G.R. No. 104171 February 24, 1999.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. B.F. GOODRICH PHILS., INC. (now SIME DARBY INTERNATIONAL TIRE CO., INC.) and THE COURT OF APPEALS, respondents.

FACTS

Private respondent B.F. Goodrich Phils., Inc., an American-owned corporation, purchased land in Basilan in 1961 to develop a rubber plantation as required by the Central Bank. Anticipating the expiration of the Parity Amendment on July 3, 1974, which would cause it to lose ownership rights over public agricultural lands, the company sold the land to Siltown Realty Philippines, Inc. on January 21, 1974, for P500,000 payable in installments, and subsequently leased it back. For taxable year 1974, the BIR examined the company’s books and, on April 23, 1975, assessed and collected a deficiency income tax of P6,005.35. Later, based on an examination of Siltown’s records, the BIR Commissioner issued an assessment on October 10, 1980, for deficiency donor’s tax amounting to P1,020,850, alleging the sale consideration was insufficient and the difference between the fair market value and purchase price constituted a taxable donation. This was contested. On April 9, 1981, private respondent received a modified assessment dated March 16, 1981, increasing the amount to P1,092,949. Private respondent appealed to the Court of Tax Appeals (CTA), which modified the assessment but upheld its validity. The Court of Appeals reversed the CTA, ruling the assessments were issued beyond the five-year prescriptive period.

ISSUE

Whether the Bureau of Internal Revenue may still assess a taxpayer for deficiency donor’s tax after the expiration of the five-year prescriptive period, notwithstanding a prior assessment and payment for the same taxable year, on the ground that the previous return was false or the assessment was insufficient.

RULING

No. The Supreme Court affirmed the Decision of the Court of Appeals. The assessments issued on October 10, 1980, and March 16, 1981, were made beyond the five-year period of limitation prescribed under Section 331 of the National Internal Revenue Code. The return for taxable year 1974 was filed on or before April 15, 1975, and an assessment for deficiency income tax for that year was made on April 23, 1975. The subsequent donor’s tax assessments for the same year, issued more than five years after the return was filed, violated the statute of limitations. The Court rejected the petitioner’s argument that the assessment was justified under Section 15 (now Section 16) of the 1974 Tax Code, which allows assessment based on the best evidence obtainable when a return is false, incomplete, or erroneous. The Court distinguished that provision, which applies to a first assessment within the five-year period, from Section 337, which governs assessments made beyond the period and requires specific grounds of “fraud, irregularity, and mistake.” The term “false” is not included in the enumeration under Section 337. The law on prescription, being a remedial measure to safeguard taxpayers from unreasonable assessment, must be liberally construed in their favor. Therefore, the right of the BIR to assess had prescribed.