G.R. No. L-25483; May 23, 1969
REPUBLIC OF THE PHILIPPINES, plaintiff-appellant, vs. LUCIA TAN, defendant-appellee.

FACTS

The Republic of the Philippines, through the Commissioner of Internal Revenue, filed a complaint on May 8, 1958, to collect deficiency income taxes, surcharges, and interests from Lucia Tan for the years 1949, 1950, 1951, and 1952. The Bureau of Internal Revenue (BIR) discovered in August 1954 that Tan had not filed income tax returns for those years, despite being liable. The BIR filed returns on her behalf and issued assessment notices in 1955, which Tan refused to pay. In her answer, Tan admitted not filing returns but claimed the assessments were arbitrary and raised the affirmative defense of prescription, arguing the assessments for 1949-1951 were made beyond the three-year period under Section 51(d) of the National Internal Revenue Code. After a reinvestigation ordered by the trial court, the BIR found Tan’s tax liability higher and attempted to file an amended complaint, but it was not properly submitted. The trial court, acting on Tan’s prescription defense, dismissed the original complaint on February 20, 1965, ruling the action had prescribed. The Republic’s motion for reconsideration was denied, prompting this appeal.

ISSUE

Whether the action for collection of deficiency income taxes against Lucia Tan, who failed to file tax returns, is governed by the three-year period under Section 51(d) of the National Internal Revenue Code or the ten-year period under Section 332(a) of the same Code.

RULING

The Supreme Court ruled that the applicable law is Section 332(a) of the National Internal Revenue Code, which provides a ten-year period for assessment or collection by judicial action in cases of failure to file a return, counted from the discovery of the omission. The Court clarified that the three-year period in Section 51(d) refers to the summary remedy of distraint and levy and does not bar an assessment as a preliminary step to judicial collection. Since Tan’s failure to file returns was discovered in August 1954, the Republic had ten years from that date, or until August 1964, to institute the collection action. The complaint filed in May 1958 was within this ten-year period. Therefore, the trial court erred in dismissing the complaint on the ground of prescription under Section 51(d). The appealed orders were set aside, and the case was remanded to the lower court for further proceedings.