BADONG, CAREEN DOMINICA O.

TAX II
JD3A TAXPAYER’S REMEDIES

PHILIPPINE BANK OF COMMUNICATIONS v. COMMISSIONER OF INTERNAL REVENUE

G.R. No. 112024 | January 28, 1999

The two-year period [for claiming a refund] cannot be extended by the BIR by a mere revenue
memorandum.

FACTS

Petitioner, 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 Nos. 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 December 31, 1986, the petitioner 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 August 7, 1987, petitioner 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 July 25, 1988, petitioner 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 respondent CIR, petitioner, on November 18, 1988, instituted a
Petition for Review before the Court of Tax Appeals (CTA). In 1993, the CTA rendered a decision
which denied the request of petitioner for a tax refund or credit in the sum amount of
P5,299,749.95, on the ground that it was filed beyond the two-year reglementary period provided
for by law. The petitioner's claim for refund in 1986 amounting to P234,077.69 was likewise
denied on the assumption that it was automatically credited by PBCom against its tax payment
in the succeeding year.

Petitioner filed a Motion for Reconsideration but the same was denied due course for lack of
merit. Thereafter, PBCom filed a petition for review of said decision and resolution of the CTA
with the Court of Appeals. However, the Court of Appeals affirmed in toto the CTA's resolution.
Hence, this petition.

Petitioner argues that its claims for refund and tax credits are not yet barred by prescription
relying on the applicability of Revenue Memorandum Circular No. 7-85 issued on April 1, 1985.
The circular states that overpaid income taxes are not covered by the two-year prescriptive
period under the tax Code and that taxpayers may claim refund or tax credits for the excess
quarterly income tax with the BIR within ten (10) years under Article 1144 of the Civil Code.

ISSUE

Whether or not the Court of Appeals erred in denying the plea for tax refund or tax credits on the
ground of prescription, despite petitioner's reliance on RMC No. 7-85, changing the prescriptive
period of two years to ten years?

RULING

NO. Contrary to the petitioner's contention, the relaxation of revenue regulations by RMC 7-85 is
not warranted as it disregards the two-year prescriptive period set by law.

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.

Sec. 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, viz.:

Sec. 230. Recovery of tax erroneously or illegally collected. — 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 proceedings shall 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.
(Emphasis supplied)

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.
In Commissioner of Internal Revenue vs. Philippine American Life Insurance Co., the Court
explained the application of Sec. 230 of 1977 NIRC, as follows:

Clearly, 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. x x x

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 Sec. 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.

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. 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.

In the case of People vs. Lim, it was held that rules and regulations issued by administrative
officials to implement a law cannot go beyond the terms and provisions of the latter.

Further, fundamental is the rule that the State cannot be put in estoppel by the mistakes or errors
of its officials or agents. As pointed out by the respondent courts, the nullification of RMC No.
7-85 issued by the Acting Commissioner of Internal Revenue is an administrative interpretation
which is not in harmony with Sec. 230 of 1977 NIRC. for being contrary to the express provision
of a statute. Hence, his interpretation could not be given weight for to do so would, in effect,
amend the statute.

It is likewise argued that the CIR, after promulgating RMC No. 7-85, is estopped by the principle
of non-retroactively of BIR rulings. Again the Court does not agree. The Memorandum Circular,
stating that a taxpayer may recover the excess income tax paid within 10 years from date of
payment because this is an obligation created by law, was issued by the Acting Commissioner of
Internal Revenue. On the other hand, the decision, stating that the taxpayer should still file a
claim for a refund or tax credit and corresponding petition for review within the two-year
prescription period, and that the lengthening of the period of limitation on refund from two to
ten years would be adverse to public policy and run counter to the positive mandate of Sec. 230,
NIRC, - was the ruling and judicial interpretation of the Court of Tax Appeals. Estoppel has no
application in the case at bar because it was not the CIR who denied petitioner's claim of refund
or tax credit. Rather, it was the Court of Tax Appeals who denied (albeit correctly) the claim and
in effect, ruled that the RMC No. 7-85 issued by the Commissioner of Internal Revenue is an
administrative interpretation which is out of harmony with or contrary to the express provision
of a statute (specifically Sec. 230, NIRC), hence, cannot be given weight for to do so would in
effect amend the statute.

Art. 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
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. Moreover, the non-
retroactivity of rulings by the Commissioner of Internal Revenue is not applicable in this case
because the nullity of RMC No. 7-85 was declared by respondent courts and not by the CIR.
Lastly, it must be noted that, as repeatedly held by this Court, a claim for refund is in the nature
of a claim for exemption and should be construed in strictissimi juris against the taxpayer.

The petitioner likewise alleges that the CA seriously erred in affirming the CTA's decision denying
its claim for refund of P234,077.69 (tax overpaid in 1986), based on mere speculation, without
proof, that PBCom availed of the automatic tax credit in 1987.

Sec. 69 of the 1977 NIRC (now Sec. 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.

As stated by respondent CA:

Finally, as to the claimed refund of income tax over-paid in 1986 — the Court of Tax
Appeals, after examining the adjusted final corporate annual income tax return for taxable
year 1986, found out that petitioner 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 petitioner 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.

That the petitioner opted for an automatic tax credit in accordance with Sec. 69 of the 1977 NIRC,
as specified in its 1986 Final Adjusted Income Tax Return, is a finding of fact which we must
respect. Moreover, the 1987 annual corporate tax return of the petitioner was not offered as
evidence to contovert said fact. Thus, the Court bound by the findings of fact by respondent
courts, there being no showing of gross error or abuse on their part to disturb our reliance thereon.