beginning of the year 1946. We therefore declare
that the alleged error has not been committed.
V
GRAND TOTAL P 57,788.16 II
=========== THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE
PETITIONER AND HIS WIFE HAD INVESTMENT IN THE
THE COURT OF TAX APPEALS, IN COMPUTING THE TALISAY LUMBER COMPANY IN THE SUM OF P20,000.00
DEFICIENCY INCOME TAX ALLEGEDLY DUE FROM THE WITHOUT CONSIDERING AN OFFSETTING LIABILITY IN THE
In the brief of the petitioner various assignments of errors are
PETITIONER, ERRED IN NOT DEDUCTING FROM THE SAME AMOUNT.
made, each error raising specific questions of law and of fact. The
INCREASE IN NET WORTH OF THE PETITIONER FOR THE
errors will now be considered one by one, each independently of
YEAR 1948, THE SUM OF P6,508.00 REPRESENTING ONE-
the others. Neither do we find any merit in this assignment of error. According
HALF () OF THE CAPITAL GAIN REALIZED FROM THE SALE
OF TWO PARCELS OF LAND (CAPITAL ASSETS) MADE IN to the evidence, the articles, of incorporation of the Talisay Lumber
I 1948. Company, which is under oath, petitioner and his wife invested the
sums of P28,000.00 and P1,000.00 in the company. If these sums
were not furnished by the petitioner but by the organizer of the
THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT The respondent denies that this error have been committed. In company, still the total amount of P29,000.00 should be considered
THE NET WORTH METHOD USED BY RESPONDENT IN Annex 1, the yellow working sheet prepared by Examiner Lasquety, as a gift, or an income received by the petitioner and his wife from
DETERMINING PETITIONER'S TAXABLE INCOME IS WITHOUT it is shown that the sum of P6,508.00 was deducted in the year the said organizer of the Talisay Lumber Company, which income
JUSTIFIABLE BASIS 1948 is the taxable capital gain. This deduction was sustained by is liable to tax.
the Court below. The alleged error, therefore, is disproved by
Annex I.
It is contended under this assignment of error that there is no VI
reasonable certainty of the amount taken as an opening net worth,
there being no sufficient basis for establishing such opening net III
worth. Included in the opening net worth as of January 1, 1946, THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE
both according to the petitioner as well as to the Commissioner of PETITIONER HAD INVESTMENT IN AVELINO, BAGTAS, ALZATE
THE COURT OF TAX APPEALS ERRED IN DISALLOWING THE AND COMPANY IN THE SUM OF P5,000.00 FOR EACH OF THE
Internal Revenue, are P700.00 and P5,500.00, representing cash in
AMOUNT OF P9,816.78 AS DEPRECIATION ON RENTAL YEARS 1946 TO 1950.
Under this assignment of error, petitioner argues that the
appearance of the said amount as having been contributed to the
partnership by petitioner is no proof that that amount was
petitioner's actual investment in the company. The same reasons
obtaining in the case of the investment of P29,000.00 of the
spouses in the Talisay Lumber Company obtain in the case of the
petitioner's investment in the partnership of Avelino, Bagtas, Alzate
and Company.
VII
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE
LOAN OF P10,000.00 FROM ROSARIO GRAY DE HAYS AND
ANOTHER LOAN OF P30,000.00 FROM ANGELA M. VDA. DE
BUTTE NEVER EXISTED.
In support of this assignment of error, petitioner contends that he
owed the sum of P10,000.00 to Rosario Gray de Hays, which
amount represents one-half of the price of P20,000.00 which was
the consideration for the sale of certain property described in
Exhibit "C". But the original of the document shows that the amount
of the consideration was P22,000.00 and the vendor was Severina
de Casal, and nothing is said in the original of the document that
any part of the amount under consideration has not been paid.
petitioner in declaring an income of only P5,258.99 in the year 1946
when he had an actual income of P105,223.06; his act in submitting
an income tax return for 1947 only for the amount of P12,219.96
when he actually had a net taxable income of P43,504.34; and
lastly his act in reporting an income for the year 1948 which is only
ten percent of the actual taxable income of P38,885.81 all these
circumstances justify the finding of the court below that there has
been fraud subject to be penalized by law.
IX
APPEALS ERRED IN HOLDING THE COURT OF TAX THAT THE
RESPONDENT'S ASSESSMENTS HAVE NOT YET
PRESCRIBED.
In this assignment of error it is contended that the liability of the
petitioner for income tax for the years 1946, 1947 and 1948 has
already prescribed. The contention is without merit as it has been
found out that the petitioner has been guilty of fraud. The period
within which he may be subjected to liability in case of fraud begins
from the moment the fraud is discovered and not when the income
tax return was presented. (Sec. 332, Internal Revenue Law).
X February 15, 1957.
destination. The weight before shipment was called copra outturn.
To allow for lose in weight due to shrinkage, said exporter collected
only 95% of the amount appearing in the letter of credit covering
every copra outturn. The 5% balance remained outstanding until
final liquidation and adjustment.
On March 30, 1953 Lim Tian Teng Sons & Co., Inc. filed its income
tax return for 1952 based on accrued income and expenses. Its
return showed a loss of P56,109.98. It took up as part of the
beginning inventory for 1952 the copra outturn shipped in 1951 in
the sum of P95,500.00 already partially collected, as part of its
outstanding stock as of December 31, 1951.
In the audit and examination of taxpayer's 1952 income tax return,
the Collector of Internal Revenue eliminated the P95,500.00 outturn
from the beginning inventory for 1952 and considered it as accrued
income for 1951. This increased taxpayer's 1952 net income by
P95,500.00 which, considering disallowances in the sum of
P9,980.85, raised the taxpayer's net taxable income for 1952 to
P50,370.87. Accordingly, in a letter dated January 16, 1957 (Exhibit
C), received by Lim Tian Teng Sons & Co., Inc. on January 30,
1957, the Collector of Internal Revenue assessed a deficiency
income tax of P10,074.00 and 50% surcharge thereon amounting
to P5,037.00 and demanded payment thereof not later than

It is also alleged in support of this error that the petitioner is

indebted to Angela M. Vda. de Butte in 1948 in the sum of
P30,000.00. Mrs. Butte testified that petitioner owed her the amount
of P30,000.00; that the debt was in the form of a check and that in
1949 Mr. Avelino, the petitioner, paid P15,000.00, and that he paid
the balance in 1951, no interest on the loan having been demanded
and paid. Evidence of this character has, as a rule, been declared
insufficient for purposes of the income tax law. (Eugenio Perez vs.
Court of Tax Appeals, et al., G.R. No. L-10507, May 30, 1958;
Aurelio P. Reyes vs. Collector of Internal Revenue, G.R. Nos. L-
11534 & L-11558, Nov. 25, 1958.) We declare that in consonance
with the rule which appears to be reasonable, the alleged loan
cannot be declared as, actually existing.
VIII
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE
PETITIONER COMMITTED FRAUD IN FILING HIS INCOME TAX
RETURNS FOR THE YEARS UNDER REVIEW.
Under this alleged error it is contended that there was no evidence
of fraud committed by the petitioner. We find that the acts of the
THE COURT OF TAX APPEALS ERRED IN HOLDING THE
PETITIONER LIABLE FOR P57,788.16 AS DEFICIENCY INCOME
TAX FOR THE YEARS 1946, 1947, AND 1948.
This supposed error is the result of the previous errors and need
not be considered.1wph1.t
Finding no error in the conclusions of fact and of law made by the
respondent court, we hereby affirm the assessments made by it as
above indicated, with costs against petitioner.
Republic vs. Lim Tian Teng Sons & Co., Inc. 21731 16 SCRA 584 ,
March 31, 1966
BENGZON, J.P., J.:
Lim Tian Teng Sons & Co., Inc., a domestic corporation with
principal office in Cebu City, engaged in 1951 and 1952, among
others, in the exportation of copra. The copra was weighed before
shipment in the port of departure and upon arrival in the port of
On January 31, 1957 Lim Tian Teng Sons & Co., Inc. requested
reinvestigation of its 1952 income tax liability. The Collector of
Internal Revenue did not reply; instead, he referred the case to the
Solicitor General for collection by judicial action.
On September 20, 1957 the Solicitor General demanded from Lim
Tian Teng Sons & Co., Inc. the payment of P15,111.50 within five
days, stating that otherwise judicial action would be instituted
without further notice. In a letter dated October 5, 1957, received by
the Collector of Internal Revenue on October 7, 1957, Lim Tian
Teng Sons & Co., Inc. reiterated its request for reinvestigation. It
also wrote the Solicitor General on October 8, 1957 requesting that
it be allowed to present its explanation together with supporting
papers relative to its income tax liability. The Solicitor General
transmitted the letter to the Collection of Internal Revenue.
Thereupon, the Deputy Collector of Internal Revenue, by his letter
dated October 16, 1957, informed the taxpayer that its request for
reinvestigation would be granted provided it executed within ten
days a waiver of the statute of limitations as required in General
Circular V-258 dated August 20, 1957. In his letter dated December
10, 1957, the Deputy Collector of Internal Revenue extended the
period within which to execute and file with him the waiver of the
statute of limitations to December 31, 1957, but advised that if no
waiver is forthcoming on or before said date, judicial action for
collection would be instituted without further notice. Receipt of this
letter is denied by appellant company.
As Lim Tian Teng Sons & Co., Inc. failed to file a waiver of the
statute of limitations, the Collector of Internal Revenue instituted
eight months after, specifically on September 2, 1958, an action in
the Court of First Instance of Cebu for the collection of deficiency
income tax.
After hearing the parties, the court below rendered the following
judgment.
IN VIEW OF THE FOREGOING, judgment is hereby
rendered, declaring the assessment (Exh. D, D-1) of
income tax in the sum of P15,111.00 due from the
defendant to the plaintiff for the year 1952 valid, final and
executory; condemning the defendant to pay the same to
the plaintiff with interest at one (1) per centum monthly
from October 28, 1957 until fully paid.
With costs against the defendant.
IT IS SO ORDERED.
Not satisfied with the decision, the Collector of Internal Revenue
moved for its reconsideration on the ground that it did not include
the 5% surcharge for late payment of tax. The motion was denied
for the reason that the taxpayer has already been ordered to pay a
surcharge of 50%.
Both parties appealed, raising only questions of law.
Plaintiff cites as errors the non-imposition of the 5% surcharge for
the late payment of tax and the computation of delinquency interest
from October 8, 1957.
Defendant, on the other hand, assails the jurisdiction of the lower
court, its finding that the assessment in question has become final
and executory, the correctness of the assessment and the
imposition of the 50% surcharge.1wph1.t
We will discuss first the taxpayer's appeal. It maintains that the
lower court has no jurisdiction to entertain this case on the ground
that the Collector of Internal Revenue has not yet issued his final
decision on its requests for reinvestigation. The taxpayer's stand is
that final decision of the Collector of Internal Revenue on the
disputed assessment is a condition precedent to the filing of an
action in the Court of First Instance for the collection of a tax. This
argument has no merit. The Collector of Internal Revenue is
authorized to collect delinquent internal revenue taxes either by
distraint and levy or by judicial action or both simultaneously.1 The
only requisite before he can collect the tax is that he must first
assess the same within the time fixed by law.2 And in the case of a
false or fraudulent return with intent to evade the tax or of a failure
to file a return, a proceeding in court for the collection of such tax
may be begun without assessment.3
Nowhere in the Tax Code is the Collector of Internal Revenue
required to rule first on a taxpayer's request for reinvestigation
before he can go to court for the purpose of collecting the tax
assessed. On the contrary, Section 305 of the same Code
withholds from all courts, except the Court of Tax Appeals under
Section 11 of Republic Act 1125, the authority to restrain the
collection of any national internal-revenue tax, fee or charge,
thereby indicating the legislative policy to allow the Collector of
Internal Revenue much latitude in the speedy and prompt collection
of taxes. The reason is obvious. It is upon taxation that the
government chiefly relies to obtain the means the carry on its
operations, and it is of the utmost importance that the modes
adopted to enforce collection of taxes levied should be summary
and interfered with as little as possible. No government could exist
if all litigants were permitted to delay the collection of its taxes.4
Moreover, before the creation of the Court of Tax Appeals the
remedy of a taxpayer who desired to contest an assessment
issued, by the Collector of Internal Revenue was to pay the tax and
bring an action in the ordinary courts for its recovery pursuant to
Section 306 of the Code.5 Collection or payment of the tax was not
made, to, wait until after the Collector of Internal Revenue has
resolved all issues raised by the taxpayer against an assessment.
Republic Act 1125 creating the Court of Appeals allows the
taxpayer to dispute the correctness legality of an assessment both
in the purely administrative level and in said court, but it does not
stop the Collector of Internal Revenue from collecting the tax
through any of the means provided for in Section 316 of the Tax
Code, except when enjoined by said Court of Tax Appeals. Section
11 of Republic Act 1125 states in part:
written waiver of the statute of limitations on or before December
No appeal taken to the Court of Tax Appeals from the
decision of the Collector of Internal Revenue ... shall
suspend the payment, levy, distraint, and/or sale of any
property of the taxpayer for the satisfaction of his tax
liability as provided by existing
law: Provided, however, That when in the opinion of the
Court the collection by the Bureau of Internal Revenue or
the Commissioner of Customs may jeopardize the
interest of the Government and/or the taxpayer the Court
at any stage of the proceeding may suspend the said
collection and require the taxpayer either to deposit the
amount claimed or to file a surety bond for not more than
double the amount with the Court.
We will now resolve the issue of whether or not the court a
quo erred in considering as final and executory the assessment
contained in the letter of the Collector of Internal Revenue dated
January 16, 1957. As stated, defendant received said assessment
on January 30, 1957 and on the following day requested
reinvestigation of its tax liability. The Collector of Internal Revenue
however did not reply to the request for reinvestigation. Instead, he
referred the case to the Solicitor General for collection of the tax.
The lower court interpreted this action of the Collector of Internal
Revenue as a denial of defendant's request for reinvestigation.
Said court, to our mind, committed no error. For what is more
indicative of the Collector's decision against reinvestigation than his
insistence to collect the tax? This decision was communicated to
defendant in a letter dated September 20, 1957 of the office of the
Solicitor General which must have been received by defendant not
later than October 8, 1957 for on said date it acknowledged receipt
thereof. It had thirty days from October 8, 1957 within which to
appeal to the Court of Tax Appeals pursuant to Section 11 of
Republic Act 1125.6 Instead of appealing to the Tax Court,
however, the defendant herein in a letter dated October 8, 1957
reiterated its request for reinvestigation.
On October 15, 1957 the Collector of Internal Revenue wrote
defendant that its "request for a reinvestigation will be granted only
upon compliance with General Circular No. V-258 dated August 20,
1957, which requires as a prerequisite to the grant of a
reinvestigation the execution of a waiver of the statute of
limitations". In a subsequent letter, he extended the period within
which to submit the aforesaid waiver to December 31, 1957.
In effect, the Collector of Internal Revenue placed in the hands of
the defendant the holding of a reinvestigation. However, no such
reinvestigation was made inasmuch as taxpayer failed to submit a
31, 1957. Such omission automatically brought about the denial of
the request for reinvestigation.
Taxpayer however questions the legality of requiring waiver of the
statute of limitations before the grant of reinvestigation as provided
for in General Circular No.
V-258. This question was not raised in the Bureau of Internal
Revenue. Suffice it to say in this connection that General Circular
No. V-258 was promulgated pursuant to Section 338 of the Tax
Code. The authority thereunder of the Secretary of Finance to issue
rules and regulations for the effective enforcement of the provisions
of the Tax Code has been sustained by this Court in previous
cases.7
Even if we do not count the period from October 8, 1957 (the date
when taxpayer received notice of the denial of its request for
reinvestigation) to December 31, 1957 (the deadline for the
submission of the written waiver of the statute of limitations) in
reckoning the 30-day period within which the taxpayer may appeal
to the Court of Tax Appeals, said period had long lapsed when the
Collector of Internal Revenue filed the complaint in this case on
September 2, 1958.
Taxpayer failure to appeal to the Court of Tax Appeals in due time
made the assessment in question final, executory and
demandable.8 And when the action was instituted on September 2,
1958 to enforce the deficiency assessment in question, it was
already barred from disputing the correctness of the assessment or
invoking any defense that would reopen the question of his tax
liability on merits.9 Otherwise, the period of thirty days for appeal to
the Court of Tax Appeals would make little sense. 10
In a proceeding like this the taxpayer's defenses are similar to
those of the defendant in a case for the enforcement of a judgment
by judicial action under Section 6 of Rule 39 of the Rules of Court.
No inquiry can be made therein as to the merits of the original case
or the justness of the judgment relied upon, other than by evidence
of want of jurisdiction, of collusion between the parties, or of fraud
in the party offering the record with respect to the
proceedings. 11 As held by this Court in Insular Government vs.
Nico 12 the taxpayer may raise only the questions whether or not
the Collector of Internal Revenue had jurisdiction to do the
particular act, and whether any fraud was committed in the doing of
the act. In that case, Doroteo Nico was fined by the Collector of
Internal Revenue for violation of subparagraphs (d), (e) and (g) of
Section 28 as well as Sections 36, 101 and 107 of Act 1189. Under
Section 54 of the same Act the taxpayer was given the right to
appeal from the decision of the Collector of Internal Revenue to the
Court of First Instance within a period of ten days from notice of
imposition of the fine. Nico did not appeal, neither did he pay the
fine. Pursuant to Section 33 of the Act, the Collector of Internal
Revenue filed an action in the Court of First Instance to enforce his
decision and collect the fine. The decision of the Collector of
Internal Revenue having become final, this Court, on appeal,
allowed no further inquiry into the merits of the same.
For the satisfaction of defendant, however, it may be worth stating
that on its merits, the assessment in question is correct. It is not
controverted that, as appearing from its 1952 income tax return Lim
Tian Teng Sons & Co., Inc. employs the "accrual" method of
accounting. Following such accounting method the copra outturn in
the amount of P95,500.00 outstanding as of December 31, 1951,
should have been treated as accrued income for 1951, instead of
as stock on hand on January 1, 1952.
Defendant took up the copra outturn in question as copra on hand
in the beginning inventory for 1952. Said beginning inventory,
together with expenses, copra purchased during the year and copra
on hand as of December 31, 1952 were deducted as "cost of goods
sold" from the total gross sales for the purpose of determining the
net sales. Since the P95,500.00 copra outturn formed part of the
"cost of goods sold", it diminished the net sales by P95,500.00,
thereby also decreasing defendant's net taxable income by the
same amount. This procedure of treating the copra outturn in
question is inconsistent with defendants accounting method.
From the record, then, there is every indication that taxpayer's 1952
income tax return is fraudulent, as alleged in paragraph (7) of the
complaint in this case. Firstly, taxpayer's beginning inventory for
1952 did not state the truth in considering the copra outturn as
copra on hand, for on December 31, 1951 such copra was not any
more in taxpayer's bodega. It was in transit to a foreign port. And
the taxpayer no longer owned the copra. As a matter of fact, it
already received payment for the same. Secondly, by observing
regularly its own system of accounting, taxpayer had no choice but
to account the copra outturn as accrued income. This it did not do.
For such deviation, we see no other purpose than to lessen, if not
obliterate as in fact it did, its income tax liability per its return. The
lower court therefore did not err in imposing the 50% surcharge.
We now come to the appeal of the Government. It maintains that
the lower court erred in not imposing on defendant's tax liability a
surcharge of 5% for late payment. Subsection (c), Section 51 of the
Tax Code states:
SEC. 51. Assessment and payment of income tax.
xxx xxx xxx
(c) Surcharge and interest in case of delinquency. - To
any sum or sums due and unpaid after the dates
prescribed in subsections (b), (c) and (d) for the payment
of the same, there shall be added the sum of five per
centum on the amount of tax unpaid and interest at the
rate of one per centum a month upon said tax from the
time the same became due . . . . (Emphasis supplied)
As may be gleaned from the above-quoted provision, the 5%
surcharge is mandatory and automatically due, once the tax is not
paid on time. "Shall" is the word that law uses a word normally
imperative and a "language of demand". 13 Applicable herein is
what has been said of a similar provision the present Section
183 of the Tax Code stating that:
If the percentage tax on any business is not paid within
the time prescribed above the amount of the tax shall be
increased by twenty-five per centum, the increment to be
part of the tax. (Emphasis supplied)
Said this Court in Lim Co Chui vs. Posadas 14:
This provision is mandatory. It provides a plan which
works out automatically. It confers no discretion on the
Collector of Internal Revenue. That, official may not
disregard the law and substitute therefor his own
personal judgment.
Finally, the Government questions the computation of the
delinquency interest, due on the deficiency tax, from October 8,
1957. It insists that payment of such interest should commence
from February 15, 1957. Such contention is well-founded. Pursuant
to Section 51(d), "the assessment made by the Collector of Internal
Revenue shall be paid ... immediately upon notification of the
amount of such assessment." Now, the income tax assessment
notice gave defendant up to February 15, 1957 to pay the
deficiency tax in question. No payment was made. Hence, pursuant
to Section 51 (e), quoted earlier, interest on the unpaid tax fell due
starting February 16, 1957 and continues to accrue until full
payment of the tax.
Wherefore, the decision appealed from is modified. Lim Tian Teng
Sons & Co., Inc. is hereby ordered to pay the sum of P10,074.00 as
deficiency income tax for 1952 plus 50% and 5% surcharges
thereon for fraud and late payment, respectively, and 1% monthly
interest upon said tax of P10,074.00, computed from February 16,
1957 until the tax is fully paid. With costs against defendant-
appellant. So ordered.
Republic vs. Heirs of Cesar Jalandoni 18384 15 SCRA 51,
September 20, 1965
BAUTISTA ANGELO, J.:
Isabel Ledesma died intestate on June 23, 1948 leaving real
properties situated in the provinces of Negros Occidental and Rizal
and in the cities of Manila and Baguio, and personal properties
consisting of shares of stock in various domestic corporations. She
left as heirs her husband Bernardino Jalandoni and three children,
namely, Cesar, Angeles and Delfin, all surnamed Jalandoni.
On November 19, 1948, Cesar Jalandoni, one of the heirs, filed an
estate and inheritance tax return reporting the following: (1) that the
real and personal properties owned by the deceased and her
surviving husband had a total market value of P1,324,555.80; (2)
that after deducting therefrom the conjugal share of her husband
and some expenses the net estate subject to estate tax was
P28,148.04; and (3) that the amount subject to inheritance tax was
P542,225.83. This return also shows that no testamentary or
intestate proceedings were instituted.
On the basis of this return the Bureau of Internal Revenue made an
assessment on November 20, 1948 calling for the payment of the
amounts of P31,435.95 and P58,863.52 as estate and inheritance
taxes, respectively, stating therein that the assessment was "to be
considered partial pending investigation of the return." These sums
were paid by Cesar Jalandoni.
After a preliminary investigation was made of the properties
reported in the abovementioned return, a second assessment was
made on January 27, 1953 by the Bureau of Internal Revenue
showing that there was due from the estate the amounts of
P5,539.67 and P9,899.37 as deficiency estate and inheritance
taxes, respectively, for which reason a demand was made on
Bernardino Jalandoni stating therein that the same was still "to be
considered partial pending further investigation of the return," which
amounts were paid by Bernardino Jalandoni on February 28, 1953.
True to the foregoing reservation, the Bureau of Internal Revenue
conducted another investigation and this time it found (1) that the
market value of the lands reported in the return filed by Cesar
Jalandoni was underdeclared in the amount of P365,149.50; (2)
that seven lots which were registered in the Talisay-Silay cadastre
of Negros Occidental as belonging to the deceased, including their
improvements, were omitted from the return the same having a
market value of P100,200.00; and (3) the shares of stock owned by
the deceased in the Victorias Milling Company, Hawaiian-Philippine
Company and Central Azucarera de la Carlota, though included in
the return, were however underdeclared in the amount of
P16,355.36, and on the basis of these findings a third assessment
was made against the estate on May 9, 1956 wherein the heirs
were required to pay the amounts of P29,995.30 and P49,842.05
as deficiency estate and inheritance taxes, respectively, including
accrued interests, with the warning that failure on their part to pay
the same would subject them to the payment of surcharge, interest,
and penalty for late payment of the tax.
In answer to this third assessment after notice was served on the
administrator of the estate, Bernardino Jalandoni, Lorenzo J.
Teves, in his capacity as counsel of the heirs of the deceased,
wrote a letter to the Collector of Internal Revenue setting up the
defense of prescription in the sense that the deficiency in the estate
and inheritance taxes payment of which was required therein can
no longer be collected since more than five years had already
elapsed from the filing of the return invoking in his favor Section
331 of the National Internal Revenue Code. To this defense, the
Collector retorted claiming that the stand of counsel cannot be
entertained for the reason that, it appearing that the estate and
inheritance tax return which was filed by the administrator or by the
heirs contained omissions which amount to fraud indicative of an
intention to evade payment of the proper tax due the government,
the taxes then being collected could still be demanded within ten
years from the discovery of the falsity or omission pursuant to
Section 332(a) of said Code, which period had not yet expired, and
as a consequence, the assessment notice was reiterated with the
request that the deficiency estate and inheritance taxes therein
demanded be settled as soon as possible. And noting that the 30-
day period within which the heirs could appeal the Collector's
assessment to the Court of Tax Appeals had already elapsed, while
on the other hand they indicated their unwillingness to settle the
claim, the Collector of Internal Revenue filed the present case
before the Court of First Instance of Manila pressing the collection
of the deficiency estate and inheritance taxes assessed against the
heirs of the deceased Isabel Ledesma Jalandoni.
While this case was pending hearing on the merits, the lower court
set a date for pre-trial in an effort to have the parties agree on a
stipulation of facts, and this having failed, upon request of
defendants, the lower court ordered the Collector of Internal
Revenue to verify the allegation that the seven lots in Negros
Occidental which were claimed not to have been included in the
return filed by Cesar Jalandoni were in fact included therein, and to
this effect the Collector designated Examiner Genaro Butas to
conduct the examination. In his report Examiner Butas stated that
of the seven lots that were previously reported not included in the
return, two were actually declared therein, though he reaffirmed his
previous finding as regards the other five lots and the market value
of the sugar lands and rice lands left by the deceased and the value
of the shares of stock owned by her in several domestic
corporations.
There being no additional evidence, oral or documentary, submitted
by the parties, and passing solely on the allegations appearing in
the pleadings which appear to be undisputed, the trial court
rendered its decision on February 16, 1960 ordering defendants,
jointly and severally, to pay plaintiff the sum of P79,837.35 as
estate and inheritance taxes, plus the interest that had accrued
thereon as a result of their delinquency. Defendants interposed the
present appeal.
It is claimed that the lower court erred in finding that the return
submitted by Cesar Jalandoni in behalf of the heirs concerning the
estate of the deceased for the purpose of the payment of the
required estate and inheritance taxes is false and fraudulent there
being no evidence on record showing that said return was filed in
bad faith for which reason fraud cannot be imputed to appellants.
As against this claim appellee advances the theory that since
fraudulent intent is a state of mind which cannot be proven by direct
evidence, the same may be inferred from facts and circumstances
that appear to be undisputed as was done by the court a quo as
follows:
The difference between the amounts appearing in the
returns filed and the undeclared properties of the estate
of the deceased is a substantial understatement of the
true value of the estate in question. The court is of the
opinion, and so holds that the tax returns filed were false.
A substantial understatement of stocks and the omission
of seven (7) parcels of land belonging to the estate of the
deceased, makes it impossible for the court to believe
that the omission or understatements were due to
inadvertence, negligence, or honest statement of error.
Circumstances such as this are competent to base a
finding of willful intent.1awphl.nt
And to bolster up this finding appellee submits the following facts
which, it contends, appear in the record: (1) among the real
properties belonging to the deceased five lots in Negros Occidental,
including improvements thereon, with a market value of P58,570.00
were not included in the return filed by a representative of
 appellants; (2) the value of the sugar and rice lands that were from the return, three were actually included, with the particularity Victorias Milling Company, Hawaiian-Philippine Company and
reported in the return were underdeclared in the amount of that they were the most valuable, to wit: Lot 493 with a market Central Azucarera de la Carlota, simply because Cesar Jalandoni
P365,149.50; and (3) the market value of the shares of stock value of P21,630.00; Lot 521 with a market value of P30,000.00; placed in his return an aggregate market value of P95,480.00,
owned by the deceased in the Victorias Milling Company, and Lot 229 with a market value of P12,000.00, while another lot instead of mentioning the book value declared by said corporations
Hawaiian-Philippine Company and the Central Azucarera de la was not also included because it belonged to Delfin Jalandoni, or in the returns filed by them with the Bureau of Internal Revenue.
Carlota was underdeclared in the amount of P16,355.36. In other Lot 228 which, including improvements, has a market value of The fact that the value given in the returns did not tally with the
words, it is claimed that a total amount of P440,074.86 which P16,900.00. Hence, from the foregoing we find that the aggregate book value appearing in the corporate books is not in itself
constitutes real asset of the estate has been deliberately omitted value of the aforesaid four lots is P86,610.00 which, if deducted indicative of fraud especially when we take into consideration the
from the return thereby evincing an intention to evade the payment from the total value of the seven lots amounting to P90,110.00, circumstance that said book value only became known several
of the correct amount of tax due to the government. gives a balance of P3,500.00 as the value of the three remaining months after the death of the deceased. Moreover, it is a known
lots. These three lots being conjugal property, one-half thereof fact that stock securities frequently fluctuate in value and a mere
belonging to the deceased's spouse should still be deducted, thus difference of opinion in relation thereto cannot serve as proper
We are of the opinion that this finding is neither fair nor reasonable.
leaving a small balance of P1,750.00. If to this we add that, as the basis for assessing an intention to defraud the government.
To begin with, it should be here noted that when this case was
record shows, these three lots were already declared in the return
pending hearing on the merits before the lower court, the latter,
submitted by Bernardino Jalandoni as part of his property and his
upon request of appellants, ordered the Collector of Internal Having reached the conclusion that the heirs of the deceased have
wife for purposes of income tax, there is reason to believe that their
Revenue to verify the allegation that there were seven lots in not committed any act indicative of an intention to evade the
omission from the return submitted by Cesar Jalandoni was merely
Negros Occidental which were claimed not to have been included payment of the inheritance or estate taxes due the government, as
due to an honest mistake or inadvertence as properly explained by
in the return filed by Cesar Jalandoni, and to this effect the evidenced by their willingness in the past to pay all the taxes
appellants. We can hardly dispute this conclusion as it would be
Collector designated Examiner Genaro Butas to conduct the properly assessed against them, it is evident that the instant claim
stretching too much the imagination if we would find that, because
examination. Examiner Butas, after conducting the examination, of appellee has already prescribed under Section 331 of the
of such inadvertence, which appears to be inconsequential, the
submitted his report the pertinent of which reads: National Internal Revenue Code. And with this conclusion, a
heirs of the deceased deliberately omitted from the return the three
discussion of the other errors assigned by appellants would seem
lots with the only purpose of defrauding the government after
to be unnecessary.
declaring therein as asset of the estate property worth
Lot Assessed Fair Market
Classification P1,324,555.80.
No. Value Value WHEREFORE, the decision appealed from is reversed and the
complaint of appellee is dismissed. No pronouncement as to costs.
493 Sugarland P15,140.00 P21,630.00 The same thing may be said with regard to the alleged
undervaluation of certain sugar and rice lands reported by Cesar
710 390.00 550.00 Jalandoni which appellee fixes at P365,149.50, for the same can at
521 21,000.00 30,000.00 most be considered as the result of an honest difference of opinion
and not necessarily an intention to commit fraud. It should be stated
954 820.00 1,230.00 that in the estate and inheritance tax returns submitted by Cesar
Jalandoni on November 19, 1948 he reported said lands as
939 1,210.00 1,720.00 belonging to the deceased with a statement of what in his opinion
Lot 6,080.00 6,080.00 represent their reasonable actual value but which happened not to
229 tally with the valuation made by the Collector of Internal Revenue.
House 12,000.00 12,000.00 Certainly if there is any mistake in the valuation made by Jalandoni
the same can only be considered as honest mistake, or one based
Commercial 6,400.00 6,400.00 on excusable inadvertence, he being not an expert in appraising
Concrete real estate. The deficiency assessment, moreover, was made by
228 10,000.00 10,000.00 the Collector of Internal Revenue more than five years from the
House
filing of the return, and experience shows that such an intervening
Camarin 500.00 500.00 period is sufficiently long to, warrant an increase in value of real
estate which is precisely what was found by the Collector of Internal
TOTAL Revenue with regard to the lands in question. It is certainly an error
P73,650.00 P90,110.00 to impute fraud based on an honest difference of opinion.

In other words, from the report of Examiner Butas the following may Finally, we find unreasonable to impute with regard to the appraisal
be gleaned: that of the seven lots alleged to have been excluded made by appellants of the shares of stock of the deceased in