REPUBLIC vs. KER & CO. (Tax 2)

G.R. No. L-21609             September 29, 1966

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,

vs.

KER & COMPANY, LTD., defendant-appellant.

Office of the Solicitor General for plaintiff-appellant.

Leido, Andrada, Perez and Associates for defendant-appellant.

FACTS:

Ker & Co., Ltd., filed its income tax returns for the years 1947, 1948, 1949 and 1950. In 1953 the Bureau of Internal Revenue examined and audited Ker & Co., Ltd.'s returns and books of accounts and subsequently issued the assessments for deficiency income tax.

On March 15, 1962, the Bureau of Internal Revenue demanded payment of the aforesaid assessments together with a surcharge and interest. Ker & Co., Ltd. refused to pay, instead in its letters dated March 28, 1962 and April 10, 1962 it set up the defense of prescription of the Commissioner's right to collect the tax.

Ker & Co., Ltd. contends that under Section 331 of the Tax Code the right of the Commissioner of Internal Revenue to assess against it a deficiency income tax for the year 1947 has prescribed because the assessment was issued on July 25, 1953 after a lapse of five years, three months and thirteen days from the date (April 12, 1948) it filed its income tax return. On the other hand, the Republic of the Philippines insists that the taxpayer's income tax return was fraudulent, therefore the Commissioner of Internal Revenue may assess the tax within ten years from discovery of the fraud on October 31, 1951 pursuant to Section 322(a) of the Tax Code.

ISSUE:

Did the right of the Commissioner of Internal Revenue to assess deficiency income tax for the year 1947 prescribe?

RULING:

No, said court resolved the issue without touching upon fraudulence of the return. The reason is that the complaint alleged no fraud, nor did the plaintiff present evidence to prove fraud.

In reply to the lower court's conclusion, the Republic of the Philippines maintains in its brief that Ker & Co., Ltd. filed a false return and since the fraud penalty of 50% surcharge was imposed in the deficiency income tax assessment, which has become final and executory, the finding of the Commissioner of Internal Revenue as to the existence of the fraud has also become final and need not be proved. This contention suffers from a flaw in that it fails to consider the well-settled principle that fraud is a question of fact6 which must be alleged and proved.7 Fraud is a serious charge and, to be sustained, it must be supported by clear and convincing proof.8 Accordingly, fraud should have been alleged and proved in the lower court. On these premises We therefore sustain the ruling of the lower court upon the point of prescription.

It would be worth mentioning that since the assessment for deficiency income tax for 1947 has become final and executory, Ker & Co., Ltd. may not anymore raise defenses which go into the merits of the assessment, i.e., prescription of the Commissioner's right to assess the tax. Such was our ruling in previous cases.9 In this case however, Ker & Co., Ltd. raised the defense of prescription in the proceedings below and the Republic of the Philippines, instead of questioning the right of the defendant to raise such defense, litigated on it and submitted the issue for resolution of the court. By its actuation, the Republic of the Philippines should be considered to have waived its right to object to the setting up of such defense.