Commissioner of Internal Revenue v. Feria

FORMER FIFTH DIVISION [CA-G.R. SP No. 34156. February 24, 1999.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . JOSE Y. FERIA, in his capacity as Executor of the Estate of JOSE SAN AGUSTIN and THE COURT OF TAX APPEALS , respondents . D E C I S I O N COSICO , J p : Assailed in this Petition for Review is the Decision of the Court of Tax Appeals, dated April 21, 1994 in CTA Case No. 4956, entitled "Jose Y. Feria in his capacity as Executor of the Estate of Jose San Agustin versus Commissioner of Internal Revenue". The said decision modified the Commissioner of Internal Revenue's deficiency assessment for surcharge, interests, and other penalties imposed under Rule 248 of the National Internal Revenue Code (NIRC), against the estate of the late Jose San Agustin. It is maintained that the Court of Tax Appeals (CTA) erred: (1) in taking cognizance of the petition, and (2) in ordering the petitioner Commissioner of Internal Revenue (Commissioner, for brevity) to refund to the respondent estate the amount of P423,577.64 from the collected deficiency assessment of P438,040.38 representing surcharges, interest and other penalties, paid under protest by the said estate. The relevant antecedent facts are hereby restated in sum: Atty. Jose San Agustin of 2904 Kakarong St., Olympia , Makati died on June 27, 1990 leaving his wife Dra. Felisa L. San Agustin as sole heir. He left a holographic will executed on April 21, 1980 giving all his estate to his widow, and naming retired Justice Jose Y. Feria as Executor thereof. Probate proceedings were instituted on August 22, 1990, in the Regional Trial Court (RTC) of Makati, Branch 139, docketed as Sp. Proc. No. M-2554. Pursuantly, notice of decedent's death was sent to the Commissioner of Internal Revenue on August 30, 1990. On September 3, 1990, an estate tax return reporting an estate tax due of P1,676,432.00 was filed on behalf of the estate, with a request for an extension of two years for the payment of the tax, inasmuch as the decedent's widow does not personally have sufficient funds, and that the payment will have to come from the estate. In his letter/answer dated September 4, 1990, BIR Deputy Commissioner Victor A. Deoferio, Jr. granted the heirs an extension of only six (6) months, subject to the imposition of penalties and interests under Sections 248 and 249 of the National Internal Revenue Code, as amended. In the probate proceedings, on October 11, 1990, the RTC allowed the will and appointed Jose Feria as Executor of the estate. On December 5, 1990, the executor submitted to the probate court an inventory of the estate with a motion for authority to withdraw funds for the payment of the estate tax. Such authority was granted by the probate court on March 5, 1991. Thereafter, on March 8, 1991, the executor paid the estate tax. Such authority was granted by the probate court on March 5, 1991. Thereafter, on March 8, 1991, the executor paid the estate tax in the amount of P1,676,432.00 as reported in the Tax Return filed with the BIR. This was well within the six(6) months extension period granted by the BIR. On September 23, 1991, the widow of the deceased, Felisa L. San Agustin, received a Pre-Assessment Notice from the BIR dated August 29, 1991, showing a deficiency estate tax of P538,509.50, which, including surcharge, interest and penalties amounted to P976,540.00. On October 1, 1991, within the ten-day period given in the pre-assessment notice, the executor filed a letter with the petitioner Commissioner expressing readiness to pay the basic deficiency estate tax of P538,509.50 as soon as the Regional Trial Court approves withdrawal thereof, but, requesting that the surcharge, interest, and other penalties, amounting to P438,040.38 be waived, considering that the assessed deficiency arose only on account of the difference in zonal valuation used by the Estate and the BIR, and that the estate tax due per return of P1,767,432.00 was already paid in due time within the extension period. On October 4, 1991, the Commissioner issued an Assessment Notice reiterating the demand in the pre-assessment notice and requesting payment on or before thirty (30) days upon receipt thereof. In a letter dated October 31, 1991, the executor requested the Commissioner a reconsideration of the assessment of P976,549.00 and waiver of the surcharge, interest, etc. On December 18, 1991, the Commissioner accepted payment of the basic deficiency tax in the amount of P538,509.50 through its Receivable Accounts Billing Division. The request for reconsideration was not acted upon until January 21, 1993, when the executor received a letter, dated September 21, 1992, signed by the Commissioner, stating that there is no legal justification for the waiver of the interests, surcharge and compromise penalty in this case, and requiring full payment of P438,040.38 representing such charges within ten (10) days from receipt thereof. llcd In view thereof, the respondent estate paid the amount of P438,040.38 under protest on January 25, 1993. On February 18, 1993, a Petition for Review was filed by the executor with the CTA with the prayer that the Commissioner's letter/decision dated September 21, 1992 be reversed and that a refund of the amount of P438,040.38 be ordered. The Commissioner opposed the said petition, alleging that the CTA's jurisdiction was not properly invoked inasmuch as no claim for a tax refund of the deficiency tax collected was filed with the Bureau of Internal Revenue before the petition was filed, in violation of Sections 204 and 230 of the National Internal Revenue Code. Moreover, there is no statutory basis for the refund of the deficiency charges, interests and penalties charged by the Commissioner upon the estate of the decedent. Upholding its jurisdiction over the dispute, the CTA rendered its Decision dated April 21, 1994 modifying the CIR's assessment for surcharge, interests and other penalties from P438,040.38 to P13,462.74, representing interest on the deficiency estate tax, for which reason the CTA ordered the reimbursement to the respondent estate the balance of p423,577.64, to wit: "WHEREFORE, respondent's deficiency assessment for surcharge, interests, and other penalties is hereby modified and since petitioner has clearly paid the full amount of P438,040.38, respondent is hereby ordered to refund to the Estate of Jose San Agustin the overpayment amounting to P423,577.64. SO ORDERED." According to the CTA, the absence of a written claim for Tax Refund or Credit notwithstanding, the CTA can still take cognizance of the case inasmuch as: "Petitioner should not be strictly bound by the requirements for claims for refund, because at the very outset, it was the assessment that is being assailed. The petition for review that was filed, in the main sought the assessment's reversal and only as a necessary consequence the refund of the payment made under duress. The fact remains that it involves a disputed assessment, a reconsideration of which was sought within the reglementary period. When it was turned down, a timely appeal was made to this Court in order to reverse the denial of the reconsideration of the deficiency assessment. Jurisdiction over the subject matter is determined upon the allegations made in the complaint, irrespective of whether the plaintiff is entitled or not to recover upon the claims asserted therein a matter resolved only after and as a result of the trial. Neither can the jurisdiction of the court be made to depend upon the pleas and defenses made by the defendant in his answer or motion to dismiss. If such were the rule, the question of jurisdiction would depend almost entirely upon the defendant. (Cardenas v. Camus, G.R. No. L-17191, July 30, 1962.) The subject matter of any given case is determined not by the nature of the action which a party is entitled under the facts and the law to bring, but the nature and character of the pleadings and issues submitted by the parties to the court for trial and judgment. (Philippine Association of Free Labor Unions and Bautista v. Padilla, et al., G.R. No. L-11727, November 28, 1959.) In view of the circumstances peculiar to this case, We find that it is within the jurisdiction of this Court to take cognizance of the petition for review at bar." (CTA Decision, p. 82, Records) In ruling to refund the assessed surcharge amounting to P134,627.58, representing 25% of the deficiency estate tax of P538,509.50 charged under Section 248 of the National Internal Revenue Code, as amended, the CTA observed that it does not appear under what ground of the four (4) cases enumerated in Section 248 (a) of the Tax Code the 25% surcharge is being imposed. A close reading of Section 248 does not warrant a conclusion that whenever a deficiency tax is found due, the 25% surcharge will be automatically imposed. For the surcharge to apply, it must fall within any of the four (4) cases mentioned in Section 248 (a), which are: "SECTION 248. Civil Penalties . (a) There shall be imposed, in addition to the tax required to be paid, penalty equivalent to twenty-five percent (25%) of the amount due in the following cases: (1) Failure to file any return required under the provisions of this Code or regulations on the prescribed; or (2) Filing a return with an integral revenue officer other than those with whom the return is required to be filed; (3) Failure to pay the tax within the time prescribed for its payment; or (4) Failure to pay the full amount of tax shown on any return required to be filed under the provisions of this Code or regulations, or the full amount of tax due for which no return is required to be filed, on or before the date described for its payment. xxx xxx xxx As for the assessed interests, the CTA ruled that petitioner is liable only for P13,462.74 representing interest on the deficiency estate tax found due by the Tax Commissioner from November 4, 1991, or the thirtieth (30th) day from receipt by the petitioner of the Assessment Notice, to December 19, 1991, when the assessed deficiency estate tax was paid. All other interest assessments were found to be undue. Petitioner was also ordered liable for P1,000.00 for failure to include the required certification by a Certified Public Accountant to the estate tax return filed. The Commissioner of Internal Revenue raised the following issues in its Petition for Review: I Whether respondent Tax Court has jurisdiction to take cognizant of the case considering the Failure of private respondent to comply with the mandatory requirements of Section 204 and 230 of the National Internal Revenue Code. II Whether or not respondent Tax Court was correct in ordering the refund to the Estate of Jose San Agustin the reduced amount of P423,577.64 as alleged overpaid surcharge, interests and compromise penalty imposed on the basic deficiency estate tax of P538,509.50 due on the transmission of the said Estate to the sole heir in 1990. In assailing the CTA's jurisdiction over the petition filed by the respondent estate, the petitioner submits that the assessment of the Commissioner under Section 229 (e) of the NIRC, and the subsequent payment of P438,040.38 representing surcharges, interest and compromise imposed on the deficiency estate tax due, the assessment has already become final and unappealable, and there is no more justiciable issue for the CTA to hear. Petitioner further maintains that with the failure to file a Tax Refund or Credit pursuant to Sections 204 (3) and 230 of the Tax Code, the petition filed before the CTA should not have been allowed. It necessarily follows, therefore, that the reimbursement of the assessments for surcharge, interest, and compromise penalties upon the deficiency estate tax ordered by the CTA should be set aside. Even on the supposition that the said petition could be allowed, the assessments for surcharges, etc. are proper as the imposition of the same is mandatory, pursuant to Section 248 and 249 of the Tax Code. The respondent estate in turn filed its Comment on December 16, 1994, sustaining the jurisdiction of the CTA. It is claimed that it would be unreasonable to expect a claim for tax refund or credit from the respondent estate, inasmuch as it had already filed repeated requests for a waiver of the surcharge, interests, and compromise penalty. A claim for refund or tax credit would have been a useless affair after the Commissioner, in his letter dated September 21, 1992 (received on January 21, 1993), denied with finality the respondent estate's requests for a waiver of the surcharge, interest and compromise penalty. Respondent also reiterates the CTA's ruling to the effect that the assessment of surcharges and other impositions are not forthcoming. On October 20, 1998, this case was re-raffled to this ponente , after the former assignee of the case retired. Upon due study, on November 16, 1998, the Court through the undersigned, gave due course to the petition, and required the CTA to elevate the original records. After both parties have filed their respective memoranda, the Court is now prepared to resolve the petition upon its merits. On the issue of the propriety of the petition for review filed with the Court of Tax Appeals, the clear requirement in the Tax Code is that no suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund on credit has been duly filed with the Commissioner of Internal Revenue. (Section 230, NIRC) Under Section 204 (3) of the Code, such claim for refund or credit must be (1) in writing, stating clearly the basis or grounds for such claim; and (2) filed with the Commissioner within two (2) years after the payment of the tax or penalty. Admittedly, the respondent estate had failed to file a claim for tax refund or credit before it filed its petition with the CTA. The CTA observed, however, that such lapse was forgivable, as the petition "involved a disputed assessment, a reconsideration of which was sought within the reglementary period. When it was turned down, a timely appeal was made to (the CTA) in order to reverse the denial of the reconsideration of the deficiency assessment." The CTA proposes therefore that the filing of the motion for reconsideration of the deficiency assessment, before the payment of the same, with the BIR is substantial compliance with the requirement of the law for a tax refund or credit. Due study shows, however, that the letter, dated October 31, 1991, of the executor Jose Feria to Deputy Commissioner Victor A. Deoferio of the BIR, asking for a reconsideration of the assessment embodied in the Notice of Assessment sent to the respondent estate, is not the claim for refund/credit required by the law to be filed before the petition for review could be taken cognizance of by the CTA. What is envisioned in Sections 204 (3) and 230 of the NIRC, is a claim for refund/credit of tax before maintaining a suit or proceeding in any court are: to afford the Commissioner an opportunity to correct the mistake, if any, committed by him or his subordinate officers in collecting the tax; and to notify the Government that the taxes sought to be refunded are under question and that, therefore, such notice should be borne in mind in estimating the revenue available for expenditure. (Bermejo v. Collector of Internal Revenue, 87 Phil 96 [1950]). Moreover, the filing of the claim is mandatory and is a condition precedent before any suit or proceeding for recovery of the erroneously or illegally collected tax can proceed. (Republic v. Vda. de Lao, 4 SCRA 246 [1962]) The rule is that the right to appeal, being merely a statutory privilege, should be exercised only in the manner and in accordance with the provisions of law. (Philippine Commercial International Bank v. Court of Tax Appeals, 229 SCRA 560 [1994]) The Court further finds the imposition of surcharge, interests, etc. under Art. 248 of the NIRC to be in accord with the law. Under Section 248 of the NIRC, a civil penalty of twenty-five percent (25%) of the amount of tax due shall be additionally imposed in the following cases: (1) Failure to file any return required under the provisions of the NIRC or regulations on the date prescribed; or (2) Filing a return with an internal revenue officer other than those with whom the return is required to be filed; or (3) Failure to pay the tax within the time prescribed for its payment; or (4) Failure to pay the full amount of tax shown on any return required to be filed under the provisions of the NIRC or regulations, or the full amount of tax due for which no return is required to be filed, on or before the date prescribed for its payment. According to Revenue Memorandum Circular No. 41-89, dated June 20, 1989, the civil penalty of 25% of the amount due, in addition to the tax required to be paid, which is authorized to be imposed under Section 2448 (a)(3) of the Tax Code, shall be imposed not only on a deficiency tax where a formal assessment notice has been issued therefor, but even on a deficiency tax ascertained after investigation even if no assessment notice has not yet been issued. This is based on the fact that a deficiency tax assessed after investigation presupposes that the taxpayer failed to pay the correct amount of tax within the time prescribed for its payment as required by law. (Annot., 232 SCRA 27 [1994]) It cannot be argued, therefore, that with the requests made by the respondent estate tax and of the assessments for surcharge, interests, and other penalties, 248 of the NIRC, as with the refusal of the estate to pay the deficiency assessment even after the lapse of the period given for the payment thereof, the estate has thereby fallen under the purview of Section 248(a)(e) of the NIRC, meriting therefore, the imposition of the 25% surcharge in addition to the deficiency assessment. The filing of the request for the waiver of added penalties did not exempt the estate from payment of the same, inasmuch as such request for waiver of penalties has no legal basis. The imposition of the same, under Section 248 and 249 of the NIRC, in fact, is mandatory on the Commissioner. LexLib Tax laws imposing penalties for delinquencies are intended to hasten tax payments by punishing evasions or neglect of duty in respect thereof. If penalties could be condoned for flimsy reasons, the law imposing penalties for delinquencies would be rendered nugatory, and the maintenance of the Government and its multifarious activities will be adversely affected. (Philippine Refining Company v. Court of Tax Appeals, 256 SCRA 667 [1996]) WHEREFORE, premises considered, the instant petition for review is hereby GRANTED, and the Decision of the respondent Court of Tax Appeals is hereby REVERSED and SET ASIDE. SO ORDERED. Luna, Vidallon-Magtolis, JJ . , concur.