COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. COURT OF APPEALS, CITYTRUST BANKING CORPORATION AND COURT OF TAX APPEALS, RESPONDENTS.

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 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                                                            P4,715,533.00

Less: 1984 Quarterly

payments             P16,214,599.00*

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 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 impasse 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 noting that the Court of Tax Appeals
erred in denying petitioner’s supplemental motion for reconsideration alleging
and 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 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 be 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., (Chairman), Padilla, Puno, and Mendoza, JJ., concur.

^[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.

^[9]
Ibid., id., 228.

^[10]
Rollo, 41.

^[11]
Ibid., 28-40.

^[12]
Ibid., 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.