G.R. No. L-11805; May 31, 1960
COLLECTOR OF INTERNAL REVENUE, petitioner, vs. PIO BARRETTO SONS, INC., respondent.

FACTS

The Collector of Internal Revenue assessed Pio Barretto Sons, Inc. a total of P79,933.41 for various charges covering the years 1947 to 1951. The assessment was based on an investigation by Internal Revenue Agent Celso P. Razal, who examined the respondent’s books and records. The specific charges were: (1) forest charges and 300% surcharges on purchases of logs (1,096,111 board feet of first group and 409,513 board feet of second group) from 1947 to 1949 for which the respondent could not produce official receipts for paid forest charges or auxiliary invoices; (2) forest charges and surcharges on undeclared purchases of logs in 1949 (349,831 board feet) and 1951 (83,355 board feet); (3) a 50% surcharge for discharging logs without a permit in 1948-49 (39,395 board feet); and (4) a deficiency 5% sales tax plus a 25% surcharge on the total value of logs from 1947 to 1949 (P237,231.34). The respondent appealed to the Court of Tax Appeals, arguing it was a buyer in good faith, that the sales tax assessment was inaccurate and had already been paid under a prior deficiency assessment, and that the Collector could no longer assess for years prior to 1950 due to the absence of fraud allegations and constant bureau examinations. The Court of Tax Appeals ruled in favor of the respondent, declaring it exempt from the entire assessment.

ISSUE

1. Whether the respondent, as a purchaser of logs, is liable for forest charges and surcharges on logs for which it could not present official receipts of payment or auxiliary invoices.
2. Whether the prescriptive period for the assessment of forest charges and surcharges had lapsed.

RULING

1. On liability for forest charges and surcharges: The Supreme Court affirmed the Court of Tax Appeals’ decision. The respondent was a purchaser in good faith of the logs. The Collector’s theory that cash advances to suppliers made them agents of the respondent was rejected; such transactions do not establish a principal-agent relationship. The term “possessor of forest products” in the applicable regulations (Section 13 of Regulation No. 85) refers to the person who cuts or gathers the forest products (the licensee), not to a subsequent purchaser for value. Furthermore, forest charges, while classified as internal revenue taxes for collection purposes, are essentially payments for timber taken from public forests under a license and are contractual in origin. The principle that a tax lien on property cannot be enforced against an innocent purchaser applies. The Collector also failed to prove that the owners of private woodlands (from whom some logs were purchased) had not registered their lands, which was necessary to establish illegal cutting.
2. On prescription: The Supreme Court held that the five-year prescriptive period under Section 331 of the National Internal Revenue Code (which runs from the filing of the return) did not apply because the assessment was not based on a return filed by the respondent. Since no specific prescriptive period is prescribed by law for forest charges (which are not pure taxes but contractual payments for resources), Section 43 of the Code of Civil Procedure applies. The right of action accrues upon discovery of the deficiency. The deficiencies were discovered in 1953 when the agents examined the books and found un-invoiced and undeclared purchases. The assessment was made within the prescriptive period reckoned from 1953. The motion for reconsideration on this point was denied.