Philippine Bank of Communications vs. Commissioner of Internal Revenue (GR 112024, 28 January 1999)
Second Division, Quisumbing (J): 4 concur

Facts: The Philippine Bank of Communications (PBCom), a commercial banking corporation duly organized under Philippine laws, filed its quarterly income tax returns for the first and second quarters of 1985, reported profits, and paid the total income tax of P5,016,954.00. The taxes due were settled by applying PBCom’s tax credit memos and accordingly, the Bureau of Internal Revenue (BIR) issued Tax Debit Memo 0746-85 and 0747-85 for P3,401,701.00 and P1,615,253.00, respectively. Subsequently, however, PBCom suffered losses so that when it filed its Annual Income Tax Returns for the year-ended 31 December 1985, it declared a net loss of P25,317,228.00, thereby showing no income tax liability. For the succeeding year, ending 31 December 31, 1986, PBCom likewise reported a net loss of P14,129,602.00, and thus declared no tax payable for the year. But during these two years, PBCom earned rental income from leased properties. The lessees withheld and remitted to the BIR withholding creditable taxes of P282,795.50 in 1985 and P234,077.69 in 1986. On 7 August 1987, PBCom requested the Commissioner of Internal Revenue, among others, for a tax credit of P5,016,954.00 representing the overpayment of taxes in the first and second quarters of 1985. Thereafter, on 25 July 1988, PBCom filed a claim for refund of creditable taxes withheld by their lessees from property rentals in 1985 for P282,795.50 and in 1986 for P234,077.69.

Pending the investigation of the Commissioner of Internal Revenue, PBCom instituted a Petition for Review on 18 November 1988 before the Court of Tax Appeals (CTA).  On 20 May 1993, the CTA dismissed the petition for lack of merit; and thus denied PBCom’s claim for refund/tax credit of overpaid income tax for 1985 in the amount of P5,299,749.95 for having been filed beyond the reglementary period, and likewise denied the 1986 claim for refund amounting to P234,077.69 since PBCom has opted and automatically credited the same to the succeeding year.  On 22 June 1993, PBCom filed a Motion for Reconsideration of the CTA’s decision but the same was denied due course for lack of merit.

PBCom filed a petition for review of CTA decision and resolution with the Court of Appeals. On 22 September 1993, the Court of Appeals affirmed in toto the CTA’s resolution dated 20 July 1993. Hence the petition for review with the Supreme Court. The Supreme Court denied the petition and affirmed the decision of the Court of Appeals appealed from, with costs against PBCom.

1.    Purpose of taxes, due process of law, and claims for refund or tax credit
Basic is the principle that “taxes are the lifeblood of the nation.” The primary purpose is to generate funds for the State to finance the needs of the citizenry and to advance the common weal. Due process of law under the Constitution does not require judicial proceedings in tax cases. This must necessarily be so because it is upon taxation that the government chiefly relies to obtain the means to carry on its operations and it is of utmost importance that the modes adopted to enforce the collection of taxes levied should be summary and interfered with as little as possible.  From the same perspective, claims for refund or tax credit should be exercised within the time fixed by law because the BIR being an administrative body enforced to collect taxes, its functions should not be unduly delayed or hampered by incidental matters.

2.    Section 230 NIRC (1977)
Section 230 of the National Internal Revenue Code (NIRC) of 1977 (now Sec. 229, NIRC of 1997) provides for the prescriptive period for filing a court proceeding for the recovery of tax erroneously or illegally collected. Section 230 (Recovery of tax erroneously or illegally collected) provides 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 or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit or proceeding shall be begun after the expiration of two years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment; Provided however, That the Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid.”

3.    Reckoning period for claim of refund or credit
The rule states that the taxpayer may file a claim for refund or credit with the Commissioner of Internal Revenue, within two (2) years after payment of tax, before any suit in CTA is commenced. The two-year prescriptive period provided, should be computed from the time of filing the Adjustment Return and final payment of the tax for the year.

4.    Application of Section 230 of 1977 NIRC; CIR vs. Phil-Am Life Insurance Co. and CIR vs. TMX Sales
In Commissioner of Internal Revenue vs. Philippine American Life Insurance Co., the Supreme Court explained the application of Section 230 of 1977 NIRC. Therein, the Court stated that the prescriptive period of two years should commence to run only from the time that the refund is ascertained, which can only be determined after a final adjustment return is accomplished. As earlier said in the TMX Sales case, Sections 68, 16 69, 17 and 70 18 on Quarterly Corporate Income Tax Payment and Section 321 should be considered in conjunction with it.

5.    RMC 7-85 invalid
When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period of two years to ten years on claims of excess quarterly income tax payments, such circular created a clear inconsistency with the provision of Section 230 of 1977 NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated guidelines contrary to the statute passed by Congress.

6.    Nature of Revenue memorandum-circulars
It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the sense of more specific and less general interpretations of tax laws) which are issued from time to time by the Commissioner of Internal Revenue.

7.    Interpretation by executive officers entitled to great respect but not conclusive
It is widely accepted that the interpretation placed upon a statute by the executive officers, whose duty is to enforce it, is entitled to great respect by the courts. Nevertheless, such interpretation is not conclusive and will be ignored if judicially found to be erroneous. Thus, courts will not countenance administrative issuances that override, instead of remaining consistent and in harmony with, the law they seek to apply and implement. As held in the case of People vs. Lim, the rules and regulations issued by administrative officials to implement a law cannot go beyond the terms and provisions of the latter.

8.    Memorandum-circular does not shield taxpayer from judicial action
Fundamental is the rule that the State cannot be put in estoppel by the mistakes or errors of its officials or agents. Article 8 of the Civil Code recognizes judicial decisions, applying or interpreting statutes as part of the legal system of the country. But administrative decisions do not enjoy that level of recognition. A memorandum-circular of a bureau head could not operate to vest a taxpayer with a shield against judicial action. For there are no vested rights to speak of respecting a wrong construction of the law by the administrative officials and such wrong interpretation could not place the Government in estoppel to correct or overrule the same. The non-retroactivity of rulings by the Commissioner of Internal Revenue is not applicable because the nullity of RMC 7-85 was declared by the courts and not by the Commissioner of Internal Revenue. Lastly, it must be noted that a claim for refund is in the nature of a claim for exemption and should be construed in strictissimi juris against the taxpayer.

9.    Section 69 of the 1977 NIRC; Availment of the exclusive relief of refund or automatic tax credit
Section 69 of the 1977 NIRC (now Section 76 of the 1997 NIRC) provides that any excess of the total quarterly payments over the actual income tax computed in the adjustment or final corporate income tax return, shall either (a) be refunded to the corporation, or (b) may be credited against the estimated quarterly income tax liabilities for the quarters of the succeeding taxable year. The corporation must signify in its annual corporate adjustment return (by marking the option box provided in the BIR form) its intention, whether to request for a refund or claim for an automatic tax credit for the succeeding taxable year. To ease the administration of tax collection, these remedies are in the alternative, and the choice of one precludes the other.

10.    PBCom opted to apply for automatic tax credit
PBCom opted to apply for automatic tax credit. This was the basis used (vis-a-vis the fact that the 1987 annual corporate tax return was not offered by the petitioner as evidence) by the CTA in concluding that PBCom had indeed availed of and applied the automatic tax credit to the succeeding year, hence it can no longer ask for refund, as to [sic] the two remedies of refund and tax credit are alternative.  Since PBCom opted for an automatic tax credit in accordance with Section 69 of the 1977 NIRC, as specified in its 1986 Final Adjusted Income Tax Return, such a finding of fact must be respected by the Supreme Court. This, especially, in light that the 1987 annual corporate tax return of PBCom was not offered as evidence to controvert said fact.