SYLLABI/SYNOPSIS

THIRDDIVISION

[G.R.No.104171.February24,1999]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. B.F. GOODRICH PHILS.,

INC.(nowSIMEDARBYINTERNATIONALTIRECO.,INC.)andTHECOURTOF
APPEALS,respondents.
DECISION
PANGANIBAN,J.:

Notwithstandingtheexpirationofthefiveyearprescriptiveperiod,maytheBureauofInternalRevenue(BIR)
stillassessataxpayerevenafterthelatterhasalreadypaidthetaxdue,onthegroundthatthepreviousassessment
wasinsufficientorbasedonafalsereturn?
TheCase
This is the main question raised before us in this Petition for Review on Certiorari assailing the Decision[1]
datedFebruary14,1992,promulgatedbytheCourtofAppeals[2]inCAGRSPNo.25100.TheassailedDecision
reversed the Court of Tax Appeals (CTA)[3] which upheld the BIR commissioners assessments made beyond the
fiveyearstatuteoflimitations.
TheFacts
Thefactsareundisputed.[4]PrivateRespondentBFGoodrichPhils.,Inc.(nowSimeDarbyInternationalTire
Co.Inc.),wasanAmericanownedandcontrolledcorporationprevioustoJuly3,1974.Asaconditionforapproving
the manufacture by private respondent of tires and other rubber products, the Central Bank of the Philippines
required that it should develop a rubber plantation. In compliance with this requirement, private respondent
purchased from the Philippine government in 1961, under the Public Land Act and the Parity Amendment to the
1935Constitution,certainparcelsoflandlocatedinTumajubong,Basilan,andtheredevelopedarubberplantation.
More than a decade later, on August 2, 1973, the justice secretary rendered an opinion stating that, upon the
expiration of the Parity Amendment on July 3, 1974, the ownership rights of Americans over public agricultural
lands, including the right to dispose or sell their real estate, would be lost. On the basis of this Opinion, private
respondent sold to Siltown Realty Philippines, Inc. on January 21, 1974, its Basilan landholding for P500,000
payableininstallments.Inaccordwiththetermsofthesale,SiltownRealtyPhilippines,Inc.leasedthesaidparcels
oflandtoprivaterespondentforaperiodof25years,withanextensionofanother25yearsatthelattersoption.
Based on the BIRs Letter of Authority No. 10115 dated April 14, 1975, the books and accounts of private
respondentwereexaminedforthepurposeofdeterminingitstaxliabilityfortaxableyear1974.The examination
resulted in the April 23, 1975 assessment of private respondent for deficiency income tax in the amount of
P6,005.35,whichitdulypaid.

Subsequently the BIR also issued Letters of Authority Nos. 074420 RR and 074421 RR and Memorandum
AuthorityReferenceNo.749157forthepurposeofexaminingSiltownsbusiness,incomeandtaxliabilities.Onthe
basis of this examination, the BIR commissioner issued against private respondent on October 10, 1980, an
assessmentfordeficiencyindonorstaxintheamountofP1,020,850,inrelationtothepreviouslymentionedsaleof
itsBasilanlandholdingstoSiltown.Apparently,theBIRdeemedtheconsiderationforthesaleinsufficient,andthe
differencebetweenthefairmarketvalueandtheactualpurchasepriceataxabledonation.
InaletterdatedNovember24,1980,privaterespondentcontestedthisassessment.OnApril9,1981,itreceived
another assessment dated March 16, 1981, which increased to P1,092,949 the amount demanded for the alleged
deficiencydonorstax,surcharge,interestandcompromisepenalty.
PrivaterespondentappealedthecorrectnessandthelegalityoftheselasttwoassessmentstotheCTA.Aftertrial
in due course, the CTA rendered its Decision dated March 29, 1991, the dispositive portion of which reads as
follows:
WHEREFORE,thedecisionoftheCommissionerofInternalRevenueassessingpetitionerdeficiencygifttaxis
MODIFIEDandpetitionerisorderedtopaytheamountofP1,311,179.01plus10%surchargeand20%annual
interestfromMarch16,1981untilfullypaidprovidedthatthemaximumamountthatmaybecollectedasinterest
ondelinquencyshallinnocaseexceedanamountcorrespondingtoaperiodofthreeyearspursuanttoSection
130(b)(1)and(c)ofthe1977TaxCode,asamendedbyP.D.No.1705,whichtookeffectonAugust1,1980.
SOORDERED.[5]
Undaunted,privaterespondentelevatedthemattertotheCourtofAppeals,whichreversedtheCTA,asfollows:
Whatisinvolvedhereisnotafirstassessmentnorisitonewithinthe5yearperiodstatedinSection331above.
Sincewhatisinvolvedinthiscaseisamultipleassessmentbeyondthefiveyearperiod,theassessmentmustbe
basedonthegroundsprovidedinSection337,andnotonSection15ofthe1974TaxCode.Section337utilizesthe
veryspecifictermsfraud,irregularity,andmistake.Falsitydoesnotappeartobeincludedinthisenumeration.
Falsitysufficesforanassessment,whichisafirstassessmentmadewithinthefiveyearperiod.Whenitisa
subsequentassessmentmadebeyondthefiveyearperiod,then,itmaybevalidlyjustifiedonlybyfraud,irregularity
andmistakeonthepartofthetaxpayer.[6]
Hence,thisPetitionforReviewunderRule45oftheRulesofCourt.[7]
TheIssues
Beforeus,petitionerraisesthefollowingissues:
I
Whetherornotpetitionersrighttoassesshereindeficiencydonorstaxhasindeedprescribedasruledbypublic
respondentCourtofAppeals
II
Whetherornotthehereindeficiencydonorstaxassessmentfor1974isvalidandinaccordancewithlaw
Prescriptionisthecrucialissueintheresolutionofthiscase.
TheCourtsRuling

Thepetitionhasnomerit.
MainIssue:Prescription
The petitioner contends that the Court of Appeals erred in reversing the CTA on the issue of prescription,
becauseitsrulingwasbasedonfactualfindingsthatshouldhavebeenleftundisturbedonappeal,intheabsenceof
anyshowingthatithadbeentaintedwithgrosserrororgraveabuseofdiscretion.[8]TheCourtisnotpersuaded.
True, the factual findings of the CTA are generally not disturbed on appeal when supported by substantial
evidenceandintheabsenceofgrosserrororgraveabuseofdiscretion.However,theCTAsapplicationofthelawto
thefactsofthiscontroversyisanaltogetherdifferentmatter,foritinvolvesalegalquestion.Thereisaquestionof
lawwhentheissueistheapplicationofthelawtoagivensetoffacts.Ontheotherhand,aquestionoffactinvolves
thetruthorfalsehoodofallegedfacts.[9]Inthepresentcase,theCourtofAppealsrulednotonthetruthorfalsityof
thefactsfoundbytheCTA,butonthelattersapplicationofthelawonprescription.
Section331oftheNationalInternalRevenueCodeprovides:
SEC.331.Periodoflimitationuponassessmentandcollection.Exceptasprovidedinthesucceedingsection,
internalrevenuetaxesshallbeassessedwithinfiveyearsafterthereturnwasfiled,andnoproceedingincourt
withoutassessmentforthecollectionofsuchtaxesshallbebegunafterexpirationofsuchperiod.Forthepurposes
ofthissection,areturnfiledbeforethelastdayprescribedbylawforthefilingthereofshallbeconsideredasfiled
onsuchlastday:Provided,Thatthislimitationshallnotapplytocasesalreadyinvestigatedpriortotheapprovalof
thisCode.
Applyingthisprovisionoflawtothefactsathand,itisclearthattheOctober16,1980andtheMarch1981
assessmentswereissuedbytheBIRbeyondthefiveyearstatuteoflimitations.TheCourthasthoroughlystudied
the records of this case and found no basis to disregard the fiveyear period of prescription. As succinctly
pronouncedbytheCourtofAppeals:
ThesubsequentassessmentmadebytherespondentCommissioneronOctober10,1980,modifiedbythatofMarch
16,1981,violatesthelaw.Involvedinthispetitionistheincomeofthepetitionerfortheyear1974,thereturnsfor
whichwererequiredtobefiledonorbeforeApril15ofthesucceedingyear.Thereturnsfortheyear1974were
dulyfiledbythepetitioner,andassessmentoftaxesdueforsuchyearincludingthatonthetransferofproperties
onJune21,1974wasmadeonApril13,1975andacknowledgedbyLetterofConfirmationNo.101155
terminatingtheexaminationonthissubject.ThesubsequentassessmentofOctober10,1980modified,bythatof
March16,1981,wasmadebeyondtheperiodexpresslysetinSection331oftheNationalIntenalRevenueCode
xxx.[10]
PetitionerreliesontheCTAruling,thesalientportionofwhichreads:
Falsityiswhatwehavehere,andforthatmatter,wehastentoaddthatthesecondassessment(March16,1981)of
theCommissionerwaswelladvisedhavingbeenmadeincontemplationofhispowerunderSection15ofthe1974
Code(nowSection16,ofNIRC)toassessthepropertaxonthebestevidenceobtainablewhenthereisreasonto
believethatareportofataxpayerisfalse,incompleteorerroneous.More,whenthereisfalsitywithintenttoevade
taxasinthiscase,theordinaryperiodoflimitationuponassessmentandcollectiondoesnotapplysothatcontraryto
theavermentofpetitioner,therighttoassessrespondenthasnotprescribed.
Whatistheconsideredfalsity?ThetransferthroughsalesoftheparcelsoflandinTumajubong,Lamitan,Basilanin
favorofSiltownRealtyforthesumofP500,000.00onlywhereassaidlandshadbeensworntounderPresidential
DecreeNo.76(Dec.6,1972)ashavingavalueofP2,683,467(P2,475,467+P207,700)(seeDeclarationofReal
Propertyform,p.28,andp.15,no.5,BIRRecord).[11]

Forthepurposeofsafeguardingtaxpayersfromanyunreasonableexamination,investigationorassessment,our
taxlawprovidesastatuteoflimitationsinthecollectionoftaxes.Thus,thelawonprescription,beingaremedial
measure,shouldbeliberallyconstruedinordertoaffordsuchprotection.[12]Asacorollary,theexceptionstothe
lawonprescriptionshouldperforcebestrictlyconstrued.
Section 15 of the NIRC, on the other hand, provides that [w]hen a report required by law as a basis for the
assessmentofanynationalinternalrevenuetaxshallnotbeforthcomingwithinthetimefixedbylaworregulation,
or when there is reason to believe that any such report is false, incomplete, or erroneous, the Commissioner of
InternalRevenueshallassessthepropertaxonthebestevidenceobtainable.Clearly,Section15doesnotprovidean
exception to the statute of limitations on the issuance of an assessment, by allowing the initial assessment to be
madeonthebasisofthebestevidenceavailable.Havingmadeitsinitialassessmentinthemannerprescribed,the
commissionercouldnothavebeenauthorizedtoissue,beyondthefiveyearprescriptiveperiod,thesecondandthe
thirdassessmentsunderconsiderationbeforeus.
Norispetitionersclaimoffalsitysufficienttotakethequestionedassessmentsoutoftheambitofthestatuteof
limitations.The relevant part of then Section 332 of the NIRC, which enumerates the exceptions to the period of
prescription,provides:
SEC.332.Exceptionsastoperiodoflimitationofassessmentandcollectionoftaxes.(a)Inthecaseofafalseor
fraudulentreturnwithintenttoevadeataxorofafailuretofileareturn,thetaxmaybeassessed,oraproceedingin
courtforthecollectionofsuchtaxmaybebegunwithoutassessment,atanytimewithintenyearsafterthe
discoveryofthefalsity,fraud,oromission:xxx.
Petitionerinsiststhatprivaterespondentcommittedfalsitywhenitsoldthepropertyforapricelesserthanits
declaredfairmarketvalue.Thisfactalonedidnotconstituteafalsereturnwhichcontainswronginformationdueto
mistake, carelessness or ignorance.[13] It is possible that real property may be sold for less than adequate
consideration for a bonafidebusiness purpose in such event, the sale remains an arms length transaction.In the
presentcase,theprivaterespondentwascompelledtosellthepropertyevenatapricelessthanitsmarketvalue,
becauseitwouldhavelostallownershiprightsoveritupontheexpirationoftheparityamendment.Inotherwords,
privaterespondentwasattemptingtominimizeitslosses.Atthesametime,itwasabletoleasethepropertyfor25
years,renewableforanother25.Thiscanberegardedasanotherconsiderationontheprice.
Furthermore,thefactthatprivaterespondentsolditsrealpropertyforapricelessthanitsdeclaredfairmarket
valuedidnotbyitselfjustifyafindingoffalsereturn.Indeed,privaterespondentdeclaredthesaleinits1974return
submitted to the BIR.[14] Within the fiveyear prescriptive period, the BIR could have issued the questioned
assessment, because the declared fair market value of said property was of public record. This it did not do,
however,duringallthosefiveyears.Moreover,theBIRfailedtoprovethatrespondent's1974returnhadbeenfiled
fraudulently. Equally. significant was its failure to prove respondent's intent to evade the payment of the correct
amountoftax.
Ineludibly, the BIR failed to show that private respondent's 1974 return was filed fraudulently with intent to
evadethepaymentofthecorrectamountoftax.[15]Moreover,eventhoughadonor'stax,whichisdefinedas"atax
on the privilege of transmitting one's property or property rights to another or others without adequate and full
valuable consideration,"[16] is different from capital gains tax, a tax on the gain from the sale of the taxpayer's
propertyformingpartofcapitalassets,[17]thetaxreturnfiledbyprivaterespondenttoreportitsincomefortheyear
1974 was sufficient compliance with the legal requirement to file a return. In other words, the fact that the sale
transactionmayhavepartlyresultedinadonationdoesnotchangethefactthatprivaterespondentalreadyreported
itsincomefor1974byfilinganincometaxreturn.
SincetheBIRfailedtodemonstrateclearlythatprivaterespondenthadfiledafraudulentreturnwiththeintent
toevadetax,orthatithadfailedtofileareturnatall,theperiodforassessmentshasobviouslyprescribed.Such
instances of negligence or oversight on the part of the BIR cannot prejudice taxpayers, considering that the
prescriptiveperiodwaspreciselyintendedtogivethempeaceofmind.

Basedontheforegoing,adiscussionofthevalidityandlegalityoftheassailedassessmentshasbecomemoot
andunnecessary.
WHEREFORE, the Petition for Review is DENIED and the assailed Decision of the Court of Appeals is
AFFIRMED.Nocosts.
SOORDERED.
Romero(Chairman),Purisima,andGonzagaReyes,JJ.,concur.
Vitug,J.,onofficialleave.
[1]Rollo,pp.2938.
[2]SpecialEleventhDivisioncomposedofJ.NathanaelP.dePano,Jr.,chairmanandponenteandJJ.FortunatoA.VailocesandLuisL.
Victor,members,concurring.
[3]Rollo,pp.3953.
[4] See Memorandum of private respondent, pp. 24 and Memorandum of petitioner, pp. 25 Rollo, pp. 123125 and 151154,
respectively.SeealsoDecisionoftheCTA,pp.13Rollo,pp.3941.
[5]DecisionoftheCTA,p.14Rollo,p.52.
[6]DecisionoftheCourtofAppeals,pp.67Rollo,pp.3435.
[7]ThecasewassubmittedforresolutiononMarch25,1997,whentheMemorandumforpetitionerwasreceivedbytheCourt. Private
respondentsMemorandumwasreceivedearlieronFebruary2,1996.
[8]Memorandumforthepetitioner,pp.1213Rollo,pp.161162.
[9]CommissionerofInternalRevenuev.CourtofAppealsetal.,GRNo124043,October14,1998,pp.810citingRamosetal.v.Pepsi
ColaBottlingCo.oftheP.I.etal.,19SCRA289,292,February9,1997.
[10]DecisionoftheCourtofAppeals,pp.56Rollo,pp.3334.
[11]DecisionoftheCTA,pp.910Rollo,pp.4748.
[12]ReportoftheTaxCommission,Vol.I,p.98andRepublicv.Ablaza,108Phil.1105,1108.(1960)citedinVitug,Compendiumof
TaxLawandJurisprudence,p.252,2ndreviseded.(1989)HectorSdeLeon,TheNationalInternalRevenueCodeAnnotated,p.509,
1991ed.andRubenE.Agpalo,StatutoryConstruction,p.227,2nded.(1990).
[13]Aznarv.CourtofTaxAppeals,58SCRA519,541,August23,1974.Theword"false"isdefinedasanadjectivewhichmeansnot
trueornotcorrect(DictionaryofLaw,2nded.,PeterCollinPublishing[1997]).
[14]Memorandumforprivaterespondent,p.5Rollo,p.126.
[15]Aznar,supra,p.541.
[16]Vitug,supra,p.192.
[17]Tuason,Jr.v.Lingad,58SCRA170,176,July31,1974.