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The BIR assessed the Babuyan Water District (BWD) with deficiency income taxes amounting to P8.5 million, inclusive of interest and surcharge. The BWD disputed the assessment, and argued that it was a wholly-owned government entity performing essential government functions. However, the BIR denied the protest.
The BWD filed a petition for arbitration in the Office of the Secretary of Justice pursuant to Sections 66 to 71, Chapter 14, Book IV of the Administrative Code of 1987 to assail the denial of its protest, and to seek the proper interpretation of Section 32(8)(7)(b) of the Tax Code that excluded from gross income the income derived by the Government or its political subdivisions. The Secretary of Justice rendered a decision declaring the BWD exempt from the payment of income tax.
The Commissioner of Internal Revenue appealed to the CTA on the sole ground that the Secretary of Justice had no jurisdiction to review the assessment of the BIR.
Is the appeal meritorious? Explain your answer. (4%)