G.R. No.

221590

COMMISSIONER OF INTERNAL REVENUE, Petitioner

vs.
ASALUS CORPORATION, Respondent

DECISION

MENDOZA, J.:

This petition for review on certiorari seeks to reverse and set aside the July 30, 2015 Decision  and
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the November 6, 2015 Resolution  of the Court of Tax Appeals (CTA) En Banc in CTA EB No. 1191,
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which affirmed the April 2, 2014 Decision  of the CTA Third Division (CTA Division).
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The Antecedents

On December 16, 2010, respondent Asalus Corporation (Asalus) received a Notice of Informal

Conference from Revenue District Office (RDO) No. 47 of the Bureau of Internal Revenue (BIR). It
was in connection with the investigation conducted by Revenue Officer Fidel M. Bañares
II (Bañares) on the Value-Added Tax (VAT) transactions of Asalus for the taxable year 2007.  Asalus
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filed its Letter-Reply,  dated December 29, 2010, questioning the basis of Bañares' computation for
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its VAT liability.

On January 10, 2011, petitioner Commissioner of Internal Revenue (CIR) issued the Preliminary

Assessment Notice (PAN) finding Asalus liable for deficiency VAT for 2007 in the aggregate amount
of ₱413, 378, 058.11, inclusive of surcharge and interest. Asalus filed its protest against the PAN but
it was denied by the CIR. 6

On August 26, 2011, Asalus received the Formal Assessment Notice (FAN) stating that it was liable
for deficiency VAT for 2007 in the total amount of ₱95,681,988.64, inclusive of surcharge and
interest. Consequently, it filed its protest against the FAN, dated September 6, 2011. Thereafter,
Asal us filed a supplemental protest stating that the deficiency VAT assessment had prescribed
pursuant to Section 203 of the National Internal Revenue Code (NIRC). 7

On October 16, 2012, Asal us received the Final Decision on Disputed

Assessment  (FDDA) showing VAT deficiency for 2007 in the aggregate amount of
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₱106,761,025.17, inclusive of surcharge and interest and ₱25,000.00 as compromise penalty. As a

result, it filed a petition for review before the CTA Division.

The CTA Division Ruling

In its April 2, 2014 Decision, the CT A Division ruled that the VAT assessment issued on August 26,
2011 had prescribed and consequently deemed invalid. It opined that the ten (10)-year prescriptive
period under Section 222 of the NIRC was inapplicable as neither the FAN nor the FDDA indicated
that Asalus had filed a false VAT return warranting the application of the ten (10)-year prescriptive
period. It explained that it was only in the PAN where an allegation of false or fraudulent return was
made. The CTA stressed that after Asalus had protested the PAN, the CIR never mentioned in both
the FAN and the FDDA that the prescriptive period would be ten (10) years. It further pointed out that
the CIR failed to present evidence regarding its allegation of fraud or falsity in the returns.
The CTA wrote that "the three instances where the three-year prescriptive period will not apply must
always be alleged and established by clear and convincing evidence and should not be anchored on
mere conjectures and speculations,  before the ten (10) year prescriptive period could be
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considered. Thus, it disposed:

WHEREFORE, the instant Petition for Review is hereby GRANTED. Accordingly, the deficiency VAT
assessment for taxable year 2007 and the compromise penalty are hereby CANCELLED and
WITHDRAWN, on ground of prescription.

SO ORDERED. 10

The CIR moved for reconsideration but its motion was denied.

The CTA En Banc Ruling

In its July 30, 2015 Decision, the CTA En Banc sustained the assailed decision of the CT A Division
and dismissed the petition for review filed by the CIR. It explained that there was nothing in the FAN
and the FDDA that would indicate, the non-application of the three (3) year prescriptive period under
Section 203 of the NIRC. It found that the CIR did not present any evidence during the trial to
substantiate its claim of falsity in the returns and again missed its chance to do so when it failed to
file its memorandum before the CTA Division.

The CTA En Banc further explained that the PAN alone could not be used as a basis because it was
not the assessment contemplated by law. Consequently, the allegation of falsity in Asalus' tax
returns could not be considered as it was not reiterated in the FAN. The dispositive portion thus
reads:

WHEREFORE, premises considered, the present Petition for Review is hereby DENIED, and
accordingly, DISMISSED for lack of merit.

SO ORDERED. 11

The CIR sought the reconsideration of the decision of the CTA En Banc, but the latter upheld its
decision in its November 6, 2015 resolution.

Hence, this petition.

ISSUES

WHETHER PETITIONER HAD SUFFICIENTLY APPRISED RESPONDENT THAT THE FAN AND
FDDA ISSUED AGAINST THE LATTER FALLS UNDER SECTION 222(A) OF THE 1997 NIRC, AS
AMENDED;

II

WHETHER RESPONDENT'S FAILURE TO REPORT IN ITS VAT RETURNS ALL THE FEES IT
COLLECTED FROM ITS MEMBERS APPLYING FOR HEALTHCARE SERVICES CONSTITUTES
"FALSE" RETURN UNDER SECTION 222(A) OF THE 1997 NIRC, AS AMENDED; AND
 II

WHETHER PETITIONER'S RIGHT TO ASSESS RESPONDENT FOR ITS DEFICIENCY VAT FOR
TAXABLE YEAR 2007 HAD ALREADY PRESCRIBED. 12

The CIR, through the Office of the Solicitor General (OSG), argues that the VAT assessment had yet
to prescribe as the applicable prescriptive period is the ten (10)-year prescriptive period under
Section 222 of the NIRC, and not the three (3) year prescriptive period under Section 203 thereof. It
claims that Asalus was informed in the PAN of the ten (10)-year prescriptive period and that the FAN
made specific reference to the PAN. In turn, the FDDA made reference to the FAN. Asalus, on the
other hand, only raised prescription in its supplemental protest to the FAN. The CIR insists that
Asalus was made fully aware that the prescriptive period under Section 222 would apply.

Moreover, the CIR asserts that there was substantial understatement in Asalus' income, which
exceeded 30% of what was declared in its VAT returns as appearing in its quarterly VAT returns;
and the underdeclaration was supported by the judicial admission of its lone witness that not all the
membership fees collected from members applying for healthcare services were reported in its VAT
returns. Thus, the CIR concludes that there was prima facie evidence of a false return.

The Position of Asalus

In its Comment/Opposition,  dated April 22, 2016, Asalus countered that the present petition
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involved a question of fact, which was beyond the ambit of a petition for review under Rule 45.
Moreover, it asserted that the findings of fact of the CT A Division, which were affirmed by the
CTA En Banc, were conclusive and binding upon the Court. It posited that the CIR could not raise
for the first time on appeal a new argument that "the FDDA and the FAN need not explicitly state the
applicability of the ten-year prescriptive period and the bases thereof as long as the totality of the
circumstances show that the taxpayer was 'sufficiently informed' of the facts in support of the
assessment. Based on the totality of the circumstances, it was informed of the facts in support of the
assessment."  14

Asalus reiterated that the CIR, either in the FAN or the FDDA, failed to show that it had filed false
returns warranting the application of the extraordinary prescriptive period under Section 222 of the
NIRC. It insisted that it was not informed of the facts and law on which the assessment was based
because the FAN did not state that it filed false or fraudulent returns. For this reason, Asalus averred
that the assessment had prescribed because it was made beyond the three (3)-year period as
provided in Section 203 of the NIRC.

The Reply of the CIR

In its Reply,   dated August 15, 2016, the CIR argued that the findings of the CT A might be set
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aside on appeal if they were not supported with substantial evidence or if there was a showing of
gross error or abuse. It repeated that there was presumption of falsity in light of the 30%
underdeclaration of sales. The CIR emphasized that even Asalus' own witness testified that not all
the membership fees collected were reported in its VAT returns. It insisted that Asalus was
sufficiently informed of its assessment based on the prescriptive period under Section 222 of the
NIRC as early as when the PAN was issued.

On another note, the CIR manifested that Asalus' counsels made use of insulting words in its
Comment, which could have been dispensed with. Particularly, it highlighted the use of the following
phrases as insulting: "even to the uninitiated," "petitioner's habit of disregarding firmly established
rules of procedure," "twist establish facts to suit her ends," "just to indulge petitioner," and "she then
tried to calculate, on her own but without factual basis." It asserted that "[w]hile a lawyer has a
complete discretion on what legal strategy to employ in a case, the overzealousness in protecting his
client's interest does not warrant the use of insulting and profane language in his pleadings xxx."  16

The Court's Ruling

There is merit in the petition.

It is true that the findings of fact of the CT A are, as a rule, respected by the Court, but they can be
set aside in exceptional cases. In Barcelon, Roxas Securities, Inc. (now known as UBP Securities,
Inc.) v. Commissioner of Internal Revenue, this Court in Toshiba Information Equipment (Phils.), Inc.
v. Commissioner of Internal Revenue,   explicitly pronounced-
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Jurisprudence has consistently shown that this Court accords the findings of fact by the CTA with the
highest respect. In Sea-Land Service, Inc. v. Court of Appeals [G.R. No. 122605, 30 April 2001, 357
SCRA 441, 445-446], this Court recognizes that the Court of Tax Appeals, which by the very nature
of its function is dedicated exclusively to the consideration of tax problems, has necessarily
developed an expertise on the subject, and its conclusions will not be overturned unless there has
been an abuse or improvident exercise of authority. Such findings can only be disturbed on
appeal if they are not supported by substantial evidence or there is a showing of gross error
or abuse on the part of the Tax Court. In the absence of any clear and convincing proof to the
contrary, this Court must presume that the CTA rendered a decision which is valid in every
respect.  [Emphasis supplied]
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After a review of the records and applicable laws and jurisprudence, the Court finds that the CTA
erred in concluding that the assessment against Asalus had prescribed.

Generally, internal revenue taxes shall be assessed within three (3) years after the ,last day
prescribed by law for the filing of the return, or where the return is filed beyond the period, from the
day the return was actually filed.   Section 222 of the NIRC, however, provides for exceptions to the
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general rule. It states that in the case of a false or fraudulent return with intent to ev