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1988 (Gyo-Tsu) 152

1990.06.05
1988 (Gyo-Tsu) 152
Minshu Vol. 44, No. 4
Judgment concerning the case in which the Court ruled that in the case where a taxpayer, when filing a tax return of income tax, calculated the amount of business income using what is generally called the approximate amount of expenses based on Article 26, paragraph (1) of the Act on Special Measures Concerning Taxation (prior to amendment by Act No. 109 of 1988), the taxpayer is allowed to replace the approximate amount of expenses with the actual amount of expenses when filing an amended return
Case seeking revocation of a disposition of reassessment
Judgment of the Third Petty Bench, quashed and decided by the Supreme Court
Fukuoka High Court, Judgment of June 29, 1988
Where a dental practitioner, when filing a tax return of income tax, calculated the amount of business income using what is generally called the approximate amount of expenses based on Article 26, paragraph (1) of the Act on Special Measures Concerning Taxation (prior to amendment by Act No. 109 of 1988), given the following facts mentioned in the judgment, the dental practitioner is allowed to withdraw the intention to choose the approximate amount of expenses, and to report the actual amount of expenses as the amount of necessary expenses relevant to medical service fees under the social insurance system, as a means to correct the miscalculation of the amount of necessary expenses stated in the tax return; the dental practitioner, when filing a tax return of income tax, made a mistake in dividing the total amount of medical service expenses into the amount relevant to income from medical services not covered by social insurance and the amount relevant to the medical service fees under the social insurance system, and calculated the amount of necessary expenses relevant to income from medical services not covered by social insurance as an amount larger than the correctly calculated amount, and calculated the actual amount of expenses relevant to medical service fees under the social insurance system as an amount smaller than the correctly calculated amount, and as a result, the dental practitioner evaluated the latter amount as more favorable to him/her and chose that amount; and there was an error in the calculation of the amount of necessary expenses to be deducted from the amount of gross income from medical services.
Article 19, paragraph (1) of the Act on General Rules for National Taxes, Article 27 of the Income Tax Act, Article 37, paragraph (1) of the Income Tax Act (prior to amendment by Act No. 96 of 1987), Article 26, paragraphs (1) and (3) of the Act on Special Measures Concerning Taxation (prior to amendment by Act No. 109 of 1988)



Act on General Rules for National Taxes

Article 19, paragraph (1)

(1) A person who has filed a tax return form (including his/her heir(s) or any other person who has succeeded in whole to the rights and obligations included in the property of such person who has filed a tax return form; hereinafter the same shall apply in Article 23, paragraph (1) and paragraph (2) (Request for Reassessment)) may, if the person falls under any of the following items, file with the district director of the tax office another tax return form to amend the tax base, etc. (meaning the matters listed in Article 2, item (vi) (a) to (c) (Definitions); the same shall apply hereinafter) or the tax amount, etc. (meaning the matters listed in (d) to (f) of said item; the same shall apply hereinafter) stated in the initial return, until a reassessment is made of the initial return under the provisions of Article 24 (Reassessment):

(i) Where there is a shortfall in the tax amount stated as the amount payable by filing the initial tax return form

(ii) Where the amount of net loss, etc. is overstated in the initial tax return form

(iii) Where the tax amount equivalent to the amount of a refund is overstated in the initial tax return form

(iv) Where the initial return form contains no statement of the tax amount payable by filing said return form, despite the fact that such payable tax amount exists



Income Tax Act

Article 27(1) Business income shall be income arising from the farming industry, the fishing industry, the manufacturing industry, the wholesale industry, the retail industry, the service industry or any other industry specified by Cabinet Order (excluding that which falls under the category of timber income or capital gains).

(2) The amount of business income shall be the amount that remains after deducting the necessary expenses from gross revenue related to business income for the year.



Income Tax Act (prior to amendment by Act No. 96 of 1987)

Article 37, paragraph (1)

(1) The amount to be included in necessary expenses in the calculation of the amount of real property income, business income, or miscellaneous income (excluding the portion of the amount of business income and miscellaneous income that relates to the felling or transfer of forests) for the year shall be, except as otherwise provided, the amount of the cost of sales for the respective income for gross revenue, other expenses directly required to acquire said gross revenue, and selling expenses, general administrative expenses and any other expenses for operations for the year needed to generate such income (excluding expenses other than a depreciation allowance for which the obligation is not determined in the year).



Act on Special Measures Concerning Taxation (prior to amendment by Act No. 109 of 1988)

Article 26, paragraphs (1) and (3)

(1) If an individual who engages in medical practice or dental practice has any amount receivable for medical services under the social insurance system in each year, the amount to be included in necessary expenses as expenses relevant to the medical services under the social insurance system in the calculation of the amount of business income for the year is to be, notwithstanding the provisions of Article 37, paragraph (1) and Part II, Chapter II, Section 2, Subsection 4 of the Income Tax Act, the sum of the amounts calculated by dividing the amount receivable into the amounts listed in the left-hand column of the following table and then multiplying the respective amounts by the rates set forth in the right-hand column of the same table:

Not more than 25,000,000 yen: 72 percent

More than 25,000,000 yen but not more than 30,000,000 yen: 70 percent

More than 30,000,000 yen but not more than 40,000,000 yen: 62 percent

More than 40,000,000 yen but not more than 50,000,000 yen: 57 percent

More than 50,000,000 yen: 52 percent

(3) The provisions of paragraph (1) do not apply if a tax return does not state that the amount of business income has been calculated pursuant to the provisions of the same paragraph.
The judgment in prior instance is quashed.

The appeal to the court of second instance filed by the appellee of final appeal is dismissed.

The costs of the appeal to the court of second instance and the costs of the final appeal shall be borne by the appellee.
Concerning the reasons for a final appeal stated by the counsel for final appeal, MARUYAMA Takahiro

I. The facts lawfully determined by the court of prior instance are as follows.

1. The appellant is a person who engages in dental practice. With regard to the income tax for 1979, the appellant filed with the appellee a tax return dated March 15, 1980, stating the amount of gross income as 9,406,855 yen and the amount of tax as 1,136,900 yen. In calculating the amount of business income related to the dental practice in order to file this tax return, the appellant calculated the amount of medical service fees under the social insurance system as 25,036,241 yen and calculated the amount of necessary expenses relevant thereto as 18,025,549 yen by applying the provisions of Article 26, paragraph (1) of the Act on Special Measures Concerning Taxation (prior to amendment by Act No. 109 of 1988; hereinafter referred to as the "Special Measures Act"), while calculating the amount of income from medical services not covered by social insurance as 10,061,000 yen and the amount of necessary expenses relevant thereto as 7,515,552 yen, respectively.

2. When filing the tax return, the appellant applied the provisions of Article 26, paragraph (1) of the Special Measures Act to the necessary expenses relevant to the medical service fees under the social insurance system, due to the following circumstances. When considering whether or not to apply the provisions of that paragraph in order to file a tax return, the appellant calculated the amount of expenses actually incurred to obtain the medical service fees under the social insurance system (hereinafter referred to as the "actual amount of expenses"), and compared this amount with the amount of expenses calculated based on that paragraph (hereinafter referred to as the "approximate amount of expenses"). First, in the process of dividing the total amount of medical service expenses into the amount relevant to income from medical services not covered by social insurance and the amount relevant to the medical service fees under the social insurance system in order to calculate the actual amount of expenses, the appellant should have calculated the actual amount of expenses through the following procedures: calculate the ratio of income from medical services not covered by social insurance to gross income from medical services, multiply the total amount of medical service expenses by this ratio to calculate the amount of necessary expenses relevant to income from medical services not covered by social insurance, and then subtract the amount of necessary expenses thus calculated from the total amount of medical service expenses. However, the appellant mistakenly calculated the ratio of income from medical services not covered by social insurance to medical service fees under the social insurance system, multiplied the total amount of medical service expenses by this ratio to calculate the amount of necessary expenses relevant to income from medical services not covered by social insurance, and then subtracted the amount of necessary expenses thus calculated from the total amount of medical service expenses, thereby calculating the actual amount of expenses. As a result, the appellant calculated the amount of necessary expenses relevant to income from medical services not covered by social insurance as an amount larger than the correctly calculated amount (the incorrectly calculated amount was 7,515,552 yen; the correct amount was 5,377,782 yen), and calculated the actual amount of expenses as an amount smaller than the correctly calculated amount (the incorrectly calculated amount was 17,350,738 yen; the correct amount was 19,488,508 yen). Then, the appellant compared this amount of 17,350,738 yen and the approximate amount of expenses of 18,025,549 yen and evaluated the latter amount as more favorable to him/her, and accordingly, the appellant filed a tax return by regarding this amount as the amount of necessary expenses relevant to the medical service fees under the social insurance system and by applying the provisions of that paragraph to that amount.

3. Subsequently, partly due to the omission of part of income from medical services not covered by social insurance in the abovementioned tax return, the appellant filed with the appellee an amended return dated July 25, 1981, stating the amount of gross income as 10,646,196 yen and the amount of tax as 1,416,700 yen. In this amended return, the appellant added 731,000 yen to the amount of income from medical services not covered by social insurance to be stated in the tax return, and also corrected the miscalculation of the amount of necessary expenses relevant to income from medical services not covered by social insurance and reduced the amount of that income to 5,601,502 yen. At the same time, the appellant reported the actual amount of expenses of 19,264,788 yen as the necessary expenses relevant to medical service fees under the social insurance system (as a result, the total amount of necessary expenses for business income was changed from 25,541,101 yen in the tax return to 24,866,290 yen in the amended return).

4. In response, as of January 20, 1982, the appellee made a disposition of reassessment regarding the amount of gross income as 11,885,435 yen and the amount of tax as 1,901,400 yen, and a disposition of assessment and determination imposing additional tax for under report of 24,200 yen (hereinafter these dispositions are collectively referred to as the "Disposition of Taxation"). The Disposition of Taxation corrected the amount of necessary expenses relevant to medical service fees under the social insurance system, which was addressed in the amended return filed by the appellant, from the actual amount of expenses (19,264,788 yen) to the approximate amount of expenses (18,025,549 yen) (as a result, the total amount of necessary expenses for business income was determined to be 23,627,051 yen).

II. Based on these facts, the court of prior instance determined that the Disposition of Taxation is lawful on the grounds that, if the appellant chose the approximate amount of expenses as the amount of necessary expenses relevant to medical service fees under the social insurance system when filing the tax return, the appellant is not allowed to replace the approximate amount of expenses with the actual amount of expense in the amended return filed after that. Accordingly, the court of prior instance revoked the judgment in first instance that had revoked that disposition, and dismissed the appellant's claim.

III. However, the aforementioned determination of the court of prior instance cannot be upheld, for the following reasons.

Article 26, paragraph (1) of the Special Measures Act provides that if a medical practitioner or dental practitioner has any amount receivable for medical service fees under the social insurance system, the amount of necessary expenses relevant to the fees to be used in the calculation of the amount of business income is to be the approximate amount of expenses calculated by multiplying the amount of the fees by a prescribed standard rate, instead of the actual amount of expenses based on Article 37, paragraph (1) and other provisions of the Income Tax Act. Article 26, paragraph (3) of the Special Measures Act provides that the provisions of paragraph (1) of the same Article do not apply if a tax return does not state that the amount of business income has been calculated pursuant to the provisions of paragraph (1) of the same Article. Consequently, unless a medical practitioner or dental practitioner, as a taxpayer, fails to state in a tax return that the amount of business income has been calculated pursuant to the provisions of paragraph (1) of the same Article, or in other words, if a medical practitioner or dental practitioner, as a taxpayer, states in a tax return that the amount of business income has been calculated pursuant to the provisions of the same paragraph (which means the case where the medical practitioner or dental practitioner expresses the intention to choose the approximate amount of expenses), the provisions of paragraph (1) of the same Article apply, and the approximate amount of expenses is to be used as the amount of necessary expenses relevant to medical service fees under the social insurance system which is to be deducted in the calculation of the amount of business income. In that case, whether the actual amount of expenses is larger or smaller than the approximate amount of expenses does not affect the applicability of that paragraph; even if the actual amount of expenses is larger than the approximate amount of expenses, that approximate amount of expenses is to be used as the amount of necessary expenses relevant to medical service fees under the social insurance system based on the provisions of laws concerning national taxes (see 1985 (Gyo-Tsu) No. 81, the judgment of the Third Petty Bench of the Supreme Court of November 10, 1987, Saibanshu Minji No. 152, at 155).

The amount of necessary expenses to be deducted from the amount of gross income from medical services in the calculation of the amount of business income earned by a dental practitioner is the sum of the amount of necessary expenses relevant to income from medical services not covered by social insurance and the amount of necessary expenses relevant to medical service fees under the social insurance system. In this case, however, in the process of dividing the total amount of medical service expenses into the amount relevant to income from medical services not covered by social insurance and the amount relevant to the medical service fees under the social insurance system, the appellant should have calculated the actual amount of necessary expenses relevant to medical service fees under the social insurance system (the actual amount of expenses) through the following procedures: calculate the ratio of income from medical services not covered by social insurance to gross income from medical services, multiply the total amount of medical service expenses by this ratio to calculate the amount of necessary expenses relevant to income from medical services not covered by social insurance, and then subtract the amount of necessary expenses thus calculated from the total amount of medical service expenses; but the appellant mistakenly calculated the ratio of income from medical services not covered by social insurance to medical service fees under the social insurance system, multiplied the total amount of medical service expenses by this ratio to calculate the actual amount of necessary expenses relevant to income from medical services not covered by social insurance, and then subtracted the amount of necessary expenses thus calculated from the total amount of medical service expenses, thereby calculating the actual amount of expenses. As a result, the appellant calculated the amount of necessary expenses relevant to income from medical services not covered by social insurance as an amount larger than the correctly calculated amount, and calculated the actual amount of expenses as an amount smaller than the correctly calculated amount. Accordingly, the appellant evaluated the approximate amount of expenses as more favorable to him/her than the actual amount of expenses, and expressed the intention to choose the approximate amount of expenses (according to the records of the case, this miscalculation is clear from the documents attached to the tax return filed by the appellant). Therefore, it should be said that based on a mistake the appellant expressed the intention to choose the approximate amount of expenses, and that there was an error in the calculation of the amount of necessary expenses to be deducted from the amount of gross income from medical services in the calculation of the amount of business income earned by the appellant.

According to Article 19, paragraph (1), item (i) of the Act on General Rules for National Taxes, an amended return may be filed if there is a shortfall in the tax amount related to a tax return. In this case, if the miscalculation of the amount of necessary expenses relevant to income from medical services not covered by social insurance as stated in the tax return is corrected, the amount of business income would necessarily increase and a shortfall would arise in the tax amount related to the tax return, and hence this case would fall under the case where an amended return may be filed. It is reasonable to consider that a taxpayer, when filing such an amended return, may withdraw the intention to choose the approximate amount of expenses expressed based on a mistake and may report the actual amount of expenses as the amount of necessary expenses relevant to medical service fees under the social insurance system based on Article 37, paragraph (1) and other provisions of the Income Tax Act, as a means to correct a miscalculation of the amount of necessary expenses stated in a tax return, as long as the requirement for filing an amended return is satisfied (that is, as long as an amended return will cause an increase in the tax amount stated in a tax return). In the amended return discussed in this case (hereinafter the "Amended Return"), the appellant reduced the amount of necessary expenses relevant to income from medical services not covered by social insurance from 7,515,552 yen, which was stated in the tax return, to 5,601,502 yen, amended the amount of necessary expenses relevant to medical service fees under the social insurance system to 19,264,788 yen (the actual amount of expenses), and reduced the total amount of necessary expenses related to the tax return from 25,541,101 yen to 24,866,290 yen. Thus, the Amended Return satisfies the requirement for filing an amended return as it causes an increase in the tax amount stated in the tax return, and the appellant has thereby effectively withdrawn the intention to choose the approximate amount of expenses. The Amended Return should be held to be lawful.

Consequently, the Disposition of Taxation is illegal because it did not allow the appellant to withdraw the intention to choose the approximate amount of expenses by means of the Amended Return, and adopted the amount stated in the amended return as the amount of necessary expenses relevant to income from medial services not covered by social insurance, while adopting the approximate amount of expenses stated in the tax return as the amount of necessary expenses relevant to medical service fees under the social insurance system. The judgment in prior instance that held this disposition to be lawful is illegal due to the errors in the interpretation and application of laws and regulations, and such illegality obviously affects the conclusion of the judgment in prior instance. The counsel's arguments are well-grounded, and the judgment in prior instance should inevitably be quashed. For the reasons stated above, the appellant's claim to seek the revocation of the Disposition of Taxation should be upheld as justifiable. The judgment in first instance that reached the same conclusion is justifiable, and the appeal to the court of second instance filed by the appellee should be dismissed as groundless.

Accordingly, in accordance with Article 7 of the Administrative Case Litigation Act and Articles 408, 396, 384, 96 and 89 of the Code of Civil Procedure, the Court unanimously decides as set forth in the main text of the judgment.
Justice SAKAUE Toshio

Justice YASUOKA Mitsuhiko

Justice TEIKA Katsumi

Justice SONOBE Itsuo
(This translation is provisional and subject to revision.)