BIR Ruling No. 016-64

March 16, 1964 BIR RULING NO. 016-64 2nd Indorsement Returned to the Chief, Income Tax Division, thru the Revenue Operations Head (Assessment), the docket relative to the 1956-1960 income tax case of Mr. CLEMENTE G. ABELLA, of 305 Estero Cegado, Manila, in the total amount of P29,034.08 (inclusive of 50% surcharge and interest), with the following information: cdt The record discloses that on April 15, 1957, Mr. Clemente G. Abella filed his income tax return for the calendar year 1956. On February 27, 1958, he likewise file his income tax return for the year 1957. Subsequently, he also filed income tax return for the years 1958 and 1960. On September 7, 1962, this Office issued an income tax assessment notice for deficiency income taxes corresponding to the years 1956, 1957, 1958 and 1960 in the total amount of P33,464.05. On February 12, 1963, in a letter addressed to this Office, Mr. Abella requested reinvestigation of this deficiency income tax liability corresponding to the years in question on the ground that the 50% fraud penalty should not be imposed on all the years mentioned. Said reinvestigation was granted. Thereafter, several reinvestigations were undertaken to determine the correct amount of taxes due from subject-taxpayer. On October 10, 1963, this Office issued a revised assessment tax notice for the amount of P29,034.08, inclusive of 50% surcharge and interest, for the years 1956, 1957, 1958 and 1960. This is the assessment which Mr. Abella now questioned on the ground that the collection of the tax for the years 1956 and 1957 has already prescribed and that the 50% fraud penalty should not be imposed for the years 1958 and 1960. Under the provision of Section 331 of the Tax Code, "internal revenue taxes shall be assessed within five years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period." And Section 332 of the same Code which is an exception to Section 331 reads as follows: cdti "Sec. 332. . . . (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 maybe begun without assessment, at any time within ten years after the discovery of the falsity, fraud, or omission." Consequently, in the absence of fraud, the right of the Government to assess deficiency income taxes for the year 1956 has become barred by prescription considering that more than five (5) years had elapsed from the filing of the return (April 15, 1957) to the date of the original assessment (September 7, 1962). The question of whether or not fraud was committed in this case will be discussed late in this indorsement. The income tax return for the year 1957 was filed on February 27, 1958, and the original income tax assessment notice was issued on September 7, 1962 well within the five-year period. Although it is true that the present assessment amending the first was made only in October 10, 1963, the period of time between September 1962 to October 1963 should be excluded from the computation of the five-year prescription, inasmuch as the revised assessment was merely a result of Mr. Abella's request for reconsideration of the original assessment. In other words, the period between the petition for reconsideration and the revised assessment should be subtracted from the total prescriptive period. (See Antonio E. Querol v. CIR, [G.R. No. L-16705, promulgated Oct. 30, 1962); CIR v. Carlos Moran Sison and Priscila F. Sison, [G.R. No. L-13739, promulgated April 30, 1963]; and Republic v. Benito Lopez, [G.R. No. L-18007, promulgated March 3, 1963]). cdta As regards the propriety of imposing 50% fraud penalty on all of the years mentioned, it is well to recount briefly the pertinent facts: Mr. Abella's net income as reported in his income tax return for the year 1956 is P53,819.88. However, upon investigation it appears that his net income for said period is P67,386.81 or an understatement of P13,566.93. For the calendar year 1957 his net income as shown in the return is P46,481.41, however, upon investigation it was ascertain that his net income for said period is P75,621.70 or an understatement of P29,140.29. Likewise, his reported net income for the year 1958 is P60,222.96 and his net income upon investigation is P75,359.16 or a difference of P15,136.20. Finally, for the year 1960, his net income as shown in the return is P22,216.72 and his net income per investigation is P33,305.79 or an understatement of P11,089.07. Under the foregoing circumstances, it seems much too obvious that his failure to report an item of income or part thereof was not merely an oversight. While there is no direct evidence on record to show actual fraud, however, the circumstances indicate that he deliberately omitted to declare his true taxable income for the years mentioned which in substance amounts to fraud. Furthermore, circumstances of intentional understatement of income substantial in amount per se or substantial in relation to the total reported income; and recurrence of the understatement of income for more than one taxable year are generally recognized as justifying the imposition of the fraud penalty. (See Ruperto Hosillas v. Collector of Internal Revenue, CTA Case No. 391, dated Nov. 2, 1957). Accordingly, finding no cogent reason to vary the findings of this Office as to the deficiency income tax liability of Mr. Clemente G. Abella in the amount of P29,034.08, the assessment of additional 50% as fraud penalty is hereby reiterated, and the Government, therefore, has ten (10) years from the discovery of the fraud or omission within which to collect the deficiency income taxes for the year 1956, as prescribed in Section 332(a) of the National Internal Revenue Code. prll (SGD.) BENJAMIN N. TABIOS Acting Commissioner of Internal Revenue