Aznar v.
CA
L-20569, Aug. 23, 1974
Doctrine: The proper and reasonable interpretation of Sec. 332 of the NIRC 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 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.
Facts:
Matias H. Aznar died on May 18, 1958. He filed his income tax returns on the cash and disbursement
basis. The CIR was having doubts on the veracity of the reported income as he was obviously wealth.
Hence, the BIR Examiner investigated and went through his income. It was then discovered that the
taxpayer did not pay correctly his taxes, by not declaring his income correctly.
Hence, the CIR notified the taxpayer and ordered him to pay Php723K. Later on, another deficiency
assessment was done, which reduced the amount to P381K. The CIR placed the properties of Aznar under
distraint and levy to secure payment of the deficiency income tax.
Matias Aznara filed a petition for review before the CTA. The CTA restrained the CIR from collecting
the deficiency tax by summary. This was however overturned by the SC. Hence, the petitioner was
required to pay the deposit to the CTA the amount that the CIR was demanding from him.
CTA ruled that petitioner should only be liable for Php227K.
Petitioner, as the administrator of the estate of Matias Aznar, was ordered to pay by the CIR to pay the
government Php227K, representing deficiency income taxes for the years, 1946-1951. If such amount
was not paid, a surcharge of 5% + interest at the rate of 12% per annum would be added.
Issues:
1. W/N the right of CIR to collect has already prescribed? NO.
2. W/N the penalty of surcharge must be imposed? NO.
Held:
1. Sec. 332 of the NIRC provides that “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.” 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 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.
The ordinary period of prescription of 5 years within which to assess tax liabilities under Sec. 331
should be applicable to normal circumstances, but when the government is at a disadvantage,
where its lawful agents are prevented 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
10 years should be the one enforced.
There are false tax returns in this case. Hence, the conclusion of the CTA should be applied.
2. Should there be fraud, the fraud penalty of a surcharge may be imposed under Sec. 72 of the Tax
Code. However, fraud cannot be presumed, but must be proven. 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 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.
In the present case, fraud cannot be presumed just because the petitioner was making a mistake in
filing his tax returns. In fact, even the CIR made mistakes when computing for the deficiency.
The mistakes committed by the Commissioner of Internal Revenue which also involve very
substantial amounts were also repeated yearly, and yet we cannot presume therefrom the
existence of any taint of official fraud.
