REPUBLIC OF THE PHILIPPINES, PLAINTIFF AND APPELLANT, VS. PAZ ARGUELLES VDA. DE LAO, CARMEN LAO, PACITA TERESA LAO AND CONCEPCION LAO, DEFENDANTS AND APPELLEES.

Appeal from a judgment of the Court of First Instance of Manila, Hon.
Carmelino G. Alvendia, presiding, the dispositive portion of which reads as
follows:

“* * * The alternative cause of action contained in defendants’ answer is
well taken. The sum of P2,198 representing the income tax due from the estate of
Gabriel Lao for the year 1950 should be deducted from the estate, subject to the
estate tax and since said estate tax without this deduction has already been
paid, the Collector of Internal Revenue should recompute the estate tax and the
overpayment should be deducted from the deficiency income tax now being claimed
against the heirs of Gabriel Lao.”

“* * * WHEREFORE, the Court orders the defendants jointly and severally to
pay the plaintiff the difference between P2,198 representing deficiency income
tax due from the estate of the deceased Gabriel Lao and the sum of the tax
credit to which the estate of Gabriel Lao is entitled as a result of the
reduction of the estate subject to inheritance due to the deficiency income tax
of P2,198 and the tax credits due to each of defendants for the over payment in
inheritance taxes made by each of them.” (ROA, pp. 36-37.)

On January 8, 1958, the Republic of the Philippines filed the present action
in the Court of First Instance of Manila for the recovery of the amount of
P2,198.00 as deficiency income tax of the spouses Gabriel Lao, now deceased, and
Paz Arguelles de Lao, for the year 1950, plus surcharge of 5% and interests
thereon. The complaint alleged that on April 16, 1961, the spouses filed a joint
income tax return for the year 1950, showing a net income of P36,889.91; that on
the basis of said return, a revised assessment notice was issued by the Bureau
of Internal Revenue on July 6, 1953, imposing an additional tax of P2,840.00 on
both spouses for said taxable income; that on August 5, 1953, after Gabriel Lao
had died, the lawyer of the spouses requested the Collector of Internal Revenue
for reinvestigation, and pursuant thereto another assessment was made on August
3, 1954, reducing the sum to P2,198.00; that on August 3, 1954, the Collector
demanded payment of the said amount of income tax for 1950 on or before
September 15, 1954; that upon failure of the heirs of the late Gabriel Lao and
his wife to pay said amount, the Collector imposed a surcharge of 5% on the sum
of P2,198.00 and an interest thereon at the rate of 1% per month from September
16, 1954 until fully paid and P20.00 as compromise penalty for late payment;
that neither the amount due nor the surcharge and interest were paid.

The defendants filed their answer on February 5, 1958, admitting the making
of the assessment against the spouses and the giving of notice thereof to the
latter or their representatives, and their refusal to pay the tax for the year
1950, in the amount of P2,198.00. They claim, as a defense, that they had
actually made payment thereof, or that if no payment had been made, the
collection of the tax has prescribed because more than two years have elapsed
since the same should have been collected, and that notwithstanding the
Collector’s knowledge of the death of said Gabriel Lao he failed and neglected
to demand said taxes within said period of time. In a paragraph captioned
“Alternative Cause of Action”, the defendants allege:

“14. Assuming arguendo that the sum of P2,198.00 as claimed by the plaintiff
as supposed income tax of the late Don Gabriel Lao for 1950 is proper, yet the
same is a proper deduction from the estate of the said deceased, and said amount
will naturally proportionately reduce the estate and inheritance taxes payable
by the defendant’s.” (par. 14, p. 29 ROA).

After trial, the trial court found the following facts: On April 16, 1951, a
joint income tax return of the spouses Gabriel Lao and Paz Arguelles was filed
with the Bureau of Internal Revenue. At first, an assessment of P9,100 was
imposed and this was paid by the spouses. Subsequently, however, an additional
deficiency income tax of P2,480.00 was imposed, for which an assessment notice
was sent on July 6, 1953. When said assessment was sent, Gabriel Lao was already
dead, but the notice was received by his widow. The deficiency income tax was
reduced to P2,198.00 after a reinvestigation of the assessment upon the
request of the lawyers of the spouses in a letter dated August 5, 1953.

The trial court found that the estate of the deceased Gabriel Lao and his
wife are liable for the sum of P2,198.00. However, it ordered the plaintiff to
recompute the estate tax of said Gabriel Lao and ordered defendants to pay the
plaintiff the difference between the deficiency tax of P2,198.00 and the amount
of the tax credit to which the estate is entitled, as a result of the
recomputation of the estate tax. Consequently, the Republic has appealed to this
Court.

Before this Court, the appellant argues that the decision of the court below
allowing recomputation and credit for overpayment of taxes already paid violates
the provisions of Sections 306 and 309 of the National Internal Revenue Code,
which read as follows:

“SEC. 306.—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 wrongful collected, until a claim for refund or
credit has been duly filed with the Collector of Internal Revenue; x x x 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.”

* * * * * * *

“SEC. 309.—The Collector of Internal Revenue may compromise any civil or
other case arising under this Code or other law or part of law administered by
the Bureau of Internal Revenue, may credit or refund taxes erroneously or
illegally received, or penalties imposed without authority, and may remit before
payment any tax that appears to be unjustly assessed or excessive.”

“* * * The authority of the Collector of Internal Revenue to credit or refund
taxes or penalties under this section can only be exercised if the claim for
credit or refund is made in writing and filed with him within two years after
the payment of the tax or penalty.”

While section 309 permits the Collector of Internal Revenue to compromise any
action or claim arising under the National Internal Revenue Code, and credit
taxes erroneously or illegally received, this power is subject to the provision
of section 306 to the effect that before a proceeding can be maintained for the
recovery of an internal revenue tax erroneously or illegally assessed or
collected, a claim for refund or credit of the tax claimed to have been
erroneously or illegally collected must be filed with the Collector of Internal
Revenue within two years from the date of the payment of the tax or the penalty.
The presentation of the claim for refund within the two-year period is a
mandatory provision which is a condition precedent to the approval of a
taxpayer’s right of action for refund. (See Johnston Lumber Co., Inc. vs. Court
of Tax Appeals, et al., 101 Phil., 151; 50 Off. Gaz., 5226, and cases cited
therein.) The claim for refund is stated in the defendant’s “alternative cause
of action,” wherein it is claimed that the amount of P2,198.00 assessed as
deficiency income tax should first be deducted from the estate of Don Gabriel
Lao, and the reduction in the estate tax caused by the reduction of the estate
in the amount of P2,198, be credited in favor of the estate against the
deficiency income tax herein sought to be recovered. The deficiency income tax
was assessed on August! 3, 1954 and payment thereof was demanded by the
Collector of Internal Revenue on or before September 15, 1954. But the
defendants’ answer in the case at bar, which contains the “alternative cause of
action” was presented on February 25, 1958, or a period of three years and five
months after the demand for the payment of the tax was made. Consequently, the
demand for the credit of the supposed overpaid tax against the deficiency income
tax of P2,198, clearly falls within the prohibition contained in section 306 of
the National Internal Revenue Code above quoted.

Wherefore, the judgment appealed from is hereby reversed and the defendants
ordered to pay the amount demanded in the complaint, P2,198, plus 5%
surcharge and 1% monthly interest thereon beginning September 16, 1954 to the
date of full payment, and P20 as compromise penalty for late payment. Without
costs. So ordered.

Bengzon, C. J., Padilla, Bautista Angelo, Concepcion, Reyes, J. B. L.,
Barrera, Paredes, Dizon, and De Leon, JJ., concur.