COMMISSIONER OF INTERNAL REVENUE vs. JAVIER

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 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MELCHOR J. JAVIER, JR. and THE COURT OF TAX APPEALS, respondents.

G.R. No. 78953. July 31, 1991. SARMIENTO, J.:

Topic: f. Effects of failure to pay the tax on time: Additions to the tax (Chapter I, Title X,  NIRC) > Surcharges > b. Fraud Penalty (Section 248B, NIRC)

Doctrine: The fraud contemplated by law is actual and not constructive. Courts never sustain findings of fraud upon circumstances which create only suspicion and the mere understatement of at ax is not itself proof of fraud for the purpose of tax evasion. There was no actual and intentional fraud through willful and deliberate misleading of the Bureau of Internal Revenue,case at bar; Error or mistake of law is not fraud.

FACTS: Melon bank erroneously remitted  to Javier 1M US Dollar instead of 1Thousand US Dollar, Melon Bank filed a complaint in the Court of First Instance. Fiscal of CIF filed an information charging spouses Javier with the crime of estafa, alleging that they misappropriated, misapplied, and converted to their own personal use and benefit the amount of  999Thousand US Dollar.

Javier filed his Income Tax Return for the taxable year 1977 and stating in the footnote of the return that “Taxpayer was recipient of some money received from abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation.”

Javier received a letter from the acting Commissioner of Internal Revenue together with income assessment notices for the years 1976 and 1977, demanding that Javier should pay the corresponding amount as deficiency assessments for the years 1976 and 1977 respectively.

Javier wrote the BIR that he was paying the deficiency income assessment for the year 1976 but denying that he had any undeclared income for the year 1977 and requested that the assessment for 1977 be made to await final court decision on the case filed against him for filing an allegedly fraudulent return.

Javier received from Acting Commissioner of Internal Revenue a letter stating in reply to his letter-protest that “the amount of Mellon Bank’s erroneous remittance which you were able to dispose, is definitely taxable.”

The Commissioner also imposed a 50% fraud penalty against Javier. Disagreeing, Javier filed an appeal before the respondent Court of Tax Appeals. CTA ruled that there is no fraud and ordered that the 50% penalty.

ISSUE: Whether a taxpayer who merely states as a footnote in his income tax return that a sum of money that he erroneously received and already spent is the subject of a pending litigation and there did not declare it as income is liable to pay the 50% penalty for filing a fraudulent return.

HELD: No. There is no fraud. “Taxpayer was the recipient of some money from abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation;” that it was an “error or mistake of fact or law” not constituting fraud, that such notation was practically an invitation for investigation and that Javier had literally “laid his cards on the table.”

The fraud contemplated by law is actual and not constructive.It must be intentional fraud, consisting of deception willfully and deliberately done or resorted to in order to induce another to give up some legal right. Negligence, whether slight or gross, is not equivalent to the fraud with intent to evade the tax contemplated by law. It must amount to intentional wrong-doing with the sole object of avoiding the tax. It necessarily follows that a mere mistake cannot be considered as fraudulent intent, and if both petitioner and respondent Commissioner of Internal Revenue committed mistakes in making entries in the returns and in the assessment, respectively, under the inventory method of determining tax liability, it would be unfair to treat the mistakes of the petitioner as tainted with fraud and those of the respondent as made in good faith.

Fraud is never imputed and the courts never sustain findings of fraud upon circumstances which, at most, create only suspicion and the mere understatement of a tax is not itself proof of fraud for the purpose of tax evasion.

In the case at bar, there was no actual and intentional fraud through willful and deliberate misleading of the government agency concerned, the Bureau of Internal Revenue, headed by the herein petitioner. The government was not induced to give up some legal right and place itself at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities because Javier did not conceal anything. Error or mistake of law is not fraud. The petitioner’s zealousness to collect taxes from the unearned windfall to Javier is highly commendable. Unfortunately, the imposition of the fraud penalty in this case is not justified by the extant facts.

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