Manila
EN BANC
[ G.R. No. 247737, August 08, 2023 ]
MCDONALD'S PHILIPPINES REALTY CORPORATION, PETITIONER, VS. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
D E C I S I O N
INTING, J.:
Before the Couti is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court filed by McDonald's Philippines Realty Corporation (petitioner or MPRC) assailing the Decision2 dated October 11, 2018, and the Resolution3 dated June 10, 2019 of the Court of Tax Appeals (CTA) En Banc in CTA EB No. 1638 (CTA Case No. 8766). In the assailed issuances, the CTA En Banc upheld with modifications the Final Decision on Disputed Assessment (FDDA) of the Commissioner of Internal Revenue (CIR) and ordered petitioner to pay the amount of ₱9,206,213.06 representing basic deficiency Value-Added Tax (VAT) for calendar year (CY) 2007, surcharge, deficiency interest, and delinquency interest.4
The Antecedents
Petitioner is a foreign corporation organized and existing under the laws of Delaware, United States of America. It is licensed to do business in the Philippines and registered with the Bureau of Internal Revenue (BlR).5 It established its Philippine branch for the purpose of purchasing and leasing back two existing restaurant sites to Golden Arches Development Corporation (GADC).6
Prior to 2007, petitioner granted long-term advances to GADC, the proceeds of which were used by the latter to purchase land and equipment for use in its various restaurants and warehouse. Furthermore, GADC acknowledged that it had unpaid rentals due to petitioner.7
In 2008, the BIR commenced the audit and examination of petitioner's books of account and other accounting records relative to its revenue taxes for CY 2007.8
Subsequently, the BIR issued a Preliminary Assessment Notice9 (PAN) dated September 15, 2010 finding petitioner Liable for deficiency income tax (IT), VAT, and documentary stamp tax (DST) for CY 2007 in the aggregate amount of ₱33,432,243.06,10 inclusive of compromise penalty and interest. Petitioner responded to the PAN on February 23, 2011.11
In the meantime, MPRC and the CIR executed two Waivers of the Defense of Prescription under the Statute of Limitations, viz.: the first one on December 29, 2010, extending the assessment period to December 31, 2011 (First Waiver); and another one on December 27, 2011, further extending said period to March 31, 2012 (Second Waiver).12
On March 30, 2012, or one day prior to the expiration of the Second Waiver, petitioner received a copy of the CIR-issued Formal Letter of Demand with attached Details of Discrepancies and Audit/Assessment Notice13 (FLD/FAN). In the FLD/FAN, the CIR deleted its previous IT and DST assessments and assessed MPRC for deficiency VAT only. In the discussion,14 the CIR pointed out that MPRC failed to subject to VAT gross receipts from interest/rental income amounting to ₱11,080,687.70. Then, it proceeded to assess MPRC deficiency VAT amounting to ₱3,104,836.70,15 computed as follows:16
Rentals and Interest Receivable
Beginning balance
Add: Income during the year |
|
P22,389,808.93 |
|
Rentals |
₱41,121,288.00 |
|
|
Interest income |
25,522,729.00 |
66,644,017.00 |
|
|
|
| Total amount available for collection |
|
₱89,033,825.93 |
| Less: Ending balance |
|
34,701,795.53 |
| Collections during the year |
|
₱54,332,030.40 |
| Multiply by: VAT rate |
|
12% |
| Output tax due |
|
₱6,519,843.65 |
| Less Creditable input tax |
|
0.00 |
| VAT due/payable per audit |
|
₱6,519,843.65 |
| Less VAT payments per returns |
|
5,190,149.13 |
| Basic deficiency VAT due |
|
₱1,329,694.52 |
| Add 20% interest |
₱1,110,294.92 |
|
|
50% surcharge |
664,847.26 |
1,775,142.18 |
|
|
|
| Total deficiency VAT per FLD/FAN |
|
|
₱3,104,836.70 |
The CIR continued to impose deficiency interest at the rate of 20%. However, it deleted the compromise penalty and imposed a 50% surcharge instead. The CIR explained:
The 50% surcharge has been imposed pursuant to the provision of Section 248 (B) of the National Internal Revenue Code, as amended by R.A. No. 8424 x x x in view of your failure to report for [VAT] purposes your aforementioned rental/interest income. Such omission renders your VAT returns filed for the calendar year 2007 as false or fraudulent returns.17 (Italics supplied.)
MPRC protested the assessment on April 26, 2012 (administrative protest).18 However, the CIR reiterated its VAT deficiency assessment in the FLD/FAN in the FDDA19 dated January 16, 2014. After adjusting the accrued interest, the CIR found petitioner liable for deficiency VAT of ₱3,595,275.39,20 computed as follows:
| Basic deficiency VAT due21 |
|
|
₱1,329,694.52 |
| Add 20% interest |
|
₱1,600,733.62 |
|
| 50% surcharge |
|
664,847.26 |
2,265,580.88 |
|
|
|
| Total deficiency VAT per FDDA |
|
|
₱3,595,275.39 |
Aggrieved, MPRC elevated the case to the CTA via a Petition for Review22 (judicial protest). The case was raffled to the CTA Third Division (CTA Division) and docketed as CTA Case No. 8766.
Ruling of the CTA Division
In the Decision23 dated December 15, 2016, the CTA Division found that MPRC derived its interest income from long-term advances and unpaid rentals owing from GADC (collectively, loans due from GADC") but did not subject them to VAT.24 It explained that the said loans were transactions in pursuit of, incidental to, or in the course of trade or business, i.e., leasing. Thus, the interest income arising therefrom were subject to VAT pursuant to Section 105,25 in relation to Section 108(A) of the National Internal Revenue Code of 199726 (1997 Tax Code).
On the issue of prescription, the CTA Division explained that the 1997 Tax Code authorizes the CIR to assess MPRC within three years from the last day prescribed by law for the filing of the tax return. In relation thereto, Section 114(A) of the 1997 Tax Code and Revenue Regulations No. 16-200527 provides that quarterly VAT returns shall be filed within 25 days after the close of each taxable quarter.28 Applying the foregoing principles, the CTA Division summarized29 the filing dates of petitioner's quarterly VAT returns and the corresponding dates on which the period to assess shall prescribe, without considering the effect of any waiver that may have been executed, viz.:
| Period Covered |
Filing of Return |
| Actual Date |
Last Day to File |
Last Day to Assess |
| First Quarter |
April 20, 2007 |
April 25, 2007 |
April 25, 2010 |
| Second Quarter |
July 24, 2007 |
July 25, 2007 |
July 25, 2010 |
| Third Quarter |
October 19, 2007 |
October 25, 2007 |
October 25, 2010 |
| Fourth Quarter |
March 26, 2008 |
January 25, 2008 |
March 26, 2011 |
The CTA Division found that MPRC received the FLD/FAN on March 30, 2012. It noted that, "[t]here was no denying on the part of respondent that the assessment notices were issued beyond the three-year period to assess." However, it agreed with the CJR's proposition that MPRC's VAT returns were false.
Citing Aznar v. Court of Tax Appeals30 (Aznar), which differentiated between a false return (i.e., implying a deviation from the truth, which may either be intentional or not) and fraudulent return (i.e., implying an intentional or a deceitful entry with intent to evade payment of tax), the CTA Division found that petitioner's VAT returns deviated from the truth inasmuch as it failed to disclose interest income arising from loans due from GADC amounting to ₱25,522,729.0031 as being subject to VAT. Based on its finding that the subject returns were false as defined in Aznar, it applied the extraordinary 10-year assessment period and concluded that the CJR's right to assess had not yet prescribed.32
However, the CTA Division reduced petitioner's tax liability on account of the finding of the independent certified public accountant (JCPA) that petitioner had a VAT overpayment of P1,680,056.96 for the 4th quarter of CY 2007.33
Lastly, the CTA Division held that while the assessments for deficiency and delinquency interests were correct, the CIR cannot impose a 50% surcharge, as provided under Section 248(8) of the 1997 Tax Code because there was no deliberate attempt on the part of the petitioner to evade tax. It explained that while petitioner did not declare the interest income as part of its gross receipts subject to VAT, it did report the interest income in its 2007 ITR. According to the CTA Division, this supports a conclusion that petitioner was under the honest belief that its interest income from loans due from GADC was not subject to VAT34
In fine, MPRC was made liable for deficiency VAT in the reduced amount of ₱2,224,211.02, inclusive of 25% surcharge, and was ordered to pay deficiency interest at the rate 20% per annum on the basic deficiency VAT computed from January 25, 2008 until full payment, and delinquency interest at the rate of 20% per annum on the total amount of ₱2,224,211.02 computed from January 17, 2014 until full payment.35
Dissatisfied, MPRC elevated the case to the CTA En Banc and reiterated its contention that the CIR's right to assess had already prescribed. Further, it contended that its interest income from loans due from GADC were not incurred in the course of trade and business and thus not subject to VAT.36
To refute MPRC's argument on prescription, the CIR pointed out that petitioner's undeclared rental/interest corresponds to more than 30% of the total receipts it declared in its 2007 VAT returns. Thus, based on Section 248 (B)37 of the 1997 Tax Code, MPRC's underdeclaration rendered these false or fraudulent.38
Ruling of the CTA En Banc
In the assailed Decision39 dated October 11, 2018, the CTA En Banc also applied the 10-year assessment period, viz.:
Given the circumstances at bar, there is nothing in the Court [sic] in Division's Decision which would cause this Court to deviate from its ruling. As already stated, Section 222 mandatory provides that a false or fraudulent return with intent to evade tax or failure to file a return [sic], the tax may be assessed at any time within ten years after the discovery of the falsity, fraud or omission.
The case of Aznar vs. Court of Tax Appeals is pivotal in this case wherein the Supreme Court ruled in this wise:
"We believe that the proper and reasonable interpretation of said provision should be that in the three different cases of (1) false return, (2) fraudulent return with intent to evade tax, (3) 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 (1) falsity, (2) fraud, (3) omission. Our stand that the law should be interpreted to mean a separation of the three different situations of false return, fraudulent return with intent to evade tax, and failure to file a return is strengthened immeasurably by the last portion of the provision which segregates the situations into three different classes, namely, "falsity," "fraud" and ·'omission." That there is a difference between "false return" and "fraudulent return cannot be denied. While the first merely implies deviation from the truth whether intentional or not. the second implies intentional or deceitful entry with intent to evade the taxes due."
Applying the doctrine in the afore-quoted case, it is evident that petitioner committed falsity in its 2007 Quarterly VAT Returns as it did not declare substantial receipts from its interest income in the amount of P25.522.729.00. While the under-declaration in petitioner's gross receipts did not arise from a deliberate attempt to evade tax. nonetheless. its deviation from the truth warrants the application of the ten (10)-year prescriptive period for assessment.
x x x x
WHEREFORE, premises considered, the instant petition is PARTIALLY GRANTED. Accordingly, the Final Decision of Disputed Assessment issued by respondent against petitioner covering deficiency VAT for the taxable year 2007 is partly UPHELD WITH MODIFICATIONS. Petitioner is ORDERED TO PAY NINE MILLION TWO HUNDRED SIX THOUSAND TWO HUNDRED THIRTEEN AND 6/100 PESOS (P9,206,213.06) representing basic deficiency VAT, the 25% surcharge[,] and deficiency and delinquency interests imposed under Sections 248(A)(3) and 249(8) and (C) of the NIRC of 1997, as amended, respectively computed until December 31, 2017:
| Basic Deficiency VAT |
[₱]1,779,368.82 |
| Add: 25% Surcharge |
[₱]444,842.80 |
| Deficiency [i]nterest computed from January 26, 2008 [to] January 17, 2014. |
[₱]1,779,368.82
20%
*5.9836 years |
| Subtotal |
[₱]2,129,392.60 |
|
|
| Total Amount Due as of January 17, 2014 (Deficiency VAT with surcharge plus Deficiency Interest) |
[₱]4,353,603.63 |
|
|
| Deficiency [i]nterest computed from January 18, 2014 [to] December 31, 2017. |
[₱]1,779,368.82
20%
₱3.9562 years |
| Subtotal |
[₱]1,407,895.11 |
|
|
| Delinquency interest computed from January 18, 2014 [to] December 31, 2017. |
[₱]4,353,603.63
20%
*3.9562 years |
| Subtotal |
[₱]3,444,7I4.32 |
|
|
| TOTAL AMOUNT DUE-December 31, 2017 (Deficiency VAT with Deficiency interest plus delinquency [i]nterest) |
[₱]9,206,213.06 |
Accordingly, in applying the provisions [of] the TRAIN [L]aw, petitioner should be held liable to pay delinquency interest at the rate of 12% on the total unpaid basic deficiency tax, surcharge, deficiency interest as of January 17, 2014 amounting to [P]4,353,603.63, computed from January 1, 2018 until full payment thereof pursuant to Section 249(C) of the NIRC of 1997, as amended by the TRAIN Law.
SO ORDERED.40 (Emphases omitted; italics in the original, omitted and supplied; underscoring omitted and supplied.)
Restated, the court a quo reiterated the CTA Division's finding that MPRC's undeclared interest income (₱25,522,729.00) was substantial. It further agreed with the CTA Division that although the underdeclaration was unintentional, pursuant to Aznar, mere deviation from the truth justified the application of the exceptional assessment period of 10 years.41
Finally, the CTA En Banc affirmed the imposition of deficiency and delinquency interests with modifications in that the delinquency interest beginning January 1, 2018 shall be 12% until full payment pursuant to the Section 249(C) of the 1997 Tax Code, as amended by Republic Act No. (RA) 10963,42 otherwise known as the Tax Reform for Acceleration and Inclusion (TRAIN) Law.43
After the court a quo denied its subsequent motion for reconsideration in the Resolution44 dated June 10, 2019, MPRC filed the present action.
MPRC's Arguments
MPRC's main defense against the CIR's tax assessment is prescription. It argues that the CTA En Banc erred in applying the extraordinary 10-year assessment period, viz.:
(a) The pronouncements of the Supreme Court in Aznar should be read in light of the facts of the case, where after the application of the net worth and expenditures method of tax investigation, the Court therein found that there was a concealment of income which placed the government at a disadvantage "so as to prevent its lawful agents from proper assessment of tax liabilities." In view thereof the Supreme Court applied the extraordinary 10-year prescription period from the time of the discovery of the falsity, fraud or omission in order to protect the government's interest. In the case at bar, it is established that petitioner did not conceal its interest income, as it was clearly shown in its income tax return (ITR) and audited financial statements (AFS). As such, there is no justification for the application of the extraordinary 10-year prescription period in this case because the government was not in any way placed at a disadvantage or prevented from assessing the correct amount of tax.
(b) In order to render a return made by a taxpayer a "false return" within the meaning of Section 222 [of the 1997] Tax Code, there must appear a design to mislead or deceive on the part of the taxpayer, or at least culpable negligence.
(c) Applying the ejusdem generis rule in statutory construction, the falsity of the return in Section 222(a) [of the 1997 Tax Code should be construed as referring to a false return that it is akin to a fraudulent return with intent to evade tax, or tantamount to the non-filing of a return.
(d) The application of the extraordinary 10-year prescription period under Section 222(A) [of the 1997] Tax Code in case of any error or omission in the taxpayer's tax return would render inoperative the 3-year prescription period under Section 203 [of the 1997] Tax Code since all deficiency tax assessments would spring from an error in the return.45 (Italics supplied.)
Stated differently, petitioner claims that the extraordinary 10-year assessment period in case of a false return applies only when the falsity is accompanied by a finding that the taxpayer: (a) concealed items/transactions that would be subject to tax,46 (b) misled/deceived or acted negligently,47 /or (c) intended to evade tax.48
Although the Court defined a false return in Aznar as one that deviates from the truth, whether intentional or not, MPRC argues, however, that not all errors or omissions justify the application of the extraordinary 10-year assessment period.
First, the application of the extraordinary 10-year period in Aznar was warranted under the circumstances because the government was placed at a disadvantage as it was prevented from assessing the correct amount of tax due to the falsity in the return.49
Second, the recent rulings on the subject modified the pronouncements in Aznar.50 Citing Commissioner of internal Revenue v. B.F. Goodrich Phils., Inc.51 (BF Goodrich), petitioner argued that "the entry of wrong information due to mistake, carelessness, or ignorance, without intent to evade tax, does not constitute a false return."52 Further, in Commissioner of internal Revenue v. Philippine Daily lnquirer53 (inquirer), the Court held that the element of intentional falsity is necessary to warrant the application of the 10-year assessment period.54
MPRC contends that in order for a return to be deemed false within the meaning of Section 222(a) of the 1997 Tax Code, it must be accompanied by an intent to evade,55 such that only mistakes or errors committed with an intent to evade tax would warrant the application of the 10-year period.56 Hence, the CIR must establish that the taxpayer deliberately filed a false return with intent to evade tax and its failure to discharge this burden of proof shall prevent the application of the 10-year period.57 It further contends that all assessments are necessarily based on errors in tax returns. Consequently, if any such error or omission, whether inadvertent or deliberate with the objective to evade tax, is a falsity within the meaning of Section 222, all assessments shall therefore become imprescriptible because the extraordinary assessment period of 10 years will always apply.58
To further bolster its contention, MPRC cites Collector of Internal Revenue v. Central Azucarera de Tarlac,59 where the Court held that in case a taxpayer files an "honest return" or that which he believes complies with the law, the tax authorities cannot apply the extraordinary 10-year period in assessing such taxpayer.60 "Otherwise, there would practically no period of limitation whatsoever, and every man who made an inaccurate return could have a deficiency assessed against him at any time, because an inaccurate return is not a return made strictly in accordance with the law."61
It emphasizes that, as pronounced in BF Goodrich, the law on prescription must be interpreted liberally in favor of taxpayers who shall be safeguarded from unreasonable examination, investigation, or assessment. In turn, the exceptions as to the period of limitation of assessment under Section 222 of the 1997 Tax Code are to be strictly construed, not expanded.62
Third, assuming for the sake of argument that the CIR's right to assess has not prescribed, petitioner insists that it is not liable for (a) deficiency VAT on interest income derived from loans due from GADC, (b) deficiency interest,63 and (c) delinquency interest.64 Petitioner argues that the subject interest income is not subject to VAT65 because it did not arise in the course of trade or business66 and was not incidental to petitioner's leasing business.67
CIR 's Arguments
In contrast, the CIR, represented by the Office of the Solicitor General, is confident that its right to assess did not prescribe because prima facie evidence exists that the VAT returns in question are false returns.68 The CIR counters as follows:
First, the definition of false returns in Aznar must be taken to mean that the mere exclusion in the return of a taxable item (i.e., non-reporting of interest income due from GADC in the VAT returns) ipso facto makes the return false within the meaning of Section 222(a) of the 1997 Tax Code.69 The CIR posits that this dispenses with the requirement of proof of intent or deceit and al lows the extraordinary 10-year assessment period of assessment to apply immediately.70
Second, the Inquirer case did not supersede Aznar71 considering that the Court did not expressly declare that a return may only be considered false if it is willfully filed.72 The CIR points out that to the contrary, the pronouncement in Inquirer only reiterated the Court's earlier position in Aznar, that is, a false return is made when the return contains wrong information regardless of intent.73
Third, in its 2007 VAT returns,74 petitioner declared receipts subject to VAT in the first, second, third, and fourth quarters amounting to ₱4,612,816.92, ₱9,295,544.67, ₱6,507,750.11, and ₱22,835,131.00, respectively. However, it failed to report the subject interest income in the aggregate amount of ₱25,522,729.00.75 Citing Section 248(8) of the 1997 Tax Code, the CIR maintains that MPRC's unreported interest income of more than 30% of the declared VAT-able sales amounts to a substantial underdeclaration and constitutes prima facie evidence of false returns.76
According to the CIR, this presumption of falsity in case of substantial underdeclaration is in accord with the ruling in Aznar that a false return implies a simple "deviation from the truth," whether intentional or not, and even more so when there is an underdeclaration exceeding 30%.77 Thus, it concludes that while a design to mislead or deceive is necessary for there to be a fraudulent return, it is not a requirement for a false return.78
Issues
The main issue in the present case relates to the timeliness of the CIR's issuance of the tax assessment. The CTA En Banc held that the CIR had 10 years-not the basic three years-within which to issue the assessment after finding that MPRC had filed a false return.
Determining whether the CTA En Banc was correct in upholding the subject tax assessment turns upon the resolution of the following questions:
I. Did the CIR satisfy the requirements to avail itself of the benefit of the extraordinary 10-year assessment period under Section 222(a) of the 1997 Tax Code?
II. If the CIR was not entitled to the l0-year assessment period, alternatively, was the assessment issued within the basic three year period under Section 203 of the 1997 Tax Code?
Our Ruling
The petition is meritorious.
The Court is tasked to review the CTA En Banc's application of the 10-year assessment period in favor of the tax authorities. This is a question of law cognizable by the Court pursuant to Rule 45 of the Rules of Court.79
While the Court affirms the CTA's findings that the non-inclusion of MPRC's interest income in its VAT returns was not attended by fraud, the Court does not agree that there had been a substantial underdeclaration in the case at bar. Verily, the tax base of VAT on lease of properties is gross receipts, not income.80 Thus, for reasons set out below, the Court holds that the 10-year assessment period cannot be applied here and the CIR's authority to assess MPRC for deficiency VAT relative to CY 2007 has prescribed.
I
In taking their respective positions, the Court observes that the parties have relied on various jurisprudence dealing with the matter of applying the exceptional 10-year period and advanced their respective interpretations of the law and jurisprudence. To weigh between the contrasting views, the Court deems it prudent to first set out the relevant Tax Code provisions and amendments thereto and revisit the Court decisions in their proper statutory context.
A. The CIR 's Power to Make Assessments
At the core of the CIR's powers is the authority to make tax assessments. The National Internal Revenue Code of 193981 (1939 Tax Code) provides:
SECTlON 15. Power of Collector of Internal Revenue lo Make Assessments. - When a report required by law as a basis for the assessment of any national internal-revenue law shall not be forthcoming within the time fixed by law or regulation, or when there is reason to believe that any such report is false, incomplete, or erroneous, the Collector pf Internal Revenue shall assess the proper tax on the best evidence obtainable. x x x
x x x x
SECTION 38. General Rule. - The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Collector of Internal Revenue does clearly reflect the income. x x x (Italics supplied.)
The above-cited provisions were incorporated in Sections 1682 and 38,83 respectively, of the National Internal Revenue Code of 1977 (1977 Tax Code),84 and eventually, found its way to the 1997 Tax Code, viz.:
SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax Administration and Enforcement.- x x x
(B) Failure to Submit Required Returns, Statements, Reports and other Documents.- When a report required by law as a basis for the assessment of any national internal revenue tax shall not be forthcoming within the time fixed by laws or rules and regulations or when there is reason to believe that any such report is false, incomplete or erroneous, the Commissioner shall assess the proper tax on the best evidence obtainable.
In case a person fails to file a required return or other document at the time prescribed by law, or willfully or otherwise files a false or fraudulent return or other document, the Commissioner shall make or amend the return from his own knowledge and from such information as he can obtain through testimony or otherwise, which shall be prima facie correct and sufficient for all legal purposes. (Italics supplied.)
The consistent import of these provisions establishes that the CIR is empowered by statute to direct the investigation of any taxpayer for the purpose of assessing the latter's correct tax liability. In the exercise of this authority, the CIR is allowed to, among others, examine a taxpayer's books of account and other accounting records, issue a subpoena, and obtain any relevant information from any person (i.e., the taxpayer himself or any third party).85 If the information needed to ascertain the correctness of tax is not forthcoming, the CIR may issue an assessment based on the best evidence available. Once the CIR issues an assessment, it shall be presumed correct and sufficient for all legal purposes.
Verily, the above-mentioned powers grant the tax authorities a wide latitude of discretion in dealing with taxpayers at large, so much so that a tax assessment thus issued shall be given the benefit of the presumption of correctness and sufficiency. However, it must be understood that the CIR's assessment powers are not absolute.
B. Prescriptive Period of Assessments
The basic rule under the 1997 Tax Code only permits the CIR and his authorized representative a limited time of three years to conclude their investigation and issue a formal assessment based on the audit findings, viz.:86
SEC. 203. Period of Limitation Upon Assessment and Collection.- Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return x x x Provided, That in a case where a return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day.
By exception, the period of assessment may be extended such as in the case of a false or fraudulent return or of non-filing of a return altogether. The 1939 Tax Code established the 10-year extraordinary period of assessment, viz.:
SECTION 332. Exceptions as to Period of Limitation of Assessment and Collection of Taxes. - (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. x x x
The 1977 Tax Code maintained the 10-year period but introduced an amendment to the above-cited provision, particularly on taking judicial notice of the fact of fraud in subsequent tax collection proceedings, viz.:
SEC. 319. Exceptions as to period cf limitation of assessment and collection of taxes. - (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: Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof x x x (Underscoring supplied)
Section 319 of the 1977 Tax Code later became Section 222 of the 1997 Tax Code-the interpretation of which is now at the center of the present controversy:
SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes.-
(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be filed without assessment, at any time within ten (10) years after the discovery of the falsity, fraud or omission; Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof.
The above-cited provision sets out three separate cases where the extraordinary 10-year assessment period may be invoked: falsity ,fraud, or omission in/of filing a return.87 The discussion henceforth shall focus on falsity and fraud, inasmuch as the subject assessment had been based on these grounds.
C. Jurisprudence on the Application of the 10-Year Assessment Period
Below is a summary of key Court rulings dealing with instances where the tax authorities relied on and invoked the extraordinary 10-year assessment period. Here, the Court have categorized the foregoing discussions according to the prevailing Tax Code version at the time of the tax assessment/s issued in each case.
i. 1939 Tax Code
Aznar dealt with ITRs for the taxable years 1946 to 1951. In the case therein, the tax audit results revealed that within the relevant period, the taxpayer's net worth increased every year. The tax authorities characterized the increases as "very much more than the income reported during said years." The CIR cited the incorrect declarations as basis for applying the 10-year assessment period. On appeal the CTA ratiocinated that the "substantial [underdeclarations] of income for six consecutive years eloquently demonstrate[ d] the falsity or fraudulence of the [lTRs] with an intent to evade the payment of tax."88
On review, the Court agreed that the CIR's extension of the assessment period was justified because the subject tax returns were false. In its discussion, the Court differentiated among the three instances Section 332(a) of the 1939 Tax Code [now Section 222(a) of the 1997 Tax Code] warranting the application of the extended period, viz.:
To our minds we can dispense with these controversial arguments on facts, although we do not deny that the findings of facts by the Court of Tax Appeals, supported as they are by very substantial evidence, carry great weight, by resorting to a proper interpretation of Section 332 of the NIRC. We believe that the proper and reasonable interpretation of said provision should be that in the three different cases of (1) false return, (2) fraudulent return with intent to evade tax. (3) 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 (1) falsity, (2) fraud, (3) omission. Our stand that the law should be interpreted to mean a separation of the three different situations of false return, fraudulent return with intent to evade tax, and failure to file a return is strengthened immeasurably by the last portion of the provision which aggregates the situations into three different classes, namely "falsity", "fraud" and "omission". That there is a difference between "false return" and "fraudulent return" cannot be denied While the first merely implies deviation from the truth, whether intentional or not the second implies intentional or deceitful entry with intent to evade the taxes due.89 (Italics supplied.)
Verily, the Court referred to a false return as one which deviates from the truth, regardless if such deviation had been deliberate or inadvertent. It must be stressed, however, that in Aznar, the tax authorities established at the onset that the taxpayer's income per investigation was substantially higher than what he had reported in his returns. To both the CTA and the Court, such substantial underdeclaration was sufficient proof of falsity to justify the application of the extended assessment period.
In BF Goodrich, the tax authorities' examination revealed that, during 1974, the taxpayer sold parcels of land. The CIR noted, however, that the consideration for the sale was insufficient-the actual sale price had been lower than the properties' fair market value. Thus, the CIR treated the difference as a taxable donation and, in 1980, assessed the taxpayer for deficiency donor's tax.
On appeal, the taxpayer sought to invalidate the assessment, arguing that it was issued beyond the five-year90 statute of limitations. However, the CTA regarded the sale of the parcels of land at a price below the fair market value as a falsity, which justified an extension of the assessment period.
The Court disagreed with the CTA. While the properties were sold for a price lesser than its declared fair market value, this fact "did not constitute a false return which contains wrong information due to mistake, carelessness, or ignorance."91 The Court explained that "[i]t is possible that real property may be sold for less than adequate consideration for a bona fide business purpose; in such event, the sale remains an 'arm's length' transaction."92 The Court noted that the taxpayer was compelled to sell the property at a lower price and that, while it did not declare any taxable donation, it nonetheless reported the sale in its ITR.
Ultimately, the Court held that the tax authorities failed to show that the subject ITR was filed fraudulently with intent to evade the payment of the correct amount of tax. Thus, the CIR's invocation of the 10-year assessment period was not justified.
ii.1aшphi1 1977 Tax Code
The tax authorities in Fitness by Design assessed the taxpayer for alleged deficiency IT, VAT, and DST relative to taxable year 1995. They issued the Final Assessment Notice almost a decade later or on March 17, 2004. The CIR regarded the taxpayer's ITR as false and fraudulent on account of its failure to reflect its true sales therein. They used this reasoning to invoke the extraordinary 10-year assessment period.
However, the assessment notice served upon the taxpayer did not impute fraud on the part of the petitioner, much less substantiate the CIR's allegations of fraud, which were raised only on appeal. Further, the BIR audit team group supervisor admitted that the information gathered during the investigation did not show that the taxpayer deliberately failed to reflect its true income.
As a result, the Court disallowed the application of the extended period. The Court emphasized that in availing itself of the extraordinary 10-year period, the CIR bears the burden of proving the existence of facts upon which the fraud is based and is obligated to communicate to the taxpayer the basis for its allegations of fraud in the assessment notice, as part of due process.
iii. 1997 Tax Code
Here, the taxpayer was assessed for deficiency withholding tax on compensation (WTC) relative to taxable years 1997 and 1998. In its defense, the taxpayer argued that the assessment was issued in 2002 or beyond the basic three-year assessment period.
However, the Court noted that the taxpayer failed to withhold taxes amounting to ₱2,690,850.91 from its employees' 13th month pay and other benefits. The Court regarded this as a substantial underdeclaration, which rendered the subject tax returns false within the meaning of Section 222(a). That the taxpayer failed to refute the falsity, both in fact and in law, allowed the CIR the benefit of the 10-year assessment period.
In Asalus, the CIR asserted that there was a substantial understatement in the taxpayer's income, which exceeded 30% of what was declared in its VAT returns as appearing in its quarterly VAT returns. The CIR used this substantial understatement to justify its application of the extraordinary assessment period.
Similar to Samar Electric, the Court also upheld the application of the 10-year period on account of the substantial underdeclaration in the taxpayer's return. On this occasion, the Court explained the presumption of falsity and the consequences thereof, viz.:
Under Section 248(8) of the NIRC, there is a prima facie evidence of a false return if there is a substantial underdeclaration of taxable sales, receipt or income. The failure to report sales, receipts or income in an amount exceeding 30% what is declared in the returns constitute substantial underdeclaration. A prima facie evidence is one which that will establish a fact or sustain a judgment unless contradictory evidence is produced.
In other words, when there is a showing that a taxpayer has substantially underdeclared its sales, receipt or income. there is a presumption that it has filed a false return. As such, the CIR need not immediately present evidence to support the falsity of the return, unless the taxpayer fails to overcome the presumption against it.
Applied in this case, the audit investigation revealed that there were undeclared VATable sales more than 30% of that declared in Asalus' VAT returns. Moreover, Asalus' lone witness testified that not all membership fees, particularly those pertaining to medical practitioners and hospitals, were reported in Asalus' VAT returns. The testimony of its witness, in trying to justify why not all or its sales were included in the gross receipts reflected in the VAT returns, supported the presumption that the return filed was indeed false precisely because not all the sales of Asalus were included in the VAT returns.
Hence, the CIR need not present further evidence as the presumption of falsity of the returns was not overcome. Asalus was bound to refute the presumption of the falsity of the return and to prove that it had filed accurate returns. Its failure to overcome the same warranted the application of the ten (10)-year prescriptive period for assessment under Section 222 of the NIRC. To require the CIR to present additional evidence in spite of the presumption provided in Section 248(B) of the NIRC would render the said provision inutile.
x x x x
Considering the existing circumstances, the assessment was timely made because the applicable prescriptive period was the ten (10)-year prescriptive period under Section 222 of the NIRC. To reiterate. there was a prima facie showing that the returns filed by Asalus were false. which it failed to controvert. Also. it was adequately informed that it was being assessed within the extraordinary prescriptive period.96 (Italics in the original; underscoring supplied)
Relying on Section 248(8) of the 1997 Tax Code, the Court explained that a prima facie case of falsity arises where there is a substantial underdeclaration tax return subject of the assessment. Substantial underdeclaration within the meaning of the 1997 Tax Code refers to a misstatement, as ascertained by the CIR, which exceeds 30% of the amount reported in the tax return filed originally.
Applying the foregoing to the case, the Court explained that the audit results demonstrated that the income reported in the return was understated by more than 30%. This satisfied the definition of a substantial underdeclaration under the law, which, in turn, shall be regarded as prima facie evidence of falsity. For its part, the evidence presented by the taxpayer did not refute the presumption but even supported the conclusion that it failed to report taxable gross receipts in the VAT returns. On account of the taxpayer's failure to overturn the presumption, "the CIR need not present further evidence" as proof of a false return. Thus, the Court held that the application of the 10-year prescriptive period was warranted.
The Inquirer case involved the taxpayer's IT and VAT relative to taxable year 2004. Given the basic assessment period, ordinarily, the tax authorities would have had three years from 2004 or until 2007 to issue an assessment, e.g., the right to assess deficiency VAT accruing to the first quarter of 2004 would have prescribed by April 2007.
However, in the course of the audit investigation, the taxpayer executed three waivers where it consented to extending the basic three year assessment period, viz.:
|
Date of Execution of the Waiver |
Assessment Period Extended Until |
| First Waiver |
March 21, 2007 |
June 30, 2007 |
| Second Waiver |
June 5, 2007 |
December 31, 2007 |
| Third Waiver |
December 20, 2007 |
April 30, 2008 |
The CIR issued a formal assessment finding the taxpayer liable for deficiency IT and VAT, which the taxpayer received on April 17, 2008. In the main, the CIR explained that the audit team cross-referred97 the purchases recorded by the taxpayer in its books98 as against the corresponding amounts recorded by the taxpayer's suppliers. The comparison revealed that purchases per the taxpayer's books exceeded the amounts recorded by its suppliers. The CIR interpreted such overstatement of purchases as equivalent to an overdeclaration of deductible input VAT, as well as an underdeclaration of gross income, which results ultimately in understatements of the taxpayer's VAT and IT liabilities, respectively.
Subsequently, the taxpayer filed a judicial protest to the assessment before the CTA. In its Answer, while the CIR could have relied on the basic three-year prescriptive period on account of the Third Waiver, it applied the 10-year extended period, asserting that the taxpayer falsely filed its return for taxable year 2004.
However, the Court rejected the CIR's theory and held that "the mere understatement of a tax is not itself proof of fraud for the purpose of tax evasion"99 and, as held in BF Goodrich, the entry of wrong information due to mistake, carelessness, or ignorance, without intent to evade tax, does not constitute a false return. Put in another way, despite the supposed misstatement of the taxpayer's purchases, the Court did not find this as sufficient evidence to prove intentional falsity on the part of the taxpayer.
The Court also noted that the waivers in the case were meant to extend the basic three-year prescriptive period. This only showed that the CIR, at the outset, did not intend to rely on the 10-year extended period as it did not find any ground to justify its application.
The tax assessment in Spouses Magaan stemmed from a complaint affidavit filed by a confidential informant. It was alleged that the taxpayers earned ₱35,498,477.62 from April 1998 to January 2002, but this income was not declared in their ITR.
The CTA found that the taxpayers received checks from a certain individual but did not report the amounts therefrom as income in their tax returns from 1998 to 2000. However, the tax cou11 disallowed the application of the 10-year period, despite the unreported amounts, because the CIR failed to prove fraud on the part of the taxpayers.
The Court agreed with the CTA and underscored the following:
First, "[i]n the context of Section 222 (A), there is fraud in the filing of a false and deceitful entry with intent to evade the taxes due. The act of filing a fraudulent return must be intentional and not attributable to 'mistake, carelessness, or ignorance. '"101
Second, "to invoke the 10-year prescriptive period, [the CIR bears the burden of proving] the following with clear and convincing evidence: (1) respondents received taxable income; (2) they underdeclared or did not declare the taxable income in their tax returns; and (3) they intended to evade payment of correct taxes due."102 While the taxpayer did not report the amounts attributable to the checks as part of income, the CIR failed to establish that these amounts counted toward their taxable income. The checks were not in the taxpayers' names, and it was not even certain that the accounts into which the checks were deposited were owned by the taxpayers.
Third, if the tax authorities failed to state the factual basis of fraud in an assessment and/or failed to establish that the taxpayer filed a false return with intent to evade the payment of correct taxes, they cannot rely on the extraordinary 10-year period.
In Unioil, the CIR issued WTC and expanded withholding tax assessments relative to taxable year 2005. The taxpayer sought to invalidate the assessments for having been issued beyond the basic three year period.
However, the Court found nothing other than the CIR's bare allegation of falsity or fraud in the taxpayer's returns that may accord the CIR the benefit of the exceptional 10-year period. To be sure, the CIR only cited Section 72 of the 1997 Code which refers to a false or fraudulent return but did not particularize the circumstances giving rise to fraud committed by the taxpayer. "On the whole, there is no prima facie evidence, much less any sort of evidence"104 that the returns in question had been false or fraudulent.
The Court also observed that the CIR issued the formal assessment only a day before the impending lapse of the basic three-year period. To the Court this hasty issuance was inconsistent with the invocation of the 10-year extraordinary period. It only revealed the CIR's original intention to abide by the basic assessment period.
D. Proof of Falsity or Fraud
i. General Rule
Tax assessments are presumed correct under the law and issued in the regular performance the tax authorities' duty. As a consequence, it is incumbent upon the taxpayer to dispute such correctness and regularity.
Similarly, tax returns are presumed to have been prepared and filed by the taxpayer in good faith,105 in observance of the ordinary course of business,106 and in compliance with the applicable rules and regulations.107
Thus, it must be understood that falsity and/or fraud with respect to any tax return cannot be presumed to the extent that these are relied upon as grounds for the extension of the assessment period to 10 years. In keeping with their duty to preserve due process in tax assessments, as enunciated in BF Goodrich, Fitness by Design, Samar Electric, Asalus, and Spouses Magaan, the tax authorities bear the burden of establishing, with clear and convincing proof, the existence of grounds warranting the application of the 10-year period.
ii. Presumption of Falsity or Fraud and the 30% Threshold
To reiterate, the concept of substantial misdeclaration does not appear in the 1939 Tax Code. However, the Court, in Aznar, introduced this concept as amounting to a false return to justify the application of the 10-year prescriptive period in interpreting the relevant provision. Notably, the taxpayer therein failed to justify the annual increases in his income or present proof to refute such falsity.
It appears that, as early as Aznar, a return containing substantial underdeclaration of income, as ascertained by the CIR, was presumed as false unless the taxpayer proves otherwise. This remained as a jurisprudential rule until the presumption of falsity or fraud in cases of substantial underdeclaration of income or overstatement of deductions was introduced formally in the 1997 Tax Code:
SECTION 248. Civil Penalties. -
(A) There shall be imposed, in addition to the tax required to be paid, a penalty equivalent to twenty-five percent (25%) of the amount due, in the following cases:
(1) Failure to file any return and pay the tax due thereon as required under the provisions of this Code or rules and regulations on the date prescribed; or
(2) Unless otherwise authorized by the Commissioner, filing a return with an internal revenue officer other than those with whom the return is required to be filed; or
(3) Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment; or
(4) Failure to pay the full or part of the amount of tax shown on any return required to be filed under the provisions of this Code or rules and regulations, or the full amount of tax clue for which no return is required to be filed, on or before the date prescribed for its payment.
(B) In case of willful neglect to file the return within the period prescribed by this Code or by rules and regulations, or in case a false or fraudulent return is willfully made, the penalty to be imposed shall be fifty percent (50%) of the tax or of the deficiency tax, in case any payment has been made on the basis of such return before the discovery of the falsity or fraud: Provided. That o substantial underdeclaration of taxable sales. receipts or income. or a substantial overstatement of deductions. as determined by the Commissioner pursuant to the rules and regulations to be promulgated by the Secretary of Finance. shall constitute prima facie evidence of a false or fraudulent return: Provided, further. That failure to report sales receipts or income in an amount exceeding thirty percent (30%) of that declared per return, and a claim of deductions in an amount exceeding thirty percent (30%) of actual deductions, shall render the taxpayer liable for substantial underdeclaration of sales, receipts or income or for overstatement of deductions as mentioned herein. (Emphases and italics supplied.)
In other words, the 1997 Tax Code provided a statutory measure to determine whether an underdeclaration is substantial, as well as an express presumption that a return containing a substantial underdeclaration shall be taken as false or fraudulent on its face.
Section 248(B) sets out the following conditions:
1) The CIR asce1iains that there is a misstatement or misdeclaration in the return, in particular,
a. an underdeclaration of sales, receipts, or income or
b. an overstatement of expenses or other deductions
2) The misstatement is substantial, such that it exceeds the corresponding amount declared in the return by 30%.
Stated differently, when the misstatement or misdeclaration identified by the CIR surpasses the 30% threshold, the return in question shall be regarded as prima facie false or fraudulent. This has two consequences: First, as held in Asalus, it relieves the CIR of its duty to establish falsity or fraud and, in turn, shifts the burden to the taxpayer, who must then refute the presumption by establishing the absence of these grounds.108 Second, the prima facie false or fraudulent return shall serve as sufficient ground for applying the extraordinary period under Section 222(a).
To be clear, the substantial nature of an underdeclaration under Section 248(B) gives rise to a mere presumption of falsity or fraud. It is not conclusive. The taxpayer may overcome the presumption by presenting evidence showing that, in fact, there was no falsity or fraud in the return within the contemplation of Section 222(a).
E. Due Process Requirements When Invoking the 10-Year Period
i. In General
It must be stressed that while the law accords the tax authorities an extended period within which they may investigate the taxpayer and issue a corresponding tax assessment, the law does so by exception. Furthermore, it is recognized that the law on prescription should be liberally construed in favor of the taxpayer,109 to afford them protection against unreasonable examination, investigation, or assessment.110
Thus, when invoking the benefit of the extraordinary 10-year assessment period, as well as the presumption of falsity or fraud, the tax authorities are duty-bound to respect a taxpayer's fundamental right to due process of the law. There is due process when the taxpayer is provided with information necessary to mount an intelligent and timely protest/defense to the assessment.
Consequently, first, the tax authorities are required to communicate to the taxpayer, in a clear and adequate manner, the basis for extending the assessment period. Guided by the pronouncements in Asalus, Fitness by Design, and Spouses Magaan, the tax authorities are obligated to indicate in the assessment notice that the extraordinary prescriptive period is being applied and the bases of allegations of falsity or fraud (First Due Process Requirement).
Second, they are likewise proscribed from adopting a position inconsistent with the invocation of the extended period or that which will mislead the taxpayer and prejudice its defense (Second Due Process Requirement).
In the past, the Court regarded the following acts performed by the tax authorities as contradictory to the application of the 10-year prescriptive period: (a) prior execution of waivers meant to extend the basic three-year period (Inquirer); (b) hasty issuance of an assessment notice in order to meet the basic three-year deadline (i.e., one day before the last day of the three-day prescriptive period, as in Unioil).
ii. Due Process in Invoking the Presumption of Falsity or Fraud
The First and Second Due Process Requirements above must also be complied with particularly when invoking thepresumption of falsity or fraud. Thus, it shall not be sufficient that the CIR merely ascertains a misstatement or misdeclaration. To avail oneself of the benefit, first, the tax authorities must set out in the assessment notice the facts comprising the misstatement or misdeclaration and the manner by which the conditions under Section 248(8) are met and, second, there are no circumstances that negate the tax authorities' claim of relying on the 10-year period or those which have misled the taxpayer that it would only be assessed within the basic three-year period.
The Court must reiterate that the conditions under Section 248(8) may be summarized as the 30% threshold, which, by its nature, is derived mathematically. Accordingly, in relation to the Second Due Process Requirement, it is essential for the CIR to at least disclose the computation by which it ascertained that the misdeclaration in the return surpassed the threshold, if only to afford the taxpayer an opportunity to refute the correctness or reasonableness of such computation.
iii. False Return
At this juncture, the Court looks back at the wording of Section 222(a). It allows the application of the extended period "[i]n the case of a false or fraudulent return with intent to evade tax or of a failure to file a return."
The CIR relies on Aznar's definition: that a return is false if it deviates from the truth, whether such deviation had been deliberate or inadvertent. Thus, when the taxpayer fails to report an item required to be declared in a tax return, regardless of intent, the mere exclusion of the item amounts to a falsity that justifies the application of the exceptional 10-year period.111
On the other hand, MPRC theorizes that only intentional errors or omissions shall make a return "false" and warrants the application of the extended period. Despite the discussion in Aznar, the phrase "with intent to evade tax" under Section 222(a) not only refers to a fraudulent return but also serves to qualify the definition of a false return. It insists that the pronouncement in Aznar should be read in light of the specific factual circumstances therein, as well as more recent jurisprudence on the same subject matter.
The Court agrees with MPRC that only intentional errors in the return may justify the application of the extraordinary 10-year period.
First, verily, Aznar differentiated between a false and fraudulent return, viz.: "[w]hile the first merely implies deviation from the truth, whether intentional or not, the second implies intentional or deceitful entry with intent to evade the taxes due." However, this statement must be construed to be a definition referring to false returns in general.
To recall, in applying the 10-year exceptional period, the Court in Aznar did not inquire into whether the misstatements in the tax returns had been deliberate. Instead, the Court regarded the returns as false on the basis of a presumption that arose on account of substantial underdeclarations committed by the taxpayer in reporting his income.
Second, the CIR's argument confining the phrase "with intent to evade" to "fraud" only contradicts settled jurisprudence.
Since Aznar, the Court has been consistent in the interpretation of what constitutes a false return with respect to the application of the 10- year period-not all types of error or falsehood in a return will make available the 10-year exception under Section 222(a) of the 1997 Tax Code.112 The settled rule is that "the entry of wrong information due to mistake, carelessness, or ignorance, without intent to evade tax, does not constitute a false return."113 That there is an under/overstatement, by itself, does not amount to a falsehood114 for purposes of extending the assessment period.
Declarations in the return pertaining to, for instance, (a) a selling price that is below the fair market value (BF Goodrich), (b) purchases the aggregate amount of which, upon audit, exceeds those reported in the suppliers' independent records (Inquirer), or (c) the face amount of checks received but excluded from the computation of taxable income (Spouses Magaan) do not ipso facto render the return false within the meaning of Section 222(a) of the 1997 Code.115
Third, the CIR's interpretation of the law disregards the presumptions that taxpayers have prepared and filed their returns in good faith and have complied with the applicable laws and regulations in doing so. It also gives the CIR and revenue agents unbridled authority to extend and prolong any assessment.
The power to assess authorizes the CIR and its revenue agents to examine a taxpayer's books for the purpose of determining the correct amount of tax. Given the nature of this authority, as pointed out by MPRC, each tax audit will necessarily expose varying errors and/or irregularities in how the taxpayer computed its tax liability. Following the CIR's logic, all such inaccuracies committed by the taxpayer-including mere clerical or typographical errors or arithmetic miscalculations, no matter how trivial-shall render the return false and may be used as a ground to invoke the exceptional 10-year period. To the Court's mind, this creates an opportunity for the CIR to find errors at whim, renders the basic three year assessment period under Section 203 of the 1997 Tax Code superfluous and inoperative, and extends the assessment period virtually in all tax audits. The Court does not believe that the law intended to grant the tax authorities such an expansive and unlimited power--one that clearly defies due process rights.
F. Summary: Conditions for a Valid Extension of Assessment Period in Case of a False Return
i. Requisites under Section 222(a) of the 1997 Tax Code
Pursuant to Section 222(a) of the 1997 Tax Code, the extraordinary 10-year assessment period may apply in case the taxpayer: (1) filed a false return, (2) filed a fraudulent return, or (3) failed to file a return.
A fraudulent return "implies intentional or deceitful entry with intent to evade the taxes due," while a false return simply "implies deviation from the truth, whether intentional or not."116
It must be stressed, however, that a false return within the meaning of Section 222(a) does not refer to false returns in general. To be sure, the extraordinary 10-year assessment period applies to a false return when:
(1) the return contains an error or misstatement, and
(2) such error or misstatement was deliberate or willfull.
Consequently, the Court's ruling in Aznar which applied the extraordinary 10-year assessment period under Section 222(a) to false returns in general, i.e., regardless of whether the deviation is intentional or not, is abandoned.
It shall be the CIR's burden to establish the existence of the above enumerated statutory requisites with clear and convincing evidence.
The CIR may be relieved from the above-mentioned burden of proof when there is prima facie evidence of falsity or fraud, as defined under Section 248(B) of the 1997 Tax Code.
(1) The CIR ascertains that there is a misstatement/misdeclaration in the return, in particular,
(a) an understatatement/underdeclaration of sales, receipts, or income or
(b) an overstatement/overdeclaration of expenses or other deductions, and
(2) the misstatement is substantial, such that exceeds the corresponding amount declared in the return by 30%.
30% threshold satisfied. There is prima facie evidence of falsity or fraud and the burden of proof shifts to the taxpayer. [f the taxpayer fails to overcome the presumption, the prima facie evidence shall be sufficient to justify the application of the 10-year period.
Taxpayer refutes presumption. If the taxpayer is successful in overturning the presumption (e.g., demonstrating that the misstatement as asce1iained by the CIR had been inadvertent or attributable to a mistake or was not deliberate or willful on the part of the taxpayer), the CIR cannot rely on the presumption in proving the taxpayer's intent to evade.
ii. Due Process Requirements
(1) First Due Process Requirement. The assessment notice issued to the taxpayer must clearly state the following:
(a) that extraordinary prescriptive period (not the basic three year period) is being applied, and
(b) the bases of allegations of falsity or fraud, e.g., if the CIR seeks to rely on the presumption of falsity or fraud particularly, the formal notice to the taxpayer must set out the computation by which it ascertained that the misdeclaration in the return surpassed the 30% threshold.
(2) Second Due Process Requirement. The tax authorities have not acted in a manner that is inconsistent with the invocation of the extraordinary prescriptive period or have otherwise misled the taxpayer that the basic period will be applied.
G. Applied to the Present Case
Here, both the CTA Division and the CTA En Banc held that MPRC's 2007 Quarterly VAT returns are not fraudulent returns. They found no deliberate attempt on the part of MPRC to evade tax considering that it reported its interest income from loans due from GADC in its 2007 ITR.117
It is settled that factual findings of the CTA, as a special court with expertise on tax laws, are generally final, binding, conclusive, and accorded respect by the Court.118 Considering that the above finding of the CTA Division and the CTA En Banc is supported by the evidence on record, the Court affirms that MPRC did not deliberately make an underdeclaration in its VAT returns.
Both the CTA Division and the CTA En Banc held, however, that MPRC's VAT returns were false returns. They also applied the 10-year extraordinary period to assess pursuant to Section 222(a) of the 1997 Tax Code. Verily, the core issue in the case is whether the falsity in MPRC's VAT returns calls for the application of the extraordinary 10-year period to assess.
As will be discussed below, the Court holds that the application of the extraordinary 10-year period is not warranted in the present case.
To reiterate, a valid extension of the basic assessment period to 10 years is conditioned upon concurrence of the requisites under Section 222(a) of the 1997 Tax Code and compliance with due process requirements. Hence, the Court inquires, first, whether the CIR could benefit from the presumption of falsity or fraud, or otherwise proved intent to evade tax on the part of MPRC and, second, whether the CIR, in applying the extraordinary 10-year period, respected MPRC's due process rights.
i. There is no proof that MPRC filed a false return with intent to evade tax
The Court rules that the CIR cannot benefit from the presumption of falsity or fraud. As the presumption is unavailable to the CIR, it has the burden of proving with clear and convincing evidence that the falsity adverted to was done with an intent to evade. However, the Court finds that the CIR also failed to demonstrate this.
The CIR asserts that there is prima facie evidence of a false return because (1) petitioner failed to report interest income in the aggregate amount of ₱25,522,729.00, and (2) this unreported amount is a substantial underdeclaration as defined under Section 248(B) of the 1997 Tax Code.
The Court disagrees with the CIR. It cannot benefit from the presumption of falsity for the following reasons:
First, the CIR violated MPRC's due process rights when it applied the 10-year period without properly notifying the latter of the basis thereof.
Below are the pertinent portions of the notices sent by the CIR to petitioner:
FORMAL LETTER OF DEMAND
x x x x
The 50% surcharge has been imposed pursuant to the provision of [S]ection 248 (B) of the National Internal Revenue Code, as amended by R.A. No. 8424 xx x in view of your failure to report for Value-Added Tax purposes your aforementioned rental/interest income. Such omission renders you VAT returns filed for the calendar year 2007 as false or fraudulent returns.119
FINAL DECISION ON DISPUTED ASSESSMENT
The fifty percent (50%) surcharge is imposed as provided under Section 248(8) of the Tax Code for filing a false return.120
It is clear from the foregoing that the CIR invoked the presumption of falsity or fraud under Section 248(B) of the 1997 Tax Code. However, the notices contained mere references to the provision. The CIR did not even propound the statutory conditions giving rise to the presumption, much less disclose the computation it used to determine whether the 30% threshold was exceeded.
The CIR's bare references to Section 248(B) in the notices were unclear on the manner by which it satisfied the threshold under the provision. To the Court's mind, this deprived MPRC an opportunity to refute the basis of the computation and, ultimately, to set up an intelligent protest.
Second, even if the Court ignores the above-discussed violation, the CIR's reliance on Section 248(B) remains erroneous.
In its Comment121 to the present petition, the CIR continues to use the presumption of falsity or fraud to justify its resort to the exceptional 10-year period. This time, it laid out the amounts used to determine whether the 30% threshold was met. Particularly, the CIR now points out that MPRC failed to report the subject interest income in the aggregate amount of ₱25,522,729.00, which accounts to more than 30% of the total VATable receipts MPRC declared in its 2007 returns.122
To validate the CIR's assertion, the Court references below the pertinent details of the subject returns, as culled from the CTA Division rollo:
| Quarter |
Rental Income123 |
| First |
₱4,612,816.92 |
| Second |
9,295,544.67 |
| Third |
6,507,750.11 |
| Fourth |
22,835,131.00 |
| Total VAT-able Sales |
₱43,251,242.70 |
Verily, the alleged unreported interest income of ₱25,522,729.00 is more than 30% or, specifically, 59.01% of the total declared VATable sales, viz.:
| Alleged undeclared interest income ("Numerator") |
₱25,522,729.00 |
| Divide by total receipts declared in VAT returns |
43,251,242.70 |
|
0.5901 |
| Multiply by: |
100 |
|
______________ |
| Percentage(%) |
59.01% |
In its assessment, the CIR imposed VAT on MPRC's interest income which the latter did not declare in its 2007 VAT returns. Both the CTA Division and the CTA En Banc confirmed that, if subject to VAT, said interest income shall be taxable under Section 108 of the 1997 Tax Code or as a sale of services.124
However, for purposes of working out the 30% threshold in MPRC's case, the use of the amount of ₱25,522,729.00 as undeclared sales/numerator is erroneous.
Significantly, the 1997 Tax Code imposes VAT on the following: (a) the sale of goods or properties,125 (b) the importation of goods,126 and (c) the sale of services and use or lease of properties.127 The differentiation is not without significance. While the VAT base in a sale of goods and importation of goods are the gross selling price and landed cost, respectively, the VAT base in a sale of services and use or lease of properties is gross receipts. These terms are expressly defined in the law, viz.:
in consideration of the sale, barter or exchange of the goods or properties, excluding the value-added tax. The excise tax, if any, on such goods or properties shall form part of the gross selling price.128 (Italics supplied.)
The term 'gross receipts' means the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructivelv received during the taxable quarter for the services performed or to be performed for another person, excluding value added tax.129 (Italics and underscoring supplied.)
Proceeding from this analysis, the proper VAT base would be gross receipts. Accordingly, the reasonable assessment would have only regarded as undeclared receipts those interests received or collected in 2007 but not reported in the VAT returns, excluding amounts which have been earned or accrued but not collected.
However, a careful study of the FLD/FAN130 and FDDA131 reveals that the amount of ₱25,522,729.00, which the CIR assessed as undeclared receipts, represents interest income earned in 2007. While said interest income may have been earned or accrued, there is no showing that it has been actually or constructively received or collected by MPRC. Inasmuch as accrued interest is not the proper VAT tax base, the amount of ₱25,522,729.00 cannot be used in the 30% threshold computation in MPRC's case.
Notably, in the FLD/FAN, the CIR expressly identified an amount of P11,080,687.70 as interest income not subjected to VAT,132 viz.:
x x x From your records showed (sic) that you have not subjected to Value Added Tax gross receipts relating to your interest/rental income in the amount of [P]11,080,687.70 for which Output Tax x x x should have been remitted to the government. . .
It appears that, based on the tax authorities' own audit results, MPRC's gross receipts from interest income amounted only to P11,080,687.70. This would have been the proper VAT base in MPRC's case and a more accurate representation of undeclared receipts in the 30% threshold computation. Interestingly, this amount is only 25.62%133 of the total VAT-able sales (gross receipts) declared in MPRC's returns.
Stated otherwise, it was obvious at the outset that actual interest received would yield a percentage that would fall below the threshold. The tax authorities should have been aware that they could not avail themselves of the presumption of falsity or fraud. The CIR's decision to rely on accrued interest even though it was the incorrect VAT base misled both the CTA Division and the CTA En Banc into thinking that the threshold was met.
Third, in any case, even if the Court assumes that the presumption arose in favor of the CIR, MPRC was able to dispute it.
To recall, the CTA Division and the CTA En Banc134 arrived at uniform findings that the underdeclaration of MPRC's gross receipts subject to VAT was not deliberate, viz.:
x x x [T]he under-declaration in petitioners gross receipts on interest income for CY 2007 did not arise from a deliberate attempt on its part to evade tax but due on the honest belief that it is not subject to VAT. This is supported by the fact that the interest income amounting to P25,522.729.00 was indeed reported in petitioner's annual Income Tax Return for CY 2007.135
It is undisputed that while MPRC overlooked its gross receipts from interest income for VAT purposes, it did declare its interest income for IT purposes and disclosed it in its 2007 Financial Statements. Echoing the words of CTA Presiding Justice Roman G. Del Rosario, in his Dissenting Opinion in the assailed CTA En Banc Decision, as MPRC ably clarified the reason for the underdeclaration, it cannot be regarded to have fraudulently concealed its interest income.136
The CIR relied wholly on the presumption of falsity or fraud in justifying its application of the extraordinary 10-year period. Aside from its repeated assertion that the underdeclaration was substantial in amount, the CIR does not point to any other circumstance or evidence that could establish that MPRC's failure to report the subject interest income in its VAT returns was willful or intentional. That a misstatement has been sizeable cannot, on its own, be regarded as sufficient proof of an intention to evade tax.
The Court underscores that only intentional and deliberate errors may render the return false for purposes of invoking the extraordinary period under Section 222(a). Certainly, a return may contain errors. However, if the CIR fails to establish that the misstatement was willful on the part of the taxpayer, plain errors-such as that committed by MPRC but expressly recognized by the tax court as not arising from a deliberate attempt to evade tax-cannot justify the application of the 10-year period.
ii. The CIR acted in violation of MPRC's due process rights
As discussed above, due process in invoking the exceptional period 10-year not only requires the tax authorities to issue an assessment notice to provide clear and adequate information necessary in setting up the taxpayer's protest but also disallows the tax authorities from acting in a manner that is inconsistent with the invocation of the extraordinary prescriptive period or would otherwise mislead the taxpayer that the basic period will be applied.
In the present case, the following circumstances negate the CIR's good faith in extending the assessment period:
First, the 2007 VAT assessments were expected to prescribe completely by March 26, 2011137 or three years counted from the filing of MPRC's fourth quarter VAT return. "[T]o afford the CIR ample time to carefully consider the legal and/or factual questions involved in the determination of [MPRC's] tax liabilities"138 the parties executed two waivers extending the assessment period as follows:
|
Date of Execution |
Extended Until |
| First Waiver |
December 29, 2010 |
December 31, 2011 |
| Second Waiver |
December 27, 2011 |
March 31, 2012 |
Second, the CIR served the FLD/FAN upon MPRC on March 30, 2012 or one day prior to the expiration of the extended deadline set in the Second Waiver.
Similar to the Court's observations in Inquirer and Unioil, the timing of the waivers' execution and FLD/FAN's issuance and service reveals the CIR's primary objective to obviate the impending expiration of the basic three-year assessment period and that, in the first place, it had no intention to extend it. These considerations lead the Court to the conclusion that the CIR invoked the 10-year period as a mere afterthought. In the Court's view, to go through the motions of limiting the audit and assessment within the basic three-year period, only to later on accuse the taxpayer of filing a false return, without so much as a justification therefor, is an arbitrary exercise of the power to assess. The taxpayer cannot be kept in the dark of such serious allegations. Otherwise, the State, on account of the tax authorities' actions, would be depriving the taxpayer of property without due process of the law.
II
Having determined that the extraordinary 10-year period does not apply in the present case, the Court shall now ascertain whether the CIR was at least able to issue a valid assessment within the basic three-year period.
The parties acknowledged the following: (a) the VAT assessments for the first, second, third, and fourth quarters of 2007 were set to prescribe on April 25, 2010, July 25, 2010, October 26, 2010, and March 26, 2011, respectively; (b) the First Waiver executed on December 29, 2010 extended the assessment period to December 31, 2011; and (c) MPRC received the FLD/FAN on March 30, 2012.
Based on these circumstances, when the parties extended the assessment period on December 29, 2010, the first, second, and third quarters VAT assessments had already prescribed.139 Anent the fourth quarter VAT return, it is undisputed that petitioner had a VAT overpayment of P1,680,056.96.
Significantly, both the CTA Division and the CTA En Banc observed that the CIR no longer disputed the issuance of the assessment notices beyond the three-year period.140 The CIR's Comment does not contain any argument advocating for the timeliness of the assessment relative to the three-year period. It does not even address, much less deny specifically, MPRC's claim that the interest income in question was, in fact, collected in the second quarter of 2007141 and, thus, would have also prescribed by July 25, 2010.
The circumstances coupled with the CIR's exclusive reliance on the application of the 10-year period suggest an acquiescence of its failure to meet the three-year assessment period.
As the FLD/FAN was issued beyond the basic three-year period and the CIR's invocation of the extraordinary 10-year assessment period is unavailing, the Court holds that the VAT assessments have prescribed. Assessments that have prescribed are void. Thus, it is no longer necessary to discuss the correctness of the VAT assessment.
WHEREFORE, the petition is GRANTED. The Decision dated October 11, 2018 and the Resolution dated June 10, 2019 of the Court of Tax Appeals En Banc in CTA EB No. 1638 (CTA Case No. 8766) are hereby REVERSED and SET ASIDE.
Accordingly, the deficiency value-added tax assessment against petitioner for calendar year 2007 is hereby CANCELLED and SET ASIDE on the ground of prescription.
SO ORDERED.
Gesmundo, C.J., Leonen, SAJ., Hernando, Lazaro-Javier, Zalameda, M. Lopez, Gaerlan, J. Lopez, Marquez, Kho, Jr., and Singh, JJ., concur.
Caguioa, J., see concurring opinion.
Rosario, J., On leave.
Dimaampao, J., see concurring and dissenting Opinion.
Footnotes
* On leave.
1 Rollo, pp. 13-71.
2 Id. at 72-96. Penned by Associate Justice Cielito N. Mindaro-Grulla as concurred in by Associate Justices Juanito C. Castaneda, Jr., Erlinda P. Uy, Esperanza R. Fabon-Victorino, Ma. Belen M. Ringpis-Liban and Catherine T. Manahan, and dissented by Presiding Justice Roman G. Del Rosario (with Dissenting Opinion).
3 Id. at 103-109.
4 Id. at 93-94, CTA En Banc Decision dated October 11, 2018.
5 Id. at 74.
6 Id. at 17, Petition for Review on Certiorari.
7 Id. at 122, CTA Division Decision dated December 15, 2016.
8 Id. at 74, CTA En Banc Decision dated October 11, 2018.
9 CTA Third Division rollo, pp. 593-594.
10 Rollo, p. 74, CTA En Banc Decision dated October 11, 2018.
11 Id. at 75.
12 Id.
13 CTA Third Division rollo, pp. 619--622.
14 Id. at 620.
15 Id. at 622.
16 Id.
17 Id. at 619.
18 Rollo, p. 75.
19 CTA Third Division rollo, pp. 649-653.
20 Id. at 649, FDDA dated January 16, 2014.
21 Same as the amount in the FAN/FLD
22 CTA Third Division rollo, pp. 7-39.
23 Rollo, pp. 111-142. Penned by Associate Justice Esperanza R. Fabon-Victorino and concurred in by Associate Justice Ma. Belen M. Ringpis-Liban; Associate Justice Lovell R. Bautista was on leave.
24 Id. at 127.
25 Section 105 of the National Internal Revenue Code of 1997 (1997 Tax Code) provides: SEC. 105. Persons Liable. - Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code.
x x x x
The phrase in the course of trade or business' means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity.
x x x x (Underscoring supplied.)
26 Republic Act No. 8424, approved on December 11, 1997.
27 Consolidated VAT Regulations of 2005, effective November 1, 2005.
28 Rollo, p. 119, CTA Third Division Decision.
29 Id. at 120.
30 157 Phil. 510 (1974).
31 Rollo, p. 128, CTA Third Division. This represents the amount of interest income earned in durino 2007, as stated in the FLD/FAN.
32 Id.
33 Id. at 135.
34 Id. at 139.
35 Id. at 140-141.
36 Id. at 80, CT A En Banc Decision.
37 Section 248(8) of the 1997 Tax Code:
SEC. 248. Civil Penalties. - x x x x
(B) In case of willful neglect to file the return within the period prescribed by this Code or by rules and regulations, or in case a false or fraudulent return is willfully made, the penalty to be imposed shall be fifty percent (50%) of the tax or of the deficiency tax, in case any payment has been made on the basis of such return before the discovery of the falsity or fraud: Provided, That a substantial underdeclaration of taxable sales, receipts or income, or a substantial overstatement of deductions, as determined by the Commissioner pursuant to the rules and regulations to be promulgated by the Secretary of Finance, shall constitute prima facie evidence of a false or fraudulent return: Provided, further, That failure to report sales, receipts or income in an amount exceeding thirty percent (30%) or that declared per return, and a claim of deductions in an amount exceeding thirty percent (30%) of actual deductions, shall render the taxpayer liable for substantial underdeclaration of sales, receipts or income or for over statement of deductions, as mentioned herein.
38 Rollo, p. 82, CTA En Banc Decision.
39 Id. at 72-95.
40 Id. at 92-95.
41 Id. at 93.
42 Approved on December 19, 2017.
43 Rollo, pp. 93-94, CTA En Banc Decision.
44 Id. at 103-109.
45 Id. at 21-22, Petition for Review on Certiorari.
46 Id. at 26-27.
47 Id. at 32.
48 Id. at 37-38.
49 Id. at 27-28.
50 Id. at 26.
51 363 Phil. 169 (1999).
52 Rollo, p. 26, Petition for Review on Certiorari.
53 807 Phil. 912 (2017).
54 Rollo, p. 24, Petition for Review on Certiorari.
55 Id. at 32-33. Citing Commissioner of Internal Revenue v. Ayala Hotels. Inc., CA-G.R. SP No. 70025, April 19, 2004.
56 Id.
57 Id. at 37.
58 Id.
59 G.R. Nos. L-11760 & 11761, July 31, 1958.
60 Relying on United States v. Mabel Elevator. (D.C.) 17 (2d) 109, 110 (1925).
61 Rollo, p. 32, Petition for Review on Certiorari.
62 Id. at 39.
63 Id. at 48.
64 Id. at 53.
65 Id. at 44.
66 Id. at 45.
67 Id. at 47.
68 Id. at 177, CIR's Comment
69 Id. at 179.
70 Id.
71 Id. at 181.
72 Id. at 183.
73 Id.
74 Id. at 180. Also see CTA Third Division rollo. pp. 654, 658, 661, and 666.
75 Id.
76 Id. at 180-181, 184.
77 Id. at 185.
78 Id. at 185-186.
79 Section I, Rule 45 of the Rules of Court provides:
SECTION I. Filing of petition with Supreme Court. - A party desiring to appeal by certiorari from a judgment, final order or resolution of the Court of Appeals, the Sand1ganbayan, the Court of Tax Appeals, the Regional Trial Court or other courts, whenever authorized by law, may file with the Supreme Court a verified petition for review on certiorari. The petition may include an application for a writ of preliminary injunction or other provisional remedies and shall raise only questions of law, which must be distinctly et forth. The petitioner may seek the same provisional remedies by verified motion filed in the same action or proceeding at any time during its pendency.
80 Section 108(A) of the 1997 Tax Code provides:
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. - (A) Rate and Base of Tax. - There shall be levied, assessed and collected, a value added tax equivalent to ten percent ( 10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties.
x x x x
81 Commonwealth Act No. 466, June 15, 1939.
82 Section 16 of the 1977 Tax Code provides:
Sec. 16. Power of Commissioner of Internal Revenue to make assessments. - When a report required by-law as a basis for the assessment of any national internal revenue tax shall not be forthcoming within the time fixed by law or regulation, or when there is reason to believe that any such report is false, incomplete, or erroneous, the Commissioner of Internal Revenue shall assess the proper tax on the best evidence obtainable.
x x x x
83 Section 38 of the 1977 Tax Code provides:
Sec. 38. General rule. - The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner of Internal Revenue does clearly reflect the income. If the taxpayer's annual accounting period is other than a fiscal year, as defined in section twenty or if the taxpayer has no annual accounting period, or does not keep books, or if the taxpayer is an individual, the net income shall be computed on the basis of the calendar year.
84 Presidential Decree No. 1158, June 3, 1977.
85 Section 5, 1997 Tax Code.
86 Section 228 of the 1997 Tax Code provides, "Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized representative shall issue an assessment based on his findings."
87 Aznar v. Court of Tax Appeals, supra note 30.
88 Aznar v. Court of Tax Appeals, supra note 30 at 523. Italics supplied.
89 Id.
90 Section 331 of the 1939 Tax Code provided a basic assessment period of five years. This was shortened to three years in the 1977 Tax Code (See Section 318, PD No. 1158, as amended by Batas Pambansa Big. 700, April 5, 1984).
91 Commissioner of Internal Revenue v. B. F. Goodrich Phils., Inc., supra note 51 at 179, citing Aznar v. Court of Tax Appeals, supra note 30 at 533.
92 Id.
93 799 Phil. 391 (2016).
94 749 Phil. 772 (2014).
95 806 Phil. 397(2017).
96 Id. at 408-411.
97 The BIR employed the Reconciliation of Listing for Enforcement (RELIEF) System: a tool that "can detect tax leaks by matching the data available under the Bureau's Integrated Tax System (ITS) with data gathered from third party sources (i.e., Schedules of Sales and Domestic Purchases and Schedule of Importations submitted by VAT taxpayers. . . "See Guidelines and Procedure in the Extraction, Analysis, Disclosure/Dissemination, Utilization, and Monitoring of RELIEF data for Audit and Enforcement Purposes, Revenue Memorandum Order No. 30-03, approved on September 18, 2003.
98 Summary List of Purchases.
99 Commissioner of Internal Revenue v. Philippine Daily Inquirer, supra note 53 at 935, citing Commissioner of Internal Revenue v. Javier. Jr., 276 Phil. 914 (1991).
100 G.R. No. 232663, May 3. 2021.
101 Id., citing Commissioner of Internal Revenue v. Philippine Daily Inquirer Inc. supra note 53 at 937.
102 Id.
103 G.R. No. 204405, August 4, 2021.
104 Id.
105 In Collector of Internal Revenue v. Central Azucarera de Tarlac, supra note 59, the Court held, ''The omission of certain taxable items does not require additional returns for the same, and can[not] be regarded as a case of failure to file a return, particularly where the taxpayer's good faith is not questioned and intent to evade tax is not charged. The returns filed, altho[ugh] incomplete, operate as sufficient notice to the Collector of Internal Revenue to make his assessment and start the running of the period of limitation ... " Citing Commissioner of Internal Revenue v. Stetson & Ellison Co. [(C.C.A) 43 F. (2d) 553], the Court also explained, "It may be true that the tiling of a return which is defective or incomplete under Section 239 is sufficient to start the running of the period of limitation x x x At most, these returns were defective or incomplete, but were tiled in good faith, and, we think, substantially comply with the requirements or the statute.'·
106 Section 3(q), Rule 131, Rules of Court.
107 Section 3(ff). Rule 131, Rules of Court.
108 In Commissioner of Internal Revenue v. Asalus Corp., supra note 95, the Court explained: ''[i]n other words, when there is a showing that a taxpayer has substantially underdeclared its sales, receipt or income, there is a presumption that it has filed a false return. As such, the CIR need not immediately present evidence to support the falsity of the return, unless the taxpayer fails to overcome the presumption against it."
109 See Commissioner of Internal Revenue v. Standard Chartered Bank, 765 Phil. 102, 114 (2015); Commissioner of Internal Revenue v. B.F. Goodrich Phils., Inc., supra note 51.
110 See Commission of Internal Revenue v. Bank of the Philippine Islands, 885 Phil. 288, 301 (2020); Commissioner of Internal Revenue v. Pilipinas Shell Petroleum Corp., 835 Phil. 875, 913(2018); Philippine Journalists, Inc. v. Commissioner of Internal Revenue, 488 Phil. 218 (2004).
111 Rollo, p. 179, CIR's Comment.
112 Formerly Section 332(a) of the 1939 Tax Code and Section 319(a) of the 1977 Tax Code.
113 Commissioner of Internal Revenue v. B.F. Goodrich Phils., Inc., supra note 51; Commissioner of Internal Revenue v. Philippine Daily Inquirer. Inc., supra note 53; Commissioner of Internal Revenue v. Spouses Magaan, supra note 100.
114 Commissioner of Internal Revenue v. Unioil Corp., supra note 103, citing Aznar v. Court of Tax Appeals, supra note 30 at 535.
115 Formerly Section 332(a) of the 1939 Tax Code and Section 319(a) of the 1977 Tax Code.
116 Aznar v. Court of Tax Appeals, supra note 30 at 253.
117 Rollo, p. 139, CTA Third Division Decision. Id. at 92, CTA En Banc Decision.
118 See Miguel J. Ossorio Pension Foundation. Inc. v. Court of Appeals and Commissioner of Internal Revenue, 635 Phil. 573, 585 (2010).
119 See Formal Letter of Demand dated March 15, 2012, CTA Division rollo, p. 619.
20 See Final Decision on Disputed Assessment dated January 16, 2014, Id. at 309.
121 Rollo, pp. 165-196.
122 Id. at 180.
123 MPRC's declared receipts in its returns consisted only or rental income.
124 Rollo, p. 84-86.
125 Section 106, 1997 Tax Code.
126 Section 107, 1997 Tax Code.
127 Section 108, 1997 Tax Code.
128 Section 106, 1997 Tax Code.
129 Section 108, 1997 Tax Code.
130 CTA Third Division rollo, p. 622, Formal Letter of Demand with attached Details of Discrepancies and Audit/Assessment Notice.
31 Id. at 309, FDDA dated January 16, 2014.
132 Id. at 620, Formal Letter of Demand with attached Details of Discrepancies and Audit/ Assessment Notice.
333 P11,080,687.707 ÷ P43,251,242.70 = 0.25619 or 25.62%.
134 Rollo, p. 93. The CTA En Banc adopted the CTA Divisions findings and confirmed that the underdeclaration was not deliberate on the part of MPRC.
135 Id. at 139, CTA Third Division Decision.
136 Id. at 101.
137 Id. at 120.
138 See Waiver of the Defense of Prescription Under the Statute of Limitations of the National Internal Revenue Code, CTA Division rollo, p. 70.
139 As observed by CTA Presiding Justice Del Rosario in his Dissenting Opinion in the Assailed CTA En Banc Decision.
140 Rollo, p. 82 and 120.
141 Id. at 43, Petition for Review on Certiorari.
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