G.R. No.

134062

April 17, 2007

COMMISSIONER
OF
INTERNAL
REVENUE, Petitioner,
vs.
BANK OF THE PHILIPPINE ISLANDS, Respondent.

We therefore request that the examiner concerned be

required to state, even in the briefest form, why he believes
the taxpayer has a deficiency documentary and percentage
taxes, and as to the percentage tax, it is important that the
taxpayer be informed also as to what particular percentage
tax the assessment refers to.

DECISION
CORONA, J.:
This is a petition for review on certiorari1 of a decision2 of the
Court of Appeals (CA) dated May 29, 1998 in CA-G.R. SP
No. 41025 which reversed and set aside the decision3 and
resolution4 of the Court of Tax Appeals (CTA) dated
November 16, 1995 and May 27, 1996, respectively, in CTA
Case No. 4715.
In two notices dated October 28, 1988, petitioner
Commissioner of Internal Revenue (CIR) assessed
respondent Bank of the Philippine Islands (BPIs) deficiency
percentage and documentary stamp taxes for the year 1986
in the total amount of P129,488,656.63:
1986 Deficiency Percentage Tax
Deficiency percentage tax
Add: 25% surcharge
20% interest from 1-21-87 to 10-28-88

P 7, 270,892.88
1,817,723.22
3,215,825.03
15,000.00

Compromise penalty
TOTAL AMOUNT DUE AND COLLECTIBLE

P12,319,441.13

1986 Deficiency Documentary Stamp Tax

Deficiency percentage tax
Add: 25% surcharge
Compromise penalty

P93,723,372.40
23,430,843.10
15,000.00

TOTAL AMOUNT DUE AND COLLECTIBLE

P117,169,215.50.5

Both notices of assessment contained the following note:

Please be informed that your [percentage and documentary
stamp taxes have] been assessed as shown above. Said
assessment has been based on return (filed by you) (as
verified) (made by this Office) (pending investigation)
(after investigation). You are requested to pay the above
amount to this Office or to our Collection Agent in the Office
of the City or Deputy Provincial Treasurer of xxx6
In a letter dated December 10, 1988, BPI, through counsel,
replied as follows:
1. Your "deficiency assessments" are no assessments at all.
The taxpayer is not informed, even in the vaguest terms,
why it is being assessed a deficiency. The very purpose of a
deficiency assessment is to inform taxpayer why he has
incurred a deficiency so that he can make an intelligent
decision on whether to pay or to protest the assessment.
This is all the more so when the assessment involves
astronomical amounts, as in this case.

2. As to the alleged deficiency documentary stamp tax, you

are aware of the compromise forged between your office and
the Bankers Association of the Philippines [BAP] on this
issue and of BPIs submission of its computations under this
compromise. There is therefore no basis whatsoever for this
assessment, assuming it is on the subject of the BAP
compromise. On the other hand, if it relates to documentary
stamp tax on some other issue, we should like to be
informed about what those issues are.
3. As to the alleged deficiency percentage tax, we are
completely at a loss on how such assessment may be
protested since your letter does not even tell the taxpayer
what particular percentage tax is involved and how your
examiner arrived at the deficiency. As soon as this is
explained and clarified in a proper letter of assessment, we
shall inform you of the taxpayers decision on whether to pay
or protest the assessment.7
On June 27, 1991, BPI received a letter from CIR dated May
8, 1991 stating that:
although in all respects, your letter failed to qualify as a
protest under Revenue Regulations No. 12-85 and therefore
not deserving of any rejoinder by this office as no valid issue
was raised against the validity of our assessment still we
obliged to explain the basis of the assessments.
xxx xxx xxx
this constitutes the final decision of this office on the
matter.8
On July 6, 1991, BPI requested a reconsideration of the
assessments stated in the CIRs May 8, 1991 letter.9 This
was denied in a letter dated December 12, 1991, received by
BPI on January 21, 1992.10
On February 18, 1992, BPI filed a petition for review in the
CTA.11 In a decision dated November 16, 1995, the CTA
dismissed the case for lack of jurisdiction since the subject
assessments had become final and unappealable. The CTA
ruled that BPI failed to protest on time under Section 270 of
the National Internal Revenue Code (NIRC) of 1986 and
Section 7 in relation to Section 11 of RA 1125. 12 It denied
reconsideration in a resolution dated May 27, 1996.13
On appeal, the CA reversed the tax courts decision and
resolution and remanded the case to the CTA14 for a decision
on the merits.15 It ruled that the October 28, 1988 notices
were not valid assessments because they did not inform the
taxpayer of the legal and factual bases therefor. It declared
that the proper assessments were those contained in the
May 8, 1991 letter which provided the reasons for the
claimed deficiencies.16 Thus, it held that BPI filed the petition

for review in the CTA on time.17 The CIR elevated the case to
this Court.
This petition raises the following issues:
1) whether or not the assessments issued to BPI for
deficiency percentage and documentary stamp taxes for
1986 had already become final and unappealable and
2) whether or not BPI was liable for the said taxes.
The former Section 27018 (now renumbered as Section 228)
of the NIRC stated:

Sec. 228. Protesting of Assessment. When the [CIR] 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:
xxx xxx xxx
The taxpayer shall be informed in writing of the law and
the facts on which the assessment is made; otherwise,
the assessment shall be void.
xxx xxx xxx (emphasis supplied)

Sec. 270. Protesting of assessment. When the [CIR] or

his duly authorized representative finds that proper
taxes should be assessed, he shall first notify the
taxpayer of his findings. Within a period to be prescribed
by implementing regulations, the taxpayer shall be required
to respond to said notice. If the taxpayer fails to respond, the
[CIR] shall issue an assessment based on his findings.

Admittedly, the CIR did not inform BPI in writing of the law
and facts on which the assessments of the deficiency taxes
were made. He merely notified BPI of his findings, consisting
only of the computation of the tax liabilities and a demand for
payment thereof within 30 days after receipt.

xxx xxx xxx (emphasis supplied)

In merely notifying BPI of his findings, the CIR relied on the

provisions of the former Section 270 prior to its amendment
by RA 8424 (also known as the Tax Reform Act of
1997).23 In CIR v. Reyes,24 we held that:

Were the October 28, 1988 Notices Valid Assessments?

The first issue for our resolution is whether or not the
October 28, 1988 notices19 were valid assessments. If they
were not, as held by the CA, then the correct assessments
were in the May 8, 1991 letter, received by BPI on June 27,
1991. BPI, in its July 6, 1991 letter, seasonably asked for a
reconsideration of the findings which the CIR denied in his
December 12, 1991 letter, received by BPI on January 21,
1992. Consequently, the petition for review filed by BPI in the
CTA on February 18, 1992 would be well within the 30-day
period provided by law.20
The CIR argues that the CA erred in holding that the October
28, 1988 notices were invalid assessments. He asserts that
he used BIR Form No. 17.08 (as revised in November 1964)
which was designed for the precise purpose of notifying
taxpayers of the assessed amounts due and demanding
payment thereof.21 He contends that there was no law or
jurisprudence then that required notices to state the reasons
for assessing deficiency tax liabilities.22
BPI counters that due process demanded that the facts, data
and law upon which the assessments were based be
provided to the taxpayer. It insists that the NIRC, as worded
now (referring to Section 228), specifically provides that:
"[t]he taxpayer shall be informed in writing of the law and the
facts on which the assessment is made; otherwise, the
assessment shall be void."
According to BPI, this is declaratory of what sound tax
procedure is and a confirmation of what due process
requires even under the former Section 270.
BPIs contention has no merit. The present Section 228 of
the NIRC provides:

In the present case, Reyes was not informed in writing of the

law and the facts on which the assessment of estate taxes
had been made. She was merely notified of the findings by
the CIR, who had simply relied upon the provisions of former
Section 229 prior to its amendment by [RA] 8424, otherwise
known as the Tax Reform Act of 1997.
First, RA 8424 has already amended the provision of Section
229 on protesting an assessment. The old requirement
of merely notifying the taxpayer of the CIR's findings
was changed in 1998 to informing the taxpayer of not only
the law, but also of the facts on which an assessment would
be made; otherwise, the assessment itself would be invalid.
It was on February 12, 1998, that a preliminary assessment
notice was issued against the estate. On April 22, 1998, the
final estate tax assessment notice, as well as demand letter,
was also issued. During those dates, RA 8424 was already
in effect. The notice required under the old law was no
longer sufficient under the new law.25 (emphasis supplied;
italics in the original)
Accordingly, when the assessments were made pursuant to
the former Section 270, the only requirement was for the CIR
to "notify" or inform the taxpayer of his "findings." Nothing in
the old law required a written statement to the taxpayer of
the law and facts on which the assessments were based.
The Court cannot read into the law what obviously was not
intended by Congress. That would be judicial legislation,
nothing less.
Jurisprudence, on the other hand, simply required that the
assessments contain a computation of tax liabilities, the
amount the taxpayer was to pay and a demand for payment
within a prescribed period.26 Everything considered, there
was no doubt the October 28, 1988 notices sufficiently met

the requirements of a valid assessment under the old law

and jurisprudence.
The sentence

[BPI]. He testified to the fact that he prepared worksheets

which contain his analysis regarding the findings of the
[CIRs] examiner, Mr. San Pedro and that the same
worksheets were presented to Mr. Carlos Tan, Comptroller of
[BPI].

[t]he taxpayers shall be informed in writing of the law and the

facts on which the assessment is made; otherwise, the
assessment shall be void

xxx xxx xxx

was not in the old Section 270 but was only later on inserted
in the renumbered Section 228 in 1997. Evidently, the
legislature saw the need to modify the former Section 270 by
inserting the aforequoted sentence.27 The fact that the
amendment was necessary showed that, prior to the
introduction of the amendment, the statute had an entirely
different meaning.28

From all the foregoing discussions, We can now conclude

that [BPI] was indeed aware of the nature and basis of the
assessments, and was given all the opportunity to contest
the same but ignored it despite the notice conspicuously
written on the assessments which states that "this
ASSESSMENT becomes final and unappealable if not
protested within 30 days after receipt." Counsel resorted to
dilatory tactics and dangerously played with time.
Unfortunately, such strategy proved fatal to the cause of his
client.33

Contrary to the submission of BPI, the inserted sentence in

the renumbered Section 228 was not an affirmation of what
the law required under the former Section 270. The
amendment introduced by RA 8424 was an innovation and
could not be reasonably inferred from the old law.29 Clearly,
the legislature intended to insert a new provision regarding
the form and substance of assessments issued by the CIR.30
In ruling that the October 28, 1988 notices were not valid
assessments, the CA explained:
xxx. Elementary concerns of due process of law should have
prompted the [CIR] to inform [BPI] of the legal and factual
basis of the formers decision to charge the latter for
deficiency documentary stamp and gross receipts taxes.31
In other words, the CAs theory was that BPI was deprived of
due process when the CIR failed to inform it in writing of the
factual and legal bases of the assessments even if these
were not called for under the old law.
We disagree.
Indeed, the underlying reason for the law was the basic
constitutional requirement that "no person shall be deprived
of his property without due process of law." 32 We note,
however, what the CTA had to say:
xxx xxx xxx
From the foregoing testimony, it can be safely adduced that
not only was [BPI] given the opportunity to discuss with the
[CIR] when the latter issued the former a Pre-Assessment
Notice (which [BPI] ignored) but that the examiners
themselves went to [BPI] and "we talk to them and we try to
[thresh] out the issues, present evidences as to what they
need." Now, how can [BPI] and/or its counsel honestly tell
this Court that they did not know anything about the
assessments?
Not only that. To further buttress the fact that [BPI] indeed
knew beforehand the assessments[,] contrary to the
allegations of its counsel[,] was the testimony of Mr. Jerry
Lazaro, Assistant Manager of the Accounting Department of

The CA never disputed these findings of fact by the CTA:

[T]his Court recognizes that the [CTA], which by the very
nature of its function is dedicated exclusively to the
consideration of tax problems, has necessarily developed an
expertise on the subject, and its conclusions will not be
overturned unless there has been an abuse or improvident
exercise of authority. Such findings can only be disturbed on
appeal if they are not supported by substantial evidence or
there is a showing of gross error or abuse on the part of the
[CTA].34
Under the former Section 270, there were two instances
when an assessment became final and unappealable: (1)
when it was not protested within 30 days from receipt and (2)
when the adverse decision on the protest was not appealed
to the CTA within 30 days from receipt of the final decision:35
Sec. 270. Protesting of assessment.1a\^/phi1.net
xxx xxx xxx
Such assessment may be protested administratively by filing
a request for reconsideration or reinvestigation in such form
and manner as may be prescribed by the implementing
regulations within thirty (30) days from receipt of the
assessment; otherwise, the assessment shall become final
and unappealable.
If the protest is denied in whole or in part, the individual,
association or corporation adversely affected by the decision
on the protest may appeal to the [CTA] within thirty (30) days
from receipt of the said decision; otherwise, the decision
shall become final, executory and demandable.
Implications Of A Valid Assessment
Considering that the October 28, 1988 notices were valid
assessments, BPI should have protested the same within 30
days from receipt thereof. The December 10, 1988 reply it
sent to the CIR did not qualify as a protest since the letter
itself stated that "[a]s soon as this is explained and clarified

in a proper letter of assessment, we shall inform you of the

taxpayers decision on whether to pay or protest the
assessment."36 Hence, by its own declaration, BPI did not
regard this letter as a protest against the assessments. As a
matter of fact, BPI never deemed this a protest since it did
not even consider the October 28, 1988 notices as valid or
proper assessments.

decision appealable to the tax court. Of greater import, this

rule of conduct would meet a pressing need for fair play,
regularity,
and
orderliness
in
administrative
action.39 (emphasis supplied)

The inevitable conclusion is that BPIs failure to protest the

assessments within the 30-day period provided in the former
Section 270 meant that they became final and unappealable.
Thus, the CTA correctly dismissed BPIs appeal for lack of
jurisdiction. BPI was, from then on, barred from disputing the
correctness of the assessments or invoking any defense that
would reopen the question of its liability on the merits. 37 Not
only that. There arose a presumption of correctness when
BPI failed to protest the assessments:

We realize that these assessments (which have been

pending for almost 20 years) involve a considerable amount
of money. Be that as it may, we cannot legally presume the
existence of something which was never there. The state will
be deprived of the taxes validly due it and the public will
suffer if taxpayers will not be held liable for the proper taxes
assessed against them:

Tax assessments by tax examiners are presumed correct

and made in good faith. The taxpayer has the duty to prove
otherwise. In the absence of proof of any irregularities in the
performance of duties, an assessment duly made by a
Bureau of Internal Revenue examiner and approved by his
superior officers will not be disturbed. All presumptions are in
favor of the correctness of tax assessments.38
Even if we considered the December 10, 1988 letter as a
protest, BPI must nevertheless be deemed to have failed to
appeal the CIRs final decision regarding the disputed
assessments within the 30-day period provided by law. The
CIR, in his May 8, 1991 response, stated that it was his "final
decision on the matter." BPI therefore had 30 days from
the time it received the decision on June 27, 1991 to appeal
but it did not. Instead it filed a request for reconsideration
and lodged its appeal in the CTA only on February 18, 1992,
way beyond the reglementary period. BPI must now suffer
the repercussions of its omission. We have already declared
that:
the [CIR] should always indicate to the taxpayer in clear
and unequivocal language whenever his action on an
assessment questioned by a taxpayer constitutes his final
determination on the disputed assessment, as contemplated
by Sections 7 and 11 of [RA 1125], as amended. On the
basis of his statement indubitably showing that the
Commissioner's communicated action is his final
decision on the contested assessment, the aggrieved
taxpayer would then be able to take recourse to the tax
court at the opportune time. Without needless difficulty,
the taxpayer would be able to determine when his right
to appeal to the tax court accrues.
The rule of conduct would also obviate all desire and
opportunity on the part of the taxpayer to continually
delay the finality of the assessment and,
consequently, the collection of the amount demanded as
taxes by repeated requests for recomputation and
reconsideration. On the part of the [CIR], this would
encourage his office to conduct a careful and thorough study
of every questioned assessment and render a correct and
definite decision thereon in the first instance. This would also
deter the [CIR] from unfairly making the taxpayer grope in
the dark and speculate as to which action constitutes the

Either way (whether or not a protest was made), we cannot

absolve BPI of its liability under the subject tax assessments.

Taxes are the lifeblood of the government, for without taxes,

the government can neither exist nor endure. A principal
attribute of sovereignty, the exercise of taxing power derives
its source from the very existence of the state whose social
contract with its citizens obliges it to promote public interest
and common good. The theory behind the exercise of the
power to tax emanates from necessity; without taxes,
government cannot fulfill its mandate of promoting the
general welfare and well-being of the people.40
WHEREFORE, the petition is hereby GRANTED. The May
29, 1998 decision of the Court of Appeals in CA-G.R. SP No.
41025 is REVERSED and SET ASIDE.
SO ORDERED.

G.R. No. L-18994

June 29, 1963

MELECIO R. DOMINGO, as Commissioner of Internal

Revenue, petitioner,
vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the
Court
of
First
Instance
of
Leyte,
and SIMEONA K. PRICE, as Administratrix of the Intestate
Estate of the late Walter Scott Price,respondents.
Office of the Solicitor General and Atty. G. H. Mantolino for
petitioner.
Benedicto and Martinez for respondents.

LABRADOR, J.:
This is a petition for certiorari and mandamus against the
Judge of the Court of First Instance of Leyte, Ron. Lorenzo
C. Garlitos, presiding, seeking to annul certain orders of the
court and for an order in this Court directing the respondent
court below to execute the judgment in favor of the
Government against the estate of Walter Scott Price for
internal revenue taxes.
It appears that in Melecio R. Domingo vs. Hon. Judge S. C.
Moscoso, G.R. No. L-14674, January 30, 1960, this Court
declared as final and executory the order for the payment by
the estate of the estate and inheritance taxes, charges and

penalties, amounting to P40,058.55, issued by the Court of

First Instance of Leyte in, special proceedings No. 14
entitled "In the matter of the Intestate Estate of the Late
Walter Scott Price." In order to enforce the claims against
the estate the fiscal presented a petition dated June 21,
1961, to the court below for the execution of the judgment.
The petition was, however, denied by the court which held
that the execution is not justifiable as the Government is
indebted to the estate under administration in the amount of
P262,200. The orders of the court below dated August 20,
1960 and September 28, 1960, respectively, are as follows:
Atty. Benedicto submitted a copy of the contract between
Mrs. Simeona K. Price, Administratrix of the estate of her
late husband Walter Scott Price and Director Zoilo Castrillo
of the Bureau of Lands dated September 19, 1956 and
acknowledged before Notary Public Salvador V. Esguerra,
legal adviser in Malacaang to Executive Secretary De Leon
dated December 14, 1956, the note of His Excellency, Pres.
Carlos P. Garcia, to Director Castrillo dated August 2, 1958,
directing the latter to pay to Mrs. Price the sum
ofP368,140.00, and an extract of page 765 of Republic Act
No. 2700 appropriating the sum of P262.200.00 for the
payment to the Leyte Cadastral Survey, Inc., represented by
the administratrix Simeona K. Price, as directed in the above
note of the President. Considering these facts, the Court
orders that the payment of inheritance taxes in the sum of
P40,058.55 due the Collector of Internal Revenue as
ordered paid by this Court on July 5, 1960 in accordance
with the order of the Supreme Court promulgated July 30,
1960 in G.R. No. L-14674, be deducted from the amount of
P262,200.00 due and payable to the Administratrix Simeona
K. Price, in this estate, the balance to be paid by the
Government to her without further delay. (Order of August
20, 1960)
The Court has nothing further to add to its order dated
August 20, 1960 and it orders that the payment of the claim
of the Collector of Internal Revenue be deferred until the
Government shall have paid its accounts to the
administratrix herein amounting to P262,200.00. It may not
be amiss to repeat that it is only fair for the Government, as
a debtor, to its accounts to its citizens-creditors before it can
insist in the prompt payment of the latter's account to it,
specially taking into consideration that the amount due to the
Government draws interests while the credit due to the
present state does not accrue any interest. (Order of
September 28, 1960)
The petition to set aside the above orders of the court below
and for the execution of the claim of the Government against
the estate must be denied for lack of merit. The ordinary
procedure by which to settle claims of indebtedness against
the estate of a deceased person, as an inheritance tax, is for
the claimant to present a claim before the probate court so
that said court may order the administrator to pay the
amount thereof. To such effect is the decision of this Court in
Aldamiz vs. Judge of the Court of First Instance of Mindoro,
G.R. No. L-2360, Dec. 29, 1949, thus:
. . . a writ of execution is not the proper procedure allowed
by the Rules of Court for the payment of debts and expenses
of administration. The proper procedure is for the court to
order the sale of personal estate or the sale or mortgage of

real property of the deceased and all debts or expenses of

administrator and with the written notice to all the heirs
legatees and devisees residing in the Philippines, according
to Rule 89, section 3, and Rule 90, section 2. And when sale
or mortgage of real estate is to be made, the regulations
contained in Rule 90, section 7, should be complied
with.1wph1.t
Execution may issue only where the devisees, legatees or
heirs have entered into possession of their respective
portions in the estate prior to settlement and payment of the
debts and expenses of administration and it is later
ascertained that there are such debts and expenses to be
paid, in which case "the court having jurisdiction of the estate
may, by order for that purpose, after hearing, settle the
amount of their several liabilities, and order how much and in
what manner each person shall contribute, and mayissue
execution if circumstances require" (Rule 89, section 6; see
also Rule 74, Section 4; Emphasis supplied.) And this is not
the instant case.
The legal basis for such a procedure is the fact that in the
testate or intestate proceedings to settle the estate of a
deceased person, the properties belonging to the estate are
under the jurisdiction of the court and such jurisdiction
continues until said properties have been distributed among
the heirs entitled thereto. During the pendency of the
proceedings all the estate is in custodia legis and the proper
procedure is not to allow the sheriff, in case of the court
judgment, to seize the properties but to ask the court for an
order to require the administrator to pay the amount due
from the estate and required to be paid.
Another ground for denying the petition of the provincial
fiscal is the fact that the court having jurisdiction of the estate
had found that the claim of the estate against the
Government has been recognized and an amount of
P262,200 has already been appropriated for the purpose by
a corresponding law (Rep. Act No. 2700). Under the above
circumstances, both the claim of the Government for
inheritance taxes and the claim of the intestate for services
rendered have already become overdue and demandable is
well as fully liquidated. Compensation, therefore, takes place
by operation of law, in accordance with the provisions of
Articles 1279 and 1290 of the Civil Code, and both debts are
extinguished to the concurrent amount, thus:
ART. 1200. When all the requisites mentioned in article 1279
are present, compensation takes effect by operation of law,
and extinguished both debts to the concurrent amount,
eventhough the creditors and debtors are not aware of the
compensation.
It is clear, therefore, that the petitioner has no clear right to
execute the judgment for taxes against the estate of the
deceased Walter Scott Price. Furthermore, the petition
for certiorari and mandamus is not the proper remedy for the
petitioner. Appeal is the remedy.
The petition is, therefore, dismissed, without costs.

G.R. No. 165109

December 14, 2009

MANUEL N. MAMBA, RAYMUND P. GUZMAN and LEONIDES N.

FAUSTO, Petitioners,
vs.
EDGAR R. LARA, JENERWIN C. BACUYAG, WILSON O.
PUYAWAN, ALDEGUNDO Q. CAYOSA, JR., NORMAN A.
AGATEP, ESTRELLA P. FERNANDEZ, VILMER V. VILORIA,
BAYLON A. CALAGUI, CECILIA MAEVE T. LAYOS, PREFERRED
VENTURES CORP., ASSET BUILDERS CORP., RIZAL
COMMERCIAL
BANKING
CORPORATION,
MALAYAN
INSURANCE
CO.,
and
LAND
BANK
OF
THE
PHILIPPINES,Respondents.

DECISION

pertinent to the flotation of the bonds of the provincial

government in an amount not to exceed P500 million for the
construction and improvement of priority projects to be
approved by the Sangguniang Panlalawigan.
On May 20, 2002, the majority of the members of the
Sangguniang Panlalawigan of Cagayan approved Ordinance
No. 19-2002, 8 authorizing the bond flotation of the provincial
government in an amount not to exceedP500 million to fund
the construction and development of the new Cagayan Town
Center. The Resolution likewise granted authority to Gov.
Lara to negotiate, sign and execute contracts and
agreements necessary and related to the bond flotation
subject to the approval and ratification by the Sangguniang
Panlalawigan.

DEL CASTILLO, J.:

The decision to entertain a taxpayers suit is discretionary
upon the Court. It can choose to strictly apply the rule or take
a liberal stance depending on the controversy involved.
Advocates for a strict application of the rule believe that
leniency would open floodgates to numerous suits, which
could hamper the government from performing its job. Such
possibility, however, is not only remote but also negligible
compared to what is at stake - "the lifeblood of the State".
For this reason, when the issue hinges on the illegal
disbursement of public funds, a liberal approach should be
preferred as it is more in keeping with truth and justice.
This Petition for Review on Certiorari with prayer for a
Temporary Restraining Order/Writ of Preliminary Injunction,
under Rule 45 of the Rules of Court, seeks to set aside the
April 27, 2004 Order 1 of the Regional Trial Court (RTC),
Branch 5, Tuguegarao City, dismissing the Petition for
Annulment of Contracts and Injunction with prayer for the
issuance of a Temporary Restraining Order/Writ of
Preliminary Injunction, 2 docketed as Civil Case No. 6283.
Likewise assailed in this Petition is the August 20, 2004
Resolution 3 of RTC, Branch 1, Tuguegarao City denying the
Motion for Reconsideration of the dismissal.
Factual Antecedents
On November 5, 2001, the Sangguniang Panlalawigan of
Cagayan passed Resolution No. 2001-272 4 authorizing
Governor Edgar R. Lara (Gov. Lara) to engage the services
of and appoint Preferred Ventures Corporation as financial
advisor or consultant for the issuance and flotation of bonds
to fund the priority projects of the governor without cost and
commitment.
On November 19, 2001, the Sangguniang Panlalawigan,
through
Resolution
No.
290-2001, 5 ratified
the
Memorandum of Agreement (MOA) 6 entered into by Gov.
Lara and Preferred Ventures Corporation. The MOA
provided that the provincial government of Cagayan shall
pay Preferred Ventures Corporation a one-time fee of 3% of
the amount of bonds floated.
On February 15, 2002, the Sangguniang Panlalawigan
approved Resolution No. 2002-061-A 7 authorizing Gov. Lara
to negotiate, sign and execute contracts or agreements

On October 20, 2003, the Sangguniang Panlalawigan

approved Resolution No. 350-2003 9 ratifying the Cagayan
Provincial Bond Agreements entered into by the provincial
government, represented by Gov. Lara, to wit:
a. Trust Indenture with the Rizal Commercial Banking
Corporation (RCBC) Trust and Investment Division and
Malayan Insurance Company, Inc. (MICO).
b. Deed of Assignment by way of security with the RCBC
and the Land Bank of the Philippines (LBP).
c. Transfer and Paying Agency Agreement with the RCBC
Trust and Investment Division.
d. Guarantee Agreement with the RCBC Trust and
Investment Division and MICO.
e. Underwriting Agreement with RCBC Capital Corporation.
On even date, the Sangguniang Panlalawigan also approved
Resolution No. 351-2003, 10 ratifying the Agreement for the
Planning, Design, Construction, and Site Development of the
New Cagayan Town Center 11 entered into by the provincial
government, represented by Gov. Lara and Asset Builders
Corporation, represented by its President, Mr. Rogelio P.
Centeno.
On May 20, 2003, Gov. Lara issued the Notice of Award to
Asset Builders Corporation, giving to the latter the planning,
design, construction and site development of the town center
project for a fee of P213,795,732.39. 12
Proceedings before the Regional Trial Court
On December 12, 2003, petitioners Manuel N. Mamba,
Raymund P. Guzman and Leonides N. Fausto filed a Petition
for Annulment of Contracts and Injunction with prayer for a
Temporary
Restraining
Order/Writ
of
Preliminary
Injunction 13 against Edgar R. Lara, Jenerwin C. Bacuyag,
Wilson O. Puyawan, Aldegundo Q. Cayosa, Jr., Norman A.
Agatep, Estrella P. Fernandez, Vilmer V. Viloria, Baylon A.
Calagui, Cecilia Maeve T. Layos, Preferred Ventures
Corporation, Asset Builders Corporation, RCBC, MICO and
LBP.1avvphi1

At the time of the filing of the petition, Manuel N. Mamba was

the Representative of the 3rd Congressional District of the
province of Cagayan 14 while Raymund P. Guzman and
Leonides N. Fausto were members of theSangguniang
Panlalawigan of Cagayan. 15
Edgar R. Lara was sued in his capacity as governor of
Cagayan, 16 while Jenerwin C. Bacuyag, Wilson O.
Puyawan, Aldegundo Q. Cayosa, Jr., Norman A. Agatep,
Estrella P. Fernandez, Vilmer V. Viloria, Baylon A. Calagui
and Cecilia Maeve T. Layos were sued as members of
the Sangguniang Panlalawigan of Cagayan. 17Respondents
Preferred Ventures Corporation, Asset Builders Corporation,
RCBC, MICO and LBP were all impleaded as indispensable
or necessary parties.
Respondent Preferred Ventures Corporation is the financial
advisor of the province of Cagayan regarding the bond
flotation undertaken by the province. 18 Respondent Asset
Builders Corporation was awarded the right to plan, design,
construct
and
develop
the
proposed
town
center. 19 Respondent RCBC, through its Trust and
Investment Division, is the trustee of the seven-year bond
flotation undertaken by the province for the construction of
the town center, 20 while respondent MICO is the
guarantor. 21 Lastly, respondent LBP is the official depositary
bank of the province. 22
In response to the petition, public respondents filed an
Answer with Motion to Dismiss, 23 raising the following
defenses: a) petitioners are not the proper parties or they
lack locus standi in court; b) the action is barred by the rule
on state immunity from suit and c) the issues raised are not
justiciable questions but purely political.
For its part, respondent Preferred Ventures Corporation filed
a Motion to Dismiss 24 on the following grounds: a)
petitioners have no cause of action for injunction; b) failure to
join an indispensable party; c) lack of personality to sue and
d) lack of locus standi. Respondent MICO likewise filed a
Motion to Dismiss 25 raising the grounds of lack of cause of
action and legal standing. Respondent RCBC similarly
argued in its Motion to Dismiss 26 that: a) petitioners are not
the real parties-in-interest or have no legal standing to
institute the petition; b) petitioners have no cause of action
as the flotation of the bonds are within the right and power of
both respondent RCBC and the province of Cagayan and c)
the viability of the construction of a town center is not a
justiciable question but a political question.
Respondent Asset Builders Corporation, on the other hand,
filed an Answer 27 interposing special and affirmative
defenses of lack of legal standing and cause of action.
Respondent LBP also filed an Answer 28 alleging in the main
that petitioners have no cause of action against it as it is not
an indispensable party or a necessary party to the case.
Two days after the filing of respondents respective
memoranda on the issues raised during the hearing of the
special and/or affirmative defenses, petitioners filed a Motion
to Admit Amended Petition 29 attaching thereto the amended
petition. 30 Public respondents opposed the motion for the
following reasons: 1) the motion was belatedly filed; 2) the

Amended Petition is not sufficient in form and in substance;

3) the motion is patently dilatory and 4) the Amended
Petition was filed to cure the defect in the original petition. 31
Petitioners also filed a Consolidated Opposition to the
Motion to Dismiss 32 followed by supplemental pleadings 33in
support of their prayer for a writ of preliminary injunction.
On April 27, 2004, the RTC issued the assailed Order
denying the Motion to Admit Amended Petition and
dismissing the petition for lack of cause of action. It ruled
that:
The language of Secs. 2 & 3 of Rule 10 of the 1997 Rules of
Civil Procedure dealing on the filing of an amended pleading
is quite clear. As such, the Court rules that the motion was
belatedly filed. The granting of leave to file amended
pleadings is a matter peculiarly within the sound discretion of
the trial court. But the rule allowing amendments to
pleadings is subject to the general but inflexible limitation
that the cause of action or defense shall not be substantially
changed or the theory of the case altered to the prejudice of
the other party (Avecilla vs. Yatcvo, 103 Phil. 666).
On the assumption that the controversy presents justiciable
issues which this Court may take cognizance of, petitioners
in the present case who presumably presented legitimate
interests in the controversy are not parties to the questioned
contract. Contracts produce effect as between the parties
who execute them. Only a party to the contract can maintain
an action to enforce the obligations arising under said
contract (Young vs. CA, 169 SCRA 213). Since a contract is
binding only upon the parties thereto, a third person cannot
ask for its rescission if it is in fraud of his rights. One who is
not a party to a contract has no rights under such contract
and even if the contrary may be voidable, its nullity can be
asserted only by one who is a party thereto; a third person
would have absolutely no personality to ask for the
annulment (Wolfson vs. Estate of Martinez, 20 Phil. 340;
Ibaez vs. Hongkong & Shanghai Bank, 22 Phil. 572; Ayson
vs. CA, G.R. Nos. L-6501 & 6599, May 21, 1955).
It was, however, held that a person who is not a party
obliged principally or subsidiarily in a contract may exercise
an action for nullity of the contract if he is prejudiced in his
rights with respect to one of the contracting parties and can
show the detriment which would positively result to him from
the contract in which he had no intervention (Baez vs. CA,
59 SCRA 15; Anyong Hsan vs. CA, 59 SCRA 110, 112-113;
Leodovica vs. CA, 65 SCRA 154-155). In the case at bar,
petitioners failed to show that they were prejudiced in their
rights [or that a] detriment x x x would positively result to
them. Hence, they lack locus standi in court.
xxxx
To the mind of the Court, procedural matters in the present
controversy may be dispensed with, stressing that the
instant case is a political question, a question which the
court cannot, in any manner, take judicial cognizance. Courts
will not interfere with purely political questions because of
the principle of separation of powers (Taada vs. Cuenco,
103 Phil. 1051). Political questions are those questions

which, under the Constitution, are to be decided by the

people in their sovereign capacity or in regard to which full
discretionary authority has been delegated to the legislative
or [to the] executive branch of the government (Nuclear Free
Phils. Coalition vs. NPC, 141 SCRA 307 (1986); Torres vs.
Gonzales, 152 SCRA 272; Citizens Alliance for Consumer
Protection vs. Energy Regulatory Board, G.R. No. 78888-90,
June 23, 1988).

is no ground for injunction being a mere damnum, absque

injuria (Talisay-Silay Milling Company, Inc. vs. CFI of Negros
Occidental, et. al. 42 SCRA 577, 582).

The citation made by the provincial government[, to] which

this Court is inclined to agree, is that the matter falls under
the discretion of another department, hence the decision
reached is in the category of a political question and
consequently may not be the subject of judicial jurisdiction
(Cruz in Political Law, 1998 Ed., page 81) is correct.

The facts and allegations [necessarily] suggest also that this

court may dismiss the case for want of jurisdiction.

It is [a] well-recognized principle that purely administrative

and discretionary functions may not be interfered with by the
courts (Adm. Law Test & Cases, 2001 Ed., De Leon, De
Leon, Jr.).
The case therefore calls for the doctrine of ripeness for
judicial review. This determines the point at which courts
may review administrative action. The basic principle of
ripeness is that the judicial machinery should be conserved
for problems which are real and present or imminent and
should not be squandered on problems which are future,
imaginary or remote. This case is not ripe for judicial
determination since there is no imminently x x x substantial
injury to the petitioners.
In other words, the putting up of the New Cagayan Town
Center by the province over the land fully owned by it and
the concomitant contracts entered into by the same is within
the bounds of its corporate power, an undertaking which falls
within the ambit of its discretion and therefore a purely
political issue which is beyond the province of the court x x x.
[Consequently, the court cannot,] in any manner, take judicial
cognizance over it. The act of the provincial government was
in pursuance of the mandate of the Local Government Code
of 1991.

xxxx
For lack of cause of action, the case should be dismissed.

The rule has to be so because it can motu propio dismiss it

as its only jurisdiction is to dismiss it if it has no jurisdiction.
This is in line with the ruling in Andaya vs. Abadia, 46 SCAD
1036, G.R. No. 104033, Dec. 27, 1993 where the court may
dismiss a complaint even without a motion to dismiss or
answer.
Upon the foregoing considerations, the case is hereby
dismissed without costs.
SO ORDERED. 34
Petitioners filed a Motion for Reconsideration 35 to which
respondents filed their respective Oppositions. 36Petitioners
then filed a Motion to Inhibit, which the court granted.
Accordingly, the case was re-raffled to Branch 1 of the RTC
of Tuguegarao City. 37
On August 20, 2004, Branch 1 of the RTC of Tuguegarao
City issued a Resolution denying petitioners plea for
reconsideration. The court found the motion to be a mere
scrap of paper as the notice of hearing was addressed only
to the Clerk of Court in violation of Section 5, Rule 15 of the
Rules of Court. As to the merits, the court sustained the
findings of Branch 5 that petitioners lack legal standing to
sue and that the issue involved is political.
Issues

xxxx

Hence, the present recourse where petitioners argue that:

Indeed, adjudication of the procedural issues presented for

resolution by the present action would be a futile exercise in
exegesis.

A. The lower court decided a question of substance in a way

not in accord with law and with the applicable decision of the
Supreme Court, and

What defeats the plea of the petitioners for the issuance of a

writ of preliminary injunction is the fact that their averments
are merely speculative and founded on conjectures. An
injunction is not intended to protect contingent or future
rights nor is it a remedy to enforce an abstract right (Cerebo
vs. Dictado, 160 SCRA 759; Ulang vs. CA, 225 SCRA 637).
An injunction, whether preliminary or final, will not issue to
protect a right not in in esse and which may never arise, or
to restrain an act which does not give rise to a cause of
action. The complainants right on title, moreover, must be
clear and unquestioned [since] equity, as a rule, will not take
cognizance of suits to establish title and will not lend its
preventive aid by injunction where the complainants title or
right is doubtful or disputed. The possibility of irreparable
damage, without proof of violation of an actual existing right,

B. The lower court has so far departed from the accepted

and usual course of judicial proceedings as to call for an
exercise of the power of supervision in that:
I. It denied locus standi to petitioners;
II. [It] determined that the matter of contract entered into by
the provincial government is in the nature of a political
question;
III. [It] denied the admission of Amended Petition; and
IV. [It] found a defect of substance in the petitioners Motion
for Reconsideration. 38

Our Ruling
The petition is partially meritorious.
Petitioners have legal standing to sue as taxpayers
A taxpayer is allowed to sue where there is a claim that
public funds are illegally disbursed, or that the public money
is being deflected to any improper purpose, or that there is
wastage of public funds through the enforcement of an
invalid or unconstitutional law. 39 A person suing as a
taxpayer, however, must show that the act complained of
directly involves the illegal disbursement of public funds
derived from taxation. 40 He must also prove that he has
sufficient interest in preventing the illegal expenditure of
money raised by taxation and that he will sustain a direct
injury because of the enforcement of the questioned statute
or contract. 41 In other words, for a taxpayers suit to prosper,
two requisites must be met: (1) public funds derived from
taxation are disbursed by a political subdivision or
instrumentality and in doing so, a law is violated or some
irregularity is committed and (2) the petitioner is directly
affected by the alleged act. 42
In light of the foregoing, it is apparent that contrary to the
view of the RTC,
a taxpayer need not be a party to the contract to challenge
its validity. 43 As long as taxes are involved, people have a
right to question contracts entered into by the government.
In this case, although the construction of the town center
would be primarily sourced from the proceeds of the bonds,
which respondents insist are not taxpayers money, a
government support in the amount of P187 million would still
be spent for paying the interest of the bonds. 44 In fact, a
Deed of Assignment 45 was executed by the governor in
favor of respondent RCBC over the Internal Revenue
Allotment (IRA) and other revenues of the provincial
government as payment and/or security for the obligations of
the provincial government under the Trust Indenture
Agreement dated September 17, 2003. Records also show
that on March 4, 2004, the governor requested
the Sangguniang Panlalawigan to appropriate an amount
of P25 million for the interest of the bond. 46Clearly, the first
requisite has been met.
As to the second requisite, the court, in recent cases, has
relaxed the stringent "direct injury test" bearing in mind
that locus standi is a procedural technicality. 47 By invoking
"transcendental importance", "paramount public interest", or
"far-reaching implications", ordinary citizens and taxpayers
were allowed to sue even if they failed to show direct
injury. 48 In cases where serious legal issues were raised or
where public expenditures of millions of pesos were
involved, the court did not hesitate to give standing to
taxpayers. 49
We find no reason to deviate from the jurisprudential trend.
To begin with, the amount involved in this case is substantial.
Under the various agreements entered into by the governor,

which were ratified by the Sangguniang Panlalawigan, the

provincial government of Cagayan would incur the following
costs: 50
Compensation to Preferred
Ventures (3% of P205M) 51 Resolution
No. 290-2001
Management and Underwriting
Fees (1.5% of P205M) 52
Documentary Tax (0.75% of P205M) 53
Guarantee Fee 54 Construction and Design of
town center 55 Total Cost -

6,150,000.00

3,075,000.00
1,537,500.00
7,350,000.00
213,795,732.39
231,908,232.39

What is more, the provincial government would be shelling

out a total amount of P187 million for the period of seven
years by way of subsidy for the interest of the bonds.
Without a doubt, the resolution of the present petition is of
paramount importance to the people of Cagayan who at the
end of the day would bear the brunt of these agreements.
Another point to consider is that local government units now
possess more powers, authority and resources at their
disposal, 56 which in the hands of unscrupulous officials may
be abused and misused to the detriment of the public. To
protect the interest of the people and to prevent taxes from
being squandered or wasted under the guise of government
projects, a liberal approach must therefore be adopted in
determining locus standi in public suits.
In view of the foregoing, we are convinced that petitioners
have sufficient standing to file the present suit. Accordingly,
they should be given the opportunity to present their case
before the RTC.
Having resolved the core issue, we shall now proceed to the
remaining issues.
The controversy involved is justiciable
A political question is a question of policy, which is to be
decided by the people in their sovereign capacity or by the
legislative or the executive branch of the government to
which full discretionary authority has been delegated.57
In filing the instant case before the RTC, petitioners seek to
restrain public respondents from implementing the bond
flotation and to declare null and void all contracts related to
the bond flotation and construction of the town center. In the
petition before the RTC, they alleged grave abuse of
discretion and clear violations of law by public respondents.
They put in issue the overpriced construction of the town
center; the grossly disadvantageous bond flotation; the
irrevocable assignment of the provincial governments
annual regular income, including the IRA, to respondent
RCBC to cover and secure the payment of the bonds
floated; and the lack of consultation and discussion with the
community regarding the proposed project, as well as a

proper and legitimate bidding for the construction of the town

center.

the dockets although a laudable objective must not be done

at the expense of substantial justice. 64

Obviously, the issues raised in the petition do not refer to the

wisdom but to the legality of the acts complained of. Thus,
we find the instant controversy within the ambit of judicial
review. Besides, even if the issues were political in nature, it
would still come within our powers of review under the
expanded jurisdiction conferred upon us by Section 1, Article
VIII of the Constitution, which includes the authority to
determine whether grave abuse of discretion amounting to
excess or lack of jurisdiction has been committed by any
branch or instrumentality of the government. 58

WHEREFORE, the instant Petition is PARTIALLY

GRANTED. The April 27, 2004 Order of Branch 5 and the
August 20, 2004 Resolution of Branch 1 of the Regional Trial
Court of Tuguegarao City are hereby REVERSEDand SET
ASIDE insofar as the dismissal of the petition is concerned.
Accordingly, the case is hereby REMANDEDto the court a
quo for further proceedings.
SO ORDERED.

The Motion to Admit Amended Petition was properly denied

However, as to the denial of petitioners Motion to Admit
Amended Petition, we find no reason to reverse the same.
The inclusion of the province of Cagayan as a petitioner
would not only change the theory of the case but would also
result in an absurd situation. The provincial government, if
included as a petitioner, would in effect be suing itself
considering that public respondents are being sued in their
official capacity.
In any case, there is no need to amend the petition because
petitioners, as we have said, have legal standing to sue as
taxpayers.
Section 5, Rule 15 of the Rules of Court was substantially
complied with
This brings us to the fourth and final issue.
A perusal of the Motion for Reconsideration filed by
petitioners would show that the notice of hearing was
addressed only to the Clerk of Court in violation of Section 5,
Rule 15 of the Rules of Court, which requires the notice of
hearing to be addressed to all parties concerned. This
defect, however, did not make the motion a mere scrap of
paper. The rule is not a ritual to be followed blindly. 59 The
purpose of a notice of hearing is simply to afford the adverse
parties a chance to be heard before a motion is resolved by
the court. 60 In this case, respondents were furnished copies
of the motion, and consequently, notified of the scheduled
hearing. Counsel for public respondents in fact moved for
the postponement of the hearing, which the court
granted. 61 Moreover, respondents were afforded procedural
due process as they were given sufficient time to file their
respective comments or oppositions to the motion. From the
foregoing, it is clear that the rule requiring notice to all
parties was substantially complied with. 62 In effect, the
defect in the Motion for Reconsideration was cured.
We cannot overemphasize that procedural rules are mere
tools to aid the courts in the speedy, just and inexpensive
resolution of cases. 63 Procedural defects or lapses, if
negligible, should be excused in the higher interest of justice
as technicalities should not override the merits of the case.
Dismissal of cases due to technicalities should also be
avoided to afford the parties the opportunity to present their
case. Courts must be reminded that the swift unclogging of

G.R. No. 147188

September 14, 2004

COMMISSIONER
OF
INTERNAL
REVENUE, petitioner,
vs.
THE ESTATE OF BENIGNO P. TODA, JR., Represented by
Special Co-administrators Lorna Kapunan and Mario Luza
Bautista, respondents.

DECISION
DAVIDE, JR., C.J.:
This Court is called upon to determine in this case whether
the tax planning scheme adopted by a corporation
constitutes tax evasion that would justify an assessment of
deficiency income tax.
The petitioner seeks the reversal of the Decision1 of the
Court of Appeals of 31 January 2001 in CA-G.R. SP No.
57799 affirming the 3 January 2000 Decision2 of the Court of
Tax Appeals (CTA) in C.T.A. Case No. 5328, 3 which held that
the respondent Estate of Benigno P. Toda, Jr. is not liable for
the deficiency income tax of Cibeles Insurance Corporation
(CIC) in the amount of P79,099,999.22 for the year 1989,
and ordered the cancellation and setting aside of the
assessment issued by Commissioner of Internal Revenue
Liwayway Vinzons-Chato on 9 January 1995.
The case at bar stemmed from a Notice of Assessment sent
to CIC by the Commissioner of Internal Revenue for
deficiency income tax arising from an alleged simulated sale
of a 16-storey commercial building known as Cibeles
Building, situated on two parcels of land on Ayala Avenue,
Makati City.
On 2 March 1989, CIC authorized Benigno P. Toda, Jr.,
President and owner of 99.991% of its issued and
outstanding capital stock, to sell the Cibeles Building and the
two parcels of land on which the building stands for an
amount of not less than P90 million.4
On 30 August 1989, Toda purportedly sold the property
for P100 million to Rafael A. Altonaga, who, in turn, sold the
same property on the same day to Royal Match Inc. (RMI)
for P200 million. These two transactions were evidenced by

Deeds of Absolute Sale notarized on the same day by the

same notary public.5

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

The Estate thereafter filed a letter of protest.13

For the sale of the property to RMI, Altonaga paid capital
gains tax in the amount of P10 million.6
On 16 April 1990, CIC filed its corporate annual income tax
return7 for the year 1989, declaring, among other things, its
gain from the sale of real property in the amount
of P75,728.021.
After
crediting
withholding
taxes
ofP254,497.00, it paid P26,341,2078 for its net taxable
income of P75,987,725.
On 12 July 1990, Toda sold his entire shares of stocks in
CIC to Le Hun T. Choa for P12.5 million, as evidenced by a
Deed of Sale of Shares of Stocks. 9 Three and a half years
later, or on 16 January 1994, Toda died.
On 29 March 1994, the Bureau of Internal Revenue (BIR)
sent an assessment notice10 and demand letter to the CIC
for deficiency income tax for the year 1989 in the amount
of P79,099,999.22.
The new CIC asked for a reconsideration, asserting that the
assessment should be directed against the old CIC, and not
against the new CIC, which is owned by an entirely different
set of stockholders; moreover, Toda had undertaken to hold
the buyer of his stockholdings and the CIC free from all tax
liabilities for the fiscal years 1987-1989.11
On 27 January 1995, the Estate of Benigno P. Toda, Jr.,
represented by special co-administrators Lorna Kapunan
and Mario Luza Bautista, received a Notice of
Assessment12 dated 9 January 1995 from the Commissioner
of Internal Revenue for deficiency income tax for the year
1989 in the amount of P79,099,999.22, computed as follows:
Income Tax 1989
Net Income per return

P75,987,725.
00

Add: Additional gain on sale of real property

taxable under ordinary corporate income but
were substituted with individual capital
gains(P200M 100M)

100,000,000.00

Total Net Taxable Income

P175,987,725.00
per investigation
Tax Due thereof at 35%
P 61,595,703.75
Less: Payment already made
1. Per return
26,595,704.00
2. Thru Capital Gains Tax made
10,000,000.00 36,595,704.00 Balance of
by R.A. Altonaga
tax due
Add: 50% Surcharge
25% Surcharge

P 24,999,999.75
12,499,999.88
6,249,999.94

Total
P 43,749,999.57
Add: Interest 20% from
4/16/90-4/30/94 (.808)
35,349,999.65
TOTAL AMT. DUE & COLLECTIBLE
P 79,099,999.22

In the letter dated 19 October 1995,14 the Commissioner

dismissed the protest, stating that a fraudulent scheme was
deliberately perpetuated by the CIC wholly owned and
controlled by Toda by covering up the additional gain
of P100 million, which resulted in the change in the income
structure of the proceeds of the sale of the two parcels of
land and the building thereon to an individual capital gains,
thus evading the higher corporate income tax rate of 35%.
On 15 February 1996, the Estate filed a petition for
review15 with the CTA alleging that the Commissioner erred
in holding the Estate liable for income tax deficiency; that the
inference of fraud of the sale of the properties is
unreasonable and unsupported; and that the right of the
Commissioner to assess CIC had already prescribed.
In his Answer16 and Amended Answer,17 the Commissioner
argued that the two transactions actually constituted a single
sale of the property by CIC to RMI, and that Altonaga was
neither the buyer of the property from CIC nor the seller of
the same property to RMI. The additional gain of P100
million (the difference between the second simulated sale
for P200 million and the first simulated sale for P100 million)
realized by CIC was taxed at the rate of only 5% purportedly
as capital gains tax of Altonaga, instead of at the rate of 35%
as corporate income tax of CIC. The income tax return filed
by CIC for 1989 with intent to evade payment of the tax was
thus false or fraudulent. Since such falsity or fraud was
discovered by the BIR only on 8 March 1991, the
assessment issued on 9 January 1995 was well within the
prescriptive period prescribed by Section 223 (a) of the
National Internal Revenue Code of 1986, which provides that
tax may be assessed within ten years from the discovery of
the falsity or fraud. With the sale being tainted with fraud, the
separate corporate personality of CIC should be
disregarded. Toda, being the registered owner of the
99.991% shares of stock of CIC and the beneficial owner of
the remaining 0.009% shares registered in the name of the
individual directors of CIC, should be held liable for the
deficiency income tax, especially because the gains realized
from the sale were withdrawn by him as cash advances or
paid to him as cash dividends. Since he is already dead, his
estate shall answer for his liability.
In its decision18 of 3 January 2000, the CTA held that the
Commissioner failed to prove that CIC committed fraud to
deprive the government of the taxes due it. It ruled that even
assuming that a pre-conceived scheme was adopted by CIC,
the same constituted mere tax avoidance, and not tax
evasion. There being no proof of fraudulent transaction, the
applicable period for the BIR to assess CIC is that
prescribed in Section 203 of the NIRC of 1986, which is
three years after the last day prescribed by law for the filing
of the return. Thus, the governments right to assess CIC
prescribed on 15 April 1993. The assessment issued on 9
January 1995 was, therefore, no longer valid. The CTA also
ruled that the mere ownership by Toda of 99.991% of the
capital stock of CIC was not in itself sufficient ground for
piercing the separate corporate personality of CIC. Hence,

the CTA declared that the Estate is not liable for deficiency
income tax of P79,099,999.22 and, accordingly, cancelled
and set aside the assessment issued by the Commissioner
on 9 January 1995.

For its part, respondent Estate asserts that the

Commissioner failed to present the income tax return of
Altonaga to prove that the latter is financially incapable of
purchasing the Cibeles property.

In its motion for reconsideration,19 the Commissioner insisted

that the sale of the property owned by CIC was the result of
the connivance between Toda and Altonaga. She further
alleged that the latter was a representative, dummy, and a
close business associate of the former, having held his office
in a property owned by CIC and derived his salary from a
foreign corporation (Aerobin, Inc.) duly owned by Toda for
representation services rendered. The CTA denied20 the
motion for reconsideration, prompting the Commissioner to
file a petition for review21 with the Court of Appeals.

To resolve the grounds raised by the Commissioner, the

following questions are pertinent:

In its challenged Decision of 31 January 2001, the Court of

Appeals affirmed the decision of the CTA, reasoning that the
CTA, being more advantageously situated and having the
necessary expertise in matters of taxation, is "better situated
to determine the correctness, propriety, and legality of the
income tax assessments assailed by the Toda Estate."22
Unsatisfied with the decision of the Court of Appeals, the
Commissioner filed the present petition invoking the
following grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT
RESPONDENT COMMITTED NO FRAUD WITH INTENT
TO EVADE THE TAX ON THE SALE OF THE PROPERTIES
OF CIBELES INSURANCE CORPORATION.
II. THE COURT OF APPEALS ERRED IN NOT
DISREGARDING
THE
SEPARATE
CORPORATE
PERSONALITY
OF
CIBELES
INSURANCE
CORPORATION.
III. THE COURT OF APPEALS ERRED IN HOLDING THAT
THE RIGHT OF PETITIONER TO ASSESS RESPONDENT
FOR DEFICIENCY INCOME TAX FOR THE YEAR 1989
HAD PRESCRIBED.
The Commissioner reiterates her arguments in her previous
pleadings and insists that the sale by CIC of the Cibeles
property was in connivance with its dummy Rafael Altonaga,
who was financially incapable of purchasing it. She further
points out that the documents themselves prove the fact of
fraud in that (1) the two sales were done simultaneously on
the same date, 30 August 1989; (2) the Deed of Absolute
Sale between Altonaga and RMI was notarized ahead of the
alleged sale between CIC and Altonaga, with the former
registered in the Notarial Register of Jocelyn H. Arreza
Pabelana as Doc. 91, Page 20, Book I, Series of 1989; and
the latter, as Doc. No.92, Page 20, Book I, Series of 1989, of
the same Notary Public; (3) as early as 4 May 1989, CIC
received P40 million from RMI, and not from Altonaga. The
said amount was debited by RMI in its trial balance as of 30
June 1989 as investment in Cibeles Building. The substantial
portion of P40 million was withdrawn by Toda through the
declaration of cash dividends to all its stockholders.

1. Is this a case of tax evasion or tax avoidance?

2. Has the period for assessment of deficiency income tax
for the year 1989 prescribed? and
3. Can respondent Estate be held liable for the deficiency
income tax of CIC for the year 1989, if any?
We shall discuss these questions in seriatim.
Is this a case of tax evasion or tax avoidance?
Tax avoidance and tax evasion are the two most common
ways used by taxpayers in escaping from taxation. Tax
avoidance is the tax saving device within the means
sanctioned by law. This method should be used by the
taxpayer in good faith and at arms length. Tax evasion, on
the other hand, is a scheme used outside of those lawful
means and when availed of, it usually subjects the taxpayer
to further or additional civil or criminal liabilities.23
Tax evasion connotes the integration of three factors: (1) the
end to be achieved, i.e., the payment of less than that known
by the taxpayer to be legally due, or the non-payment of tax
when it is shown that a tax is due; (2) an accompanying
state of mind which is described as being "evil," in "bad
faith," "willfull," or "deliberate and not accidental"; and (3) a
course of action or failure of action which is unlawful.24
All these factors are present in the instant case. It is
significant to note that as early as 4 May 1989, prior to the
purported sale of the Cibeles property by CIC to Altonaga on
30 August 1989, CIC received P40 million from RMI,25 and
not from Altonaga. That P40 million was debited by RMI and
reflected in its trial balance26 as "other inv. Cibeles Bldg."
Also, as of 31 July 1989, another P40 million was debited
and reflected in RMIs trial balance as "other inv. Cibeles
Bldg." This would show that the real buyer of the properties
was RMI, and not the intermediary Altonaga.lavvphi1.net
The investigation conducted by the BIR disclosed that
Altonaga was a close business associate and one of the
many trusted corporate executives of Toda. This information
was revealed by Mr. Boy Prieto, the assistant accountant of
CIC and an old timer in the company.27 But Mr. Prieto did not
testify on this matter, hence, that information remains to be
hearsay and is thus inadmissible in evidence. It was not
verified either, since the letter-request for investigation of
Altonaga was unserved,28 Altonaga having left for the United
States of America in January 1990. Nevertheless, that
Altonaga was a mere conduit finds support in the admission
of respondent Estate that the sale to him was part of the tax
planning scheme of CIC. That admission is borne by the
records. In its Memorandum, respondent Estate declared:

Petitioner, however, claims there was a "change of structure"

of the proceeds of sale. Admitted one hundred percent. But
isnt this precisely the definition of tax planning? Change the
structure of the funds and pay a lower tax. Precisely, Sec. 40
(2) of the Tax Code exists, allowing tax free transfers of
property for stock, changing the structure of the property and
the tax to be paid. As long as it is done legally, changing the
structure of a transaction to achieve a lower tax is not
against the law. It is absolutely allowed.
Tax planning is by definition to reduce, if not eliminate
altogether, a tax. Surely petitioner [sic] cannot be faulted
for wanting to reduce the tax from 35% to
5%.29 [Underscoring supplied].
The scheme resorted to by CIC in making it appear that
there were two sales of the subject properties, i.e., from CIC
to Altonaga, and then from Altonaga to RMI cannot be
considered a legitimate tax planning. Such scheme is tainted
with fraud.
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."30
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. Altonagas 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.lavvphi1.net
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.31
Generally, a sale or exchange of assets will have an income
tax incidence only when it is consummated. 32 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.33

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. 34 The two
sale transactions should be treated as a single direct sale by
CIC to RMI.
Accordingly, the tax liability of CIC is governed by then
Section 24 of the NIRC of 1986, as amended (now 27 (A) of
the Tax Reform Act of 1997), which stated as follows:
Sec. 24. Rates of tax on corporations. (a) Tax on domestic
corporations.- A tax is hereby imposed upon the taxable net
income received during each taxable year from all sources
by every corporation organized in, or existing under the laws
of the Philippines, and partnerships, no matter how created
or organized but not including general professional
partnerships, in accordance with the following:
Twenty-five percent upon the amount by which the taxable
net income does not exceed one hundred thousand pesos;
and
Thirty-five percent upon the amount by which the taxable net
income exceeds one hundred thousand pesos.
CIC is therefore liable to pay a 35% corporate tax for its
taxable net income in 1989. The 5% individual capital gains
tax provided for in Section 34 (h) of the NIRC of 1986 35 (now
6% under Section 24 (D) (1) of the Tax Reform Act of 1997)
is inapplicable. Hence, the assessment for the deficiency
income tax issued by the BIR must be upheld.
Has the period of assessment prescribed?
No. Section 269 of the NIRC of 1986 (now Section 222 of
the Tax Reform Act of 1997) read:
Sec. 269. Exceptions as to period of limitation of assessment
and collection of taxes.-(a) In the case of a false or
fraudulent return with intent to evade tax or of failure to file a
return, the tax may be assessed, or a proceeding in court
after the collection of such tax may be begun without
assessment, at any time within ten years after the discovery
of the falsity, fraud or omission: Provided, That in a fraud
assessment which has become final and executory, the fact
of fraud shall be judicially taken cognizance of in the civil or
criminal action for collection thereof .
Put differently, 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.36 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. 37 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.
Is respondent Estate liable for the 1989 deficiency income
tax of Cibeles Insurance Corporation?
A corporation has a juridical personality distinct and separate
from the persons owning or composing it. Thus, the owners
or stockholders of a corporation may not generally be made
to answer for the liabilities of a corporation and vice versa.
There are, however, certain instances in which personal
liability may arise. It has been held in a number of cases that
personal liability of a corporate director, trustee, or officer
along, albeit not necessarily, with the corporation may validly
attach when:
1. He assents to the (a) patently unlawful act of the
corporation, (b) bad faith or gross negligence in directing its
affairs, or (c) conflict of interest, resulting in damages to the
corporation, its stockholders, or other persons;
2. He consents to the issuance of watered down stocks or,
having knowledge thereof, does not forthwith file with the
corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable
with the corporation; or
4. He is made, by specific provision of law, to personally
answer for his corporate action.38
It is worth noting that when the late Toda sold his shares of
stock to Le Hun T. Choa, he knowingly and voluntarily held
himself personally liable for all the tax liabilities of CIC and
the buyer for the years 1987, 1988, and 1989. Paragraph g
of the Deed of Sale of Shares of Stocks specifically provides:
g. Except for transactions occurring in the ordinary course of
business, Cibeles has no liabilities or obligations, contingent
or otherwise, for taxes, sums of money or insurance claims
other than those reported in its audited financial statement
as of December 31, 1989, attached hereto as "Annex B" and
made a part hereof. The business of Cibeles has at all times
been conducted in full compliance with all applicable laws,
rules and regulations. SELLER undertakes and agrees to
hold the BUYER and Cibeles free from any and all

income tax liabilities of Cibeles for the fiscal years 1987,

1988 and 1989.39[Underscoring Supplied].
When the late Toda undertook and agreed "to hold the
BUYER and Cibeles free from any all income tax liabilities of
Cibeles for the fiscal years 1987, 1988, and 1989," he
thereby voluntarily held himself personally liable therefor.
Respondent estate cannot, therefore, deny liability for CICs
deficiency income tax for the year 1989 by invoking the
separate corporate personality of CIC, since its obligation
arose from Todas contractual undertaking, as contained in
the Deed of Sale of Shares of Stock.
WHEREFORE, in view of all the foregoing, the petition is
hereby GRANTED. The decision of the Court of Appeals of
31 January 2001 in CA-G.R. SP No. 57799
is REVERSED and SET ASIDE, and another one is hereby
rendered ordering respondent Estate of Benigno P. Toda Jr.
to pay P79,099,999.22 as deficiency income tax of Cibeles
Insurance Corporation for the year 1989, plus legal interest
from 1 May 1994 until the amount is fully paid.
Costs against respondent.
SO ORDERED.