G.R. No.

L-21731             March 31, 1966

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,

Lim Tian Teng Sons & Co., Inc., a domestic corporation with principal office in Cebu City, engaged in
1951 and 1952, among others, in the exportation of copra. The copra was weighed before shipment
in the port of departure and upon arrival in the port of destination. The weight before shipment was
called copra outturn. To allow for lose in weight due to shrinkage, said exporter collected only 95%
of the amount appearing in the letter of credit covering every copra outturn. The 5% balance
remained outstanding until final liquidation and adjustment.

On March 30, 1953 Lim Tian Teng Sons & Co., Inc. filed its income tax return for 1952 based on
accrued income and expenses. Its return showed a loss of P56,109.98. It took up as part of the
beginning inventory for 1952 the copra outturn shipped in 1951 in the sum of P95,500.00 already
partially collected, as part of its outstanding stock as of December 31, 1951.

In the audit and examination of taxpayer's 1952 income tax return, the Collector of Internal Revenue
eliminated the P95,500.00 outturn from the beginning inventory for 1952 and considered it as
accrued income for 1951. This increased taxpayer's 1952 net income by P95,500.00 which,
considering disallowances in the sum of P9,980.85, raised the taxpayer's net taxable income for
1952 to P50,370.87. Accordingly, in a letter dated January 16, 1957 (Exhibit C), received by Lim
Tian Teng Sons & Co., Inc. on January 30, 1957, the Collector of Internal Revenue assessed a
deficiency income tax of P10,074.00 and 50% surcharge thereon amounting to P5,037.00 and
demanded payment thereof not later than February 15, 1957.

On January 31, 1957 Lim Tian Teng Sons & Co., Inc. requested reinvestigation of its 1952 income
tax liability. The Collector of Internal Revenue did not reply; instead, he referred the case to the
Solicitor General for collection by judicial action.

On September 20, 1957 the Solicitor General demanded from Lim Tian Teng Sons & Co., Inc. the
payment of P15,111.50 within five days, stating that otherwise judicial action would be instituted
without further notice. In a letter dated October 5, 1957, received by the Collector of Internal
Revenue on October 7, 1957, Lim Tian Teng Sons & Co., Inc. reiterated its request for
reinvestigation. It also wrote the Solicitor General on October 8, 1957 requesting that it be allowed to
present its explanation together with supporting papers relative to its income tax liability. The
Solicitor General transmitted the letter to the Collection of Internal Revenue. Thereupon, the Deputy
Collector of Internal Revenue, by his letter dated October 16, 1957, informed the taxpayer that its
request for reinvestigation would be granted provided it executed within ten days a waiver of the
statute of limitations as required in General Circular V-258 dated August 20, 1957. In his letter dated
December 10, 1957, the Deputy Collector of Internal Revenue extended the period within which to
execute and file with him the waiver of the statute of limitations to December 31, 1957, but advised
that if no waiver is forthcoming on or before said date, judicial action for collection would be instituted
without further notice. Receipt of this letter is denied by appellant company.

As Lim Tian Teng Sons & Co., Inc. failed to file a waiver of the statute of limitations, the Collector of
Internal Revenue instituted eight months after, specifically on September 2, 1958, an action in the
Court of First Instance of Cebu for the collection of deficiency income tax.

After hearing the parties, the court below rendered the following judgment.
 IN VIEW OF THE FOREGOING, judgment is hereby rendered, declaring the assessment
(Exh. D, D-1) of income tax in the sum of P15,111.00 due from the defendant to the plaintiff
for the year 1952 valid, final and executory; condemning the defendant to pay the same to
the plaintiff with interest at one (1) per centum monthly from October 28, 1957 until fully paid.

With costs against the defendant.

IT IS SO ORDERED.

Not satisfied with the decision, the Collector of Internal Revenue moved for its reconsideration on the
ground that it did not include the 5% surcharge for late payment of tax. The motion was denied for
the reason that the taxpayer has already been ordered to pay a surcharge of 50%.

Both parties appealed, raising only questions of law.

Plaintiff cites as errors the non-imposition of the 5% surcharge for the late payment of tax and the
computation of delinquency interest from October 8, 1957.

Defendant, on the other hand, assails the jurisdiction of the lower court, its finding that the
assessment in question has become final and executory, the correctness of the assessment and the
imposition of the 50% surcharge.

We will discuss first the taxpayer's appeal. It maintains that the lower court has no jurisdiction to
entertain this case on the ground that the Collector of Internal Revenue has not yet issued his final
decision on its requests for reinvestigation. The taxpayer's stand is that final decision of the Collector
of Internal Revenue on the disputed assessment is a condition precedent to the filing of an action in
the Court of First Instance for the collection of a tax. This argument has no merit. The Collector of
Internal Revenue is authorized to collect delinquent internal revenue taxes either by distraint and
levy or by judicial action or both simultaneously.1 The only requisite before he can collect the tax is
that he must first assess the same within the time fixed by law.2 And in the case of a false or
fraudulent return with intent to evade the tax or of a failure to file a return, a proceeding in court for
the collection of such tax may be begun without assessment.3

Nowhere in the Tax Code is the Collector of Internal Revenue required to rule first on a taxpayer's
request for reinvestigation before he can go to court for the purpose of collecting the tax assessed.
On the contrary, Section 305 of the same Code withholds from all courts, except the Court of Tax
Appeals under Section 11 of Republic Act 1125, the authority to restrain the collection of any
national internal-revenue tax, fee or charge, thereby indicating the legislative policy to allow the
Collector of Internal Revenue much latitude in the speedy and prompt collection of taxes. The
reason is obvious. It is upon taxation that the government chiefly relies to obtain the means the carry
on its operations, and it is of the utmost importance that the modes adopted to enforce collection of
taxes levied should be summary and interfered with as little as possible. No government could exist
if all litigants were permitted to delay the collection of its taxes.4

Moreover, before the creation of the Court of Tax Appeals the remedy of a taxpayer who desired to
contest an assessment issued, by the Collector of Internal Revenue was to pay the tax and bring an
action in the ordinary courts for its recovery pursuant to Section 306 of the Code.5 Collection or
payment of the tax was not made, to, wait until after the Collector of Internal Revenue has resolved
all issues raised by the taxpayer against an assessment. Republic Act 1125 creating the Court of
Appeals allows the taxpayer to dispute the correctness legality of an assessment both in the purely
administrative level and in said court, but it does not stop the Collector of Internal Revenue from
collecting the tax through any of the means provided for in Section 316 of the Tax Code, except
when enjoined by said Court of Tax Appeals. Section 11 of Republic Act 1125 states in part:

No appeal taken to the Court of Tax Appeals from the decision of the Collector of Internal
Revenue ... shall suspend the payment, levy, distraint, and/or sale of any property of the
taxpayer for the satisfaction of his tax liability as provided by existing
law: Provided, however, That when in the opinion of the Court the collection by the Bureau
of Internal Revenue or the Commissioner of Customs may jeopardize the interest of the
Government and/or the taxpayer the Court at any stage of the proceeding may suspend the
said collection and require the taxpayer either to deposit the amount claimed or to file a
surety bond for not more than double the amount with the Court.

We will now resolve the issue of whether or not the court a quo erred in considering as final and
executory the assessment contained in the letter of the Collector of Internal Revenue dated January
16, 1957. As stated, defendant received said assessment on January 30, 1957 and on the following
day requested reinvestigation of its tax liability. The Collector of Internal Revenue however did not
reply to the request for reinvestigation. Instead, he referred the case to the Solicitor General for
collection of the tax. The lower court interpreted this action of the Collector of Internal Revenue as a
denial of defendant's request for reinvestigation.

Said court, to our mind, committed no error. For what is more indicative of the Collector's decision
against reinvestigation than his insistence to collect the tax? This decision was communicated to
defendant in a letter dated September 20, 1957 of the office of the Solicitor General which must
have been received by defendant not later than October 8, 1957 for on said date it acknowledged
receipt thereof. It had thirty days from October 8, 1957 within which to appeal to the Court of Tax
Appeals pursuant to Section 11 of Republic Act 1125.6 Instead of appealing to the Tax Court,
however, the defendant herein in a letter dated October 8, 1957 reiterated its request for
reinvestigation.

On October 15, 1957 the Collector of Internal Revenue wrote defendant that its "request for a
reinvestigation will be granted only upon compliance with General Circular No. V-258 dated August
20, 1957, which requires as a prerequisite to the grant of a reinvestigation the execution of a waiver
of the statute of limitations". In a subsequent letter, he extended the period within which to submit
the aforesaid waiver to December 31, 1957.

In effect, the Collector of Internal Revenue placed in the hands of the defendant the holding of a
reinvestigation. However, no such reinvestigation was made inasmuch as taxpayer failed to submit a
written waiver of the statute of limitations on or before December 31, 1957. Such omission
automatically brought about the denial of the request for reinvestigation.

Taxpayer however questions the legality of requiring waiver of the statute of limitations before the
grant of reinvestigation as provided for in General Circular No. V-258. This question was not raised
in the Bureau of Internal Revenue. Suffice it to say in this connection that General Circular No. V-
258 was promulgated pursuant to Section 338 of the Tax Code. The authority thereunder of the
Secretary of Finance to issue rules and regulations for the effective enforcement of the provisions of
the Tax Code has been sustained by this Court in previous cases.7

Even if we do not count the period from October 8, 1957 (the date when taxpayer received notice of
the denial of its request for reinvestigation) to December 31, 1957 (the deadline for the submission
of the written waiver of the statute of limitations) in reckoning the 30-day period within which the
taxpayer may appeal to the Court of Tax Appeals, said period had long lapsed when the Collector
of Internal Revenue filed the complaint in this case on September 2, 1958.
Taxpayer failure to appeal to the Court of Tax Appeals in due time made the assessment in question
final, executory and demandable.8 And when the action was instituted on September 2, 1958 to
enforce the deficiency assessment in question, it was already barred from disputing the correctness
of the assessment or invoking any defense that would reopen the question of his tax liability on
merits.9 Otherwise, the period of thirty days for appeal to the Court of Tax Appeals would make little
sense. 10

In a proceeding like this, the taxpayer’s defenses are similar to those of the defendant in a case for
the enforcement of a judgment by judicial action under Section 6 of Rule 39 of the Rules of Court.
No inquiry can be made therein as to the merits of the original case or the justness of the judgment
relied upon, other than by evidence of want of jurisdiction, of collusion between the parties, or of
fraud in the party offering the record with respect to the proceedings. 11 As held by this Court in
Insular Government vs. Nico  12 the taxpayer may raise only the questions whether or not the
Collector of Internal Revenue had jurisdiction to do the particular act, and whether any fraud was
committed in the doing of the act. In that case, Doroteo Nico was fined by the Collector of Internal
Revenue for violation of subparagraphs (d), (e) and (g) of Section 28 as well as Sections 36, 101
and 107 of Act 1189. Under Section 54 of the same Act the taxpayer was given the right to appeal
from the decision of the Collector of Internal Revenue to the Court of First Instance within a period of
ten days from notice of imposition of the fine. Nico did not appeal, neither did he pay the fine.
Pursuant to Section 33 of the Act, the Collector of Internal Revenue filed an action in the Court of
First Instance to enforce his decision and collect the fine. The decision of the Collector of Internal
Revenue having become final, this Court, on appeal, allowed no further inquiry into the merits of the
same.

For the satisfaction of defendant, however, it may be worth stating that on its merits, the assessment
in question is correct. It is not controverted that, as appearing from its 1952 income tax return Lim
Tian Teng Sons & Co., Inc. employs the "accrual" method of accounting. Following such accounting
method the copra outturn in the amount of P95,500.00 outstanding as of December 31, 1951, should
have been treated as accrued income for 1951, instead of as stock on hand on January 1, 1952.

Defendant took up the copra outturn in question as copra on hand in the beginning inventory for
1952. Said beginning inventory, together with expenses, copra purchased during the year and copra
on hand as of December 31, 1952 were deducted as "cost of goods sold" from the total gross sales
for the purpose of determining the net sales. Since the P95,500.00 copra outturn formed part of the
"cost of goods sold", it diminished the net sales by P95,500.00, thereby also decreasing defendant's
net taxable income by the same amount. This procedure of treating the copra outturn in question is
inconsistent with defendants accounting method.

From the record, then, there is every indication that taxpayer's 1952 income tax return is fraudulent,
as alleged in paragraph (7) of the complaint in this case. Firstly, taxpayer's beginning inventory for
1952 did not state the truth in considering the copra outturn as copra on hand, for on December 31,
1951 such copra was not any more in taxpayer's bodega. It was in transit to a foreign port. And the
taxpayer no longer owned the copra. As a matter of fact, it already received payment for the same.
Secondly, by observing regularly its own system of accounting, taxpayer had no choice but to
account the copra outturn as accrued income. This it did not do. For such deviation, we see no other
purpose than to lessen, if not obliterate as in fact it did, its income tax liability per its return. The
lower court therefore did not err in imposing the 50% surcharge.

We now come to the appeal of the Government. It maintains that the lower court erred in not
imposing on defendant's tax liability a surcharge of 5% for late payment. Subsection (c), Section 51
of the Tax Code states:
 SEC. 51. Assessment and payment of income tax. —

xxx     xxx     xxx

(c) Surcharge and interest in case of delinquency. - To any sum or sums due and unpaid
after the dates prescribed in subsections (b), (c) and (d) for the payment of the same, there
shall be added the sum of five per centum on the amount of tax unpaid and interest at the
rate of one per centum a month upon said tax from the time the same became due . . . .
(Emphasis supplied)

As may be gleaned from the above-quoted provision, the 5% surcharge is mandatory and
automatically due, once the tax is not paid on time. "Shall" is the word that law uses a word normally
imperative and a "language of demand". 13 Applicable herein is what has been said of a similar
provision — the present Section 183 of the Tax Code — stating that:

If the percentage tax on any business is not paid within the time prescribed above the
amount of the tax shall be increased by twenty-five per centum, the increment to be part of
the tax. (Emphasis supplied)

Said this Court in Lim Co Chui vs. Posadas  14:

This provision is mandatory. It provides a plan which works out automatically. It confers no
discretion on the Collector of Internal Revenue. That, official may not disregard the law and
substitute therefor his own personal judgment.

Finally, the Government questions the computation of the delinquency interest, due on the deficiency
tax, from October 8, 1957. It insists that payment of such interest should commence from February
15, 1957. Such contention is well-founded. Pursuant to Section 51(d), "the assessment made by the
Collector of Internal Revenue shall be paid ... immediately upon notification of the amount of such
assessment." Now, the income tax assessment notice gave defendant up to February 15, 1957 to
pay the deficiency tax in question. No payment was made. Hence, pursuant to Section 51 (e),
quoted earlier, interest on the unpaid tax fell due starting February 16, 1957 and continues to accrue
until full payment of the tax.

Wherefore, the decision appealed from is modified. Lim Tian Teng Sons & Co., Inc. is hereby
ordered to pay the sum of P10,074.00 as deficiency income tax for 1952 plus 50% and 5%
surcharges thereon for fraud and late payment, respectively, and 1% monthly interest upon said tax
of P10,074.00, computed from February 16, 1957 until the tax is fully paid. With costs against
defendant-appellant. So ordered.