G.R. No. L-52306 October 12, 1981
ABS-CBN BROADCASTING CORPORATION, petitioner, vs. COURT OF TAX APPEALS and THE COMMISSIONER OF INTERNAL REVENUE, respondents.

FACTS

Petitioner ABS-CBN Broadcasting Corporation, during the years 1965 to 1968, paid film rentals to foreign corporations not engaged in trade or business in the Philippines. Following General Circular No. V-334 issued by the Commissioner of Internal Revenue (CIR) on April 12, 1961, which implemented Section 24(b) of the Tax Code, ABS-CBN withheld income tax at the rate of 30% on only one-half of the film rentals. The Circular explicitly stated that part of a non-resident foreign film distributor’s receipts represents a return of investment, and thus, the tax should be levied on only one-half of the rental income.
Subsequently, Republic Act No. 5431 amended Section 24(b) on June 27, 1968, increasing the tax rate to 35% and specifying the tax base as “gross income.” Years later, on February 8, 1971, the CIR issued Revenue Memorandum Circular No. 4-71, revoking the earlier Circular V-334. This new circular declared the previous ruling “erroneous for lack of legal basis,” stating that the tax should be based on the gross income “without any deduction whatever.” Relying on this revocation, the CIR assessed ABS-CBN for deficiency withholding taxes for the years 1965-1968, amounting to P525,897.06, computed on the full amount of the film rentals. The Court of Tax Appeals affirmed this assessment.

ISSUE

Whether the Commissioner of Internal Revenue may retroactively apply Revenue Memorandum Circular No. 4-71 to revoke a prior circular and assess deficiency taxes for periods during which the taxpayer had relied in good faith on the earlier official ruling.

RULING

No. The Supreme Court reversed the decision of the Court of Tax Appeals and set aside the deficiency assessment. The Court ruled that while the Commissioner has the authority to interpret tax laws and issue circulars, and may correct erroneous rulings, such corrections cannot be applied retroactively to the prejudice of a taxpayer who acted in good faith reliance on the prior official ruling. ABS-CBN had religiously complied with the explicit directives of General Circular No. V-334, which was issued by the highest official of the Bureau of Internal Revenue and approved by the Secretary of Finance.
The legal logic is anchored on principles of equity and fair play. The Court emphasized that the government is not estopped from collecting taxes correctly due, but an exception exists to prevent injustice where a taxpayer has been misled by an official interpretation. To allow a retroactive revocation would penalize the taxpayer for complying with the government’s own instructions. The insertion of Section 338-A in the Tax Code, which prohibits retroactive rulings prejudicial to taxpayers, supports this principle of protecting good faith reliance. Consequently, the assessment based on the retroactive application of the new circular was invalid. The Court also found the imposition of interest and surcharge unwarranted given the circumstances.