Aznar vs.

Court of Tax Appeals

GR No. 20569, 23 August 1974

Facts:
PET, as administrator of the estate of the deceased Matias H. Aznar, seeks a review and nullification of CTA decision,
ordering PET to pay deficiency income taxes P227,691.77 for 1946-1951.

 CIR investigation discovered that the taxpayer did not declare correctly the income in his income tax returns
because the increase in net worth from 1946-1951 was very much more than the income reported.
PET: According to the NIRC, the right of the CIR to assess deficiency income taxes of the late Aznar for the years
1946, 1947, and 1948 had already prescribed at the time the assessment was made on November 28, 1952; there
being a five year limitation upon assessment and collection from the filing of the returns.
RESP: The prescription period applicable is under Sec. 332 of the NIRC which provides that: "(a) In the case of a
false or fraudulent return with intent to evade tax or of a failure to file a return, the tax may be assessed, or a
proceeding in court for the collection of such tax may be begun without assessment, at any time within ten years after
the discovery of the falsity, fraud or omission".

- PET argues said provision does not apply because the taxpayer did not file false and fraudulent returns with
intent to evade tax.
ISSUE:
W/N deceased Aznar filed false or fraudulent income tax returns? YES (W/N action has prescribed? NO)

RATIO:

Sec. 332 of the NIRC provides that in cases of (1) false return, (2) fraudulent return with intent to
evade tax, (3) failure to file a return, the tax may be assessed at any time within 10 years after its
discovery.

 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 that it would prevent its lawful agents from proper assessment of tax
liabilities, the prescription period of 10 years from the time of the discovery of the falsity, fraud
or omission should apply.
 The law should be interpreted to mean a separation of the three different situations, namely
"falsity", "fraud" and "omission".

 "False return" merely implies deviation from the truth, whether intentional or not,
while "fraudulent return" implies intentional or deceitful entry with intent to evade the
taxes due.

 ITC, there being undoubtedly false tax returns, we affirm RESP’s conclusion that Sec. 332 (a) of
the NIRC should apply and that the period of 10 years within which to assess PET’s tax liability
had not expired at the time said assessment was made.

SC: PET, however, was right in claiming that while there might have been false tax returns, 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.

SC: Fraud cannot be presumed but must be proven. Also, 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 deceased’s income tax returns were prepared for him by his accountant and employees.
During his lifetime and during the investigation of his tax liabilities, he cooperated readily with
the B.I.R. and there is no indication in the record of any act of bad faith committed by him.

SC: 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.