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Aznar v.

CTA
G.R. No. L-20569
August 23, 1974

Esguerra, J.:
Facts:
Petitioner Jose Aznar, the estate administrator of one Matias Aznar, seeks a review and
nullification of the CTA decision that imposes the petitioner to pay P227, 691 representing
deficiency income taxes for the years 1946 to 1951.
The case roots from the time when the CIR had doubts regarding the tax returns of Matias Aznar,
a person known to be wealthy. An investigation was conducted. It was found that Matias did not
declare correctly the income reported in his tax returns in the said years. Therefore, the CIR now
wants to collect an additional 50% surcharges on the reported income and even had the properties
placed under distraint and levy to secure the payment of such deficiency income tax which totaled
to P723, 032. The lower court granted the CIR’s motions.
Issue:
1. W/N the imposition of the 50% surcharge is proper.
Held/Ratio:
1. NO. The lower court based its decision on the presumption that there was fraud in the reporting
of the petitioner’s income since they did appear to be substantially lower that what must be
reported (the difference is ranging from 95% to 946%…yes, 946%). With such disparity, the lower
court found that the 50% fraud penalty is fitting.
The Supreme Court found this wrong. An investigation was conducted and resulted to quite an
amazement. It was seen that the petitioner and the CIR incurred errors in their assessment and
reporting of the net income and tax due. On the petitioner’s part, there were erroneous entries on
the books. On the CIR, there was an error of the accounting method used to determine the tax
liability (for example: two buildings should have been eliminated in the list of the petitioner’s assets
because they were destroyed in the fire)
The two must be differentiated. False returns (due to mistake, carelessness or ignorance) and
fraudulent returns (with intent to evade taxes). In addition, it is a well-established doctrine that
fraud cannot be presumed since it must be proven. Fraudulent intent cannot be deduced from the
mistakes, though how frequent it may be. It was seen that the petitioner did not have the intention
to report fraudulent returns and they were even very cooperative during the BIR investigations.
The fraud contemplated by law is one that is actual and not constructive; it must be intentional
and deliberately done. Negligence, whether slight or gross, is not equivalent to the fraud with
intent to evade the tax contemplated by the 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.
The court held that the 50% surcharge shall not be imposed and that the recalculated tax must
still be paid which now amounted to only P151, 762. This shall be paid within 30 days of the
decision, otherwise a 5% surcharge plus a 12% interest per annum shall be added to the balance
from the date of delinquency.

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