DIGESTS
Remedies (under the NIRC of 1997)
Periods of Limitation To Assess
What does the statute of limitations mean?
The statute of limitations on the right to assess and collect a tax means that once the period established by law for the assessment and collection of taxes has lapsed, the government’s corresponding right to enforce that action is barred by provision of law.
——————————————
Governing provisions
In the case of Commissioner of Internal Revenue vs. Ilagan Electric & Ice Plant, et al., G.R. No. L-23081, December 30, 1969, it was held that the assessment, collection and recovery of taxes, as well as the matter of prescription thereof are governed by the provisions of the NIRC, particularly Sections 331 and 332 thereof (now Sections 203 and 222, NIRC of 1997), and not by other provisions of law. (See also Lim Tio, Dy Heng and Dee Jue vs. Court of Tax Appeals & Collector of Internal Revenue, G.R. No. L-10681, March 29, 1958). .
~~~Vera, et al. vs. Fernandez, et al. (G.R. No. L-31364, 30 March 1979, 1st Div., J. De Castro)
——————————————
Periods of limitation to assess.
Under Section 203 of the NIRC, the prescriptive period to assess is set at three years. This rule is subject to the exceptions provided under Section 222 of the NIRC.
*******
Section 203 of the NIRC of 1997 mandates the government to assess internal revenue taxes within three years from the last day prescribed by law for the filing of the tax return or the actual date of filing of such return, whichever comes later. Hence, an assessment notice issued after the three-year prescriptive period is no longer valid and effective. Exceptions however are provided under Section 222 of the NIRC.
*******
Under Section 203 of the NIRC, internal revenue taxes must be assessed within three years counted from the period fixed by law for the filing of the tax return or the actual date of filing, whichever is later. This mandate governs the question of prescription of the government’s right to assess internal revenue taxes primarily to safeguard the interests of taxpayers from unreasonable investigation. Accordingly, the government must assess internal revenue taxes on time so as not to extend indefinitely the period of assessment and deprive the taxpayer of the assurance that it will no longer be subjected to further investigation for taxes after the expiration of reasonable period of time.
*******
The period for the BIR to assess and collect an internal revenue tax is limited to three years by Section 203 of the Tax Code of 1977, as amended (Section 203, NIRC of 1997).
The three-year period of limitations on the assessment and collection of national internal revenue taxes set by Section 203 of the Tax Code of 1977, as amended, can be affected, adjusted, or suspended, in accordance with [Section 223] of the same Code (now Section 222, NIRC of 1997).
As enunciated in these statutory provisions, the BIR has three years, counted from the date of actual filing of the return or from the last date prescribed by law for the filing of such return, whichever comes later, to assess a national internal revenue tax or to begin a court proceeding for the collection thereof without an assessment. In case of a false or fraudulent return with intent to evade tax or the failure to file any return at all, the prescriptive period for assessment of the tax due shall be 10 years from discovery by the BIR of the falsity, fraud, or omission. When the BIR validly issues an assessment, within either the three-year or ten-year period, whichever is appropriate, then the BIR has another three years after the assessment within which to collect the national internal revenue tax due thereon by distraint, levy, and/or court proceeding. The assessment of the tax is deemed made and the three-year period for collection of the assessed tax begins to run on the date the assessment notice had been released, mailed or sent by the BIR to the taxpayer.
*******
The law prescribed a period of three years from the date the return was actually filed or from the last date prescribed by law for the filing of such return, whichever came later, within which the BIR may assess a national internal revenue tax. However, the law increased the prescriptive period to assess or to begin a court proceeding for the collection without an assessment to ten years when a false or fraudulent return was filed with the intent of evading the tax or when no return was filed at all. In such cases, the ten-year period began to run only from the date of discovery by the BIR of the falsity, fraud or omission.
——————————————
Withholding taxes are internal revenue taxes covered by Section 203 of the NIRC.
Section 203 of the NIRC provides for the ordinary prescriptive period for the assessment and collection of taxes.
On the other hand, Section 222(a) of the NIRC provides for instances where the ordinary prescriptive period of three years for the assessment and collection of taxes is extended to 10 years, i.e., false return, fraudulent returns, or failure to file a return. In short, the relevant provisions in the NIRC concerning the prescriptive period for the assessment of internal revenue taxes provide for an ordinary and extraordinary period for assessment.
The CIR, however, forwards a novel theory that Section 203 is inapplicable in the present assessment of EWT and WTC deficiency against La Flor. It argues that withholding taxes are not contemplated under the said provision considering that they are not internal revenue taxes but are penalties imposed on the withholding agent should it fail to remit the proper amount of tax withheld.
In Chamber of Real Estate and Builders’ Associations, Inc. v. Hon. Executive Secretary Romulo, the Court had succinctly explained the withholding tax system observed in our jurisdiction, to wit:
We have long recognized that the method of withholding tax at source is a procedure of collecting income tax which is sanctioned by our tax laws. The withholding tax system was devised for three primary reasons: first, to provide the taxpayer a convenient manner to meet his probable income tax liability; second, to ensure the collection of income tax which can otherwise be lost or substantially reduced through failure to file the corresponding returns and third, to improve the government’s cash flow. This results in administrative savings, prompt and efficient collection of taxes, prevention of delinquencies and reduction of governmental effort to collect taxes through more complicated means and remedies.
Under the existing withholding tax system, the withholding agent retains a portion of the amount received by the income earner. In turn, the said amount is credited to the total income tax payable in transactions covered by the EWT. On the other hand, in cases of income payments subject to WTC and Final Withholding Tax, the amount withheld is already the entire tax to be paid for the particular source of income. Thus, it can readily be seen that the payee is the taxpayer, the person on whom the tax is imposed, while the payor, a separate entity, acts as the government’s agent for the collection of the tax in order to ensure its payment.
As a consequence of the withholding tax system, two distinct liabilities arise — one for the income earner/payee and another for the withholding agent. In Rizal Commercial Banking Corporation v. Commissioner of Internal Revenue, the Court elaborated:
It is, therefore, indisputable that the withholding agent is merely a tax collector and not a taxpayer, as elucidated by this Court in the case of Commissioner of Internal Revenue v. Court of Appeals, to wit:
In the operation of the withholding tax system, the withholding agent is the payor, a separate entity acting no more than an agent of the government for the collection of the tax in order to ensure its payments; the payer is the taxpayer — he is the person subject to tax imposed by law; and the payee is the taxing authority. In other words, the withholding agent is merely a tax collector, not a taxpayer. Under the withholding system, however, the agent-payor becomes a payee by fiction of law. His (agent) liability is direct and independent from the taxpayer, because the income tax is still imposed on and due from the latter. The agent is not liable for the tax as no wealth flowed into him — he earned no income. The Tax Code only makes the agent personally liable for the tax arising from the breach of its legal duty to withhold as distinguished from its duty to pay tax since:
“the government’s cause of action against the withholding agent is not for the collection of income tax, but for the enforcement of the withholding provision of Section 53 of the Tax Code, compliance with which is imposed on the withholding agent and not upon the taxpayer.”
Based on the foregoing, the liability of the withholding agent is independent from that of the taxpayer. The former cannot be made liable for the tax due because it is the latter who earned the income subject to withholding tax. The withholding agent is liable only insofar as he failed to perform his duty to withhold the tax and remit the same to the government. The liability for the tax, however, remains with the taxpayer because the gain was realized and received by him. (Citations omitted)
It is true that withholding tax is a method of collecting tax in advance and that a withholding tax on income necessarily implies that the amount of tax withheld comes from the income earned by the taxpayer/payee. Nonetheless, the Court does not agree with the CIR that withholding tax assessments are merely an imposition of a penalty on the withholding agent, and thus, outside the coverage of Section 203 of the NIRC.
The CIR cites National Development Company v. CIR [235 Phil. 477 (1987)] as basis that withholding taxes are only penalties imposed on the withholding agent, to wit:
The petitioner also forgets that it is not the NDC that is being taxed. The tax was due on the interests earned by the Japanese shipbuilders. It was the income of these companies and not the Republic of the Philippines that was subject to the tax the NDC did not withhold.
In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for its failure to withhold the same from the Japanese shipbuilders. Such liability is imposed by Section 53(c) of the Tax Code, thus:
Section 53(c). Return and Payment. — Every person required to deduct and withhold any tax under this section shall make return thereof, in duplicate, on or before the fifteenth day of April of each year, and, on or before the time fixed by law for the payment of the tax, shall pay the amount withheld to the officer of the Government of the Philippines authorized to receive it. Every such person is made personally liable for such tax, and is indemnified against the claims and demands of any person for the amount of any payments made in accordance with the provisions of this section. (As amended by Section 9, R.A. No. 2343.)
In Philippine Guaranty Co. v. The Commissioner of Internal Revenue and the Court of Tax Appeals, the Court quoted with approval the following regulation of the BIR on the responsibilities of withholding agents:
In case of doubt, a withholding agent may always protect himself by withholding the tax due, and promptly causing a query to be addressed to the Commissioner of Internal Revenue for the determination whether or not the income paid to an individual is not subject to withholding. In case the Commissioner of Internal Revenue decides that the income paid to an individual is not subject to withholding, the withholding agent may thereupon remit the amount of tax withheld. (2nd par., Sec. 200, Income Tax Regulations).
“Strict observance of said steps is required of a withholding agent before he could be released from liability,” so said Justice Jose P. Bengson, who wrote the decision. “Generally, the law frowns upon exemption from taxation; hence, an exempting provision should be construed strictissimi juris.”
The petitioner was remiss in the discharge of its obligation as the withholding agent of the government and so should be held liable for its omission.
A careful analysis of the above-quoted decision, however, reveals that the Court did not equate withholding tax assessments to the imposition of civil penalties imposed on tax deficiencies. The word “penalty” was used to underscore the dynamics in the withholding tax system that it is the income of the payee being subjected to tax and not of the withholding agent. It was never meant to mean that withholding taxes do not fall within the definition of internal revenue taxes, especially considering that income taxes are the ones withheld by the withholding agent. Withholding taxes do not cease to become income taxes just because it is collected and paid by the withholding agent.
The liability of the withholding agent is distinct and separate from the tax liability of the income earner. It is premised on its duty to withhold the taxes paid to the payee. Should the withholding agent fail to deduct the required amount from its payment to the payee, it is liable for deficiency taxes and applicable penalties. In Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corporation [281 Phil. 425 (1991)] the Court explained:
It thus becomes important to note that under Section 53 (c) of the NIRC, the withholding agent who is “required to deduct and withhold any tax” is made “personally liable for such tax” and indeed is indemnified against any claims and demands which the stockholder might wish to make in questioning the amount of payments effected by the withholding agent in accordance with the provisions of the NIRC. The withholding agent, P&G-Phil., is directly and independently liable for the correct amount of the tax that should be withheld from the dividend remittances. The withholding agent is, moreover, subject to and liable for deficiency assessments, surcharges and penalties should the amount of the tax withheld be finally found to be less than the amount that should have been withheld under law.
A “person liable for tax” has been held to be a “person subject to tax” and properly considered a “taxpayer.” The terms “liable for tax” and “subject to tax” both connote legal obligation or duty to pay a tax. It is very difficult, indeed conceptually impossible, to consider a person who is statutorily made “liable for tax” as not “subject to tax.” By any reasonable standard, such a person should be regarded as a party in interest, or as a person having sufficient legal interest, to bring a suit for refund of taxes he believes were illegally collected from him. (Emphasis supplied)
Thus, withholding tax assessments such as EWT and WTC clearly contemplate deficiency internal revenue taxes. Their aim is to collect unpaid income taxes and not merely to impose a penalty on the withholding agent for its failure to comply with its statutory duty. Further, a holistic reading of the Tax Code reveals that the CIR’s interpretation of Section 203 is erroneous. Provisions of the NIRC itself recognize that the tax assessment for withholding tax deficiency is different and independent from possible penalties that may be imposed for the failure of withholding agents to withhold and remit taxes. For one, Title X, Chapter I of the NIRC provides for additions to the tax or deficiency tax and is applicable to all taxes, fees and charges under the Tax Code.
In addition, Section 247(b) of the NIRC provides:
SEC. 247. General Provisions. —
x x x x
(b) If the withholding agent is the Government or any of its agencies, political subdivisions or instrumentalities, or a government-owned or controlled corporation the employee thereof responsible for the withholding and remittance of the tax shall be personally liable for the additions to the tax prescribed herein.
On the other hand, Section 251 of the Tax Code reads:
SEC. 251. Failure of a Withholding Agent to Collect and Remit Tax. — Any person required to withhold, account for and remit any tax imposed by this Code or who willfully fails to withhold such tax, or account for and remit such tax, or aids or abets in any manner to evade any such tax or the payment thereof, shall, in addition to other penalties provided for under this Chapter, be liable upon conviction to a penalty equal to the total amount of the tax not withheld, or not accounted for and remitted.
Based on the above-cited provisions, it is clear to see that the “penalties” are amounts collected on top of the deficiency tax assessments including deficiency withholding tax assessments. Thus, it was wrong for the CIR to restrict the EWT and WTC assessments against La Flor as only for the purpose of imposing penalties and not for the collection of internal revenue taxes.
——————————————
The issue of the validity of assessment is separate and distinct from the issue of the whether the right to collect an assessed tax has prescribed.
To be sure, the fact that an assessment has become final for failure of the taxpayer to file a protest within the time allowed only means that the validity or correctness of the assessment may no longer be questioned on appeal. However, the validity of the assessment itself is a separate and distinct issue from the issue of whether the right of the CIR to collect the validly assessed tax has prescribed. This issue of prescription, being a matter provided for by the NIRC, is well within the jurisdiction of the CTA to decide.
——————————————
If the pleadings or the evidence on record show that the claim is barred by prescription, the court must dismissed the same, even if prescription is not raised as a defense.
If the pleadings or the evidence on record show that the claim is barred by prescription, the court is mandated to dismiss the claim even if prescription is not raised as a defense. In Heirs of Valientes v. Ramas (G.R. No. 157852, 15 December 2010), we ruled that the CA may motu proprio dismiss the case on the ground of prescription despite failure to raise this ground on appeal. The court is imbued with sufficient discretion to review matters, not otherwise assigned as errors on appeal, if it finds that their consideration is necessary in arriving at a complete and just resolution of the case. More so, when the provisions on prescription were enacted to benefit and protect taxpayers from investigation after a reasonable period of time.
To determine prescription, what is essential only is that the facts demonstrating the lapse of the prescriptive period were sufficiently and satisfactorily apparent on the record either in the allegations of the plaintiff’s complaint, or otherwise established by the evidence.
——————————————
Periods of limitation to assess; and to collect [prior to the NIRC of 1997 (RA No. 8424)].
The statute of limitations on assessment and collection of national internal revenue taxes was shortened from five (5) years to three (3) years by Batas Pambansa Blg. 700. Thus, the CIR has three (3) years from the date of actual filing of the tax return to assess a national internal revenue tax or to commence court proceedings for the collection thereof without an assessment.
When it validly issues an assessment within the three (3)-year period, it has another three (3) years within which to collect the tax due by distraint, levy, or court proceeding. The assessment of the tax is deemed made and the three (3)-year period for collection of the assessed tax begins to run on the date the assessment notice had been released, mailed or sent to the taxpayer.
As applied to the present case, the CIR had three (3) years from the time he issued assessment notices to BPI on 7 April 1989 or until 6 April 1992 within which to collect the deficiency DST. However, it was only on 9 August 2002 that the CIR ordered BPI to pay the deficiency.
*******
To determine prescription, what is essential only is that the facts demonstrating the lapse of the prescriptive period were sufficiently and satisfactorily apparent on the record either in the allegations of the plaintiff’s complaint, or otherwise established by the evidence. Under the then applicable Section 319(c) [now, 222(c), NIRC of 1997] of the NIRC of 1977, as amended, any internal revenue tax which has been assessed within the period of limitation may be collected by distraint or levy, and/or court proceeding within three years following the assessment of the tax. The assessment of the tax is deemed made and the three-year period for collection of the assessed tax begins to run on the date the assessment notice had been released, mailed or sent by the BIR to the taxpayer.
In the present case, although there was no allegation as to when the assessment notice had been released, mailed or sent to BPI, still, the latest date that the BIR could have released, mailed or sent the assessment notice was on the date BPI received the same on 16 June 1989. Counting the three-year prescriptive period from 16 June 1989, the BIR had until 15 June 1992 to collect the assessed DST. But despite the lapse of 15 June 1992, the evidence established that there was no warrant of distraint or levy served on BPI’s properties, or any judicial proceedings initiated by the BIR.
*******
Petitioner avers that its right to collect the EWT for taxable year 1992 has not yet prescribed. It argues that while the final assessment notice and demand letter on EWT for taxable year 1992 were all issued on January 9, 1996, the five (5)-year prescriptive period to collect was interrupted when respondent filed its request for reinvestigation on March 14, 1997 which was granted by petitioner on January 22, 2001 through the issuance of Tax Verification Notice No. 00165498 on even date. Thus, the period for tax collection should have begun to run from the date of the reconsidered or modified assessment.
This argument fails to persuade us.
The statute of limitations on assessment and collection of national internal revenue taxes was shortened from five (5) years to three (3) years by virtue of Batas Pambansa Blg. 700. Thus, petitioner has three (3) years from the date of actual filing of the tax return to assess a national internal revenue tax or to commence court proceedings for the collection thereof without an assessment. However, when it validly issues an assessment within the three (3)-year period, it has another three (3) years within which to collect the tax due by distraint, levy, or court proceeding. The assessment of the tax is deemed made and the three (3)-year period for collection of the assessed tax begins to run on the date the assessment notice had been released, mailed or sent to the taxpayer.
On this matter, we note the findings of the CTA-Special First Division that no evidence was formally offered to prove when respondent filed its returns and paid the corresponding EWT and WTC for taxable year 1992.
Nevertheless, as correctly held by the CTA En Banc, the Preliminary Collection Letter for deficiency taxes for taxable year 1992 was only issued on February 21, 2002, despite the fact that the FANs for the deficiency EWT and WTC for taxable year 1992 was issued as early as January 9, 1996. Clearly, five (5) long years had already lapsed, beyond the three (3)-year prescriptive period, before collection was pursued by petitioner.
Further, while the request for reinvestigation was made on March 14, 1997, the same was only acted upon by petitioner on January 22, 2001, also beyond the three (3) year statute of limitations reckoned from January 9, 1996, notwithstanding the lack of impediment to rule upon such issue.
We cannot countenance such inaction by petitioner to the prejudice of respondent pursuant to our ruling in Commissioner of Internal Revenue v. Philippine Global Communication, Inc., to wit:
The assessment, in this case, was presumably issued on 14 April 1994 since the respondent did not dispute the CIR’s claim. Therefore, the BIR had until 13 April 1997. However, as there was no Warrant of Distraint and/or Levy served on the respondents nor any judicial proceedings initiated by the BIR, the earliest attempt of the BIR to collect the tax due based on this assessment was when it filed its Answer in CTA Case No. 6568 on 9 January 2003, which was several years beyond the three-year prescriptive period. Thus, the CIR is now prescribed from collecting the assessed tax.
Here, petitioner had ample time to make a factually and legally well-founded assessment and implement collection pursuant thereto. Whatever examination that petitioner may have conducted cannot possibly outlast the entire three (3)-year prescriptive period provided by law to collect the assessed tax. Thus, there is no reason to suspend the running of the statute of limitations in this case.
Moreover, in Bank of the Philippine Islands, citing earlier jurisprudence, we held that the request for reinvestigation should be granted or at least acted upon in due course before the suspension of the statute of limitations may set in, thus:
In BPI v. Commissioner of Internal Revenue, the Court emphasized the rule that the CIR must first grant the request for reinvestigation as a requirement for the suspension of the statute of limitations. The Court said:
In the case of Republic of the Philippines v. Gancayco, taxpayer Gancayco requested for a thorough reinvestigation of the assessment against him and placed at the disposal of the Collector of Internal Revenue all the evidences he had for such purpose; yet, the Collector ignored the request, and the records and documents were not at all examined. Considering the given facts, this Court pronounced that—
x x x The act of requesting a reinvestigation alone does not suspend the period. The request should first be granted, in order to effect suspension. (Collector v. Suyoc Consolidated, supra; also Republic v. Ablaza, supra). Moreover, the Collector gave appellee until April 1, 1949, within which to submit his evidence, which the latter did one day before. There were no impediments on the part of the Collector to file the collection case from April 1, 1949…
In Republic of the Philippines v. Acebedo, this Court similarly found that –
x x x T]he defendant, after receiving the assessment notice of September 24, 1949, asked for a reinvestigation thereof on October 11, 1949 (Exh. “A”). There is no evidence that this request was considered or acted upon. In fact, on October 23, 1950 the then Collector of Internal Revenue issued a warrant of distraint and levy for the full amount of the assessment (Exh. “D”), but there was follow-up of this warrant. Consequently, the request for reinvestigation did not suspend the running of the period for filing an action for collection. [Emphasis in the original]
With respect to petitioner’s argument that respondent’s act of elevating its protest to the CTA has fortified the continuing interruption of petitioner’s prescriptive period to collect under Section 223 of the Tax Code, the same is flawed at best because respondent was merely exercising its right to resort to the proper Court, and does not in any way deter petitioner’s right to collect taxes from respondent under existing laws.
On the strength of the foregoing observations, we ought to reiterate our earlier teachings that “in balancing the scales between the power of the State to tax and its inherent right to prosecute perceived transgressors of the law on one side, and the constitutional rights of a citizen to due process of law and the equal protection of the laws on the other, the scales must tilt in favor of the individual, for a citizen’s right is amply protected by the Bill of Rights under the Constitution.” Thus, while “taxes are the lifeblood of the government,” the power to tax has its limits, in spite of all its plenitude. Even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure.
After all, the statute of limitations on the collection of taxes was also enacted to benefit and protect the taxpayers, as elucidated in the case of Philippine Global Communication, Inc., thus:
x x x The report submitted by the tax commission clearly states that these provisions on prescription should be enacted to benefit and protect taxpayers:
Under the former law, the right of the Government to collect the tax does not prescribe. However, in fairness to the taxpayer, the Government should be estopped from collecting the tax where it failed to make the necessary investigation and assessment within 5 years after the filing of the return and where it failed to collect the tax within 5 years from the date of assessment thereof. Just as the government is interested in the stability of its collections, so also are the taxpayers entitled to an assurance that they will not be subjected to further investigation for tax purposes after the expiration of a reasonable period of time. (Vol. II, Report of the Tax Commission of the Philippines, pp. 321-322).
*******
To recall, the BIR issued the assessment for deficiency DST on 19 April 1989, when the applicable rule was Section 319(c) of the NIRC of 1977, as amended [now Section 222(c), NIRC of 1997]. In that provision, the time limit for the government to collect the assessed tax is set at three years, to be reckoned from the date when the BIR mails/releases/sends the assessment notice to the taxpayer. Further, Section 319(c) [now Section 222(c)] states that the assessed tax must be collected by distraint or levy and/or court proceeding within the three-year period.
With these rules in mind, we shall now determine whether the claim of the BIR is barred by time.
In this case, the records do not show when the assessment notice was mailed, released or sent to CBC. Nevertheless, the latest possible date that the BIR could have released, mailed or sent the assessment notice was on the same date that CBC received it, 19 April 1989. Assuming therefore that 19 April 1989 is the reckoning date, the BIR had three years to collect the assessed DST. However, the records of this case show that there was neither a warrant of distraint or levy served on CBC’s properties nor a collection case filed in court by the BIR within the three-year period.
The attempt of the BIR to collect the tax through its Answer with a demand for CBC to pay the assessed DST in the CTA on 11 March 2002 did not comply with Section 319(c) of the 1977 Tax Code, as amended [now Section 222(c), NIRC of 1997]. The demand was made almost thirteen years from the date from which the prescriptive period is to be reckoned. Thus, the attempt to collect the tax was made way beyond the three-year prescriptive period.
The BIR’s Answer in the case filed before the CTA could not, by any means, have qualified as a collection case as required by law. Under the rule prevailing at the time the BIR filed its Answer, the regular courts, and not the CTA, had jurisdiction over judicial actions for collection of internal revenue taxes. It was only on 23 April 2004, when RA No. 9282 took effect, that the jurisdiction of the CTA was expanded to include, among others, original jurisdiction over collection cases in which the principal amount involved is one million pesos or more.
Consequently, the claim of the CIR for deficiency DST from petitioner is forever lost, as it is now barred by time. This Court has no other option but to dismiss the present case.
*******
The period of collection has also prescribed. As held by the CTA:
As to the period of collection, We uphold the ruling of the Division that such has already prescribed. Regardless if We will reckon the period to collect from May 6, 1991, or the alleged Final Demand Letter on February 5, 1992, counting the three-year period therein to collect in accordance with Section 223 (c) of the 1977 Tax Code, obviously, the mode of collection through the issuance of Warrant of Distraint and/or Levy on October 05, 2011 was made beyond the prescriptive period.
It must be remembered that [T]he law imposes a substantive, not merely a formal, requirement. To proceed heedlessly with tax collection without first establishing a valid assessment is evidently violative of the cardinal principle in administrative investigations: that taxpayers should be able to present their case and adduce supporting evidence. Although taxes are the lifeblood of the government, their assessment and collection “should be made in accordance with law as any arbitrariness will negate the very reason for government itself.”
*******
Under Section 318 of the 1977 NIRC, petitioner had five years from the time respondents filed their excise tax returns in question to: (a) issue an assessment; and/or (b) file a court action for collection without an assessment. In the petitions at bar, respondents filed their returns for the Covered Years from 1992 to 1997, and the five-year prescriptive period under Section 319 of the 1977 NIRC would have prescribed accordingly from 1997 to 2002.
——————————————
Construction of the law on prescription.
The prescriptive period on when to assess taxes benefits both the government and the taxpayer. Exceptions extending the period to assess must, therefore, be strictly construed.
*******
For the purpose of safeguarding taxpayers from any unreasonable examination, investigation or assessment, our tax law provides a statute of limitations in the collection of taxes. Thus, the law on prescription, being a remedial measure, should be liberally construed in order to afford such protection. As a corollary, the exceptions to the law on prescription should perforce be strictly construed.
Section 15 of the NIRC, on the other hand, provides that “[w]hen a report required by law as a basis for the assessment of any national internal revenue tax shall not be forthcoming within the time fixed by law or regulation, or when there is reason to believe that any such report is false, incomplete, or erroneous, the Commissioner of Internal Revenue shall assess the proper tax on the best evidence obtainable.” Clearly, Section 15 does not provide an exception to the statute of limitations on the issuance of an assessment, by allowing the initial assessment to be made on the basis of the best evidence available. Having made its initial assessment in the manner prescribed, the commissioner could not have been authorized to issue, beyond the five-year prescriptive period, the second and the third assessments under consideration before us.
Nor is petitioner’s claim of falsity sufficient to take the questioned assessments out of the ambit of the statute of limitations. The relevant part of then Section 332 of the NIRC, which enumerates the exceptions to the period of prescription, provides:
“SEC. 332. Exceptions as to period of limitation of assessment and collection of taxes. — (a) In the case of a false or fraudulent return with intent to evade a tax or of a failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within ten years after the discovery of the falsity, fraud, or omission: xxx.”
Petitioner insists that private respondent committed “falsity” when it sold the property for a price lesser than its declared fair market value. This fact alone did not constitute a false return which contains wrong information due to mistake, carelessness or ignorance. It is possible that real property may be sold for less than adequate consideration for a bona fide business purpose; in such event, the sale remains an “arm’s length” transaction. In the present case, the private respondent was compelled to sell the property even at a price less than its market value, because it would have lost all ownership rights over it upon the expiration of the parity amendment. In other words, private respondent was attempting to minimize its losses. At the same time, it was able to lease the property for 25 years, renewable for another 25. This can be regarded as another consideration on the price.
Furthermore, the fact that private respondent sold its real property for a price less than its declared fair market value did not by itself justify a finding of false return. Indeed, private respondent declared the sale in its 1974 return submitted to the BIR. Within the five-year prescriptive period, the BIR could have issued the questioned assessment, because the declared fair market value of said property was of public record. This it did not do, however, during all those five years. Moreover, the BIR failed to prove that respondent’s 1974 return had been filed fraudulently. Equally. significant was its failure to prove respondent’s intent to evade the payment of the correct amount of tax.
Ineludibly, the BIR failed to show that private respondent’s 1974 return was filed fraudulently with intent to evade the payment of the correct amount of tax. Moreover, even though a donor’s tax, which is defined as “a tax on the privilege of transmitting one’s property or property rights to another or others without adequate and full valuable consideration,” is different from capital gains tax, a tax on the gain from the sale of the taxpayer’s property forming part of capital assets, the tax return filed by private respondent to report its income for the year 1974 was sufficient compliance with the legal requirement to file a return. In other words, the fact that the sale transaction may have partly resulted in a donation does not change the fact that private respondent already reported its income for 1974 by filing an income tax return.
Since the BIR failed to demonstrate clearly that private respondent had filed a fraudulent return with the intent to evade tax, or that it had failed to file a return at all, the period for assessments has obviously prescribed. Such instances of negligence or oversight on the part of the BIR cannot prejudice taxpayers, considering that the prescriptive period was precisely intended to give them peace of mind.
Based on the foregoing, a discussion of the validity and legality of the assailed assessments has become moot and unnecessary.
——————————————
When the right to assess and collect is imprescriptible.
The Court is persuaded by the fundamental principle invoked by petitioner that limitations upon the right of the government to assess and collect taxes will not be presumed in the absence of clear legislation to the contrary and that where the government has not by express statutory provision provided a limitation upon its right to assess unpaid taxes, such right is imprescriptible.
~~~Commissioner of Internal Revenue vs. Ayala Securities Corp., et al. (G.R. No. L-29485, 21 November 1980, 1st Div., J. Teehankee)
——————————————
Origin of the provisions on prescription in tax assessment and collection.
The provisions on prescription in the assessment and collection of national internal revenue taxes became law upon the recommendation of the tax commissioner of the Philippines. The report submitted by the tax commission clearly states that these provisions on prescription should be enacted to benefit and protect taxpayers:
Under the former law, the right of the Government to collect the tax does not prescribe. However, in fairness to the taxpayer, the Government should be estopped from collecting the tax where it failed to make the necessary investigation and assessment within 5 years after the filing of the return and where it failed to collect the tax within 5 years from the date of assessment thereof. Just as the government is interested in the stability of its collections, so also are the taxpayers entitled to an assurance that they will not be subjected to further investigation for tax purposes after the expiration of a reasonable period of time. (Vol. II, Report of the Tax Commission of the Philippines, pp. 321-322).
——————————————
The statute of limitations principally intends to afford protection to the taxpayer against unreasonable investigation.
Though the statute of limitations on assessment and collection of national internal revenue taxes benefits both the Government and the taxpayer, it principally intends to afford protection to the taxpayer against unreasonable investigation. The indefinite extension of the period for assessment is unreasonable because it deprives the said taxpayer of the assurance that he will no longer be subjected to further investigation for taxes after the expiration of a reasonable period of time. As aptly explained in Republic of the Philippines v. Ablaza [108 Phil. 1105 (1960)] –
The law prescribing a limitation of actions for the collection of the income tax is beneficial both to the Government and to its citizens; to the Government because tax officers would be obliged to act promptly in the making of assessment, and to citizens because after the lapse of the period of prescription citizens would have a feeling of security against unscrupulous tax agents who will always find an excuse to inspect the books of taxpayers, not to determine the latter’s real liability, but to take advantage of every opportunity to molest peaceful, law-abiding citizens. Without such a legal defense taxpayers would furthermore be under obligation to always keep their books and keep them open for inspection subject to harassment by unscrupulous tax agents. The law on prescription being a remedial measure should be interpreted in a way conducive to bringing about the beneficent purpose of affording protection to the taxpayer within the contemplation of the Commission which recommend the approval of the law.
In order to provide even better protection to the taxpayer against unreasonable investigation, the Tax Code of 1977, as amended, identifies specifically in Sections 223 and 224 (now Sections 222 and 223 of the NIRC of 1997) thereof the circumstances when the prescriptive periods for assessing and collecting taxes could be suspended or interrupted.
To give effect to the legislative intent, these provisions on the statute of limitations on assessment and collection of taxes shall be construed and applied liberally in favor of the taxpayer and strictly against the Government.
*******
And again in the recent case Bank of the Philippine Islands v. Commissioner of Internal Revenue, this Court, in confirming these earlier rulings, pronounced that:
Though the statute of limitations on assessment and collection of national internal revenue taxes benefits both the Government and the taxpayer, it principally intends to afford protection to the taxpayer against unreasonable investigation. The indefinite extension of the period for assessment is unreasonable because it deprives the said taxpayer of the assurance that he will no longer be subjected to further investigation for taxes after the expiration of a reasonable period of time.
——————————————
The period of limitation affects only the remedy.
The law fixing limitations of time in the assessment and collection of taxes constitute a growing and often altered system not to be viewed as conditions on the right to tax, but, like other limitation laws, as affecting by their own force only the remedy.
~~~The Collector of Internal Revenue vs. Clement, et al. (G.R. No. L-12194, 24 January 1959, En Banc, J. J.B.L. Reyes)
——————————————
The period of assessment is not penal in nature.
Article 22 of the Revised Penal Code finds no application in this case for the simple reason that the provisions on the period of assessment can not be considered as penal in nature.
~~~Tupaz vs. Ulep, et al. (G.R. No. 127777, 1 October 1999, 1st Div., J. Pardo)
——————————————
The taxpayer must actually receive, even beyond the prescriptive period, the assessment notice which was timely released, mailed and sent.
Under Section 203 of the NIRC, respondent had three (3) years from the last day for the filing of the return to send an assessment notice to petitioner. In the case of Collector of Internal Revenue v. Bautista [105 Phil. 1326 (1959)], this Court held that an assessment is made within the prescriptive period if notice to this effect is released, mailed or sent by the CIR to the taxpayer within said period. Receipt thereof by the taxpayer within the prescriptive period is not necessary. At this point, it should be clarified that the rule does not dispense with the requirement that the taxpayer should actually receive, even beyond the prescriptive period, the assessment notice which was timely released, mailed and sent.
In the present case, records show that petitioner filed its Annual Income Tax Return for taxable year 1987 on 14 April 1988. The last day for filing by petitioner of its return was on 15 April 1988, thus, giving respondent until 15 April 1991 within which to send an assessment notice. While respondent avers that it sent the assessment notice dated 1 February 1991 on 6 February 1991, within the three (3)-year period prescribed by law, petitioner denies having received an assessment notice from respondent. Petitioner alleges that it came to know of the deficiency tax assessment only on 17 March 1992 when it was served with the Warrant of Distraint and Levy.
In Protector’s Services, Inc. v. Court of Appeals, this Court ruled that when a mail matter is sent by registered mail, there exists a presumption, set forth under Section 3(v), Rule 131 of the Rules of Court, that it was received in the regular course of mail. The facts to be proved in order to raise this presumption are: (a) that the letter was properly addressed with postage prepaid; and (b) that it was mailed. While a mailed letter is deemed received by the addressee in the ordinary course of mail, this is still merely a disputable presumption subject to controversion, and a direct denial of the receipt thereof shifts the burden upon the party favored by the presumption to prove that the mailed letter was indeed received by the addressee.
In the present case, petitioner denies receiving the assessment notice, and the respondent was unable to present substantial evidence that such notice was, indeed, mailed or sent by the respondent before the BIR’s right to assess had prescribed and that said notice was received by the petitioner. The respondent presented the BIR record book where the name of the taxpayer, the kind of tax assessed, the registry receipt number and the date of mailing were noted. The BIR records custodian, Ingrid Versola, also testified that she made the entries therein. Respondent offered the entry in the BIR record book and the testimony of its record custodian as entries in official records in accordance with Section 44, Rule 130 of the Rules of Court, which states that:
Section 44. Entries in official records. – Entries in official records made in the performance of his duty by a public officer of the Philippines, or by a person in the performance of a duty specially enjoined by law, are prima facie evidence of the facts therein stated.
The foregoing rule on evidence, however, must be read in accordance with this Court’s pronouncement in Africa v. Caltex (Phil.), Inc. [123 Phil. 272 (1966)], where it has been held that an entrant must have personal knowledge of the facts stated by him or such facts were acquired by him from reports made by persons under a legal duty to submit the same.
There are three requisites for admissibility under the rule just mentioned: (a) that the entry was made by a public officer, or by another person specially enjoined by law to do so; (b) that it was made by the public officer in the performance of his duties, or by such other person in the performance of a duty specially enjoined by law; and (c) that the public officer or other person had sufficient knowledge of the facts by him stated, which must have been acquired by him personally or through official information x x x.
In this case, the entries made by Ingrid Versola were not based on her personal knowledge as she did not attest to the fact that she personally prepared and mailed the assessment notice. Nor was it stated in the transcript of stenographic notes how and from whom she obtained the pertinent information. Moreover, she did not attest to the fact that she acquired the reports from persons under a legal duty to submit the same. Hence, Rule 130, Section 44 finds no application in the present case. Thus, the evidence offered by respondent does not qualify as an exception to the rule against hearsay evidence.
Furthermore, independent evidence, such as the registry receipt of the assessment notice, or a certification from the Bureau of Posts, could have easily been obtained. Yet respondent failed to present such evidence.
In the case of Nava v. Commissioner of Internal Revenue [121 Phil. 117 (1965)], this Court stressed on the importance of proving the release, mailing or sending of the notice.
While we have held that an assessment is made when sent within the prescribed period, even if received by the taxpayer after its expiration (Coll. of Int. Rev. vs. Bautista, L-12250 and L-12259, May 27, 1959), this ruling makes it the more imperative that the release, mailing, or sending of the notice be clearly and satisfactorily proved. Mere notations made without the taxpayer’s intervention, notice, or control, without adequate supporting evidence, cannot suffice; otherwise, the taxpayer would be at the mercy of the revenue offices, without adequate protection or defense.
In the present case, the evidence offered by the respondent fails to convince this Court that Formal Assessment Notice No. FAN-1-87-91-000649 was released, mailed, or sent before 15 April 1991, or before the lapse of the period of limitation upon assessment and collection prescribed by Section 203 of the NIRC. Such evidence, therefore, is insufficient to give rise to the presumption that the assessment notice was received in the regular course of mail. Consequently, the right of the government to assess and collect the alleged deficiency tax is barred by prescription.
*******
The CTA was correct in ruling that petitioner failed to prove that it sent a notice of assessment and that it was received by respondent.
Thus, the failure of petitioner to prove the receipt of the assessment by respondent would necessarily lead to the conclusion that no assessment was issued.
——————————————
The prescriptive periods may be waived by agreement.
At the outset, the period for petitioner to assess and collect an internal revenue tax is limited only to three years by Section 203 of the NIRC of 1997, as amended, quoted hereunder as follows:
SEC. 203. Period of Limitation Upon Assessment and Collection. – Except as provided in Section 222, internal revenue taxes shall be assessed within three years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from the day the return was filed.
For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day. (Emphasis supplied)
This mandate governs the question of prescription of the government’s right to assess internal revenue taxes primarily to safeguard the interests of taxpayers from unreasonable investigation by not indefinitely extending the period of assessment and depriving the taxpayer of the assurance that it will no longer be subjected to further investigation for taxes after the expiration of reasonable period of time.
Thus, in the present case, petitioner only had three years, counted from the date of actual filing of the return or from the last date prescribed by law for the filing of such return, whichever comes later, to assess a national internal revenue tax or to begin a court proceeding for the collection thereof without an assessment. However, one of the exceptions to the three-year prescriptive period on the assessment of taxes is that provided for under Section 222(b) of the NIRC of 1997, as amended, which states:
SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes. –
x x x x
(b) If before the expiration of the time prescribed in Section 203 for the assessment of the tax, both the Commissioner and the taxpayer have agreed in writing to its assessment after such time, the tax may be assessed within the period agreed upon.
The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon. (Emphasis supplied)
From the foregoing, the above provision authorizes the extension of the original three-year prescriptive period by the execution of a valid waiver, where the taxpayer and the CIR may stipulate to extend the period of assessment by a written agreement executed prior to the lapse of the period prescribed by law, and by subsequent written agreements before the expiration of the period previously agreed upon. It must be kept in mind that the very reason why the law provided for prescription is to give taxpayers peace of mind, that is, to safeguard them from unreasonable examination, investigation, or assessment. The law on prescription, being a remedial measure, should be liberally construed in order to afford such protection. As a corollary, the exceptions to the law on prescription should perforce be strictly construed.
In the landmark case of Philippine Journalists, Inc. v. CIR (PJI case), we pronounced that a waiver is not automatically a renunciation of the right to invoke the defense of prescription. A waiver of the Statute of Limitations is nothing more than “an agreement between the taxpayer and the Bureau of Internal Revenue (BIR) that the period to issue an assessment and collect the taxes due is extended to a date certain.” It is a bilateral agreement, thus necessitating the very signatures of both the CIR and the taxpayer to give birth to a valid agreement. Furthermore, indicating in the waiver the date of acceptance by the BIR is necessary in order to determine whether the parties (the taxpayer and the government) had entered into a waiver “before the expiration of the time prescribed in Section 203 (the three-year prescriptive period) for the assessment of the tax.” When the period of prescription has expired, there will be no more need to execute a waiver as there will be nothing more to extend. Hence, no implied consent can be presumed, nor can it be contended that the concurrence to such waiver is a mere formality.
In delineation of the same sense about the waiver of the Statute of Limitations, RMO No. 20-90 and RDAO No. 05-01 were issued on 4 April 1990 and 2 August 2001, respectively. The said revenue orders outline the procedure for the proper execution of a waiver, viz.:
1. The waiver must be in the proper form prescribed by RMO 20-90. The phrase “but not after ____ 19 __”, which indicates the expiry date of the period agreed upon to assess/collect the tax after the regular three-year period of prescription, should be filled up.
2. The waiver must be signed by the taxpayer himself or his duly authorized representative. In the case of a corporation, the waiver must be signed by any of its responsible officials. In case the authority is delegated by the taxpayer to a representative, such delegation should be in writing and duly notarized.
3. The waiver should be duly notarized.
4. The CIR or the revenue official authorized by him must sign the waiver indicating that the BIR has accepted and agreed to the waiver. The date of such acceptance by the BIR should be indicated. However, before signing the waiver, the CIR or the revenue official authorized by him must make sure that the waiver is in the prescribed form, duly notarized, and executed by the taxpayer or his duly authorized representative.
5. Both the date of execution by the taxpayer and date of acceptance by the Bureau should be before the expiration of the period of prescription or before the lapse of the period agreed upon in case a subsequent agreement is executed.
6. The waiver must be executed in three copies, the original copy to be attached to the docket of the case, the second copy for the taxpayer and the third copy for the Office accepting the waiver. The fact of receipt by the taxpayer of his/her file copy must be indicated in the original copy to show that the taxpayer was notified of the acceptance of the BIR and the perfection of the agreement. (Emphases supplied)
The provisions of the RMO and RDAO explicitly show their mandatory nature, requiring strict compliance. Hence, failure to comply with any of the requisites renders a waiver defective and ineffectual. It is worth mentioning that strict compliance with the requirements set forth in RMO No. 20-90 has been upheld in the PJI case. In reversing the decision of the Court of Appeals promulgated on 5 August 2003, this Court ruled that:
The NIRC, under Sections 203 and 222, provides for a statute of limitations on the assessment and collection of internal revenue taxes in order to safeguard the interest of the taxpayer against unreasonable investigation. Unreasonable investigation contemplates cases where the period of assessment extends indefinitely because this deprives the taxpayer of the assurance that it will no longer be subjected to further investigation for taxes after the expiration of a reasonable period of time x x x
x x x x
RMO No. 20-90 implements these provisions of the NIRC relating to the period of prescription for the assessment and collection of taxes. A cursory reading of the Order supports petitioner’s argument that the RMO must be strictly followed, x x x” (Emphasis supplied)
Applying the rules and rulings, the waivers in question were defective and did not validly extend the original three-year prescriptive period. As correctly found by the CTA in Division, and affirmed in toto by the CTA En Banc, the subject waivers of the Statute of Limitations were in clear violation of RMO No. 20-90:
1) This case involves assessment amounting to more than P1,000,000.00. For this, RMO No. 20-90 requires the Commissioner of Internal Revenue to sign for the BIR. A perusal of the First and Second Waivers of the Statute of Limitations shows that they were signed by Assistant Commissioner-Large Taxpayers Service Virginia L. Trinidad and Assistant Commissioner-Large Taxpayers Service Edwin R. Abella respectively, and not by the Commissioner of Internal Revenue;
2) The date of acceptance by the Assistant Commissioner-Large Taxpayers Service Virginia L. Trinidad of the First Waiver was not indicated therein;
3) The date of acceptance by the Assistant Commissioner-Large Taxpayers Service Edwin R. Abella of the Second Waiver was not indicated therein;
4) The First and Second Waivers of Statute of Limitations did not specify the kind and amount of the tax due; and
5) The tenor of the Waiver of the Statute of Limitations signed by petitioner’s authorized representative failed to comply with the prescribed requirements of RMO No. 20-90. The subject waiver speaks of a request for extension of time within which to present additional documents, whereas the waiver provided under RMO No. 20-90 pertains to the approval by the Commissioner of Internal Revenue of the taxpayer’s request for re-investigation and/or reconsideration of his/its pending internal revenue case.
Taking into consideration the foregoing defects in the First and Second Waivers presented and admitted in evidence before the court a quo, the period to assess the tax liabilities of respondent for taxable year 1998 was never extended. Consequently, when the succeeding waivers of Statute of Limitations were subsequently executed covering the same tax liabilities of respondent, and there being no assessment having been issued as of that time, prescription has already set in. We therefore hold that the subject waivers did not extend the period to assess the subject deficiency tax liabilities of respondent for taxable year 1998. The aforesaid waivers cannot be considered as “subsequent written agreement(s) made before the expiration of the period previously agreed upon” referred to in the second sentence of the earlier quoted Section 222(b) of the NIRC of 1997, as amended, since there is no “period previously agreed upon” to speak of.
*******
According to paragraphs (b) and (d) of Section 223 of the Tax Code of 1977, as amended [now Section 222(b) and (d), NIRC of 1997], the prescriptive periods for assessment and collection of national internal revenue taxes, respectively, could be waived by agreement.
The agreements so described in the afore-quoted provisions are often referred to as waivers of the statute of limitations. The waiver of the statute of limitations, whether on assessment or collection, should not be construed as a waiver of the right to invoke the defense of prescription but, rather, an agreement between the taxpayer and the BIR to extend the period to a date certain, within which the latter could still assess or collect taxes due. The waiver does not mean that the taxpayer relinquishes the right to invoke prescription unequivocally.
A valid waiver of the statute of limitations under paragraphs (b) and (d) of Section 223 of the Tax Code of 1977, as amended [now Section 222(b) and (d), NIRC of 1997], must be: (1) in writing; (2) agreed to by both the Commissioner and the taxpayer; (3) before the expiration of the ordinary prescriptive periods for assessment and collection; and (4) for a definite period beyond the ordinary prescriptive periods for assessment and collection. The period agreed upon can still be extended by subsequent written agreement, provided that it is executed prior to the expiration of the first period agreed upon. The BIR had issued RMO No. 20-90 on 04 April 1990 to lay down an even more detailed procedure for the proper execution of such a waiver. RMO No. 20-90 mandates that the procedure for execution of the waiver shall be strictly followed, and any revenue official who fails to comply therewith resulting in the prescription of the right to assess and collect shall be administratively dealt with.
This Court had consistently ruled in a number of cases that a request for reconsideration or reinvestigation by the taxpayer, without a valid waiver of the prescriptive periods for the assessment and collection of tax, as required by the Tax Code and implementing rules, will not suspend the running thereof.
*******
As a general rule, petitioner has three (3) years from the filing of the return to assess taxpayers.
An exception to the rule of prescription is found m Section 222, paragraphs (b) and (d) of the same Code.
Thus, the period to assess and collect taxes may be extended upon the Commissioner and the taxpayer’s written agreement, executed before the expiration of the three (3)-year period.
——————————————
Nature of a Waiver; Importance of furnishing the taxpayer with a copy thereof.
A Waiver of the Defense of Prescription is a bilateral agreement between a taxpayer and the BIR to extend the period of assessment and collection to a certain date. The requirement to furnish the taxpayer with a copy of the waiver is not only to give notice of the existence of the document but of the acceptance by the BIR and the perfection of the agreement.
——————————————
The waiver must be executed in accordance with pre-set guidelines and procedural requirements.
It must be remembered that the execution of a Waiver of Statute of Limitations may be beneficial to the taxpayer or to the BIR, or to both. Considering however, that it results to a derogation of some of the rights of the taxpayer, the same must be executed in accordance with pre-set guidelines and procedural requirements. Otherwise, it does not serve its purpose, and the taxpayer has all the right to invoke its nullity. For that reason, this Court cannot turn blind on the importance of the Statute of Limitations upon the assessment and collection of internal revenue taxes provided for under the NIRC. The law prescribing a limitation of actions for the collection of the income tax is beneficial both to the Government and to its citizens; to the Government because tax officers would be obliged to act properly in the making of the assessment, and to citizens because after the lapse of the period of prescription, citizens would have a feeling of security against unscrupulous tax agents who may find an excuse to inspect the books of taxpayers, not to determine the latter’s real liability, but to take advantage of every opportunity to molest peaceful, law-abiding citizens. Without such a legal defense, taxpayers would furthermore be under obligation to always keep their books and keep them open for inspection subject to harassment by unscrupulous tax agents. The law on prescription being a remedial measure should be interpreted in a way conducive to bringing about the beneficent purpose of affording protection to the taxpayer within the contemplation of the Commission which recommends the approval of the law.
——————————————
The prescriptive periods could be waived by agreement, but the waiver must be legally compliant; When the doctrine of estoppel cannot be applied.
An exception to the three-year prescriptive period on the assessment of taxes is Section 222 (b) of the NIRC, which provides:
x x x x
(b) If before the expiration of the time prescribed in Section 203 for the assessment of the tax, both the Commissioner and the taxpayer have agreed in writing to its assessment after such time, the tax may be assessed within the period agreed upon. The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon.
x x x x
The above provision authorizes the extension of the original three-year period by the execution of a valid waiver, where the taxpayer and the BIR agreed in writing that the period to issue an assessment and collect the taxes due is extended to an agreed upon date. Under RMO No. 20-90, which implements Sections 203 and 222 (b), the following procedures should be followed:
1. The waiver must be in the form identified as Annex “A” hereof.
2. The waiver shall be signed by the taxpayer himself or his duly authorized representative. In the case of a corporation, the waiver must be signed by any of its responsible officials.
Soon after the waiver is signed by the taxpayer, the Commissioner of Internal Revenue or the revenue official authorized by him, as hereinafter provided, shall sign the waiver indicating that the Bureau has accepted and agreed to the waiver. The date of such acceptance by the Bureau should be indicated. Both the date of execution by the taxpayer and date of acceptance by the Bureau should be before the expiration of the period of prescription or before the lapse of the period agreed upon in case a subsequent agreement is executed.
3. The following revenue officials are authorized to sign the waiver.
A. In the National Office
x x x x
3. Commissioner For tax cases involving more than P1M
B. In the Regional Offices
- The Revenue District Officer with respect to tax cases still pending investigation and the period to assess is about to prescribe regardless of amount.
x x x x
4. The waiver must be executed in three (3) copies, the original copy to be attached to the docket of the case, the second copy for the taxpayer and the third copy for the Office accepting the waiver. The fact of receipt by the taxpayer of his/her file copy shall be indicated in the original copy.
5. The foregoing procedures shall be strictly followed. Any revenue official found not to have complied with this Order resulting in prescription of the right to assess/collect shall be administratively dealt with. (Emphasis supplied.)
Applying RMO No. 20-90, the waiver in question here was defective and did not validly extend the original three-year prescriptive period. Firstly, it was not proven that respondent was furnished a copy of the BIR-accepted waiver. Secondly, the waiver was signed only by a revenue district officer, when it should have been signed by the Commissioner as mandated by the NIRC and RMO No. 20-90, considering that the case involves an amount of more than P1 million, and the period to assess is not yet about to prescribe. Lastly, it did not contain the date of acceptance by the Commissioner of Internal Revenue, a requisite necessary to determine whether the waiver was validly accepted before the expiration of the original three-year period. Bear in mind that the waiver in question is a bilateral agreement, thus necessitating the very signatures of both the Commissioner and the taxpayer to give birth to a valid agreement.
Petitioner contends that the procedures in RMO No. 20-90 are merely directory and that the execution of a waiver was a renunciation of respondent’s right to invoke prescription. We do not agree. RMO No. 20-90 must be strictly followed. In Philippine Journalists, Inc. v. Commissioner of Internal Revenue, we ruled that a waiver of the statute of limitations under the NIRC, to a certain extent being a derogation of the taxpayer’s right to security against prolonged and unscrupulous investigations, must be carefully and strictly construed. The waiver of the statute of limitations does not mean that the taxpayer relinquishes the right to invoke prescription unequivocally, particularly where the language of the document is equivocal. Notably, in this case, the waiver became unlimited in time because it did not specify a definite date, agreed upon between the BIR and respondent, within which the former may assess and collect taxes. It also had no binding effect on respondent because there was no consent by the Commissioner. On this basis, no implied consent can be presumed, nor can it be contended that the concurrence to such waiver is a mere formality.
Consequently, petitioner cannot rely on its invocation of the rule that the government cannot be estopped by the mistakes of its revenue officers in the enforcement of RMO No. 20-90 because the law on prescription should be interpreted in a way conducive to bringing about the beneficent purpose of affording protection to the taxpayer within the contemplation of the Commission which recommended the approval of the law. To the Government, its tax officers are obliged to act promptly in the making of assessment so that taxpayers, after the lapse of the period of prescription, would have a feeling of security against unscrupulous tax agents who will always try to find an excuse to inspect the books of taxpayers, not to determine the latter’s real liability, but to take advantage of a possible opportunity to harass even law-abiding businessmen. Without such legal defense, taxpayers would be open season to harassment by unscrupulous tax agents.
In fine, Assessment Notice No. 33-1-00487-95 dated October 25, 1999, was issued beyond the three-year prescriptive period. The waiver was incomplete and defective and thus, the three-year prescriptive period was not tolled nor extended and continued to run until April 15, 1999. Even if the three-year period be counted from May 8, 1996, the date of filing of the amended return, assuming the amended return was substantially different from the original return, a case which affects the reckoning point of the prescriptive period, still, the subject assessment is definitely considered time-barred.
*******
The waivers executed by respondent’s
accountant did not extend the period
within which the assessment can be made
Petitioner does not deny that the assessment notices were issued beyond the three-year prescriptive period, but claims that the period was extended by the two waivers executed by respondent’s accountant.
We do not agree.
Section 222 (b) of the NIRC provides that the period to assess and collect taxes may only be extended upon a written agreement between the CIR and the taxpayer executed before the expiration of the three-year period. RMO 20-90 issued on April 4, 1990 and RDAO 05-01 issued on August 2, 2001 lay down the procedure for the proper execution of the waiver, to wit:
1. The waiver must be in the proper form prescribed by RMO 20-90. The phrase “but not after ______ 19 ___”, which indicates the expiry date of the period agreed upon to assess/collect the tax after the regular three-year period of prescription, should be filled up.
2. The waiver must be signed by the taxpayer himself or his duly authorized representative. In the case of a corporation, the waiver must be signed by any of its responsible officials. In case the authority is delegated by the taxpayer to a representative, such delegation should be in writing and duly notarized.
3. The waiver should be duly notarized.
4. The CIR or the revenue official authorized by him must sign the waiver indicating that the BIR has accepted and agreed to the waiver. The date of such acceptance by the BIR should be indicated. However, before signing the waiver, the CIR or the revenue official authorized by him must make sure that the waiver is in the prescribed form, duly notarized, and executed by the taxpayer or his duly authorized representative.
5. Both the date of execution by the taxpayer and date of acceptance by the Bureau should be before the expiration of the period of prescription or before the lapse of the period agreed upon in case a subsequent agreement is executed.
6. The waiver must be executed in three copies, the original copy to be attached to the docket of the case, the second copy for the taxpayer and the third copy for the Office accepting the waiver. The fact of receipt by the taxpayer of his/her file copy must be indicated in the original copy to show that the taxpayer was notified of the acceptance of the BIR and the perfection of the agreement.
A perusal of the waivers executed by respondent’s accountant reveals the following infirmities:
1. The waivers were executed without the notarized written authority of Pasco to sign the waiver in behalf of respondent.
2. The waivers failed to indicate the date of acceptance.
3. The fact of receipt by the respondent of its file copy was not indicated in the original copies of the waivers.
Due to the defects in the waivers, the period to assess or collect taxes was not extended. Consequently, the assessments were issued by the BIR beyond the three-year period and are void.
Estoppel does not apply in this case
We find no merit in petitioner’s claim that respondent is now estopped from claiming prescription since by executing the waivers, it was the one which asked for additional time to submit the required documents.
In Collector of Internal Revenue v. Suyoc Consolidated Mining Company [104 Phil. 819 (1958)], the doctrine of estoppel prevented the taxpayer from raising the defense of prescription against the efforts of the government to collect the assessed tax. However, it must be stressed that in the said case, estoppel was applied as an exception to the statute of limitations on collection of taxes and not on the assessment of taxes, as the BIR was able to make an assessment within the prescribed period. More important, there was a finding that the taxpayer made several requests or positive acts to convince the government to postpone the collection of taxes, viz:
It appears that the first assessment made against respondent based on its second final return filed on November 28, 1946 was made on February 11, 1947. Upon receipt of this assessment respondent requested for at least one year within which to pay the amount assessed although it reserved its right to question the correctness of the assessment before actual payment. Petitioner granted an extension of only three months. When it failed to pay the tax within the period extended, petitioner sent respondent a letter on November 28, 1950 demanding payment of the tax as assessed, and upon receipt of the letter respondent asked for a reinvestigation and reconsideration of the assessment. When this request was denied, respondent again requested for a reconsideration on April 25, 1952, which was denied on May 6, 1953, which denial was appealed to the Conference Staff. The appeal was heard by the Conference Staff from September 2, 1953 to July 16, 1955, and as a result of these various negotiations, the assessment was finally reduced on July 26, 1955. This is the ruling which is now being questioned after a protracted negotiation on the ground that the collection of the tax has already prescribed.
It is obvious from the foregoing that petitioner refrained from collecting the tax by distraint or levy or by proceeding in court within the 5-year period from the filing of the second amended final return due to the several requests of respondent for extension to which petitioner yielded to give it every opportunity to prove its claim regarding the correctness of the assessment. Because of such requests, several reinvestigations were made and a hearing was even held by the Conference Staff organized in the collection office to consider claims of such nature which, as the record shows, lasted for several months. After inducing petitioner to delay collection as he in fact did, it is most unfair for respondent to now take advantage of such desistance to elude his deficiency income tax liability to the prejudice of the Government invoking the technical ground of prescription.
While we may agree with the Court of Tax Appeals that a mere request for reexamination or reinvestigation may not have the effect of suspending the running of the period of limitation for in such case there is need of a written agreement to extend the period between the Collector and the taxpayer, there are cases however where a taxpayer may be prevented from setting up the defense of prescription even if he has not previously waived it in writing as when by his repeated requests or positive acts the Government has been, for good reasons, persuaded to postpone collection to make him feel that the demand was not unreasonable or that no harassment or injustice is meant by the Government. And when such situation comes to pass there are authorities that hold, based on weighty reasons, that such an attitude or behavior should not be countenanced if only to protect the interest of the Government.
This case has no precedent in this jurisdiction for it is the first time that such has risen, but there are several precedents that may be invoked in American jurisprudence. As Mr. Justice Cardozo has said: “The applicable principle is fundamental and unquestioned. `He who prevents a thing from being done may not avail himself of the nonperformance which he has himself occasioned, for the law says to him in effect “this is your own act, and therefore you are not damnified.”‘ “(R. H. Stearns Co. vs. U.S., 78 L. ed., 647). Or, as was aptly said, “The tax could have been collected, but the government withheld action at the specific request of the plaintiff. The plaintiff is now estopped and should not be permitted to raise the defense of the Statute of Limitations.” [Newport Co. vs. U.S., (DC-WIS), 34 F. Supp. 588].
Conversely, in this case, the assessments were issued beyond the prescribed period. Also, there is no showing that respondent made any request to persuade the BIR to postpone the issuance of the assessments.
The doctrine of estoppel cannot be applied in this case as an exception to the statute of limitations on the assessment of taxes considering that there is a detailed procedure for the proper execution of the waiver, which the BIR must strictly follow. As we have often said, the doctrine of estoppel is predicated on, and has its origin in, equity which, broadly defined, is justice according to natural law and right. As such, the doctrine of estoppel cannot give validity to an act that is prohibited by law or one that is against public policy. It should be resorted to solely as a means of preventing injustice and should not be permitted to defeat the administration of the law, or to accomplish a wrong or secure an undue advantage, or to extend beyond them requirements of the transactions in which they originate. Simply put, the doctrine of estoppel must be sparingly applied.
Moreover, the BIR cannot hide behind the doctrine of estoppel to cover its failure to comply with RMO 20-90 and RDAO 05-01, which the BIR itself issued. As stated earlier, the BIR failed to verify whether a notarized written authority was given by the respondent to its accountant, and to indicate the date of acceptance and the receipt by the respondent of the waivers. Having caused the defects in the waivers, the BIR must bear the consequence. It cannot shift the blame to the taxpayer. To stress, a waiver of the statute of limitations, being a derogation of the taxpayer’s right to security against prolonged and unscrupulous investigations, must be carefully and strictly construed.
As to the alleged delay of the respondent to furnish the BIR of the required documents, this cannot be taken against respondent. Neither can the BIR use this as an excuse for issuing the assessments beyond the three-year period because with or without the required documents, the CIR has the power to make assessments based on the best evidence obtainable.
*******
We do not agree with petitioner that respondent is now barred from setting up the defense of prescription by arguing that the repeated requests and positive acts of the latter constituted estoppels, as these were attempts to persuade the CIR to delay the collection of respondent’s deficiency income tax.
True, respondent filed a Protest and asked for a reconsideration and cancellation of the assessment on 19 May 1993; however, it is uncontested that petitioner failed to act on that Protest until 29 November 2001, when the latter required the submission of other supporting documents. In fact, the Protest was denied only on 22 March 2004.
Petitioner’s reliance on CIR v. Suyoc [104 Phil 819 (1958)] (Suyoc) is likewise misplaced. In Suyoc, the BIR was induced to extend the collection of tax through repeated requests for extension to pay and for reinvestigation, which were all denied by the Collector. Contrarily, herein respondent filed only one Protest over the assessment, and petitioner denied it 10 years after. The subsequent letters of respondent cannot be construed as inducements to extend the period of limitation, since the letters were intended to urge petitioner to act on the Protest, and not to persuade the latter to delay the actual collection.
Petitioner cannot take refuge in BPI either, considering that respondent and BPI are similarly situated. Similar to BPI, this is a simple case in which the BIR Commissioner and other BIR officials failed to act promptly in resolving and denying the request for reconsideration filed by the taxpayer and in enforcing the collection on the assessment. Both in BPI and in this case, the BIR presented no reason or explanation as to why it took many years to address the Protest of the taxpayer. The statute of limitations imposed by the Tax Code precisely intends to protect the taxpayer from prolonged and unreasonable assessment and investigation by the BIR.
Even assuming arguendo that the Waiver executed by respondent on 16 November 1993 is valid, the right of petitioner to collect the deficiency income tax for the year 1989 would have already prescribed by 2001 when the latter first acted upon the protest, more so in 2004 when it finally denied the reconsideration. Records show that the Waiver extends only for the period ending 30 June 1994, and that there were no further extensions or waivers executed by respondent. Again, a waiver is not a unilateral act of the taxpayer or the BIR, but is a bilateral agreement between two parties to extend the period to a date certain.
Since the Waiver in this case is defective and therefore invalid, it produces no effect; thus, the prescriptive period for collecting deficiency income tax for taxable year 1989 was never suspended or tolled. Consequently, the right to enforce collection based on Assessment Notice No. 002523-89-6014 has already prescribed.
*******
Indeed, the Waivers executed by the BIR and PDI were meant to extend the three-year prescriptive period, and would have extended such period were it not for the defects found by the CTA. This further shows that at the outset, the BIR did not find any ground that would make the assessment fall under the exceptions.
In this case, the CTA found that contrary to PDI’s allegations, the First and Second Waivers were executed in three copies. However, the CTA also found that the CIR failed to provide the office accepting the First and Second Waivers with their respective third copies, as the CTA found them still attached to the docket of the case. In addition, the CTA found that the Third Waiver was not executed in three copies.
The failure to provide the office accepting the waiver with the third copy violates RMO 20-90 and RDAO 05-01. Therefore, the First Waiver was not properly executed on 21 March 2007 and thus, could not have extended the three-year prescriptive period to assess and collect taxes for the year 2004. To make matters worse, the CIR committed the same error in the execution of the Second Waiver on 5 June 2007. Even if we consider that the First Waiver was validly executed, the Second Waiver failed to extend the prescriptive period because its execution was contrary to the procedure set forth in RMO 20-90 and RDAO 05-01. Granting further that the First and Second Waivers were validly executed, the Third Waiver executed on 12 December 2007 still failed to extend the three-year prescriptive period because it was not executed in three copies. In short, the records of the case showed that the CIR’s three-year prescriptive period to assess deficiency tax had already prescribed due to the defects of all the Waivers.
In Commissioner of Internal Revenue v. The Stanley Works Sales (Phils.), Incorporated, the Court explained the nature of a waiver of assessment (infra).
Clearly, the defects in the Waivers resulted to the non-extension of the period to assess or collect taxes, and made the assessments issued by the BIR beyond the three-year prescriptive period void.
The CIR also argues that PDI is estopped from questioning the validity of the Waivers. We do not agree. As stated by the CTA, the BIR cannot shift the blame to the taxpayer for issuing defective waivers. The Court has ruled that the BIR cannot hide behind the doctrine of estoppel to cover its failure to comply with RMO 20-90 and RDAO 05-01 which were issued by the BIR itself. A waiver of the statute of limitations is a derogation of the taxpayer’s right to security against prolonged and unscrupulous investigations and thus, it must be carefully and strictly construed.
Since the three Waivers in this case are defective, they do not produce any effect and did not suspend the three-year prescriptive period under Section 203 of the NIRC. As such, we sustain the cancellation of the Formal Letter of Demand dated 11 March 2008 and Assessment No. LN # 116-AS-04-00-00038-000526 for taxable year 2004 issued by the BIR against PDI.
******
As to the contention of petitioner that through the principle of estoppel, respondent is not allowed to raise the defense of prescription against the efforts of the government to collect the tax assessed against it, such is misplaced. Its argument that respondent’s belated assertions relative to the alleged defects and flaws in the waivers it signed in favor of the government should not be given merit, is also amiss.
Petitioner cannot implore the doctrine of estoppel just to compensate its failure to follow the proper procedure. As aptly ruled by the CTA:
It is well established that issues raised for the first time on appeal are barred by estoppel. However, in the leading case of Commissioner of Internal Revenue v. Kudos Metal Corporation, the Supreme Court held that:
The doctrine of estoppel cannot be applied in this case as an exception to the statute of limitations on the assessment of taxes considering that there is a detailed procedure for the proper execution of the waiver, which the BIR must strictly follow. xxx As such, the doctrine of estoppel cannot give validity to an act that is prohibited by law or one that is against public policy. xxx
Moreover, the BIR cannot hide behind the doctrine of estoppel to cover its failure to comply with RMO 20-90 and RDAO 05-01, which the BIR itself issued. xxx Having caused the defects in the waivers, the BIR must bear the consequence. It cannot shift the blame to the taxpayer. To stress, a waiver of the statute of limitations, being a derogation of the taxpayer’s right to security against prolonged and unscrupulous investigations, must be carefully and strictly construed.
Applying the said ruling in the case at bench, BPI is not estopped from raising the invalidity of the subject Waivers as the BIR in this case caused the defects thereof. As such, the invalid Waivers did not operate to toll or extend the period of prescription.
From the above disquisitions, it is clear that the right of petitioner to assess respondent has already prescribed and respondent is not liable to pay the deficiency tax assessment.
*******
The OSG insists that the CIR’s right to assess the subject taxes did not prescribe because the waivers of the statute of limitations were valid and binding. BPI is estopped from assailing the documents’ validity because they did not do so in the administrative level.
On the other hand, both the CTA Division and CTA EB carefully reviewed and examined the records (i.e., tax returns for each tax type, waivers of the statutes of limitations, etc.) to precisely ascertain whether the period to assess each tax type has prescribed. The court a quo ultimately invalidated the waivers of the statutes of limitations due to the absence of the CIR’s signature and found that only the assessments for EWT and DFT have not prescribed.
The Court shall no longer disturb the afore-cited findings.
Verily, the 1977 Tax Code, as amended, allowed the parties to execute an agreement waiving the three-year statute of limitation for tax assessment. However, it is already established that, to be valid, waivers of this nature must be in the form as prescribed by the applicable tax regulations. That both parties must signify their assent in extending the assessment period is not merely a formal requisite under tax rules, but one that is essential to the validity of a contract under the Civil Code.
Furthermore, the Court already ruled that BPI is not estopped from raising questions on the waivers’ validity. That the fundamental defect that invalidated the subject waivers were caused by the CIR gives more reason to the taxpayer to seek redress for this inadvertence.
——————————————
The waiver is not a unilateral act of the taxpayer, hence, the BIR must act on it; The waiver does not imply that the taxpayer relinquishes the right to invoke prescription unequivocally.
Petitioner mainly argues that in view of respondent’s execution of the Waiver of the statute of limitations, the period to collect the assessed deficiency income taxes has not yet prescribed.
The resolution of the main issue requires a factual determination of the proper execution of the Waiver. The CTA Division has already made a factual finding on the infirmities of the Waiver executed by respondent on 16 November 1993. The Court found that the following requisites were absent:
(1) Conformity of either petitioner or a duly authorized representative;
(2) Date of acceptance showing that both parties had agreed on the Waiver before the expiration of the prescriptive period; and
(3) Proof that respondent was furnished a copy of the Waiver.
These findings are undisputed by petitioner. In fact, it cites BPI v. CIR to support its contention that the approval of the CIR need not be express, but may be implied from the acts of the BIR officials in response to the request for reinvestigation. Accordingly, petitioner argues that the actual approval of the Waiver is apparent from the proceedings that were additionally conducted in determining the propriety of the subject assessment.
We do not agree.
The statute of limitations on the right to assess and collect a tax means that once the period established by law for the assessment and collection of taxes has lapsed, the government’s corresponding right to enforce that action is barred by provision of law.
The period to assess and collect deficiency taxes may be extended only upon a written agreement between the CIR and the taxpayer prior to the expiration of the three-year prescribed period in accordance with Section 222 (b) of the NIRC. In relation to the implementation of this provision, the CIR issued RMO No. 20-90 on 4 April 1990 to provide guidelines on the proper execution of the Waiver of the Statute of Limitations. In the execution of this waiver, the following procedures should be followed:
1. The waiver must be in the form identified hereof. This form may be reproduced by the Office concerned but there should be no deviation from such form. The phrase “but not after __________ 19___” should be filled up x x x
2. x x x x
Soon after the waiver is signed by the taxpayer, the Commissioner of Internal Revenue or the revenue official authorized by him, as hereinafter provided, shall sign the waiver indicating that the Bureau has accepted and agreed to the waiver. The date of such acceptance by the Bureau should be indicated. x x x.
3. The following revenue officials are authorized to sign the waiver.
A. In the National Office
x x x x
3. Commissioner For tax cases involving more than P1M
B. In the Regional Offices
1. The Revenue District Officer with respect to tax cases still pending investigation and the period to assess is about to prescribe regardless of amount.
x x x x
5. The foregoing procedures shall be strictly followed. Any revenue official found not to have complied with this Order resulting in prescription of the right to assess/collect shall be administratively dealt with.
Furthermore, jurisprudence is replete with requisites of a valid waiver:
1. The waiver must be in the proper form prescribed by RMO 20-90. The phrase “but not after ______ 19 ___”, which indicates the expiry date of the period agreed upon to assess/collect the tax after the regular three-year period of prescription, should be filled up.
2. The waiver must be signed by the taxpayer himself or his duly authorized representative. In the case of a corporation, the waiver must be signed by any of its responsible officials. In case the authority is delegated by the taxpayer to a representative, such delegation should be in writing and duly notarized.
3. The waiver should be duly notarized.
4. The CIR or the revenue official authorized by him must sign the waiver indicating that the BIR has accepted and agreed to the waiver. The date of such acceptance by the BIR should be indicated. However, before signing the waiver, the CIR or the revenue official authorized by him must make sure that the waiver is in the prescribed form, duly notarized, and executed by the taxpayer or his duly authorized representative.
5. Both the date of execution by the taxpayer and date of acceptance by the Bureau should be before the expiration of the period of prescription or before the lapse of the period agreed upon in case a subsequent agreement is executed.
6. The waiver must be executed in three copies, the original copy to be attached to the docket of the case, the second copy for the taxpayer and the third copy for the Office accepting the waiver. The fact of receipt by the taxpayer of his/her file copy must be indicated in the original copy to show that the taxpayer was notified of the acceptance of the BIR and the perfection of the agreement.
In Philippine Journalist, Inc. v. Commissioner of Internal Revenue, the Court categorically stated that a Waiver must strictly conform to RMO No. 20-90. The mandatory nature of the requirements set forth in RMO No. 20-90, as ruled upon by this Court, was recognized by the BIR itself in the latter’s subsequent issuances, namely, RMC Nos. 6-2005 and 29-2012. Thus, the BIR cannot claim the benefits of extending the period to collect the deficiency tax as a consequence of the Waiver when, in truth it was the BIR’s inaction which is the proximate cause of the defects of the Waiver. The BIR has the burden of ensuring compliance with the requirements of RMO No. 20-90, as they have the burden of securing the right of the government to assess and collect tax deficiencies. This right would prescribe absent any showing of a valid extension of the period set by the law.
To emphasize, the Waiver was not a unilateral act of the taxpayer; hence, the BIR must act on it, either by conforming to or by disagreeing with the extension. A waiver of the statute of limitations, whether on assessment or collection, should not be construed as a waiver of the right to invoke the defense of prescription but, rather, an agreement between the taxpayer and the BIR to extend the period to a date certain, within which the latter could still assess or collect taxes due. The waiver does not imply that the taxpayer relinquishes the right to invoke prescription unequivocally.
Although we recognize that the power of taxation is deemed inherent in order to support the government, tax provisions are not all about raising revenue. Our legislature has provided safeguards and remedies beneficial to both the taxpayer, to protect against abuse; and the government, to promptly act for the availability and recovery of revenues. A statute of limitations on the assessment and collection of internal revenue taxes was adopted to serve a purpose that would benefit both the taxpayer and the government.
This Court has expounded on the significance of adopting a statute of limitation on tax assessment and collection in this case:
The provision of law on prescription was adopted in our statute books upon recommendation of the tax commissioner of the Philippines which declares:
Under the former law, the right of the Government to collect the tax does not prescribe. However, in fairness to the taxpayer, the Government should be estopped from collecting the tax where it failed to make the necessary investigation and assessment within 5 years after the filing of the return and where it failed to collect the tax within 5 years from the date of assessment thereof. Just as the government is interested in the stability of its collection, so also are the taxpayers entitled to an assurance that they will not be subjected to further investigation for tax purposes after the expiration of a reasonable period of time. (Vol. II, Report of the Tax Commission of the Philippines, pp. 321-322)
The law prescribing a limitation of actions for the collection of the income tax is beneficial both to the Government and to its citizens; to the Government because tax officers would be obliged to act promptly in the making of assessment, and to citizens because after the lapse of the period of prescription citizens would have a feeling of security against unscrupulous tax agents who will always find an excuse to inspect the books of taxpayers, not to determine the latter’s real liability, but to take advantage of every opportunity to molest peaceful, law-abiding citizens. Without such legal defense taxpayers would furthermore be under obligation to always keep their books and keep them open for inspection subject to harassment by unscrupulous tax agents. The law on prescription being a remedial measure should be interpreted in a way conducive to bringing about the beneficient purpose of affording protection to the taxpayer within the contemplation of the Commission which recommends the approval of the law. [Republic of the Philippines v. Ablaza, 108 Phil. 1105 (1960)]
Again, a waiver is not a unilateral act of the taxpayer or the BIR, but is a bilateral agreement between two parties to extend the period to a date certain.
——————————————
When a waiver does not comply with the requisites for its validity, it is invalid and ineffective to extend the prescriptive period to assess taxes.
Section 203 of the 1997 NIRC mandates the BIR to assess internal revenue taxes within three years from the last day prescribed by law for the filing of the tax return or the actual date of filing of such return, whichever comes later. Hence, an assessment notice issued after the three-year prescriptive period is not valid and effective. Exceptions to this rule are provided under Section 222 of the NIRC.
Section 222(b) of the NIRC provides that the period to assess and collect taxes may only be extended upon a written agreement between the CIR and the taxpayer executed before the expiration of the three-year period. RMO 20-90 issued on April 4, 1990 and RDAO 05-01 issued on August 2, 2001 provide the procedure for the proper execution of a waiver.
The Court has consistently held that a waiver of the statute of limitations must faithfully comply with the provisions of RMO No. 20-90 and RDAO 05-01 in order to be valid and binding.
In Philippine Journalists, Inc. v. Commissioner of Internal Revenue the Court declared the waiver executed by petitioner therein invalid because: (1) it did not specify a definite agreed date between the BIR and petitioner within which the former may assess and collect revenue taxes; (2) it was signed only by a revenue district officer, not the Commissioner; (3) there was no date of acceptance; and (4) petitioner was not furnished a copy of the waiver.
Philippine Journalists tells us that since a waiver of the statute of limitations is a derogation of the taxpayer’s right to security against prolonged and unscrupulous investigations, waivers of this kind must be carefully and strictly construed. Philippine Journalists also clarifies that a waiver of the statute of limitations is not a waiver of the right to invoke the defense of prescription but rather an agreement between the taxpayer and the BIR that the period to issue an assessment and collect the taxes due is extended to a date certain. It is not a unilateral act by the taxpayer of the BIR but is a bilateral agreement between two parties.
In Commissioner of Internal Revenue v. FMF Development Corporation the Court found the waiver in question defective because: (1) it was not proved that respondent therein was furnished a copy of the BIR-accepted waiver; (2) the waiver was signed by a revenue district officer instead of the Commissioner as mandated by the NIRC and RMO 20-90 considering that the case involved an amount of more than P1,000,000.00, and the period to assess was not yet about to prescribe; and (3) it did not contain the date of acceptance by the CIR. The Court explained that the date of acceptance by the CIR is a requisite necessary to determine whether the waiver was validly accepted before the expiration of the original period.
In CIR v. Kudos Metal Corporation, the waivers executed by Kudos were found ineffective to extend the period to assess or collect taxes because: (1) the accountant who executed the waivers had no notarized written board authority to sign the waivers in behalf of respondent corporation; (2) there was no date of acceptance indicated on the waivers; and (3) the fact of receipt by respondent of its file copy was not indicated in the original copies of the waivers.
The Court rejected the CIR’s argument that since it was the one who asked for additional time, Kudos should be considered estopped from raising the defense of prescription. The Court held that the BIR cannot hide behind the doctrine of estoppel to cover its failure to comply with its RMO 20-90 and RDAO 05-01. Having caused the defects in the waivers, the Court held that the BIR must bear the consequence. Hence, the BIR assessments were found to be issued beyond the three-year period and declared void. Further, the Court stressed that there is compliance with RMO 20-90 only after the taxpayer receives a copy of the waiver accepted by the BIR, viz:
The flaw in the appellate court’s reasoning stems from its assumption that the waiver is a unilateral act of the taxpayer when it is in fact and in law an agreement between the taxpayer and the BIR. When the petitioner’s comptroller signed the waiver on September 22, 1997, it was not yet complete and final because the BIR had not assented. There is compliance with the provision of RMO No. 20-90 only after the taxpayer received a copy of the waiver accepted by the BIR. The requirement to furnish the taxpayer with a copy of the waiver is not only to give notice of the existence of the document but of the acceptance by the BIR and the perfection of the agreement.
*******
Section 203 of the NIRC of 1997, as amended, limits the CIR’s period to assess and collect internal revenue taxes to three (3) years counted from the last day prescribed by law for the filing of the return or from the day the return was filed, whichever comes later. Thus, assessments issued after the expiration of such period are no longer valid and effective.
In SMI-Ed Philippines Technology, Inc. v. Commissioner of Internal Revenue, the Court explained the primary reason behind the prescriptive period on the CIR’s right to assess or collect internal revenue taxes: that is, to safeguard the interests of taxpayers from unreasonable investigation. Accordingly, the government must assess internal revenue taxes on time so as not to extend indefinitely the period of assessment and deprive the taxpayer of the assurance that it will no longer be subjected to further investigation for taxes after the expiration of a reasonable period of time.
In this regard, the CTA Division found that the last day for the CIR to issue an assessment on STI’s income tax for fiscal year ending March 31, 2003 was on August 15, 2006; while the latest date for the CIR to assess STI of EWT for the fiscal year ending March 31, 2003 was on April 17, 2006; and the latest date for the CIR to assess STI of deficiency VAT for the four quarters of the same fiscal year was on May 25, 2006. Clearly, on the basis of these dates, the final assessment notice dated June 16, 2007, assessing STI for deficiency income tax, VAT and EWT for fiscal year 2003, in the aggregate amount of P161,835,737.98, which STI received on June 28, 2007, was issued beyond the three-year prescriptive period.
However, the CIR maintains that prescription had not set in because the parties validly executed a waiver of statute of limitations under Section 222(b) of the NIRC, as amended.
To implement the foregoing provisions, the BIR issued RMO No. 20-90 and RDAO No. 05-01, outlining the procedures for the proper execution of a valid waiver.
These requirements are mandatory and must strictly be followed. To be sure, in a number of cases, this Court did not hesitate to strike down waivers which failed to strictly comply with the provisions of RMO No. 20-90 and RDAO No. 05-01.
In Philippine Journalists, Inc. v. Commissioner of Internal Revenue, the Court declared the waiver invalid because: (1) it did not specify the date within which the BIR may assess and collect revenue taxes, such that the waiver became unlimited in time; (2) it was signed only by a revenue district officer, and not the CIR; (3) there was no date of acceptance; and (4) the taxpayer was not furnished a copy of the waiver.
In Commissioner of Internal Revenue v. FMF Development Corporation, the waiver was found defective and thus did not validly extend the original three-year prescriptive period because: (1) it was not proven that the taxpayer was furnished a copy of the waiver; (2) it was signed only by a revenue district officer, and not the CIR as mandated by law; and (3) it did not contain the date of acceptance by the CIR, which is necessary to determine whether the waiver was validly accepted before the expiration of the original three-year period.
In another case (CIR vs. Kudos Metal Corporation), the waivers executed by the taxpayer’s accountant were found defective for the following reasons: (1) the waivers were executed without the notarized written authority of the taxpayer’s representative to sign the waiver on its behalf; (2) the waivers failed to indicate the date of acceptance; and (3) the fact of receipt by the taxpayer of its file copy was not indicated in the original copies of the waivers.
In Commissioner of Internal Revenue v. The Stanley Works Sales (Phils.), Inc., the Court nullified the waivers because the following requisites were absent: (1) conformity of either the CIR or a duly authorized representative; (2) date of acceptance showing that both parties had agreed on the waiver before the expiration of the prescriptive period; and (3) proof that the taxpayer was furnished a copy of the waiver.
The Court also invalidated the waivers executed by the taxpayer in the case of Commissioner of Internal Revenue v. Standard Chartered Bank, because: (1) they were signed by Assistant Commissioner-Large Taxpayers Service and not by the CIR; (2) the date of acceptance was not shown; (3) they did not specify the kind and amount of the tax due; and (4) the waivers speak of a request for extension of time within which to present additional documents and not for reinvestigation and/or reconsideration of the pending internal revenue case as required under RMO No. 20-90.
Tested against the requirements of RMO No. 20-90 and relevant jurisprudence, the Court cannot but agree with the CTA’s finding that the waivers subject of this case suffer from the following defects:
- At the time when the first waiver took effect, on June 2, 2006, the period for the CIR to assess STI for deficiency EWT and deficiency VAT for fiscal year ending March 31, 2003, had already prescribed. To recall, the CIR only had until April 17, 2006 (for EWT) and May 25, 2006 (for VAT), to issue the subject assessments.
- STI’s signatory to the three waivers had no notarized written authority from the corporation’s board of directors. It bears to emphasize that RDAO No. 05-01 mandates the authorized revenue official to ensure that the waiver is duly accomplished and signed by the taxpayer or his authorized representative before affixing his signature to signify acceptance of the same; and in case the authority is delegated by the taxpayer to a representative, as in this case, the concerned revenue official shall see to it that such delegation is in writing and duly notarized. The waiver should not be accepted by the concerned BIR office and official unless notarized.
- Similar to Standard Chartered Bank, the waivers in this case did not specify the kind of tax and the amount of tax due. It is established that a waiver of the statute of limitations is a bilateral agreement between the taxpayer and the BIR to extend the period to assess or collect deficiency taxes on a certain date. Logically, there can be no agreement if the kind and amount of the taxes to be assessed or collected were not indicated. Hence, specific information in the waiver is necessary for its validity.
Verily, considering the foregoing defects in the waivers executed by STI, the periods for the CIR to assess or collect the alleged deficiency income tax, deficiency EWT and deficiency VAT were not extended. The assessments subject of this case, which were issued by the BIR beyond the three-year prescriptive, are therefore considered void and of no legal effect. Hence, the CTA committed no reversible error in cancelling and setting aside the subject assessments on the ground of prescription.
——————————————
When a waiver is still considered valid, even when the requisites for its validity were not complied with; In pari delicto; Estoppel.
The deficiencies of the Waivers in this case are the same as the defects of the waiver in Kudos. In the instant case, the CTA found the Waivers because of the following flaws: (1) they were executed without a notarized board authority; (2) the dates of acceptance by the BIR were not indicated therein; and (3) the fact of receipt by respondent of its copy of the Second Waiver was not indicated on the face of the original Second Waiver.
To be sure, both parties in this case are at fault.
Here, respondent, through Sarmiento, executed five Waivers in favor of petitioner. However, her authority to sign these Waivers was not presented upon their submission to the BIR. In fact, later on, her authority to sign was questioned by respondent itself, the very same entity that caused her to sign such in the first place. Thus, it is clear that respondent violated RMO No. 20-90 which states that in case of a corporate taxpayer, the waiver must be signed by its responsible officials and RDAO 01-05 which requires the presentation of a written and notarized authority to the BIR.
Similarly, the BIR violated its own rules and was careless in performing its functions with respect to these Waivers. It is very clear that under RDAO No. 05-01 it is the duty of the authorized revenue official to ensure that the waiver is duly accomplished and signed by the taxpayer or his authorized representative before affixing his signature to signify acceptance of the same. It also instructs that in case the authority is delegated by the taxpayer to a representative, the concerned revenue official shall see to it that such delegation is in writing and duly notarized. Furthermore, it mandates that the waiver should not be accepted by the concerned BIR office and official unless duly notarized.
Vis-a-vis the five Waivers it received from respondent, the BIR has failed, for five times, to perform its duties in relation thereto: to verify Ms. Sarmiento’s authority to execute them, demand the presentation of a notarized document evidencing the same, refuse acceptance of the Waivers when no such document was presented, affix the dates of its acceptance on each waiver, and indicate on the Second Waiver the date of respondent’s receipt thereof.
Both parties knew the infirmities of the Waivers yet they continued dealing with each other on the strength of these documents without bothering to rectify these infirmities. In fact, in its Letter Protest to the BIR, respondent did not even question the validity of the Waivers or call attention to their alleged defects.
In this case, respondent, after deliberately executing defective waivers, raised the very same deficiencies it caused to avoid the tax liability determined by the BIR during the extended assessment period. It must be remembered that by virtue of these Waivers, respondent was given the opportunity to gather and submit documents to substantiate its claims before the CIR during investigation. It was able to postpone the payment of taxes, as well as contest and negotiate the assessment against it. Yet, after enjoying these benefits, respondent challenged the validity of the Waivers when the consequences thereof were not in its favor. In other words, respondent’s act of impugning these Waivers after benefiting therefrom and allowing petitioner to rely on the same is an act of bad faith.
On the other hand, the stringent requirements in RMO No. 20-90 and RDAO No. 05-01 are in place precisely because the BIR put them there. Yet, instead of strictly enforcing its provisions, the BIR defied the mandates of its very own issuances. Verily, if the BIR was truly determined to validly assess and collect taxes from respondent after the prescriptive period, it should have been prudent enough to make sure that all the requirements for the effectivity of the Waivers were followed not only by its revenue officers but also by respondent. The BIR stood to lose millions of pesos in case the Waivers were declared void, as they eventually were by the CTA, but it appears that it was too negligent to even comply with its most basic requirements.
The BIR’s negligence in this case is so gross that it amounts to malice and bad faith. Without doubt, the BIR knew that waivers should conform strictly to RMO No. 20-90 and RDAO No. 05-01 in order to be valid. In fact, the mandatory nature of the requirements, as ruled by this Court, has been recognized by the BIR itself in its issuances such as RMC No. 6-2005, among others. Nevertheless, the BIR allowed respondent to submit, and it duly received, five defective Waivers when it was its duty to exact compliance with RMO No. 20-90 and RDAO No. 05-01 and follow the procedure dictated therein. It even openly admitted that it did not require respondent to present any notarized authority to sign the questioned Waivers. The BIR failed to demand respondent to follow the requirements for the validity of the Waivers when it had the duty to do so, most especially because it had the highest interest at stake. If it was serious in collecting taxes, the BIR should have meticulously complied with the foregoing orders, leaving no stone unturned.
The general rule is that when a waiver does not comply with the requisites for its validity specified under RMO No. 20-90 and RDAO No. 01-05, it is invalid and ineffective to extend the prescriptive period to assess taxes. However, due to its peculiar circumstances, We shall treat this case as an exception to this rule and find the Waivers valid for the reasons discussed below.
First, the parties in this case are in pari delicto or “in equal fault.” In pari delicto connotes that the two parties to a controversy are equally culpable or guilty and they shall have no action against each other. However, although the parties are in pari delicto, the Court may interfere and grant relief at the suit of one of them, where public policy requires its intervention, even though the result may be that a benefit will be derived by one party who is in equal guilt with the other.
Here, to uphold the validity of the Waivers would be consistent with the public policy embodied in the principle that taxes are the lifeblood of the government, and their prompt and certain availability is an imperious need. Taxes are the nation’s lifeblood through which government agencies continue to operate and which the State discharges its functions for the welfare of its constituents. As between the parties, it would be more equitable if petitioner’s lapses were allowed to pass and consequently uphold the Waivers in order to support this principle and public policy.
Second, the Court has repeatedly pronounced that parties must come to court with clean hands. Parties who do not come to court with clean hands cannot be allowed to benefit from their own wrongdoing. Following the foregoing principle, respondent should not be allowed to benefit from the flaws in its own Waivers and successfully insist on their invalidity in order to evade its responsibility to pay taxes.
Third, respondent is estopped from questioning the validity of its Waivers. While it is true that the Court has repeatedly held that the doctrine of estoppel must be sparingly applied as an exception to the statute of limitations for assessment of taxes, the Court finds that the application of the doctrine is justified in this case. Verily, the application of estoppel in this case would promote the administration of the law, prevent injustice and avert the accomplishment of a wrong and undue advantage. Respondent executed five Waivers and delivered them to petitioner, one after the other. It allowed petitioner to rely on them and did not raise any objection against their validity until petitioner assessed taxes and penalties against it. Moreover, the application of estoppel is necessary to prevent the undue injury that the government would suffer because of the cancellation of petitioner’s assessment of respondent’s tax liabilities.
Finally, the Court cannot tolerate this highly suspicious situation. In this case, the taxpayer, on the one hand, after voluntarily executing waivers, insisted on their invalidity by raising the very same defects it caused. On the other hand, the BIR miserably failed to exact from respondent compliance with its rules. The BIR’s negligence in the performance of its duties was so gross that it amounted to malice and bad faith. Moreover, the BIR was so lax such that it seemed that it consented to the mistakes in the Waivers. Such a situation is dangerous and open to abuse by unscrupulous taxpayers who intend to escape their responsibility to pay taxes by mere expedient of hiding behind technicalities.
It is true that petitioner was also at fault here because it was careless in complying with the requirements of RMO No. 20-90 and RDAO No. 01-05. Nevertheless, petitioner’s negligence may be addressed by enforcing the provisions imposing administrative liabilities upon the officers responsible for these errors. The BIR’s right to assess and collect taxes should not be jeopardized merely because of the mistakes and lapses of its officers, especially in cases like this where the taxpayer is obviously in bad faith.
*******
Estoppel applies against a taxpayer who did not only raise at the earliest opportunity its representative’s lack of authority to execute two (2) waivers of defense of prescription, but was also accorded, through these waivers, more time to comply with the audit requirements of the BIR.
As a general rule, petitioner has three (3) years to assess taxpayers from the filing of the return.
An exception to the rule of prescription is found in Section 222(b) and (d) of [the NIRC of 1997].
Thus, the period to assess and collect taxes may be extended upon the Commissioner of Internal Revenue and the taxpayer’s written agreement, executed before the expiration of the three (3)-year period.
In this case, two (2) waivers were supposedly executed by the parties extending the prescriptive periods for assessment of income tax, value-added tax, and expanded and final withholding taxes to June 20, 2008, and then to November 30, 2008.
The CTA, both its First Division and En Banc, declared as defective and void the two (2) Waivers of the Defense of Prescription for non-compliance with the requirements for the proper execution of a waiver as provided in RMO No. 20-90 and RDAO No. 05-01. Specifically, the CTA found that these Waivers were not accompanied by a notarized written authority from respondent, authorizing the so-called representatives to act on its behalf. Likewise, neither the Revenue District Office’s acceptance date nor respondent’s receipt of the BIR’s acceptance was indicated in either document.
However, Presiding Justice Roman G. Del Rosario (Justice Del Rosario) in his Separate Concurring Opinion in the CTA June 7, 2016 Decision, found that respondent is estopped from claiming that the waivers were invalid by reason of its own actions, which persuaded the government to postpone the issuance of the assessment. He discussed:
In the case at bar, respondent performed acts that induced the BIR to defer the issuance of the assessment. Records reveal that to extend the BIR’s prescriptive period to assess respondent for deficiency taxes for taxable year 2004, respondent executed two (2) waivers. The first Waiver dated October 2007 extended the period to assess until June 20, 2008, while the second Waiver, which was executed on June 2, 2008, extended the period to assess the taxes until November 30, 2008. As a consequence of the issuance of said waivers, petitioner delayed the issuance of the assessment.
Notably, when respondent filed its protest on November 26, 2008 against the Preliminary Assessment Notice dated November 11, 2008, it merely argued that it is not liable for the assessed deficiency taxes and did not raise as an issue the invalidity of the waiver and the prescription of petitioner’s right to assess the deficiency taxes. In its protest dated December 8, 2008 against the FAN, respondent argued that the year being audited in the FAN has already prescribed at the time such FAN was mailed on December 2, 2008. Respondent even stated in that protest that it received the letter (referring to the FAN dated November 28, 2008) on December 5, 2008, which accordingly is five (5) days after the waiver it issued had prescribed. The foregoing narration plainly does not suggest that respondent has any objection to its previously executed waivers. By the principle of estoppel, respondent should not be allowed to question the validity of the waivers.
In Commissioner of Internal Revenue v. Next Mobile, Inc. (formerly Nextel Communications Phils., Inc.), this Court recognized the doctrine of estoppel and upheld the waivers when both the taxpayer and the BIR were in pari delicto. The taxpayer’s act of impugning its waivers after benefitting from them was considered an act of bad faith:
In this case, respondent, after deliberately executing defective waivers, raised the very same deficiencies it caused to avoid the tax liability determined by the BIR during the extended assessment period. It must be remembered that by virtue of these Waivers, respondent was given the opportunity to gather and submit documents to substantiate its claims before the [Commissioner of Internal Revenue] during investigation. It was able to postpone the payment of taxes, as well as contest and negotiate the assessment against it. Yet, after enjoying these benefits, respondent challenged the validity of the Waivers when the consequences thereof were not in its favor. In other words, respondent’s act of impugning these Waivers after benefiting therefrom and allowing petitioner to rely on the same is an act of bad faith.
This Court found the taxpayer estopped from questioning the validity of its waivers:
Respondent executed five Waivers and delivered them to petitioner, one after the other. It allowed petitioner to rely on them and did not raise any objection against their validity until petitioner assessed taxes and penalties against it. Moreover, the application of estoppel is necessary to prevent the undue injury that the government would suffer because of the cancellation of petitioner’s assessment of respondent’s tax liabilities. (Emphasis in the original)
Parenthetically, this Court stated that when both parties continued to deal with each other in spite of knowing and without rectifying the defects of the waivers, their situation is “dangerous and open to abuse by unscrupulous taxpayers who intend to escape their responsibility to pay taxes by mere expedient of hiding behind technicalities.”
Estoppel similarly applies in this case
Indeed, the BIR was at fault when it accepted respondent’s Waivers despite their non compliance with the requirements of RMO No. 20-90 and RDAO No. 05-01.
Nonetheless, respondent’s acts also show its implied admission of the validity of the waivers. First, respondent never raised the invalidity of the Waivers at the earliest opportunity, either in its Protest to the PAN, Protest to the FAN, or Supplemental Protest to the FAN. It thereby impliedly recognized these Waivers‘ validity and its representatives’ authority to execute them. Respondent only raised the issue of these Waivers‘ validity in its Petition for Review filed with the CTA. In fact, as pointed out by Justice Del Rosario, respondent’s Protest to the FAN clearly recognized the validity of the Waivers, when it stated:
This has reference to the Final Assessment Notice (“[F]AN”) issued by your office, dated November 28, 2008. The said letter was received by Transitions Optical Philippines[,] Inc. (TOPI) on December 5, 2008, five days after the waiver we issued which was valid until November 30, 2008 had prescribed. (Emphasis supplied)
Second, respondent does not dispute petitioner’s assertion that respondent repeatedly failed to comply with petitioner’s notices, directing it to submit its books of accounts and related records for examination by the BIR. Respondent also ignored the BIR’s request for an Informal Conference to discuss other “discrepancies” found in the partial documents submitted. The Waivers were necessary to give respondent time to fully comply with the BIR notices for audit examination and to respond to its Informal Conference request to discuss the discrepancies. Thus, having benefitted from the Waivers executed at its instance, respondent is estopped from claiming that they were invalid and that prescription had set in.
*******
We reiterate through this decision that the taxpayer has the primary responsibility for the proper preparation of the waiver of the prescriptive period for assessing deficiency taxes. Hence, the CIR may not be blamed for any defects in the execution of the waiver.
To be noted is that the CTA En Banc cited Commissioner of Internal Revenue v. Kudos Metal Corporation, whereby the Court reiterated that RMO No. 20-90 and RDAO No. 05-01 governed the proper execution of a valid waiver of the statute of limitations; and pointed to Commissioner of Internal Revenue v. Next Mobile Inc., supra, to highlight the recognized exception to the strict application of RMO No. 20-90 and RDAO No. 05-01.
In Commissioner of Internal Revenue v. Next Mobile Inc., the Court declared that as a general rule a waiver that did not comply with the requisites for validity specified in RMO No. 20-90 and RDAO No. 01-05 was invalid and ineffective to extend the prescriptive period to assess the deficiency taxes. However, due to peculiar circumstances obtaining, the Court treated the case as an exception to the rule, and considered the waivers concerned as valid for the following reasons, viz.:
First, the parties in this case are in pari delicto or “in equal fault.” In pari delicto connotes that the two parties to a controversy are equally culpable or guilty and they shall have no action against each other. However, although the parties are in pari delicto, the Court may interfere and grant relief at the suit of one of them, where public policy requires its intervention, even though the result may be that a benefit will be derived by one party who is in equal guilt with the other.
Here, to uphold the validity of the Waivers would be consistent with the public policy embodied in the principle that taxes are the lifeblood of the government, and their prompt and certain availability is an imperious need. Taxes are the nation’s lifeblood through which government agencies continue to operate and which the State discharges its functions for the welfare of its constituents. As between the parties, it would be more equitable if petitioner’s lapses were allowed to pass and consequently uphold the Waivers in order to support this principle and public policy.
Second, the Court has repeatedly pronounced that parties must come to court with clean hands. Parties who do not come to court with clean hands cannot be allowed to benefit from their own wrongdoing. Following the foregoing principle, respondent should not be allowed to benefit from the flaws in its own Waivers and successfully insist on their invalidity in order to evade its responsibility to pay taxes.
Third, respondent is estopped from questioning the validity of its Waivers. While it is true that the Court has repeatedly held that the doctrine of estoppel must be sparingly applied as an exception to the statute of limitations for assessment of taxes, the Court finds that the application of the doctrine is justified in this case. Verily, the application of estoppel in this case would promote the administration of the law, prevent injustice and avert the accomplishment of a wrong and undue advantage. Respondent executed five Waivers and delivered them to petitioner, one after the other. It allowed petitioner to rely on them and did not raise any objection against their validity until petitioner assessed taxes and penalties against it. Moreover, the application of estoppel is necessary to prevent the undue injury that the government would suffer because of the cancellation of petitioner’s assessment of respondent’s tax liabilities.
Finally, the Court cannot tolerate this highly suspicious situation. In this case, the taxpayer, on the one hand, after voluntarily executing waivers, insisted on their invalidity by raising the very same defects it caused. On the other hand, the BIR miserably failed to exact from respondent compliance with its rules. The BIR’s negligence in the performance of its duties was so gross that it amounted to malice and bad faith. Moreover, the BIR was so lax such that it seemed that it consented to the mistakes in the Waivers. Such a situation is dangerous and open to abuse by unscrupulous taxpayers who intend to escape their responsibility to pay taxes by mere expedient of hiding behind technicalities.
It is true that petitioner was also at fault here because it was careless in complying with the requirements of RMO No. 20-90 and RDAO No. 01-05. Nevertheless, petitioner’s negligence may be addressed by enforcing the provisions imposing administrative liabilities upon the officers responsible for these errors. The BIR’s right to assess and collect taxes should not be jeopardized merely because of the mistakes and lapses of its officers, especially in cases like this where the taxpayer is obviously in bad faith.
In this case, the CTA in Division noted that the eight waivers of ATC contained the following defects, to wit:
1. The notarization of the Waivers was not in accordance with the 2004 Rules on Notarial Practice;
2. Several waivers clearly failed to indicate the date of acceptance by the Bureau of Internal Revenue;
3. The Waivers were not signed by the proper revenue officer; and
4. The Waivers failed to specify the type of tax and the amount of tax due.
We agree with the holding of the CTA En Banc that ATC’s case was similar to the case of the taxpayer involved in Commissioner of Internal Revenue v. Next Mobile Inc. The foregoing defects noted in the waivers of ATC were not solely attributable to the CIR. Indeed, although RDAO 01-05 stated that the waiver should not be accepted by the concerned BIR office or official unless duly notarized, a careful reading of RDAO No. 01-05 indicates that the proper preparation of the waiver was primarily the responsibility of the taxpayer or its authorized representative signing the waiver. Such responsibility did not pertain to the BIR as the receiving party. Consequently, ATC was not correct in insisting that the act or omission giving rise to the defects of the waivers should be ascribed solely to the respondent CIR and her subordinates.
Moreover, the principle of estoppel was applicable. The execution of the waivers was to the advantage of ATC because the waivers would provide to ATC the sufficient time to gather and produce voluminous records for the audit. It would really be unfair, therefore, were ATC to be permitted to assail the waivers only after the final assessment proved to be adverse. Indeed, the Court observed in Commissioner of Internal Revenue v. Next Mobile Inc. that:
In this case, respondent, after deliberately executing defective waivers, raised the very same deficiencies it caused to avoid the tax liability determined by the BIR during the extended assessment period. It must be remembered that by virtue of these Waivers, respondent was given the opportunity to gather and submit documents to substantiate its claims before the CIR during investigation. It was able to postpone the payment of taxes, as well as contest and negotiate the assessment against it. Yet, after enjoying these benefits, respondent challenged the validity of the Waivers when the consequences thereof were not in its favor. In other words, respondent’s act of impugning these Waivers after benefiting therefrom and allowing petitioner to rely on the same is an act of bad faith.
Thus, the CTA En Banc did not err in ruling that ATC, after having benefitted from the defective waivers, should not be allowed to assail them. In short, the CTA En Banc properly applied the equitable principles of in pari delicto, unclean hands, and estoppel as enunciated in Commissioner of Internal Revenue v. Next Mobile case.
——————————————
When the taxpayer is estopped from questioning the validity of the waivers.
RCBC assails the validity of the waivers of the statute of limitations on the ground that the said waivers were merely attested to by Sixto Esquivias, then Coordinator for the CIR, and that he failed to indicate acceptance or agreement of the CIR, as required under Section 223 (b) of the 1977 Tax Code. RCBC further argues that the principle of estoppel cannot be applied against it because its payment of the other tax assessments does not signify a clear intention on its part to give up its right to question the validity of the waivers.
The Court disagrees.
Under Article 1431 of the Civil Code, the doctrine of estoppel is anchored on the rule that “an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon.” A party is precluded from denying his own acts, admissions or representations to the prejudice of the other party in order to prevent fraud and falsehood.
Estoppel is clearly applicable to the case at bench. RCBC, through its partial payment of the revised assessments issued within the extended period as provided for in the questioned waivers, impliedly admitted the validity of those waivers. Had petitioner truly believed that the waivers were invalid and that the assessments were issued beyond the prescriptive period, then it should not have paid the reduced amount of taxes in the revised assessment. RCBC’s subsequent action effectively belies its insistence that the waivers are invalid. The records show that on December 6, 2000, upon receipt of the revised assessment, RCBC immediately made payment on the uncontested taxes. Thus, RCBC is estopped from questioning the validity of the waivers. To hold otherwise and allow a party to gainsay its own act or deny rights which it had previously recognized would run counter to the principle of equity which this institution holds dear.
——————————————
Where estoppel does not apply.
As regards petitioner’s insistence that respondent is already estopped from impugning the validity of the subject waivers considering that it made partial payments on the deficiency taxes being collected, particularly as to the payment of its deficiency WTC and FWT assessments in the amounts of P124,967.73 and P139,713.11, respectively, we find this argument bereft of merit.
As aptly found in the 29 July 2009 Resolution of the CTA in Division, although respondent paid the deficiency WTC and FWT assessments, it did not waive the defense of prescription as regards the remaining tax deficiencies, it being on record that respondent continued to raise the issue of prescription in its Pre-Trial Brief filed on 15 August 2005, Joint Stipulations of Facts and Issues filed on 1 September 2005, direct testimonies of its witness, and Memorandum filed on 24 October 2008. More so, even petitioner did not consider such payment of respondent as a waiver of the defense of prescription, but merely raised the issue of estoppel in her Motion for Reconsideration of the aforesaid decision. From the conduct of both parties, there can be no estoppel in this case.
Upon payment of the assessed deficiency in the WTC in the amount of P124,967.73 and in the FWT in the amount of P139,713.11, respondent filed a Motion for Leave of Court to Serve Supplemental Petition, with attached Supplemental Petition for Review. As stated in the CTA En Banc affirmed decision of the CTA in Division, “[i]n its Supplemental Petition for Review, respondent seeks to be fully credited of the payments it made to cover the deficiency WTC and FWT. Thus, the remaining assessments cover only the deficiency income tax, final income tax – FCDU, and (EWT) in the modified total amount of P33,076,944.18, x x x”. The aforesaid motion was granted and the supplemental petition was admitted by the CTA in Division. Undeniably, the acceptance of said payments was never questioned by petitioner. Indeed, the decision of the CTA in Division, which decision was affirmed by the CTA En Banc, covered only the remaining questioned assessment, namely: income tax, final income tax – FCDU, and EWT. Clearly, the payment of the deficiency WTC and FWT was made together with the reiteration in the petition for the cancellation of the assessment notices on the alleged deficiency income tax, final income tax – FCDU, and EWT.
When respondent paid the deficiency WTC and FWT assessments, petitioner accepted said payment without any opposition. This effectively extinguished respondent’s obligation to pay the subject taxes. It bears emphasis that, obligations are extinguished, among others, by payment or performance. Under Article 1232 of the Civil Code, payment means not only the delivery of money but also the performance, in any other manner, of an obligation. As intended, which intention was recognized by the CTA in Division and CTA En Banc, the question regarding the income tax, final income tax – FCDU, and EWT, was kept unaffected by the payment of the deficiency WTC and FWT assessments.
By way of reiteration, taking into consideration the foregoing flaws found in the subject waivers, the same are void, and the supposed suspensions of the prescriptive periods within which to issue the subject assessments were not legally effected. And the facts of this case do not call for the application of the doctrine of estoppel.
It must be remembered that the execution of a Waiver of Statute of Limitations may be beneficial to the taxpayer or to the BIR, or to both. Considering however, that it results to a derogation of some of the rights of the taxpayer, the same must be executed in accordance with pre-set guidelines and procedural requirements. Otherwise, it does not serve its purpose, and the taxpayer has all the right to invoke its nullity. For that reason, this Court cannot turn blind on the importance of the Statute of Limitations upon the assessment and collection of internal revenue taxes provided for under the NIRC. The law prescribing a limitation of actions for the collection of the income tax is beneficial both to the Government and to its citizens; to the Government because tax officers would be obliged to act properly in the making of the assessment, and to citizens because after the lapse of the period of prescription, citizens would have a feeling of security against unscrupulous tax agents who may find an excuse to inspect the books of taxpayers, not to determine the latter’s real liability, but to take advantage of every opportunity to molest peaceful, law-abiding citizens. Without such a legal defense, taxpayers would furthermore be under obligation to always keep their books and keep them open for inspection subject to harassment by unscrupulous tax agents. The law on prescription being a remedial measure should be interpreted in a way conducive to bringing about the beneficent purpose of affording protection to the taxpayer within the contemplation of the Commission which recommends the approval of the law.
In fine, considering the defects in the First and Second Waivers, the period to assess or collect deficiency taxes for the taxable year 1998 was never extended. Consequently, the Formal Letter of Demand and Assessment Notices dated 24 June 2004 for deficiency income tax, FCDU, and EWT in the aggregate amount of P33,076,944.18, including increments, were issued by the BIR beyond the three-year prescriptive period and are therefore void.
*******
As regards the CIR’s reliance on the case of RCBC and its insistence that STI’s request for reinvestigation, which resulted in a reduced assessment, bars STI from raising the defense of prescription, the Court finds the same bereft of merit.
As correctly stated by the CTA, RCBC is not on all fours with the instant case. The estoppel upheld in the said case arose from the taxpayer’s act of payment and not on the reduction in the amount of the assessed taxes. The Court explained that RCBC’s partial payment of the revised assessments effectively belied its insistence that the waivers are invalid and the assessments were issued beyond the prescriptive period. Here, as no such payment was made by STI, mere reduction of the amount of the assessment because of a request for reinvestigation should not bar it from raising the defense of prescription.
At this juncture, the Court deems it important to reiterate its ruling in Commissioner of Internal Revenue v. Kudos Metal Corporation, that the doctrine of estoppel cannot be applied as an exception to the statute of limitations on the assessment of taxes considering that there is a detailed procedure for the proper execution of the waiver, which the BIR must strictly follow. The BIR cannot hide behind the doctrine of estoppel to cover its failure to comply with RMO 20-90 and RDAO 05-01, which the BIR itself had issued. Having caused the defects in the waivers, the BIR must bear the consequence. It cannot simply shift the blame to the taxpayer.
*******
The Commissioner in this case contends that Avon is estopped from assailing the validity of the Waivers of the Defense of Prescription that it executed when it paid portions of the disputed assessments. The Commissioner invokes the ruling in Rizal Commercial Banking Corporation v. CIR, which allegedly must be applied as stare decisis.
The Commissioner’s contention is untenable.
Rizal Commercial Banking Corporation is not on all fours with this case. The estoppel upheld in that case arose from the benefit obtained by the taxpayer from its execution of the waiver, in the form of a drastic reduction of the deficiency taxes, and the taxpayer’s payment of a portion of the reduced tax assessment. In that case, this Court explained that Rizal Commercial Banking Corporation’s partial payment of the revised assessments effectively belied its insistence that the waivers were invalid and the assessments were issued beyond the prescriptive period. Thus:
Estoppel is clearly applicable to the case at bench. RCBC, through its partial payment of the revised assessments issued within the extended period as provided for in the questioned waivers, impliedly admitted the validity of those waivers. Had petitioner truly believed that the waivers were invalid and that the assessments were issued beyond the prescriptive period, then it should not have paid the reduced amount of taxes in the revised assessment. RCBC’s subsequent action effectively belies its insistence that the waivers are invalid. The records show that on December 6, 2000, upon receipt of the revised assessment, RCBC immediately made payment on the uncontested taxes. Thus, RCBC is estopped from questioning the validity of the waivers. To hold otherwise and allow a party to gainsay its own act or deny rights which it had previously recognized would run counter to the principle of equity which this institution holds dear. (Citation omitted)
Here, Avon claimed that it did not receive any benefit from the waivers. On the contrary, there was even a drastic increase in the assessed deficiency taxes when the Commissioner increased the alleged sales discrepancy from P15,700,000.00 in the preliminary findings to P62,900,000.00 in the PAN and FANs. Furthermore, Avon was compelled to pay a portion of the deficiency assessments “in compliance with the Revenue Officer’s condition in the hope of cancelling the assessments on the non-existent sales discrepancy.” Under these circumstances, Avon’s payment of an insignificant portion of the assessment cannot be deemed an admission or recognition of the validity of the waivers.
On the other hand, the CTA’s’ reliance on the general rule enunciated in CIR v. Kudos Metal Corporation is proper. In that case, this Court ruled that the BIR could not hide behind the doctrine of estoppel to cover its failure to comply with its own procedures. “[A] waiver of the statute of limitations [is] a derogation of the taxpayer’s right to security against prolonged and unscrupulous investigations [and thus, it] must be carefully and strictly construed.”
——————————————
To be valid, a waiver must indicate the nature and amount of the tax due.
The CIR further argues that even if Section 203 of the NIRC was applicable, the assessments against La Flor had yet to prescribe. It points out that La Flor had executed three Waivers to extend the statutory prescriptive period. The CIR insists that the Waivers should have been considered even if they were not offered in evidence because the CTA is not strictly governed by technical rules of evidence. It adds that the requirements under RMO No. 20-90 are not mandatory.
In CIR v. Systems Technology Institute, Inc., the Court had ruled that waivers extending the prescriptive period of tax assessments must be compliant with RMO No. 20-90 and must indicate the nature and amount of the tax due, to wit:
These requirements are mandatory and must strictly be followed. To be sure, in a number of cases, this Court did not hesitate to strike down waivers which failed to strictly comply with the provisions of RMO No. 20-90 and RDAO No. 05-01.
x x x x
The Court also invalidated the waivers executed by the taxpayer in the case of Commissioner of Internal Revenue v. Standard Chartered Bank, because: (1) they were signed by Assistant Commissioner-Large Taxpayers Service and not by the CIR; (2) the date of acceptance was not shown; (3) they did not specify the kind and amount of the tax due; and (4) the waivers speak of a request for extension of time within which to present additional documents and not for reinvestigation and/or reconsideration of the pending internal revenue case as required under RMO No. 20-90.
Tested against the requirements of RMO 20-90 and relevant jurisprudence, the Court cannot but agree with the CTA’s finding that the waivers subject of this case suffer from the following defects:
x x x x
3. Similar to Standard Chartered Bank, the waivers in this case did not specify the kind of tax and the amount of tax due. It is established that a waiver of the statute of limitations is a bilateral agreement between the taxpayer and the BIR to extend the period to assess or collect deficiency taxes on a certain date. Logically, there can be no agreement if the kind and amount of the taxes to be assessed or collected were not indicated. Hence, specific information in the waiver is necessary for its validity. (Emphasis supplied)
In the present case, the September 3, 2008, February 16, 2009 and December 2, 2009 Waivers failed to indicate the specific tax involved and the exact amount of the tax to be assessed or collected. As above-mentioned, these details are material as there can be no true and valid agreement between the taxpayer and the CIR absent these information. Clearly, the Waivers did not effectively extend the prescriptive period under Section 203 on account of their invalidity. The issue on whether the CTA was correct in not admitting them as evidence becomes immaterial since even if they were properly offered or considered by the CTA, the same conclusion would be reached — the assessments had prescribed as there was no valid waiver.
cf:
RMO No. 14-2016; RMC No. 141-2019
——————————————
Period of limitation to assess in case the original return is substantially amended.
Considering that the deficiency assessment was based on the amended return which, as aforestated, is substantially different from the original return, the period of limitation of the right to issue the same should be counted from the filing of the amended income tax return.
To strengthen our opinion, we believe that to hold otherwise, we would be paving the way for taxpayers to evade the payment of taxes by simply reporting in their original return heavy losses and amending the same more than five years later when the CIR has lost his authority to assess the proper tax thereunder. The object of the Tax Code is to impose taxes for the needs of the Government, not to enhance tax avoidance to its prejudice.
~~~The Commissioner of Internal Revenue vs. Phoenix Assurance Co., Ltd., et seq. (G.R. Nos. L-19727 and L-19903, 20 May 1965, En Banc, J. J. P. Bengzon)
——————————————
Effects of the improper service of a tax assessment.
Although the administrator of the estate may have been remiss in his legal obligation to inform respondent of the decedent’s death, the consequences thereof, as provided in Section 119 of the NIRC of 1977, merely refer to the imposition of certain penal sanctions on the administrator. These do not include the indefinite tolling of the prescriptive period for making deficiency tax assessments, or the waiver of the notice requirement for such assessments.
Thus, as of November 18, 1982, the date of the demand letter and Assessment Notice No. NARD-78-82-00501, there was absolutely no legal obligation on the part of Philtrust to either (1) respond to the demand letter and assessment notice, (2) inform respondent of the decedent’s death, or (3) inform petitioner that it had received said demand letter and assessment notice. This lack of legal obligation was implicitly recognized by the CA, which, in fact, rendered its assailed decision on grounds of “equity”.
Since there was never any valid notice of this assessment, it could not have become final, executory and incontestable, and, for failure to make the assessment within the five-year period provided in Section 318 of the NIRC of 1977 (now Section 203 of the NIRC of 1997), respondent’s claim against the petitioner Estate is barred.
Respondent argues that an assessment is deemed made for the purpose of giving effect to such assessment when the notice is released, mailed or sent to the taxpayer to effectuate the assessment, and there is no legal requirement that the taxpayer actually receive said notice within the five-year period. It must be noted, however, that the foregoing rule requires that the notice be sent to the taxpayer, and not merely to a disinterested party. Although there is no specific requirement that the taxpayer should receive the notice within the said period, due process requires at the very least that such notice actually be received. In CIR v. Pascor Realty and Development Corporation, we had occasion to say:
An assessment contains not only a computation of tax liabilities, but also a demand for payment within a prescribed period. It also signals the time when penalties and interests begin to accrue against the taxpayer. To enable the taxpayer to determine his remedies thereon, due process requires that it must be served on and received by the taxpayer.
In Republic v. De le Rama (124 Phil. 1493), we clarified that, when an estate is under administration, notice must be sent to the administrator of the estate, since it is the said administrator, as representative of the estate, who has the legal obligation to pay and discharge all debts of the estate and to perform all orders of the court. In that case, legal notice of the assessment was sent to two heirs, neither one of whom had any authority to represent the estate. We said:
The notice was not sent to the taxpayer for the purpose of giving effect to the assessment, and said notice could not produce any effect. In the case of Bautista and Corrales Tan v. Collector of Internal Revenue … this Court had occasion to state that “the assessment is deemed made when the notice to this effect is released, mailed or sent to the taxpayer for the purpose of giving effect to said assessment.” It appearing that the person liable for the payment of the tax did not receive the assessment, the assessment could not become final and executory. (Citations omitted, emphasis supplied.)
In this case, the assessment was served not even on an heir of the Estate, but on a completely disinterested third party. This improper service was clearly not binding on the petitioner.
By arguing that (1) the demand letter and assessment notice were served on Philtrust, (2) Philtrust was remiss in its obligation to respond to the demand letter and assessment notice, (3) Philtrust was remiss in its obligation to inform respondent of the decedent’s death, and (4) the assessment notice is therefore binding on the Estate, respondent is arguing in circles. The most crucial point to be remembered is that Philtrust had absolutely no legal relationship to the deceased, or to her Estate. There was therefore no assessment served on the Estate as to the alleged underpayment of tax. Absent this assessment, no proceedings could be initiated in court for the collection of said tax, and respondent’s claim for collection, filed with the probate court only on November 22, 1984, was barred for having been made beyond the five-year (now three-year) prescriptive period set by law.
——————————————
Requirements of due process are not satisfied if the PAN is not sent to the taxpayer.
On the matter of service of a tax assessment, a further perusal of our ruling in Barcelon is instructive, viz:
Jurisprudence is replete with cases holding that if the taxpayer denies ever having received an assessment from the BIR, it is incumbent upon the latter to prove by competent evidence that such notice was indeed received by the addressee. The onus probandi was shifted to respondent to prove by contrary evidence that the Petitioner received the assessment in the due course of mail. The Supreme Court has consistently held that while a mailed letter is deemed received by the addressee in the course of mail, this is merely a disputable presumption subject to controversion and a direct denial thereof shifts the burden to the party favored by the presumption to prove that the mailed letter was indeed received by the addressee (Republic vs. Court of Appeals, 149 SCRA 351). Thus as held by the Supreme Court in Gonzalo P. Nava vs. Commissioner of Internal Revenue, 13 SCRA 104, January 30, 1965:
“The facts to be proved to raise this presumption are (a) that the letter was properly addressed with postage prepaid, and (b) that it was mailed. Once these facts are proved, the presumption is that the letter was received by the addressee as soon as it could have been transmitted to him in the ordinary course of the mail. But if one of the said facts fails to appear, the presumption does not lie. (VI, Moran, Comments on the Rules of Court, 1963 ed, 56-57 citing Enriquez vs. Sunlife Assurance of Canada, 41 Phil 269).”
x x x. What is essential to prove the fact of mailing is the registry receipt issued by the Bureau of Posts or the Registry return card which would have been signed by the Petitioner or its authorized representative. And if said documents cannot be located, Respondent at the very least, should have submitted to the Court a certification issued by the Bureau of Posts and any other pertinent document which is executed with the intervention of the Bureau of Posts. This Court does not put much credence to the self serving documentations made by the BIR personnel especially if they are unsupported by substantial evidence establishing the fact of mailing. Thus:
“While we have held that an assessment is made when sent within the prescribed period, even if received by the taxpayer after its expiration (Coll. of Int. Rev. vs. Bautista, L-12250 and L-12259, May 27, 1959), this ruling makes it the more imperative that the release, mailing or sending of the notice be clearly and satisfactorily proved. Mere notations made without the taxpayer’s intervention, notice or control, without adequate supporting evidence cannot suffice; otherwise, the taxpayer would be at the mercy of the revenue offices, without adequate protection or defense.” (Nava vs. CIR, 13 SCRA 104, January 30, 1965).
x x x.
The failure of the respondent to prove receipt of the assessment by the Petitioner leads to the conclusion that no assessment was issued. Consequently, the government’s right to issue an assessment for the said period has already prescribed. (Industrial Textile Manufacturing Co. of the Phils., Inc. vs. CIR CTA Case 4885, August 22, 1996). (Emphases supplied.)
The Court agrees with the CTA that the CIR failed to discharge its duty and present any evidence to show that Metro Star indeed received the PAN dated January 16, 2002. It could have simply presented the registry receipt or the certification from the postmaster that it mailed the PAN, but failed. Neither did it offer any explanation on why it failed to comply with the requirement of service of the PAN. It merely accepted the letter of Metro Star’s chairman dated April 29, 2002, that stated that he had received the FAN dated April 3, 2002, but not the PAN; that he was willing to pay the tax as computed by the CIR; and that he just wanted to clarify some matters with the hope of lessening its tax liability.
This now leads to the question: Is the failure to strictly comply with notice requirements prescribed under Section 228 of the NIRC of 1997 and RR No. 12-99 tantamount to a denial of due process? Specifically, are the requirements of due process satisfied if only the FAN stating the computation of tax liabilities and a demand to pay within the prescribed period was sent to the taxpayer?
The answer to these questions require an examination of Section 228 of the Tax Code which reads:
SEC. 228. Protesting of Assessment. – When the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings: provided, however, that a preassessment notice shall not be required in the following cases:
(a) When the finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face of the return; or
(b) When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or
(c) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or
(d) When the excise tax due on exciseable articles has not been paid; or
(e) When the article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons.
The taxpayers shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void.
Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized representative shall issue an assessment based on his findings.
Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final.
If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of one hundred eighty (180)-day period; otherwise, the decision shall become final, executory and demandable. (Emphasis supplied).
Indeed, Section 228 of the Tax Code clearly requires that the taxpayer must first be informed that he is liable for deficiency taxes through the sending of a PAN. He must be informed of the facts and the law upon which the assessment is made. The law imposes a substantive, not merely a formal, requirement. To proceed heedlessly with tax collection without first establishing a valid assessment is evidently violative of the cardinal principle in administrative investigations – that taxpayers should be able to present their case and adduce supporting evidence.
This is confirmed under the provisions RR No. 12-99 of the BIR which pertinently provide:
SECTION 3. Due Process Requirement in the Issuance of a Deficiency Tax Assessment. —
3.1 Mode of procedures in the issuance of a deficiency tax assessment:
3.1.1 Notice for informal conference. — The Revenue Officer who audited the taxpayer’s records shall, among others, state in his report whether or not the taxpayer agrees with his findings that the taxpayer is liable for deficiency tax or taxes. If the taxpayer is not amenable, based on the said Officer’s submitted report of investigation, the taxpayer shall be informed, in writing, by the Revenue District Office or by the Special Investigation Division, as the case may be (in the case Revenue Regional Offices) or by the Chief of Division concerned (in the case of the BIR National Office) of the discrepancy or discrepancies in the taxpayer’s payment of his internal revenue taxes, for the purpose of “Informal Conference,” in order to afford the taxpayer with an opportunity to present his side of the case. If the taxpayer fails to respond within fifteen (15) days from date of receipt of the notice for informal conference, he shall be considered in default, in which case, the Revenue District Officer or the Chief of the Special Investigation Division of the Revenue Regional Office, or the Chief of Division in the National Office, as the case may be, shall endorse the case with the least possible delay to the Assessment Division of the Revenue Regional Office or to the Commissioner or his duly authorized representative, as the case may be, for appropriate review and issuance of a deficiency tax assessment, if warranted.
3.1.2 Preliminary Assessment Notice (PAN). — If after review and evaluation by the Assessment Division or by the Commissioner or his duly authorized representative, as the case may be, it is determined that there exists sufficient basis to assess the taxpayer for any deficiency tax or taxes, the said Office shall issue to the taxpayer, at least by registered mail, a Preliminary Assessment Notice (PAN) for the proposed assessment, showing in detail, the facts and the law, rules and regulations, or jurisprudence on which the proposed assessment is based (see illustration in ANNEX A hereof). If the taxpayer fails to respond within fifteen (15) days from date of receipt of the PAN, he shall be considered in default, in which case, a formal letter of demand and assessment notice shall be caused to be issued by the said Office, calling for payment of the taxpayer’s deficiency tax liability, inclusive of the applicable penalties.
3.1.3 Exceptions to Prior Notice of the Assessment. — The notice for informal conference and the preliminary assessment notice shall not be required in any of the following cases, in which case, issuance of the formal assessment notice for the payment of the taxpayer’s deficiency tax liability shall be sufficient:
(i) When the finding for any deficiency tax is the result of mathematical error in the computation of the tax appearing on the face of the tax return filed by the taxpayer; or
(ii) When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or
(iii) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or
(iv) When the excise tax due on excisable articles has not been paid; or
(v) When an article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons.
3.1.4 Formal Letter of Demand and Assessment Notice. — The formal letter of demand and assessment notice shall be issued by the Commissioner or his duly authorized representative. The letter of demand calling for payment of the taxpayer’s deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based, otherwise, the formal letter of demand and assessment notice shall be void (see illustration in ANNEX B hereof).
The same shall be sent to the taxpayer only by registered mail or by personal delivery.
If sent by personal delivery, the taxpayer or his duly authorized representative shall acknowledge receipt thereof in the duplicate copy of the letter of demand, showing the following: (a) His name; (b) signature; (c) designation and authority to act for and in behalf of the taxpayer, if acknowledged received by a person other than the taxpayer himself; and (d) date of receipt thereof.
x x x.
From the provision quoted above, it is clear that the sending of a PAN to taxpayer to inform him of the assessment made is but part of the “due process requirement in the issuance of a deficiency tax assessment,” the absence of which renders nugatory any assessment made by the tax authorities. The use of the word “shall” in subsection 3.1.2 describes the mandatory nature of the service of a PAN. The persuasiveness of the right to due process reaches both substantial and procedural rights and the failure of the CIR to strictly comply with the requirements laid down by law and its own rules is a denial of Metro Star’s right to due process. Thus, for its failure to send the PAN stating the facts and the law on which the assessment was made as required by Section 228 of RA No. 8424, the assessment made by the CIR is void.
The case of CIR v. Menguito cited by the CIR in support of its argument that only the non-service of the FAN is fatal to the validity of an assessment, cannot apply to this case because the issue therein was the non-compliance with the provisions of RR No. 12-85 which sought to interpret Section 229 of the old tax law. RA No. 8424 has already amended the provision of Section 229 on protesting an assessment. The old requirement of merely notifyingthe taxpayer of the CIR’s findings was changed in 1998 to informing the taxpayer of not only the law, but also of the facts on which an assessment would be made. Otherwise, the assessment itself would be invalid. The regulation then, on the other hand, simply provided that a notice be sent to the respondent in the form prescribed, and that no consequence would ensue for failure to comply with that form.
The Court need not belabor to discuss the matter of Metro Star’s failure to file its protest, for it is well-settled that a void assessment bears no fruit.
It is an elementary rule enshrined in the 1987 Constitution that no person shall be deprived of property without due process of law. In balancing the scales between the power of the State to tax and its inherent right to prosecute perceived transgressors of the law on one side, and the constitutional rights of a citizen to due process of law and the equal protection of the laws on the other, the scales must tilt in favor of the individual, for a citizen’s right is amply protected by the Bill of Rights under the Constitution. Thus, while “taxes are the lifeblood of the government,” the power to tax has its limits, in spite of all its plenitude. Hence in Commissioner of Internal Revenue v. Algue, Inc. [241 Phil. 829 (1988)], it was said –
Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved.
——————————————
Section 222(a), NIRC of 1997, as an exception to Section 203 thereof.
The prescriptive period in making an assessment depends upon whether a tax return was filed or whether the tax return filed was either false or fraudulent. When a tax return that is neither false nor fraudulent has been filed, the BIR may assess within three (3) years, reckoned from the date of actual filing or from the last day prescribed by law for filing. However, in case of a false or fraudulent return with intent to evade tax, Section 222(a) provides:
Section 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes. –
(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be filed without assessment, at any time within ten (10) years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof. (Emphasis supplied)
In Aznar v. Court of Tax Appeals [157 Phil. 510 (1974)], this Court interpreted Section 332 (now Section 222[a] of the NIRC) by dividing it in three (3) different cases: first, in case of false return; second, in case of a fraudulent return with intent to evade; and third, in case of failure to file a return. Thus:
Our stand that the law should be interpreted to mean a separation of the three different situations of false return, fraudulent return with intent to evade tax and failure to file a return is strengthened immeasurably by the last portion of the provision which aggregates the situations into three different classes, namely “falsity”, “fraud” and “omission.”
This Court held that there is a difference between “false return” and a “fraudulent return.” A false return simply involves a “deviation from the truth, whether intentional or not” while a fraudulent return “implies intentional or deceitful entry with intent to evade the taxes due.”
*******
In Samar-I Electric Cooperative v. Commissioner of Internal Revenue, the Court differentiated between false and fraudulent returns. Quoting Aznar v. Court of Tax Appeals [157 Phil. 510 (1974)], the Court explained in Samar-I the acts or omissions that may constitute falsity.
Thus, while the filing of a fraudulent return necessarily implies that the act of the taxpayer was intentional and done with intent to evade the taxes due, the filing of a false return can be intentional or due to honest mistake. In CIR v. B.F. Goodrich Phils., Inc., the Court stated that the entry of wrong information due to mistake, carelessness, or ignorance, without intent to evade tax, does not constitute a false return. In this case, we do not find enough evidence to prove fraud or intentional falsity on the part of PDI.
*******
Generally, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, or where the return is filed beyond the period, from the day the return was actually filed. Section 222 of the NIRC, however, provides for exceptions to the general rule. It states that in the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the assessment may be made within ten (10) years from the discovery of the falsity, fraud or omission.
——————————————
Fraud
Fraud is a question of fact that should be alleged and duly proven. The willful neglect to file the required tax return or the fraudulent intent to evade the payment of taxes, considering that the same is accompanied by legal consequences, cannot be presumed. Fraud entails corresponding sanctions under the tax law. Therefore, it is indispensable for the CIR to include the basis for its allegations of fraud in the assessment notice.
*******
Fraud in its general sense, is deemed to comprise anything calculated to deceive, including all acts, omissions, and concealment involving a breach of legal or equitable duty, trust or confidence justly reposed, resulting in the damage to another, or by which an undue and unconscionable advantage is taken of another.
Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid especially that the transfer from him to RMI would then subject the income to only 5% individual capital gains tax, and not the 35% corporate income tax. Altonaga’s sole purpose of acquiring and transferring title of the subject properties on the same day was to create a tax shelter. Altonaga never controlled the property and did not enjoy the normal benefits and burdens of ownership. The sale to him was merely a tax ploy, a sham, and without business purpose and economic substance. Doubtless, the execution of the two sales was calculated to mislead the BIR with the end in view of reducing the consequent income tax liability.
In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more on the mitigation of tax liabilities than for legitimate business purposes constitutes one of tax evasion.
Generally, a sale or exchange of assets will have an income tax incidence only when it is consummated. The incidence of taxation depends upon the substance of a transaction. The tax consequences arising from gains from a sale of property are not finally to be determined solely by the means employed to transfer legal title. Rather, the transaction must be viewed as a whole, and each step from the commencement of negotiations to the consummation of the sale is relevant. A sale by one person cannot be transformed for tax purposes into a sale by another by using the latter as a conduit through which to pass title. To permit the true nature of the transaction to be disguised by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax policies of Congress.
To allow a taxpayer to deny tax liability on the ground that the sale was made through another and distinct entity when it is proved that the latter was merely a conduit is to sanction a circumvention of our tax laws. Hence, the sale to Altonaga should be disregarded for income tax purposes. The two sale transactions should be treated as a single direct sale by CIC to RMI.
*******
Actual, not presumed, fraud should be the bench mark of liability.
*******
In Commissioner of Internal Revenue v. Javier [276 Phil. 914 (1991)], this Court ruled that fraud is never imputed. The Court stated that it will not sustain findings of fraud upon circumstances which, at most, create only suspicion. The Court added that the mere understatement of a tax is not itself proof of fraud for the purpose of tax evasion. The Court explained:
x x x. The fraud contemplated by law is actual and not constructive. It must be intentional fraud, consisting of deception willfully and deliberately done or resorted to in order to induce another to give up some legal right. Negligence, whether slight or gross, is not equivalent to fraud with intent to evade the tax contemplated by law. It must amount to intentional wrongdoing with the sole object of avoiding the tax. x x x.
——————————————
A mere showing that the tax return was false is sufficient to apply the 10-year prescriptive period.
In the oft-cited Aznar v. CTA [157 Phil. 510 (1974)], the Court compared a false return to a fraudulent return in relation to the applicable prescriptive periods for assessments, to wit:
Petitioner argues that Sec. 332 of the NIRC does not apply because the taxpayer did not file false and fraudulent returns with intent to evade tax, while respondent Commissioner of Internal Revenue insists contrariwise, with respondent Court of Tax Appeals concluding that the very “substantial under declarations of income for six consecutive years eloquently demonstrate the falsity or fraudulence of the income tax returns with an intent to evade the payment of tax.”
xxxx
xxx We believe that the proper and reasonable interpretation of said provision should be that in the three different cases of (1) false return, (2) fraudulent return with intent to evade tax, (3) failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within ten years after the discovery of the (1) falsity, (2) fraud, (3) omission. Our stand that the law should be interpreted to mean a separation of the three different situations of false return, fraudulent return with intent to evade tax, and failure to file a return is strengthened immeasurably by the last portion of the provision which seggregates the situations into three different classes, namely “falsity”, “fraud” and “omission.” That there is a difference between “false return” and “fraudulent return” cannot be denied. While the first merely implies deviation from the truth, whether intentional or not, the second implies intentional or deceitful entry with intent to evade the taxes due.
The ordinary period of prescription of 5 years within which to assess tax liabilities under Sec. 331 of the NIRC should be applicable to normal circumstances, but whenever the government is placed at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities due to false returns, fraudulent return intended to evade payment of tax or failure to file returns, the period of ten years provided for in Sec. 332 (a) NIRC, from the time of the discovery of the falsity, fraud or omission even seems to be inadequate and should be the one enforced.
There being undoubtedly false tax returns in this case, We affirm the conclusion of the respondent Court of Tax Appeals that Sec. 332 (a) of the NIRC should apply and that the period of ten years within which to assess petitioner’s tax liability had not expired at the time said assessment was made. (Emphasis supplied)
Thus, a mere showing that the returns filed by the taxpayer were false, notwithstanding the absence of intent to defraud, is sufficient to warrant the application of the ten (10) year prescriptive period under Section 222 of the NIRC.
——————————————
Presumption of falsity of returns.
In the present case, the CTA opined that the CIR failed to substantiate with clear and convincing evidence its claim that Asalus filed a false return. As it noted that the CIR never presented any evidence to prove the falsity in the returns that Asalus filed, the CTA ruled that the assessment was subject to the three (3) year ordinary prescriptive period.
The Court is of a different view.
Under Section 248(B) of the NIRC, there is a prima facie evidence of a false return if there is a substantial underdeclaration of taxable sales, receipt or income. The failure to report sales, receipts or income in an amount exceeding 30% what is declared in the returns constitute substantial underdeclaration. A prima facie evidence is one which that will establish a fact or sustain a judgment unless contradictory evidence is produced.
In other words, when there is a showing that a taxpayer has substantially underdeclared its sales, receipt or income, there is a presumption that it has filed a false return. As such, the CIR need not immediately present evidence to support the falsity of the return, unless the taxpayer fails to overcome the presumption against it.
Applied in this case, the audit investigation revealed that there were undeclared VAT able sales more than 30% of that declared in Asalus’ VAT returns. Moreover, Asalus’ lone witness testified that not all membership fees, particularly those pertaining to medical practitioners and hospitals, were reported in Asalus’ VAT returns. The testimony of its witness, in trying to justify why not all of its sales were included in the gross receipts reflected in the VAT returns, supported the presumption that the return filed was indeed false precisely because not all the sales of Asalus were included in the VAT returns.
Hence, the CIR need not present further evidence as the presumption of falsity of the returns was not overcome. Asalus was bound to refute the presumption of the falsity of the return and to prove that it had filed accurate returns. Its failure to overcome the same warranted the application of the ten (lO)-year prescriptive period for assessment under Section 222 of the NIRC. To require the CIR to present additional evidence in spite of the presumption provided in Section 248(B) of the NIRC would render the said provision inutile.
Considering the existing circumstances, the assessment was timely made because the applicable prescriptive period was the ten (10)-year prescriptive period under Section 222 of the NIRC. To reiterate, there was a prima facieshowing that the returns filed by Asalus were false, which it failed to controvert. Also, it was adequately informed that it was being assessed within the extraordinary prescriptive period.
——————————————
Application of Section 222(a) of the NIRC of 1997.
The CTA correctly upheld the validity of the assessment notices. Citing Section 223 of the Tax Code (now Section 222, NIRC of 1997) which provides that the prescriptive period for the issuance of assessment notices based on fraud is 10 years, the CTA ruled that the assessment notices issued against respondent on September 2, 1997 were timely because petitioner discovered the falsity in respondent’s tax returns for 1991, 1992 and 1993 only on February 19, 1997.
——————————————
Section 222(a) of the NIRC of 1997 does not apply when no fraudulent act or false return has been shown nor proven.
Several approvals were secured by (petitioner) PSPC before it utilized the transferred Tax Credit Certificates (TCCs), and it relied on the verification of the various government agencies concerned of the genuineness and authenticity of the TCCs as well as the validity of their issuances. Furthermore, the parties stipulated in open court that the BIR-issuedAuthorities to Accept Payment for Excise Taxes (ATAPETs) for the taxes covered by the subject TCCs confirm the correctness of the amount of excise taxes paid by PSPC during the tax years in question.
Thus, it is clear that PSPC is a transferee in good faith and for value of the subject TCCs and may not be prejudiced with a re-assessment of excise tax liabilities it has already settled when due with the use of the subject TCCs. Logically, therefore, the excise tax returns filed by PSPC duly covered by the TDM and ATAPETs issued by the BIR confirming the full payment and satisfaction of the excise tax liabilities of PSPC, have not been fraudulently filed. Consequently, as PSPC is a transferee in good faith and for value, Sec. 222(a) of the NIRC does not apply in the instant case as PSPC has neither been shown nor proven to have committed any fraudulent act in the transfer and utilization of the subject TCCs. With more reason, therefore, that the three-year prescriptive period for assessment under Art. 203 of the NIRC has already set in and bars respondent from assessing anew PSPC for the excise taxes already paid in 1992 and 1994 to 1997. Besides, even if the period for assessment has not prescribed, still, there is no valid ground for the assessment as the excise tax liabilities of PSPC have been duly settled and paid.
*******
As regards petitioner’s claim that the 10-year period of limitation within which to assess deficiency taxes provided in Section 222(a) of the 1997 NIRC is applicable in this case as respondent allegedly filed false and fraudulent returns, there is no reason to disturb the tax court’s findings that records failed to establish, even by prima facie evidence, that respondent Next Mobile filed false and fraudulent returns on the ground of substantial underdeclaration of income in respondent Next Mobile’s Annual ITR for taxable year ending December 31, 2001.
——————————————
Application of Section 222(a) and (c) of the NIRC of 1997.
Section 223 [Section 222(a), NIRC of 1997] specifies three (3) instances when the running of the three-year prescriptive period does not apply. These are: (1) filing a false return, (2) filing a fraudulent return with intent to evade tax or (3) failure to file a return. The period within which to assess tax is ten years from discovery of the fraud, falsification or omission.
Here, respondent failed to file his tax returns for 1986 and 1987. On September 14, 1989, petitioner found respondent’s omission. Hence, the running of the ten-year prescriptive period within which to assess and collect the taxes due from respondent commenced on that date until September 14, 1999. The two final assessment notices were issued on February 28, 1991, well within the prescriptive period of three (3) years. When respondent failed to question or protest the deficiency assessments thirty (30) days therefrom, or until March 30, 1991, the same became final and executory.
As we held in Marcos II vs. Court of Appeals, the omission to file an estate tax return, and the subsequent failure to contest or appeal the assessment made by the BIR is fatal, considering that under Section 223 of the NIRC [Section 222(a), NIRC of 1997], in case of failure to file a return, the tax may be assessed at any time within ten years after the omission, and any tax so assessed may be collected by levy upon real property within three years following the assessment of the tax (as was done here). Since the estate tax assessment had become final and unappealable, there is now no reason why petitioner should not enforce its authority to collect respondent’s deficiency percentage taxes for 1986 and 1987.
*******
In cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failure to file a return, the period within which to assess tax is ten years from discovery of the fraud, falsification or omission, as the case may be.
It is true that in a query dated 24 August 1989, Altonaga, through his counsel, asked the Opinion of the BIR on the tax consequence of the two sale transactions. Thus, the BIR was amply informed of the transactions even prior to the execution of the necessary documents to effect the transfer. Subsequently, the two sales were openly made with the execution of public documents and the declaration of taxes for 1989. However, these circumstances do not negate the existence of fraud. As earlier discussed those two transactions were tainted with fraud. And even assuming arguendo that there was no fraud, we find that the income tax return filed by CIC for the year 1989 was false. It did not reflect the true or actual amount gained from the sale of the Cibeles property. Obviously, such was done with intent to evade or reduce tax liability.
As stated above, the prescriptive period to assess the correct taxes in case of false returns is ten years from the discovery of the falsity. The false return was filed on 15 April 1990, and the falsity thereof was claimed to have been discovered only on 8 March 1991. The assessment for the 1989 deficiency income tax of CIC was issued on 9 January 1995. Clearly, the issuance of the correct assessment for deficiency income tax was well within the prescriptive period.
——————————————
What must be done by the taxpayer to avail of the benefits of Section 203 of the NIRC of 1997.
It is clear that since prescription is one of the affirmative defenses set up by petitioner herein, it was incumbent upon the latter, if it wanted to avail itself of the benefits of section 331 (now Section 203 of the NIRC of 1997), to prove that it had submitted said returns, and that, having failed to do so, the conclusion must be that no such returns had been filed and that the Government had ten (10) years within which to make the corresponding assessments, as it did in this case.
~~~Tagaliman Lumber Co. vs. Collector of Internal Revenue (G.R. No. L-15716, 31 March 1962, En Banc, J. Concepcion)
——————————————
The running of the statute of limitations could be suspended, when the taxpayer requests for a reinvestigation which is granted by the CIR.
The Tax Code of 1977, as amended, also recognizes instances when the running of the statute of limitations on the assessment and collection of national internal revenue taxes could be suspended, even in the absence of a waiver, under Section 224 thereof (now Section 223, NIRC of 1997).
Of particular importance to the present case is one of the circumstances enumerated in Section 224 of the Tax Code of 1977, as amended (now Section 223, NIRC of 1997), wherein the running of the statute of limitations on assessment and collection of taxes is considered suspended “when the taxpayer requests for a reinvestigation which is granted by the Commissioner.”
This Court gives credence to the argument of petitioner BPI that there is a distinction between a request for reconsideration and a request for reinvestigation. RR No. 12-85, issued on 27 November 1985 by the Secretary of Finance, upon the recommendation of the BIR Commissioner, governs the procedure for protesting an assessment and distinguishes between the two types of protest, as follows –
PROTEST TO ASSESSMENT
SEC. 6. Protest. The taxpayer may protest administratively an assessment by filing a written request for reconsideration or reinvestigation. . .
. . .
For the purpose of the protest herein –
(a) Request for reconsideration. – refers to a plea for a re-evaluation of an assessment on the basis of existing records without need of additional evidence. It may involve both a question of fact or of law or both.
(b) Request for reinvestigation. – refers to a plea for re-evaluation of an assessment on the basis of newly-discovered or additional evidence that a taxpayer intends to present in the reinvestigation. It may also involve a question of fact or law or both.
With the issuance of RR No. 12-85 on 27 November 1985 providing the above-quoted distinctions between a request for reconsideration and a request for reinvestigation, the two types of protest can no longer be used interchangeably and their differences so lightly brushed aside. It bears to emphasize that under Section 224 of the Tax Code of 1977, as amended (now Section 223, NIRC of 1997), the running of the prescriptive period for collection of taxes can only be suspended by a request for reinvestigation, not a request for reconsideration. Undoubtedly, a reinvestigation, which entails the reception and evaluation of additional evidence, will take more time than a reconsideration of a tax assessment, which will be limited to the evidence already at hand; this justifies why the former can suspend the running of the statute of limitations on collection of the assessed tax, while the latter can not.
Even if, for the sake of argument, this Court glosses over the distinction between a request for reconsideration and a request for reinvestigation, and considers the protest of petitioner BPI as a request for reinvestigation, the filing thereof could not have suspended at once the running of the statute of limitations. Article 224 of the Tax Code of 1977, as amended (now Section 223, NIRC of 1997), very plainly requires that the request for reinvestigation had been granted by the BIR Commissioner to suspend the running of the prescriptive periods for assessment and collection.
That the BIR Commissioner must first grant the request for reinvestigation as a requirement for suspension of the statute of limitations is even supported by existing jurisprudence.
In the case of Republic of the Philippines v. Gancayco [120 Phil. 376 (1964)], taxpayer Gancayco requested for a thorough reinvestigation of the assessment against him and placed at the disposal of the Collector of Internal Revenue all the evidences he had for such purpose; yet, the Collector ignored the request, and the records and documents were not at all examined. Considering the given facts, this Court pronounced that –
. . .The act of requesting a reinvestigation alone does not suspend the period. The request should first be granted, in order to effect suspension. (Collector vs. Suyoc Consolidated, supra; also Republic vs. Ablaza, supra). Moreover, the Collector gave appellee until April 1, 1949, within which to submit his evidence, which the latter did one day before. There were no impediments on the part of the Collector to file the collection case from April 1, 1949. . . .
In Republic of the Philippines v. Acebedo [131 Phil. 469 (1968)], this Court similarly found that –
. . . [T]he defendant, after receiving the assessment notice of September 24, 1949, asked for a reinvestigation thereof on October 11, 1949 (Exh. A). There is no evidence that this request was considered or acted upon. In fact, on October 23, 1950 the then Collector of Internal Revenue issued a warrant of distraint and levy for the full amount of the assessment (Exh. D), but there was no follow-up of this warrant. Consequently, the request for reinvestigation did not suspend the running of the period for filing an action for collection.
–
–
The burden of proof that the taxpayer’s request for reinvestigation had been actually granted shall be on respondent BIR Commissioner. The grant may be expressed in communications with the taxpayer or implied from the actions of the respondent BIR Commissioner or his authorized BIR representatives in response to the request for reinvestigation.
In Querol v. Collector of Internal Revenue [116 Phil. 615 (1962)], the BIR, after receiving the protest letters of taxpayer Querol, sent a tax examiner to San Fernando, Pampanga, to conduct the reinvestigation; as a result of which, the original assessment against taxpayer Querol was revised by permitting him to deduct reasonable depreciation. In another case, Republic of the Philippines v. Lopez [117 Phil. 575 (1963)], taxpayer Lopez filed a total of four petitions for reconsideration and reinvestigation. The first petition was denied by the BIR. The second and third petitions were granted by the BIR and after each reinvestigation, the assessed amount was reduced. The fourth petition was again denied and, thereafter, the BIR filed a collection suit against taxpayer Lopez. When the taxpayers spouses Sison, in Commissioner of Internal Revenue v. Sison [117 Phil. 892 (1963)], contested the assessment against them and asked for a reinvestigation, the BIR ordered the reinvestigation resulting in the issuance of an amended assessment. Lastly, in Republic of the Philippines v. Oquias [114 Phil. 492 (1970)], the BIR granted taxpayer Oquias’s request for reinvestigation and duly notified him of the date when such reinvestigation would be held; only, neither taxpayer Oquias nor his counsel appeared on the given date.
In all these cases, the request for reinvestigation of the assessment filed by the taxpayer was evidently granted and actual reinvestigation was conducted by the BIR, which eventually resulted in the issuance of an amended assessment. On the basis of these facts, this Court ruled in the same cases that the period between the request for reinvestigation and the revised assessment should be subtracted from the total prescriptive period for the assessment of the tax; and, once the assessment had been reconsidered at the taxpayer’s instance, the period for collection should begin to run from the date of the reconsidered or modified assessment.
The rulings of the foregoing cases do not apply to the present Petition because: (1) the protest filed by petitioner BPI was a request for reconsideration, not a reinvestigation, of the assessment against it; and (2) even granting that the protest of petitioner BPI was a request for reinvestigation, there was no showing that it was granted by respondent BIR Commissioner and that actual reinvestigation had been conducted.
——————————————
Necessity of proving fraud by clear and convincing evidence; Burden of proof thereof.
While the CTA is not governed strictly by technical rules of evidence on the principle that rules of procedure are not ends in themselves but are primarily intended as tools in the administration of justice, respondent’s presentation of evidence to prove the fraud which attended the issuance of the subject TCCs is not a mere procedural technicality which may be disregarded considering that it is the very basis for the claim that Petron’s payment of its excise tax liabilities had been avoided. It cannot be over-emphasized that fraud is a question of fact which cannot be presumed and must be proven by clear and convincing evidence by the party alleging the same. Without even presenting the documents which served as bases for the issuance of the subject TCCs from 1994 to 1997, respondent miserably failed in discharging his evidentiary burden with the presentation of the Center’s cancellation memoranda to which were simply annexed some of the grantees’ original registration documents and their Financial Statements for an average of two years.
*******
To avail of the extraordinary period of assessment in Section 222(a) of the NIRC, the CIR should show that the facts upon which the fraud is based is communicated to the taxpayer. The burden of proving that the facts exist in any subsequent proceeding is with the Commissioner.
Respondent filed its income tax return in 1995. Almost eight (8) years passed before the disputed final assessment notice was issued. Respondent pleaded prescription as its defense when it filed a protest to the Final Assessment Notice. Petitioner claimed fraud assessment to justify the belated assessment made on respondent. If fraud was indeed present, the period of assessment should be within 10 years. It is incumbent upon petitioner to clearly state the allegations of fraud committed by respondent to serve the purpose of an assessment notice to aid respondent in filing an effective protest.
——————————————
Acts or omissions which may constitute falsity.
While petitioner is correct that Section 203 sets the three-year prescriptive period to assess, the following exceptions are provided under Section 222 of the NIRC of 1997, viz.:
SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes. –
(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be filed without assessment, at any time within ten (10) years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof.
xxxx. (Emphasis supplied.)
In the case at bar, it was petitioner’s substantial underdeclaration of withholding taxes in the amount of P2,690,850.91 which constituted the “falsity” in the subject returns – giving respondent the benefit of the period under Section 222 of the NIRC of 1997 to assess the correct amount of tax “at any time within ten (10) years after the discovery of the falsity, fraud or omission.”
The case of Aznar v. Court of Tax Appeals [157 Phil. 510 (1974)] discusses what acts or omissions may constitute falsity, viz.:
Petitioner argues that Sec. 332 of the NIRC does not apply because the taxpayer did not file false and fraudulent returns with intent to evade tax, while respondent Commissioner of Internal Revenue insists contrariwise, with respondent Court of Tax Appeals concluding that the very “substantial underdeclarations of income for six consecutive years eloquently demonstrate the falsity or fraudulence of the income tax returns with an intent to evade the payment of tax.”
To our minds we can dispense with these controversial arguments on facts, although we do not deny that the findings of facts by the Court of Tax Appeals, supported as they are by very substantial evidence, carry great weight, by resorting to a proper interpretation of Section 332 of the NIRC. We believe that the proper and reasonable interpretation of said provision should be that in the three different cases of (1) false return, (2) fraudulent return with intent to evade tax, (3) failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within ten years after the discovery of the (1) falsity, (2) fraud, (3) omission. Our stand that the law should be interpreted to mean a separation of the three different situations of false return, fraudulent return with intent to evade tax, and failure to file a return is strengthened immeasurably by the last portion of the provision which segregates the situations into three different classes, namely “falsity,” “fraud” and “omission.” That there is a difference between “false return” and “fraudulent return” cannot be denied. While the first merely implies deviation from the truth, whether intentional or not, the second implies intentional or deceitful entry with intent to evade the taxes due.
The ordinary period of prescription of 5 years within which to assess tax liabilities under Sec. 331 of the NIRC should be applicable to normal circumstances, but whenever the government is placed at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities due to false returns, fraudulent return intended to evade payment of tax or failure to file returns, the period of ten years provided for in Sec. 332 (a) NIRC, from the time of the discovery of the falsity, fraud or omission even seems to be inadequate and should be the one enforced.
There being undoubtedly false tax returns in this case, We affirm the conclusion of the respondent Court of Tax Appeals that Sec. 332 (a) of the NIRC should apply and that the period of ten years within which to assess petitioner’s tax liability had not expired at the time said assessment was made.
A careful examination of the evidence on record yields to no other conclusion but that petitioner failed to withhold taxes from its employees’ 13th month pay and other benefits in excess of thirty thousand pesos (P30,000.00) amounting to P2,690,850.91 for the taxable years 1997 to 1999 – resulting to its filing of the subject false returns. Petitioner failed to refute this finding, both in fact and in law, before the courts a quo.
We quote the following portion of the assailed Decision of the CTA EB, viz.:
It is noteworthy to mention that during the trial, the witness for the CIR testified that SAMELCO-I did not file an accurate return, as follows:
ATTY. FRANCIA:
Q: Did the petitioner file an accurate Return?
MS. RAPATAN:
A: No.
ATTY. FRANCIA:
Q: Can you please explain?
MS. RAPATAN:
A: Because I based the computation of my deficiency withholding taxes on declared taxable income per alpha list submitted then, I have extracted a data from the Alpha List, particularly that of the manager and other officials, only their basic salary and their overtime pay were declared but the other benefits were not actually subjected to withholding tax. So, the deficiency withholding taxes from the taxes on the taxable 13th month pay and other benefits in excess of the [P]12,000.00 for 1997 and for the taxable years 1998 and 1999, in excess of the [P]30,000.00. I also noticed that the per diem of the Manager was not included in the withholding tax computation of SAMELCO[-]I.
ATTY. FRANCIA:
Nothing further, your Honors.
JUSTICE BAUTISTA:
Any re-cross?
ATTY. NAPUTO:
A: No re-cross, your Honors.
We have consistently held that courts will not interfere in matters which are addressed to the sound discretion of the government agency entrusted with the regulation of activities coming under its special and technical training and knowledge. The findings of fact of these quasi-judicial agencies are generally accorded respect and even finality as long as they are supported by substantial evidence – in recognition of their expertise on the specific matters under their consideration. In the case at bar, petitioner failed to proffer convincing argument and evidence that would persuade us to disturb the factual findings of the CTA First Division, as affirmed by the CTA EB. As such, we cannot but affirm the finding of petitioner’s substantial underdeclaration of withholding taxes in the amount of P2,690,850.91 which constituted the “falsity” in the subject returns.
——————————————
What constitutes a defective waiver of the statute of limitations under the NIRC? What are the consequences thereof?
The NIRC, under Sections 203 and 222, provides for a statute of limitations on the assessment and collection of internal revenue taxes in order to safeguard the interest of the taxpayer against unreasonable investigation. Unreasonable investigation contemplates cases where the period for assessment extends indefinitely because this deprives the taxpayer of the assurance that it will no longer be subjected to further investigation for taxes after the expiration of a reasonable period of time. As was held in Republic of the Phils. v. Ablaza [108 Phil. 1105 (1960)]:
The law prescribing a limitation of actions for the collection of the income tax is beneficial both to the Government and to its citizens; to the Government because tax officers would be obliged to act promptly in the making of assessment, and to citizens because after the lapse of the period of prescription citizens would have a feeling of security against unscrupulous tax agents who will always find an excuse to inspect the books of taxpayers, not to determine the latter’s real liability, but to take advantage of every opportunity to molest peaceful, law-abiding citizens. Without such a legal defense taxpayers would furthermore be under obligation to always keep their books and keep them open for inspection subject to harassment by unscrupulous tax agents. The law on prescription being a remedial measure should be interpreted in a way conducive to bringing about the beneficent purpose of affording protection to the taxpayer within the contemplation of the Commission which recommend the approval of the law. (Emphasis supplied)
RMO No. 20-90 implements these provisions of the NIRC relating to the period of prescription for the assessment and collection of taxes. A cursory reading of the Order supports petitioner’s argument that the RMO must be strictly followed.
A waiver of the statute of limitations under the NIRC, to a certain extent, is a derogation of the taxpayers’ right to security against prolonged and unscrupulous investigations and must therefore be carefully and strictly construed. The waiver of the statute of limitations is not a waiver of the right to invoke the defense of prescription as erroneously held by the CA. It is an agreement between the taxpayer and the BIR that the period to issue an assessment and collect the taxes due is extended to a date certain. The waiver does not mean that the taxpayer relinquishes the right to invoke prescription unequivocally particularly where the language of the document is equivocal. For the purpose of safeguarding taxpayers from any unreasonable examination, investigation or assessment, our tax law provides a statute of limitations in the collection of taxes. Thus, the law on prescription, being a remedial measure, should be liberally construed in order to afford such protection. As a corollary, the exceptions to the law on prescription should perforce be strictly construed. RMO No. 20-90 explains the rationale of a waiver:
… The phrase “but not after _________ 19___” should be filled up. This indicates the expiry date of the period agreed upon to assess/collect the tax after the regular three-year period of prescription. The period agreed upon shall constitute the time within which to effect the assessment/collection of the tax in addition to the ordinary prescriptive period. (Emphasis supplied)
As found by the CTA, the Waiver of Statute of Limitations, signed by petitioner’s comptroller on September 22, 1997 is not valid and binding because it does not conform with the provisions of RMO No. 20-90. It did not specify a definite agreed date between the BIR and petitioner, within which the former may assess and collect revenue taxes. Thus, petitioner’s waiver became unlimited in time, violating Section 222(b) of the NIRC.
The waiver is also defective from the government side because it was signed only by a revenue district officer, not the Commissioner, as mandated by the NIRC and RMO No. 20-90. The waiver is not a unilateral act by the taxpayer or the BIR, but is a bilateral agreement between two parties to extend the period to a date certain. The conformity of the BIR must be made by either the Commissioner or the Revenue District Officer. This case involves taxes amounting to more than One Million Pesos (P1,000,000.00) and executed almost seven months before the expiration of the three-year prescription period. For this, RMO No. 20-90 requires the CIR to sign for the BIR.
The case of CIR v. CA, dealt with waivers that were not signed by the Commissioner but were argued to have been given implied consent by the BIR. We invalidated the subject waivers and ruled:
Petitioner’s submission is inaccurate…
…
The Court of Appeals itself also passed upon the validity of the waivers executed by Carnation, observing thus:
We cannot go along with the petitioner’s theory. Section 319 of the Tax Code earlier quoted is clear and explicit that the waiver of the five-year prescriptive period must be in writing and signed by both the BIR Commissioner and the taxpayer.
Here, the three waivers signed by Carnation do not bear the written consent of the BIR Commissioner as required by law.
We agree with the CTA in holding “these ‘waivers’ to be invalid and without any binding effect on petitioner (Carnation) for the reason that there was no consent by the respondent (Commissioner of Internal Revenue).”
…
For sure, no such written agreement concerning the said three waivers exists between the petitioner and
private respondent Carnation.
…
What is more, the waivers in question reveal that they are in no wise unequivocal, and therefore necessitates for its binding effect the concurrence of the Commissioner of Internal Revenue…. On this basis neither implied consent can be presumed nor can it be contended that the waiver required under Sec. 319 of the Tax Code is one which is unilateral nor can it be said that concurrence to such an agreement is a mere formality because it is the very signatures of both the Commissioner of Internal Revenue and the taxpayer which give birth to such a valid agreement. (Emphasis supplied)
The other defect noted in this case is the date of acceptance which makes it difficult to fix with certainty if the waiver was actually agreed before the expiration of the three-year prescriptive period. The CA held that the date of the execution of the waiver on September 22, 1997 could reasonably be understood as the same date of acceptance by the BIR. Petitioner points out however that Revenue District Officer Sarmiento could not have accepted the waiver yet because she was not the Revenue District Officer of RDO No. 33 on such date. Ms. Sarmiento’s transfer and assignment to RDO No. 33 was only signed by the BIR Commissioner on January 16, 1998 as shown by the Revenue Travel Assignment Order No. 14-98. The CTA noted in its decision that it is unlikely as well that Ms. Sarmiento made the acceptance on January 16, 1998 because “Revenue Officials normally have to conduct first an inventory of their pending papers and property responsibilities.”
Finally, the records show that petitioner was not furnished a copy of the waiver. Under RMO No. 20-90, the waiver must be executed in three copies with the second copy for the taxpayer. The CA did not think this was important because the petitioner need not have a copy of the document it knowingly executed. It stated that the reason copies are furnished is for a party to be notified of the existence of a document, event or proceeding.
The flaw in the appellate court’s reasoning stems from its assumption that the waiver is a unilateral act of the taxpayer when it is in fact and in law an agreement between the taxpayer and the BIR. When the petitioner’s comptroller signed the waiver on September 22, 1997, it was not yet complete and final because the BIR had not assented. There is compliance with the provision of RMO No. 20-90 only after the taxpayer received a copy of the waiver accepted by the BIR. The requirement to furnish the taxpayer with a copy of the waiver is not only to give notice of the existence of the document but of the acceptance by the BIR and the perfection of the agreement.
The waiver document is incomplete and defective and thus the three-year prescriptive period was not tolled or extended and continued to run until April 17, 1998. Consequently, the Assessment/Demand No. 33-1-000757-94 issued on December 9, 1998 was invalid because it was issued beyond the three (3) year period. In the same manner, Warrant of Distraint and/or Levy No. 33-06-046 which petitioner received on March 28, 2000 is also null and void for having been issued pursuant to an invalid assessment.
——————————————
The waiver of the statute of limitations under the NIRC must bear the consent of the CIR.
Section 319 of the Tax code (now Section 222 of the NIRC of 1997)earlier quoted is clear and explicit that the waiver of the five-year prescriptive period must be in writing and signed by both the BIR Commissioner and the taxpayer.
Here, the three waivers signed by Carnation do not bear the written consent of the BIR Commissioner as required by law.
We agree with the CTA in holding “these ‘waivers’ to be invalid and without any binding effect on petitioner (Carnation) for the reason that there was no consent by the respondent (Commissioner of Internal Revenue).
The ruling of the Supreme Court in Collector of Internal Revenue vs. Solano (L-11475, 31 July 1958), is in point, thus:
“x x x The only agreement that could have suspended the running of the prescriptive period for the collection of the tax in question is, as correctly pointed out by the Court of Tax Appeals, a written agreement between Solano and the Collector, entered into before the expiration of the of the five-year prescriptive period, extending the limitation prescribed by law.”
For sure, no such written agreement concerning the said three waivers exists between the petitioner and private respondent Carnation.
What is more, the waivers in question reveal that they are in no wise unequivocal, and therefore necessitates for its binding effect the concurrence of the CIR. In fact, in his reply dated April 18, 1995, the Solicitor General, representing the CIR, admitted that subject waivers executed by Carnation were “for and in consideration of the approval by the Commissioner of Internal Revenue of its request for reinvestigation and/or reconsideration of its internal revenue case involving tax assessments for the fiscal year ended September 30, 1981 which were all pending at the time”. On this basis neither implied consent can be presumed nor can it be contended that the waiver required under Sec. 319 of the Tax Code is one which is unilateral nor can it be said that concurrence to such an agreement is a mere formality because it is the very signatures of both the CIR and the taxpayer which give birth to such a valid agreement.
——————————————
The running of the statute of limitations shall be suspended only when the taxpayer cannot be located in the address given by him in the return filed upon which tax is being assessed or collected.
Petitioner contends that, insofar as respondent’s alleged deficiency taxes for the taxable year 1999 are concerned, the running of the three-year prescriptive period to assess, under Sections 203 and 222 of the National Internal Revenue Act of 1997 (Tax Reform Act of 1997) was suspended when respondent failed to notify petitioner, in writing, of its change of address, pursuant to the provisions of Section 223 .of the same Act and Section 11 of BIR RR No. 12-85.
It is true that, under Section 223 of the Tax Reform Act of 1997, the running of the Statute of Limitations provided under the provisions of Sections 203 and 222 of the same Act shall be suspended when the taxpayer cannot be located in the address given by him in the return filed upon which a tax is being assessed or collected. In addition, Section 11 of RR No. 12-85 states that, in case of change of address, the taxpayer is required to give a written notice thereof to the Revenue District Officer or the district having jurisdiction over his former legal residence and/or place of business. However, this Court agrees with both the CTA Special First Division and the CTA En Banc in their ruling that the abovementioned provisions on the suspension of the three-year period to assess apply only if the BIR Commissioner is not aware of the whereabouts of the taxpayer.
In the present case, petitioner, by all indications, is well aware that respondent had moved to its new address in Calamba, Laguna, as shown by the following documents which form part of respondent’s records with the BIR:
1) Checklist on Income Tax/Withholding Tax/Documentary Stamp Tax/Value-Added Tax and Other Percentage Taxes;
2) General Information (BIR Form No. 23-02);
3) Report on Taxpayer’s Delinquent Account, dated June 27, 2002;
4) Activity Report, dated October 17, 2002;
5) Memorandum Report of Examiner, dated June 27, 2002;
6) Revenue Officer’s Audit Report on Income Tax;
7) Revenue Officer’s Audit Report on Value-Added Tax;
8) Revenue Officer’s Audit Report on Compensation Withholding Taxes;
9) Revenue Officer’s Audit Report on Expanded Withholding Taxes;
10) Revenue Officer’s Audit Report on Documentary Stamp Taxes.
The above documents, all of which were accomplished and .signed by officers of the BIR, clearly show that respondent’s address is at Carmelray Industrial Park, Canlubang, Calamba, Laguna.
The CTA also found that BIR officers, at various times prior to the issuance of the subject FAN, conducted examination and investigation of respondent’s tax liabilities for 1999 at the latter’s new address in Laguna as evidenced by the following, in addition to the abovementioned records:
1) Letter, dated September 27, 2001, signed by Revenue Officer I Eugene R. Garcia;
2) Final Request for Presentation of Records Before Subpoena Duces Tecum, dated March 20, 2002, signed by Revenue Officer I Eugene R. Garcia.
Moreover, the CTA found that, based on records, the RDO sent respondent a letter dated April 24, 2002 informing the latter of the results of their investigation and inviting it to an informal conference. Subsequently, the RDO also sent respondent another letter dated May 30, 2002, acknowledging receipt of the latter’s reply to his April 24, 2002 letter. These two letters were sent to respondent’s new address in Laguna. Had the RDO not been informed or was not aware of respondent’s new address, he could not have sent the said letters to the said address.
Furthermore, petitioner should have been alerted by the fact that prior to mailing the FAN, petitioner sent to respondent’s old address a PAN but it was “returned to sender.” This was testified to by petitioner’s Revenue Officer II at its Revenue District Office 39 in Quezon City. Yet, despite this occurrence, petitioner still insisted in mailing the FAN to respondent’s old address.
Hence, despite the absence of a formal written notice of respondent’s change of address, the fact remains that petitioner became aware of respondent’s new address as shown by documents replete in its records. As a consequence, the running of the three-year period to assess respondent was not suspended and has already prescribed.
It bears stressing that, in a number of cases, this Court has explained that the statute of limitations on the collection of taxes primarily benefits the taxpayer. In these cases, the Court exemplified the detrimental effects that the delay in the assessment and collection of taxes inflicts upon the taxpayers. Thus, in Commissioner of Internal Revenue v. Philippine Global Communication, Inc., this Court echoed Justice Montemayor’s disquisition in his dissenting opinion in Collector of Internal Revenue v. Suyoc Consolidated Mining Company [104 Phil. 819 (1958)], regarding the potential loss to the taxpayer if the assessment and collection of taxes are not promptly made, thus:
Prescription in the assessment and in the collection of taxes is provided by the Legislature for the benefit of both the Government and the taxpayer; for the Government for the purpose of expediting the collection of taxes, so that the agency charged with the assessment and collection may not tarry too long or indefinitely to the prejudice of the interests of the Government, which needs taxes to run it; and for the taxpayer so that within a reasonable time after filing his return, he may know the amount of the assessment he is required to pay, whether or not such assessment is well founded and reasonable so that he may either pay the amount of the assessment or contest its validity in court x x x. It would surely be prejudicial to the interest of the taxpayer for the Government collecting agency to unduly delay the assessment and the collection because by the time the collecting agency finally gets around to making the assessment or making the collection, the taxpayer may then have lost his papers and books to support his claim and contest that of the Government, and what is more, the tax is in the meantime accumulating interest which the taxpayer eventually has to pay.
Likewise, in Republic of the Philippines v. Ablaza [108 Phil. 1105 (1960)], this Court elucidated that the prescriptive period for the filing of actions for collection of taxes is justified by the need to protect law-abiding citizens from possible harassment. Also, in Bank of the Philippine Islands v. Commissioner of Internal Revenue, it was held that the statute of limitations on the assessment and collection of taxes is principally intended to afford protection to the taxpayer against unreasonable investigations as the indefinite extension of the period for assessment deprives the taxpayer of the assurance that he will no longer be subjected to further investigation for taxes after the expiration of a reasonable period of time. Thus, in Commissioner of Internal Revenue v. B.F. Goodrich Phils., Inc. this Court ruled that the legal provisions on prescription should be liberally construed to protect taxpayers and that, as a corollary, the exceptions to the rule on prescription should be strictly construed.
It might not also be amiss to point out that petitioner’s issuance of the First Notice Before Issuance of Warrant of Distraint and Levy violated respondent’s right to due process because no valid notice of assessment was sent to it. An invalid assessment bears no valid fruit. The law imposes a substantive, not merely a formal, requirement. To proceed heedlessly with tax collection without first establishing a valid assessment is evidently violative of the cardinal principle in administrative investigations: that taxpayers should be able to present their case and adduce supporting evidence. In the instant case, respondent has not properly been informed of the basis of its tax liabilities. Without complying with the unequivocal mandate of first informing the taxpayer of the government’s claim, there can be no deprivation of property, because no effective protest can be made.
It is true that taxes are the lifeblood of the government. However, in spite of all its plenitude, the power to tax has its limits. Thus, in Commissioner of Internal Revenue v. Algue, Inc. (G.R. No. L-28896, 17 February 1988), this Court held:
Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved.
x x x x
It is said that taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for the lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one’s hard-earned income to taxing authorities, every person who is able to must contribute his share in the running of the government. The government for its part is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate x x x that the law has not been observed.
It is an elementary rule enshrined in the 1987 Constitution that no person shall be deprived of property without due process of law. In balancing the scales between the power of the State to tax and its inherent right to prosecute perceived transgressors of the law on one side, and the constitutional rights of a citizen to due process of law and the equal protection of the laws on the other, the scales must tilt in favor of the individual, for a citizen’s right is amply protected by the Bill of Rights under the Constitution.
As to the second assigned error, petitioner’s reliance on the provisions of Section 3.1.7 of BIR RR No. 12-99 as well as on the case of Nava v. Commissioner of Internal Revenue (G.R. No. L-19470, 30 January 1965) is misplaced, because in the said case, one of the requirements of a valid assessment notice is that the letter or notice must be properly addressed. It is not enough that the notice is sent by registered mail as provided under the said RR. In the instant case, the FAN was sent to the wrong address. Thus, the CTA is correct in holding that the FAN never attained finality because respondent never received it, either actually or constructively.
——————————————
A criminal complaint need not be preceded by an assessment.
Private respondents maintain that the filing of a criminal complaint must be preceded by an assessment. This is incorrect, because Section 222 of the NIRC specifically states that in cases where a false or fraudulent return is submitted or in cases of failure to file a return such as this case, proceedings in court may be commenced without an assessment. Furthermore, Section 205 of the same Code clearly mandates that the civil and criminal aspects of the case may be pursued simultaneously. In Ungab v. Cusi (97 SCRA 877, 30 May 1980), petitioner therein sought the dismissal of the criminal Complaints for being premature, since his protest to the CTA had not yet been resolved. The Court held that such protests could not stop or suspend the criminal action which was independent of the resolution of the protest in the CTA. This was because the commissioner of internal revenue had, in such tax evasion cases, discretion on whether to issue an assessment or to file a criminal case against the taxpayer or to do both.
Private respondents insist that Section 222 should be read in relation to Section 255 of the NIRC, which penalizes failure to file a return. They add that a tax assessment should precede a criminal indictment. We disagree. To reiterate, said Section 222 states that an assessment is not necessary before a criminal charge can be filed. This is the general rule. Private respondents failed to show that they are entitled to an exception. Moreover, the criminal charge need only be supported by a prima facie showing of failure to file a required return. This fact need not be proven by an assessment.
The issuance of an assessment must be distinguished from the filing of a complaint. Before an assessment is issued, there is, by practice, a pre-assessment notice sent to the taxpayer. The taxpayer is then given a chance to submit position papers and documents to prove that the assessment is unwarranted. If the commissioner is unsatisfied, an assessment signed by him or her is then sent to the taxpayer informing the latter specifically and clearly that an assessment has been made against him or her. In contrast, the criminal charge need not go through all these. The criminal charge is filed directly with the DOJ. Thereafter, the taxpayer is notified that a criminal case had been filed against him, not that the commissioner has issued an assessment. It must be stressed that a criminal complaint is instituted not to demand payment, but to penalize the taxpayer for violation of the Tax Code.
*******
[Section 269(a) of the NIRC (now Section 222(a), NIRC of 1997)] is clear. When fraudulent tax returns are involved as in the cases at bar, a proceeding in court after the collection of such tax may be begun without assessment. Here, the private respondents had already filed the capital gains tax return and the VAT returns, and paid the taxes they have declared due therefrom. Upon investigation of the examiners of the BIR, there was a preliminary finding of gross discrepancy in the computation of the capital gains taxes due from the sale of two lots of AAI shares, first to APAC and then to APAC Philippines, Limited. The examiners also found that the VAT had not been paid for VAT-liable sale of services for the third and fourth quarters of 1990. Arguably, the gross disparity in the taxes due and the amounts actually declared by the private respondents constitutes badges of fraud.
Thus, the applicability of Ungab v. Cusi (Nos. L-41919-24, 30 May 1980) is evident to the cases at bar. In this seminal case, this Court ruled that there was no need for precise computation and formal assessment in order for criminal complaints to be filed against him. It quoted Merten’s Law of Federal Income Taxation, Vol. 10, Sec. 55A.05, p. 21, thus:
An assessment of a deficiency is not necessary to a criminal prosecution for willful attempt to defeat and evade the income tax. A crime is complete when the violator has knowingly and willfully filed a fraudulent return, with intent to evade and defeat the tax. The perpetration of the crime is grounded upon knowledge on the part of the taxpayer that he has made an inaccurate return, and the government’s failure to discover the error and promptly to assess has no connections with the commission of the crime.
This hoary principle still underlies Section 269 (now Section 222, NIRC of 1997) and related provisions of the present Tax Code.
——————————————
Effects of repealing statutes or laws.
Regarding the effects of repealing statutes, the argument has been advanced, that taxes assessed (but not collected) under the law before its repeal, may not be collected after such repeal — except, always, provisions to the contrary. But the courts permit such collection.
“The rule favoring a prospective construction of statutes is applicable to statutes which repeal tax laws. Accordingly it is held that where such statute is not made retroactive a tax assessed before the repeal is collectible afterwards; and where taxes are levied under a law which is repealed by a subsequent act, unless it appears clearly that the legislature intended the repeal to work retrospectively, it will be assumed that it intended the taxes to be collected according to the law in force when they were levied.” (Cooley, Taxation Section 538 Vol. 2.)
So, if taxes assessed may still be demanded after the repeal of the law, it follows that taxes already collected may be and should be retained after the repeal. Unless of course the repealing statute provides otherwise.
~~~Intestate Testate of the late Jovito Co, et al. vs. Collector of Internal Revenue (G.R. No. L-9352, 29 November 1956, En Banc, J. Bengzon)
——————————————
