1. Javier vs.

CA, 199 SCRA 824

Doctrine: Under the then Section 72 of the Tax Code (now Section 248 of the 1988 National Internal
Revenue Code), a taxpayer who files a false return is liable to pay the fraud penalty of 50% of the tax
due from him or of the deficiency tax in case payment has been made on the basis of the return filed
before the discovery of the falsity or fraud.

Facts: In 1977, Victoria Javier, wife of Javier, received $999k from Prudential Bank remitted by her
sister Dolores through Mellon Bank in US. Around 3 weeks after, Mellon Bank filed a complaint with
CFI Rizal against Javier claiming that its remittance of $1M was a clerical error and should have been
$1k only and praying that the excess be returned on the ground that the Javiers are just trustees of an
implied trust for the benefit of Mellon Bank. Thereafter, City Fiscal of Pasay City filed an Information
with the then Circuit Criminal Court charging Javier with estafa alleging that they misappropriated and
converted it to their own personal use, the remitted money.

A year after, Javier filed his Income Tax Return for 1976-77 and in the 1977 Tax return, stating in the
footnote that “the taxpayer was recipient of some money received abroad which he presumed to be a
gift but turned out to be an error and is now subject of litigation”. The Commissioner of Internal
Revenue wrote a letter to Javier demanding him to pay taxes for the deficiency, for both years
especially the 1977 due to the remittance.

Javier replied to the Commissioner and said that he will pay the deficiency of 1976 but denied that he
had any undeclared income for 1977 and requested that the assessment of 1977 be made to await final
court decision on the case filed against him for filing an allegedly fraudulent return.

Commissioner replied that “the amount of Mellon Bank’s erroneous remittance which you were able to
dispose is definitely taxable” and the Commissioner imposed a 50% fraud penalty on Javier.

Thereafter, Javier file an appeal with the CTA, and the CTA ruled in favor with Javier, stating that there
is no fraudulent return as it was stated in the footnote that “the taxpayer was recipient of some money
received abroad which he presumed to be a gift but turned out to be an error and is now subject of
litigation”. Hence, this petition.

Issue: Whether Javier is liable for the 50% penalty.

Ruling: No, the court held that there was no actual and intentional fraud through willful and
deliberate misleading of the BIR in the case. Javier even noted that “the taxpayer was recipient of some
money received abroad which he presumed to be a gift but turned out to be an error and is now subject
of litigation” the remittance was not a taxable gain, since it is still under litigation and there is a chance
that Javier might have the obligation to return it. It will only become taxable once the case has been
settled because by then whatever amount that will be rewarded, Javier has a claim of right over it

It is true that a fraudulent return shall cause the imposition of a 50% penalty upon a taxpayer filing such
fraudulent return. However, in this case, although Javier may be guilty of estafa due to
misappropriating money that does not belong to him, as far as his tax return is concerned, there can be
no fraud. There is no fraud in the filing of the return. Javier’s notation on his income tax return can be
considered as a mere mistake of fact or law but not fraud. Such notation was practically an invitation
for investigation and that Javier had literally “laid his cards on the table.”
The government was never defrauded because by such notation, Javier opened himself for
investigation. It must be noted that 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.