REPUBLIC vs. PATANAO (Tax 2)

G.R. No. L-22356             July 21, 1967

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,

vs.

PEDRO B. PATANAO, defendant-appellee.

Office of the Solicitor General Arturo A. Alafriz, Solicitor A. B. Afurong and L. O. Gal-lang for plaintiff-appellant.

Tranquilino O. Calo, Jr. for defendant-appellee.

FACTS:

In the complaint filed by the Republic of the Philippines, through the Solicitor General, against Pedro B. Patanao, it is alleged that defendant was engaged in the business of producing logs and lumber for sale during the years 1951-1955; that defendant failed to file income tax returns for 1953 and 1954, and although he filed income tax returns for 1951, 1952 and 1955, the same were false and fraudulent because he did not report substantial income earned by him from his business. On February 14, 1958, plaintiff, through the Deputy Commissioner of Internal Revenue, sent a letter of demand with enclosed income tax assessment to the defendant requiring him to pay the deficient amount; that notwithstanding repeated demands the defendant refused, failed and neglected to pay said taxes; and that the assessment for the payment of the taxes in question has become final, executory and demandable, because it was not contested before the Court of Tax Appeals in accordance with the provisions of section 11 of Republic Act No. 1125.

Defendant moved to dismiss the complaint on the ground that the action has prescribed.

ISSUE:

Whether the action has prescribed.

RULING:

No, the lower court held that the cause of action on the deficiency income tax and residence tax for 1951 is barred because appellee's income tax return for 1951 was assessed by the Bureau of Internal Revenue only on February 14, 1958, or beyond the five year period of limitation for assessment as provided in section 331 of the National Internal Revenue Code. Appellant contends that the applicable law is section 332 (a) of the same Code under which a proceeding in court for the collection of the tax may be commenced without assessment at any time within 10 years from the discovery of the falsity, fraud or omission.

The complaint filed on December 7, 1962, alleges that the fraud in the appellee's income tax return for 1951, was discovered on February 14, 1958. By filing a motion to dismiss, appellee hypothetically admitted this allegation as all the other averments in the complaint were so admitted. Hence, section 332 (a) and not section 331 of the National Internal Revenue Code should determine whether or not the cause of action of deficiency income tax and residence tax for 1951 has prescribed. Applying the provision of section 332 (a), the appellant's action instituted in court on December 7, 1962 has not prescribed.