TAN GUAN, PETITIONER, VS. THE COURT OF TAX APPEALS AND THE COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE, RESPONDENTS.

In 1947 Tan Guan and Sia Lin, Chinese nationals,
organized and registered the Philippine Surplus Company, a general
partnership.  For the same year the
partners and the partnership filed separate income tax returns.  Tan Guan, who filed his return on April 18, 1949, reported a net income
of P20,987.14 and paid P2,577.81 as income tax
thereon.  The partnership paid no income
tax.

A registered general partnership is exempt from income tax^[1]
although it is required to file an income tax return.^[2]
Profits, whether or not distributed, are considered income of the partners.^[3]

Acting upon a confidential report that the Philippine Surplus
Company posted in its books fictitious expenses for the purpose of avoiding
taxes, the Bureau of Internal Revenue investigated in 1954 the books and papers
of said partnership and disallowed the following ex­pense deductions for the
year 1948 for being fictitious:

The BIR investigators discovered that the expenses were not
supported by receipts; that the names of the payees in the aforesaid entries
were erased; and that the said payees did not report the sums in question in
their in­come tax returns for 1948.

Treating the disallowed sum as income of the indivi­dual
partners, the Bureau of Internal Revenue assessed on January 2, 1956 the following deficiency income tax
against Tan Guan:

This assessment could not be served on Tan Guan inasmuch as he could
not be located.

On June 6, 1960
the Bureau of Internal Revenue wrote a letter to Tan Guan, c/o Atty. Constantino P. Tadeña, demanding
payment of the sum of P50,956.57 as well as 5%
surcharge for late payment, 1% monthly interest computed from January 26, 1957, and P50.00
administrative penalty.  This letter was
received by Atty. Tadeña on June 28, 1960.

On July 8, 1960
Tan Guan appealed to the Court of Tax Appeals which in turn affirmed the
assessment of the Commissioner of Internal Revenue.  His motion for recon­sideration having been
denied by the Court of Tax Appeals, Tan Guan appealed to this Court.

The issues are:

1. Has the right of the Commissioner of Internal Revenue to assess
the deficiency tax in question prescribed?

2. Should the deduction in the amount of P206,870.00
claimed by the Philippine Surplus Co. as a business expense be allowed?

Tan Guan maintains that inasmuch as the deficiency assessment was
issued only on January 2, 1957, the right of the Commissioner of Internal
Revenue had prescribed, the same having been exercised after the lapse of the
five-year period provided for in Section 331 of the Tax Code counted from the
filing of his return on April 18, 1949. 
On the other hand, the Commissioner of Internal Revenue contends that
Tan Guan’s return was false and fraudulent, hence the
Commissioner had ten years counted from the dis­covery of the falsity or fraud
on August 10, 1954 within which to make a deficiency assessment pursuant to
Section 332(a) of the Tax Code; and that since the assessment was issued on
January 8, 1957, the same was timely made.

Obviously, the resolution of the question on whether or not the
right of the Commissioner of Internal Revenue to assess the deficiency tax
prescribed would depend on whether or not the income tax return of Tan Guan for
1948 was false or fraudulent.  If so, the
Commissioner’s right has not prescribed. 
If not, the assessment issued is void because of prescription.

The Commissioner’s bases in concluding that Tan Guan’s income tax return was false or fraudulent are the
findings of his agents that the Philippine Surplus Co. claimed deductions of
fictitious expenses for the purpose of avoiding the declaration of profits
which eventually would be taxable as income of Tan Guan and Sia
Lin, and that the names of the payees in the corresponding entries of the
expenses involved in the books of accounts were erased.

The Commissioner’s finding on the facts constituting fraud, proved
in, and found established by, the Court of Tax Appeals, was not rebutted by the
taxpayer.  Hence, We
are not inclined to disturb the finding of falsity or fraudulence in Tan Guan’s return.

The returns being false or fraudulent, the Commis­sioner of Internal
Revenue has not lost his right to issue the assessment on January 8, 1957.

With respect to Tan Guan’s contention
that he should be given the same treatment as Sia
Lin, who was absolved by the Commissioner of Internal Revenue from paying defi­ciency
income tax on the other half of the sum of P206,870.00,
suffice it to say that the Government is not bound by the errors committed by
its agents in previous investigations and assessments.^[4]

We come now to the question of deductibility of the sum of P206,870.00 as business expenses of the Philippine Surplus Co.
for 1948.  The only reason why said
deduction was disallowed is because the expenses were fictitious or
non-existent.  Said conclusion was
prompted by the absence of supporting receipts in the voucher covering the
expenses and by the failure of the recipients thereof to declare them in their
income tax returns.  Tan Guan however
contends that said supporting receipts could not be produced, for the
assessment took place beyond the period during which he was duty bound under
Section 337 of the Tax Code to keep and preserve them, that is, allegedly more
than five years from the filing of his income tax return.  This explanation for the absence of
supporting receipts cannot be accepted. 
The records show that the investigation of Tan Guan’s
liability was made in 1954, prior to the expiration of the five-year period set
forth in Section 337 of the Tax Code.

The Commissioner of Internal Revenue, sustained by the Tax Court,
found for a fact that the expenses in the amount of P206,870.00
are fictitious.  Tan Guan presented no
evidence to disprove such finding.  In
appeals to the Court of Tax Appeals, the determination of the Commissioner of
Internal Revenue is presumed correct and it behooves the taxpayer to rebut such
presumption.^[5]
Tan Guan failed to overcome his burden. 
Hence, the finding that the expenses are fictitious must be
sustained.  And being fictitious, the
expenses cannot be claimed as deduction from gross income.

WHEREFORE, the decision appealed from is affirmed.  With costs against
petitioner.

SO ORDERED.

Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Zaldivar, Sanchez, and Castro, JJ., concur.

^[1] Section 24, Tax Code.

^[2] Section 49, Id.

^[3] Section 26, Id.

^[4]
Phil-American Drug Co. v. Collector of Internal Revenue, L-13032, August 31, 1959.

^[5]
Perez v. Court of Tax Appeals, et al., L-10507, May 30, 1958; Collector of Internal Revenue v.
Bohol Land Transportation Co., L-13099, L-13462, April 29, 1960.