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EIGHTH DIVISION

[CA-G.R. SP No. 70025. April 19, 2004.]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.


AYALA HOTELS, INC., respondent.

DECISION

ASUNCION-VICENTE, R., J : p

May the Bureau of Internal Revenue (BIR) still assess a taxpayer for alleged
deficiency income taxes despite the expiration of the three-year period provided for by
law 1(1) as the period of limitation for assessment of taxes?

The Case

Petitioner, as the official of the Republic of the Philippines charged with the
duty of assessing and collecting internal revenue taxes, seeks a review of the
Decision, dated 10 January 2002, of the Court of Tax Appeals (CTA) in C.T.A. Case
No. 6002 entitled Ayala Hotels, Inc. vs. Commissioner of Internal Revenue, the
dispositive portion of which reads:

IN THE LIGHT OF ALL THE FOREGOING, the instant Petition for


Review is hereby GRANTED. Accordingly, the subject assessment issued by
the Respondent against Petitioner for the year 1993 is hereby ORDERED
CANCELLED AND WITHDRAWN.

SO ORDERED. 2(2)

and from the Resolution, dated 12 March 2002, denying petitioner's motion for

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reconsideration of the above-mentioned Decision, the dispositive portion of which
reads:

WHEREFORE, Motion for Reconsideration is hereby DENIED for lack


of merit.

SO ORDERED. 3(3)

The Facts

The facts are undisputed. 4(4) Private respondent Ayala Hotels, Inc. (hereinafter
referred to as respondent) entered into two (2) separate contracts of lease with two (2)
lessees, namely, Manila Mandarin Hotel and Manila Peninsula Hotel, covering two
(2) parcels of land in Makati. Both lease contracts similarly provide:

a) that each of the Lessees, with the consent of Petitioner, will erect
a building on the parcels of land, to be used as a hotel;

b) the duration of the contract is twenty-five (25) years starting from


the date of actual occupancy of the hotel by the first paying guest;

c) that the Petitioner represents that the leased property forms an


essential part of a commercial center is an integrated and
controlled development project, and all buildings and
improvements thereon shall be exclusively used and occupied by
commercial businesses of a type and quality that will fit into the
pattern of development of the surrounding area;

d) that the Lessees have an option to renew the lease for an


additional period of 25 years under the same terms and
conditions as those obtaining during the last year of such lease,
the Lessees agree to promptly notify the Petitioner in writing
within ninety (90) days before the termination of the original
term of the lease; and

e) that the Lessees shall own the hotel building and all the
improvements.

For the taxable year ending 31 December 1993, respondent duly filed on 15
April 1994 its Corporate Annual Income Tax Return (ITR) with the BIR.

On 7 October 1999 or 5 years from the time respondent filed its ITR,
respondent received from petitioner a Formal Assessment Notice (FAN) dated 17
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September 1999, which FAN alleged that respondent had deficiency income taxes
dues to the Government for the taxable year 1993 total amount of P19,779,385.50,
broken down as flows: IDcAHT

Net income per return P59,297,967.00


Add: Unreported income for the year 1993
on improvements by Lessees:
Manila Mandarin Hotel: P7,546,227.00
Manila Peninsula Hotel: 8,600,210.00

P16,146,437.00

Net income per investigation P75,444,404.00
===========
Income tax due thereon P26,405,541.00
Less: Income tax already paid 20,754,288.00

Deficiency income tax 5,651,253.00
Add: 50% Surcharge 2,825,626.50
25% Surcharge 1,412,813.25

9,889,692.75
Add: 20% interest per annum from
4-15-94 to 10-15-99 9,889,692.75

Total Amount Due P19,779,385.50
===========

The deficiency assessment arose from the finding of the petitioner that the
respondent should have reported as part of its income for taxable year 1993, the total
amount of P16,146,437.00 representing a portion of the total value of the leasehold
improvements introduced by the two lessees of respondent, namely, Manila Mandarin
Hotel and Manila Peninsula Hotel.

Petitioner's findings were premised mainly on the application of Section 49 of


Revenue Regulations No. 2 (Income Tax Regulations) which provides:

Section 49. Improvements by Lessees. When buildings are erected or


improvements made by a lessee in pursuance of an agreement with the lessor,
and such buildings or improvements are not subject to removal by the lessee, the
lessor may at his option report the income therefrom upon either of the
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following bases:

(a) The lessor may report as income at the time when


such buildings or improvements are completed the fair market
value of such buildings or improvements subject to the lease.

(b) The lessor may spread over the life of the lease
the estimated depreciated value of such buildings or
improvements at the termination of the lease and report as
income for each year of the lease an aliquot part thereof.

Specifically, petitioner posits that the improvements introduced by respondent's


lessees are not subject to removal and hence, must be reported by respondent as
income based on either of the two rules under Section 49, that is, to report the fair
market value of the buildings or improvements as income at the time when such
buildings or improvements are completed, or to report as income for each year of the
lease an aliquot part of the estimated depreciated value of such buildings or
improvements at the termination of the lease.

Pursuant to the Audit Report sent to the respondent by petitioner through the
revenue officers who conducted the examination of respondent's books, the following
calculations were made to establish the amounts alleged as "unreported income"
subject of the instant deficiency assessment:

Manila Mandarin Manila Peninsula


Hotel (in Pesos) Hotel (in Pesos)

COST OF IMPROVEMENTS
Site Improvement 4,084,259.00 314,905,352.00
Building and Building
Equipment 398,949,466.00 120,738,873.00

APPRAISAL INCREASE
Site Improvement 329,005.00 121,320,807.00
Building and Building
Equipment 99,719,098.00 16,382,293.00

Total Value
(Estimated useful life
@ 40 years) (a) 503,081,828.00 573,347,325.00

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NET BOOK VALUE
AFTER 25 YEARS (b) 188,655,686.00 215,005,247.00

ANNUAL REPORTABLE
INCOME FOR 25 YEARS (c) 7,546,227.00 8,600,210.00

TAXABLE INCOME
FOR 1993 7,546,227.00 8,600,210.00

The amount of alleged unreported income for 1993 was arrived at by

(i) taking the total value of the improvements (including the


building equipment) in (a) above;

(ii) dividing the same by 40 years representing estimated useful life


to arrive at the annual depreciation over 40 years;

(iii) multiplying the annual depreciation over 40 years by 25 years


(representing the original 25-year term of the lease) to arrive at
the total depreciation expense to be claimed by the lessee for the
first 25-year term of the lease;

(iv) deducting the total depreciation expense for 25 years arrived at in


(iii) above from the total value of the improvements in (a) above
to arrive at the net depreciated value of the improvements after
25 years in (b) above; and

(v) dividing the net depreciated value after 25 years in (b) above by
25 years to arrive at the aliquot part of the net depreciated value
of the improvements at the end of the original 25-year term of the
lease which should allegedly be reported as income for each year
of the original 25-year term of the lease.

On 5 November 1999, respondent, through its external auditors, filed with


petitioner its protest letter dated 4 November 1999, pursuant to Section 228 of the Tax
Code, as amended. Said protest letter specified the factual and legal bases of the
protest against said alleged deficiency income tax assessment, and further requested
that the deficiency tax assessment be withdrawn and cancelled.

On 27 December 1999, petitioner's letter, dated 6 December 1999, was


received by respondent's external auditors, denying the protest filed on 5 November
1999.
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The denial of respondent's protest is based on the following grounds:

(i) the respondent's failure to report alleged rental income in the


amount of P16,146,437.00 can be legally considered a fraudulent
act with intent to evade tax; hence, the ten-year and not the
three-year, prescriptive period should apply;

(ii) even granting that there was no willful intent on the part of the
respondent to understate its rental income for purpose of evading
its corporate income, tax, the Supreme case, of Aznar vs.
Commissioner of Internal Revenues 5(5) that the filing of a false
tax return, even without any intent to evade tax, is likewise
embraced under the ten-year statute of limitations;

(iii) that Section 49 of Revenue Regulations No. 2, upon which the


assessment issued against respondent is based, is legal and has
the force and effect of law;

(iv) that the 50% surcharge is being imposed in the assessment


against the respondent by reason of the finding of petitioner that
respondent failed to report its income from the leasehold
improvements introduced by the lessees which amounts were
considered substantial; and

(v) that the imposition of the 25% surcharge in addition to the 50%
surcharge is justified considering that, since the assessment
against the Petitioner pertains to calendar year 1993, the
provisions of the old NIRC should apply, and not those of the
Tax Reform Act of 1997 and Revenue Regulations No. 12-99.

On 26 January 2000, respondent filed with the CTA a petition for review,
which prayed for the cancellation and termination of the alleged deficiency income
tax assessment for the taxable year 1993 in the amount of P19,779,385.50.

After the presentation of evidence by the parties, the CTA ruled in favor of
respondents, ordering the cancellation of the subject assessment issued by petitioner
against respondent.

In upholding respondent's stance, the CTA ruled that petitioner's right to assess
has already prescribed for having been issued beyond the three-year prescriptive
period and that there is no basis to apply the extended ten-year prescriptive period
considering that there was no willful intention to evade tax on the part of respondent
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in failing to report as income the amount of improvements introduced by its lessees.

The CTA is of the view that for the ten-year prescriptive period to apply, the
must be, apart from the element of mistake, a clear, unequivocal and willful intention
to evade tax. Considering that no evidence was presented to show the existence of
fraud, no "false return" was filed to justify the application of the ten-year period.
Petitioner's reliance on the Aznar Case, according to the CTA, was misplaced. Citing
Packaging Products Corporation vs. Commissioner of Internal Revenue, CTA Case
No. 4464, dated 11 January 1995, the court ruled that there must appear, if not a
design to mislead or deceive on the part of the taxpayer at least culpable negligence. A
mistake, not culpable in respect of its value would not constitute such false return.

From the said Decision of the CTA, petitioner filed a motion for
reconsideration 6(6) which was denied in a Resolution dated 12 March 2002 7(7). With
regard to petitioner's argument that Section 49 of Revenue Regulation No. 2 is still
valid and applicable in the instant case, the CTA ruled that Section 49 of Revenue
Regulation No. 2, which served as basis for the issuance of the subject assessment
was declared without force and effect by the United States Supreme Court (USSC).
The BIR recognizes this fact when on 6 May 1975, it issued a BIR Ruling addressed
to Mr. Antonio M. de Ynchausti adopting the said ruling. Considering that the
interpretation of the USSC of our tax law carries great weight and respect, having
patterned our own law after the US Tax Code, the basis for which the subject
assessment was issued become doubtful.

The Petition

Petitioner is now before this Court seeking a review of the said Decision and
Resolution issued by the CTA.

Petitioner argues that respondent's failure to report in its 1993 income tax
return the rental income from improvements introduced by its lessees, although
unintentional, makes the 1993 return a false return, therefore, the ten-year prescriptive
period applies as prescribed by Section 223 of the Tax Code (now Section 222 of the
1997 NIRC 8(8) ). Petitioner, again cites the Aznar Case where the Supreme Court
ruled 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. This view is strengthened 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
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intentional or not, the second implies intentional or deceitful entry with intent to evade
the taxes due. 9(9)

Petitioner further argues that Section 49 of Revenue Regulation No. 2 has the
force and effect of law having been promulgated by the Secretary of Finance, upon
recommendation of the Commissioner of Internal Revenue, in the exercise of his
power under Section 244 of the 1997 NIRC to "promulgate all needful rules and
regulations in connection with the implementation of the provisions of internal
revenue laws." Not having been modified or revoked, it is still valid and legal until
declared otherwise.

The surcharges thus imposed on the deficiency income tax assessment against
respondent finds basis in the fact that the said return was considered as a "false
return," thus making the respondent liable for the 50% surcharge. The 25% surcharge,
on the other hand, was imposed applying the old NIRC considering that the case
pertains to deficiency income tax for the calendar year 1993.

Respondent, on the other hand, maintains that petitioner's right to assess


deficiency income taxes has prescribed considering that the FAN was issued only
after 5 years from the time respondent filed its ITR, way beyond the three-year
prescriptive period provided for under Section 203 of the 1997 NIRC. To bolster its
argument, respondent cites CTA case San Miguel Corporation vs. Commissioner of
Internal Revenue (6 January 1995) which ruled that there is nothing in the Aznar Case
which establishes a hard and fast rule that every "deviation" from the truth necessarily
brings a particular return under the coverage of Section 223 of the Tax Code. It is only
where the falsity or "deviation" would place the government at a disadvantage so as to
prevent the assessment and collection of the correct amount of taxes that the ordinary
prescriptive period provided under Section 331 (now Section 203) of the Tax Code
should not be applied.

Respondent further argues, by citing the case of Commissioner of Internal


Revenue vs. B.F. Goodrich Phils., Inc., 10(10) that mere falsity of a return does not merit
the application of the ten-year prescriptive period. The element of fraud, as in the case
of the taxpayer's intent to evade the payment of the correct amount of tax, must be
clearly established. In the absence of proof that there exists fraudulent intent on the
part of respondent in failing to report as income the improvements introduced by its
lessees, there is no basis for the application of the ten-year prescriptive period.

On the validity of Section 49 of Revenue Regulation No. 2, respondent posits


that the said revenue regulation should no longer be enforced considering that in the
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12 March 2002 Resolution of the CTA, the court mentioned the fact that its
counterpart provision in the US Revenue Regulations was declared without force and
effect by the US Supreme Court and the BIR itself adopted this ruling in its 6 May
1975 ruling issued to Mr. Antonio M. de Ynchausti stating that, Section 49 of
Revenue Regulation No. 2, which was patterned after the US Revenue Regulations,
should no longer be enforced.

The Issue

The central issue that needs to be resolved in this case is whether or not
petitioner's right to assess herein deficiency income taxes has indeed prescribed as
ruled by the CTA.

The Court's Ruling

The petition has no merit.

Petitioner mainly argues that respondent, in failing to report as part of its


income the improvements introduced by its lessees in its ITR, filed a "false return" as
defined in the Aznar Case and consequently, the assessment made 5 years after the
ITR was filed on 15 April 1994 was still within the ten-year prescriptive period
provided for in Section 222 of the 1997 NIRC.

What, therefore, constitutes "false return" to warrant the application of the


ten-year prescriptive period? ESaITA

Section 222 of the 1997 NIRC provides:

(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.

In interpreting the above provision, it is important to note that commentaries


consider two (2) groups of exceptions provided for in Section 222: The first,
11(11)

where there is a failure to file the required return; and the second, where there is a
return filed but the same is false or fraudulent and made with intent to evade tax. It

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appears that the phrase "with intent to evade tax" qualifies not only the word
"fraudulent" but also the word "false", having been grouped together as one category
under the exceptions.

Under the rules of statutory construction, the qualifying words "with intent to
evade tax" should refer to both the words "false" and "fraudulent" since these words
are not separated by a comma. If it was the intent of the lawmakers to qualify only the
word "fraudulent" then the same should have been treated separately or at the very
least, the words "false" and "fraudulent" should have been separated by a comma to
show separate treatment of the two.

In the case of Florentino and Zandueta vs. P.N.B., 12(12) the Supreme Court
ruled in this wise:

Grammatically, the qualifying clause refers only to the last antecedent; that is,
"any citizen of the Philippines or any association or corporation organized under
the laws of the Philippines." It should be noted that there is a comma before the
words "or to any citizen, etc.," which separates said phrase from the preceding
ones.

The words "false" and "fraudulent" can therefore be treated as one category of
exception qualified by the phrase "with intent to evade tax."

But even if We disregard the grammatical construction, there are still


persuasive reasons why the qualifying phrase should refer to both the words "false"
and "fraudulent."

It is more logical to follow such interpretation considering that our tax law
provides a statute of limitations in the collection of taxes for the purpose of
safeguarding taxpayers from any unreasonable examination, investigation or
assessment. Thus, the law on prescription should be liberally construed in order to
afford such protection. Consequently, the exceptions to the law on prescription should
be strictly construed. 13(13) To allow a different interpretation of the said provision
would be unfair for the taxpayer and would negate the purpose for which said periods
were intended.

Reliance on the Aznar Case with regard to the issue of prescription is


misplaced. Although in the said case, the Supreme Court ruled that a "false return"
merely implies a deviation from the truth, whether intentional or not, such
pronouncement should not be given a sweeping application in all cases where a

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mistake in ITR entries are made by taxpayers. Otherwise, any mistake, however slight,
in a return filed by a taxpayer in good faith would justify the application of the
ten-year prescriptive period for assessment. Consequently, the protection provided for
under Section 203 of the 1997 NIRC is rendered nugatory. Logically therefore, not all
"false returns" would call for an application of Section 222 of the 1997 NIRC. Only
"false returns" which are filed by a taxpayer with intent to evade tax should warrant an
application of the ten-year prescriptive period.

In order to render a return made by a taxpayer a "false return" within the


meaning of Section 222, of the Tax Code, there must appear, a design to mislead or
deceive on the part of the taxpayer, or at least culpable negligence. A mistake, not
culpable in respect of its value would not constitute a false return. 14(14)

Moreover, the factual setting of the Aznar Case is entirely different from that
of the case at bar. In the said case, the taxpayer was assessed deficiency income taxes
for the years 1946 to 1951, covering more than five taxable years. On the other hand,
in this case, respondent was assessed deficiency income taxes only for the year 1993.

There is a false or fraudulent return if any of the following are present:

1. There is intentional substantial under declaration of income.

2. There is intentional substantial overstatement of deductions.

3. There is intentional under declaration of selling price and


overvaluation of cost or property sold.

4. Recurrence of the understatement of income or overstatement of


deductions for more than one taxable year. (emphasis supplied)
15(15)

In the Aznar Case the taxpayer undoubtedly filed several false tax returns
warranting the application of the ten-year prescriptive period. Clearly, in this case,
even if respondent made an understatement of income in its ITR, the same cannot
constitute a "false" or "fraudulent" return, since the subject deficiency assessment
pertains only to one taxable year. Moreover, no proof was presented to show that such
understatement of income was done intentionally to evade taxes.

The CTA correctly ruled that,

There is no basis for the application of the ten-year prescriptive period


based on the ground that there is no "willful intention to evade tax" on the part
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of the Petitioner (respondent herein).

An indispensable ingredient that must be proven to exist for the 10-year


prescriptive period to apply is that there must be, apart from the element of
mistake, a clear, unequivocal and willful intention to evade tax. 16(16)

In this case, the failure of respondent to report as part of its income the
improvements introduced by its lessees was omission done in good faith and not
intentionally to evade taxes due to the government, considering that Section 49 of
Revenue Regulation No. 2 admits of different interpretations.

In one commentary, the authors recognize that with respect to improvements


introduced by the lessee, several rules may be followed, thus,

In the case of lease agreements where the improvements introduced by


the lessee would thereby or later become the lessor's property, the following
rules have been offered:

(a) BIR Rule (Rev. Reg. No. 2): At his option, the lessor may
consider the property as income

(1) Upon the completion of the improvement; or

(2) By spreading the value of the improvement over the life


of the lease.

(b) United States Rule (Blatt vs. U.S., 308 U.S. 267):

(1) If the improvements are in the concept of rents, the lessor


must treat the property as income upon completion of the
improvement; but

(2) If the introduction of improvement is merely an incidental


element of the contract, then the lessor must treat the
property as income upon the termination of the lease.

The problem being indeed one of accounting, due consideration should


be given to the taxpayer's own accounting preference. Equally acceptable
perhaps would be the following approaches to a lessor who is

(a) On cash basis The lessor may consider the improvements as


income upon the effective transfer of legal and beneficial
ownership to him, i.e., fulfillment of all conditions therefore. If

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such transfer were to take place prior to the termination of the
lease it shall be its fair market value at the time of transfer minus
its expected depreciation for the balance of the period (such
remaining value being what the improvement would be worth to
the taxpayer). If the transfer were to take place upon the
termination of the lease then the taxable income would be the fair
market value of the property at that time. This remaining value,
having been earned, may then serve as a basis for possible
depreciation allowance over the further useful life of the
improvement.

(b) On accrual basis The value of the improvement may be


spread over the life of the lease and the value allocated over each
taxable year is the portion that is deemed earned. If, for any
reason, the improvement suffers a loss or is totally lost, then to
that extent, not exceeding what has been earned, this may
become a deductible loss. 17(17)

It appears, therefore, that in applying Section 49 of Revenue Regulation No. 2,


the choice is given to the lessor on when to treat the said improvements as income and
when to report the same in its ITR. There is no hard and fast rule with respect to the
application of the said provision. The lessor may opt to apply the BIR Rule or the U.S.
Rule since no fixed guideline with respect to reporting such improvements as income
has been provided for. It cannot be said, therefore, that in failing to report as income
the improvements introduced by the lessee, respondent was motivated by ill will with
intent to evade taxes. Differences in interpretation of the law between the
Commissioner and the taxpayer (do) not necessarily make the taxpayer's return false.
18(18)

The burden of proving fraud is with the BIR. One of the disputable
presumptions provided in Section 3 (ff), Rule 131 of the Revised Rules of Court is
that the law has been obeyed. If the three-year period for assessment has expired at the
time of the mailing of the notice of deficiency, the burden is on the BIR to show that
the ten (10) year period is applicable. 19(19)

The Supreme Court has ruled,

On the issue of whether Sec 331 or Sec. 332 (a) of the National Internal
Revenue Code should apply to this case, there is no iota of evidence presented
by the petitioner as to any fraud or falsity on the return with intent to evade
payment of tax. . . . Petitioner merely relies on the provisions of Section 25 of

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the National Internal Revenue Code, violation of which, according to petitioner,
presupposes the existence of fraud. But this is begging the question and We do
not subscribe to the view of the petitioner.

Fraud is a question of fact and the circumstances constituting fraud must


be alleged and proved in the court below. . . . Fraud is never lightly presumed
because it is a serious charge. (emphasis supplied) 20(20)

In the above quoted case of Commissioner of Internal Revenue vs. Ayala


Securities Corporation, 21(21) the Supreme Court applied the Aznar doctrine (on false
and fraudulent return in relation to the fraud penalty) to the prescriptive period, stating
that fraud must be alleged and proved and never lightly presumed. The Aznar Case
provided thus,

The lower court's conclusion regarding the existence of fraudulent intent


to evade payment of taxes was based merely on a presumption and not on
evidence establishing a willful filing of false and fraudulent returns so as to
warrant the imposition of the fraud penalty. The fraud contemplated by law is
actual and not constructive. It must be intentional fraud, consisting of deception
willfully and deliberately done or resorted to in order to induce another to give
up some legal right. Negligence, whether slight or gross, is not equivalent to the
fraud with intent to evade the tax contemplated by the law. It must amount to
intentional wrong-doing with the sole object of avoiding the tax. It necessarily
follows that a mere mistake cannot be considered fraudulent intent, and if both
petitioner and respondent Commissioner of Internal Revenue committed
mistakes in making entries in the returns and in the assessment, respectively,
under the inventory method of determining tax liability, it would be unfair to
treat the mistakes of the petitioner as tainted with fraud and those of the
respondent as made in good faith. (emphasis supplied) 22(22)

Considering the foregoing, there is no basis to disregard the three-year


prescriptive period. Since the petitioner failed to present proof that respondent filed a
false return with intent to evade tax, the period for assessment that should apply is the
three-year period provided in Section 203 of the 1997 NIRC and not the ten-year
period provided in Section 222 of the Code. Therefore, petitioner's right to assess
respondent the subject deficiency income taxes has already prescribed considering that
the assessment notice was issued more than three years, or five and a half years to be
exact, after respondent filed its ITR.

WHEREFORE, the petition is DISMISSED. The Decision, dated 10 January


2002, of the Court of Tax Appeals (CTA) in C.T.A. Case No. 6002 entitled Ayala

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Hotels, Inc. vs. Commissioner of Internal Revenue, is hereby AFFIRMED in toto.

SO ORDERED.

Vasquez, Jr. and De los Santos, JJ ., concur.

Footnotes
1. 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, and no proceeding in court
without assessment for the collection of such taxes shall be begun after the expiration
of such period; provided, that in a case where a return is filed beyond the period
prescribed by law, the three-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. (The National
Internal Revenue Code [NIRC] of 1997).
2. Decision, Rollo, p. 40.
3. Resolution, Rollo, p. 42.
4. See Petition for Review, Rollo, pp. 812; Memorandum for Petitioner, Rollo pp.
138142; Annex "D", Rollo, pp. 5052; and Decision of the Court of Tax Appeals,
Rollo, pp. 2430.
5. Aznar vs. Court of Tax Appeals, 58 SCRA 519, (23 August 1974).
6. Rollo, pp. 4349.
7. Resolution, Rollo, pp. 4142.
8. 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. . . . (1997
NIRC).
9. supra note 5 at p. 532.
10. Commissioner of Internal Revenue vs. B.F. Goodrich Phils., Inc., 303 SCRA 546 (24
February 1999).
11. See B. TEODORO AND H. DE LEON, THE LAW ON INCOME TAXATION, p.
507 (1998) [hereinafter TEODORO AND DE LEON]; J. VITUG AND E. ACOSTA,
TAX LAW AND JURISPRUDENCE, p. 298 (2000) [hereinafter VITUG AND
ACOSTA].
12. Florentino and Zandueta vs. PNB, 98 Phil 959 (28 April 1956).

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13. supra, note 10 at p. 554.
14. ABELARDO T. DOMONDON, TAXATION REVIEWER, p. 196 (1999)
[hereinafter DOMONDON].
15. TEODORO AND DE LEON, pp. 496497.
16. Decision, Rollo, p. 35.
17. VITUG AND ACOSTA., pp. 178179.
18. DOMONDON, p. 196.
19. Id., pp. 196197 (citing Packaging Products Corporation vs. Commissioner of
Internal Revenue CTA Case No. 4464, prom. 11 January 1995 citing Commissioner
of Internal Revenue vs. Ayala Securities Corporation, 70 SCRA 204 [31 March
1976]).
20. Commissioner of Internal Revenue vs. Ayala Securities, supra at pp. 209210.
21. Id.
22. supra note 5 at p. 543.

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Endnotes

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1. 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, and no proceeding in court
without assessment for the collection of such taxes shall be begun after the expiration
of such period; provided, that in a case where a return is filed beyond the period
prescribed by law, the three-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. (The National
Internal Revenue Code [NIRC] of 1997).

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2. Decision, Rollo, p. 40.

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3. Resolution, Rollo, p. 42.

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4. See Petition for Review, Rollo, pp. 812; Memorandum for Petitioner, Rollo pp.
138142; Annex "D", Rollo, pp. 5052; and Decision of the Court of Tax Appeals,
Rollo, pp. 2430.

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5. Aznar vs. Court of Tax Appeals, 58 SCRA 519, (23 August 1974).

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6. Rollo, pp. 4349.

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7. Resolution, Rollo, pp. 4142.

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8. 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. . . . (1997
NIRC).

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9. supra note 5 at p. 532.

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10. Commissioner of Internal Revenue vs. B.F. Goodrich Phils., Inc., 303 SCRA 546 (24
February 1999).

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11. See B. TEODORO AND H. DE LEON, THE LAW ON INCOME TAXATION, p.
507 (1998) [hereinafter TEODORO AND DE LEON]; J. VITUG AND E. ACOSTA,
TAX LAW AND JURISPRUDENCE, p. 298 (2000) [hereinafter VITUG AND
ACOSTA].

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12. Florentino and Zandueta vs. PNB, 98 Phil 959 (28 April 1956).

13 (Popup - Popup)
13. supra, note 10 at p. 554.

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14 (Popup - Popup)
14. ABELARDO T. DOMONDON, TAXATION REVIEWER, p. 196 (1999)
[hereinafter DOMONDON].

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15. TEODORO AND DE LEON, pp. 496497.

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16. Decision, Rollo, p. 35.

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17. VITUG AND ACOSTA., pp. 178179.

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18. DOMONDON, p. 196.

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19. Id., pp. 196197 (citing Packaging Products Corporation vs. Commissioner of
Internal Revenue CTA Case No. 4464, prom. 11 January 1995 citing Commissioner
of Internal Revenue vs. Ayala Securities Corporation, 70 SCRA 204 [31 March
1976]).

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20. Commissioner of Internal Revenue vs. Ayala Securities, supra at pp. 209210.

21 (Popup - Popup)
21. Id.

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22 (Popup - Popup)
22. supra note 5 at p. 543.

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