AZNAR v. CA

G.R. No. L-20569, August 23, 1974

FACTS: Petitioner, as administrator of the estate of the deceased, Matias H. Aznar, seeks a review and nullification of the decision of the Court of Tax Appeals ordering the petitioner to pay the government the sum of P227,691.77 representing deficiency income taxes for the years 1946 to 1951.

The case roots from the time when the CIR had doubts regarding the tax returns of Matias Aznar, a person known to be wealthy. An investigation by the Commissioner of Internal Revenue (CIR) ascertained the assets and liabilities of the taxpayer and it was discovered that from 1946 to 1951, his net worth had increased every year, which increases in net worth was very much more than the income reported during said years. The findings clearly indicated that the taxpayer did not declare correctly the income reported in his income tax returns for the aforesaid years. The CIR wants to collect an additional 50% surcharges on the reported income and even had the properties placed under distraint and levy to secure the payment of such deficiency income tax which totaled to P723, 032.

Petitioner avers that according to the NIRC, the right of the CIR to assess deficiency income taxes of the late Aznar for the years 1946, 1947, and 1948 had already prescribed at the time the assessment was made on November 28, 1952; there being a five year limitation upon assessment and collection from the filing of the returns. Meanwhile, respondents believe that the prescription period in the case at bar that is applicable is under Sec. 332 of the NIRC which provides that: "(a) In the case of a false or fraudulent return with intent to evade tax or of a failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within ten years after the discovery of the falsity, fraud or omission". Petitioner argues said provision does not apply because the taxpayer did not file false and fraudulent returns with intent to evade tax. 

ISSUES:

1. Whether the imposition of the 50% fraud penalty is proper; and

2. Whether the right if the CIR to assess deficiency income taxes has prescribed.

HELD: 

1. No. The respondent CTA concluded that the very "substantial under declarations of income for six consecutive years eloquently demonstrate the falsity or fraudulence of the income tax returns with an intent to evade the payment of tax." The Supreme Court found this wrong. It was seen that the petitioner and the CIR incurred errors in their assessment and reporting of the net income and tax due. On the petitioner’s part, there were erroneous entries on the books. On the CIR, there was an error of the accounting method used to determine the tax liability (for example: two buildings should have been eliminated in the list of the petitioner’s assets because they were destroyed in the fire).

The two must be differentiated. False returns (due to mistake, carelessness or ignorance) and fraudulent returns (with intent to evade taxes). In addition, it is a well-established doctrine that fraud cannot be presumed since it must be proven. Fraudulent intent cannot be deduced from the mistakes, though how frequent it may be. It was seen that the petitioner did not have the intention to report fraudulent returns and they were even very cooperative during the BIR investigations.

2. No. The ordinary period of prescription of 5 years within which to assess tax liabilities under Sec. 331 of the NIRC should be applicable to normal circumstances, but whenever the government is placed at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities due to false returns, fraudulent return intended to evade payment of tax, or failure to file returns, the period of ten years from the time of the discovery of the falsity, fraud or omission even seems to be inadequate. There being undoubtedly false tax returns in this case, Sec. 332 (a) of the NIRC should apply and that the period of ten years within which to assess petitioner's tax liability had not expired at the time said assessment was made.