COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. FITNESS BY DESIGN, INC., Respondent; G.R. No. 215957; 09 November 2016
On April 11, 1996, Fitness filed its Annual Income Tax Return for taxable year 1995.
On June 9, 2004, Fitness received a copy of the Final Assessment Notice dated March 17, 2004. The Final Assessment Notice was issued under Letter of Authority No. 00002953. The Final Assessment Notice assessed that Fitness had a tax deficiency in the amount of ₱10,647,529.69.
Fitness filed a protest to the Final Assessment Notice on June 25, 2004. According to Fitness, the Commissioner’s period to assess had already prescribed. Further, the assessment was without basis since the company was only incorporated on May 30, 1995.
On February 2, 2005, the Commissioner issued a Warrant of Distraint and/or Levy with Reference No. OCN WDL-95-05-005 dated February 1, 2005 to Fitness.
Fitness filed before the First Division of the Court of Tax Appeals a Petition for Review (With Motion to Suspend Collection of Income Tax, Value Added Tax, Documentary Stamp Tax and Surcharges and Interests) on March 1, 2005.
On May 17, 2005, the Commissioner of Internal Revenue filed an Answer to Fitness’ Petition and raised special and affirmative defenses. The Commissioner posited that the Warrant of Distraint and/or Levy was issued in accordance with law. The Commissioner claimed that its right to assess had not yet prescribed under Section 222(a) of the National Internal Revenue Code. Because the 1995 Income Tax Return filed by Fitness was false and fraudulent for its alleged intentional failure to reflect its true sales, Fitness’ respective taxes may be assessed at any time within 10 years from the discovery of fraud or omission.
The Court of Tax Appeals First Division granted Fitness’ Petition on the ground that the assessment has already prescribed. It ruled that the Final Assessment Notice is invalid for failure to comply with the requirements of Section 228 of the National Internal Revenue Code.
The Commissioner’s Motion for Reconsideration and its Supplemental Motion for Reconsideration were denied by the Court of Tax Appeals First Division.
Aggrieved, the Commissioner filed an appeal before the Court of Tax Appeals En Banc. The Commissioner asserted that it had 10 years to make an assessment due to the fraudulent income tax return filed by Fitness.
The Court of Tax Appeals En Banc ruled in favor of Fitness. It affirmed the Decision of the Court of Tax Appeals First Division. The Commissioner’s Motion for Reconsideration was denied by the Court of Tax Appeals En Banc in the Resolution dated December 16, 2014.
Whether the applicable prescriptive period is 10 years as provided under Sec. 222(a) of the NIRC.
The prescriptive period in making an assessment depends upon whether a tax return was filed or whether the tax return filed was either false or fraudulent. When a tax return that is neither false nor fraudulent has been filed, the Bureau of Internal Revenue may assess within three (3) years, reckoned from the date of actual filing or from the last day prescribed by law for filing. However, in case of a false or fraudulent return with intent to evade tax, the assessment may be made within ten (10) years after the discovery of the falsity or fraud.
“To avail of the extraordinary period of assessment in Section 222(a) of the National Internal Revenue Code, the Commissioner of Internal Revenue should show that the facts upon which the fraud is based is communicated to the taxpayer.”
Fraud is a question of fact that should be alleged and duly proven. “The willful neglect to file the required tax return or the fraudulent intent to evade the payment of taxes, considering that the same is accompanied by legal consequences, cannot be presumed.” Fraud entails corresponding sanctions under the tax law. Therefore, it is indispensable for the Commissioner of Internal Revenue to include the basis for its allegations of fraud in the assessment notice.
During the proceedings in the Court of Tax Appeals First Division, respondent presented its President, Domingo C. Juan Jr. (Juan, Jr.), as witness. Juan, Jr. testified that respondent was in its pre-operating stage in 1995. During that period, respondent “imported equipment and distributed them for market testing in the Philippines without earning any profit.” He also confirmed that the Final Assessment Notice and its attachments failed to substantiate the Commissioner’s allegations of fraud against respondent.
Petitioner did not refute respondent’s allegations. For its defense, it presented Socrates Regala (Regala), the Group Supervisor of the team, who examined respondent’s tax liabilities. Regala confirmed that the investigation was prompted by a tip from an informant who provided them with respondent’s list of sales. He admitted that the gathered information did not show that respondent deliberately failed to reflect its true income in 1995.