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G.R. No. 249540, February 28, 2024,

♦ Decision, Caguioa, [J]
♦ Separate Concurring Opinion, Dimaampao, [J]

Manila

THIRD DIVISION

[ G.R. No. 249540, February 28, 2024 ]

COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. ARTURO E. VILLANUEVA, JR., RESPONDENT.

DECISION

CAGUIOA, J.:

Before the Court is the Petition for Review on Certiorari1 (Petition) under Rule 45 of the Rules of Court filed by
the Commissioner of Internal Revenue (CIR), assailing the Decision2 dated March 13, 2019 and Resolution3 dated
September 16, 2019 of the Court of Tax Appeals En Banc (CTA EB) in CTA EB No. 1771, which affirmed the
Decision4 dated August 18, 2017 and Resolution5 dated January 10, 2018 of the Court of Tax Appeals First Division
(CTA Division) in CTA Case No. 8935. The CTA Division cancelled the assessments for deficiency income tax and
value-added tax (VAT) for taxable year 2006 issued against respondent Arturo E. Villanueva Jr. (respondent) on the
ground of prescription.6

Facts

The facts as summarized by the CTA EB are as follows:

[Respondent] is engaged in the business of providing hauling services under the name Producers
Connection Logistics, with registered address at No. 324 Younger St., Balut, Tondo, Manila.

....

For taxable year 2006, [respondent] filed with the Bureau of Internal Revenue his Annual Income
Tax Return (ITR) and Quarterly VAT Returns, among other tax returns, on the dates prescribed by law.

On July 11, 2008, [respondent] received Letter Notice No. 029-WEI-00-00041 dated June 20, 2008.
Meanwhile, on May 14, 2009, he received a follow-up letter (Tax Reconciliation System). Thereafter, on
June 15, 2009, [respondent] received Letter of Authority No. 2001-00012853 dated June 8, 2009 and
the First Request for Presentation of Records.

[Respondent] then received the 1st Call-up dated May 23, 2011 from Revenue District Office (RDO)
No. 29 for the collection of deficiency income tax and VAT in the amounts of [PHP] 23,349,944.59 and
[PHP] 7,374,006.51, respectively.

On June 21, 2011, [respondent] received a Final Notice Before Seizure (FNBS) dated June 6,
2011, issued by RDO No. 29 of Revenue Region No. 6-Manila.

On July 13, 2011, [respondent] sent a reply-letter to RDO No. 29, seeking clarification with regard
to the 1st Call-up and FNBS, and requesting a clarification and re-investigation of his case.

On September 6, 2011, [respondent] received a letter dated August 31, 2011 from the Regional
Director of Revenue Region No. 6-Manila.

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[Respondent] received a Collection Notice dated October 29, 2012 from the BIR. [On November
14, 2012, respondent] then requested for the revocation of the Collection Notice . . . but the same was
denied in a letter issued by [the CIR] through the Chief of Collection Division of Revenue Region No. 6-
Manila.

On December 13, 2013, [respondent] sent a letter dated December 11, 2013 to the Regional
Director of Revenue Region No. 6-Manila, requesting reconsideration of the denial of the request for
revocation of the collection notices issued by [the CIR]. Then, on October 31, 2014, [respondent]
received a letter dated October 14, 2014, issued by the Regional Director of Revenue Region No. 6-
Manila, denying [respondent]'s request for reconsideration and reinvestigation.7

Accordingly, on November 25, 2014, [respondent] filed [a] Petition for Review [with the CTA
Division; and the CIR filed an Answer thereto].

The case was set for pre-trial conference . . . [where both parties admitted] that the [Final
Assessment Notices (FAN)] was issued only sometime in 2011 and that no Waiver of the Statute of
Limitation has been issued by [respondent] for taxable year 2006. In view thereof, the [CTA Division]
directed the parties to submit their respective Memoranda containing their positions on whether or not
the right of [the CIR] to issue the FAN has prescribed, and if so, the propriety of dismissing the case.
Accordingly, [both parties submitted their respective position papers] . . . However, in [its] position
paper, [the CIR claimed] that the prescriptive period should be ten (10) years as the case involves a
substantial under-declaration, amounting to falsity or fraud on [respondent]'s part.

The [CTA Division then] issued a Resolution on June 9, 2015, holding that the arguments raised by
both parties involve evidentiary matters requiring a full-blown trial, and that [it] finds no valid ground to
dismiss the case, to render a judgment based on the pleadings, or to render a summary judgment at
that stage of the proceedings. Hence, trial ensued.

[After both parties had formally offered their evidence, the case was then submitted for decision.]8

CTA Division Ruling

In its Decision dated August 18, 2017, the CTA Division found that the CIR was able to establish that the
Preliminary Assessment Notice (PAN) and FAN with Formal Letter of Demand (FLD) were properly issued and
served to respondent at his registered business address, through registered mail.9

However, the CTA Division ordered the cancellation of the deficiency income tax and VAT assessments for
taxable year 2006 because the CIR was not able to clearly establish any substantial under-declaration and/or fraud
on respondent's income tax and VAT returns. Hence, the CTA Division ruled that the three-year period within which
to assess internal revenue taxes under Section 203 of the National Internal Revenue Code (NIRC) of 1997, as
amended, had already lapsed when the FAN and FLD were issued on January 24, 2011.10

Aggrieved, the CIR moved for reconsideration but this was denied by the CTA Division in its Resolution dated
January 10, 2018.11 In denying the CIR's motion, the CTA Division reiterated its finding that there was no substantial
under-declaration and/or fraud in the instant case, for which the 10-year prescriptive period applies.12

CTA EB Ruling

In the assailed Decision, the CTA EB affirmed the CTA Division's findings.13

First, the CTA EB found that while the CIR was able to present the registry receipts of the PAN, FAN and FLD,
they were not authenticated. Also, apart from the unauthenticated registry receipts, no other evidence was
presented by the CIR to prove that the said assessment notices and FLD were actually received by respondent or
his authorized representative.14

Second, the CTA EB ruled that the applicable prescriptive period in this case is three years and not 10 years
because the CIR failed to establish that respondent's tax return was false or fraudulent.15

In the assailed Resolution, the CTA EB denied the CIR's Motion for Reconsideration.16

Hence, this Petition filed by the CIR.17

In its Petition, the CIR insists that it was able to prove receipt by respondent of the pertinent PAN and FAN/FLD
despite the latter's unfounded claim of denial. According to the CIR, Registry Receipt No. 921958 dated December
28, 2010, and Registry Receipt No. 903220 dated January 24, 2011 proved that the PAN and FAN/FLD were duly
issued and served to respondent at his registered business address, through registered mail.18

The CIR further claims that the assessment notices were issued and served to respondent well within the
prescribed period to make an assessment. Citing the case of Commissioner of Internal Revenue v.

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Asalus19 (Asalus), where the Court defined a false return under Section 222(a) of the 1997 NIRC as deviation from
the truth, whether intentional or not, the CIR maintains that the 10-year prescriptive period applies in this case in
view of respondent's failure to disclose in his 2006 ITR his gross income amounting to PHP 31,671,388.34.20

Finally, the CIR argues that the subject assessments are already final, executory, and demandable because
respondent failed to file a valid protest within 30 days from receipt of the assessments.21

The filing of a Comment on the Petition was deemed waived after respondent failed to file the same within the
period directed by the Court.22

Issues

Culled from the Petition, the following are the issues for the Court's resolution:

i. Whether the PAN and FAN were validly served upon respondent; and

ii. Whether the Bureau of Internal Revenue's (BIR) right to assess respondent for deficiency taxes
for taxable year 2006 has already prescribed.

The Court's Ruling

The Petition lacks merit.

Preliminarily, the Court emphasizes the settled rule that findings of fact and conclusions of law by the CTA are
accorded with the highest respect and will not lightly be set aside.23 As a matter of principle, the Court will not set
aside the ruling of the CTA, which is, by the very nature of its function, dedicated exclusively to the study and
consideration of tax problems and has necessarily developed an expertise on the subject unless there has been an
abuse or improvident exercise of authority.24 Findings and conclusions of the CTA can only be disturbed on appeal if
they are not supported by substantial evidence or there is a showing of gross error or abuse on the part of the CTA
—these are not present in this case.

The CIR failed to prove that the

assessment notices were properly served
and received by respondent

Section 228 of the 1997 NIRC, as implemented by Revenue Regulation No. 12-99,25 outlines the due process
requirements for the issuance of deficiency tax assessments. In the case of Commissioner of Internal Revenue v.
Avon Products Manufacturing, Inc.26 (Avon), the Court summarized these requirements as follows:

. . . Under Section 228, it is explicitly required that the taxpayer be informed in writing of the law
and of the facts on which the assessment is made; otherwise, the assessment shall be void. Section
3.1.2 of Revenue Regulations No. 12-99 requires the Preliminary Assessment Notice to show in detail
the facts and law, rules and regulations, or jurisprudence on which the proposed assessment is based.
Further, Section 3.1.4 requires that the Final Letter of Demand must state the facts and law on which it
is based; otherwise, the Final Letter of Demand and Final Assessment Notices themselves shall be
void. Finally, Section 3.1.6 specifically requires that the decision of the Commissioner or of his or her
duly authorized representative on a disputed assessment shall state the facts and law, rules and
regulations, or jurisprudence on which the decision is based. Failure to do so would invalidate the Final
Decision on Disputed Assessment.

....

On the other hand, the taxpayer is explicitly given the opportunity to explain or present his or her
side throughout the process, from tax investigation through tax assessment. Under Section 3.1.1 of
Revenue Regulations No. 12-99, the taxpayer is given 15 days from receipt of the Notice for Informal
Conference to respond; otherwise, he or she will be considered in default and the case will be referred
to the Assessment Division for appropriate review and issuance of deficiency tax assessment, if
warranted. Again, under Section 228 of the Tax Code and Section 3.1.2 of Revenue Regulations No.
12-99, the taxpayer is required to respond within 15 days from receipt of the Preliminary Assessment
Notice; otherwise, he or she will be considered in default and the Final Letter of Demand and Final
Assessment Notices will be issued. After receipt of the Final Letter of Demand and Final Assessment
Notices, the taxpayer is given 30 days to file a protest, and subsequently, to appeal his or her protest to
the Court of Tax Appeals.27

Essentially, to comply with the requirements of due process, the CIR is required to inform the taxpayer of the
factual and legal bases of the deficiency tax assessment and provide him or her the opportunity to protest such
assessment, present his or her case, and adduce supporting evidence.28 Avon further underscored that the CIR
must give due consideration to the taxpayer's evidence and explanation; otherwise, the right to be heard is rendered

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meaningless.29 Certainly, as "between the power of the State to tax and an individual's right to due process, the
scale favors the right of the taxpayer to due process."30

Section 3 of Revenue Regulation No. 12-99 authorizes the CIR to serve the assessment notices to the taxpayer
either personally or via registered mail.31 Relatedly, under Section 3(v), Rule 131 of the Rules of Court, a
presumption arises that a letter duly directed and mailed was received in the regular course of mail. This
presumption is however disputable and a direct denial that the mail matter was received shifts the burden to the
party favored by the presumption to prove actual receipt by the addressee.32

As applied to issuance of deficiency tax assessments, the Court, in Barcelon, Roxas Securities, Inc. v.
Commissioner of Internal Revenue33 (Barcelon), ruled that if the taxpayer denies ever having received an
assessment notice from the BIR, it becomes incumbent upon the latter to prove that such notice was, in fact,
received by the addressee.34 To discharge this burden, it is essential for the BIR to present independent evidence,
such as the registry receipt issued by the Bureau of Posts, or the registry return card which would have been signed
by the taxpayer or the latter's authorized representative, showing that the assessment notice was released, mailed,
or sent to the taxpayer.35 If such document cannot be located, the BIR may submit a certification issued by the
Bureau of Posts and other pertinent document which is executed with the latter's intervention.36 Thus, in Barcelon,
the Court found the BIR record book showing the name of the taxpayer, the kind of tax assessed, the registry receipt
number, and the date of mailing of the assessment as incompetent evidence to prove actual receipt by the
taxpayer.37

In the more recent case of Commissioner of Internal Revenue v. T Shuttle Services, Inc.38 (T Shuttle) where the
taxpayer also denied receipt of the PAN and FAN, the Court, reiterating the doctrine in Barcelon, clarified that mere
presentation of registry receipts, absent any authentication or identification that the signature appearing therein is
the taxpayer's or his or her authorized representative's, is insufficient to prove actual receipt by the taxpayer.

As ruled by the CTA En Banc, the CIR's mere presentation of Registry Receipt Nos. 5187 and
2581 was insufficient to prove respondent's receipt of the PAN and the FAN. It held that the
witnesses for the CIR failed to identify and authenticate the signatures appearing on the registry
receipts; thus, it cannot be ascertained whether the signatures appearing in the documents were
those of respondent's authorized representatives. It further noted that Revenue Officer Joseph V
Galicia (Galicia), the CIR's witness, had in fact admitted during cross-examination that he was
uncertain whether the PAN and FAN were actually received by respondent.39 (Emphasis supplied)

Applying the foregoing to the present case, the CTA EB was correct in ruling that the CIR failed to discharge its
burden in this case.

While the CIR presented a copy of the registry receipt of the FAN/FLD,40 it failed to identify or authenticate
whether the signature appearing therein belongs to respondent or his authorized representative. In addition, apart
from the registry receipt, no other independent and competent evidence was presented by the CIR to prove
respondent's actual receipt of the assessment notices. Indeed, as ruled in T Shuttle, mere presentation by the CIR
of the registry receipts does not automatically prove actual receipt by the taxpayer. It must be clearly shown that the
assessment notices were properly served to and received by only the taxpayer or his or her duly authorized
representative. This exacting standard guarantees the due process mandate that the taxpayer be informed of the
basis of the assessment.

The CIR failed to establish false or

fraudulent return; thus, the ordinary three-
year prescriptive period applies to this
case

Even assuming that the assessment notices were duly served and received by respondent, still the Petition
should be denied on the ground of prescription.

The CIR maintains that the 10-year prescriptive period for assessment under Section 222(a) of the 1997 NIRC
applies to this case because respondent's ITR for 2006 failed to disclose a gross income for the said year
amounting to PHP31,164,900.67. According to the CIR, this under declaration of income of more than 30%
constitutes fraud. In any event, respondent's under declaration of income in his ITR also falls within the ambit of a
false return.41

The CIR seeks jurisprudential support in the case of Asalus. In Asalus, the Court, referring to the earlier case
of Aznar v. CTA,42 ruled that "a mere showing that the returns filed by the taxpayer were false, notwithstanding the
absence of intent to defraud, is sufficient to warrant the application of the ten (10)[-]year prescriptive period under
Section 222 of the NIRC."43 Asalus further held that under Section 248(B) of the 1997 NIRC, substantial under-
declaration of sales, receipts or income is a prima facie evidence of a false return; thus, it is incumbent upon the
taxpayer to present a contrary proof to overcome the presumption.44

In the assailed Decision, the CTA EB held that respondent's ITR cannot be considered false or fraudulent

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because the CIR, in the first place, failed to establish that respondent actually has substantial under-declared
sales.45

The Court finds no reason to disturb the CTA EB's ruling.

In general, the CIR's power to assess and collect taxes is limited by the ordinary three-year prescriptive period
provided under Section 203 of the 1997 NIRC, to wit:

SECTION 203. 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.

Section 222(a) of the same code, on the other hand, provides an exception to this ordinary three-year period.
Said provision grants the CIR a period of 10 years within which to assess and collect taxes, viz.:

Section 222. 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 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.

Parsed from this provision, the extraordinary 10-year prescriptive period applies only to the following cases: (1)
when a taxpayer files a false return with intent to evade tax; (2) when the taxpayer files a fraudulent return with
intent to evade tax; and (3) when a taxpayer fails to file a return. While the phrase intent to evade tax follows the
phrase fraudulent return, it also qualifies and refers to a false return. To be sure, Section 222(a) does not separate
the words false and fraudulent by a comma, indicating that they should be read together as a single unit. 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.46 Given that the clause with intent to evade tax is in the company of the
words false or fraudulent return, there is no gainsaying that the qualifying phrase with intent to evade tax pertains to
the entire category of false or fraudulent return.

Furthermore, it is absurd to construe the phrase with intent to evade tax as only qualifying the term fraudulent
return because a fraudulent return, by the term itself, already presupposes the existence of intent to avoid tax. To
use with intent to evade tax as the modifier of fraudulent return is defining a term with its own definition.

In CIR v. Estate of Toda, Jr.,47 tax evasion was defined as a scheme of not paying taxes legally due through
means outside of those sanctioned by law. It connotes 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
described as being evil, in bad faith, willful, or deliberate and not accidental.48 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."49 Therefore, to construe that the phrase with intent to evade tax as only qualifying the
term fraudulent return 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.50 Ut magis valeat quam pereat, that is, the Court chooses the interpretation that gives effect to the
whole of the statute—its every word.51

Proceeding from the foregoing, mere falsity of a return does not merit the application of the 10-year prescriptive
period. To fall within the purview of Section 222(a) of the 1997 NIRC, the filing of a false return must be animated by
fraud or an intent to evade the payment of the correct amount of tax. Hence, in cases of false returns, the BIR can
only invoke the 10-year prescriptive period where there is clear and convincing evidence of fraud or intent to evade
tax on the part of the taxpayer.

This interpretation of Section 222(a) is consistent with the purpose of the statute of limitations on assessment
and collection of taxes.

In Commissioner of Internal Revenue v. BASF Coating + Inks Phils., Inc.,52 the Court, citing previous

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jurisprudence, underscored that the statute of limitations on assessment and collection of taxes was incorporated in
our Tax Code for the benefit and protection of taxpayers against unreasonable and protracted investigations, viz.:

It bears stressing that, in a number of cases, this Court has explained that the statute of limitations
on the collection of taxes primarily benefits the taxpayer. In these cases, the Court exemplified the
detrimental effects that the delay in the assessment and collection of taxes inflicts upon the taxpayers.
Thus, in Commissioner of Internal Revenue v. Philippine Global Communication, Inc., this Court
echoed Justice Montemayor's disquisition in his dissenting opinion in Collector of Internal Revenue v.
Suyoc Consolidated Mining Company, regarding the potential loss to the taxpayer if the assessment
and collection of taxes are not promptly made, thus:

Prescription in the assessment and in the collection of taxes is provided by the Legislature for the
benefit of both the Government and the taxpayer; for the Government for the purpose of expediting the
collection of taxes, so that the agency charged with the assessment and collection may not tarry too
long or indefinitely to the prejudice of the interests of the Government, which needs taxes to run it; and
for the taxpayer so that within a reasonable time after filing his [or her] return, he [or she] may know the
amount of the assessment he [or she] is required to pay, whether or not such assessment is well
founded and reasonable so that he [or she] may either pay the amount of the assessment or contest its
validity in court . . . It would surely be prejudicial to the interest of the taxpayer for the Government
collecting agency to unduly delay the assessment and the collection because by the time the collecting
agency finally gets around to making the assessment or making the collection, the taxpayer may then
have lost his [or her] papers and books to support his [or her] claim and contest that of the
Government, and what is more, the tax is in the meantime accumulating interest which the taxpayer
eventually has to pay.

Likewise, in Republic of the Philippines v. Ablaza, this Court elucidated that the prescriptive period
for the filing of actions for collection of taxes is justified by the need to protect law-abiding citizens from
possible harassment. Also, in Bank of the Philippine Islands v. Commissioner of Internal Revenue, it
was held that the statute of limitations on the assessment and collection of taxes is principally intended
to afford protection to the taxpayer against unreasonable investigations as the indefinite extension of
the period for assessment deprives the taxpayer of the assurance that he [or she] will no longer be
subjected to further investigation for taxes after the expiration of a reasonable period of time. Thus, in
Commissioner of Internal Revenue v. B.F. Goodrich Phils., Inc., this Court ruled that the legal provisions
on prescription should be liberally construed to protect taxpayers and that, as a corollary, the
exceptions to the rule on prescription should be strictly construed.53 (Emphasis supplied; citations
omitted)

In Republic of the Philippines v. GMCC United Development Corporation, et al.,54 the Court explained anew the
rationale for 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[s] the approval of the law.55 (Emphasis supplied; citations omitted)

Indeed, 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 errors or discrepancies in the tax return, which could have been easily detected by the BIR within the
ordinary period of prescription given its bountiful resources and machineries. Restricting the application of the 10-
year prescriptive period, as the law plainly indicates, compels 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.
To allow the invocation of the 10-year period, without any restriction, runs counter to this impetus and leads only to
situations of unscrupulous tax examiners continuing to shag innocent, peaceful, and law-abiding taxpayers.

The Court is not unaware of the cases of Aznar and Asalus cited by the CIR and other similar cases56 where the
Court defined a false return, under the 10-year prescriptive period, as referring to mere deviation from the truth,
whether intentional or not. The mere showing that the returns filed by the taxpayer were false, notwithstanding the
absence of intent to defraud, was found by the Court as sufficient to warrant the application of the extraordinary
prescriptive period under Section 222 of the 1997 NIRC.57 Further, as noted by the CIR, under Section 248(B) of the
1997 NIRC,58 there is a presumption of falsity of return when there is a substantial under-declaration of taxable

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assets, receipt or income of more than 30%.

Notwithstanding the foregoing, the Court sustains the ruling of the CTA that the 10-year prescriptive period does
not apply in this case.

In stark contrast to the cases cited by the CIR, there is a catena of cases where the Court clarified that for the
10-year prescriptive period to apply, the filing of a false return must be intentional.59 The Court ruled that mere
understatement of tax liability or a wrong information due to mistake, carelessness, or ignorance, without proof of
fraud or intent to evade tax, do not constitute a false return.60

In fact, in the most recent case of Mcdonald's Philippines Realty Corporation v. Commissioner of Internal
Revenue,61 the Court, sitting En Banc, put an end to the seemingly conflicting jurisprudence on the definition of a
false return necessary for the 10-year extraordinary prescriptive period of assessment to apply. The Court En
Banc expressly abandoned the definition of false return in Aznar and ruled that, with respect to the application of the
10-year prescriptive period, it must be understood that only intentional errors in the return may justify the application
of the extraordinary 10-year period.62 The Court clarified that understatement or overstatement of income, sales or
receipts by itself does not amount to a falsehood for purposes of extending the assessment period.63

Moreover, mindful of the due process requirements in the assessment and collection of taxes, the Court En
Banc set forth the following conditions for a valid extension of assessment period in case of a false return:

F. Summary: Conditions for a Valid

Extension of Assessment Period in
Cases of False Return

i. 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.

....

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) the return contains an error or misstatement, and

(2) 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 return in general, i.e. regardless of whether the deviation is
intentional or not, is abandoned.

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 Return or Fraudulent Return
(30% Threshold)

The CIR may be relieved from the above-mentioned burden of proof when there is a prima facie
evidence of falsity or fraud, as defined under Section 248(B) of the 1997 Tax Code.

(1) The CIR ascertains that there is a misstatement/misdeclaration in the return, in

particular,

(a) an understatement/underdeclaration of sales, receipts, or income, or

(b) an overstatement/overdeclaration of expenses or other deductions,

and

(2) the misstatement is substantial, such that it exceeds the corresponding amount
declared in the return by 30%.

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[Thirty percent] 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), the CIR cannot rely on the presumption in proving the taxpayer's intent to
evade.

ii. Due Process Requirements

(1) First Due Process Requirement. The assessment notice issued to the taxpayer must clearly state
the following:

(a) that extraordinary prescriptive period (not the basic three-year period) is being
applied, and

(b) 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) 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.64 (Emphasis in the original)

Simply put, based on the afore-quoted guidelines, for the 10-year prescriptive period to apply, the following must
concur: (1) the CIR has established a prima facie case of a false or fraudulent return or otherwise proved intent to
evade on the part of the taxpayer; and (2) the CIR complied with the requirements of due process.

In this case, none of the foregoing conditions were established. Thus, the extension of the prescriptive period to
10 years is not proper in this case.

Foremost, the CIR failed to observe the requirements of due process requirements.

As discussed, the CIR fell short of proving that respondent actually received the assessment notices, which
would have informed the latter of the factual and legal bases of his deficiency taxes and the application of the
extraordinary 10-year prescriptive period. Consequently, respondent would have been able to refute or protest the
subject assessments had the latter actually received the assessment notices.

Moreover, upon a cursory reading of the PAN and FAN/FLD, apart from the computation of respondent's
deficiency taxes for 2006 and references to provisions of the 1997 NIRC, nothing therein stated or even suggested
that the CIR is applying the 10-year prescriptive period. No explanation was indicated in the said assessment
notices for the application of the extraordinary prescriptive period. Annex "A" of the the PAN and FAN, which
supposedly provided for the factual and legal bases for the assessments, simply read as follows:

Details of Discrepancies

1. Deficiency Income Tax

The deficiency income tax was based on the Undeclared Sales per Letter Notice that was added to
the taxable income pursuant to Sections 6(8) and 32 of the NIRC.

2. Deficiency Value-Added Tax (VAT)

The deficiency value added tax arose from the recognition of Undeclared Sales pursuant to Title IV
of the NIRC.65

Also, the CIR appears to have misled respondent on the applicable prescriptive period in this case. The CTA
Division noted that during the hearing, the CIR's counsel agreed that the applicable prescriptive period of
assessment in this case is three years. However, in its position paper and memorandum subsequently submitted
with the CTA Division, the CIR claimed that the prescriptive period should be 10 years as the case involves a
substantial under declaration, amounting to falsity or fraud.66

Secondly, the CIR failed to establish a prima facie case of a false or fraudulent return or prove that respondent
was animated with intent to evade taxes.

Apart from bare allegations that respondent failed to indicate in his Final/Amended ITR for taxable year 2006 a
gross income amounting to PHP 31,164,900.67, the CIR failed to substantiate, much less, prove the source and

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bases for said amount. Likewise, no evidence was presented by the CIR establishing that respondent's alleged
failure to report PHP 31,164,900.67 income was intentional or animated with fraudulent intent to evade the payment
of correct taxes.

On the contrary, the CTA Division found that respondent was able to establish that there was no substantial
under-declaration of income or fraud in his 2006 ITR.

The CTA Division aptly found:

In the present case, [respondent] was able to establish through evidence that he did not willfully or
fraudulently conceal his interest income with intent to evade taxes, as he in fact declared correct
income in his Annual ITR. Records show, and as pointed out by [respondent], on the "Tentative" Annual
ITR filed on April 7, 2007, he declared total sales in the amount of [PHP] 31,164,900.67. While Item No.
29 of the Tentative Annual ITR was left blank or without any amount, Item No. 53 contains the amount
of [PHP] 31,164,900.67 as Net Sales/Receipts/Revenues/Fees.

In his Final/ Amended Annual ITR for taxable year 2006, there was no amount stated in Item Nos.
29 and 53. However, a scrutiny of said ITR would reveal that the Net Income, Taxable Income, and Tax
Due declared were in accordance with the financial statements submitted by [respondent's] company,
showing the amount of [PHP] 31,164,900.67 as Gross Income. Hence, while the Total Sales was
without any amount, there can be no under-declaration of sales because the amounts for Net Income,
Taxable Income and Tax Due were properly indicated in [respondent]'s ITR. Clearly, [the CIR] failed to
demonstrate that [respondent] had filed a fraudulent return with the intent to evade tax.

Since there is no substantial under-declaration and/or fraud to speak of, Section 203 of the NIRC of
1997, as amended, will apply and the prescriptive period of three years will govern.67

The CTA EB affirmed in toto the foregoing findings and underscored further that:

[The CIR] failed to establish that [r]espondent has undeclared sales amounting to [PHP]
31,671,388.34. In fact, [r]espondent declared total sales of [PHP] 31,671,388.34 in his [Annual ITR].
Consequently, [r]espondent's tax return cannot be construed as false or fraudulent.68

The subject assessments are void for

being issued beyond the prescriptive
period

Following the foregoing discussion, the CIR's right to assess and collect from respondent deficiency taxes for
2006 is subject to the ordinary three-year prescriptive period under Section 203 of the 1997 NIRC. The three-year
period is reckoned from the last day prescribed by law for the filing of the return, or in a case where a return is filed
beyond such period, from the day the return was actually filed.

Here, the CTA found that for taxable year 2006, the CIR had until June 12, 2010 within which to assess
respondent for deficiency income taxes. For VAT, the CIR had the following dates within which to assess respondent
for the same taxable year: (a) 1st Quarter — April 26, 2009; (b) 2nd Quarter — July 26, 2009; (c) 3rd Quarter —
October 26, 2009; and (d) 4th Quarter — January 26, 2010. However, as the CIR admitted, the FAN/FLD assessing
respondent of deficiency income tax and VAT for taxable year 2006 was only sent to respondent, via registered mail,
on January 24, 2011, which is clearly beyond the allowable period for assessment and collection of taxes. Verily, the
subject assessments are void for being barred by prescription.

All told, the Court finds that the CTA did not err in cancelling and withdrawing the subject assessments against
respondent, requiring the latter to pay deficiency income tax and VAT, inclusive of surcharges and interests in the
aggregate amount of PHP 30,723,951.10 for taxable year 2006. Said assessments are null and void for two
reasons: (1) the CIR failed to comply with the requirements of due process in the issuance of assessments; and (2)
the subject assessments were issued beyond the three-year prescriptive period for assessment and collection of
taxes.

ACCORDINGLY, the instant Petition for Review on Certiorari is DENIED. The Decision dated March 13, 2019
and Resolution dated September 16, 2019 of the Court of Tax Appeals En Banc in CTA EB No. 1771 are
hereby AFFIRMED.

SO ORDERED.

Inting, Gaerlan, and Singh, JJ., concur.

Dimaampao, J., see separate concurring opinion.

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Footnotes
1
Rollo, pp. 10-37.
2
Id. at 39-52. Penned by Associate Ma. Belen M. Ringpis-Liban with Presiding Justice Roman G. Del Rosario
(with Concurring Opinion) and Associate Justices Juanito C. Castañeda, Jr., Erlinda P. Uy, Esperanza R.
Fabon-Victorino, Cielito N. Mindaro-Grulla, and Catherine T. Manahan concurring.
3
Id. at 59-62.
4
Id. at 64-84. Penned by Associate Justice Cielito N. Mindaro-Grulla with the concurrence of Presiding
Justice Roman G. Del Rosario (with Concurring Opinion) and Associate Justice Erlinda P. Uy.
5
Id. at 89-92.
6
Id. at 84.
7
Id. at 40-41, CTA EB Decision dated March 13, 2019.
8
Id. at 67-70, CTA Division Decision dated August 18, 2017.
9
Id. at 76-78.
10
Id. at 71-73.
11
Supra note 5.
12
Rollo, p. 91, CTA Division Resolution dated January 10, 2018.
13
Supra note 2.
14
Id. at 45-48, CTA EB Decision dated March 13, 2019.
15
Id. at 49-50.
16
Supra note 5.
17
Supra note 1.
18
Rollo, p. 18, Petition.
19
806 Phil. 397 (2017) [Per J. Mendoza, Second Division].
20
Rollo, pp. 18-24, Petition.
21
Id. at 25-27.
22
Id. at 110, Unsigned Resolution dated March 3, 2021.
23
Commissioner of Internal Revenue v. Team [Philippines] Operations Corp., 731 Phil. 141, 152 (2014) [Per
J. Perez, Second Division].
24
Commissioner of Internal Revenue v. Cebu Toyo Corporation, 491 Phil. 625, 640 (2005) [Per J.
Quisumbing, First Division].
25
Implementing the Provisions of the National Internal Revenue Code of 1997 Governing the Rules on
Assessment of National Internal Revenue Taxes, Civil Penalties and Interest and the Extra-Judicial
Settlement of a Taxpayer' Criminal Violation of the Code Through Payment of a Suggested Compromise
Penalty, Revenue Regulations No. 12-99, September 6, 1999.
26
841 Phil. 114 (2018) [Per J. Leonen, Third Division].
27
Id. at 145-146.
28
See Commissioner of Internal Revenue v. Unioil Corp., G.R. No. 204405, August 4, 2021 [Per J. Hernando,
Second Division] at 13. This pinpoint citation refers to the copy of the Decision uploaded to the Supreme
Court website.
29
Commissioner of Internal Revenue v. Avon Products Manufacturing, Inc., supra note 26, at 153.

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30
Commissioner of Internal Revenue v. Fitness by Design, Inc., 799 Phil. 391, 409-410 (2016) [Per J.
Leonen, Second Division].
31
Commissioner of Internal Revenue v. T Shuttle Services, Inc., 879 Phil 409, 422 (2020) [Per J. Inting,
Second Division].
32
Aguirre v. Nieto, 860 Phil. 642, 649-650 (2019) [Per J. Carandang, First Division].
33
529 Phil. 785 (2006) [Per J. Chico-Nazario, First Division].
34
Id. at 796.
35
Id. at 793.
36
Id. at 793-794.
37
Id. at 798.
38
Supra note 31.
39
Id. at 422-423.
40
CTA rollo, CTA No. 8935, p. 117. Exhibit "R-10."
41
Rollo, p. 20.
42
157 Phil. 510 (1974) [Per J. Esguerra, First Division].
43
Commissioner of Internal Revenue v. Asalus Corporation, supra note 19, at 408.
44
Id. at 408-409.
45
Rollo, pp. 49-50, CTA EB Decision dated March 13, 2019.
46
Government Service Insurance System v. Commission on Audit, 674 Phil. 578, 600-601 (2011) [Per J.
Leonardo-De Castro, En Banc].
47
481 Phil. 626 (2004) [Per CJ. Davide, Jr., First Division].
48
Id. at 639.
49
Pilipinas Shell Petroleum Corp. v. Commissioner of Customs, 801 Phil. 806, 842 (2016) [Per J. Perez, Third
Division].
50
SM Land, Inc. v. Bases Conversion and Development Authority, et al., 741 Phil. 269,299 (2014) [Per J.
Velasco, Jr., Third Division].
51
Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue, 616 Phil. 387, 402 (2009) [Per
J. Corona, Special First Division].
52
748 Phil. 760 (2014) [Per J. Peralta, Third Division].
53
Id. at 769-771.
54
802 Phil. 432 (2016) [Per J. Leonen, Second Division].
55
Id. at 447.
56
See Samar-1 Electric Cooperative. v. Commissioner of Internal Revenue, 749 Phil. 772, 782 (2014) [Per J.
Villarama, Jr., Third Division] and Commissioner of Internal Revenue v. Fitness by Design, Inc., supra note
30, at 414-145.
57
Commissioner of Internal Revenue v. Asalus Corp., supra note 19.
58
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
(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 under-declaration 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

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facie evidence of a false or fraudulent return; Provided further, That a failure to report sales, receipts or
income in an amount exceeding thirty percent (30%) of that declared per return, and a claim of deduction in
an amount exceeding thirty (30%) of actual deductions, shall render the taxpayer liable for substantial under-
declaration of sales, receipts or income or for overstatement of deductions, as mentioned herein.
59
Commissioner of Internal Revenue v. Philippine Daily Inquirer, Inc., 807 Phil. 912, 935-937 (2017) [Per J.
Carpio, Second Division].
60
See CIR v. B.F. Goodrich Phils., Inc. 363 Phil. 169, 179 (1999) [Per J. Panganiban, Third Division]
and Commissioner of Internal Revenue v. Philippine Daily Inquirer, Inc., id. at 937.
61
G.R. No. 247737, August 8, 2023 [Per J. Inting, En Banc].
62
Id. at 32. This pinpoint citation refers to the copy of the Decision uploaded to the Supreme Court website.
63
Id. at 33. This pinpoint citation refers to the copy of the Decision uploaded to the Supreme Court website.
64
Id. at 34-36.
65
CTA rollo, p. 95, Annex A of Exhibit R-5, Preliminary Assessment Notice dated October 15, 2015.
66
Rollo, p. 81, CTA First Division Decision dated August 18, 2017.
67
Id. at 82-83.
68
Id. at 48, CTA EB Decision dated March 13, 2019.

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