G.R. No.

215957, November 09, 2016

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. FITNESS BY DESIGN, INC., Respondent.

LEONEN, J.:

FACTS: Fitness received a copy of the Final Assessment Notice dated March 17, 2004. The Final Assessment Notice
assessed that Fitness had a tax deficiency in the amount of P10,647,529.69.

Fitness filed a protest to the Final Assessment Notice on June 25, 2004. According to Fitness, the Commissioner's
period to assess had already prescribed. Further, the assessment was without basis since the company was only
incorporated on May 30, 1995.

The Commissioner issued a Warrant of Distraint and/or Levy.

Fitness filed before the First Division of the Court of Tax Appeals a Petition for Review (With Motion to Suspend
Collection of Income Tax, Value Added Tax, Documentary Stamp Tax and Surcharges and Interests).

The Commissioner claimed that its right to assess had not yet prescribed under Section 222(a) of the National Internal
Revenue Code. Because the 1995 Income Tax Return filed by Fitness was false and fraudulent for its alleged
intentional failure to reflect its true sales, Fitness' respective taxes may be assessed at any time within 10 years from
the discovery of fraud or omission.

The Court of Tax Appeals First Division granted Fitness' Petition on the ground that the assessment has already
prescribed. It cancelled and set aside the Final Assessment Notice as well as the Warrant of Distraint and/or Levy
issued by the Commissioner. It ruled that the Final Assessment Notice is invalid for failure to comply with the
requirements of Section 228 of the National Internal Revenue Code.

The Court of Tax Appeals En Banc affirmed in toto the decision.

ISSUES: 1. Whether the Final Assessment Notice issued against respondent Fitness by Design, Inc. is a valid
assessment. NO

2. Whether the assessment has already prescribed. YES

HELD: 1. The disputed Final Assessment Notice is not a valid assessment.

First, it lacks the definite amount of tax liability for which respondent is accountable. It does not purport to be a
demand for payment of tax due, which a final assessment notice should supposedly be. An assessment, in the context
of the National Internal Revenue Code, is a "written notice and demand made by the [Bureau of Internal Revenue] on
the taxpayer for the settlement of a due tax liability that is there definitely set and fixed." Although the disputed notice
provides for the computations of respondent's tax liability, the amount remains indefinite. It only provides that the tax
due is still subject to modification, depending on the date of payment. The pertinent portion of the assessment reads:

“The complete details covering the aforementioned discrepancies established during the investigation of this case are
shown in the accompanying Annex 1 of this Notice. The 50% surcharge and 20% interest have been imposed pursuant
to Sections 248 and 249 (B) of the [National Internal Revenue Code], as amended. Please note, however, that the
interest and the total amount due will have to be adjusted if prior or beyond April 15, 2004”.

Second, there are no due dates in the Final Assessment Notice. This negates petitioner's demand for
payment. Petitioner's contention that April 15, 2004 should be regarded as the actual due date cannot be accepted. The
last paragraph of the Final Assessment Notice states that the due dates for payment were supposedly reflected in the
attached assessment:

In view thereof, you are requested to pay your aforesaid deficiency internal revenue tax liabilities through the duly
authorized agent bank in which you are enrolled within the time shown in the enclosed assessment notice.

However, based on the findings of the Court of Tax Appeals First Division, the enclosed assessment pertained to
remained unaccomplished.

Contrary to petitioner's view, April 15, 2004 was the reckoning date of accrual of penalties and surcharges and not the
due date for payment of tax liabilities. The total amount depended upon when respondent decides to pay. The notice,
therefore, did not contain a definite and actual demand to pay.

Compliance with Section 228 of the National Internal Revenue Code is a substantive requirement. It is not a mere
formality. Providing the taxpayer with the factual and legal bases for the assessment is crucial before proceeding with
tax collection. Tax collection should be premised on a valid assessment, which would allow the taxpayer to present his
or her case and produce evidence for substantiation.

The Court of Tax Appeals did not err in cancelling the Final Assessment Notice as well as the Audit
Result/Assessment Notice issued by petitioner to respondent for the year 1995 covering the "alleged deficiency
income tax, value-added tax and documentary stamp tax amounting to P10,647,529.69, inclusive of surcharges and
interest" for lack of due process. Thus, the Warrant of Distraint and/or Levy is void since an invalid assessment bears
no valid effect.

2. 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.

This Court held that there is a difference between "false return" and a "fraudulent return." A false return simply
involves a "deviation from the truth, whether intentional or not" while a fraudulent return "implies intentional or
deceitful entry with intent to evade the taxes due."

During the proceedings in the Court of Tax Appeals First Division, respondent presented its President, Domingo C.
Juan Jr. (Juan, Jr.), as witness. Juan, Jr. testified that respondent was in its pre-operating stage in 1995. During that
period, respondent "imported equipment and distributed them for market testing in the Philippines without earning any
profit." He also confirmed that the Final Assessment Notice and its attachments failed to substantiate the
Commissioner's allegations of fraud against respondent.

Petitioner did not refute respondent's allegations. For its defense, it presented Socrates Regala (Regala), the Group
Supervisor of the team, who examined respondent's tax liabilities. Regala confirmed that the investigation was
prompted by a tip from an informant who provided them with respondent's list of sales. He admitted that the gathered
information did not show that respondent deliberately failed to reflect its true income in 1995.

NOTES:

The assessment process starts with the filing of tax return and payment of tax by the taxpayer. The initial assessment
evidenced by the tax return is a self-assessment of the taxpayer. The tax is primarily computed and voluntarily paid by
the taxpayer without need of any demand from govemment. If tax obligations are properly paid, the Bureau of Internal
Revenue may dispense with its own assessment.

After filing a return, the Commissioner or his or her representative may allow the examination of any taxpayer for
assessment of proper tax liability. The failure of a taxpayer to file his or her return will not hinder the Commissioner
from permitting the taxpayer's examination. The Commissioner can examine records or other data relevant to his or
her inquiry in order to verify the correctness of any return, or to make a return in case of noncompliance, as well as to
determine and collect tax liability.

The indispensability of affording taxpayers sufficient written notice of his or her tax liability is a clear definite
requirement. Section 228 of the National Internal Revenue Code and Revenue Regulations No. 12-99, as amended,
transparently outline the procedure in tax assessment.

Section 3 of Revenue Regulations No. 12-99,66 the then prevailing regulation regarding the due process requirement
in the issuance of a deficiency tax assessment, requires a notice for informal conference. The revenue officer who
audited the taxpayer's records shall state in his or her report whether the taxpayer concurs with his or her findings of
liability for deficiency taxes. If the taxpayer does not agree, based on the revenue officer's report, the taxpayer shall be
informed in writing of the discrepancies in his or her payment of internal revenue taxes for "Informal
Conference." The informal conference gives the taxpayer an opportunity to present his or her side of the case.

The taxpayer is given 15 days from receipt of the notice of informal conference to respond. If the taxpayer fails to
respond, he or she will be considered in default. The revenue officer endorses the case with the least possible delay to
the Assessment Division of the Revenue Regional Office or the Commissioner or his or her authorized
representative. The Assessment Division of the Revenue Regional Office or the Commissioner or his or her authorized
representative is responsible for the "appropriate review and issuance of a deficiency tax assessment, if warranted."

If, after the review conducted, there exists sufficient basis to assess the taxpayer with deficiency taxes, the officer shall
issue a preliminary assessment notice showing in detail the facts, jurisprudence, and law on which the assessment is
based. The taxpayer is given 15 days from receipt of the pre-assessment notice to respond. If the taxpayer fails to
respond, he or she will be considered in default, and a formal letter of demand and assessment notice will be issued.

The formal letter of demand and assessment notice shall state the facts, jurisprudence, and law on which the
assessment was based; otherwise, these shall be void. The taxpayer or the authorized representative may
administratively protest the formal letter of demand and assessment notice within 30 days from receipt of the notice.

However, the mandate of giving the taxpayer a notice of the facts and laws on which the assessments are based should
not be mechanically applied. To emphasize, the purpose of this requirement is to sufficiently inform the taxpayer of
the bases for the assessment to enable him or her to make an intelligent protest.

In Samar-I Electric Cooperative v. Commissioner of Internal Revenue,100substantial compliance with Section 228 of
the National Internal Revenue Code is allowed, provided that the taxpayer would be later apprised in writing of the
factual and legal bases of the assessment to enable him or her to prepare for an effective protest.101 Thus:

Although the [Final Assessment Notice] and demand letter issued to petitioner were not accompanied by a written
explanation of the legal and factual bases of the deficiency taxes assessed against the petitioner, the records showed
that respondent in its letter dated April 10, 2003 responded to petitioner's October 14, 2002 letter-protest, explaining at
length the factual and legal bases of the deficiency tax assessments and denying the protest.
Considering the foregoing exchange of correspondence and documents between the parties, we find that the
requirement of Section 228 was substantially complied with. Respondent had fully informed petitioner in writing of
the factual and legal bases of the deficiency taxes assessment, which enabled the latter to file an "effective" protest,
much unlike the taxpayer's situation in Enron. Petitioner's right to due process was thus not violated.