Samar-I Electric Cooperative v.

CIR (744 SCRA 459)

Facts:
At bar is a petition for review on certiorari of the Decision1 of the Court of Tax Appeals
En Banc (CTA EB) dated March 11, 2010 and its Resolution2 dated July 28, 2010 in
C.T.A. EB Nos. 460 and 462 (C.T.A. Case No. 6697) affirming the May 27, 2008
Decision3 and the January 19, 2009 Amended Decision4 of the CTA’s First Division,
and ordering petitioner to pay respondent Commissioner of Internal Revenue (CIR)
deficiency withholding tax on compensation in the aggregate amount of P2,690,850.91,
plus 20% interest starting September 30, 2002, until fully paid, pursuant to Section
249(c) of the National Internal Revenue Code (NIRC) of 1997.

The following facts are undisputed as found by the CTA’s First Division and adopted by
the CTA EB:

Samar-I Electric Cooperative, Inc. (Petitioner) is an electric cooperative, with principal

office at Barangay Carayman, Calbayog City. It was issued a Certificate of Registration
by the National Electrification Administration (NEA) on February 27, 1974 pursuant to
Presidential Decree (PD) 269. Likewise, it was granted a Certificate of Provisional
Registration under Republic Act (RA) 6938, otherwise known as the Cooperative Code
of the Philippines on March 16, 1993, by the Cooperative Development Authority (CDA).

Samar-I electric cooperative Inc is an electric cooperative

Respondent Commissioner of Internal Revenue is a public officer authorized under the

National Internal Revenue Code (NIRC) to examine any taxpayer including inter alia,
the power to issue tax assessment, evaluate, and decide upon protests relative thereto.

On July 13, 1999 and April 17, 2000, petitioner filed its 1998 and 1999 income tax
returns, respectively. Petitioner filed its 1997, 1998, and 1999 Annual Information
Return of Income Tax Withheld on Compensation, Expanded and Final Withholding
Taxes on February 17, 1998, February 1, 1999, and February 4, 2000, in that order.

On November 13, 2000, respondent issued a duly signed Letter of Authority (LOA) No.
1998 00023803; covering the examination of petitioner’s books of account and other
accounting records for income and withholding taxes for the period 1997 to 1999. The
LOA was received by petitioner on November 14, 2000.

Petitioner cooperated in the audit and investigation conducted by the Special

Investigation Division of the BIR by submitting the required documents on December 5,
2000.

On October 19, 2001, respondent sent a Notice for Informal Conference which was
received by petitioner in November 2001; indicating the allegedly income and
withholding tax liabilities of petitioner for 1997 to 1999. Attached to the letter is a
summary of the report, with an explanation of the findings of the investigators.
Samar was audited by the BIR where Deficiency tax were found for 1997 to 1999
and the CIR officially issued the Final assessment on November 4, 2002.

One the defenses of Samar is that the assessments for tax returns filed on 1997
and 1998 were only issued on July 8, 2002 or beyond the three year period
allowed by law for the CIR to issue an assessment..

In response, petitioner sent a letter dated November 26, 2001 to respondent

maintaining its indifference to the latter’s findings and requesting details of the
assessment.

On December 13, 2001, petitioner executed a Waiver of the Defense of

Prescription under the Statute of Limitations, good until March 29, 2002.

On February 27, 2002, a letter was sent by petitioner to respondent requesting a

detailed computation of the alleged 1997, 1998 and 1999 deficiency withholding tax on
compensation.

On February 28, 2002, respondent issued a Preliminary Assessment Notice (PAN). The
PAN was received by petitioner on April 9, 2002, which was protested on April 18, 2002.
Respondent’s Reply dated May 27, 2002, contained the explanation of the legal basis of
the issuance of the questioned tax assessments.

However, on July 8, 2002, respondent dismissed petitioner’s protest and recommended

the issuance of a Final Assessment Notice.

Consequently, on September 15, 2002, petitioner received a demand letter and

assessments notices (Final Assessment Notices) for the alleged 1997, 1998, and 1999
deficiency withholding tax in the amount of [P]3,760,225.69, as well as deficiency
income tax covering the years 1998 to 1999 in the amount of [P]440,545.71, or in the
aggregate amount of [P]4,200,771.40.

Petitioner filed its protest and Supplemental Protest to the Final Assessment Notices on
October 14, 2002 and November 4, 2002, respectively. But on the Final Decision on
Disputed Assessment issued on April 10, 2003, petitioner was still held liable for the
alleged tax liabilities.5
The CTA EB narrates the following succeeding events:

On May 29, 2003, the Petition for Review was filed by SAMELCO-I with the Court in
division.

On May 27, 2008, the assailed Decision partially granting SAMELCO-I’s petition was
promulgated.

Dissatisfied, both parties sought reconsideration of the said decision. CIR filed the
“Motion for Partial Reconsideration (Re: Decision dated 27 May 2008[)]” on June 13,
2008. On the other hand, SAMELCO-I’s “Motion for Reconsideration” was filed on June
17, 2008.

On January 19, 2009, the Court in division promulgated its Amended Decision which
denied CIR’s motion and partially granted SAMELCO-I’s motion.

Thereafter, CIR and SAMELCO-I filed their “Motion for Extension of Time to File Petition
for Review” on February 6, 2009 and February 11, 2009, respectively. Both motions
were granted by the Court.6
The following issues were raised by the parties in their petitions for review before the
CTA EB. In C.T.A. EB 460, herein respondent CIR raised the following
grounds:chanroblesvirtuallawlibrary
Whether or not SAMELCO-I is entitled to tax privileges accorded to members in
accordance with Republic Act No. 6938, or the Cooperative Code, or to privileges of
Presidential Decree (PD) No. 269.

Whether or not SAMELCO-I is liable for the minimum corporate income tax (MCIT) for
taxable years 1998 to 1999.

Whether or not SAMELCO-I is liable to pay the total deficiency expanded withholding
tax of [P]3,760,225.69 for taxable years 1997 to 1999.7
On the other hand, petitioner SAMELCO-I raised the following legal and factual errors in
C.T.A. EB No. 462, viz.:

The Court in Division gravely erred in holding that the 1997 and 1998 assessments on
withholding tax on compensation (received by SAMELCO-I on September 15, 2002),
have not prescribed even if the waiver validly executed was good only until March 29,
2002.

The Court in Division erred in holding that CIR can validly assess within the ten
(10)-year prescriptive period even if the notice of informal conference, PAN,
formal letter of demand, and assessment notice mention not a word that the BIR
is invoking Section 222 (a) of the 1997 Tax Code [then Sec. 223, NIRC], due to
alleged false withholding tax returns filed by [SAMELCO-I] as the same assertions
were mere afterthought to justify application of the 10-year prescriptive period to
assess.

The Court in Division failed to consider that CIR made no findings as to SAMELCO-I’s
filing of a false return as clearly manifested by the non-imposition of 50% surcharge on
the 1997, 1998 and 1999 basic withholding tax deficiency in the PAN, demand notice
and even in the assessment notice other than interest charges.

The Court in Division erred in not holding that given SAMELCO-I’s filing of its 1997,
1998, and 1999 withholding tax returns in good faith, and in close consultation with the
BIR personnel in Calbayog City where SAMELCO-I’s place of business is located, the
latter should no longer be imposed the incremental penalties (surcharge and interest).
The Court in Division failed to rule that since there was no substantial under remittance
of 1998 withholding tax as the basic deficiency tax per amended decision is less than
30% of the computed total tax due per return, SAMELCO-I did not file a false return.

The Court in Division overlooked the fact that for taxable year 1999, [SAMELCO-I]
remitted the amount of [P]844,958.00 as withholding tax in compensation instead of
[P]786,702.43 as indicated in Page 8, Annex C of the CTA (1st Division) Decision.

The Court in Division erred in failing to declare as void both the formal letter of demand
and assessment notice on withholding tax on compensation for 1997 taxable year,
given its non-compliance with Section 3.1.4 of RR 12-99.8
On February 26, 2009, the CTA EB consolidated both cases. After the filing of the
respective Comments of both parties, the cases were deemed submitted for decision.
The CTA EB found that the issues and arguments raised by the parties were “mere
reiterations of what have been considered and passed upon by the Court in division in
the assailed Decision and the Amended Decision.”9 It ruled that SAMELCO-I is
exempted in the payment of the Minimum Corporate Income Tax (MCIT); that due
process was observed in the issuance of the assessments in accordance with Section
228 of the Tax Code; and that the 1997 and 1998 assessments on deficiency
withholding tax on compensation have not prescribed. Finding no reversible error in the
Decision and the Amended Decision, the CTA EB ruled, viz.:chanroblesvirtuallawlibrary
WHEREFORE, premises considered, We deny the petitions for lack of merit.
Accordingly, We AFFIRM the May 27, 2008 Decision and the January 19, 2009
Amended Decision promulgated by the First Division of this Court.

SO ORDERED.10
Petitioner moved for reconsideration. In a Resolution dated July 28, 2010, the CTA EB
denied the motion. Petitioner now comes to this Court raising the following assignment
of errors:chanroblesvirtuallawlibrary
A. The Honorable CTA En Banc gravely erred in holding that respondent sufficiently
complied with the due process requirements mandated by Section 228 of the 1997 Tax
Code in the issuance of 1997-1999 assessments to petitioner, even if the details of
discrepancies on which the assessments were factually and legally based as required
under Section 3.1.4 of Revenue Regulations (RR) No[.] 12-99, were not found in the
Formal Letter of Demand and Final Assessment Notice (FAN) sent to petitioner, in clear
violation of the doctrine established in the case of Commissioner of Internal Revenue
vs. Enron Subic Power Corporation, G.R. No. 166387, January 19, 2009, applying
Section 3.1.4 of RR 12-99 in relation to Section 228 NIRC.

B. The Honorable CTA En Banc erred in holding that respondent observed due process
notwithstanding the missing Annex “A-1” that was meant to show Details of
Discrepancies and to be attached to BIR’s Letter of Demand/Final Notice dated
September 15, 2002, which was not furnished to petitioner and worse, a file copy of
which is not even found in the BIR records as part of its Exhibit “16” and neither is the
same found in the CTA records.
C. In deciding that the 1997 and 1998 withholding tax assessments have not yet
prescribed, the Honorable CTA En Banc failed to consider the singular significance of
the Waiver of the Defense of Prescription validly agreed upon and executed by the
parties.

D. The Honorable CTA En Banc erred in holding that respondent can validly assess
within the ten (10)-year prescriptive period even if the Notice of Informal Conference,
PAN, and Final Letter of Demand (dated September 15, 2002), mentioned not a word
as to the falsity of the returns filed by petitioner, but as an afterthought that was raised
rather belatedly only in the Answer and during the trial.

E. The Honorable CTA En Banc erred in holding as valid the 1997 deficiency
withholding tax assessment being anchored on RR 2-98 (as cited in Notice of Informal
Conference and PAN), as the said RR 2-98 governs compensation income paid
beginning January 1, 1998.11
We shall resolve the instant controversy by discussing the following two main issues in
seriatim: whether the 1997 and 1998 assessments on withholding tax on compensation
were issued within the prescriptive period provided by law; and whether the
assessments were issued in accordance with Section 228 of the NIRC of 1997.

On the issue of prescription, petitioner contends that the subject 1997 and 1998
withholding tax assessments on compensation were issued beyond the
prescriptive period of three years under Section 203 of the NIRC of 1997. Under
this section, the government is allowed a period of only three years to assess the
correct tax liability of a taxpayer, viz.:

SEC. 203. Period of Limitation Upon Assessment and Collection. – Except as

provided in Section 222, internal revenue taxes shall be assessed within three (3)
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.

Relying on Section 203, petitioner argues that the subject deficiency tax
assessments issued by respondent on September 15, 2002 was issued beyond
the three-year prescriptive period. Petitioner filed its Annual Information Return
of Income Tax Withheld on Compensation, Expanded and Final Withholding
Taxes on the following dates: on February 17, 1998 for the taxable year 1997; and
on February 1, 1999 for the year taxable 1998. Thus, if the period prescribed
under Section 203 of the NIRC of 1997 is to be followed, the three-year
prescriptive period to assess for the taxable years 1997 and 1998 should have
ended on February 16, 2001 and January 31, 2002, respectively.
We disagree.

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.

(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.

(c) Any internal revenue tax which has been assessed within the period of limitation as
prescribed in paragraph (a) hereof may be collected by distraint or levy or by a
proceeding in court within five (5) years following the assessment of the tax.

(d) Any internal revenue tax, which has been assessed within the period agreed upon
as provided in paragraph (b) hereinabove, may be collected by distraint or levy or by a
proceeding in court within the period agreed upon in writing before the expiration of the
five (5)-year period. The period so agreed upon may be extended by subsequent written
agreements made before the expiration of the period previously agreed upon.

(e) Provided, however, That nothing in the immediately preceding Section and
paragraph (a) hereof shall be construed to authorize the examination and investigation
or inquiry into any tax return filed in accordance with the provisions of any tax amnesty
law or decree. (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.”12
The case of Aznar v. Court of Tax Appeals13 discusses what acts or omissions may
constitute falsity, viz.:chanroblesvirtuallawlibrary
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.14

Samar-I Electric Cooperative v. CIR (744 SCRA 459)

Facts:
Samar-I electric cooperative Inc is an electric cooperative
Samar was audited by the BIR where Deficiency tax were found for 1997 to 1999
and the CIR officially issued the Final assessment on November 4, 2002.
One the defenses of Samar is that the assessments for tax returns filed on 1997
and 1998 were only issued on July 8, 2002 or beyond the three year period
allowed by law for the CIR to issue an assessment.

Issue:
Whether or not the period to issue an assessment has prescribed.

Ruling:
No, 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.:

(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.

(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.

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.”

Samar-I Electric Cooperative v. CIR (744 SCRA 459)

Facts:
1. Samar-I electric cooperative Inc is an electric cooperative
2. Samar was audited by the BIR where substantial under declaration were
found for 1997 to 1999 and the CIR officially issued the Final assessment
on November 4, 2002.
3. One the defenses of Samar is that the assessments for tax returns filed on
1997 and 1998 were only issued on July 8, 2002 or beyond the three year
period allowed by law for the CIR to issue an assessment.

Issue:
Whether or not the period to issue an assessment has prescribed.
Ruling:
No, 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.:

(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.

(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.

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.”