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106611

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Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 106611 July 21, 1994

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
COURT OF APPEALS, CITYTRUST BANKING CORPORATION and COURT OF TAX APPEALS, respondents.

The Solicitor General for petitioner.

Palaez, Adriano & Gregorio for private respondent.

REGALADO, J.:

The judicial proceedings over the present controversy commenced with CTA Case No. 4099, wherein the Court of
Tax Appeals ordered herein petitioner Commissioner of Internal Revenue to grant a refund to herein private
respondent Citytrust Banking Corporation (Citytrust) in the amount of P13,314,506.14, representing its overpaid
income taxes for 1984 and 1985, but denied its claim for the alleged refundable amount reflected in its 1983 income
tax return on the ground of prescription.1 That judgment of the tax court was affirmed by respondent Court of
Appeals in its judgment in CA-G.R. SP
No. 26839.2 The case was then elevated to us in the present petition for review on certiorari wherein the latter
judgment is impugned and sought to be nullified and/or set aside.

It appears that in a letter dated August 26, 1986, herein private respondent corporation filed a claim for refund with
the Bureau of Internal Revenue (BIR) in the amount of P19,971,745.00 representing the alleged aggregate of the
excess of its carried-over total quarterly payments over the actual income tax due, plus carried-over withholding tax
payments on government securities and rental income, as computed in its final income tax return for the calendar
year ending December 31, 1985.3

Two days later, or on August 28, 1986, in order to interrupt the running of the prescriptive period, Citytrust filed a
petition with the Court of Tax Appeals, docketed therein as CTA Case No. 4099, claiming the refund of its income
tax overpayments for the years 1983, 1984 and 1985 in the total amount of P19,971,745.00.4

In the answer filed by the Office of the Solicitor General, for and in behalf of therein respondent commissioner, it was
asserted that the mere averment that Citytrust incurred a net loss in 1985 does not ipso facto merit a refund; that the
amounts of P6,611,223.00, P1,959,514.00 and P28,238.00 claimed by Citytrust as 1983 income tax overpayment,
taxes withheld on proceeds of government securities investments, as well as on rental income, respectively, are not
properly documented; that assuming arguendo that petitioner is entitled to refund, the right to claim the same has
prescribed
with respect to income tax payments prior to August 28, 1984, pursuant to Sections 292 and 295 of the National
Internal Revenue Code of 1977, as amended, since the petition was filed only on August 28, 1986.5

On February 20, 1991, the case was submitted for decision based solely on the pleadings and evidence submitted
by herein private respondent Citytrust. Herein petitioner could not present any evidence by reason of the repeated
failure of the Tax Credit/Refund Division of the BIR to transmit the records of the case, as well as the investigation
report thereon, to the Solicitor General.6

However, on June 24, 1991, herein petitioner filed with the tax court a manifestation and motion praying for the
suspension of the proceedings in the said case on the ground that the claim of Citytrust for tax refund in the amount
of P19,971,745.00 was already being processed by the Tax Credit/Refund Division of the BIR, and that said bureau

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was only awaiting the submission by Citytrust of the required confirmation receipts which would show whether or not
the aforestated amount was actually paid and remitted to the BIR.7

Citytrust filed an opposition thereto, contending that since the Court of Tax Appeals already acquired jurisdiction
over the case, it could no longer be divested of the same; and, further, that the proceedings therein could not be
suspended by the mere fact that the claim for refund was being administratively processed, especially where the
case had already been submitted for decision.
It also argued that the BIR had already conducted an audit, citing therefor Exhibits Y, Y-1, Y-2 and Y-3 adduced in
the case, which clearly showed that there was an overpayment of income taxes and for which a tax credit or refund
was due to Citytrust. The Foregoing exhibits are allegedly conclusive proof of and an admission by herein petitioner
that there had been an overpayment of income taxes.8

The tax court denied the motion to suspend proceedings on the ground that the case had already been submitted
for decision since February 20, 1991.9

Thereafter, said court rendered its decision in the case, the decretal portion of which declares:

WHEREFORE, in view of the foregoing, petitioner is entitled to a refund but only for the overpaid taxes
incurred in 1984 and 1985. The refundable amount as shown in its 1983 income tax return is hereby
denied on the ground of prescription. Respondent is hereby ordered to grant a refund to petitioner
Citytrust Banking Corp. in the amount of P13,314,506.14 representing the overpaid income taxes for
1984 and 1985, recomputed as follows:

1984 Income tax due P 4,715,533.00

Less: 1984 Quarterly payments P 16,214,599.00*
1984 Tax Credits —
W/T on int. on gov't. sec. 1,921,245.37*
W/T on rental inc. 26,604.30* 18,162,448.67
——————— ———————
Tax Overpayment (13,446,915.67)
Less: FCDU payable 150,252.00
———————
Amount refundable for 1984 P (13,296,663.67)

1985 Income tax due (loss) P — 0 —

Less: W/T on rentals 36,716.47*
———————
Tax Overpayment (36,716.47)*
Less: FCDU payable 18,874.00
———————
Amount Refundable for 1985 P (17,842.47)

* Note:

These credits are smaller than the claimed amount because only the above figures are
well supported by the various exhibits presented during the hearing.

No pronouncement as to costs.

SO ORDERED.10

The order for refund was based on the following findings of the Court of Tax Appeals: (1) the fact of withholding has
been established by the statements and certificates of withholding taxes accomplished by herein private
respondent's withholding agents, the authenticity of which were neither disputed nor controverted by herein
petitioner; (2) no evidence was presented which could effectively dispute the correctness of the income tax return
filed by herein respondent corporation and other material facts stated therein; (3) no deficiency assessment was
issued by herein petitioner; and (4) there was an audit report submitted by the BIR Assessment Branch,
recommending the refund of overpaid taxes for the years concerned (Exhibits Y to Y-3), which enjoys the
presumption of regularity in the performance of official duty.11

A motion for the reconsideration of said decision was initially filed by the Solicitor General on the sole ground that
the statements and certificates of taxes allegedly withheld are not conclusive evidence of actual payment and
remittance of the taxes withheld to the BIR.12 A supplemental motion for reconsideration was thereafter filed,
wherein it was contended for the first time that herein private respondent had outstanding unpaid deficiency income
taxes. Petitioner alleged that through an inter-office memorandum of the Tax Credit/Refund Division, dated August
8, 1991, he came to know only lately that Citytrust had outstanding tax liabilities for 1984 in the amount of
P56,588,740.91 representing deficiency income and business taxes covered by Demand/Assessment Notice No.
FAS-1-84-003291-003296.13

Oppositions to both the basic and supplemental motions for reconsideration were filed by private respondent
Citytrust.14 Thereafter, the Court of Tax Appeals issued a resolution denying both motions for the reason that Section
52 (b) of the Tax Code, as implemented by Revenue Regulation

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6-85, only requires that the claim for tax credit or refund must show that the income received was declared as part of
the gross income, and that the fact of withholding was duly established. Moreover, with regard to the argument
raised in the supplemental motion for reconsideration anent the deficiency tax assessment against herein petitioner,
the tax court ruled that since that matter was not raised in the pleadings, the same cannot be considered, invoking
therefor the salutary purpose of the omnibus motion rule which is to obviate multiplicity of motions and to discourage
dilatory pleadings.15

As indicated at the outset, a petition for review was filed by herein petitioner with respondent Court of Appeals which
in due course promulgated its decision affirming the judgment of the Court of Tax Appeals. Petitioner eventually
elevated the case to this Court, maintaining that said respondent court erred in affirming the grant of the claim for
refund of Citytrust, considering that, firstly, said private respondent failed to prove and substantiate its claim for such
refund; and, secondly, the bureau's findings of deficiency income and business tax liabilities against private
respondent for the year 1984 bars such payment.16

After a careful review of the records, we find that under the peculiar circumstances of this case, the ends of
substantial justice and public interest would be better subserved by the remand of this case to the Court of Tax
Appeals for further proceedings.

It is the sense of this Court that the BIR, represented herein by petitioner Commissioner of Internal Revenue, was
denied its day in court by reason of the mistakes and/or negligence of its officials and employees. It can readily be
gleaned from the records that when it was herein petitioner's turn to present evidence, several postponements were
sought by its counsel, the Solicitor General, due to the unavailability of the necessary records which were not
transmitted by the Refund Audit Division of the BIR to said counsel, as well as the investigation report made by the
Banks/Financing and Insurance Division of the said bureau/ despite repeated requests.17 It was under such a
predicament and in deference to the tax court that ultimately, said records being still unavailable, herein petitioner's
counsel was constrained to submit the case for decision on February 20, 1991 without presenting any evidence.

For that matter, the BIR officials and/or employees concerned also failed to heed the order of the Court of Tax
Appeals to remand the records to it pursuant to Section 2, Rule 7 of the Rules of the Court of Tax Appeals which
provides that the Commissioner of Internal Revenue and the Commissioner of Customs shall certify and forward to
the Court of Tax Appeals, within ten days after filing his answer, all the records of the case in his possession, with
the pages duly numbered, and if the records are in separate folders, then the folders shall also be numbered.

The aforestated impassé came about due to the fact that, despite the filing of the aforementioned initiatory petition in
CTA Case No. 4099 with the Court of Tax Appeals, the Tax Refund Division of the BIR still continued to act
administratively on the claim for refund previously filed therein, instead of forwarding the records of the case to the
Court of Tax Appeals as ordered.18

It is a long and firmly settled rule of law that the Government is not bound by the errors committed by its agents.19 In
the performance of its governmental functions, the State cannot be estopped by the neglect of its agent and officers.
Although the Government may generally be estopped through the affirmative acts of public officers acting within
their authority, their neglect or omission of public duties as exemplified in this case will not and should not produce
that effect.

Nowhere is the aforestated rule more true than in the field of taxation.20 It is axiomatic that the Government cannot
and must not be estopped particularly in matters involving taxes. Taxes are the lifeblood of the nation through which
the government agencies continue to operate and with which the State effects its functions for the welfare of its
constituents.21 The errors of certain administrative officers should never be allowed to jeopardize the Government's
financial position,22 especially in the case at bar where the amount involves millions of pesos the collection whereof,
if justified, stands to be prejudiced just because of bureaucratic lethargy.

Further, it is also worth nothing that the Court of Tax Appeals erred in denying petitioner's supplemental motion for
reconsideration alleging bringing to said court's attention the existence of the deficiency income and business tax
assessment against Citytrust. The fact of such deficiency assessment is intimately related to and inextricably
intertwined with the right of respondent bank to claim for a tax refund for the same year. To award such refund
despite the existence of that deficiency assessment is an absurdity and a polarity in conceptual effects. Herein
private respondent cannot be entitled to refund and at the same time be liable for a tax deficiency assessment for
the same year.

The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts stated therein are
true and correct. The deficiency assessment, although not yet final, created a doubt as to and constitutes a
challenge against the truth and accuracy of the facts stated in said return which, by itself and without unquestionable
evidence, cannot be the basis for the grant of the refund.

Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the applicable law when the claim
of Citytrust was filed, provides that "(w)hen an assessment is made in case of any list, statement, or return, which in
the opinion of the Commissioner of Internal Revenue was false or fraudulent or contained any understatement or

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undervaluation, no tax collected under such assessment shall be recovered by any suits unless it is proved that the
said list, statement, or return was not false nor fraudulent and did not contain any understatement or undervaluation;
but this provision shall not apply to statements or returns made or to be made in good faith regarding annual
depreciation of oil or gas wells and mines."

Moreover, to grant the refund without determination of the proper assessment and the tax due would inevitably
result in multiplicity of proceedings or suits. If the deficiency assessment should subsequently be upheld, the
Government will be forced to institute anew a proceeding for the recovery of erroneously refunded taxes which
recourse must be filed within the prescriptive period of ten years after discovery of the falsity, fraud or omission in
the false or fraudulent return involved.23 This would necessarily require and entail additional efforts and expenses on
the part of the Government, impose a burden on and a drain of government funds, and impede or delay the
collection of much-needed revenue for governmental operations.

Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both logically necessary and legally
appropriate that the issue of the deficiency tax assessment against Citytrust be resolved jointly with its claim for tax
refund, to determine once and for all in a single proceeding the true and correct amount of tax due or refundable.

In fact, as the Court of Tax Appeals itself has heretofore conceded, 24 it would be only just and fair that the taxpayer
and the Government alike be given equal opportunities to avail of remedies under the law to defeat each other's
claim and to determine all matters of dispute between them in one single case. It is important to note that in
determining whether or not petitioner is entitled to the refund of the amount paid, it would necessary to determine
how much the Government is entitled to collect as taxes. This would necessarily include the determination of the
correct liability of the taxpayer and, certainly, a determination of this case would constitute res judicata on both
parties as to all the matters subject thereof or necessarily involved therein.

The Court cannot end this adjudication without observing that what caused the Government to lose its case in the
tax court may hopefully be ascribed merely to the ennui or ineptitude of officialdom, and not to syndicated intent or
corruption. The evidential cul-de-sac in which the Solicitor General found himself once again gives substance to the
public perception and suspicion that it is another proverbial tip in the iceberg of venality in a government bureau
which is pejoratively rated over the years. What is so distressing, aside from the financial losses to the Government,
is the erosion of trust in a vital institution wherein the reputations of so many honest and dedicated workers are
besmirched by the acts or omissions of a few. Hence, the liberal view we have here taken pro hac vice, which may
give some degree of assurance that this Court will unhesitatingly react to any bane in the government service, with a
replication of such response being likewise expected by the people from the executive authorities.

WHEREFORE, the judgment of respondent Court of Appeals in CA-G.R. SP No. 26839 is hereby SET ASIDE and
the case at bar is REMANDED to the Court of Tax Appeals for further proceedings and appropriate action, more
particularly, the reception of evidence for petitioner and the corresponding disposition of CTA Case No. 4099 not
otherwise inconsistent with our adjudgment herein.

SO ORDERED.

Narvasa, C.J., Padilla, Puno and Mendoza, JJ., concur.

#Footnotes

1 Decision, Citytrust Banking Corporation vs. Commissioner of Internal Revenue, May 28, 1991,
penned by Associate Judge Ernesto D. Acosta with the concurrence of Presiding Judge Alex Z. Reyes
and Associate Judge Constante C. Roaquim; Rollo, 26.

2 Decision, Commissioner of Internal Revenue vs. Citytrust Banking Corporation, promulgated on July
31, 1992, with Associate Justice Manuel C. Herrera as ponente and Associate Justices Nicolas A.
Lapena, Jr. and Maria Alicia M. Austria concurring; Rollo, 68.

3 Original Record, CTA Case No. 4099, 11.

4 Ibid., id., 1-7.

5 Ibid., id., 43-46.

6 Ibid., id., 220.

7 Ibid., id., 221.

8 Ibid., id., 225.

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9 Ibid., id., 228.

10 Rollo, 41.

11 Ibid., 28-40.

12 Ibid., id., 43.

13 Original Record, CTA Case No. 4099, 267.

14 Ibid., id., 278.

15 Ibid., id., 352.

16 Rollo, 13.

17 Original Record, CTA Case No. 4099, 215-219.

18 Ibid., id., 20.

19 Republic vs. Intermediate Appellate Court, et al., G.R. No. 69138, May 19, 1992, 209 SCRA 90.

20 Luzon Stevedoring Corporation vs. Court of Tax Appeals, et al., L-21005, October 22, 1966, 18
SCRA 436; Commissioner of Internal Revenue vs. Abad, L-19627, June 27, 1968, 23 SCRA 1132.

21 Dayrit, et al., vs. Cruz, L-39910, September 21, 1988, 165 SCRA 571.

22 Pineda vs. Court of First Instance of Tayabas, 52 Phil. 803 (1929).

23 Section 223, National Internal Revenue Code.

24 See Pirovano vs. Collector of Internal Revenue, CTA Case No. 375, September 29, 1958, as
reported in Montejo, C.G., Court of Tax Appeals Act Annotated,
1960 ed., Sec. 11.22, 60.

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