JOSE B. AZNAR v. CTA and CIR  PETITIONER: Sec.
 PETITIONER: Sec. 332 of the NIRC does not apply because the taxpayer did not
August 23, 1974 | ESGUERRA, J.:
FACTS:
 Matias H. Aznar died on May 18, 1958. He is the predecessor in interest of the
petitioner. During his lifetime as a resident of Cebu City, he filed his income tax
returns on the cash and disbursement basis.
 The Commissioner of Internal Revenue directed the BIR Examiner to ascertain
the taxpayer’s true income for said years since he was having doubts on the
veracity of the reported income of one obviously wealthy.
 November 28, 1952: The findings indicated that the taxpayer did not declare
correctly the income reported in his income tax returns for the years 1946-1951.
 The CIR Commissioner then notified the taxpayer (Matias H. Aznar) of the
assessed tax delinquency to the amount of P723,032.66, plus compromise
penalty. The taxpayer requested a reinvestigation which was granted for the
purpose of verifying the merits of his various objections to the assessment.
 February 16, 1955: another deficiency assessment to the reduced amount of
P381,096.07 superseded the previous assessment and notice thereof was
received by Matias H. Aznar on March 2, 1955.
 February 20, 1953: CIR thru the City Treasurer of Cebu, placed the properties of
Matias H. Aznar under distraint and levy to secure payment of the deficiency
income tax in question.
 April 1, 1955: Matias H. Aznar filed his petition for review of the case with the
Court of Tax Appeals with a subsequent petition immediately thereafter to restrain
respondent from collecting the deficiency tax by summary method.
 CTA: granted the petition without requiring petitioner to file a bond.
 SC: set aside the C.T.A. resolution and required the petitioner to deposit with the
Court of Tax Appeals the amount demanded by the CIR or furnish a surety bond
for not more than double the amount
 March 5, 1962: CTA concluded that the tax liability of the late Matias H. Aznar for
the year 1946 to 1951, inclusive should be P227,788.64 minus P96.87
representing the tax credit for 1945, or P227,691.77
ISSUES:
(1) WON the right of the CIR to assess deficiency income taxes of the late Matias
H. Aznar for the years 1946, 1947, and 1948 had already prescribed at the
time the assessment was made on November 28, 1952 – NO, 10 year
prescriptive period is applied.
 PETITIONER: the provision of law applicable to this case is the period of five
years limitation upon assessment and collection from the filing of the returns
provided for in Sec. 331 NIRC. He argues that since the 1946 income tax return
could be presumed filed before March 1, 1947 and the notice of final and last
assessment was received by the taxpayer on March 2, 1955, a period of about 8
years had elapsed and the five year period provided by law had already expired.
 RESPONDENTS: regarding the prescriptive period for assessment of tax returns,
Section 332 NIRC should apply because, as in this case," (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"
file false and fraudulent returns with intent to evade tax
 COURT: 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.
 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.
 The ordinary period of prescription of 5 years within which to assess tax liabilities
under Sec. 331 of the NIRC should be applicable to normal circumstances, but
whenever the government is placed at a disadvantage so as to prevent its lawful
agents from proper assessment of tax liabilities due to false returns, fraudulent
return intended to evade payment of tax or failure to file returns, the period of
ten years provided for in Sec. 332 (a) NIRC, from the time of the discovery of
the falsity, fraud or omission even seems to be inadequate and should be the
one enforced.
 There being undoubtedly false tax returns in this case Sec. 332 (a) of the NIRC
should apply and that the period of ten years within which to assess petitioner’s
tax liability bad net expired at the time said assessment was made.
(2) WON the 50% fraud penalty should be imposed – NO.
 PETITIONER: insists that there might have been false returns by mistake filed by
Mr. Matias H. Aznar as those returns were prepared by his accountant employees,
but there were no proven fraudulent returns with intent to evade taxes that would
justify the imposition of the 50% surcharge authorized by law as fraud penalty.
 COURT: As discussed earlier, the CTA made no distinction between false returns
(due to mistake, carelessness or ignorance) and fraudulent returns (with intent to
evade taxes). The lower court based its conclusion on a presumption that fraud
can be deduced from the very substantial disparity of incomes as reported and
determined by the inventory method and on the similarity of consecutive
disparities for six years. Such a basis for determining the existence of fraud
(intent to evade payment of tax) suffers from an inherent flaw when applied
to this case.
 The CIR concluded that the correct tax liability of Mr. Aznar amounted to
P723,032.66. After a reinvestigation the same respondent, in another
assessment, concluded that the tax liability should be reduced to P381,096.07.
This is a crystal-clear, indication that even the respondent CIR with the use of the
inventory method can commit a glaring mistake in the assessment of
petitioner’s tax liability.
 When the respondent CTA reviewed this case on appeal, it concluded that
petitioner’s tax liability should be only P227,788.64.
 The CTA supported petitioner’s stand on the wrong inclusions in his lists of assets
made by the CIR, resulting in the very substantial reduction of the liability.
 It was not only Mr. Matias H. Aznar who committed mistakes in his report of his
income but also the CIR who committed mistakes in his use of the inventory
method to determine the petitioner’s tax liability. The mistakes committed by the
CIR which also involve very substantial amounts were also repeated yearly, and
yet we cannot presume therefrom the existence of any taint of official fraud.
 Fraud cannot be presumed but must be proven. As a corollary thereto,
fraudulent intent could not be deduced from mistakes however frequent
they may be, especially if such mistakes emanate from erroneous entries or
erroneous classification of items in accounting methods utilized for
determination of tax liabilities.
 The predecessor of the petitioner undoubtedly filed his income tax returns and
those tax returns were prepared for him by his accountant and employees. It also
appears that petitioner in his lifetime and during the investigation of his tax
liabilities cooperated readily with the B.I.R. and there is no indication in the record
of any act of bad faith committed by him.
 The CTA’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 as 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.
 The 50% surcharge as fraud penalty authorized under Section 72 of the Tax Code
should not be imposed, but eliminated from the income tax deficiency for each
year from 1946 to 1951, inclusive.
 The total sum of P151,859.10 should be decreased by P96.87 representing the
tax credit for 1945, thereby leaving a balance of P151,762.23.
 DISPOSITIVE: WHEREFORE, the decision of the Court of Tax Appeals is
modified in so far as the imposition of the 50% fraud penalty is concerned, and
affirmed in all other respects. The petitioner is ordered to pay to the Commissioner
of Internal Revenue, or his duly authorized representative, the sum of
P151,762.23, representing deficiency income taxes for the years 1946 to 1951,
inclusive, within 30 days from the date this decision becomes final. If the said
amount is not paid within said period, there shall be added to the unpaid amount
the surcharge of 5%, plus interest at the rate of 12% per annum from the date of
delinquency to the date of payment, in accordance with Section 51 of the National
Internal Revenue Code.