EN BANC

[G.R. No. 247737. August 8, 2023.]

MCDONALD'S PHILIPPINES REALTY CORPORATION , petitioner, vs. COMMISSIONER OF

INTERNAL REVENUE, respondent.

DECISION

INTING, J : p

Before the Court is a Petition for Review on Certiorari 1 under Rule 45 of the Rules of Court filed by
McDonald's Philippines Realty Corporation (petitioner or MPRC) assailing the Decision 2 dated October 11,
2018, and the Resolution 3 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 P9,206,213.06 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 (BIR). 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 HTcADC

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 Notice 9 (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 P33,432,243.06, 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 Notice 13 (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 P11,080,687.70.
Then, it proceeded to assess MPRC deficiency VAT amounting to P3,104,836.70, 15 computed as follows: 16
CAIHTE

Rentals and  Â
Interest
Receivable

Beginning  P22,389,808.93
balance

Add: Â Â
Income
during the
year

Rentals P41,121,288.00 Â

Interest 25,522,729.00 66,644,017.00

income

 ––––––––––––– –––––––––––––
Total  P89,033,825.93
amount
available for
collection
Less: Â 34,701,795.53
Ending
balance

  –––––––––––––

Collections  P54,332,030.40
during the
year

Multiply by: Â 12%

VAT rate

  –––––––––––––

Output tax  P6,519,843.65

due

Less  0.00
Creditable
input tax

  –––––––––––––

VAT Â P6,519,843.65
due/payable
per audit

Less VAT Â 5,190,149.13

payments
per returns

  –––––––––––––

Basic  P1,329,694.52
deficiency
VAT due

Add 20% P1,110,294.92 Â

interest

50% 664,847.26 1,775,142.18

surcharge

 –––––––––––– ––––––––––––

Total  P3,104,836.70
deficiency
VAT per
FLD/FAN

  ===========

Â
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 FDDA 19 dated January 16, 2014. After
adjusting the accrued interest, the CIR found petitioner liable for deficiency VAT of P3,595,275.39, 20
computed as follows:
Â

Basic  P1,329,694.52
deficiency
VAT due 21
 Add 20% P1,600,733.62 Â
interest

50% 664,847.26 2,265,580.88

surcharge

 –––––––––––– ––––––––––––

Total  P3,595,275.39
deficiency
VAT per
FDDA

  ===========

Â
Aggrieved, MPRC elevated the case to the CTA via a Petition for Review 22 (judicial protest). The case
was raffled to the CTA Third Division (CTA Division) and docketed as CTA Case No. 8766. aScITE

Ruling of the CTA Division

In the Decision 23 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 1997 26 (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. 16-2005 27 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 summarized 29 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.:
Â

Filing of Return
Period Covered
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

Â
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 CIR's proposition that MPRC's VAT returns were false.
Citing Aznar v. Court of Tax Appeals 30 (Aznar), which differentiated between a false return (i.e.,
implying a deviation from the truth, which may either be intentional or not) and a 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 P25,522,729.00 31 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 CIR'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 (ICPA) 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 (B) 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 VAT. 34
In fine, MPRC was made liable for deficiency VAT in the reduced amount of P2,224,211.02, inclusive
of 25% surcharge, and was ordered to pay deficiency interest at the rate of 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 P2,224,211.02 computed from January 17, 2014 until full payment.
35 DETACa

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 Decision 39 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 mandatorily 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. HEITAD

xxx xxx xxx

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(B) and (C) of the NIRC of 1997,
as amended, respectively computed until December 31, 2017:
Â

Basic Deficiency VAT [P]1,779,368.82

Add: 25% Surcharge [P]444,842.20

Deficiency [i]nterest computed from January 26, 2008 [to] January [P]1,779,368.82
17, 2014.
20%
*5.9836 years

Subtotal [P]2,129,392.60

 Â

Total Amount Due as of January 17, 2014 (Deficiency VAT with

surcharge plus Deficiency Interest) [P]4,353,603.63

 Â
 Deficiency [i]nterest computed from January 18, 2014 [to] [P]1,779,368.82
December 31, 2017.
20%
*3.9562 years

Subtotal [P]1,407,895.11

 Â

Delinquency interest computed from January 18, 2014 [to] [P]4,353,603.63

December 31, 2017.
20%
*3.9562 years

Subtotal [P]3,444,714.32

 Â

TOTAL AMOUNT DUE — December 31, 2017 (Deficiency VAT with

Deficiency interest plus delinquency [i]nterest) [P]9,206,213.06

Â
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. aDSIHc

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 (P25,522,729.00) 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 Resolution 44 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) Â 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) Â 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) Â 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. ATICcS

(d) Â 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 and/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 Inquirer
53 (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 ETHIDa

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 VAT 65 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 allows the extraordinary 10-year
assessment period of assessment to apply immediately. 70
Second , the Inquirer case did not supersede Aznar 71 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 P4,612,816.92, P9,295,544.67, P6,507,750.11, and P22,835,131.00,
respectively. However, it failed to report the subject interest income in the aggregate amount of
P25,522,729.00. 75 Citing Section 248 (B) 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 TIADCc

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. Â 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. Â If the CIR was not entitled to the 10-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. cSEDTC

A. Â 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 1939 81 (1939 Tax Code) provides:
SECTION 15. Â Power of Collector of Internal Revenue to 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 of Internal Revenue shall assess the
proper tax on the best evidence obtainable. x x x
xxx xxx xxx
SECTION 38. Â 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 16 82 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. Â Power of the Commissioner to Make Assessments and Prescribe Additional
Requirements for Tax Administration and Enforcement. — x x x
(B) Â 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. AIDSTE

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. Â 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. Â 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 ofa 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. Â 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.
xxx
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.: SDAaTC

SEC. 319. Â 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:
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. Â Exceptions as to Period of Limitation of Assessment and Collection of Taxes. —
(a) Â 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. Â 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. Â 1939 Tax Code
•  Aznar
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 [ITRs] with an intent to evade the payment of
tax." 88
AaCTcI
 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.
•  BF Goodrich
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-year 90 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. acEHCD

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. Â 1977 Tax Code
•  Commissioner of Internal
Revenue v. Fitness by Design,
Inc. 93 (Fitness by Design)
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. Â 1997 Tax Code
•  Samar-I Electric Cooperative v.
Commissioner of Internal
 Revenue 94 (Samar Electric)
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 P2,690,850.91
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. EcTCAD

•  Commissioner of Internal

Revenue v. Asalus Corp. 95
(Asalus)
I n 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
t h e 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(B) 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, As alus' 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 of 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. SDHTEC

xxx xxx xxx

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 (B) 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.
•  Inquirer
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.:
Â

 Date of Execution of the Assessment Period Extended

Waiver 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

Â
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-referred 97
the purchases recorded by the taxpayer in its books 98 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. HSAcaE

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.
•  Commissioner of Internal
Revenue v. Spouses Magaan 100
(Spouses Magaan)
The tax assessment in Spouses Magaan stemmed from a complaint-affidavit filed by a confidential
informant. It was alleged that the taxpayers earned P35,498,477.62 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 court 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 AScHCD

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.
•  Commissioner of Internal
Revenue v. Unioil Corp. 103
(Unioil)
I n 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. Â Proof of Falsity or Fraud
i. Â 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,
105in observance of the ordinary course of business,106 and in compliance with the applicable rules and
regulations. 107HESIcT

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. Â 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. Â Civil Penalties. —
(A) Â 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) Â 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) Â 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) Â Failure to pay the deficiency tax within the time prescribed for its payment in the notice of
assessment; or
(4) Â 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 due for which no
return is required to be filed, on or before the date prescribed for its payment.
AcICHD

(B) Â 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%) 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) Â The CIR ascertains that there is a misstatement or misdeclaration in the return, in particular,
a. Â an underdeclaration of sales, receipts, or income or
b. Â an overstatement of expenses or other deductions
2) Â 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. Â Due Process Requirements When
Invoking the 10-Year Period
i. Â 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. caITAC

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 inUnioil).
ii. Â 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 the presumption 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 (B) 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 (B) 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. TAIaHE

iii. Â 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 afalse 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 falsehood 114 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 ICHDca

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. Â Summary: Conditions for a Valid
Extension of Assessment Period in
Case of a False Return
i. Â Requisites under Section 222 (a) of
the 1997 Tax Code
•  General Rule — Proof of False
or Fraudulent Return
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) Â the return contains an error or misstatement, and
(2) Â such error or misstatement was deliberate or willful.
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. cDHAES

It shall be the CIR's burden to establish the existence of the above-enumerated statutory requisites
with clear and convincing evidence.
•  Exception — Prima Facie
Evidence of a False or
Fraudulent Return (30%
Threshold)
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) Â The CIR ascertains that there is a misstatement/misdeclaration in the return, in particular,
(a) Â an understatement/underdeclaration of sales, receipts, or income or
(b) Â an overstatement/overdeclaration of expenses or other deductions, and
(2) Â 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. If 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 ascertained 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. Â Due Process Requirements
(1) Â First Due Process Requirement. The assessment notice issued to the taxpayer must
clearly state the following:
(a) Â that extraordinary prescriptive period (not the basic three-year period) is being
applied, and
(b) Â 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) Â 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.TCAScE

G. Â 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. Â 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. ASEcHI

•  The CIR cannot benefit from the

presumption of falsity
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 P25,522,729.00, 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
xxx xxx xxx
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 x x 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(B) of the Tax Code
for filing a false return. 120
It is clear from the foregoing that the CIR involved 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 Comment 121 to the present petition, the CIR continues to use the presumption or 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 P25,522,729.00, which accounts to more
than 30% of the total VATable receipts MPRC declared in its 2007 returns. 122 cTDaEH

To validate the CIR's assertion, the Court references below the pertinent details of the subject
returns, as culled from the CTA Division rollo:
Â

Quarter Rental Income 123

First P4,612,816.92

Second 9,295,544.67

Third 6,507,750.11

Fourth 22,835,131.00

Total VAT-able Sales P43,251,242.70

Â
Verily, the alleged unreported interest income of P25,522,729.00 is more than 30% or, specifically,
59.01% of the total declared VATable sales, viz.:
Â
 Alleged undeclared interest income P25,522,729.00
("Numerator")

Divide by total receipts declared in VAT returns 43,251,242.70

 ––––––––––––

 0.5901

Multiply by: 100

 ––––––––––––

Percentage (%) 59.01%

 ==========

Â
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
P25,522,729.00 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.: ITAaHc

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 constructively
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/FAN 130 and FDDA 131 reveals that the amount of
P25,522,729.00, 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 P25,522,729.00 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 Banc 134 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 petitioner's 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. 135cSaATC

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 failed to prove
intentional falsity
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. Â The CIR acted in violation of
MPRC's due process rights
As discussed above, due process in invoking the exceptional period 10-year not onlyrequires 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, 2011 137 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: CHTAIc

 Date of Execution Extended Until

First Waiver December 29, 2010 December 31, 2011

Second Waiver December 27, 2011 March 31, 2012

Â
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 2007 141 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. cHDAIS

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, Hernando, Lazaro-Javier, Zalameda, M.V. Lopez, Gaerlan, J.Y. Lopez,
Marquez, Kho, Jr. and Singh, JJ., concur.
Caguioa, J., see concurring opinion.
Rosario, * J., is on leave.
Dimaampao, J., see concurring and dissenting opinion.

Separate Opinions
CAGUIOA, J., concurring:
I fully concur with the ponencia's abandonment of the Court's ruling in Aznar v. Court of Tax Appeals
1 (Aznar) which applied the extraordinary 10-year prescriptive period under Section 222 (a) of the National
Internal Revenue Code of 1997 2 (1997 NIRC) to false returns in general.
I submit this Concurring Opinion only to highlight that the filing of false returnswithout intent to
evade tax does not warrant the application of the 10-year prescriptive period under Section 222 (a) of the
1997 NIRC.
For context, the crux of the controversy in this case pertains to whether petitioner McDonald's
Philippines Realty Corporation (MPRC) should be subject to the ordinary three-year prescriptive period or
the extraordinary 10-year prescriptive period for assessment. MPRC asserts that the three-year period is
applicable to its situation because it did not file a false return with intent to evade tax. Respondent
Commissioner of Internal Revenue (CIR) insists otherwise and maintains that the issuance of the subject
assessment was not yet barred by prescription as the 10-year prescriptive period should be applied due to
MPRC's submission of a false return. On this note, the Court of Tax Appeals En Banc (CTA EB) agreed with
the CIR and concluded that MPRC committed falsity in its 2007 Quarterly Value-Added Tax (VAT) returns as
it did not declare substantial receipts from its interest income. This deviation from the truth, according to
the CTA EB, warrants the application of the 10-year prescriptive period for assessment. EATCcI

The CIR's power to assess and collect taxes is provided under Section 2 of the 1997 NIRC, which
reads:
SECTION 2. Â Powers and Duties of the Bureau of Internal Revenue. — The Bureau of Internal
Revenue shall be under the supervision and control of the Department of Finance and its powers and
duties shall comprehend the assessment and collection of all national internal revenue taxes, fees,
and charges, and the enforcement of all forfeitures, penalties, and fines connected therewith,
including the execution of judgments in all cases decided in its favor by the Court of Tax Appeals and
the ordinary courts. The Bureau shall give effect to and administer the supervisory and police powers
conferred to it by this Code or other laws.
This power to assess and collect taxes is, however, limited by Section 203 of the 1997 NIRC:
SECTION 203. Â 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 (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.
As an exception to the ordinary three-year prescriptive period for assessment and collection of taxes,
Section 222 of the 1997 NIRC provides:
SECTION 222. Â Exceptions as to Period of Limitation of Assessment and Collection of Taxes .
—
(a) Â 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.
(Emphasis supplied)
Like the ponencia, I find that the extraordinary 10-year period to assess doesnot apply in the
present case — which is a situation of a return being false but without any intent to evade the tax.
A review of relevant jurisprudence on the definition of a "false return" is in order. ISHCcT

In 1974, the Court strictly defined in Aznar what constitutes a false return as a "deviation from the
truth, whether intentional or not" such that "it becomes easy for revenue officers to claim that there was
falsity in the return filed by the taxpayer that would allow the assessment of tax within ten (10) years from
the date of discovery." 3
However, as will be discussed below, subsequent decisions after Aznar suggest that the Court had
relaxed the strict application of what constitutes a false return.
Almost 25 years after Aznar, the Court promulgated the case of CIR v. B.F. Goodrich Phils., Inc. 4 (B.F.
Goodrich Phils.), where the CIR argued that there was "falsity" when the taxpayer sold a property for a
price lesser than its declared fair market value thereby justifying the application of the extraordinary
prescriptive period to assess. In refusing to apply the 10-year period, the Court held that mere falsity in
the return is insufficient to take the questioned assessment out of the ambit of the ordinary prescriptive
period to assess. The CIR must prove that the return was filed fraudulently or that the taxpayer intended
to evade the payment of correct taxes to justify the application of the 10-year period, to wit:
Petitioner insists that private respondent committed "falsity" when it sold the property for a
price lesser than its declared fair market value. This fact alone did not constitute a false return
which contains wrong information due to mistake, carelessness or ignorance. It 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. In the present case, the private
respondent was compelled to sell the property even at a price less than its market value, because it
would have lost all ownership rights over it upon the expiration of the parity amendment. In other
words, private respondent was attempting to minimize its losses. At the same time, it was able to
lease the property for 25 years, renewable for another 25. This can be regarded as another
consideration on the price.
Furthermore, the fact that private respondent sold its real property for a price less
than its declared fair market value did not by itself justify a finding of false return. Indeed,
private respondent declared the sale in its 1974 return submitted to the BIR. Within the five-year
prescriptive period, the BIR could have issued the questioned assessment, because the declared fair
market value of said property was of public record. This it did not do, however, during all those five
years. Moreover, the BIR failed to prove that respondent's 1974 return had been filed
fraudulently. Equally significant was its failure to prove respondent's intent to evade the
payment of the correct amount of tax. DHITCc

Ineludibly, the BIR failed to show that private respondent's 1974 return was filed
fraudulently with intent to evade the payment of the correct amount of tax. Moreover, even
though a donor's tax, which is defined as "a tax on the privilege of transmitting one's property or
property rights to another or others without adequate and full valuable consideration," is different
from capital gains tax, a tax on the gain from the sale of the taxpayer's property forming part of
capital assets, the tax return filed by private respondent to report its income for the year 1974 was
sufficient compliance with the legal requirement to file a return. In other words, the fact that the sale
transaction may have partly resulted in a donation does not change the fact that private respondent
already reported its income for 1974 by filing an income tax return.
Since the BIR failed to demonstrate clearly that private respondent had filed a
fraudulent return with the intent to evade tax, or that it had failed to file a return at all,
the period for assessments has obviously prescribed. Such instances of negligence or
oversight on the part of the BIR cannot prejudice taxpayers, considering that the prescriptive period
was precisely intended to give them peace of mind. 5 (Emphasis supplied, italics and citations
omitted)
In the 2004 case of CIR v. Estate of Toda, Jr. 6 (Estate of Toda, Jr.) , the Court interpreted Section 269
of the 1986 NIRC (now Section 222 of the 1997 NIRC) differently from Aznar — that the phrase "intent to
evade tax" qualified the term "false return" and not "fraudulent return," to wit:
Has the period of
 assessment prescribed?
No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997) read:
Sec. 269. Â 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 after 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 collection thereof.
Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to
evade tax; and (3) failure to file a return, the period within which to assess tax is ten
years from discovery of the fraud, falsification or omission, as the case may be. 7
(Emphasis and underscoring supplied, italics in the original)
Then in the 2016 case of Republic of the Phils. v. GMCC United Development Corp., et al. 8 (GMCC
United Development Corp.), the Court also refused to apply the 10-year period to assess:
In arguing for the application of the 10-year prescriptive period, petitioner claims that the tax
return in this case is fraudulent and thus, the three-year prescriptive period is not applicable. CAacTH

Petitioner fails to convince that respondents filed a fraudulent tax return. The respondents
may have erred in reporting their tax liability when they recorded the assailed
transactions in the wrong year, but such error stemmed from the wrong application of the
law and is not an indication of their intent to evade payment. If there were really an
intent to evade payment, respondents would not have reported and subsequently paid
the income tax, albeit in the wrong year. 9 (Emphasis supplied, citation omitted)
Still further, in the 2017 case of CIR v. Philippine Daily Inquirer, Inc. 10 (Philippine Daily Inquirer), the
Court, applying the case of B.F. Goodrich Phils., categorically declared:
In Commissioner of Internal Revenue v. Javier , this Court ruled that fraud is never imputed. The
Court stated that it will not sustain findings of fraud upon circumstances which, at most, create only
suspicion. The Court added that the mere understatement of a tax is not itself proof of fraud
for the purpose of tax evasion. The Court explained:
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 fraud with intent to evade the tax contemplated by law. It must amount to
intentional wrong-doing with the sole object of avoiding the tax.
I n Samar-I Electric Cooperative v. Commissioner of Internal Revenue , the Court differentiated
between false and fraudulent returns. Quoting Aznar v. Court of Tax Appeals , the Court explained in
Samar-I the acts or omissions that may constitute falsity, thus:
Petitioner argues that Sec. 332 of the NIRC does not apply because the taxpayer
did not file false and fraudulent returns with intent to evade tax, while respondent
Commissioner of Internal Revenue insists contrariwise, with respondent Court of Tax
Appeals concluding that the very "substantial under[ ]declarations of income for six
consecutive years eloquently demonstrate the falsity or fraudulence of the income tax
returns with an intent to evade the payment of tax." cEaSHC

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 segregates the situation 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 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) [of the] NIRC, from the time of discovery of the falsity, fraud or omission even
seems to be inadequate and should be the one enforced.
Thus, while the filing of a fraudulent return necessarily implies that the act of the
taxpayer was intentional and done with intent to evade the taxes due, the filing of a false
 return can be intentional or due to honest mistake. In CIR v. B.F. Goodrich Phils., Inc. , the
Court stated that the entry of wrong information due to mistake, carelessness, or
ignorance, without intent to evade tax, does not constitute a false return. In this case, we
do not find enough evidence to prove fraud or intentional falsity on the part of PDI.
Since the case does not fall under the exceptions, Section 203 of the NIRC should
apply. 11 (Emphasis supplied, citations omitted)
While the Court in Philippine Daily Inquirer cited Aznar in differentiating between a false and a
fraudulent return, it nonetheless recognized and applied the ruling in B.F. Goodrich Phils. that "the entry of
wrong information due to mistake, carelessness, or ignorance, without intent to evade tax, does not
constitute a false return." The Court concluded that since there was no evidence to prove fraud or
intentional falsity on the part of the taxpayer, then the three-year, and not the 10-year, prescriptive period
applies. IAETDc

Clearly, in contrast to Aznar, the cases of B.F. Goodrich Phils., Estate of Toda, Jr. , and GMCC United
Development Corp. held that mere falsity of a return will not warrant the application of the 10-year
prescriptive period for an assessment. It must be established that the filing of a false return was done
intentionally or with intent to evade the payment of tax.
Thus, as I see it, the Court's strict definition of false return inAznar (rendered in 1974) was
effectively abandoned by the Court as early as 1999 in its ruling inB.F. Goodrich Phils. , which
categorically declared that the main issue it was resolving therein was the prescription provision of
Section 332 of the 1939 Tax Code 12 (now Section 222 of the 1997 NIRC). As the Court notably held:
For the purpose of safeguarding taxpayers from any unreasonable examination, investigation
or assessment, our tax law provides a statute of limitations in the collection of taxes. Thus, the law
on prescription, being a remedial measure, should be liberally construed in order to afford such
protection. As a corollary, the exceptions to the law on prescription should perforce be strictly
construed. 13 (Citation omitted)
That B.F. Goodrich Phils. had really abandoned the strict interpretation in Aznar is thereafter seen in
the promulgation of the case of Philippine Daily Inquirer in 2017. The Court cannot ignore its ruling in
Philippine Daily Inquirer as an authoritative example, because, as in this case, the main issue resolved
therein was the prescription provision on the assessment and collection of taxes. Thus, Philippine Daily
Inquirer affirms the position of the ponencia that the strict interpretation in Aznar had already been
abandoned by B.F. Goodrich Phils.
In his Concurring and Dissenting Opinion, Associate Justice Japar B. Dimaampao (Justice Dimaampao)
takes a different view urging the Court to revert to the decision in Aznar. For Justice Dimaampao, there is
no need to abandon Aznar because it is more in keeping with the literal wording of Section 222 (a) of the
1997 NIRC and the spirit of the law. 14
I disagree. The Court should not disturb the prevailing current jurisprudence and, through the current
ponencia, it should now finally and definitively hold that the narrow interpretation inAznar where a "false
return" was simplistically understood to mean any "deviation from the truth, whether intentional or not,"
has been abandoned.
Again, for easier reference, the provision in question reads as follows:
SECTION 222. Â Exceptions as to Period of Limitation of Assessment and Collection of Taxes .
—
(a) Â 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.
(Emphasis supplied) CTIEac

While the above provision shows that the phrase "with intent to evade tax" follows the phrase
"fraudulent return," it is absurd to interpret that only a "fraudulent return" is qualified by the phrase "with
intent to evade tax" because "fraudulent return" already embraces the intent to avoid tax. In other words,
to use "with intent to evade tax" as the modifier of "fraudulent return" is defining a term with its own
definition. Borrowing the words of the Court in Philippine Daily Inquirer quoting from Samar-I Electric
Cooperative v. CIR, 15 the filing of a fraudulent return "necessarily implies that the act of the taxpayer was
intentional and done with intent to evade the taxes due." The "literal wording" of the law, therefore, as
properly applied — and contrary to the position of Justice Dimaampao — is that the phrase "with intent to
evade tax" modifies only — as it can only modify — the term "false return."
To continue following Aznar is to continue to destroy any significant difference between the three-
year and 10-year periods because any error or omission by the taxpayer in his or her return, even if by
simple mistake or ignorance will be considered as an assessment under the extraordinary 10-year period.
More importantly, this broad interpretation of what constitutes a false return only widens the door to
corruption and abuse of power by tax authorities. In the context of regular tax audits, where findings of
under-declared income or over-declared deductions are common, any mistake, no matter if in good faith,
will result in triggering the 10-year prescriptive period.
Justice Dimaampao further submits that it would be absurd to presume that the legislative intent
behind Section 222 (a) of the 1997 NIRC allows for the extraordinary period only when no return is filed
and not when a return is filed with errors or inaccuracies. It was suggested that both scenarios equally
hinder the taxing authority's collection efforts, and restricting the provision to false returns filed with intent
to evade tax limits the government's ability to recover taxes. 16
With due respect, this is wrong. The distinction between situations in which no return is filed and
situations in which false returns are filed without the intent to evade tax is justified by practical and legal
considerations. It is important to consider that the prescriptive period for assessment and collection exists
to strike a balance between allowing the government to effectively assess and collect taxes while also
ensuring fairness and protection for taxpayers . When no return is filed, the taxing authority faces
significant challenges in assessing and collecting taxes. The absence of a return deprives the government
of any basis for determining the taxpayer's liability, making it difficult to initiate the assessment or
collection process. To address this, the law provides for the extraordinary 10-year prescriptive period. DcHSEa

On the other hand, false returns present a different scenario. While errors or inaccuracies in a return
may create difficulties for the taxing authority, it is essential to note that the government still has access
to the filed returns. The three-year period prescribed for assessing and collecting taxes in such cases
strikes a balance between giving the government enough time to identify and address false returns while
safeguarding the rights of taxpayers. Furthermore, the three-year period does not preclude the
government from assessing and collecting taxes based on false returns. Within this timeframe, the
government retains the authority and resources to assess and collect taxes.
Justice Dimaampao raises the question regarding the qualification of false returns with the phrase
"with intent to evade tax" and its potential differentiation from fraudulent returns. He submits that if false
returns can be filed with the intent to evade tax, yet not be classified as fraudulent, it may render the word
"fraudulent" superfluous. 17 The problem with this formulation is that the premise is false. When a false
return is determined by the tax authorities as having an "intent to evade tax," then that false return is a
fraudulent return and the 10-year period is triggered.
To repeat, to limit the application of the phrase "with intent to evade tax" solely to fraudulent returns
would be redundantly repetitious and overlooks the balancing act provided by Section 222 (a), as
heretofore already explained.
Indeed, the subsequent cases after Aznar provide a more sound and logical approach in
the construction and application of Section 222 of the 1997 NIRC.
Intent to evade tax or tax evasion refers to the payment of less than that known by the taxpayer to
be legally due, or the non-payment of tax when it is shown that a tax is due with an accompanying state of
mind which is described as being evil, in bad faith, willful, or deliberate and not accidental. 18 On the other
hand, fraud, in its general sense, refers to "the deliberate intention to cause damage or prejudice. It is
voluntary execution of a wrongful act, or a willful omission, knowing and intending the effects which
naturally and necessarily arise from such act or omission." 19 Therefore, to construe that the phrase "with
intent to evade tax" as only qualifying the term "fraudulent return," as Aznar provided, would render the
qualifying phrase superfluous and irrelevant inasmuch as tax evasion and fraud are relatively
synonymous. It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part
of a statute shall be considered surplusage or superfluous, meaningless, void and insignificant. For this
purpose, a construction which renders every word operative is preferred over that which makes some
words idle and nugatory. 20 Ut magis valeat quam pereat. I submit that the Court should choose the
interpretation that gives effect to the whole of the statute and its every word. 21 SaCIDT

In fact, a reading of Section 222 of the 1997 NIRC reveals that the phrase "with intent to evade tax"
qualifies a "false return." Under the doctrine of noscitur a sociis, the construction of a particular word or
phrase, which is in itself ambiguous, or is equally susceptible of various meanings, may be made clear and
specific by considering the company of words in which it is found or with which it is associated. In other
words, the obscurity or doubt of the word or phrase may be reviewed by reference to associated words. 22
Given that the clause "with intent to evade tax" is in the company of the words "false or fraudulent
return," it becomes clear that the qualifying phrase "with intent to evade tax" pertains to the entire
category of "false or fraudulent return." This interpretation is supported by the fact that the provision does
not separate the words "false" and "fraudulent" by a comma, indicating that they should be read together
as a single unit.
Thus, Section 222 of the 1997 NIRC reveals that the phrase "with intent to evade tax" qualifies as
well a "false return." This interpretation is consistent with the purpose of the provision, which is to provide
exceptions to the general rule on the assessment and collection of taxes on false or fraudulent returns
with the intent to evade tax. In other words, not every erroneous return would warrant the application of
the 10-year period to assess. It bears to stress that since the 1939 Tax Code up to the 1997 NIRC, the
Legislature has remained consistent with the phraseology of the exceptions as to the period of limitation
of assessment and collection of taxes. The precursor provision of Section 222 of the 1997 NIRC is Section
332 of the 1939 Tax Code:
SECTION 332. Â 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.
(Emphasis supplied)
Furthermore, for purposes of imposing a civil penalty, Section 248 (B) of the 1997 NIRC provides a
fifty percent (50%) surcharge "in case a false or fraudulent return is willfully made," thus:
SECTION 248. Â Civil Penalties. —
xxx xxx xxx
(B) Â 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. (Emphasis
supplied)
Section 248 (B) of the 1997 NIRC affirms my position, as inB.F. Goodrich Phils. , that the entry of
wrong information due to mistake, carelessness, or ignorance, without intent to evade tax, does not
warrant the application of the 10-year prescriptive period. SCaITA

At the risk of being repetitive, in order to render a false return within the ambit of Section 222 of the
1997 NIRC, such filing must be done willfully or intentionally or with intent to evade the payment
of tax. As emphasized by the Court, the law on prescription should be liberally construed in favor of
taxpayers and that, as a corollary, Section 222 of the 1997 NIRC, as an exception to the statute of
limitations, should perforce be strictly construed. In GMCC United Development Corp., the Court explained
anew the reasons behind the prescriptive period for assessment and collection of internal revenue taxes:
The law prescribing a limitation of actions for the collection of the income tax is beneficial both
to the Government and to its citizens; to the Government because tax officers would be obliged to
act promptly in the making of assessment, and to citizens because after the lapse of the
period of prescription citizens would have a feeling of security against unscrupulous tax
agents who will always find an excuse to inspect the books of taxpayers, not to determine
the latter's real liability, but to take advantage of every opportunity to molest peaceful,
law-abiding citizens. Without such a legal defense[,] taxpayers would furthermore be under
obligation to always keep their books and keep them open for inspection subject to harassment by
unscrupulous tax agents. The law on prescription being a remedial measure should be interpreted in
a way conducive to bringing about the beneficient purpose of affording protection to the taxpayer
within the contemplation of the Commission which recommend the approval of the law. 23 (Emphasis
supplied)
Justice Dimaampao proposes that only false returns, whether done intentionally or unintentionally,
that have a true impact on the government's collection of taxes should qualify for the extended period for
assessment and collection. The test should be whether the false entries resulted in actual prejudice to the
government, without necessarily a specific intent to evade taxes, and must be of such a degree that the
government is prevented from uncovering the same with reasonable efforts. 24
This proposal is simply an invitation to do judicial legislation that is totally uncalled for. Section 222
(a) of the 1997 NIRC is clear and unambiguous. The law states that false returns, filed with the intent to
evade tax, are subject to the extraordinary 10-year prescriptive period. The requirement of specific
intent to evade tax is an essential element in the determination of whether the extraordinary
prescriptive period will apply. cHECAS

To adopt Justice Dimaampao's proposed interpretation would introduce an additional requirement

that goes beyond what the law prescribes. It would deviate from the express intent and wording of the
statute. The clear legislative intent is that the 10-year prescriptive period will apply when false returns
with the intent to evade tax are involved. Moreover, determining the impact on the government's
tax collection or the extent of prejudice suffered would require subjective evaluations and
may lead to inconsistent application. This also creates another door for "unscrupulous tax agents
who will always find an excuse to inspect the books of taxpayers, not to determine the latter's
real liability, but to take advantage of every opportunity to molest peaceful, law-abiding
citizens."
In sum, mere falsity of a return does not merit the application of the 10-year prescriptive period. The
animating element of fraud as in the case of taxpayer's intent to evade the payment of the correct amount
of tax must be clearly established. Hence, in cases of "false returns," the Bureau of Internal Revenue (BIR)
should only invoke the 10-year prescriptive period where there is clear and convincing evidence of fraud or
intent to evade tax.
To my mind, understanding fraud or intent to evade tax to be the animating element of a "false
return" protects taxpayers from tax agents senselessly (or worse, maliciously) invoking the 10-year
prescriptive period based on simple discrepancies, which could have been easily detected by the BIR
within the ordinary period of prescription given its bountiful resources and machineries,
especially in this age of computerization. To repeat the wisdom of earlier years, imposing the
prescriptive period will compel the BIR to promptly and thoroughly examine the records of the taxpayer,
verify the correctness of their returns, assess, and collect deficiency internal revenue taxes, if any. To
allow the BIR the 10-year period runs counter to this impetus and leads only to situations of unscrupulous
BIR examiners continuing to shag innocent, peaceful, and law-abiding citizens.
In this case, as correctly found by the CTA Division and CTA EB, the under-declaration in MPRC's
gross receipts in its 2007 Quarterly VAT returns did not arise from an intent to evade tax. On the contrary,
such under-declaration arose from MPRC's honest belief that it was not subject to VAT. More, the fact that
MPRC reported its interest income in its annual Income Tax Return for calendar year 2007 is a clear
indication that it did not intent to evade tax.
Where such intent to evade tax is absent, the BIR is not justified in invoking the 10-year prescriptive
period to assess. Indeed, as between the strict and literal but erroneous interpretation in Aznar and the
liberal albeit correct ruling in B.F. Goodrich Phils. , as affirmed in Estate of Toda, Jr., GMCC United
Development Corp., and Philippine Daily Inquirer, the Court is now bound to apply the latter because the
Court's duty is to give effect not only to the letter of the law, but more importantly, to the spirit and the
policy that animate it.aTHCSE

Again, it is a settled rule that the law on prescription is liberally interpreted in favor of taxpayers,
while exceptions thereto are strictly construed. Considering that the exception to the statute of limitations
principally favors the BIR, the burden to prove the filing of a false return with intent to evade tax rests
upon its shoulders.
Unfortunately, in this case, the BIR failed to discharge its burden. Apart from bare claims of falsity of
MPRC's return, the BIR failed to clearly demonstrate, as in B.F. Goodrich Phils., Estate of Toda, Jr., GMCC
United Development Corp., and Philippine Daily Inquirer, that MPRC filed its return with intent to evade the
payment of the correct taxes. Verily, inasmuch as intent to evade the payment of tax on the part of MPRC
has not been established, the application of the 10-year prescriptive period is not warranted.
For these reasons, I fully concur with the ponencia, and accordingly vote to GRANT the present
Petition, REVERSE and SET ASIDE the Decision and Resolution of the Court of Tax Appeals En Banc, and
CANCEL the value-added tax assessment against Mcdonald's Philippines Realty Corporation for calendar
year 2007 on the ground that the three-year period for assessment has already prescribed.
DIMAAMPAO, J., concurring and dissenting:
I concur in granting the present Petition and cancelling the subject assessment on the ground of
prescription. I agree that the Commissioner of Internal Revenue failed to prove that the present case
warranted the application of the extraordinary ten-year prescriptive period under Section 222 (a) of the
National Internal Revenue Code (NIRC), as amended by Republic Act (RA) No. 8424. 1
However, I dissent as to the ponencia's abandonment of the doctrine in Aznar v. Court of Tax
Appeals, 2 which declared that Section 222 (a) (formerly, Section 332 [a]) of the NIRC contemplates both
intentional and unintentional false returns, and instead exclusively qualifies "false returns" in the
aforementioned provision to returns containing errors made deliberately or willfully with intent to evade
taxes. 3
The relevant provision under consideration is Section 222 (a) of the NIRC, particularly as to the
proper characterization of a "false return" which would trigger the extraordinary ten-year period to assess
or collect taxes —
SECTION 222. Â Exceptions as to Period of Limitation of Assessment and Collection of Taxes.
—
(a) Â 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.
(Emphasis supplied)
The cause célèbre between the majority and this dissent rests on whether a false return under the
aforecited provision is necessarily qualified by the phrase "with intent to evade tax," in the same manner
as fraudulent returns. It is my humble assertion that it is not. AHDacC

Section 222 (a) of the present NIRC traces its legislative origins to Section 332 (a) of the NIRC of
1939: 4
SECTION 332. Â 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.
 Subsequently, Presidential Decree (PD) No. 69 5 introduced the proviso to the effect that in a
collection case instituted by the Bureau of Internal Revenue (BIR) involving fraud assessment, which has
become final and executory, the fact of fraud shall be judicially taken cognizance of by the court: 6
Sec. 332. Â 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;
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.
Following this amendment, the provision saw no changes up until its present form in the NIRC of
1997. 7
Having seen little to no changes in its wording or styling since its introduction in 1939, it would be
safe to assume that its intended meaning has not changed and even decades old jurisprudence
interpreting the provision remains instructive to properly glean the will of the legislative, as the repository
of the sovereign power of taxation. 8
Pertinently, the provision was first interpreted by the Court in the seminal case of Aznar v. Court of
Tax Appeals, 9 which declared that Section 222 (a) (formerly, Section 332 [a]) of the NIRC recognizes three
distinct scenarios: false returns, fraudulent returns with intent to evade taxes, and failure to file returns.
The Court then distinguished between the first two 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 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. (Emphasis supplied) cAaDHT

In Aznar, the Court found that the taxpayer had filed false returns given that the information therein
did not accurately reflect his financial condition at the time based on the evidence presented. The Court
also found that the lower court erred in presuming that the returns were fraudulent based solely on the
substantial disparity of incomes as reported and determined by the inventory method and on the similarity
of consecutive disparities for six years. It held that the intent to evade taxes was actually belied by the
Commissioner of Internal Revenue's own findings that resulted in varied tax liability results based on
mistakes in the use of the inventory method. This bolstered the taxpayer's defense that the falsity of the
returns was merely due to mistake, carelessness, or ignorance of the taxpayer's accountants. 10
In Commissioner of Internal Revenue v. Javier, Jr. , 11 the Court maintained the particular distinction of
fraudulent returns as opposed to false returns and stated that "[a] 'fraudulent return' is always an attempt
to evade a tax, but a merely 'false return' may not be." It emphasized that the fraud contemplated by the
NIRC is "actual and intentional fraud through willful and deliberate misleading of the government agency
concerned," and which would induce government "to give up some legal right and place itself at a
disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities." 12
The doctrine drawing a distinction between false returns and fraudulent returns was then reiterated
in subsequent cases, 13 most recently in Commissioner of Internal Revenue v. Fitness by Design, Inc., 14
where the Court clarified that "[a] false return simply involves a 'deviation from the truth, whether
intentional or not' while a fraudulent return 'implies intentional or deceitful entry with intent to evade the
taxes due.'" Simply put, the line of cases following Aznar interpreted Section 222 (a) of the NIRC by not
qualifying "false returns" with the subsequent phrase of "with intent to evade taxes."
Contrarily, the case of Commissioner of Internal Revenue v. Estate of Toda, Jr. 15 advanced a
different interpretation and provided that the three situations contemplated by Section 222 (a) 16 are: (1)
fraudulent returns; (2) false returns with intent to evade tax ; and (3) failure to file a return. 17 The Court
then went on to say that the transactions covered by the assessment were a "a tax ploy, a sham, and
without business purpose and economic substance" done to circumvent tax laws. 18 Moreover, the Court
also held that assuming arguendo that there was no fraud, the return was still false as it did not accurately
reflect the actual amount gained by the taxpayer from the transaction and was "done with intent to evade
or reduce tax liability." 19
IDSEAH

This was followed by Commissioner of Internal Revenue v. Asalus Corp., 20 where it was implied that
the extraordinary ten-year period would only apply for false returns filed with "intent to defraud."
The case of Commissioner of Internal Revenue v. Philippine Daily Inquirer, Inc., 21 appears to echo
this doctrine insofar as it concluded that "the entry of wrong information due to mistake, carelessness, or
ignorance, without intent to evade tax , does not constitute a false return," 22 citing Commissioner of
Internal Revenue v. B.F. Goodrich Phils., Inc. 23 as its basis. 24 Notably, the implication of the foregoing
statement is that a false return under Section 222 (a) must be attended by intent to evade tax. However, a
circumspect analysis of B.F. Goodrich Phils., Inc. would show that the Court never expressly drew such a
conclusion.
The issue resolved in B.F. Goodrich Phils., Inc. was whether or not the BIR's right to assess therein
taxpayer for deficiency taxes had already prescribed. The BIR primarily argued that the extraordinary
period under Section 222 (a) (then Section 332 [a]) of the NIRC applied due to the falsity in the filed
returns given that the property subject of the underlying transaction was sold "for a price lesser than its
declared fair market value." The Court rejected this argument in the following manner:
Nor is petitioner's claim of falsity sufficient to take the questioned assessments out of the ambit
of the statute of limitations. The relevant part of then Section 332 of the NIRC, which enumerates the
exceptions to the period of prescription, provides:
"SECTION 332. Â 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 a
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: . . ."
Petitioner insists that private respondent committed "falsity" when it sold the property for a
price lesser than its declared fair market value. This fact alone did not constitute a false return
which contains wrong information due to mistake, carelessness or ignorance. It 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. In the present case, the private
respondent was compelled to sell the property even at a price less than its market value, because it
would have lost all ownership rights over it upon the expiration of the parity amendment. In other
words, private respondent was attempting to minimize its losses. At the same time, it was able to
lease the property for 25 years, renewable for another 25. This can be regarded as another
consideration on the price. HCaDIS

Furthermore, the fact that private respondent sold its real property for a price less than its
declared fair market value did not by itself justify a finding of false return. Indeed, private respondent
declared the sale in its 1974 return submitted to the BIR. Within the five-year prescriptive period, the
BIR could have issued the questioned assessment, because the declared fair market value of said
property was of public record. This it did not do, however, during all those five years. Moreover, the
BIR failed to prove that respondent's 1974 return had been filed fraudulently. Equally
significant was its failure to prove respondent's intent to evade the payment of the
correct amount of tax.
Ineludibly, the BIR failed to show that private respondent's 1974 return was filed fraudulently
with intent to evade the payment of the correct amount of tax. Moreover, even though a donor's tax,
which is defined as "a tax on the privilege of transmitting one's property or property rights to another
or others without adequate and full valuable consideration," 6 is different from capital gains tax, a
tax on the gain from the sale of the taxpayer's property forming part of capital assets, the tax return
filed by private respondent to report its income for the year 1974 was sufficient compliance with the
legal requirement to file a return. In other words, the fact that the sale transaction may have partly
resulted in a donation does not change the fact that private respondent already reported its income
for 1974 by filing an income tax return.
Since the BIR failed to demonstrate clearly that private respondent had filed a fraudulent return
with the intent to evade tax, or that it had failed to file a return at all , the period for
assessments has obviously prescribed. Such instances of negligence or oversight on the part of the
BIR cannot prejudice taxpayers, considering that the prescriptive period was precisely intended to
give them peace of mind. (Emphasis and underscoring supplied)
A reading of the Court's discourse readily shows that there was neither an interchanging of the
concept of false returns and fraudulent returns, nor was there a qualification that false returns must be
attended by an intent to defraud or evade taxes. While the BIR's argument was based only on the "falsity"
of the returns, the Court still examined the applicability of all three types of situations under Section 222
(a) (then Section 332 [a]) of the NIRC. As above-quoted there were separate discussions for the three
types: the Court first examined whether the subject returns were "false" for "contain[ing] wrong
information due to mistake, carelessness or ignorance"; second, it determined whether the returns can be
considered to have been filed "fraudulently" for being attended with "intent to evade the payment of the
correct tax"; and third, it determined that there was no "fail[ure]" to file a return at all. Undoubtedly,
nowhere in its ratio did the Court ever directly link intent to evade tax with "false returns."25 If at all, it
shows that B.F. Goodrich Phils., Inc. directly followed the framework in Aznar, as the former did, in fact,
cite the latter as basis, 26 by confining false returns to those "contain[ing] wrong information due to
mistake, carelessness or ignorance." Consequently, Philippine Daily Inquirer, Inc. may have misunderstood
the doctrine in B.F. Goodrich Phils., Inc.aCIHcD

More recently, the case of Commissioner of Internal Revenue v. Spouses Magaan, 27 seems to follow
the interpretation put forth in Estate of Toda, Jr. where the lines between false returns and fraudulent
returns are blurred. In Spouses Magaan, fraudulent filing was characterized as "false and deceitful entry
with intent to evade the taxes due," and that fraudulent returns must not be attributable to "mistake,
carelessness, or ignorance," which is the indication typically associated with false returns in previous
cases. It is well to note, however, that Spouses Magaan did not involve a determination of "falsity" but a
testing of whether the subject returns were fraudulent.
Whether intentionally or unintentionally, there existed two competing schools of thought in
jurisprudence for interpreting Section 222 (a) of the Tax Code, which has now been resolved by the
majority's abandonment of Aznar. As I will further propound on below, I respectfully submit that this is
error. It is my considered opinion that the Aznar interpretation is better supported not only by the text of
the provision and the law as a whole, but also the spirit and impelling purpose behind providing for
extraordinary periods to assess and collect taxes.
The Aznar interpretation is more in
keeping with the literal wording of
Section 222 (a) of the NIRC.
First, the most basic rule in statutory construction is that words used in law must be given their
ordinary meaning. 28 Indeed, the ordinary meaning of "false" and "fraudulent" support the notion that
these are distinct. "False" in its general sense means untrue, deceitful, not genuine, inauthentic, wrong, or
erroneous; 29 and "fraud" means a knowing misrepresentation or knowing concealment of a material fact
to induce another to act to their detriment. 30 Verily, the key distinction lies in the mental state and
objective of the actor. "Fraud" involves an active machination to deceive in order to take advantage or
swindle another, whereas "false" has a more general connotation of simply being untruthful. Axiomatically,
a fraudulent return is always false, but not all false returns are fraudulent. Necessarily, in the context of
tax returns, a fraudulent return is always filed to evade taxes, whereas the filing of a false return may or
may not result in deficiency taxes. AHCETa

Second, it is presumed that in enacting a law, the Legislature does not "insert any section or
provision which is unnecessary and a mere surplusage; that all provisions contained in a law should be
given effect, and that contradictions are to be avoided." 31 As above adumbrated, while there is a
correlation between falseness and fraudulence, these are distinct concepts. If the phrase "with intent
to evade tax" similarly qualifies false returns, how would it then differ from fraudulent
returns? In what manner may a false return be filed with intent to evade tax, and yet not
qualify as a fraudulent return? I submit that such an interpretation would render the word
superfluous, which could not have been the intent of the lawmakers. Moreover, a reading of the
provision in its entirety supports the idea that there are three distinct situations contemplated therein. As
the Court held in Aznar: "[o]ur 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.'" 32 Undeniably, a contrary
interpretation would also render nugatory and ineffective the word "falsity" in Section 222 (a).
Furthermore, the proviso inserted by PD No. 69 also validates this interpretation. Notably, only the "fact of
fraud" in fraud assessments shall be judicially taken cognizance of, and not the fact of "falsity" or
"omission." Clearly, the provision itself recognizes a distinction, which the Court must give effect to.
The Aznar interpretation is supported
by other provisions of the NIRC.
Another principle in statutory construction is to read a word or phrase in the context of the entire
statute. "The particular words, clauses and phrases in a law should not be studied as detached and
isolated expressions, but the whole and every part thereof must be considered in fixing the meaning of
any of its parts and in order to produce a harmonious whole." 33
A reading of the following provisions of the NIRC would show that the law recognizes a distinct
concept of a "false return" that is not tied to intent to evade taxes:
SECTION 6. Â Power of the Commissioner to Make Assessments and Prescribe Additional
Requirements for Tax Administration and Enforcement. —
xxx xxx xxx
(B) Â 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. (Emphasis supplied) cHaCAS

SECTION 51. Â Individual Return. —

 xxx xxx xxx
(F) Â Persons under Disability. — If the taxpayer is unable to make his own return, the return
may be made by his duly authorized agent or representative or by the guardian or other person
charged with the care of his person or property, the principal and his representative or guardian
assuming the responsibility of making the return and incurring penalties provided for erroneous,
false or fraudulent returns. (Emphasis supplied)
SECTION 72. Â Suit to Recover Tax Based on False or Fraudulent Returns. — When an
assessment is made in case of any list, statement or return, which in the opinion of the Commissioner
was false or fraudulent or contained any understatement or undervaluation , no tax collected
under such assessment shall be recovered by any suit, unless it is proved that the said list, statement
or return was not false nor fraudulent and did not contain any understatement or
undervaluation; but this provision shall not apply to statements or returns made or to be made in
good faith regarding annual depreciation of oil or gas wells and mines. (Emphasis supplied)
SECTION 269. Â Violations Committed by Government Enforcement Officers. — Every
official, agent, or employee of the Bureau of Internal Revenue or any other agency of the Government
charged with the enforcement of the provisions of this Code, who is guilty of any of the offenses
hereinbelow specified shall, upon conviction for each act or omission, be punished by a fine of not
less than Fifty thousand pesos (P50,000) but not more than One hundred thousand pesos (P100,000)
and suffer imprisonment of not less than ten (10) years but not more than fifteen (15) years and shall
likewise suffer an additional penalty of perpetual disqualification to hold public office, to vote, and to
participate in any public election:
xxx xxx xxx
(f) Â Making or signing any false entry or entries in any book, or making or signing any false
certificate or return; (Emphasis supplied)
SECTION 272. Â Violation of Withholding Tax Provision. — Every officer or employee of the
Government of the Republic of the Philippines or any of its agencies and instrumentalities, its political
subdivisions, as well as government-owned or -controlled corporations, including the Bangko Sentral
ng Pilipinas (BSP), who, under the provisions of this Code or rules and regulations promulgated
thereunder, is charged with the duty to deduct and withhold any internal revenue tax and to remit
the same in accordance with the provisions of this Code and other laws is guilty of any offense
hereinbelow specified shall, upon conviction for each act or omission be punished by a fine of not less
than Five thousand pesos (P5,000) but not more than Fifty thousand pesos (P50,000) or suffer
imprisonment of not less than six (6) months and one (1) day but not more than two (2) years, or
both: ScHADI

xxx xxx xxx

(c) Â Failing or causing the failure to file return or statement within the time prescribed, or
rendering or furnishing a false or fraudulent return or statement required under the withholding
tax laws and rules and regulations. (Emphasis supplied)
The Aznar interpretation is more in
keeping with the apparent spirit of the
law.
While the Estate of Toda, Jr. line of cases is concededly more advantageous to taxpayers, it would
not be in keeping with the spirit of the law. It is not hard to imagine that Section 222 (a) seeks to afford
the taxing authority some leeway to recover taxes rightfully due to the government. However, false
returns, meaning those that simply do not speak the truth regardless of the taxpayer's intent, are not less
onerous or misleading than when no returns are filed. It is absurd to presume that the Legislative would
allow the extraordinary period to situations where no return is filed, but not to situations where a return
was filed that was rife with errors or inaccuracies. Both are equally disarming to the taxing authority's
collection effort. To shoehorn the provision to false returns filed with intent to evade would foreclose
avenues for the government to recover taxes. Additionally, and as seen in the provisions above-quoted,
the tax code affords remedies to the taxing authority and consequences to taxpayers for the filing of false
returns in general, with no particular qualification as to intent. Had lawmakers intended to only cover false
returns with intent to evade taxes under the NIRC, they could have used the very same phrasing in the
other provisions as found in Section 222 (a). While the Aznar interpretation may be less favorable to
taxpayers, it is the law. Dura lex sed lex. 34
It bears stressing that the "Courts should not, by construction, revise even the most arbitrary and
unfair action of the legislature, nor rewrite the law to conform with what they think should be the law. Nor
may they interpret into the law a requirement which the law does not prescribe. x x x To do any of such
things would be to do violence to the language of the law and to invade the legislative sphere." 35 This
doctrine is particularly true in the field of taxation as the power to tax is legislative in nature and all
incidents thereof are within the control of the Legislature. 36 DACcIH

Not all false returns are covered by

Section 222 (a).
As a point of clarification, I am not advocating that any erroneous entry done by mistake,
carelessness, or ignorance should constitute a false return as to justify the application of the extraordinary
ten-year prescriptive period. In this regard, the ponencia is correct that jurisprudence has been consistent
on this point. Nevertheless, what I propose is that only false returns, whether done intentionally or
unintentionally, that have a true impact on the government's collection of taxes should qualify.
In short, we must look into the nature of the "falsity" and its consequent effects. Certainly, not every
incorrect entry affects the amount that the government may reasonably collect from taxpayers, and not
every entry which results in a decrease of the taxes due is prohibited, as seen in the case of B.F. Goodrich
Phils., Inc. In the end, the test should be whether the false entries resulted in actual prejudice to the
government, without necessarily a specific intent to evade taxes, and must be of such a degree that the
government is prevented from uncovering the same with reasonable efforts.
This qualification requiring apparent prejudice to the government is grounded on the title of Section
222 (a) itself insofar as it provides an extraordinary period only for the "assessment and collection of
taxes." It is also warranted based on the other above-quoted provisions of the NIRC, especially Sections 6
(B), 51, and 72. It is also further supported by Section 248 (B) the Tax Code, which make a clear reference
to the taxes "lost" on account of the false return:
Section 248. Â Civil Penalties. —
xxx xxx xxx
(B) Â 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%) of that declared per return, and a claim of
deductions in an amount exceeding (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. (Emphasis supplied)
The government still bears the burden
of proving falsity.
Relevantly, I am also not asserting that the Court departs from the general rule that the taxing
authority bears the burden of proving the fact of falsity or fraudulence. Rather, it is only a recognition that
there are some underdeclarations that may fall short of the 30% threshold in Section 248 (B) and may not
necessarily be borne from machinations to evade taxes, but may constitute falsity based on a wrong
presumption or mistaken notion on the part of the taxpayer. In such instances, the taxing authority should
be allowed to prove the fact of falsity to apply the extraordinary ten-year period, if warranted. This
interpretation would breathe life into all the provisions of the Tax Code. aICcHA

As a final point, I must stress that the "falsity" of returns must still be based on facts and law, as is
every other aspect of a valid assessment, and that the same being an exception to the ordinary three-year
period will still be strictly construed against the taxing authority; any doubt on the existence of the
purported falsity and prejudice to the government will be resolved in favor of the taxpayer. By requiring
the taxing authority to provide clear basis for a return's purported falsity, I believe that the fears intimated
by the ponencia on undue extensions of tax audits may be forestalled without needing to abandonAznar.
With the foregoing discourse, I vote to GRANT the petition. HSCATc

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. Castañeda, 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.

xxx xxx xxx

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.

xxx xxx xxx (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 during 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, CTA En Banc Decision.

37. Section 248 (B) of the 1997 Tax Code:

SEC. 248. Civil Penalties. — 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%) 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.

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 1, Rule 45 of the Rules of Court provides:

SECTION 1. 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 Sandiganbayan, 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 set 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.

xxx xxx xxx

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.

xxx xxx xxx

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 Blg. 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 Procedures 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 filing 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 filed in good faith, and, we think, substantially comply with the requirements of 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 Commissioner 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.

120. 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 of rental income.

124. Rollo , pp. 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.

131. 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.

133. P11,080,687.70 ÷ P43,251,242.70 = 0.25619 or 25.62%.

134. Rollo , p. 93. The CTA En Banc adopted the CTA Division's 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 , pp. 82 and 120.

141. Id. at 43, Petition for Review on Certiorari.

CAGUIOA, J., concurring:

1. 157 Phil. 510 (1974).

2. Republic Act No. 8424, December 11, 1997.

3. Mamalateo and Mamalateo-Jusay, Tax Rights and Remedies (2016), p. 777.

4. 363 Phil. 169 (1999).

5. Id. at 179-180.

6. 481 Phil. 626 (2004).

7. Id. at 642-643.

8. 802 Phil. 432 (2016).

9. Id. at 448.

10. 807 Phil. 912 (2017).

11. Id. at 935-937.

12. Commonwealth Act No. 466, June 15, 1939.

13. CIR v. B.F. Goodrich Phils., Inc., supra note 4, at 178.

14. Dimaampao, J., Concurring and Dissenting Opinion, pp. 7-11.

15. 749 Phil. 772 (2014).

16. Dimaampao, J., Concurring and Dissenting Opinion, pp. 10-11.

17. Id. at 7-8.

18. CIR v. Estate of Toda, Jr., supra note 6, at 639.

19. Pilipinas Shell Petroleum Corporation v. Commissioner of Customs, 801 Phil. 806, 842 (2016); citation omitted.

20. SM Land, Inc. v. Bases Conversion and Dev't. Authority, et al., 741 Phil. 269, 299 (2014); Allied Banking
Corporation v. CA, 348 Phil. 382 (1998).

21. Phil. Health Care Providers, Inc. v. CIR , 616 Phil. 387, 402 (2009).

22. Government Service Insurance System, et al. v. Commission on Audit, et al., 674 Phil. 578, 600-601 (2011).

23. Republic of the Phils. v. GMCC United Development Corp., et al., supra note 8, at 447, citing Republic of the
Phils. v. Ablaza, 108 Phil. 1105 (1960).

24. Dimaampao, J., Concurring and Dissenting Opinion, pp. 11-12.

DIMAAMPAO, J., concurring and dissenting:

1. An Act Amending the National Internal Revenue Code, as Amended, and for Other Purposes, enacted on
December 11, 1997.

2. G.R. No. L-20569, August 23, 1974, 157 Phil. 510-536.

3. Ponencia , p. 34.

4. Commonwealth Act No. 466, entitled "AN ACT TO REVISE, AMEND AND CODIFY THE INTERNAL REVENUE LAWS
OF THE PHILIPPINES," enacted on June 15, 1939.

5. AMENDING CERTAIN SECTIONS OF THE NATIONAL INTERNAL REVENUE CODE, enacted on November 24, 1972.

6. Revenue Memorandum Circular No. 09-73, issued on January 9, 1973.

7. See Section 319 (a) of PD No. 1158, or the NIRC of 1977, enacted on June 3, 1977 —

SECTION 319. 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: 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.

See Section 2 of Batas Pambansa Blg. 700, entitled AN ACT AMENDING SECTIONS 318 AND 319 OF THE
NATIONAL INTERNAL REVENUE CODE, AS AMENDED, SO AS TO REDUCE THE PERIOD OF LIMITATION FOR
ASSESSMENT OF INTERNAL REVENUE TAXES FROM FIVE (5) TO THREE (3) YEARS, enacted on April 5, 1984 —

SECTION 2. Section 319 of the same Code is hereby amended to read as follows:

"Sec. 319. 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 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.

8. See Abakada Guro Party List v. Ermita , G.R. Nos. 168056, 168207, 168461, 168463 & 168730, September 1,
2005.

9. Supra note 2.

10. Id.

11. G.R. No. 78953, July 31, 1991, 276 Phil. 914-923.

12. Id.

13. See Commissioner of Internal Revenue v. B.F. Goodrich Phils., Inc., G.R. No. 104171, February 24, 1999, 363
Phil. 169-181; Republic v. Marcos II, G.R. Nos. 130371 & 130855, August 4, 2009, 612 Phil. 355-379; and
Samar-I Electric Cooperative v. Commissioner of Internal Revenue, G.R. No. 193100, December 10, 2014,
749 Phil. 772-790.

14. G.R. No. 215957, November 9, 2016, 799 Phil. 391-420.

15. G.R. No. 147188, September 14, 2004, 481 Phil. 626-645.

16. Then Section 269 (a) of the NIRC, as renumbered by Executive Order No. 273, entitled "ADOPTING A VALUE-
ADDED TAX, AMENDING FOR THIS PURPOSE CERTAIN PROVISIONS OF THE NATIONAL INTERNAL REVENUE
CODE, AND FOR OTHER PURPOSES," issued on July 25, 1987.

17. See Commissioner of Internal Revenue v. Estate of Toda, Jr., supra note 15.

18. Id.

19. Id.

20. G.R. No. 221590, February 22, 2017, 806 Phil. 397-413.

21. G.R. No. 213943, March 22, 2017, 807 Phil. 912-941.

22. Id. Emphasis supplied.

23. G.R. No. 104171, February 24, 1999, 363 Phil. 169-181.

24. See footnote 31 of Commissioner of Internal Revenue v. Philippine Daily Inquirer, Inc., supra note 21.

25. See Commissioner of Internal Revenue v. B.F. Goodrich Phils., Inc., supra note 23.

26. See footnote 13 of Commissioner of Internal Revenue v. B.F. Goodrich Phils., Inc., supra note 23.

27. G.R. No. 232663, May 3, 2021.

28. See Republic v. Sereno, G.R. No. 237428, May 11, 2018.

29. See False, Black's Law Dictionary p. 745 (11th ed. 2019).

30. See Fraud, Black's Law Dictionary p. 802 (11th ed. 2019).

31. Mcgee v. Republic, G.R. No. L-5387, April 29, 1954, 94 Phil. 820-825.

32. Emphasis supplied.

33. Kanemitsu Yamaoka v. Pescarich Manufacturing Corp., G.R. No. 146079, July 20, 2001, 414 Phil. 211-220.

34. See Qatar Airways Co. with Limited Liability v. Commissioner of Internal Revenue, G.R. No. 238914, June 8,
2020.

35. Canet v. Decena, G.R. No. 155344, January 20, 2004, 465 Phil. 325-334.

36. See National Dental Supply Co. v. Meer , G.R. No. L-4183, October 26, 1951, 90 Phil. 265-269.