G.R. No. 215957 , November 9, 2016
COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. FITNESS BY DESIGN, INC., Respondent

FACTS

Respondent Fitness by Design, Inc. (Fitness) filed its Annual Income Tax Return for the taxable year 1995 on April 11, 1996, stating it was in its pre-operating stage. On June 9, 2004, Fitness received a Final Assessment Notice (FAN) dated March 17, 2004, assessing a total tax deficiency of ₱10,647,529.69 for deficiency income tax, value-added tax, and documentary stamp tax for 1995. The FAN was issued based on alleged unreported sales of ₱7,156,336.08. Fitness filed a protest on June 25, 2004, arguing the assessment had prescribed and was without basis. On February 2, 2005, the Commissioner of Internal Revenue (CIR) issued a Warrant of Distraint and/or Levy. Fitness filed a Petition for Review before the Court of Tax Appeals (CTA). The CIR argued the right to assess had not prescribed under Section 222(a) of the National Internal Revenue Code (NIRC) due to a false and fraudulent return, claiming the fraud was discovered through a confidential informant and the assessment became final due to Fitness’s alleged failure to timely protest. The CTA First Division granted Fitness’s petition, canceling the FAN and Warrant, ruling the assessment was invalid for non-compliance with Section 228 of the NIRC and had prescribed. The CTA En Banc affirmed the decision.

ISSUE

Whether the Final Assessment Notice issued against Fitness by Design, Inc. is a valid assessment under Section 228 of the National Internal Revenue Code and Revenue Regulations No. 12-99.

RULING

No. The Supreme Court denied the CIR’s petition and affirmed the CTA En Banc’s decision. The FAN was invalid for two independent reasons. First, it did not comply with the mandatory requirements of Section 228 of the NIRC and Revenue Regulations No. 12-99, as it failed to state a definite due date for payment. The notice merely stated “within the time shown in the enclosed assessment notice,” but no such specific date was provided, rendering it a mere request for payment rather than a valid assessment. Second, the assessment had prescribed. The ordinary three-year period to assess (from April 15, 1996) expired on April 15, 1999. The CIR failed to prove that the ten-year period for fraudulent returns under Section 222(a) applied. To avail of this extraordinary period, the CIR must communicate the facts constituting the fraud to the taxpayer, which it did not do. The FAN did not allege fraud, and the CIR’s claim of fraud, based on a tip and a recommendation for a criminal complaint, was insufficient. The burden to prove the facts of fraud is on the CIR, and it failed to discharge this burden. Therefore, the assessment was issued beyond the prescriptive period.