THIRD DIVISION G.R. No. 175651, September 14, 2016 PILMICO-MAURI FOODS CORP., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. RESOLUTION REYES, J.: Before the Court is a petition for review on certiorari1 under Rule 45 of the Rules of Court pursuant to Republic Act (R.A.) No. 1125,2 Section 19,3 as amended by R.A. No. 9282,4 Section 12.5 The petition filed by Pilmico-Mauri Foods Corp. (PMFC) against the Commissioner of Internal Revenue (CIR) assails the Decision 6 and Resolution7 of the Court of Appeals (CTA) en banc, dated August 29, 2006 and December 4, 2006, respectively, in C.T.A. EB No. 97. Antecedents The CTA aptly summed up the facts of the case as follows:
ChanRoblesVirtualawlibrary
[PMFC] is a corporation, organized and existing under the laws of the Philippines, with principal place of business at Aboitiz Corporate Center, Banilad, Cebu City. The books of accounts of [PMFC] pertaining to 1996 were examined by the [CIR] thru Revenue Officer Eugenio D. Maestrado of Revenue District No. 81 (Cebu City North District) for deficiency income, value-added [tax] (VAT) and withholding tax liabilities. As a result of the investigation, the following assessment notices were issued against [PMFC]: chanRoblesvirtualLawlibrary
(a) Assessment Notice No. 81-WT-13-96-98-11-126, dated November 26, 1998, demanding payment for deficiency withholding taxes for the year 1996 in the sum of P384,925.05 (inclusive of interest and other penalties); (b) Assessment Notice No. 81-VAT-13-96-98-11-127, dated November 26, 1998, demanding payment of deficiency value-added tax in the sum of P5,017,778.01 (inclusive of interest and other penalties); [and] (c) Assessment Notice No. 81-IT-13-96[-]98-11-128, dated November 26, 1998, demanding payment of. deficiency income tax for the year 1996 in the sum of P4,359,046.96 (inclusive of interest and other penalties). The foregoing Assessment Notices were all received by [PMFC] on December 1, 1998. On December 29, 1998, [PMFC] filed a protest letter against the aforementioned deficiency tax assessments through the Regional Director, Revenue Region No. 13, Cebu City. In a final decision of the [CIR] on the disputed assessments dated July 3, 2000, the deficiency tax liabilities of [PMFC] were reduced from P9,761,750.02 to P3,020,259.30, broken down as follows: chanRoblesvirtualLawlibrary
b) c)
a) Deficiency withholding Deficiency value-added tax Deficiency Income Tax
xxxx
tax from P384,925.05 to P197,780.67; from P5,017,778.01 to P1,642,145.79; and from P4,359,046.96 to P1,180,332.84.
On the basis of the foregoing facts[, PMFC] filed its Petition for Review on August 9, 2000. In the "Joint Stipulation of Facts" filed on March 7, 2001, the parties have agreed that the following are the issues to be resolved: ChanRoblesVirtualawlibrary
I. Whether or not [PMFC] is liable for the payment of deficiency income, value-added, expanded withholding, final withholding and withholding tax (on compensation). II. On the P1,180,382.84 deficiency income tax A. Whether or not the P5,895,694.66 purchases of raw materials are unsupported[;] B. Whether or not the cancelled invoices and expenses for taxes, repairs and freight are unsupported[;] C. Whether or not commission, storage and trucking charges claimed are deductible[; and] D. Whether or not the alleged deficiency income tax for the year 1996 was correctly computed. x
x
x
x
V. Whether or not [CIR's] decision on the 1996 internal revenue tax liabilities of [PMFC] is contrary to law and the facts. After trial on the merits, the [CTA] in Division rendered the assailed Decision affirming the assessments but in the reduced amount of P2,804,920.36 (inclusive of surcharge and deficiency interest) representing [PMFC's] Income, VAT and Withholding Tax deficiencies for the taxable year 1996 plus 20% delinquency interest per annum until fully paid. The [CTA] in Division ruled as follows: ChanRoblesVirtualawlibrary
"However, [PMFC's] contention that the NIRC of 1977 did not impose substantiation requirements on deductions from gross income is bereft of merit. Section 238 of the 1977 Tax Code [now Section 237 of the National Internal Revenue Code of 1997] provides: ChanRoblesVirtualawlibrary
SEC. 238. Issuance of receipts or sales or commercial invoices. - All persons, subject to an internal revenue tax shall for each sale or transfer of merchandise or for services rendered valued at P25.00 or more, issue receipts or sales or commercial invoices, prepared at least in duplicate, showing the date of transaction, quantity, unit cost and description of merchandise or nature of service: Provided, That in the case of sales, receipts or transfers in the amount of P100.00 or more, or, regardless of amount, where the sale or transfer is made by persons subject to value-added tax to other persons, also subject to value-added tax; or, where the receipt is issued to cover payment made as rentals, commissions, compensations or fees, receipts or invoices shall be issued which shall show the name, business style, if any, and address of the purchaser, customer, or client. The original of each receipt or invoice shall be issued to the purchaser, customer or client at the time the transaction is effected, who, if engaged in business or in the exercise of profession, shall keep and preserve the same in his place of business for a period of three (3) years from the close of the taxable year in which such invoice or receipt was issued, while the duplicate shall be kept and preserved by the issuer, also in his place of business for a like period. x x x From the foregoing provision of law, a person who is subject to an internal revenue tax shall issue receipts, sales or commercial invoices, prepared at least in duplicate. The provision likewise imposed a responsibility upon the purchaser to keep and preserve the original copy of the invoice or receipt for a period of three years from the close of the taxable year in which such invoice or receipt was issued. The rationale behind the latter requirement is the duty of the taxpayer to keep adequate records of each and every transaction entered into in the conduct of its business. So that when their books of accounts are subjected to a tax audit examination, all entries therein, could be shown as adequately supported and proven
as legitimate business transactions. Hence, [PMFC's] claim that the NIRC of 1977 did not require substantiation requirements is erroneous. In fact, in its effort to prove the above-mentioned purchases of raw materials, [PMFC] presented the following sales invoices: chanRoblesvirtualLawlibrary
Exhibit Number
Invoice No.
Date
Gross Amount
10% VAT
Net Amount
B-3
2072
04/18/9 6
P2,312,670.00
P210,242.73
P2,102,427.27
2026
Undated
2,762,099.10
251,099.92
2,510,999.18
P5,074,769.10
P461,342.65
P4,613,426.45
B-7, B-11
The mere fact that [PMFC] submitted the foregoing sales invoices belies [its] claim that the NIRC of 1977 did not require that deductions must be substantiated by adequate records. From the total purchases of P5,893,694.64 which have been disallowed, it seems that a portion thereof amounting to P1,280,268.19 (729,663.64 + 550,604.55) has no supporting sales invoices because of [PMFC's] failure to present said invoices. A scrutiny of the invoices supporting the remaining balance of P4,613,426.45 (P5,893,694.64 less P1,280,268.19) revealed the following: chanRoblesvirt ualLawlibrary
a) In Sales Invoice No. 2072 marked as Exhibit B3, the name Pilmico Foods Corporation was erased and on top of it the name [PMFC] was inserted but with a counter signature therein; b) For undated Sales Invoice No. 2026, [PMFC] presented two exhibits marked as Exhibits B-7 and B-11. Exhibit B-11 is the original sales invoice whereas Exhibit B-7 is a photocopy thereof. Both exhibits contained the word Mauri which was inserted on top and between the words Pilmico and Foods. The only difference is that in the original copy (Exhibit B-11), there was a counter signature although the ink used was different from that used in the rest of the writings in the said invoice; while in the photocopied invoice (Exhibit B-7), no such counter signature appeared. [PMFC] did not explain why the said countersignature did not appear in the photocopied invoice considering it was just a mere reproduction of the original copy. The sales invoices contain alterations particularly in the name of the purchaser
giving rise to serious doubts regarding their authenticity and if they were really issued to [PMFC]. Exhibit B-11 does not even have any date indicated therein, which is a clear violation of Section 238 of the NIRC of 1977 which required that the official receipts must show the date of the transaction. Furthermore, [PMFC] should have presented documentary evidence establishing that Pilmico Foods Corporation did not claim the subject purchases as deduction from its gross income. After all, the records revealed that both [PMFC] and its parent company, Pilmico Foods Corporation, have the same AVP Comptroller in the person of Mr. Eugenio Gozon, who is in-charge of the financial records of both entities x x x. Similarly, the official receipts presented by [PMFC] x x x, cannot be considered as valid proof of [PMFC's] claimed deduction for raw materials purchases. The said receipts did not conform to the requirements provided for under Section 238 of the NIRC of 1977, as amended. First the official receipts were not in the name of [PMFC] but in the name of Golden Restaurant. And second, these receipts were issued by PFC and not the alleged seller, JTE. Likewise, [PMFC's] allegations regarding the offsetting of accounts between [PMFC], PFC and JTE is untenable. The following circumstances contradict [PMFC's] proposition: 1) the Credit Agreement itself does not provide for the offsetting arrangement; 2) [PMFC] was not even a party to the credit agreement; and 3) the official receipts in question pertained to the year 1996 whereas the Credit Agreement (Exhibit M) and the Real Estate Mortgage Agreement (Exhibit N) submitted by [PMFC] to prove the fact of the offsetting of accounts, were both executed only in 1997. Besides, in order to support its claim, [PMFC] should have presented the following vital documents, namely, 1) Written Offsetting Agreement; 2) proof of payment by [PMFC] to Pilmico Foods Corporation; and 3) Financial Statements for the year 1996 of Pilmico Foods Corporation to establish the fact that Pilmico Foods Corporation did not deduct the amount of raw materials being claimed by [PMFC]. Considering that the official receipts and sales invoices presented by [PMFC] failed to comply with the requirements of Section 238 of the NIRC of 1977, the disallowance by the [CIR] of the claimed deduction for raw materials is proper. [PMFC] filed a Motion for Partial Consideration on January 21, 2005 x x x but x x x [PMFC's] Motion for Reconsideration was denied in a Resolution dated May 19, 2005 for lack of merit, x x x. 8 (Citation omitted, italics ours and emphasis in the original) Unperturbed, PMFC then filed a petition for review before the CTA en banc, which adopted the CTA First Division's ruling and ratiocinations. Additionally, the CTA en banc declared that: ChanRoblesVirtualawlibrary
The language of [Section 238] of the 1977 NIRC, as amended, is clear. It requires that for each sale valued at P100.00 or more, the name, business style and address of the purchaser, customer or client shall be indicated and that the purchaser is required to keep and preserve the same in his place of business. The purpose of the law in requiring the preservation by the purchaser of the official receipts or sales invoices for a period of three years is two-fold: 1) to enable said purchaser to substantiate his claimed deductions from the gross income, and 2) to enable the Bureau of Internal Revenue to verify the accuracy of the gross income of the seller from external sources such as the customers of said seller . Hence, [PMFC's] argument that there was no substantiation requirement under the 1977 NIRC is without basis. Moreover, the Supreme Court had ruled that in claiming deductions for business expenses [,] it is not enough to prove the business test but a claimant must substantially prove by evidence or records the deductions claimed under the law, thus: ChanRoblesVirtualawlibrary
The principle is recognized that when a taxpayer claims a deduction, he must point to some specific provision of the statute in which that deduction is authorized and must be able to prove that he is entitled to the deduction which the law allows. As previously adverted to, the law allowing expenses as deduction from gross income for purposes of the income tax is Section 30 (a) (l) of the National Internal Revenue which allows a deduction of "all the
ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.["] An item of expenditure, in order to be deductible under this section of the statute must fall squarely within its language. We come, then, to the statutory test of deductibility where it is axiomatic that to be deductible as a business expense, three conditions are imposed, namely: (1) the expense must be ordinary and necessary; (2) it must be paid or incurred within the taxable year, and (3) it must be paid or incurred in carrying on a trade or business. In addition, not only must the taxpayer meet the business test, he must substantially prove by evidence or records the deductions claimed under the law, otherwise, the same will be disallowed. The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction. x x x And in proving claimed deductions from gross income, the Supreme Court held that invoices and official receipts are the best evidence to substantiate deductible business expenses. x x x x
x
x
x
The irregularities found on the official receipts and sales invoices submitted in evidence by [PMFC], i.e. not having been issued in the name of [PMFC] as the purchaser and the fact that the same were not issued by the alleged seller himself directly to the purchaser, rendered the same of no probative value. Parenthetically, the "Cohan Rule" which according to [PMFC] was adopted by the Supreme Court in the case of Visayan Cebu Terminal v. Collector, x x x, is not applicable because in both of these cases[,] there were natural calamities that prevented the taxpayers therein to fully substantiate their claimed deductions. In the Visayan Cebu Terminal case, there was a fire that destroyed some of the supporting documents for the claimed expenses. There is no such circumstance in [PMFC's] case, hence, the ruling therein is not applicable. It is noteworthy that notwithstanding the destruction of some of the supporting documents in the aforementioned Visayan Cebu Terminal case, the Supreme Court[,] in denying the appeal[,] issued the following caveat noting the violation of the provision of the Tax Code committed by [PMFC] therein: ChanRoblesVirtualawlibrary
"It may not be amiss to note that the explanation to the effect that the supporting paper of some of those expenses had been destroyed when the house of the treasurer was burned, can hardly be regarded as satisfactory, for appellant's records are supposed to be kept in its offices, not in the residence of one of its officers." x x x From the above-quoted portion of the Supreme Court's Decision, it is clear that compliance with the mandatory record-keeping requirements of the National Internal Revenue Code should not be taken lightly. Raw materials are indeed deductible provided they are duly supported by official receipts or sales invoices prepared and issued in accordance with the invoicing requirements of the National Internal Revenue Code. x x x [PMFC] failed to show compliance with the requirements of Section 238 of the 1977 NIRC as shown by the fact that the sales invoices presented by [it] were not in its name but in the name of Pilmico Foods Corporation. x
x
x
x
In the Joint Stipulation of Facts filed on March 7, 2001, the parties have agreed that with respect to the deficiency income tax assessment, the following are the issues to be resolved: Whether or not the P5,895,694.66 purchases of raw materials are unsupported; x
x
x
x
Clearly, the issue of proper substantiation of the deduction from gross income pertaining to the purchases of raw materials was properly raised even before [PMFC] began presenting its evidence. [PMFC] was aware that the [CIR] issued the assessment from the standpoint of lack of supporting documents for the claimed deduction and the fact that the assessments were not based on the deductibility of the cost of raw materials. There is no difference in the basis of the assessment and the issue presented to the [CTA] in Division for resolution since both pertain to the issue of proper supporting documents for ordinary and necessary business expenses.9(Citation omitted, italics ours and emphasis in the original) PMFC moved for reconsideration. Pending its resolution, the CIR issued Revenue Regulation (RR) No. 15-2006, 10the abatement program of which was availed by PMFC on October 27, 2006. Out of the total amount of P2,804,920.36 assessed as income, value-added tax (VAT) and withholding tax deficiencies, plus surcharges and deficiency interests,
PMFC paid the CIR P1,101,539.63 as basic deficiency tax. The PMFC, thus, awaits the CIR's approval of the abatement, which
can
render
moot
the
resolution
of
the
petition. 11
instant
chanrobleslaw
Meanwhile, the CTA en banc denied the motion for reconsideration12 of PMFC, in its Resolution13 dated December 4, 2006. Issues In the instant petition, what is essentially being assailed is the CTA en banc's concurrence with the CTA First Division's ruling, which affirmed but reduced the CIR's income deficiency tax assessment against PMFC. More specifically, the following errors are ascribed to the CTA: ChanRoblesVirtualawlibrary
I The Honorable CTA First Division deprived PMFC of due process of law and the CTA assumed an executive function when it substituted a legal basis other than that stated in the assessment and pleading of the CIR, contrary to law. II The decision of the Honorable CTA First Division must conform to the pleadings and the theory of the action under which the case was tried. A judgment going outside the issues and purporting to adjudicate something on which the parties were not heard is invalid. Since the legal basis cited by the CTA supporting the validity of the assessment was never raised by the CIR, PMFC was deprived of its constitutional right to be apprised of the legal basis of the assessment. III The nature of evidence required to prove an ordinary expense like raw materials is governed by Section 2914 of the 1977 National Internal Revenue Code (NIRC) and not by Section 238 as found by the CTA.15 chanroblesvirtuallawlibrary
In support of the instant petition, PMFC claims that the deficiency income tax assessment issued against it was anchored on Sect on 34(A)(l)(b)16 of the 1997 NIRC. In disallowing the deduction of the purchase of raw materials from PMFC's gross income, the CIR never m any reference to Section 238 of the 1977 NIRC relative to the mandatory requirement of keeping records of official receipts, upon which the CTA had misplaced reliance. Had substantiation requirements under Section 23 the 1977 NIRC been made an issue during the trial, PMFC could have presented official receipts
or
invoices,
or
could
have
compelled
its
suppliers
to
issue
the
same. 17
chanrobleslaw
PMFC further argues that in determining the deductibility of the purchase of raw materials from gross income, Section 29 of the 1977 NIRC is the applicable provision. According to the said section, for the deduction to be allowed, the expenses must be (a) both ordinary and necessary; (b) incurred in carrying on a trade or business; and (c) paid or incurred within the taxable year. PMFC, thus, claims that prior to the promulgation of the 1997 NIRC, the law does not require
the
production
of
official
receipts
to
prove
an
expense. 18
chanrobleslaw
In its Comment,19 the Office of the Solicitor General (OSG) counters that the arguments advanced by PMFC are mere reiterations of those raised in the proceedings below. Further, PMFC was fully apprised of the assailed tax assessments and
had
all
the
opportunities
to
prove
its
claims.20
chanrobleslaw
The OSG also avers that in the Joint Stipulation of Facts filed before the CTA First Division on March 7, 2001, it was stated that one of the issues for resolution was "whether or not the Php5,895,694.66 purchases of raw materials are unsupported." Hence, PMFC was aware that the CIR issued the assessments due to lack of supporting documents for the deductions claimed. Essentially then, even in the proceedings before the CIR, the primary issue has always been the
lack
or
inadequacy
of
supporting
documents
for
ordinary
and
necessary
business
expenses. 21
chanrobleslaw
The OSG likewise points out that PMFC failed to satisfactorily discharge the burden of proving the propriety of the tax deductions claimed. Further, there were discrepancies in the names of the sellers and purchasers i indicated in the receipts casting doubts on their authenticity.22
chanrobleslaw
Ruling of the Court The
Court
affirms
but
modifies
the
herein
assailed
decision
and
Preliminary
resolution. matters
On December 19, 2006, PMFC filed before the Court a motion for extension of time to file a petition for review. 23 In the said motion, PMFC informed the Court that it had availed of the CIR's tax abatement program, the details of which were provided for in RR No. 15-2006. PMFC paid the CIR the amount of P1,101,539.63 as basic deficiency tax. PMFC manifested that if the abatement application would be approved by the CIR, the instant petition filed before the Court may be rendered superfluous. According to Section 4 of RR No. 15-2006, after the taxpayer's payment of the assessed basic deficiency tax, the docket of the case shall forwarded to the CIR, thru the Deputy Commissioner for Operations Group, for issuance of a termination letter. However, as of this Resolution's writing, none of the parties have presented the said termination letter. Hence, the Court cannot outrightly dismiss the instant petition on the ground of mootness. On
the
procedural
issues
raised
by
PMFC
The first and second issues presented by PMFC are procedural in nature. They both pertain to the alleged omission of due process of law by the CTA since in its rulings, it invoked Section 238 of the 1977 NIRC, while in the proceedings below, the CIR's tax deficiency assessments issued against PMFC were instead anchored on Section 34 of the 1997 NIRC. Due
process
was
In CIR v. Puregold Duty Free, Inc.,24 the Court is emphatic that:
not
violated.
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It is well settled that matters that were neither alleged in the pleadings nor raised during the proceedings below cannot be ventilated for the first time on appeal and are barred by estoppel. To allow the contrary would constitute a violation of the other party's right to due process, and is contrary to the principle of fair play. x x x x x x Points of law, theories, issues, and arguments not brought to the attention of the trial court ought not to be considered by a reviewing court, as these cannot be raised for the first time on appeal. To consider the alleged facts and arguments belatedly raised would amount to trampling on the basic principles of fair play, justice, and due process.25 (Citations omitted) cralawre d
In the case at bar, the CIR issued assessment notices against PMFC for deficiency income, VAT and withholding tax for the year 1996. PMFC assailed the assessments before the Bureau of Internal Revenue and late before the CTA. In the Joint Stipulation of Facts, dated March 7, 2001, filed before CTA First Division, the CIR and PMFC both agreed that among the issues for resolution was "whether or not the P5,895,694.66 purchases of raw materials are unsupported."26 Estoppel, thus, operates against PMFC anent its argument that the issue of lack or inadequacy of documents to justify the costs of purchase of raw materials as deductions from the gross income had not been presented in the proceedings below, hence, barred for being belatedly raised only on appeal. Further, in issuing the assessments, the CIR had stated the material facts and the law upon which they were based. In the petition for review filed by PMFC before the CTA, it was the former's burden to properly invoke the applicable legal provisions in pursuit of its goal to reduce its tax liabilities. The CTA, on the other hand, is not bound to rule solely on the basis of the laws cited by the CIR. Were it otherwise, the tax court's appellate power of review shall be rendered useless. An absurd situation would arise leaving the CTA with only two options, to wit: (a) affirming the CIR's legal findings; or (b) altogether absolving the taxpayer from liability if the CIR relied on misplaced legal provisions. The foregoing is not what the law intends. To reiterate, PMFC was at the outset aware that the lack or inadequacy of supporting documents to justify the deductions claimed from the gross income was among the issues raised for resolution before the CTA. With PMFC's acquiescence to the Joint Stipulation of Facts filed before the CTA and thenceforth, the former's participation in the
proceedings with all opportunities it was afforded to ventilate its claims, the alleged deprivation of due process is bereft of basis. On
the
applicability
of
Section
29
of
the
1977
NIRC
The third issue raised by PMFC is substantive in nature. At its core is the alleged application of Section 29 of the 1977 NIRC as regards the deductibility from the gross income of the cost of raw materials purchased by PMFC. It bears noting that while the CIR issued the assessments on the basis of Section 34 of the 1997 NIRC, the CTA and PMFC are in agreement that the 1977 NIRC finds application. However, while the CTA ruled on the basis of Section 238 of the 1977 NIRC, PMFC now insists that Section 29 of the same code should be applied instead. Citing Atlas Consolidated Mining and Development Corporation v. CIR,27 PMFC argues that Section 29 imposes less stringent requirements and the presentation of official receipts as evidence of the claimed deductions dispensable. PMFC further posits that the mandatory nature of the submission of official receipts as proof
is
a
mere
innovation
in
PMFC's
the
19
NIRC,
which
cannot
be
applied
retroactively. 28
argument
chanrobleslaw
fails.
The Court finds that the alleged differences between the requirements of Section 29 of the 1977 NIRC invoked by PMFC, on one hand, and Section 238 relied upon by the CTA, on the other, are more imagined than real. In CIR v. Pilipinas Shell Petroleum Corporation,29 the Count enunciated that:
ChanRoblesVirtualawlibrary
It is a rule in statutory construction that every part of the statute must be interpreted with reference to the context, i.e., that every part of the statute must be considered together with the other parts, and kept subservient to the general intent of the whole enactment. The law must not be read in truncated parts, its provisions must be read in relation to the whole law. The particular words, clauses and phrases should not be studied as detached and isolated expression, but the whole and every part of the statute must be considered in fixing the meaning of any of its parts and in order to produce a harmonious whole.30 (Citations omitted) The law, thus, intends for Sections 29 and 238 of the 1977 NIRC to be read together, and not for one provision to be accorded preference over the other. It is undisputed that among the evidence adduced by PMFC on it behalf are the official receipts of alleged purchases of raw materials. Thus, the CTA cannot be faulted for making references to the same, and for applying Section 238 of the 1977 NIRC in rendering its judgment. Required or not, the official receipts were submitted by PMFC as evidence. Inevitably, the said receipts were subjected to scrutiny, and the CTA exhaustively explained why it had found them wanting. PMFC cites Atlas31 to contend that the statutory test, as provided in Section 29 of the 1977 NIRC, is sufficient to allow the deductibility of a business expense from the gross income. As long as the expense is: (a) both ordinary and necessary; (b) incurred in carrying a business or trade; and (c) paid or incurred within the taxable year, then, it shall be
allowed
as
a
deduction
from
Let it, however, be noted that in Atlas, the Court likewise declared that:
the
gross
income.32
chanrobleslaw
ChanRoblesVirtualawlibrary
In addition, not only must the taxpayer meet the business test, he must substantially prove by evidence or records the deductions claimed under the law, otherwise, the same will be disallowed . The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction.33 (Citation omitted and italics ours) It is, thus, clear that Section 29 of the 1977 NIRC does not exempt the taxpayer from substantiating claims for deductions. While official receipts are not the only pieces of evidence which can prove deductible expenses, if presented, they shall be subjected to examination. PMFC submitted official receipts as among its evidence, and the CTA doubted their veracity. PMFC was, however, unable to persuasively explain and prove through other documents the discrepancies in the said receipts. Consequently, the CTA disallowed the deductions claimed, and in its ruling, invoked Section 238 of the 1977 NIRC considering that official receipts are matters provided for in the said section.
Conclusion The Court recognizes that the CTA, 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, the Court must presume that the CTA rendered
a
decision
which
is
valid
in
respect.34
every
chanrobleslaw
Further, revenue laws are not intended to be liberally construed. Taxes are the lifeblood of the government and in Holmes' memorable metaphor, the price we pay for civilization; hence, laws relative thereto must be faithfully and strictly implemented.35 While the 1977 NIRC required substantiation requirements for claimed deductions to be allowed, PMFC insists on leniency, which is not warranted under the circumstances. Lastly, the Court notes too that PMFC's tax liabilities have been me than substantially reduced to P2,804,920.36 from the In
CIR's precis,
the
affirmation
initial of
the
assessment herein
assailed
P9,761,750.02. 36
of decision
and
resolution
is
in
chanrobleslaw
order.
However, the Court finds it proper to modify the herein assail decision and resolution to conform to the interest rates prescribed in Nacar v. Gallery Frames, et al. 37 The total amount of P2,804,920.36 to be paid PMFC to the CIR shall be subject to an interest of six percent (6%) per annum to be computed from the finality of this Resolution until full payment. WHEREFORE, the instant petition is DENIED. The Decision dated August 29, 2006 and Resolution dated December 4, 2006 of the Court of Tax Appeals en banc in C.T.A. EB No. 97 are AFFIRMED. However, MODIFICATION thereof, the legal interest of six percent (6%) per annum reckoned from the finality of this Resolution until full satisfaction, is here imposed upon the amount of P2,804,920.36 to be paid by Pilmico-Mauri Foods Corporation to the Commissioner of Internal Revenue. SO Velasco, Jr., (Chairperson), Peralta, Perez, and Jardeleza, JJ., concur.
ORDERED.
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G.R. No. 215957 COMMISSIONER OF INTERNAL REVENUE, Petitioner vs. FITNESS BY DESIGN, INC., Respondent DECISION LEONEN, J.: To avail of the extraordinary period of assessment in Section 222(a) of the National Internal Revenue Code, the Commissioner of Internal Revenue should show that the facts upon which the fraud' is based is communicated to the taxpayer. The burden of proving that the facts exist in any subsequent proceeding is with the Commissioner. Furthermore, the Final Assessment Notice is not valid if it does not contain a definite due date for payment by the taxpayer. This resolves a Petition for Review on Certiorari1 filed by the Commissioner of Internal Revenue, which assails the Decision2 dated July 14, 2014 and Resolution 3 dated December 16, 2014 of the Court of Tax Appeals. The Court of Tax Appeals En Banc affirmed the Decision of the First Division, which declared the assessment issued against Fitness by Design, Inc. (Fitness) as invalid.4 On April 11, 1996, Fitness filed its Annual Income Tax Return for the taxable year of 1995.5 According to Fitness, it was still in its pre-operating stage during the covered period.6 On June 9, 2004, Fitness received a copy of the Final Assessment Notice dated March 17, 2004.7 The Final Assessment Notice was issued under Letter of Authority No. 00002953. 8 The Final Assessment Notice assessed that Fitness had a tax deficiency in the amount of ₱10,647,529.69. 9 It provides: FINAL ASSESSMENT NOTICE March 17, 2004 FITNESS BY DESIGN, INC 169 Aguirre St., BF Homes, Paranaque City Gentlemen: Please be informed that after investigation of your Internal revenue Tax Liabilities for the year 1995 pursuant to Letter of Authority No. 000029353 dated May 13, 2002, there has been found due deficiency taxes as shown hereunder: Assessment No. _____________ Income Tax
Taxable Income per return
₱
Add: Unreported Sales
7,156,336.08
Taxable Income per audit
7,156,336.08
Tax Due (35%) Add: Surcharge (50%) Interest (20%/annum) until 4-15-04
2,504,717.63
₱ 1,252,358.81 4,508,491. 73
5, 760,850.54
₱ 8,265,568.17
Deficiency Income Tax
Value Added Tax
Unreported Sales
₱ 7,156,336.08
Output Tax (10%)
715,633.61
Add: Surcharge (50%)
₱ 357,816.80
Interest (20%/ annum) until 4-15-04
1,303,823.60
1,661,640.41
₱
2,311,214.02
Deficiency VAT Documentary Stamp Tax
Subscribe Capital Stock DST due (2/200) Add: Surcharge (25%) Deficiency DST
Total Deficiency Taxes
₱ 375,000.00 3,750.00 937.50
₱ 4,687.50 ₱ 10,647,529.69
The complete details covering the aforementioned discrepancies established during the investigation of this case are shown in the accompanying Annex 1 of this Notice. The 50% surcharge and 20% interest have been imposed pursuant to Sections 248 and 249(B) of the [National Internal Revenue Code], as amended. Please note, however, that the interest and the total amount due will have to be adjusted if paid prior or beyond April 15, 2004. In view thereof, you are requested to pay your aforesaid deficiency internal revenue taxes liabilities through the duly authorized agent bank in which you are enrolled within the time shown in the enclosed assessment notice.10 (Emphasis in the original) Fitness filed a protest to the Final Assessment Notice on June 25, 2004. According to Fitness, the Commissioner's period to assess had already prescribed. Further, the assessment was without basis since the company was only incorporated on May 30, 1995.11 On February 2, 2005, the Commissioner issued a Warrant of Distraint and/or Levy with Reference No. OCN WDL-95-05-005 dated February 1, 2005 to Fitness.12 Fitness filed before the First Division of the Court of Tax Appeals a Petition for Review (With Motion to Suspend Collection of Income Tax, Value Added Tax, Documentary Stamp Tax and Surcharges and Interests) on March 1, 2005.13
On May 17, 2005, the Commissioner of Internal Revenue filed an Answer to Fitness' Petition and raised special and affirmative defenses.14 The Commissioner posited that the Warrant of Distraint and/or Levy was issued in accordance with law.15 The Commissioner claimed that its right to assess had not yet prescribed under Section 222(a)16 of the National Internal Revenue Code. 17 Because the 1995 Income Tax ,Return filed by Fitness was false and fraudulent for its alleged intentional failure to reflect its true sales, Fitness' respective taxes may be assessed at any time within 10 years from the discovery of fraud or omission. 18 The Commissioner asserted further that the assessment already became final and executory for Fitness' failure , to file a protest within the reglementary period. 19 The Commissioner denied that there was a protest to the Final Assessment Notice filed by Fitness on June 25, 2004. 20 According to the Commissioner, the alleged protest was "nowhere to be found in the [Bureau of Internal Revenue] Records nor reflected in the Record Book of the Legal Division as normally done by [its]' receiving clerk when she received [sic] any document."21 Therefore, the Commissioner had sufficient basis to collect the tax deficiency through the Warrant of Distraint and/or Levy.22 The alleged fraudulent return was discovered through a tip from a confidential informant. 23 The revenue officers' investigation revealed that Fitness had been operating business with sales operations amounting to ₱7,156,336.08 in 1995, which it neglected toreport in its income tax return. 24 Fitness' failure to report its income resulted in deficiencies to its income tax and value-added tax of ₱8,265,568.17 and ₱2,377,274.02 respectively, as well as the documentary stamp tax with regard to capital stock subscription. 25 Through the report, the revenue officers recommended the filing of a civil case for collection of taxes and a criminal case for failure to declare Fitness' purported sales in its 1995 Income Tax Return. 26 Hence, a criminal complaint against Fitness was filed before the Department of Justice. 27 The Court of Tax Appeals First Division granted Fitness' Petition on the ground that the assessment has already prescribed.28 It cancelled and set aside the Final Assessment Notice dated March 1 7, 2004 as well as the Warrant of Distraint and/or Levy issued by the Commissioner. 29 It ruled that the Final Assessment Notice is invalid for failure to comply with the requirements of Section 228 30 of the National Internal Revenue Code. The dispositive portion of the Decision reads: WHEREFORE, the Petition for Review dated February 24, 2005 filed by petitioner Fitness by Design, Inc., is hereby GRANTED. Accordingly, the Final Assessment Notice dated 'March 17, 2004, finding petitioner liable for deficiency income tax, documentary stamp tax and value-added tax for taxable year 1995 in the total amount of ₱10,647,529.69 is hereby CANCELLED and SET ASIDE. The Warrant of Distraint and Levy dated February 1, 2005 is 'likewise CANCELLED and SET ASIDE. SO ORDERED.31 (Emphasis in the original) The Commissioner's Motion for Reconsideration and its Supplemental Motion for Reconsideration were denied by the Court of Tax Appeals First Division.32 Aggrieved, the Commissioner filed an appeal before the Court of Tax Appeals En Banc.33 The Commissioner asserted ,that it had 10 years to make an assessment due to the fraudulent income tax return filed by Fitness.34 It also claimed that the assessment already attained finality due to Fitness' failure to file its protest within the period provided by law. 35 Fitness argued that the Final Assessment Notice issued to it could not be claimed as a valid deficiency assessment that could justify the issuance of a warrant of distraint and/or levy. 36 It asserted that it was a mere request for payment as it did not provide the period within which to pay the alleged liabilities. 37 The Court of Tax Appeals En Banc ruled in favor of Fitness. It affirmed the Decision of the Court of Tax Appeals First Division, thus:
WHEREFORE, the instant Petition for Review is DENIED for lack of merit. Accordingly, both the Decision and Resolution in CTA Case No. 7160 dated July 10, 2012 and November 21, 2012 respectively are AFFIRMED in toto.38 (Emphasis in the original) The Commissioner's Motion for Reconsideration was denied by the Court of Tax Appeals En Banc in the Resolution39 dated December 16, 2014. Hence, the Commissioner of Internal Revenue filed before this Court a Petition for Review. Petitioner Commissioner of Internal Revenue raises the sole issue of whether the Final Assessment Notice issued against respondent Fitness by Design, Inc. is a valid assessment under Section 228 of the National Internal Revenue Code and Revenue Regulations No. 12-99. 40 Petitioner argues that the Final Assessment Notice issued to respondent is valid since it complies with Section 228 of the National Internal Revenue Code and Revenue Regulations No. 12-99. 41 The law states that the taxpayer shall be informed in writing of the facts, jurisprudence, and law on which the assessment is based.42 Nothing in the law provides that due date for payment is a substantive requirement for the validity of a final assessment notice.43 Petitioner further claims that a perusal of the Final Assessment Notice shows that April 15, 2004 is the due date for payment.44 The pertinent portion of the assessment reads: The complete details covering the aforementioned discrepancies established during the investigation of this case are shown in the accompanying Annex 1 of this Notice. The 50% surcharge and 20% interest have been imposed pursuant to Sections 248 and 249(B) of the [National Internal Revenue Code], as amended. Please note, however, that the interest and the total amount due will have to be adjusted if paid prior or beyond April 15, 2004.45 (Emphasis supplied) This Court, through the Resolution 46 dated July 22, 2015, required respondent to comment on the Petition for Review. In its Comment,47 respondent argues that the Final Assessment Notice issued was merely a request and not a demand for payment of tax liabilities.48 The Final Assessment Notice cannot be considered as a final deficiency assessment because it deprived respondent of due process when it failed to reflect its fixed tax liabilities.49Moreover, it also gave respondent an indefinite period to pay its tax liabilities. 50 Respondent points out that an assessment should strictly comply with the law for its validity.51 Jurisprudence provides that "not all documents coming from the [Bureau of Internal Revenue] containing a computation of the tax liability can be deemed assessments[,] which can attain finality."52 Therefore, the Warrant of Distraint and/or Levy cannot be enforced since it is based on an invalid assessment.53 Respondent likewise claims that since the Final Assessment Notice was allegedly based on fraud, it must show the details of the fraudulent acts imputed to it as part of due process. 54 I The Petition has no merit. An assessment "refers to the determination of amounts due from a person obligated to make payments."55 "In the context of national internal revenue collection, it refers to the determination of the taxes due from a taxpayer under the National Internal Revenue Code of 1997."56 The assessment process starts with the filing of tax return and payment of tax by the taxpayer. 57 The initial assessment evidenced by the tax return is a self-assessment of the taxpayer. 58 The tax is primarily
computed and voluntarily paid by the taxpayer without need of any demand from government. 59 If tax obligations are properly paid, the Bureau of Internal Revenue may dispense with its own assessment. 60 After filing a return, the Commissioner or his or her representative may allow the examination of any taxpayer for assessment of proper tax liability. 61 The failure of a taxpayer to file his or her return will not hinder the Commissioner from permitting the taxpayer's examination. 62 The Commissioner can examine records or other data relevant to his or her inquiry in order to verify the correctness of any return, or to make a return in case of noncompliance, as well as to determine and collect tax liability. 63 The indispensability of affording taxpayers sufficient written notice of his or her tax liability is a clear definite requirement.64 Section 228 of the National Internal Revenue Code and Revenue Regulations No. 12-99, as amended, transparently outline the procedure in tax assessment. 65 Section 3 of Revenue Regulations No. 12-99, 66 the then prevailing regulation regarding the due process requirement in the issuance of a deficiency tax assessment, requires a notice for informal conference.67 The revenue officer who audited the taxpayer's records shall state in his or her report whether the taxpayer concurs with his or her findings of liability for deficiency taxes. 68 If the taxpayer does not agree, based on the revenue officer's report, the taxpayer shall be informed in writing 69 of the discrepancies in his or her payment of internal revenue taxes for "Informal Conference." 70 The informal conference gives the taxpayer an opportunity to present his or her side of the case. 71 The taxpayer is given 15 days from receipt of the notice of informal conference to respond. 72 If the taxpayer fails to respond, he or she will be considered in default. 73 The revenue officer74 endorses the case with the least possible delay to the Assessment Division of the Revenue Regional Office or the Commissioner or his or her authorized representative. 75 The Assessment Division of the Revenue Regional Office or the Commissioner or his or her authorized representative is responsible for the "appropriate review and issuance of a deficiency tax assessment, if warranted." 76 If, after the review conducted, there exists sufficient basis to assess the taxpayer with deficiency taxes, the officer 'shall issue a preliminary assessment notice showing in detail the facts, jurisprudence, and law on which the assessment is based. 77 The taxpayer is given 15 days from receipt of the pre-assessment notice to respond.78 If the taxpayer fails to respond, he or she will be considered in default, and a formal letter of demand and assessment notice will be issued.79 The formal letter of demand and assessment notice shall state the facts, jurisprudence, and law on which the assessment was based; otherwise, these shall be void. 80 The taxpayer or the authorized representative may administratively protest the formal letter of demand and assessment notice within 30 days from receipt of the notice.81 II The word "shall" in Section 228 of the National Internal Revenue Code and Revenue Regulations No. 1299 means the act of informing the taxpayer of both the legal and factual bases of the assessment is mandatory.82 The law requires that the bases be reflected in the formal letter of demand and assessment notice.83 This cannot be presumed.84 Otherwise, the express mandate of Section 228 and Revenue Regulations No. 12-99 would be nugatory. 85 The requirement enables the taxpayer to make an effective protest or appeal of the assessment or decision.86 The rationale behind the requirement that taxpayers should be informed of the facts and the law on which the assessments are based conforms with the constitutional mandate that no person shall be deprived of his or her property without due process of law. 87 Between the power of the State to tax and an individual's right to due process, the scale favors the right of the taxpayer to due process. 88
The purpose of the written notice requirement is to aid the taxpayer in making a reasonable protest, if necessary.89Merely notifying the taxpayer of his or her tax liabilities without details or particulars is not enough.90 Commissioner of Internal Revenue v. United Salvage and Towage (Phils.), Inc. 91 held that a final assessment notice that only contained a table of taxes with no other details was insufficient: In the present case, a mere perusal of the [Final Assessment Notice] for the deficiency EWT for taxable year 1994 will show that other than a tabulation of the alleged deficiency taxes due, no further detail regarding the assessment was provided by petitioner. Only the resulting interest, surcharge and penalty were anchored with legal basis. Petitioner should have at least attached a detailed notice of discrepancy or stated an explanation why the amount of P48,461.76 is collectible against respondent and how the same was arrived at.92 Any deficiency to the mandated content of the assessment or its process will not be tolerated.93 In Commissioner of Internal Revenue v. Enron, 94 an advice of tax deficiency from the Commissioner of Internal Revenue to an employee of Enron, including the preliminary five (5)-day letter, were not considered valid substitutes for the mandatory written notice of the legal and factual basis of the assessment.95 The required issuance of deficiency tax assessment notice to the taxpayer is different from the required contents of the notice.96 Thus: The law requires that the legal and factual bases of the assessment be stated in the formal letter of demand and assessment notice. Thus, such cannot be presumed. Otherwise, the express provisions of Article 228 of the [National Internal Revenue Code] and [Revenue Regulations] No. 12-99 would be rendered nugatory. The alleged "factual bases" in the advice, preliminary letter and "audit working papers" did not suffice. There was no going around the mandate of the law that the legal and factual bases of the assessment be stated in writing in the formal letter of demand accompanying the assessment notice.97 (Emphasis supplied) 1âwphi1
However, the mandate of giving the taxpayer a notice of the facts and laws on which the assessments are based should not be mechanically applied. 98 To emphasize, the purpose of this requirement is to sufficiently inform the taxpayer of the bases for the assessment to enable him or her to make an intelligent protest. 99 In Samar-I Electric Cooperative v. Commissioner of Internal Revenue, 100 substantial compliance with Section 228 of the National Internal Revenue Code is allowed, provided that the taxpayer would be later apprised in writing of the factual and legal bases of the assessment to enable him or her to prepare for an effective protest.101 Thus: Although the [Final Assessment Notice] and demand letter issued to petitioner were not accompanied by a written explanation of the legal and factual bases of the deficiency taxes assessed against the petitioner, the records showed that respondent in its letter dated April 10, 2003 responded to petitioner's October 14, 2002 letter-protest, explaining at length the factual and legal bases of the deficiency tax assessments and denying the protest. Considering the foregoing exchange of correspondence and documents between the parties, we find that the requirement of Section 228 was substantially complied with. Respondent had fully informed petitioner in writing of the factual and legal bases of the deficiency taxes assessment, which enabled the latter to file an "effective" protest, much unlike the taxpayer's situation in Enron. Petitioner's right to due process was thus not violated. 102 A final assessment notice provides for the amount of tax due with a demand for payment. 103 This is to determine the amount of tax due to a taxpayer. 104 However, due process requires that taxpayers be informed in writing of the facts and law on which the assessment is based in order to aid the taxpayer in making a reasonable protest.105 To immediately ensue with tax collection without initially substantiating a
valid assessment contravenes the principle in administrative investigations "that taxpayers should be able to present their case and adduce supporting evidence." 106 Respondent filed its income tax return in 1995. 107 Almost eight (8) years passed before the disputed final assessment notice was issued. Respondent pleaded prescription as its defense when it filed a protest to the Final Assessment Notice. Petitioner claimed fraud assessment to justify the belated assessment made on respondent.108If fraud was indeed present, the period of assessment should be within 10 years. 109 It is incumbent upon petitioner to clearly state the allegations of fraud committed by respondent to serve the purpose of an assessment notice to aid respondent in filing an effective protest. III The prescriptive period in making an assessment depends upon whether a tax return was filed or whether the tax return filed was either false or fraudulent. When a tax return that is neither false nor fraudulent has been filed, the Bureau of Internal Revenue may assess within three (3) years, reckoned from the date of actual filing or from the last day prescribed by law for filing. 110 However, in case of a false or fraudulent return with intent to evade tax, Section 222(a) provides: 1âwphi1
Section 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes. – (a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be filed without assessment, at any time within ten (10) years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof. (Emphasis supplied) In Aznar v. Court of Tax Appeals, 111 this Court interpreted Section 332 112 (now Section 222[a] of the National Internal Revenue Code) by dividing it in three (3) different cases: first, in case of false return; second, in case of a fraudulent return with intent to evade; and third, in case of failure to file a return.113 Thus: Our stand that the law should be interpreted to mean a separation of the three different situations of false return, fraudulent return with intent to evade tax and failure to file a return is strengthened immeasurably by the last portion of the provision which aggregates the situations into three different classes, namely "falsity'', "fraud" and "omission."114 This Court held that there is a difference between "false return" and a "fraudulent return."115 A false return simply involves a "deviation from the truth, whether intentional or not" while a fraudulent return "implies intentional or deceitful entry with intent to evade the taxes due."116 Fraud is a question of fact that should be alleged and duly proven. 117 "The willful neglect to file the required tax return or the fraudulent intent to evade the payment of taxes, considering that the same is accompanied by legal consequences, cannot be presumed."118 Fraud entails corresponding sanctions under the tax law. Therefore, it is indispensable for the Commissioner of Internal Revenue to include the basis for its allegations of fraud in the assessment notice. During the proceedings in the Court of Tax Appeals First Division, respondent presented its President, Domingo C. Juan Jr. (Juan, Jr.), as witness. 119 Juan, Jr. testified that respondent was, in its pre-operating stage in 1995.120During that period, respondent "imported equipment and distributed them for market testing in the Philippines without earning any profit." 121 He also confirmed that the Final Assessment Notice and its attachments failed to substantiate the Commissioner's allegations of fraud against respondent, thus:
More than three (3) years from the time petitioner filed its 1995 annual income tax return on April 11, 1996, respondent issued to petitioner a [Final Assessment Notice] dated March 17, 2004 for the year 1995, pursuant to the Letter of Authority No. 00002953 dated May 13, 2002. The attached Details of discrepancy containing the assessment for income tax (IT), value-added tax (VAT) and documentary stamp tax (DST) as well as the Audit Result/ Assessment Notice do not impute fraud on the part of petitioner. Moreover, it was obtained on information and documents illegally obtained by a [Bureau of Internal Revenue] informant from petitioner's accountant Elnora Carpio in 1996.122 (Emphasis supplied) Petitioner did not refute respondent's allegations. For its defense, it presented Socrates Regala (Regala), the Group Supervisor of the team, who examined respondent's tax liabilities. 123 Regala confirmed that the investigation was prompted by a tip from an informant who provided them with respondent's list of sales.124 He admitted125 that the gathered information did not show that respondent deliberately failed to reflect its true income in 1995.126 IV The issuance of a valid formal assessment is a substantive prerequisite for collection of taxes. 127 Neither the National Internal Revenue Code nor the revenue regulations provide for a "specific definition or form of an assessment." However, the National Internal Revenue Code defines its explicit functions and effects."128 An assessment does not only include a computation of tax liabilities; it also includes a demand for payment within a period prescribed. 129 Its main purpose is to determine the amount that a taxpayer is liable to pay.130 A pre-assessment notice "do[es] not bear the gravity of a formal assessment notice." 131 A pre-assessment notice merely gives a tip regarding the Bureau of Internal Revenue's findings against a taxpayer for an informal conference or a clarificatory meeting.132 A final assessment is a notice "to the effect that the amount therein stated is due as tax and a demand for payment thereof."133 This demand for payment signals the time "when penalties and interests begin to accrue against the taxpayer and enabling the latter to determine his remedies[.]" 134 Thus, it must be "sent to and received by the taxpayer, and must demand payment of the taxes described therein within a specific period."135 The disputed Final Assessment Notice is not a valid assessment. First, it lacks the definite amount of tax liability for which respondent is accountable. It does not purport to be a demand for payment of tax due, which a final assessment notice should supposedly be. An assessment, in the context of the National Internal Revenue Code, is a "written notice and demand made by the [Bureau of Internal Revenue] on the taxpayer for the settlement of a due tax liability that is there: definitely set and fixed."136 Although the disputed notice provides for the computations of respondent's tax liability, the amount remains indefinite. It only provides that the tax due is still subject to modification, depending on the date of payment. Thus: The complete details covering the aforementioned discrepancies established during the investigation of this case are shown in the accompanying Annex 1 of this Notice. The 50% surcharge and 20% interest have been imposed pursuant to Sections 248 and 249 (B) of the [National Internal Revenue Code], as amended. Please note, however, that the interest and the total amount due will have to be adjusted if prior or beyond April 15, 2004.137 (Emphasis Supplied) Second, there are no due dates in the Final Assessment Notice. This negates petitioner's demand for payment.138Petitioner's contention that April 15, 2004 should be regarded as the actual due date cannot be accepted. The last paragraph of the Final Assessment Notice states that the due dates for payment were supposedly reflected in the attached assessment:
In view thereof, you are requested to pay your aforesaid deficiency internal revenue tax liabilities through the duly authorized agent bank in which you are enrolled within the time shown in the enclosed assessment notice.139 (Emphasis in the original) However, based on the findings of the Court of Tax Appeals First Division, the enclosed assessment pertained to remained unaccomplished.140 Contrary to petitioner's view, April 15, 2004 was the reckoning date of accrual of penalties and surcharges and not the due date for payment of tax liabilities. The total amount depended upon when respondent decides to pay. The notice, therefore, did not contain a definite and actual demand to pay. 1avvphi1
Compliance with Section 228 of the National Internal Revenue Code is a substantative requirement. 141 It is not a mere formality.142 Providing the taxpayer with the factual and legal bases for the assessment is crucial before proceeding with tax collection. Tax collection should be premised on a valid assessment, which would allow the taxpayer to present his or her case and produce evidence for substantiation. 143 The Court of Tax Appeals did not err in cancelling the Final Assessment Notice as well as the Audit Result/Assessment Notice issued by petitioner to respondent for the year 1995 covering the "alleged deficiency income tax, value-added tax and documentary stamp tax amounting to ₱10,647,529.69, inclusive of surcharges and interest" 144 for lack of due process. Thus, the Warrant of Distraint and/or Levy is void since an invalid assessment bears no valid effect.145 Taxes are the lifeblood of government and should be collected without hindrance. 146 However, the collection of taxes should be exercised "reasonably and in accordance with the prescribed procedure." 147 The essential nature of taxes for the existence of the State grants government with vast remedies to ensure its collection. However, taxpayers are guaranteed their fundamental right to due process of law, as articulated in various ways in the process of tax assessment. After all, the State's purpose is to ensure the well-being of its citizens, not simply to deprive them of their fundamental rights. WHEREFORE, the Petition is DENIED. The Decision of the Court of Tax Appeals En Banc dated July 14, 2014 and Resolution dated December 16, 2014 in CTA EB Case No. 970 (CTA Case No. 7160) are hereby AFFIRMED. SO ORDERED. MARVIC M.V.F. LEONEN Associate Justice
G.R. No. 202695 COMMISSIONER OF INTERNAL vs. GJM PHILIPPINES MANUFACTURING, INC., Respondent.
REVENUE,Petitioner
,
DECISION PERALTA, J.: For resolution is a Petition for Review under Rule 45 of the Rules of Court which petitioner Commissioner of Internal Revenue (CIR) filed, praying for the reversal of the Decision 1 of the Court of Tax Appeals (CTA) En Banc dated March 6, 2012 and its Resolution 2 dated July 12, 2012 in CTA EB CASE No. 637. The CTA En Banc affirmed the Decision3 of the CTA First Division dated January 26, 2010 and its Resolution4 dated May 4, 2010 in favor of respondent GJM Philippines Manufacturing, Inc. (GJM). The facts, as culled from the records, are as follows: On April 12, 2000, GJM filed its Annual Income Tax Return for the year 1999. Thereaftr, its parent company, Warnaco (HK) Ltd., underwent bankruptcy proceedings, resulting in the transfer of ownership over GJM and its global affiliates to Luen Thai Overseas Limited in December 2001. On August 26, 2002, GJM informed the Revenue District Officer of Trece Martirez, through a letter, that on April 29, 2002, it would be canceling its registered address in Makati and transferring to Rosario, Cavite, which is under Revenue District Office (RDO) No. 54. On August 26, 2002, GJM's request for transfer of its tax registration from RDO No. 48 to RDO No. 54 was confirmed through Transfer Confirmation Notice No. OCN ITR 000018688. On October 18, 2002, the Bureau of Internal Revenue (BIR) sent a letter of informal conference informing GJM that the report of investigation on its income and business tax liabilities for 1999 had been submitted . The report disclosed that GJM was still liable for an income tax deficiency and the corresponding 20% interest, as well as for the compromise penalty in the total amount of P1,192,541.51. Said tax deficiency allegedly resulted from certain disallowances/understatements, to wit: (a) Loading and Shipment/Freight Out in the amount of P2,354,426.00; (b) Packing expense, P8,859,975.00; (c) Salaries and Wages, P2,717,910.32; (d) Staff Employee Benefits, P1,191,965.87; and (e) Fringe Benefits Tax, in the amount of P337,814.57. On October 24, 2002, GJM refuted said findings through its Financial Controller. On February l 2, 2003, the Bureau of Internal Revenue (BIR) issued a Pre-Assessment Notice and Details of Discrepancies against GJM. On April 14, 2003, it issued an undated Assessment Notice, indicating a deficiency income tax assessment in the amount of P1,480,099.29. On July 25, 2003, the BIR issued a Preliminary Collection Letter requesting GJM to pay said income tax deficiency for the taxable year 1999. Said letter was addressed to GJM's former address in Pio del Pilar, Makati. On August 18, 2003, although the BIR sent a Final Notice Before Seizure to GJM's address in Cavite, the latter claimed that it did not receive the same. On December 8, 2003, GJM received a Warrant of Distraint and/or Levy from the BIR RDO No. 48-West Makati. The company then filed its Letter Protest on January 7, 2004, which the BIR denied on January 15, 2004. Hence, G.JM filed a Petition for Review before the CTA. On January 26, 20 l 0, the CTA First Division rendered a Decision in favor of GJM, the dispositive portion of which reads: WHEREFORE, the deficiency income tax assessment in the amount of P1,480,099.29, inclusive of interest, for taxable year 1999, covered by Formal Assessment Notice No. IT-17316-99-03-282 and the Warrant of Distraint and/or Levy dated November 27, 2003, both issued against petitioner by respondent, are hereby CANCELLED and WITHDRAWN.
Accordingly, respondent is hereby ORDERED to cease and desist from implementing the said assessment and Warrant. SO ORDERED.5 When its Motion for Reconsideration was denied, the CIR brought the case to the CT A En Banc. On March 6, 2012, the CTA En Banc denied the CIR's petition, thus: WHEREFORE, the Petition for Review is hereby DENIED. Accordingly, the impugned Decision dated January 26, 2010 and Resolution dated May 4, 2010 are hereby AFFIRMED in toto. SO ORDERED.6 The CIR filed a Motion for Reconsideration but the same was denied for Jack of merit. Thus, the instant petition. The CIR raised the following issues: I. WHETHER OR NOT THE FORMAL ASSESSMENT NOTICE (FAN) FOR DEFICIENCY INCOME TAX ISSUED TO GJM FOR TAXABLE YEAR 1999 WAS RELEASED, MAILED, AND SENT WITHIN THE THREE (3)-YEAR PRESCRIPTIVE PERIOD UNDER SECTION 203 OF THE NIRC OF 1997. II. WHETHER OR NOT THE BIR'S RIGHT TO ASSESS GJM FOR DEFICIENCY INCOME TAX FOR TAXABLE YEAR 1999 HAS ALREADY PRESCRIBED. The petition lacks merit. Section 203 of the 1997 National Internal Revenue Code (NIRC), as amended, specifically provides for the period within which the CIR must make an assessment. It provides: 1âwphi1
SEC. 203. Period of Limitation Upon Assessmentand Collection. - Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day. (Emphasis supplied) Thus, the CIR has three (3) years from the date of the actual filing of the return or from the last day prescribed by law for the filing of the return, whichever is later, to assess internal revenue taxes . Here, GJM filed its Annual Income Tax Return for the taxable year 1999 on April 12, 2000. The three (3)-year prescriptive period, therefore, was only until April 15, 2003. The records reveal that the BIR sent the FAN through registered mail on April 14, 2003, well-within the required period. The Court has held that when an assessment is made within the prescriptive period, as in the case at bar, receipt by the taxpayer may or may not be within said period. But it must be clarified that the rule does not dispense with the requirement that the taxpayer should actually receive the assessment notice, even beyond the prescriptive period.7 GJM, however, denies ever having received any FAN.
If the taxpayer denies having received an assessment from the BIR, it then becomes incumbent upon the latter to prove by competent evidence that such notice was indeed received by the addressee. 8 Here, the onus probandi has shifted to the BIR to show by contrary evidence that GJM indeed received the assessment in the clue course of mail. It has been settled that while a mailed letter is deemed received by the addressee in the course of mail, this is merely a disputable presumption subject to controversion, the direct denial of which shifts the burden to the sender to prove that the mailed letter was, in fact, received by the addressee. 9 To prove the fact of mailing, it is essential to present the registry receipt issued by the Bureau of Posts or the Registry return card which would have been signed by the taxpayer or its authorized representative. And if said documents could not be located, the CIR should have, at the very least, submitted to the Court a certification issued by the Bureau of Posts and any other pertinent document executed with its intervention. The Court does not put much credence to the self-serving documentations made by the BIR personnel, especially if they are unsupported by substantial evidence establishing the fact of mailing. While it is true that an assessment is made when the notice is sent within the prescribed period, the release, mailing, or sending of the same must still be clearly and satisfactorily proved. Mere notations made without the taxpayer's intervention, notice or control, and without adequate supporting evidence cannot suffice. Otherwise, the defenseless taxpayer would be unreasonably placed at the mercy of the revenue offices. 10 The BIR's failure to prove GJM's receipt of the assessment leads to no other conclusion but that no assessment was issued. Consequently, the government's right to issue an assessment for the said period has already prescribed. The CIR offered in evidence Transmittal Letter No. 282 dated April 14, 2003 prepared and signed by one Ma. Nieva A. Guerrero, as Chief of the Assessment Division of BIR Revenue Region No. 8-Makati, to show that the FAN was actually served upon GJM. However, it never presented Guerrero to testify on said letter, considering that GJM vehemently denied receiving the subject FAN and the Details of Discrepancies. Also, the CIR presented the Certification signed by the Postmaster of Rosario, Cavite, Ni carter Looc, which supposedly proves the fact of mailing of the FAN and Details of Discrepancy. It also adduced evidence of mail envelopes stamped February 17, 2003 and April 14, 2003, which were meant to prove that, on said dates, the Preliminary Assessment Notice (PAN) and the FAN were delivered, respectively. Said envelopes also indicate that they were posted from the Makati Central Post Office. However, according to the Postmaster's Certification, of all the mail matters addressed to GJM which were received by the Cavite Post Office from February 12, 2003 to September 9, 2003, only two (2) came from the Makati Central Post Office. These two (2) were received by the Cavite Post Office on February 12, 2003 and May 13, 2003. But the registered mail could not have been the PAN since the latter was mailed only on February 17, 2003, and the FAN, although mailed on April 14, 2003, was not proven to be the mail received on May 13, 2003. The CIR likewise failed to show that said mail matters received indeed came from it. It could have simply presented the registry receipt or the registry return card accompanying the envelope purportedly containing the assessment notice, but it offered no explanation why it failed to do so. Hence, the CT A aptly ruled that the CIR failed to discharge its duty to present any evidence to show that GJM indeed received the FAN sent through registered mail on April 14, 2003. The Court wishes to note and reiterate that it is not a trier of facts. The CIR mainly raised issues on factual findings which have already been thoroughly discussed below by both the CTA First Division and the CTA En Banc. Oft-repeated is the rule that the Court will not lightly set aside the conclusions reached by the CTA which, by the very nature of its function of being dedicated exclusively to the resolution of tax problems, has accordingly developed an expertise on the subject, unless there has been an abuse or improvident exercise of authority. This Court recognizes that the CTA's 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, the Court must presume that the CTA rendered a decision which is valid in every respect. It has been the Court's long-
standing policy and practice to respect the conclusions of quasi-judicial agencies such as the CTA, a highly specialized body specifically created for the purpose of reviewing tax cases. 11 The Court hereby sustains the order of cancellation and withdrawal of the Formal Assessment Notice No. IT-17316-99-03-282, and the Warrant of Distraint and/or Levy dated November 27, 2003. WHEREFORE, PREMISES CONSIDERED, the petition is DENIED. The Decision of the Court of Tax Appeals En Banc dated March 6, 2012 and its Resolution dated July 12, 2012 in CTA EB CASE No. 637 are hereby AFFIRMED. SO ORDERED.
THIRD DIVISION
RIZAL COMMERCIAL BANKING CORPORATION, Petitioner,
G.R. No. 170257 Present: VELASCO, JR., J., Chairperson, PERALTA, ABAD, VILLARAMA, JR.,* and MENDOZA, JJ.
- versus -
COMMISSIONER OF INTERNAL REVENUE, Respondent.
Promulgated: September 7, 2011
x --------------------------------------------------------------------------------------- x
DECISION MENDOZA, J.: This is a petition for review on certiorari under Rule 45 seeking to set aside the July 27, 2005 Decision[1] and October 26, 2005 Resolution[2] of the Court of Tax Appeals En Banc (CTA-En Banc) in C.T.A. E.B. No. 83 entitled Rizal Commercial Banking Corporation v. Commissioner of Internal Revenue. THE FACTS Petitioner Rizal Commercial Banking Corporation (RCBC) is a corporation engaged in general banking operations. It seasonably filed its Corporation Annual Income Tax Returns for Foreign Currency Deposit Unit for the calendar years 1994 and 1995.[3] On August 15, 1996, RCBC received Letter of Authority No. 133959 issued by then Commissioner of Internal Revenue (CIR) Liwayway Vinzons-Chato, authorizing a special audit team to examine the books of accounts and other accounting records for all internal revenue taxes from January 1, 1994 to December 31, 1995.[4]
On January 23, 1997, RCBC executed two Waivers of the Defense of Prescription Under the Statute of Limitations of the National Internal Revenue Code covering the internal revenue taxes due for the years 1994 and 1995, effectively extending the period of the Bureau of Internal Revenue (BIR) to assess up to December 31, 2000.[5] Subsequently, on January 27, 2000, RCBC received a Formal Letter of Demand together with Assessment Notices from the BIR for the following deficiency tax assessments:[6] Particulars Deficiency Income Tax
Basic Tax
Interest
Compromise Penalties
Total
1995 (ST-INC-95-0199-2000)
₱ 252,150,988.01
₱ 191,496,585.96
₱ 25,000.00
₱ 443,672,573.97
1994 (ST-INC-94-0200-2000) Deficiency Gross Receipts Tax
216,478,397.90
207,819,261.99
25,000.00
424,322,659.89
1995 (ST-GRT-95-0201-2000) 1994 (ST-GRT-94-0202-2000) Deficiency Final Withholding Tax
13,697,083.68 2,488,462.38
12,428,696.21 2,755,716.42
2,819,745.52 25,000.00
28,945,525.41 5,269,178.80
1995 (ST-EWT-95-0203-2000) 1994 (ST-EWT-94-0204-2000) Deficiency Final Tax on FCDU Onshore Income 1995 (ST-OT-95-0205-2000) 1994 (ST-OT-94-0206-2000) Deficiency Expanded Withholding Tax
64,365,610.12 53,058,075.25
58,757,866.78 59,047,096.34
25,000.00 25,000.00
123,148,477.15 112,130,171.59
81,508,718.20 34,429,503.10
61,901,963,.52 33,052,322.98
25,000.00 25,000.00
143,435,681.72 67,506,826.08
5,051,415.22 4,482,740.35
4,583,640.33 4,067,626.31
113,000.00 78,200.00
9,748,055.55 8,628,566.66
351,900,539.39 367,207,105.29 460,370,640.05 223,037,675.89
315,804,946.26 331,535,844.68 512,193,460.02 240,050,706.09
250,000.00 300,000.00 300,000.00 300,000.00
667,955,485.65 699,042,949.97 972,864,100.07 463,388,381.98
1995 (ST-EWT-95-0207-2000) 1994 (ST-EWT-94-0208-2000) Deficiency Documentary Stamp Tax 1995 (ST-DST1-95-0209-2000) 1995 (ST-DST2-95-0210-2000) 1994 (ST-DST3-94-0211-2000) 1994 (ST-DST4-94-0212-2000) TOTALS
₱ 2,130,226,954.83 ₱ 2,035,495,733.89
₱ 4,335,945.52 ₱ 4,170,058,634.49
Disagreeing with the said deficiency tax assessment, RCBC filed a protest on February 24, 2000 and later submitted the relevant documentary evidence to support it. Much later on November 20, 2000, it filed a petition for review before the CTA, pursuant to Section 228 of the 1997 Tax Code.[7] On December 6, 2000, RCBC received another Formal Letter of Demand with Assessment Notices dated October 20, 2000, following the reinvestigation it requested, which drastically reduced the original amount of deficiency taxes to the following:[8] Particulars Deficiency Income Tax
Basic Tax
Interest
Surcharge &/ Compromise
Total
1995 (INC-95-000003)
₱ 374,348.45
₱ 346,656.92
₱ 721,005.37
1994 (INC-94-000002)
1,392,366.28
1,568,605.52
2,960,971.80
2,000,926.96
3,322,589.63
Deficiency Gross Receipts Tax 1995 (GRT-95-000004)
₱ 1,367,222.04
6,690,738.63
1994 (GRT-94-000003)
138,368.61
161,872.32
300,240.93
1995 (FT-95-000005)
362,203.47
351,287.75
713,491.22
1994 (FT-94-000004)
188,746.43
220,807.47
409,553.90
81,508,718.20
79,052,291.08
160,561,009.28
34,429,503.10
40,277,802.26
74,707,305.36
520,869.72 297,949.95
505,171.80 348,560.63
Deficiency Final Withholding Tax
Deficiency Final Tax on FCDU Onshore Income 1995 (OT-95-000006) 1994 (OT-94-000005) Deficiency Expanded Withholding Tax 1995 (EWT-95-000004) 1994 (EWT-94-000003) Deficiency Documentary Stamp Tax 1995 (DST-95-000006) 1995 (DST2-95-000002) 1994 (DST-94-000005) 1994 (DST2-94-000001) TOTALS
25,000.00 25,000.00
1,051,041.03 671,510.58
599,890.72
149,972.68
749,863.40
24,953,842.46
6,238,460.62
31,192,303.08
905,064.74
226,266.18
1,131,330.92
17,040,104.84
4,260,026.21
21,300,131.05
₱ 12,291,947.73
₱ 303,160,496.55
₱ 164,712,903.44
₱ 126,155,645.38
On the same day, RCBC paid the following deficiency taxes as assessed by the BIR:[9] Particulars Deficiency Income Tax Deficiency Gross Receipts Tax Deficiency Final Withholding Tax Deficiency Expanded Withholding Tax Deficiency Documentary Stamp Tax TOTALS
1994
1995
Total
₱ 2,965,549.44
₱ 722,236.11
₱ 3,687,785.55
300,695.84 410,174.44 672,490.14
6,701,893.17 714,682.02 1,052,753.48
7,002,589.01 1,124,856.46 1,725,243.62
1,131,330.92
749,863.40
1,881,194.32
₱ 5,480,240.78 ₱ 9,941,428.18 ₱ 15,421,668.96
RCBC, however, refused to pay the following assessments for deficiency onshore tax and documentary stamp tax which remained to be the subjects of its petition for review: [10] Particulars Deficiency Final Tax on FCDU Onshore Income Basic Interest Sub Total Deficiency Stamp Tax Basic Surcharge Sub Total TOTALS
1994
₱ 34,429,503.10 40,277,802.26
1995
Total
₱ 81,508,718.20 ₱ 115,938,221.30 79,052,291.08
119,330,093.34
₱ 74,707,305.36 ₱ 160,561,009.28 ₱ 235,268,314.64
Documentary
₱ 17,040,104.84
₱ 24,953,842.46
₱ 41,993,947.30
4,260,026.21
6,238,460.62
10,498,486.83
₱ 21,300,131.05 ₱ 31,192,303.08 ₱ 52,492,434.13 ₱ 96,007,436.41 ₱ 191,753,312.36 ₱ 287,760,748.77
RCBC argued that the waivers of the Statute of Limitations which it executed on January 23, 1997 were not valid because the same were not signed or conformed to by the respondent CIR as required under Section 222(b) of the Tax Code.[11] As regards the deficiency FCDU onshore tax, RCBC contended that because the onshore tax was collected in the form of a final withholding tax, it was the borrower, constituted by law as the withholding agent, that was primarily liable for the remittance of the said tax.[12] On December 15, 2004, the First Division of the Court of Tax Appeals (CTA-First Division) promulgated its Decision[13] which partially granted the petition for review. It considered as closed and terminated the assessments for deficiency income tax, deficiency gross receipts tax, deficiency final withholding tax, deficiency expanded withholding tax, and deficiency documentary stamp tax (not an industry issue) for 1994 and 1995.[14] It, however, upheld the assessment for deficiency final tax on FCDU onshore income and deficiency documentary stamp tax for 1994 and 1995 and ordered RCBC to pay the following amounts plus 20% delinquency tax:[15] Particulars Deficiency Final Tax on FCDU Onshore Income Basic Interest Sub Total Deficiency Documentary Stamp Tax (Industry Issue) Basic Surcharge Sub Total TOTALS
1994
1995
Total
₱ 22,356,324.43
₱ 16,067,952.86
₱ 115,938, 221.30
26,153,837.08 48,510,161.51
15,583,713.19 31,651,666.05
119,330,093.34 119,330,093.34
₱ 17,040,104.84
₱ 24,953,842.46
₱ 41,993,947.30
4,260,026.21 21,300,131.05
6,238,460.62 31,192,303.08
10,498,486.83 52,492,434.13
₱69,810,292.56
₱62,843,969.13
₱171,822,527.47
Unsatisfied, RCBC filed its Motion for Reconsideration on January 21, 2005, arguing that: (1) the CTA erred in its addition of the total amount of deficiency taxes and the correct amount should only be ₱132,654,261.69 and not ₱171,822,527.47; (2) the CTA erred in holding that RCBC was estopped from questioning the validity of the waivers; (3) it was the payor-borrower as withholding tax agent, and not RCBC, who was liable to pay the final tax on FCDU, and (4) RCBCs special savings account was not subject to documentary stamp tax.[16] In its Resolution[17] dated April 11, 2005, the CTA-First Division substantially upheld its earlier ruling, except for its inadvertence in the addition of the total amount of deficiency taxes. As such, it modified its earlier decision and ordered RCBC to pay the amount of ₱132,654,261.69 plus 20% delinquency tax.[18] RCBC elevated the case to the CTA-En Banc where it raised the following issues:
I. Whether or not the right of the respondent to assess deficiency onshore tax and documentary stamp tax for taxable year 1994 and 1995 had already prescribed when it issued the formal letter of demand and assessment notices for the said taxable years. II. Whether or not petitioner is liable for deficiency onshore tax for taxable year 1994 and 1995. III. Whether or not petitioners special savings account is subject to documentary stamp tax under then Section 180 of the 1993 Tax Code. [19] The CTA-En Banc, in its assailed Decision, denied the petition for lack of merit. It ruled that by receiving, accepting and paying portions of the reduced assessment, RCBC bound itself to the new assessment, implying that it recognized the validity of the waivers.[20] RCBC could not assail the validity of the waivers after it had received and accepted certain benefits as a result of the execution of the said waivers.[21] As to the deficiency onshore tax, it held that because the payor-borrower was merely designated by law to withhold and remit the said tax, it would then follow that the tax should be imposed on RCBC as the payee-bank.[22] Finally, in relation to the assessment of the deficiency documentary stamp tax on petitioners special savings account, it held that petitioners special savings account was a certificate of deposit and, as such, was subject to documentary stamp tax.[23] Hence, this petition. While awaiting the decision of this Court, RCBC filed its Manifestation dated July 22, 2009, informing the Court that this petition, relative to the DST deficiency assessment, had been rendered moot and academic by its payment of the tax deficiencies on Documentary Stamp Tax (DST) on Special Savings Account (SSA) for taxable years 1994 and 1995 after the BIR approved its applications for tax abatement.[24]
In its November 17, 2009 Comment to the Manifestation, the CIR pointed out that the only remaining issues raised in the present petition were those pertaining to RCBCs deficiency tax on FCDU Onshore Income for taxable years 1994 and 1995 in the aggregate amount of ₱80,161,827.56 plus 20% delinquency interest per annum. The CIR prayed that RCBC be considered to have withdrawn its appeal with respect to the CTAEn Banc ruling on its DST on SSA deficiency for taxable years 1994 and 1995 and that the questioned CTA decision regarding RCBCs deficiency tax on FCDU Onshore Income for the same period be affirmed.[25] THE ISSUES Thus, only the following issues remain to be resolved by this Court: Whether petitioner, by paying the other tax assessment covered by the waivers of the statute of limitations, is rendered estopped from questioning the validity of the said waivers with respect to the assessment of deficiency onshore tax.[26] and Whether petitioner, as payee-bank, can be held liable for deficiency onshore tax, which is mandated by law to be collected at source in the form of a final withholding tax.[27] THE COURTS RULING Petitioner is estopped from questioning the validity of the waivers RCBC assails the validity of the waivers of the statute of limitations on the ground that the said waivers were merely attested to by Sixto Esquivias, then Coordinator for the CIR, and that he failed to indicate acceptance or agreement of the CIR, as required under Section 223 (b) of the 1977 Tax Code.[28] RCBC further argues that the principle of estoppel cannot be applied against it because its payment of the other tax assessments does not signify a clear intention on its part to give up its right to question the validity of the waivers.[29]
The Court disagrees. Under Article 1431 of the Civil Code, the doctrine of estoppel is anchored on the rule that an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon. A party is precluded from denying his own acts, admissions or representations to the prejudice of the other party in order to prevent fraud and falsehood.[30] Estoppel is clearly applicable to the case at bench. RCBC, through its partial payment of the revised assessments issued within the extended period as provided for in the questioned waivers, impliedly admitted the validity of those waivers. Had petitioner truly believed that the waivers were invalid and that the assessments were issued beyond the prescriptive period, then it should not have paid the reduced amount of taxes in the revised assessment. RCBCs subsequent action effectively belies its insistence that the waivers are invalid. The records show that on December 6, 2000, upon receipt of the revised assessment, RCBC immediately made payment on the uncontested taxes. Thus, RCBC is estopped from questioning the validity of the waivers. To hold otherwise and allow a party to gainsay its own act or deny rights which it had previously recognized would run counter to the principle of equity which this institution holds dear.[31]
Liability for Deficiency Onshore Withholding Tax RCBC is convinced that it is the payor-borrower, as withholding agent, who is directly liable for the payment of onshore tax, citing Section 2.57(A) of Revenue Regulations No. 2-98 which states: (A) Final Withholding Tax. Under the final withholding tax system the amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income. The liability for payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of his failure to withhold the tax or in case of under withholding, the deficiency tax shall be collected from the payor/withholding agent. The payee is not required to file an income tax return for the particular income. (Emphasis supplied)
The petitioner is mistaken. Before any further discussion, it should be pointed out that RCBC erred in citing the abovementioned Revenue Regulations No. 2-98 because the same governs collection at source on income paid only on or after January 1, 1998. The deficiency withholding tax subject of this petition was supposed to have been withheld on income paid during the taxable years of 1994 and 1995. Hence, Revenue Regulations No. 2-98 obviously does not apply in this case. In Chamber of Real Estate and Builders Associations, Inc. v. The Executive Secretary, [32] the Court has explained that the purpose of the withholding tax system is three-fold: (1) to provide the taxpayer with a convenient way of paying his tax liability; (2) to ensure the collection of tax, and (3) to improve the governments cashflow. Under the withholding tax system, the payor is the taxpayer upon whom the tax is imposed, while the withholding agent simply acts as an agent or a collector of the government to ensure the collection of taxes.[33] It is, therefore, indisputable that the withholding agent is merely a tax collector and not a taxpayer, as elucidated by this Court in the case of Commissioner of Internal Revenue v. Court of Appeals,[34] to wit: In the operation of the withholding tax system, the withholding agent is the payor, a separate entity acting no more than an agent of the government for the collection of the tax in order to ensure its payments; the payer is the taxpayer he is the person subject to tax imposed by law; and the payee is the taxing authority. In other words, the withholding agent is merely a tax collector, not a taxpayer. Under the withholding system, however, the agent-payor becomes a payee by fiction of law. His (agent) liability is direct and independent from the taxpayer, because the income tax is still imposed on and due from the latter. The agent is not liable for the tax as no wealth flowed into him he earned no income. The Tax Code only makes the agent personally liable for the tax arising from the breach of its legal duty to withhold as distinguished from its duty to pay tax since: the governments cause of action against the withholding agent is not for the collection of income tax, but for the enforcement of the withholding provision of Section 53 of the Tax Code, compliance with
which is imposed on the withholding agent and not upon the taxpayer.[35] (Emphases supplied)
Based on the foregoing, the liability of the withholding agent is independent from that of the taxpayer. The former cannot be made liable for the tax due because it is the latter who earned the income subject to withholding tax. The withholding agent is liable only insofar as he failed to perform his duty to withhold the tax and remit the same to the government. The liability for the tax, however, remains with the taxpayer because the gain was realized and received by him. While the payor-borrower can be held accountable for its negligence in performing its duty to withhold the amount of tax due on the transaction, RCBC, as the taxpayer and the one which earned income on the transaction, remains liable for the payment of tax as the taxpayer shares the responsibility of making certain that the tax is properly withheld by the withholding agent, so as to avoid any penalty that may arise from the nonpayment of the withholding tax due. RCBC cannot evade its liability for FCDU Onshore Tax by shifting the blame on the payor-borrower as the withholding agent. As such, it is liable for payment of deficiency onshore tax on interest income derived from foreign currency loans, pursuant to Section 24(e)(3) of the National Internal Revenue Code of 1993: Sec. 24. Rates of tax on domestic corporations. xxxx (e) Tax on certain incomes derived by domestic corporations xxxx (3) Tax on income derived under the Expanded Foreign Currency Deposit System. Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with nonresidents, offshore banking units in the Philippines, local commercial banks including branches of foreign banks that may be authorized by the Central Bank to transact business with foreign currency depository system units and other depository banks under the expanded foreign currency deposit system shall be exempt from all taxes, except taxable income from such transactions as may be specified by the Secretary of Finance, upon recommendation of the Monetary Board to be subject to the usual income tax payable by banks: Provided, That
interest income from foreign currency loans granted by such depository banks under said expanded system to residents (other than offshore banking units in the Philippines or other depository banks under the expanded system) shall be subject to a 10% tax. (Emphasis supplied)
As a final note, this Court has consistently held that findings and conclusions of the CTA shall be accorded the highest respect and shall be presumed valid, in the absence of any clear and convincing proof to the contrary.[36] The CTA, as a specialized court dedicated exclusively to the study and resolution of tax problems, has developed an expertise on the subject of taxation.[37] As such, its decisions shall not be lightly set aside on appeal, unless this Court finds that the questioned decision is not supported by substantial evidence or there is a showing of abuse or improvident exercise of authority on the part of the Tax Court.[38] WHEREFORE, the petition is DENIED. SO ORDERED.
G.R. No. 198677
November 26, 2014
COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. BASF COATING + INKS PHILS., INC., Respondent. DECISION PERALTA, J.:
Before the Court is a petition for review on certiorari assailing the Decision 1 of the Court of Tax Appeals (CTA) En Banc, dated June 16, 2011, and Resolution 2 dated September 16, 2011, in C.T.A. EB No. 664 (C.T.A. Case No. 7125). The pertinent factual and procedural antecedents of the case are as follows: Respondent was a corporation which was duly organized under and by virtue of the laws of the Republic of the Philippines on August 1, 1990 with a term of existence of fifty (50) years. Its BIR-registered address was at 101 Marcos Alvarez Avenue, Barrio Talon, Las Piñas City. In a joint special meeting held on March 19, 2001, majorityof the members of the Board of Directors and the stockholders representing more than two-thirds (2/3) of the entire subscribed and outstanding capital stock of herein respondent corporation, resolved to dissolve the corporation by shortening its corporate term to March 31, 2001.3 Subsequently, respondent moved out of its address in Las Piñas City and transferred to Carmelray Industrial Park, Canlubang, Calamba, Laguna. On June 26, 2001, respondent submitted two (2) letters to the Bureau of Internal Revenue (BIR) Revenue District Officer of Revenue District Office (RDO) No. 53, Region 8, in Alabang, Muntinlupa City. The first letter, dated April 26, 2001, was a notice of respondent's dissolution, in compliance with the requirements of Section 52(c) of the National Internal Revenue Code. 4 On the other hand, the second letter, dated June 22, 2001, was a manifestation indicating the submission of various documents supporting respondent's dissolution, among which was BIR Form No. 1905, which refers to an update of information contained in its tax registration.5 Thereafter, in a Formal Assessment Notice (FA N) dated January 17, 2003, petitioner assessed respondent the aggregate amount of ₱18,671,343.14 representing deficiencies in income tax, value added tax, withholding tax on compensation, expanded withholding tax and documentary stamp tax, including increments, for the taxable year 1999.6 The FAN was sent by registered mail on January 24, 2003 to respondent's former address in Las Piñas City. On March 5, 2004, the Chief of the Collection Section of BIR Revenue Region No. 7, RDO No. 39, South Quezon City, issued a First Notice Before Issuance of Warrant of Distraint and Levy, which was sent to the residence of one of respondent's directors.7 On March 19, 2004, respondent filed a protest letter citing lack of due process and prescription as grounds.8 On April 16, 2004, respondent filed a supplemental letter of protest. 9 Subsequently, on June 14, 2004, respondent submitted a letter wherein it attached documents to prove the defenses raised in its protest letters.10 On January 10, 2005, after 180 dayshad lapsed without action on the part of petitioner on respondent's protest, the latter filed a Petition for Review11 with the CTA. Trial on the merits ensued. On February 17, 2010, the CTA Special First Division promulgated its Decision, 12 the dispositive portion of which reads, thus: WHEREFORE, the Petition for Review is hereby GRANTED. The assessments for deficiency income tax in the amount of ₱14,227,425.39, deficiency value-added tax of ₱3,981,245.66, deficiency withholding tax on compensation of ₱49,977.21, deficiency expanded withholding tax of ₱156,261.97 and deficiency documentary stamp tax of ₱256,432.91, including increments, in the aggregate amount of ₱18,671,343.14 for the taxable year 1999 are hereby CANCELLED and SET ASIDE. SO ORDERED.13
The CTA Special First Division ruled that since petitioner was actually aware of respondent's new address, the former's failure to send the Preliminary Assessment Notice and FAN to the said address should not be taken against the latter. Consequently, since there are no valid notices sent to respondent, the subsequent assessments against it are considered void. Aggrieved by the Decision, petitioner filed a Motion for Reconsideration, but the CTA Special First Division denied it in its Resolution 14 dated July 13, 2010. Petitioner then filed a Petition for Review with the CTA En Banc.15 On June 16, 2011, the CTA En Banc promulgated its assailed Decision denying petitioner's Petition for Review for lack of merit. The CTA En Banc held that petitioner's right to assess respondent for deficiency taxes for the taxable year 1999 has already prescribed and that the FAN issued to respondent never attained finality because respondent did not receive it. Petitioner filed a Motion for Reconsideration, but the CTA En Banc denied it in its Resolution dated September 16, 2011. Hence, the present petition with the following Assignment of Errors: I THE HONORABLE CTA EN BANC ERRED IN RULING THAT THE RIGHT OF PETITIONER TO ASSESS HEREIN RESPONDENT FOR DEFICIENCY INCOME TAX, VALUEADDED TAX, WITHHOLDING TAX ON COMPENSATION, EXPANDED WITHHOLDING TAX AND DOCUMENTARY STAMP TAX, FOR TAXABLE YEAR 1999 IS BARRED BY PRESCRIPTION. II THE HONORABLE COURT OF TAX APPEALS, EN BANC, ERRED IN RULING THAT THE FORMAL ASSESSMENT NOTICE (FAN) FOR RESPONDENT'S DEFICIENCY INCOME TAX, VALUE-ADDED TAX, WITHHOLDING TAX ON COMPENSATION, EXPANDED WITHHOLDING TAX AND DOCUMENTARY STAMP TAX FOR TAXABLE YEAR 1999 HAS NOT YET BECOME FINAL, EXECUTORY AND DEMANDABLE.16 The petition lacks merit. Petitioner contends that, insofar as respondent's alleged deficiency taxes for the taxable year 1999 are concerned, the running of the three-year prescriptive period to assess, under Sections 203 and 222 of the National Internal Revenue Act of 1997 (Tax Reform Act of 1997) was suspended when respondent failed to notify petitioner, in writing, of its change of address, pursuant to the provisions of Section 223 of the same Act and Section 11 of BIR Revenue Regulation No. 12-85. Sections 203, 222 and 223 of the Tax Reform Act of 1997 provide, respectively: Sec. 203. Period of Limitation Upon Assessment and Collection.– Except as provided in Section 222,internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day. (emphasis supplied) Sec. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes. (a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be filed without
assessment, at any time within ten (10) years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof. (b) If before the expiration of the time prescribed in Section 203 for the assessment of the tax, both the Commissioner and the taxpayer have agreed in writing to its assessment after such time, the tax may be assessed within the period agreed upon. The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon. (c) Any internal revenue tax which has been assessed within the period of limitation as prescribed in paragraph (a) hereof may be collected by distraint or levy or by a proceeding in court within five (5) years following the assessment of the tax. (d) Any internal revenue tax, which has been assessed within the period agreed upon as provided in paragraph (b) hereinabove, may be collected bydistraint or levy or by a proceeding in court within the period agreed upon in writing before the expiration of the five (5) -year period. The period so agreed upon may be extended by subsequent written agreements made before the expiration of the period previously agreed upon. (e) Provided, however, That nothing in the immediately preceding and paragraph (a) hereof shall be construed to authorize the examination and investigation or inquiry into any tax return filed in accordance with the provisions of any tax amnesty law or decree. Sec. 223. Suspension of Running of Statute of Limitations. - The running of the Statute of Limitations provided in Sections 203 and 222 on the making of assessment and the beginning of distraint or levy a proceeding in court for collection, in respect of any deficiency, shall be suspended for the period during which the Commissioner is prohibited from making the assessment or beginning distraint or levy or a proceeding in court and for sixty (60) days thereafter; when the taxpayer requests for a reinvestigation which is granted by the Commissioner; when the taxpayer cannot be located in the address given by him in the return filed upon which a tax is being assessed or collected: Provided, that, if the taxpayer informs the Commissioner of any change in address, the running of the Statute of Limitations will not be suspended; when the warrant of distraint or levy is duly served upon the taxpayer, his authorized representative, or a member of his household with sufficient discretion, and no property could be located; and when the taxpayer is out of the Philippines. (emphasis supplied) In addition, Section 11 of BIR Revenue Regulation No. 12-85 states: Sec. 11. Change of Address. – In case of change of address, the taxpayer must give a written notice thereof to the Revenue District Officer or the district having jurisdiction over his former legal residence and/or place of business, copy furnished the Revenue District Officer having jurisdiction over his new legal residence or place of business, the Revenue Computer Center and the Receivable Accounts Division, BIR, National Office, Quezon City, and in case of failure to do so, any communication referred to in these regulations previously sent to his former legal residence or business address as appear in is tax return for the period involved shall be considered valid and binding for purposes of the period within which to reply. It is true that, under Section 223 of the Tax Reform Act of 1997, the running of the Statute of Limitations provided under the provisions of Sections 203 and 222 of the same Act shall be suspended when the taxpayer cannot be located in the address given by him in the return filed upon which a tax is being assessed or collected. In addition, Section 11 of Revenue Regulation No. 12-85 states that, in case of change of address, the taxpayer is required to give a written notice thereof to the Revenue District Officer or the district having jurisdiction over his former legal residence and/or place of business. However, this
Court agrees with both the CTA Special First Division and the CTA En Banc in their ruling that the above mentioned provisions on the suspension of the three-year period to assess apply only if the BIR Commissioner is not aware of the whereabouts of the taxpayer. In the present case, petitioner, by all indications, is well aware that respondent had moved to its new address in Calamba, Laguna, as shown by the following documents which form partof respondent's records with the BIR: 1) Checklist on Income Tax/Withholding Tax/Documentary Stamp Tax/Value-Added Tax and Other Percentage Taxes;17 2) General Information (BIR Form No. 23-02);18 3) Report on Taxpayer's Delinquent Account, dated June 27, 2002; 19 4) Activity Report, dated October 17, 2002;20 5) Memorandum Report of Examiner, dated June 27, 2002; 21 6) Revenue Officer's Audit Report on Income Tax;22 7) Revenue Officer's Audit Report on Value-Added Tax;23 8) Revenue Officer's Audit Report on Compensation Withholding Taxes; 24 9) Revenue Officer's Audit Report on Expanded Withholding Taxes;25 10) Revenue Officer's Audit Report on Documentary Stamp Taxes. 26 The above documents, all of which were accomplished and signed by officers of the BIR, clearly show that respondent's address is at Carmelray Industrial Park, Canlubang, Calamba, Laguna. The CTA also found that BIR officers, at various times prior to the issuance of the subject FAN, conducted examination and investigation of respondent's tax liabilities for 1999 at the latter's new address in Laguna as evidenced by the following, in addition to the above mentioned records: 1) Letter, dated September 27, 2001, signed by Revenue Officer I Eugene R. Garcia; 27 2) Final Request for Presentation of Records Before Subpoena Duces Tecum, dated March 20, 2002, signed by Revenue Officer I Eugene R. Garcia. 28 Moreover, the CTA found that, based on records, the RDO sent respondent a letter dated April 24, 2002 informing the latter of the results of their investigation and inviting it to an informal conference.29 Subsequently, the RDO also sent respondent another letter dated May 30, 2002, acknowledging receipt of the latter's reply to his April 24, 2002 letter. 30 These two letters were sent to respondent's new address in Laguna. Had the RDO not been informed or was not aware of respondent's new address, he could not have sent the said letters to the said address. Furthermore, petitioner should have been alerted by the fact that prior to mailing the FAN, petitioner sent to respondent's old address a Preliminary Assessment Notice but it was "returned to sender." This was testified to by petitioner's Revenue Officer II at its Revenue District Office 39 in Quezon City. 31 Yet, despite this occurrence, petitioner still insisted in mailing the FAN to respondent's old address. Hence, despite the absence of a formal written notice of respondent's change of address, the fact remains that petitioner became aware of respondent's new address as shown by documents replete in its records. As a consequence, the running of the three-year period to assess respondent was not suspended and has already prescribed.
It bears stressing that, in a number of cases, this Court has explained that the statute of limitations on the collection of taxes primarily benefits the taxpayer. In these cases, the Court exemplified the detrimental effects that the delay in the assessment and collection of taxes inflicts upon the taxpayers. Thus, in Commissioner of Internal Revenue v. Philippine Global Communication, Inc., 32 this Court echoed Justice Montemayor's disquisition in his dissenting opinion in Collector of Internal Revenue v. Suyoc Consolidated Mining Company,33 regarding the potential loss to the taxpayer if the assessment and collection of taxes are not promptly made, thus: Prescription in the assessment and in the collection of taxes is provided by the Legislature for the benefit of both the Government and the taxpayer; for the Government for the purpose of expediting the collection of taxes, so that the agency charged with the assessment and collection may not tarry too long or indefinitely tothe prejudice of the interests of the Government, which needs taxes to run it; and for the taxpayer so that within a reasonable time after filing his return, hemay know the amount of the assessment he is required to pay, whether or not such assessment is well founded and reasonable so that he may either pay the amount of the assessment or contest its validity incourt x x x. It would surely be prejudicial to the interest of the taxpayer for the Government collecting agency to unduly delay the assessment and the collection because by the time the collecting agency finally gets around to making the assessment or making the collection, the taxpayer may then have lost his papers and books to support his claim and contest that of the Government, and what is more, the tax is in the meantime accumulating interest which the taxpayer eventually has to pay.34 Likewise, in Republic of the Philippines v. Ablaza, 35 this Court elucidated that the prescriptive period for the filing of actions for collection of taxes is justified by the need to protect law-abiding citizens from possible harassment. Also, in Bank of the Philippine Islands v. Commissioner of Internal Revenue, 36 it was held that the statute of limitations on the assessment and collection of taxes is principally intended to afford protection to the taxpayer against unreasonable investigations as the indefinite extension of the period for assessment deprives the taxpayer of the assurance that he will no longer be subjected to further investigation for taxes after the expiration of a reasonable period of time. Thus, in Commissioner of Internal Revenue v. B.F. Goodrich Phils., Inc., 37 this Court ruled that the legal provisions on prescription should be liberally construed to protect taxpayers and that, as a corollary, the exceptions to the rule on prescription should be strictly construed. It might not also be amiss to point out that petitioner's issuance of the First Notice Before Issuance of Warrant of Distraint and Levy 38 violated respondent's right to due process because no valid notice of assessment was sent to it. An invalid assessment bears no valid fruit. The law imposes a substantive, not merely a formal, requirement. To proceed heedlessly with tax collection without first establishing a valid assessment is evidently violative of the cardinal principle inadministrative investigations: that taxpayers should be able to present their case and adduce supporting evidence. 39 In the instant case, respondent has not properly been informed of the basis of its tax liabilities. Without complying with the unequivocal mandate of first informing the taxpayer of the government’s claim, there can be no deprivation of property, because no effective protest can be made. It is true that taxes are the lifeblood of the government. However, in spite of all its plenitude, the power to tax has its limits.40 Thus, in Commissioner of Internal Revenue v. Algue, Inc.,41 this Court held: Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved. 1âwphi1
xxxx It is said that taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for the lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one’s hard-earned income to taxing authorities, every person who is able to must contribute his share in the running of the government. The government for its partis expected torespond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power. But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate x x x that the law has not been observed.42 It is an elementary rule enshrined in the 1987 Constitution that no person shall be deprived of property without due process of law. In balancing the scales between the power of the State to tax and its inherent right to prosecute perceived transgressors of the law on one side, and the constitutional rights of a citizen todue process of law and the equal protection of the laws on the other, the scales must tilt in favor of the individual, for a citizen’s right is amply protected by the Bill of Rights under the Constitution. 43 As to the second assigned error, petitioner's reliance on the provisions of Section 3.1.7 of BIR Revenue Regulation No. 12-9944 as well as on the case of Nava v. Commissioner of Internal Revenue 45 is misplaced, because in the said case, one of the requirements ofa valid assessment notice is that the letter or notice must be properly addressed. It is not enough that the notice is sent by registered mail as provided under the said Revenue Regulation. In the instant case, the FAN was sent tothe wrong address. Thus, the CTA is correct in holding that the FAN never attained finality because respondent never received it, either actually or constructively. WHEREFORE, the instant petition is DENIED. The Decision of the Court of Tax Appeals En Banc, dated June 16, 2011, and its Resolution dated September 16, 2011, in C.T.A. EB No. 664 (C.T.A. Case No. 7125), are AFFIRMED. SO ORDERED.
G.R. No. L-41919-24 May 30, 1980 QUIRICO P. UNGAB, petitioner, vs. HON. VICENTE N. CUSI, JR., in his capacity as Judge of the Court of First Instance, Branch 1, 16TH Judicial District, Davao City, THE COMMISSIONER OF INTERNAL REVENUE, and JESUS N. ACEBES, in his capacity as State Prosecutor, respondents.
CONCEPCION JR., J: Petition for certiorari and prohibition with preliminary injunction and restraining order to annul and set aside the informations filed in Criminal Case Nos. 1960, 1961, 1962, 1963, 1964, and 1965 of the Court of First Instance of Davao, all entitled: "People of the Philippines, plaintiff, versus Quirico Ungab, accused;" and to restrain the respondent Judge from further proceeding with the hearing and trial of the said cases. It is not disputed that sometime in July, 1974, BIR Examiner Ben Garcia examined the income tax returns filed by the herein petitioner, Quirico P. Ungab, for the calendar year ending December 31, 1973. In the course of his examination, he discovered that the petitioner failed to report his income derived from sales of banana saplings. As a result, the BIR District Revenue Officer at Davao City sent a "Notice of Taxpayer" to the petitioner informing him that there is due from him (petitioner) the amount of P104,980.81, representing income, business tax and forest charges for the year 1973 and inviting petitioner to an informal conference where the petitioner, duly assisted by counsel, may present his objections to the findings of the BIR Examiner. 1 Upon receipt of the notice, the petitioner wrote the BIR District Revenue Officer protesting the assessment, claiming that he was only a dealer or agent on commission basis in the banana sapling business and that his income, as reported in his income tax returns for the said year, was accurately stated. BIR Examiner Ben Garcia, however, was fully convinced that the petitioner had filed a fraudulent income tax return so that he submitted a "Fraud Referral Report," to the Tax Fraud Unit of the Bureau of Internal Revenue. After examining the records of the case, the Special Investigation Division of the Bureau of Internal Revenue found sufficient proof that the herein petitioner is guilty of tax evasion for the taxable year 1973 and recommended his prosecution: têñ.£îhqwâ£
(1) For having filed a false or fraudulent income tax return for 1973 with intent to evade his just taxes due the government under Section 45 in relation to Section 72 of the National Internal Revenue Code; (2) For failure to pay a fixed annual tax of P50.00 a year in 1973 and 1974, or a total of unpaid fixed taxes of P100.00 plus penalties of 175.00 or a total of P175.00, in accordance with Section 183 of the National Internal Revenue Code; (3) For failure to pay the 7% percentage tax, as a producer of banana poles or saplings, on the total sales of P129,580.35 to the Davao Fruit Corporation, depriving thereby the government of its due revenue in the amount of P15,872.59, inclusive of surcharge. 2 In a second indorsement to the Chief of the Prosecution Division, dated December 12, 1974, the Commissioner of Internal Revenue approved the prosecution of the petitioner. 3 Thereafter, State Prosecutor Jesus Acebes who had been designated to assist all Provincial and City Fiscals throughout the Philippines in the investigation and prosecution, if the evidence warrants, of all violations of the National Internal Revenue Code, as amended, and other related laws, in Administrative Order No. 116 dated December 5, 1974, and to whom the case was assigned, conducted a preliminary investigation of the case, and finding probable cause, filed six (6) informations against the petitioner with the Court of First Instance of Davao City, to wit: têñ.£îhqwâ£
(1) Criminal Case No. 1960 — Violation of Sec. 45, in relation to Sec. 72 of the National Internal-Revenue Code, for filing a fraudulent income tax return for the calendar year ending December 31, 1973; 4 (2) Criminal Case No. 1961 — Violation of Sec. 182 (a), in relation to Secs. 178, 186, and 208 of the National Internal Revenue Code, for engaging in business as producer of saplings, from January, 1973 to December, 1973, without first paying the annual fixed or privilege tax thereof; 5
(3) Criminal Case No. 1962 — Violation of Sec. 183 (a), in relation to Secs. 186 and 209 of the National Internal Revenue Code, for failure to render a true and complete return on the gross quarterly sales, receipts and earnings in his business as producer of banana saplings and to pay the percentage tax due thereon, for the quarter ending December 31, 1973; 6 (4) Criminal Case No. 1963 — Violation of Sec. 183 (a), in relation to Secs. 186 and 209 of the National Internal Revenue Code, for failure to render a true and complete return on the gross quarterly sales receipts and earnings in his business as producer of saplings, and to pay the percentage tax due thereon, for the quarter ending on March 31, 1973; 7 (5) Criminal Case No. 1964 — Violation of Sec. 183 (a), in relation to Secs. 186 and 209 of the National Internal Revenue Code, for failure to render a true and complete return on the gross quarterly sales, receipts and earnings in his business as producer of banana saplings for the quarter ending on June 30, 1973, and to pay the percentage tax due thereon; 8 (6) Criminal Case No. 1965 — Violation of Sec. 183 (a), in relation to Secs. 186 and 209 of the National Internal Revenue Code, for failure to render a true and complete return on the gross quarterly sales, receipts and earnings as producer of banana saplings, for the quarter ending on September 30, 1973, and to pay the percentage tax due thereon. 9 On September 16, 1975, the petitioner filed a motion to quash the informations upon the grounds that: (1) the informations are null and void for want of authority on the part of the State Prosecutor to initiate and prosecute the said cases; and (2) the trial court has no jurisdiction to take cognizance of the above-entitled cases in view of his pending protest against the assessment made by the BIR Examiner. 10 However, the trial court denied the motion on October 22, 1975. 11 Whereupon, the petitioner filed the instant recourse. As prayed for, a temporary restraining order was issued by the Court, ordering the respondent Judge from further proceeding with the trial and hearing of Criminal Case Nos. 1960, 1961, 1962, 1963, 1964, and 1965 of the Court of First Instance of Davao, all entitled: "People of the Philippines, plaintiff, versus Quirico Ungab, accused." The petitioner seeks the annulment of the informations filed against him on the ground that the respondent State Prosecutor is allegedly without authority to do so. The petitioner argues that while the respondent State Prosecutor may initiate the investigation of and prosecute crimes and violations of penal laws when duly authorized, certain requisites, enumerated by this Court in its decision in the case of Estrella vs. Orendain, 12 should be observed before such authority may be exercised; otherwise, the provisions of the Charter of Davao City on the functions and powers of the City Fiscal will be meaningless because according to said charter he has charge of the prosecution of all crimes committed within his jurisdiction; and since "appropriate circumstances are not extant to warrant the intervention of the State Prosecution to initiate the investigation, sign the informations and prosecute these cases, said informations are null and void." The ruling adverted to by the petitioner reads, as follows: têñ.£îhqwâ£
In view of all the foregoing considerations, it is the ruling of this Court that under Sections 1679 and 1686 of the Revised Administrative Code, in any instance where a provincial or city fiscal fails, refuses or is unable, for any reason, to investigate or prosecute a case and, in the opinion of the Secretary of Justice it is advisable in the public interest to take a different course of action, the Secretary of Justice may either appoint as acting provincial or city fiscal to handle the investigation or prosecution exclusively and only of such case, any practicing attorney or some competent officer of the Department of Justice or office of any city or provincial fiscal, with complete authority to act therein in all respects as if he were the provincial or city fiscal himself, or appoint any lawyer in the government service, temporarily to assist such city of provincial fiscal in the discharge of his duties, with the same complete
authority to act independently of and for such city or provincial fiscal provided that no such appointment may be made without first hearing the fiscal concerned and never after the corresponding information has already been filed with the court by the corresponding city or provincial fiscal without the conformity of the latter, except when it can be patently shown to the court having cognizance of the case that said fiscal is intent on prejudicing the interests of justice. The same sphere of authority is true with the prosecutor directed and authorized under Section 3 of Republic Act 3783, as amended and/or inserted by Republic Act 5184. The observation in Salcedo vs. Liwag, supra, regarding the nature of the power of the Secretary of Justice over fiscals as being purely over administrative matters only was not really necessary, as indicated in the above relation of the facts and discussion of the legal issues of said case, for the resolution thereof. In any event, to any extent that the opinion therein may be inconsistent herewith the same is hereby modified. The contention is without merit. Contrary to the petitioner's claim, the rule therein established had not been violated. The respondent State Prosecutor, although believing that he can proceed independently of the City Fiscal in the investigation and prosecution of these cases, first sought permission from the City Fiscal of Davao City before he started the preliminary investigation of these cases, and the City Fiscal, after being shown Administrative Order No. 116, dated December 5, 1974, designating the said State Prosecutor to assist all Provincial and City fiscals throughout the Philippines in the investigation and prosecution of all violations of the National Internal Revenue Code, as amended, and other related laws, graciously allowed the respondent State Prosecutor to conduct the investigation of said cases, and in fact, said investigation was conducted in the office of the City Fiscal. 13 The petitioner also claims that the filing of the informations was precipitate and premature since the Commissioner of Internal Revenue has not yet resolved his protests against the assessment of the Revenue District Officer; and that he was denied recourse to the Court of Tax Appeals. The contention is without merit. What is involved here is not the collection of taxes where the assessment of the Commissioner of Internal Revenue may be reviewed by the Court of Tax Appeals, but a criminal prosecution for violations of the National Internal Revenue Code which is within the cognizance of courts of first instance. While there can be no civil action to enforce collection before the assessment procedures provided in the Code have been followed, there is no requirement for the precise computation and assessment of the tax before there can be a criminal prosecution under the Code. têñ.£îhqwâ£
The contention is made, and is here rejected, that an assessment of the deficiency tax due is necessary before the taxpayer can be prosecuted criminally for the charges preferred. The crime is complete when the violator has, as in this case, knowingly and willfully filed fraudulent returns with intent to evade and defeat a part or all of the tax. 14 An assessment of a deficiency is not necessary to a criminal prosecution for willful attempt to defeat and evade the income tax. A crime is complete when the violator has knowingly and willfuly filed a fraudulent return with intent to evade and defeat the tax. The perpetration of the crime is grounded upon knowledge on the part of the taxpayer that he has made an inaccurate return, and the government's failure to discover the error and promptly to assess has no connections with the commission of the crime. 15 Besides, it has been ruled that a petition for reconsideration of an assessment may affect the suspension of the prescriptive period for the collection of taxes, but not the prescriptive period of a criminal action for violation of law. 16Obviously, the protest of the petitioner against the assessment of the District Revenue Officer cannot stop his prosecution for violation of the National Internal Revenue Code. Accordingly, the respondent Judge did not abuse his discretion in denying the motion to quash filed by the petitioner.
WHEREFORE, the petition should be, as it is hereby dismissed. The temporary restraining order heretofore issued is hereby set aside. With costs against the petitioner. SO ORDERED.
G.R. No. 119322 June 4, 1996 FORTUNE CASE KAPUNAN, J.:p The pivotal issue in this petition for review is whether or not respondent Court of Appeals in its decision 1 in CA-G.R. SP No. 33599 correctly ruled that the Regional Trial Court of Quezon City (Branch 88) in Civil Case No. Q-94- 18790 did not commit grave abuse of discretion amounting to lack of jurisdiction in issuing four (4) orders directing the issuance of writs of preliminary injunction restraining petitioner prosecutors from continuing with the preliminary injunction of I.S. Nos. 93-508 and 93-584 in the Department of Justice and I.S. No. 93-17942 in the Office of the City Prosecutors of Quezon City wherein private respondents were respondents and denying petitioners' Motion to Dismiss said Civil Case No. 94-18790. 2
In resolving the issue raised in the petition, the Court may be guided by its definition of what constitutes grave abuse of discretion. By grave abuse of discretion is meant such capricious and whimsical exercise of
judgment as is equivalent to lack of jurisdiction. The abuse of discretion must be patent and gross as to amount to an evasion of positive duty or a virtual refusal to perform a duty enjoined by law, or to act at all in contemplation of law as where the power is exercised in an arbitrary and despotic manner by reason of passion and hostility.3 On June 1, 1993, the President issued a Memorandum creating a Task Force to investigate the tax liabilities of manufacturers engaged in tax evasion scheme, such as selling products through dummy marketing corporations to avoid payment of correct internal revenue tax, to collect from them any tax liabilities discovered from such investigation, and to file the necessary criminal actions against those who may have violated the tax code. The task force was composed of the Commissioner of Internal Revenue as Chairman, a representative of the Department of Justice and a representative of the Executive Secretary. On July 1, 1993, the Commissioner of Internal Revenue issued a Revenue Memorandum Circular No. 3793 reclassifying best selling cigarettes bearing the brands "Hope," "More," and "Champion" as cigarettes of foreign brands subject to a higher rate of tax. On August 3, 1993, respondent Fortune Tobacco Corporation (Fortune) questioned the validity of the reclassification of said brands of cigarettes as violative of its right to due process and equal protection o f law. Parenthetically, on September 8, 1993, the Court of Tax Appeals by resolution ruled that the reclassification made by the Commissioner "is of doubtful legality" and enjoined its enforcement. In a letter of August 13, 1993 which was received by Fortune on August 24, 1993, the Commissioner assessed against Fortune the total amount of P7,685,942,221.66 representing deficiency income, ad valorem and value-added tax for the year 1992 with the request that the said amount be paid within thirty (30) days upon receipt thereof. 4 Fortune on September 17, 1993 moved for reconsideration of the assessments. On September 7, 1993, the Commissioner of Internal Revenue filed a complaint with the Department of Justice against respondent Fortune, its corporate officers, nine (9) other corporations and their respective corporate officers for alleged fraudulent tax evasion for supposed non-payment by Fortune of the correct amount of income tax, ad valorem tax and value-added tax for the year 1992. The complaint alleged, among others, that: In the said income tax return, the taxpayer declared a net taxable income of P183,613,408.00 and an income tax due of P64,264,693.00. Based mainly on documentary evidence submitted by the taxpayer itself, these declarations are false and fraudulent because the correct taxable income of the corporation for the said year is P1,282,959,399.25. This underdeclaration which resulted in the evasion of the amount of P723,773,759.79 as deficiency income tax for the year 1992 is a violation of Section 45 of the Tax Code, penalized under Section 253 in relation to Sections 252(b) and (d) and 253 thereof, thus: . . . xxx xxx xxx Fortune Tobacco Corporation, through its Vice-President for Finance, Roxas Chua, likewise filed value-added tax returns for the 1st, 2nd, 3rd and 4th quarters of 1992 with the Rev. District Office of Marikina, Metro Manila, declaring therein gross taxable sales, as follows: 1st Qtr. P 2,924,418,055.00 2nd Qtr. 2,980,335,235.00
3rd Qtr. 2,839,519,325.00 4th Qtr. 2,992,386,005.00 However, contrary to what have been reported in the said value- added tax returns, and based on documentary evidence obtained from the taxpayer, the total actual taxable sales of the corporation for the year 1992 amounted to P16,158,575,035.00 instead of P11,929,322,334.52 as declared by the corporation in the said VAT returns. These fraudulent underdeclarations which resulted in the evasion of value-added taxes in the aggregate amount of P1,169,688,645.63 for the entire year 1992 are violations of Section 110 in relation to Section 100 of the Tax Code, which are likewise penalized under the aforequoted Section 253, in relation to Section 252, thereof. Sections 110 and 100 provide: xxx xxx xxx Furthermore, based on the corporation's VAT returns, the corporation reported its taxable sales for 1992 in the amount of P11,736,658,580. This declaration is likewise false and fraudulent because, based on the daily manufacturer's sworn statements submitted to the BIR by the taxpayer, its total taxable sales during the year 1992 is P16,686,372,295.00. As a result thereof, the corporation was able to evade the payment of ad valorem taxes in the aggregate amount of P5,792,479,816.24 in violation of Section 127 in relation to Section 142, as amended by R.A. 6956, penalized under the aforequoted Section 253, in relation to Section 252, all of the Tax Code. Sections 127 and 142, as amended by R.A. 6956, are quoted as follows: . . . The complaint docketed as I.S. No. 93-508, was referred to the Department of Justice Task Force on revenue cases which found sufficient basis to further investigate the allegations that Fortune, through fraudulent means, evaded payment of income tax, ad valorem tax, and value-added tax for the year 1992 thus, depriving the government of revenues in the amount of Seven and One-half (P7.5) Billion Pesos. The fraudulent scheme allegedly adopted by private respondents consisted of making fictitious and simulated sales of Fortune's cigarette products to non-existing individuals and to entities incorporated and existing only for the purpose of such fictitious sales by declaring registered wholesale prices with the BIR lower than Fortune's actual wholesale prices which are required for determination of Fortune's correct income, ad valorem, and value-added tax liabilities. The "ghosts wholesale buyers" then ostensibly sold the products to customers and other wholesalers/retailers at higher wholesale prices determined by Fortune. The tax returns and manufacturer's sworn statements filed by Fortune would then declare the fictitious sales it made to the conduit corporators and non-existing individual buyers as its gross sales. 5 On September 8, 1993, the Department of Justice Task Force issued a subpoena directing private respondents to submit their counter-affidavits not later than September 20, 1993. 6 Instead of filing their counter-affidavits, the private respondents on October 15, 1993 filed a Verified Motion to Dismiss; Alternatively Motion to Suspend,7 based principally on the following grounds: 1. The complaint of petitioner Commissioner follows a pattern of prosecution against private respondents in violation of their right to due process and equal protection of the law. 2. Petitioner Commissioner and the Court of Tax Appeals have still to determine Fortune's tax liability for 1992 in question; without any tax liability, there can be no tax evasion.
3. Exclusive jurisdiction to determine tax liability is vested in the Court of Tax Appeals; therefore, the DOJ is without jurisdiction to conduct preliminary investigation. 4. The complaint of petitioner Commissioner is not supported by any evidence to serve as adequate basis for the issuance of subpoena to private respondents and to put them to their defense. At the scheduled preliminary investigation on October 15, 1993, private respondents were asked by the panel of prosecutors to inform it of the aspects of the Verified Motion to Dismiss which counsel for private respondents did so briefly. Counsel for the Commissioner of Internal Revenue asked for fifteen (15) days within which to file a reply in writing to private respondents' Verified Motion to Dismiss. Thereupon, the panel of prosecutors declared a recess. Upon reconvening, the panel of prosecutors denied the motion to dismiss and treated the same as private respondents' counter-affidavits. 8 On October 20, 1993, private respondents filed a motion for reconsideration of the order of October 15, 1993.9 On October 21, 1993, private respondents filed a motion to require the submission by the Bureau of Internal Revenue of certain documents in further support of their Verified Motion to Dismiss. Among the documents sought to be produced are the "Daily Manufacturer's Sworn Statements" which according to petitioner Commissioner in her complaint were submitted by Fortune to the BIR and which were the basis of her conclusion that Fortune's tax declarations were false and fraudulent. Fortune claimed that without the "Daily Manufacturer's Sworn Statements," there is no evidence to support the complaint, hence, warranting its outright dismissal. On October 26, 1993, private respondents moved for the inhibition of the State prosecutors assigned to the case for alleged lack of impartiality.10 Private respondents also sought the production of the "Daily Manufacturer's Sworn Statements" submitted by certain cigarette companies similarly situated as Fortune but were not proceeded against, thus, private respondents charged that Fortune and its officers were being singled out for criminal prosecution which is discriminatory and in violation of the equal protection clause of the Constitution. On December 20, 1993, the panel of prosecutors issued an Omnibus Order 11 denying private respondents' motion for reconsideration, motion for suspension of investigation, motion to inhibit the State Prosecutors, and motion to require submission by the BIR of certain documents to further support private respondents' motion to dismiss. On January 4, 1994, private respondents filed a petition for certiorari and prohibition with prayer for preliminary injunction with the Regional Trial Court, Branch 88, Quezon City, docketed as Q-94-18790, praying that the complaint of the Commissioner of Internal Revenue and the orders of the prosecutors in I.S. No. 93-508 be dismissed or set aside, alternatively, the proceedings on the preliminary investigation be suspended pending final determination by the Commissioner of Fortune's motion for reconsideration/ reinvestigation of the August 13, 1993 assessment of the taxes due. 12 On January 17, 1994, petitioners filed a motion to dismiss the petition 13 on the grounds that (a) the trial court is bereft of jurisdiction to enjoin a criminal prosecution under preliminary investigation; (b) a criminal prosecution for tax fraud can proceed independently of criminal or administrative action; (c) there is no prejudicial question to justify suspension of the preliminary investigation; (d) private respondents' rights to due process was not violated; and (e) selective prosecution is not a valid defense in this jurisdiction. On January 19, 1994, at the hearing of the incident for the issuance of a writ of preliminary injunction in the petition, private respondents offered in evidence their verified petition for certiorari and prohibition and its annexes. Petitioners responded by praying that their motion to dismiss the petition for certiorari and
prohibition be considered as their opposition to private respondents' application for the issuance of a writ of preliminary injunction. On January 25, 1994, the trial court issued an order granting the prayer for the issuance of a preliminary injunction.14 The trial court rationalized its order in this wise: a) It is private respondents' claim that the ad valorem tax for the year 1992 was levied, assessed and collected by the BIR under Section 142(c) of the Tax Code on the basis of the "manufacturer's registered wholesale price" duly approved by the BIR. Fortune's taxable sales for 1992 was in the amount of P11,736,658,580.00. b) On the other hand, it is petitioners' contention that Fortune's declaration was false and fraudulent because, based on its daily manufacturer's sworn statements submitted to the BIR, its taxable sales in 1992 were P16,686,372,295.00, as a result of which, Fortune was able to evade the payment of ad valorem tax in the aggregate amount of P5,792,479,816.24. c) At the hearing for preliminary investigation, the "Daily Manufacturer's Sworn Statements" which, according to petitioners, were submitted to the BIR by private respondents and made the basis of petitioner Commissioner's complaint that the total taxable sales of Fortune in 1992 amounted to P16,686,372, 295.00 were not produced as part of the evidence for petitioners. In fact, private respondents had filed a motion to require petitioner Commissioner to submit the aforesaid daily manufacturer's sworn statements before the DOJ panel of prosecutors to show that Fortune's actual taxable sales totaled P16,686,373,295.00, but the motion was denied. d) There is nothing on record in the preliminary investigation before the panel of investigators which supports the allegation that Fortune made a fraudulent declaration of its 1992 taxable sales. e) Since, as alleged by private respondents, the ad valorem tax for the year 1992 should be based on the "manufacturer's registered wholesale price" while, as claimed by petitioners, the ad valorem taxes should be based on the wholesale price at which the manufacturer sold the cigarettes, which is a legal issue as admitted by a BIR lawyer during the hearing for preliminary injunction, the correct interpretation of the law involved, which is Section 142(c) of the Tax Code, constitutes a prejudicial question which must first be resolved before criminal proceedings for tax evasion may be pursued. In other words, the BIR must first make a final determination, which it has not, of Fortune's tax liability relative to its 1992 ad valorem, value-added and income taxes before the taxpayer can be made liable for tax evasion. f) There was a precipitate issuance by the panel of prosecutors of subpoenas to private respondents, on the very day following the filing of the complaint with the DOJ consisting of about 600 pages, and the precipitate denial by the panel of prosecutors, after a recess of about twenty (20) minutes, of private respondents' motion to dismiss, consisting of one hundred and thirty five (135) pages. g) Private respondents had been especially targeted by the government for prosecution. Prior to the filing of the complaint in I.S. No. 93-508, petitioner Commissioner issued Revenue Memorandum Circular No. 37-93 reclassifying Fortune's best selling cigarettes, namely "Hope," "More," and "Champion" as cigarettes bearing a foreign brand, thereby imposing upon them a higher rate of tax that would price them out of the market.
h) While in petitioner Commissioner's letter of August 13, 1993, she gave Fortune a period of thirty (30) days from receipt thereof within which to pay the alleged tax deficiency assessments, she filed the criminal complaint for tax evasion before the period lapsed. i) Based on the foregoing, the criminal complaint against private respondents was filed prematurely and in violation of their constitutional right to equal protection of the laws. On January 26, 1994, private respondents filed with the trial court a Motion to Admit Supplemental Petition and sought the issuance of a writ of preliminary injunction to enjoin the State Prosecutors from continuing with the preliminary investigation filed by them against private respondents with the Quezon City Prosecutor's Office, docketed as I.S. 93-17942, for alleged fraudulent tax evasion, committed by private respondents for the taxable year 1990. Private respondents averred in their motion that no supporting documents or copies of the complaint were attached to the subpoena in I.S. 93-17942; that the subpoena violates private respondents' constitutional right to due process, equal protection and presumption of innocence; that I.S. 93-17942 is substantially the same as I.S. 93-508; that no tax assessment has been issued by the Commission of Internal Revenue and considering that taxes paid have not been challenged, no tax liability exists; and that since Assistant City Prosecutor Baraquia was a former classmate of Presidential Legal Counsel Antonio T. Carpio, the former cannot conduct the preliminary investigation in an impartial manner. On January 28, 1994, private respondents filed with the trial court a second supplemental petition, 15 also seeking to stay the preliminary investigation in I.S. 93-584, which was the third complaint filed against private respondents with the DOJ for alleged fraudulent tax evasion for the taxable year 1991. On January 31, 1994, the lower court admitted the two (2) supplemental petitions and issued a temporary restraining order in I.S. 93-17942 and I.S. 93-584. 16 Also, on the same day, petitioners filed an Urgent Motion for Immediate Resolution of petitioners' motion to dismiss. On February 7, 1994, the trial court issued an order denying petitioners' motion to dismiss private respondents' petition seeking to stay preliminary investigation in I.S. 93-508, ruling that the issue of whether Sec. 127(b) of the National Tax Revenue Code should be the basis of private respondents' tax liability as contended by the Bureau of Internal Revenue, or whether it is Section 142(c) of the same Code that applies, as argued by herein private respondents, should first be settled before any complaint for fraudulent tax evasion can be initiated.17 On February 14, 1994, the trial court issued an order granting private respondents' petition for a supplemental writ of preliminary injunction, likewise enjoining the preliminary investigation of the two (2) other complaints filed with the Quezon City Prosecutor's Office and the DOJ for fraudulent tax evasion, I.S. 93-17942 and I.S. 93-584, for alleged tax evasion for the taxable years 1990 and 1991 respectively. 18 In granting the supplemental writ, the trial court stated that the two other complaints are the same as in I.S. 93-508, except that the former refer to the taxable years 1990 and 1991. On March 7, 1994, petitioners filed a petition for certiorari and prohibition with prayer for preliminary injunction before this Court. However, the petition was referred to the Court of Appeals for disposition by virtue of its original concurrent jurisdiction over the petition. On December 19, 1994, the Court of Appeals in CA-G.R No. SP-33599 rendered a decision denying the petition. The Court of Appeals ruled that the trial court committed no grave abuse of discretion in ordering the issuance of writs of preliminary injunction and in denying petitioners' motion to dismiss. In upholding the reasons and conclusions given by the trial court in its orders for the issuance of the questioned writs, the Court of Appeals said in part:
In making such conclusion the respondent Court must have understood from herein petitioner Commissioner's letter-complaint of 14 pages (pp. 477-490, rollo of this case) and the joint affidavit of eight revenue officers of 17 pages attached thereto (pp. 491-507, supra) and its annexes (pp. 508-1077, supra), that the charge against herein respondents is for tax evasion for non-payment by herein respondent Fortune of the correct amounts of income tax, ad valorem tax and value added tax, not necessarily "fraudulent tax evasion." Hence, the need for previous assessment of the correct amount by herein petitioner Commissioner before herein respondents may be charged criminally. Certiorari will not be issued to cure errors in proceedings or correct erroneous conclusions of law or fact. As long as a Court acts within its jurisdictions, any alleged error committed in the exercise of its jurisdiction, will amount to nothing more than errors of judgment which are reviewable by timely appeal and not by a special civil action of certiorari (Santos, Jr. vs. Court of Appeals, 152 SCRA 378; Gold City Integrated Port Services, Inc. vs. Intermediate Appellate Court, 171 SCRA 579). The questioned orders issued after hearing (Annexes A, B, C and D, petition) being but interlocutory, review thereof by this Court is inappropriate until final judgment is rendered, absent a showing of grave abuse of discretion on the part of the issuing court (See Van Dorn vs. Romillo, 139 SCRA 139, 141; Newsweek, Inc. vs. IAC, 171, 177; Mendoza vs. Court of Appeals, 201 SCRA 343, 352). The factual and legal issues involved in the main case still before the respondent Court are best resolved after trial. Petitioners, therefore, instead of resorting to this petition for certiorari and prohibition should have filed an answer to the petition as ordained in Section 4, Rule 16, in connection with Rule 11 of the Revised Rules of Court, interposing as defense or defenses the objection or objections raised in their motion to dismiss, then proceed to trial in order that thereafter the case may be decided on the merits by the respondent Court. In case of an adverse decision, they may appeal therefrom by which the entire record of the case would be elevated for review (See Mendoza vs. Court of Appeals, supra). Therefore, certiorari and prohibition resorted to by herein petitioners will not lie in view of the remedy open to them. Thus, the resulting delay in the final disposition of the case before the respondent Court would not have been incurred. Grave abuse of discretion as a ground for issuance of writs of certiorari and prohibition implies capricious and whimsical exercise of judgment as is equivalent to lack of jurisdiction, or where the power is exercised in an arbitrary or despotic manner by reason of passion, prejudice, or personal hostility, amounting to an evasion of positive duty or to a virtual refusal to perform the duty enjoined, or to act at all in contemplation of law (Confederation of Citizens Labor Union vs. NLRC, 60 SCRA 84; Bustamante vs. Commission on Audit, 216 SCRA 134). For such writs to lie, there must be capricious, arbitrary and whimsical exercise of power, the very antithesis of the judicial prerogative in accordance with centuries of both civil law and common law traditions (Young vs. Sulit, 162 SCRA 659, 664; FCC vs. IAC, 166 SCRA 155; Purefoods Corp. vs. NLRC, 171 SCRA 45). Certiorari and prohibition are remedies narrow in scope and inflexible in character. They are not general utility tools in the legal workshop (Vda. de Guia vs. Veloso, 158 SCRA 340, 344). Their function is but limited to correction of defects of jurisdiction solely, not to be used for any other purpose (Garcia vs. Ranada, 166 SCRA 9), such as to cure errors in. proceedings or to correct erroneous conclusions of law or fact (Gold City Integrated Ports Services vs. IAC, 171 SCRA 579). Due regard for the foregoing teachings enunciated in the decisions cited can not bring about a decision other than what has been reached herein.
Needless to say, the case before the respondent court involving those against herein respondents for alleged non-payment of the correct amounts due as income tax, ad valorem tax and value added tax for the years 1990, 1991 and 1992 (Civil Case No. Q-94-18790) is not ended by this decision. The respondent Court is still to try the case and decide it on the merits. All that is decided here is but the validity of the orders of the respondent Court granting herein respondents' application for preliminary injunction and denying herein petitioners' motion to dismiss. If upon the facts established after trial and the applicable law, dissolution of the writ of preliminary injunction allowed to be issued by the respondent Court is called for and a judgment favorable to herein petitioners is demanded, the respondent Court is duty bound to render judgment accordingly. WHEREFORE, the instant petition for certiorari and prohibition with application for issuance of restraining order and writ of preliminary injunction is DISMISSED. Costs de oficio.19 Their motion for reconsideration having been denied by respondent appellate court on February 23, 1995, petitioners filed the present petition for review based on the following grounds: THE RESPONDENT COURTS COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN HOLDING THAT: I. THERE IS A PREJUDICIAL AND/OR LEGAL QUESTION TO JUSTIFY THE SUSPENSION OF THE PRELIMINARY INVESTIGATION. II. PRIVATE RESPONDENTS' RIGHTS TO DUE PROCESS, EQUAL PROTECTION AND PRESUMPTION OF INNOCENCE WERE VIOLATED; ON THE CONTRARY, THE STATE ITSELF WAS DEPRIVED OF DUE PROCESS. III. THE ADMISSION OF PRIVATE RESPONDENTS' SUPPLEMENTAL PETITIONS WERE PROPER. IV. THERE WAS SELECTIVE PROSECUTION. V. THE FACTUAL ALLEGATIONS IN THE PETITION ARE HYPOTHETICALLY ADMITTED IN A MOTION TO DISMISS BASED ON JURISDICTIONAL GROUNDS. VI. THE ISSUANCE OF THE WRITS OF INJUNCTION IS NOT A DECISION ON THE MERITS OF THE PETITION BEFORE THE LOWER COURT.20 The petition is bereft of merit. In essence, the complaints in I.S. Nos. 93-508, 93-584 and 93-17942 charged private respondents with fraudulent tax evasion or wilfully attempting to evade or defeat payment of income tax, ad valorem tax and value-added tax for the year 1992, as well as for the years 1990-1991. The pertinent provisions of law involved are Sections 127(b) and 142(c) of the National Internal Revenue Code which state: Sec. 127. . . . (b) Determination of gross selling price of goods subject to ad valorem tax. -- Unless otherwise provided, the price, excluding the value-added tax, at which the goods are sold at wholesale in the place of production or through their sales agents to the public shall constitute the gross selling price. If the manufacturer also sells or allows such goods to be sold at wholesale price in another establishment of which he is the owner or in the profits at which he has an interest, the wholesale price in such establishment shall constitute the
gross selling price. Should such price be less than the costs of manufacture plus expenses incurred until the goods are finally sold, then a proportionate margin of profit, not less than 10% of such manufacturing costs and expenses, shall be added to constitute the gross selling price. Sec. 142. . . . (c) Cigarettes packed in twenties. -- There shall be levied, assessed and collected on cigarettes packed in twenties an ad valorem tax at the rates prescribed below based on the manufacturer's registered wholesale price. xxx
xxx
xxx
Private respondents contend that per Fortune's VAT returns, correct taxable sales for 1992 was in the amount of P11,736,658,580.00 which was the "manufacturer's registered wholesale price" in accordance with Section 142(c) of the Tax Code and paid the amount of P4,805,254,523 as ad valorem tax. On the other hand, petitioners allege, as specifically worded in the complaint in I.S. No. 93-508, that "based on the daily manufacturer's sworn statements submitted to the BIR by the Taxpayer (Fortune's) total taxable sales during the year 1992 is P16,686,372,295.00," as result of which Fortune "was able to evade the payment of ad valorem taxes in the aggregate amount of P5,792,479,816.24 . . ." Petitioners now argue that Section 127(b) lays down the rule that in determining the gross selling price of goods subject to ad valorem tax, it is the price, excluding the value-added tax, at which the goods are sold at wholesale price in the place of production or through their sales agents to the public. The registered wholesale price shall then be used for computing the ad valorem tax which is imposable upon removal of the taxable goods from the place of production. However, petitioners claim that Fortune used the "manufacturer's registered wholesale price" in selling the goods to alleged fictitious individuals and dummy corporations for the purpose of evading the payment of the correct ad valorem tax. There can be no question that under Section 127(b), the ad valorem tax should be based on the correct price excluding the value-added tax, at which goods are sold at wholesale in the place of production. It is significant to note that among the goods subject to ad valorem tax, the law -- specifically Section 142(c) -- requires that the corresponding tax on cigarettes shall be levied, assessed and collected at the rates based on the "manufacturer's registered wholesale price." Why does the wholesale price need to be registered and what is the purpose of the registration? The reason is self-evident, which is to ensure the payment of the correct taxes by the manufacturers of cigarettes through close supervision, monitoring and checking of the business operations of the cigarette companies. As pointed out by private respondents, no industry is as intensely supervised by the BIR and also by the National Tobacco Administration (NTA). Thus, the purchase and use of raw materials are subject to prior authorization and approval by the NTA. Importations of bobbins or cigarette paper, the manufacture, sale, and utilization of the same, are subject to BIR supervision and approval.21 Moreover, as pointed to by private respondents, for purposes of closer supervision by the BIR over the production of cigarettes, Revenue Enforcement Officers are detailed on a 24-hour basis in the premises of the manufacturer to secure production and removal of finished products. Composite Mobile Teams conduct counter-security on the business operations as well as the performance of the Revenue Enforcement Officers detailed thereat. Every transfer of any raw material is not allowed unless, in addition to the required permits, accompanied by Revenue Enforcement Officer. For the purpose of determining the "Manufacturer's Registered Wholesale Price" a cigarette manufacturer is required to file a Manufacturer's Declaration (BIR Form No. 31.03) for each brand of cigarette manufactured, stating: a) Materials, b) Labor; c) Overhead; d) Tax Burden and the Wholesale Price by Case. The data submitted therewith is verified by
the Revenue Officers and approved by the Commission of Internal Revenue. Any change in the manufacturer's registered wholesale price of any brand cannot be effected without submitting the corresponding Sworn Manufacturer's Declaration and verified by the Revenue Officer and approved by the Commissioner on Internal Revenue.22 The amount of ad valorem tax payments together with the Payment Order and Confirmation Receipt Nos. must be indicated in the sales and delivery invoices and together with the Manufacturer's Sworn Declarations on (a) the quantity of raw materials used during the day's operations; (b) the total quantity produced according to brand; and (c) the corresponding quantity removed during the day, the corresponding wholesale price thereof, and the VAT paid thereon must be presented to the corresponding BIR representative for authentication before removal. Thus, as observed by the trial court in its order of January 25, 1994 granting private respondents' prayer for the issuance of a writ of preliminary injunction, Fortune's registered wholesale price (was) duly approved by the BIR, which fact is not disputed by petitioners.23 Now, if every step in the production of cigarettes was closely monitored and supervised by the BIR personnel specifically assigned to Fortune's premises, and considering that the Manufacturer's Sworn Declarations on the data required to be submitted by the manufacturer were scrutinized and verified by the BIR and, further, since the manufacturer's wholesale price was duly approved by the BIR, then it is presumed that such registered wholesale price is the same as, or approximates "the price, excluding the value-added tax, at which the goods are sold at wholesale in the place production," otherwise, the BIR would not have approved the registered wholesale price of the goods for purposes of imposing the ad valorem tax due. In such case, and in the absence of contrary evidence, it was precipitate and premature to conclude that private respondents made fraudulent returns or wilfully attempted to evade payment of taxes due. "Wilful" means "premeditated; malicious; done with intent, or with bad motive or purpose, or with indifference to the natural consequence . . ."24 "Fraud" in its general sense, "is deemed to comprise anything calculated to deceive, including all acts, omissions, and concealment involving a breach of legal or equitable duty, trust or confidence justly reposed, resulting in the damage to another, or by which an undue and unconscionable advantage taken of another. 25 Fraud cannot be presumed. If there was fraud or wilful attempt to evade payment of ad valorem taxes by private respondents through the manipulation of the registered wholesale price of the cigarettes, it must have been with the connivance or cooperation of certain BIR officials and employees who supervised and monitored Fortune's production activities to see to it that the correct taxes were paid. But there is no allegation, much less evidence, of BIR personnel's malfeasance. In the very least, there is the presumption that the BIR personnel performed their duties in the regular course in ensuing the correct taxes were paid by Fortune.26 It is the opinion of both the trial court and respondent Court of Appeals, that before Fortune and the other private respondents could be prosecuted for tax evasion under Sections 253 and 255 of the Tax Code, the fact that the deficiency income, ad valorem and value-added taxes were due from Fortune for the year 1992 should first be established. Fortune received form the Commissioner of Internal Revenue the deficiency assessment notices in the total amount of P7,685,942,221.06 on August 24, 1993. However, under Section 229 of the Tax Code, the taxpayer has the right to move for reconsideration of the assessment issued by the Commissioner of Internal Revenue within thirty (30) days from receipt of the assessment; and if the motion for reconsideration is denied, it may appeal to the Court of Appeals within thirty (30) days from receipt of the Commissioner's decision. Here, Fortune received the Commissioner's assessment notice dated August 13, 1993 on August 24, 1993 asking for the payment of the deficiency taxes. Within thirty (30) days from receipt thereof, Fortune moved for reconsideration. The Commissioner has not resolved the request for reconsideration up to the present.
We share with the view of both the trial court and court of Appeals that before the tax liabilities of Fortune are first finally determined, it cannot be correctly asserted that private respondents have wilfully attempted to evade or defeat the taxes sought to be collected from Fortune. In plain words, before one is prosecuted for wilful attempt to evade or defeat any tax under Sections 253 and 255 of the Tax code, the fact that a tax is due must first be proved. Suppose the Commissioner eventually resolves Fortune's motion for reconsideration of the assessments by pronouncing that the taxpayer is not liable for any deficiency assessment, then, the criminal complaints filed against private respondents will have no leg to stand on. In view of the foregoing reasons, we cannot subscribe to the petitioners' thesis citing Ungad v. Cusi,27 that the lack of a final determination of Fortune's exact or correct tax liability is not a bar to criminal prosecution, and that while a precise computation and assessment is required for a civil action to collect tax deficiencies, the Tax Code does not require such computation and assessment prior to criminal prosecution. Reading Ungad carefully, the pronouncement therein that deficiency assessment is not necessary prior to prosecution is pointedly and deliberately qualified by the Court with following statement quoted from Guzik v. U.S.:28"The crime is complete when the violator has knowingly and wilfully filed a fraudulent return with intent to evade and defeat apart or all of the tax." In plain words, for criminal prosecution to proceed before assessment, there must be aprima facie showing of a wilful attempt to evade taxes. There was a wilful attempt to evade tax in Ungad because of the taxpayer's failure to declare in his income tax return "his income derived from banana sapplings." In the mind of the trial court and the Court of Appeals, Fortune's situation is quite apart factually since the registered wholesale price of the goods, approved by the BIR, is presumed to be the actual wholesale price, therefore, not fraudulent and unless and until the BIR has made a final determination of what is supposed to be the correct taxes, the taxpayer should not be placed in the crucible of criminal prosecution. Herein lies a whale of difference between Ungad and the case at bar. This brings us to the erroneous disquisition that private respondents' recourse to the trial court by way of special civil action of certiorari and prohibition was improper because: a) the proceedings before the state prosecutors (preliminary injunction) were far from terminated -- private respondents were merely subpoenaed and asked to submit counter affidavits, matters that they should have appealed to the Secretary of Justice; b) it is only after the submission of private respondents' counter affidavits that the prosecutors will determine whether or not there is enough evidence to file in court criminal charges for fraudulent tax evasion against private respondents; and c) the proper procedure is to allow the prosecutors to conduct and finish the preliminary investigation and to render a resolution, after which the aggrieved party can appeal the resolution to the Secretary of Justice. We disagree. As a general rule, criminal prosecutions cannot be enjoined. However, there are recognized exceptions which, as summarized in Brocka v. Enrile29 are: a. To afford adequate protection to the constitutional rights of the accused (Hernandez vs. Albano, et al., L-19272, January 25, 1967, 19 SCRA 95); b. When necessary for the orderly administration of justice or to avoid oppression or multiplicity of actions (Dimayuga, et al. vs. Fernandez, 43 Phil. 304; Hernandez vs. Albano, supra; Fortun vs. Labang, et al., L-38383, May 27, 1981, 104 SCRA 607); c. When there is a prejudicial question which is sub judice (De Leon vs. Mabanag, 70 Phil 202);
d. When the acts of the officer are without or in excess of authority (Planas vs. Gil, 67 Phil 62); e. Where the prosecution is under an invalid law, ordinance or regulation (Young vs. Rafferty, 33 Phil. 556; Yu Cong Eng vs. Trinidad, 47 Phil. 385, 389); f. When double jeopardy is clearly apparent (Sangalang vs. People and Alvendia, 109 Phil. 1140); g. Where the court had no jurisdiction over the offense (Lopez vs. City Judge, L-25795, October 29, 1966, 18 SCRA 616); h. Where it is a case of persecution rather than prosecution (Rustia vs. Ocampo, CA-G.R. No. 4760, March 25, 1960); i. Where the charges are manifestly false and motivated by the lust for vengeance (Recto vs. Castelo, 18 L.J. [1953], cited in Rano vs. Alvenia, CA-G.R. No. 30720-R, October 8, 1962; Cf. Guingona, et al. vs. City Fiscal, L-60033, April 4, 1984, 128 SCRA 577); and j. When there is clearly no prima facie case against the accused and a motion to quash on that ground has been denied (Salonga vs. Pane, et al., L-59524, February 18, 1985, 134 SCRA 438). In issuing the questioned orders granting the issuance of a writ of preliminary injunction, the trial court believed that said orders were warranted to afford private respondents adequate protection of their constitutional rights, particularly in reference to presumption of innocence, due process and equal protection of the laws. The trial court also found merit in private respondents' contention that preliminary injunction should be issued to avoid oppression and because the acts of the state prosecutors were without or in excess of authority and for the reason that there was a prejudicial question. Contrary to petitioners' submission, preliminary investigation may be enjoined where exceptional circumstances so warrant. In Hernandez v. Albano30 and Fortun v. Labang,31 injunction was issued to enjoin a preliminary investigation. In the case at bar, private respondents filed a motion to dismiss the complaint against them before the prosecution and alternatively, to suspend the preliminary investigation on the grounds cited hereinbefore, one of which is that the complaint of the Commissioner is not supported by any evidence to serve as adequate basis for the issuance of the subpoena to them and put them to their defense. Indeed, the purpose of a preliminary injunction is to secure the innocent against hasty, malicious and oppressive prosecution and to protect him from an open and public accusation of crime, from the trouble, expense and anxiety of a public trial and also to protect the state from useless and expensive trials. 32 Thus, the pertinent provisions of Rule 112 of the Rules of Court state: Sec. 3. Procedure. -- Except as provided for in Section 7 hereof, no complaint or information for an offense cognizable by the Regional Trial Court shall be filed without a preliminary investigation having been first conducted in the following manner: (a) The complaint shall state the known address of the respondent and be accompanied by affidavits of the complainant and his witnesses as well as other supporting documents, in such number of copies as there are respondents, plus two (2) copies for the official file. The said affidavits shall be sworn to before any fiscal, state prosecutor or government official authorized to administer oath, or, in their absence or unavailability, a notary public, who must certify that he personally examined the affiants and that he is satisfied that they voluntarily executed and understood their affidavits.
(b) Within ten (10) days after the filing of the complaint, the investigating officer shall either dismiss the same if he finds no ground to continue with the inquiry, or issue a subpoena to the respondent, attaching thereto a copy of the complaint, affidavits and other supporting documents. Within ten (10) days from receipt thereof, the respondent shall submit counteraffidavits and other supporting documents. He shall have the right to examine all other evidence submitted by the complainant. (c) Such counter-affidavits and other supporting evidence submitted by the respondent shall also be sworn to and certified as prescribed in paragraph (a) hereof and copies thereof shall be furnished by him to the complainant. (d) If the respondent cannot be subpoenaed, or if subpoenaed, does not submit counteraffidavits within the ten (10) day period, the investigating officer shall base his resolution on the evidence presented by the complainant. (e) If the investigating officer believes that there are matters to be clarified, he may set a hearing to propound clarificatory questions to the parties or their witnesses, during which the parties shall be afforded an opportunity to be present but without the right to examine or cross-examine. If the parties so desire, they may submit questions to the investigating officer which the latter may propound to the parties or witnesses concerned. (f) Thereafter, the investigation shall be deemed concluded, and the investigating officer shall resolve the case within ten (10) days therefrom. Upon the evidence thus adduced, the investigating officer shall determine whether or not there is sufficient ground to hold the respondent for trial. As found by the Court of Appeals, there was obvious haste by which the subpoena was issued to private respondents, just the day after the complaint was filed, hence, without the investigating prosecutors being afforded material time to examine and study the voluminous documents appended to the complaint for them to determine if preliminary investigation should be conducted. The Court of Appeals further added that the precipitate haste in the issuance of the subpoena justified private respondents' misgivings regarding the objectivity and neutrality of the prosecutors in the conduct of the preliminary investigation and so, the appellate court concluded, the grant of preliminary investigation by the trial court to afford adequate protection to private respondents' constitutional rights and to avoid oppression does not constitute grave abuse of discretion amounting to lack of jurisdiction. The complaint filed by the Commissioner on Internal Revenue states itself that the primary evidence establishing the falsity of the declared taxable sales in 1992 in the amount of P11,736,658,580.00 were the "daily Manufacturer's Sworn Statements" submitted by the taxpayer which would show that the total taxable sales in 1992 are in the amount of P16,686,372,295.00. However, the Commissioner did not present the "Daily Manufacturer's Sworn Statements" supposedly submitted to the BIR by the taxpayer, prompting private respondents to move for their production in order to verify the basis of petitioners' computation. Still, the Commissioner failed to produce the declarations. In Borja v. Moreno,33 it was held that the act of the investigator in proceeding with the hearing without first acting on respondents' motion to dismiss is a manifest disregard of the requirement of due process. Implicit in the opinion of the trial court and the Court of Appeals is that, if upon the examination of the complaint, it was clear that there was no ground to continue, with the inquiry, the investigating prosecutor was duty bound to dismiss the case. On this point, the trial court stressed that the prosecutor conducting the preliminary investigation should have allowed the production of the "Daily Manufacturer's Sworn Statements" submitted by Fortune without which there was no valid basis for the allegation that private respondents wilfully attempted to evade payment of the correct taxes. The prosecutors should also have produced the "Daily Manufacturer's Sworn Statements" by other
cigarette companies, as sought by private respondents, to show that these companies which had paid the ad valorem taxes on the same basis and in the same manner as Fortune were not similarly criminally charged. But the investigating prosecutors denied private respondents' motion, thus, indicating that only Fortune was singled out for prosecution. The trial court and the Court of Appeals maintained that at that stage of the preliminary investigation, where the complaint and the accompanying affidavits and supporting documents did not show any violation of the Tax Code providing penal sanctions, the prosecutors should have dismissed the complaint outright because of total lack of evidence, instead of requiring private respondents to submit their counter affidavits under Section 3(b) of Rule 112. We believe that the trial court in issuing its questioned orders, which are interlocutory in nature, committed no grave abuse of discretion amounting to lack of jurisdiction. There are factual and legal bases for the assailed orders. On the other hand, the burden is upon the petitioners to demonstrate that the questioned orders constitute a whimsical and capricious exercise of judgment, which they have not. For certiorari will not be issued to cure errors in proceedings or correct erroneous conclusions of law or fact. As long as a court acts within its jurisdiction, any alleged errors committed in the exercise of its jurisdiction will amount to nothing more than errors of judgment which are reviewable by timely appeal and not by a special civil action of certiorari. 34 Consequently, the Regional Trial Court acted correctly and judiciously, and as demanded by the facts and the law, in issuing the orders granting the writs of preliminary injunction, in denying petitioners' motion to dismiss and in admitting the supplemental petitions. What petitioners should have done was to file an answer to the petition filed in the trial court, proceed to the hearing and appeal the decision of the court if adverse to them. WHEREFORE, the instant petition is hereby DISMISSED. SO ORDERED. Hermosisima, Jr., J., concurs.
Separate Opinions
BELLOSILLO, J., concurring and dissenting: I am in full accord with the conclusion of the majority that the trial court committed no grave abuse of discretion in issuing the assailed injunctive writs. But I am constrained to dissent insofar as it finds that there was "selective prosecution" in charging private respondents. Let me first touch on "selective prosecution." There is no showing that petitioner Commissioner of Internal Revenue is not going after others who may be suspected of being big tax evaders and that only private respondents are being prosecuted, or even merely investigated, for tax evasion. As pointed out by the Solicitor General, assuming ex hypothesi that other corporate manufacturers are guilty of using similar schemes for tax evasion, the proper remedy is not the dismissal of the complaints against private respondents, but the prosecution of other similar evaders. In this regard, in the absence of willful or malicious prosecution, or so-called "selective prosecution," the choice on whom to prosecute ahead of the others belongs legitimately, and rightly so, to the public prosecutors.
But, I share the view of the majority that the trial court did not commit grave abuse of discretion amounting to lack of jurisdiction. At once it must be pointed out that the trial court merely issued writs of preliminary injunction. However to grant the prayer of herein petitioners would effectively dismiss the petition for certiorari and prohibition filed by private respondents with the trial court even before the issues in the main case could be joined, which seems to me to be a procedural lapse since the main case is already being resolved when the only issue before the Court is the propriety of the ancillary or provisional remedy. The trial court granted the writs of preliminary injunction upon finding, after hearing for the purpose, that private respondents sufficiently established that "they are entitled to certain constitutional rights and that these rights have been violated," 1 and that they have complied with the requirements of Sec. 3, Rule 58, Rules of Court.2 In support of its conclusion, the trial court enumerated its reasons: first, inspite of the motion of respondent Fortune Tobacco Corporation, petitioner Commissioner of Internal Revenue failed to present the "daily manufacturer's sworn statements submitted to the BIR by the taxpayer," supposedly stating that the total taxable sales of respondent Corporation for the year 1992 is P16,686,372,295.00, which is the basis of petitioner Commissioner's allegation that private respondents failed to pay the correct taxes since it declared in its VAT returns that its total taxable sales in 1992 was only P11,736,658.580.00; second, the proper application of Sec. 142, par. (c), of the National Internal Revenue Code is a prejudicial question which must first be resolved by the Court of Tax Appeals to determine whether a tax liability which is an essential element of tax evasion exists before criminal proceedings may be pursued; third, from the evidence submitted, it appears that the Bureau of Internal Revenue has not yet made a final determination of the tax liability of private respondents with respect to its ad valorem, value added and income taxes for 1992; and, fourth, the precipitate issuance by the prosecutors of subpoenas to private respondents one (1) day after the filing of the complaint, consisting of about 600 pages, inclusive of the 14-page complaint, 17-page joint affidavit of eight (8) revenue officers and the annexes attached thereto, and their hasty denial of private respondents' 135-page motion to dismiss, after a recess of only about 20 minutes, show that private respondents' constitutional rights may have been violated. These circumstances as well as the other traces of discrimination mentioned by the trial court, i.e., the announcement by the PCGG that it would take over the various corporations associated with respondent Lucio C. Tan; the creation of the Task Force on Revenue Cases among the functions of which is to "[i]nvestigate the tax liabilities of manufacturers that engage in well-known tax evasion schemes, such as selling products through dummy marketing companies to evade the payment of the correct internal revenue taxes," the very charge against respondent Tan; the reclassification of respondent corporation's best selling cigarettes as foreign brands thereby imposing upon them a higher tax rate that would price them out of the market without notice and hearing; the singling out of private respondents as subjects of a complaint for tax evasion when other cigarette manufacturers have been using the same basis private respondents are using in paying ad valorem, value added and income taxes; and, the failure of petitioner Commissioner to wait for the expiration of the 30-day period she herself gave to private respondents to pay the supposed tax deficiencies before the filing of the complaint, obviously impelled the trial court to issue the writ of preliminary injunction. Practically the same grounds were found by the trial court when it provisionally restrained the investigation of the two (2) other complaints, i.e., tax evasion complaints for FYs 1990 and 1991. On the basis of the findings of the trial court, it indeed appears that private respondents' constitutional rights to due process of law and equal protection of the laws may have been for the moment set aside, if not outright violated. The trial court was convinced that the tell-tale signs of malice and partiality were indications that the constitutional rights of private respondents may not have been afforded adequate protection. Accordingly I see no manifest abuse, much less grave, on the part of the trial court in issuing the injunctive writs. Thus it is my opinion that the trial court did not commit grave abuse of discretion in granting the assailed writs.
Well entrenched is the rule that the issuance of the writ of preliminary injunction as an ancillary or preventive remedy to secure the rights of a party in a pending case rests upon the sound discretion of the court hearing it. The exercise of sound judicial discretion by the trial court in injunctive matters should not be interfered with except in case of manifest abuse, 3 which is not true in the case before us. Equally well settled is that under Sec. 7, Rule 58, Rules of Court, 4 a wide latitude is given to the trial court. 5 This is because the conflicting claims in an application for a provisional writ more often than not involves a factual determination which is not the function of this Court, or even respondent appellate court. Thus in the case at bar the ascertainment of the actual tax liability, if any, based on the evidence already presented and still to be presented, is more within the competence of the trial court before which the parties have raised the very same issue in the main case. The truth or falsity of the divergent statements that there was deliberate haste in issuing the subpoenas and in denying private respondents' motion to dismiss may be confirmed not by this Court but by the trial court during that hearing on the merits. In fine, no grave abuse of discretion can be attributed to a judge or body in the issuance of a writ of preliminary injunction where a party was not deprived of its day in court as it was heard and had exhaustively presented all its arguments and defenses.6 It is undisputed that in the case before us petitioners and private respondents were given sufficient time and opportunity to present their respective pieces of evidence as well as arguments in support of their positions. Consequently, I concur with the finding of the majority that the trial court committed no grave abuse of discretion. As respondent appellate court said, "[g]rave abuse of discretion as a ground for issuance of writs of certiorari and prohibition implies capricious and whimsical exercise of judgment as is equivalent to lack of jurisdiction, or where the power is exercised in an arbitrary or despotic manner by reason of passion, prejudice or personal hostility amounting to an evasion of positive duty or to a virtual refusal to perform the duty enjoined, or to act at all in contemplation of law. 7 For such writs to lie there must be capricious, arbitrary and whimsical exercise of power, the very antithesis of the judicial prerogative in accordance with centuries of both civil and common law traditions." 8 The trial court, to my mind, is not guilty of any of these. Thus I accord respect to the exercise of the trial court's sound judicial discretion and hold that the same should not be interfered with. To permanently enjoin the trial court from proceeding in any manner in Civil Case No. Q-94-19790 and allow the preliminary investigation of the complaints docketed as I.S. Nos. 93-508, 93-17942 and 93-584 with the Department of Justice to resume until their final conclusion and completion would go against the prevailing rule that courts should avoid issuing a writ or preliminary injunction which would in effect dispose of the main case without trial.9 Due process considerations dictate that the assailed injunctive writs are not judgments on the merits but merely orders for the grant of a provisional and ancillary remedy to preserve the status quo until the merits of the case can be heard. The hearing on the application for issuance of a writ of preliminary injunction is separate and distinct from the trial on the merits of the main case. The quantum of evidence required for one is different from that for the other, so that it does not necessarily follow that if the court grants and issues the temporary writ applied for the same court will now have to rule in favor of the petition for prohibition and ipso facto make the provisional injunction permanent. If grave abuse of discretion attended the issuance of the writ of preliminary injunction, then by all means nullify the abusive act -- but only that. The main case should be allowed to proceed according to due process. The trial court should receive the evidence from the contending parties, weigh and evaluate the same and then make its findings. Clearly, the dismissal of the main case as a result of a mere incident relative to the issuance of an ancillary writ is procedurally awkward and violates due process, as it deprives private respondents of their right to present their case in court and support it with its evidence. In resolving the fundamental issue at hand, i.e., whether the trial court committed grave abuse of discretion in issuing the subject writs of preliminary injunction, we cannot avoid balancing on the scales the power of
the State to tax and its inherent right to prosecute perceived transgressors of the law on one side, and the constitutional rights of a citizen to due process of law and the equal protection of the laws on the other. Obviously the scales must tilt in favor of the individual, for a citizen's right is amply protected by the Bill of Rights of the Constitution. Thus while "taxes are the lifeblood of the government," the power to tax has its limits, inspite of all its plenitude. Hence in Commissioner of Internal Revenue v. Algue, Inc.,10 we said -Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved. xxx xxx xxx It is said that taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for the lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard-earned income to taxing authorities, every person who is able to must contribute his share in the running of the government. The government for its part is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power. But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts will then came to his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate . . . that the law has not been observed. In the instant case, it seems that due to the overzealousness in collecting taxes from private respondents and to some accident of immediate overwhelming interest which distressingly impassions and distorts judgment, the State has unwittingly ignored the citizens' constitutional rights. Thus even the rule that injunction will not lie to prevent a criminal prosecution has admitted exceptions, which we enumerated in Brocka v. Enrile11 and in Ocampo IV v. Ombudsman12 -- (a) to afford adequate protection to the constitutional rights of the accused; (b) when necessary for the orderly administration of justice or to avoid oppression or multiplicity of actions; (c) when there is a prejudicial question which is sub-judice; (d) when the acts of the officer are without or in excess of authority; (e) where the prosecution is under an invalid law, ordinance or regulation; (f) when double jeopardy is clearly apparent; (g) when the court has no jurisdiction over the offense; (h) where it is a case of persecution rather than prosecution; (i) where the charges are manifestly false and motivated by lust for vengeance; (j) when there is clearly no prima facie case against the accused and a motion to quash on that ground has been denied; and, (k) to prevent a threatened unlawful arrest. Finally, courts indeed should not hesitate to invoke the constitutional guarantees to give adequate protection to the citizens when faced with the enormous powers of the State, even when what is in issue are only provisional remedies, as in the case at hand. In days of great pressure, it is alluring to take short cuts by borrowing dictatorial techniques. But when we do, we set in motion an arbitrary or subversive influence by our own design which destroys us from within. Let not the present case dangerously sway towards that trend.
For all the foregoing, I vote to dismiss the instant petition for lack of merit, and to order the trial court to proceed with Civil Case No. Q-94-19790 with reasonable dispatch.
PADILLA, J., dissenting: Because of what I humbly perceive to be the crippling, chilling and fatal effects of the majority opinion on the power of the state to investigate fraudulent tax evasion in the country, I am constrained to dissent, as vigorously as I can, from the majority opinion. THE ISSUE The main issue in this petition for review on certiorari is whether or not there are valid grounds to stop or stay the preliminary investigation of complaints filed by the Bureau of Internal Revenue (BIR) with the Department of Justice (DOJ) Revenue Cases Task Force against private respondents for alleged fraudulent tax evasion for the years 1990, 1991 and 1992. Stated differently, the issue is: did respondent trial court commit grave abuse of discretion amounting to lack or excess of jurisdiction in stopping the subject preliminary investigation? THE CASE AND THE FACTS On 7 September 1993, petitioner Commissioner of Internal Revenue filed a complaint with the DOJ against private respondents Fortune Tobacco Corporation (hereinafter referred to simply as "Fortune"), its corporate officers, nine (9) other corporations, and their respective corporate officers, for alleged fraudulent tax evasion for the year 1992. The complaint, docketed as I.S. No. 93-508, was referred to the DOJ Task Force on Revenue Cases which found sufficient grounds to further investigate the allegation that Fortune fraudulently evaded payment of income, value-added and ad valorem taxes for the year 1992 thus depriving the Government of revenue allegedly in excess of seven and one-half (7 1/2) billion pesos. The fraudulent scheme allegedly adopted and employed by private respondents, is described by the BIR as follows: In order to evade payment of said taxes, [Fortune] made fictitious and simulated sales of its cigarette products to non-existent individuals and to entities incorporated and existing only for the purpose of such fictitious sales by declaring registered wholesale prices with the BIR lower than [Fortune's] actual wholesale prices which are required for determination of [Fortune's] correct ad valorem, income and value-added tax liabilities. These "ghost wholesale buyers" then ostensibly sold the product to consumers and other wholesalers/retailers at higher wholesale prices determined by [Fortune]. The tax returns and manufacturer's sworn statements filed by [Fortune] as aforesaid declare the fictitious sales it made to the conduit corporations and non-existent individual buyers as its gross sales.1 Based on the initial evaluation of the DOJ Task Force, private respondents were subpoenaed and required to submit their counter-affidavits not later than 20 September 1993. 2 Instead of filing counter-affidavits, private respondents filed a "Verified Motion to Dismiss; Alternatively, Motion to Suspend." 3 Said motion was denied by the DOJ Task Force and treated as private respondents' counter-affidavit, in an order dated 15 October 1993.4 Private respondents sought reconsideration of the aforementioned order of denial and likewise filed motions to require submission by the Bureau of Internal Revenue (BIR) of certain documents to support the
verified motion to dismiss or suspend the investigation, and for the inhibition of the state prosecutors assigned to the case for alleged lack of impartiality.5 On 20 December 1993, an omnibus order was issued by the investigating Task Force: 6 a. denying reconsideration; b. denying suspension of investigation; and c. denying the motion to inhibit the investigating state prosecutors. Thereupon, or on 4 January 1994, private respondents went to court. They filed a petition for certiorari and prohibition with prayer for preliminary injunction in the Regional Trial Court, Branch 88, Quezon City, praying that the proceedings (investigation) before the DOJ Task Force be stopped. The petition was docketed as Civil Case No. Q-94-19790.7 On 17 January 1994, petitioners filed with the trial court a motion to dismiss the aforesaid petition. 8 On 25 January 1994, the trial court issued instead an order granting the herein private respondents' prayer for a writ of preliminary injunction,9 to stop the preliminary investigation in the DOJ Revenue Cases Task Force. On 26 January 1994, private respondents filed with the trial court a Motion to Admit Supplemental Petition seeking this time the issuance of another writ of preliminary injunction against a second complaint of the BIR with the DOJ docketed as I.S. No. 93-17942 likewise against herein private respondents for fraudulent tax evasion for the year 1990. Private respondents averred in their aforesaid motion with the trail court that -a. no supporting documents nor copies of the complaint were attached to the subpoena in I.S. No. 9317942; b. the abovementioned subpoena violates private respondents' constitutional rights to due process, equal protection and presumption of innocence; c. I.S. No. 93-17942 is substantially the same as I.S. No. 93-508 except that it concerns the year 1990; d. no tax assessment has been issued by the Commissioner of Internal Revenue and since taxes already paid have not been challenged by the BIR, no tax liability exists; e. Assistant Quezon City Prosecutor Leopoldo E. Baraquia was a former classmate of then Presidential Legal Counsel Antonio T. Carpio, thus, he cannot conduct the preliminary investigation in an impartial manner. On 28 January 1994, private respondents filed with the trial court a second supplemental petition 10 this time seeking to stay the preliminary investigation in I.S. No. 93-548, a third BIR complaint with the DOJ against private respondents for fraudulent tax evasion for the year 1991. On 31 January 1994, the trial court admitted the two (2) supplemental petitions and issued a temporary restraining order stopping the preliminary investigation of the two (2) later complaints with the DOJ against private respondents for alleged fraudulent tax evasion for the years 1990 and 1991. On 7 February 1994, the trial court also issued an order denying herein petitioners' motion to dismiss private respondents' petition seeking to stay the preliminary investigation in I.S. No. 93-508. The trial court ruled that the issue of whether Sec. 127(b) of the National Internal Revenue (Tax) Code should be the basis of herein private respondents' tax liability, as contended by the Bureau of Internal Revenue, or whether it is Sec. 142(c) of the same code that applies, as argued by herein private respondents, should first be settled before any criminal complaint for fraudulent tax evasion can be initiated or maintained.
On 14 February 1994, the trial court issued a supplemental writ of preliminary injunction this time enjoining the preliminary investigations of the two (2) other BIR complaints with the DOJ for fraudulent tax evasion. The trial court then denied motions to dismiss the two (2) supplemental petitions, filed by therein respondents Commissioner of Internal Revenue and the DOJ Revenue Cases Task Force investigators. On 7 March 1994, herein petitioners filed with this Court a petition for certiorari and prohibition with prayer for preliminary injunction which questioned the orders issued by the trial court granting the private respondents' prayer for preliminary injunction to stop the preliminary investigation in the DOJ of the BIR's complaints for fraudulent tax evasions against private respondents and denying petitioners' motions to dismiss private respondents' various petitions with the trial court. The petition was referred by this Court to the Court of Appeals which has original concurrent jurisdiction over the petition. On 19 December 1994, the Court of Appeals rendered a decision which, in part, reads: In making such conclusion the respondent Court (the Regional Trial Court of Quezon City, Branch 88) must have understood from herein petitioner Commissioner's letter-complaint of 14 pages and the joint affidavit of eight revenue officers of 17 pages attached thereto and its annexes, that the charge against herein respondents is for tax evasion for non-payment by herein respondent Fortune of the correct amounts of income tax, ad valorem tax and value added tax, not necessarily "fraudulent tax evasion". Hence, the need for previous assessment of the correct amount by herein petitioner Commissioner before herein respondents may be charged criminally. Certiorari will not be issued to cure errors in proceedings or correct erroneous conclusions of law or fact. As long as a Court acts within its jurisdiction, any alleged error committed in the exercise of its jurisdiction, will amount to nothing more than errors of judgment which are reviewable by timely appeal and not by a special civil action of certiorari. The questioned orders issued after hearing being but interlocutory, review thereof by this court is inappropriate until final judgment is rendered, absent a showing of grave abuse of discretion on the part of the issuing court. The factual and legal issues involved in the main case still before the respondent Court are best resolved after trial. Petitioners, therefore, instead of resorting to this petition for certiorari and prohibition should have filed an answer to the petition as ordained in Section 4, Rule 16, in connection with Rule 11 of the Revised Rules of Court, interposing as defense or defenses the objection or objections raised in their motion to dismiss, then proceed to trial in order that thereafter the case may be decided on the merits by the respondent Court. In case of an adverse decision, they may appeal therefrom by which the entire record of the case would be elevated for review. Therefore, certiorari and prohibition resorted to by herein petitioners will not lie in view of the remedy open to them. Thus, the resulting delay in the final disposition of the case before the respondent Court would not have been incurred. Grave abuse of discretion as a ground for issuance of writs of certiorari and prohibition implies capricious and whimsical exercise of judgment as is equivalent to lack of jurisdiction, or where the power is exercised in an arbitrary or despotic manner by reason of passion, prejudice, or personal hostility, amounting to an evasion of positive duty or to a virtual refusal to perform the duty enjoined, or to act at all in contemplation of law. For such writs to lie, there must be capricious, arbitrary and whimsical exercise of power, the very antithesis of the judicial prerogative in accordance with centuries of both civil law and common law traditions. Certiorari and prohibition are remedies narrow in scope and inflexible in character. They are not general utility tools in the legal workshop. Their function is but limited to correction of defects of jurisdiction solely, not to be used for any other purpose,
such as to cure errors in proceedings or to correct erroneous conclusions of law or fact. Due regard for the foregoing teachings enunciated in the decision cited can not bring about a decision other than what has been reached herein. Needless to say, the case before the respondent Court involving those against herein respondents for alleged non-payment of the correct amount due as income tax, ad valorem tax and value-added tax for the years 1990, 1991, and 1992 is not ended by this decision. The respondent Court is still to try the case and decide it on the merits. All that is decided here is but the validity of the orders of the respondent Court granting herein respondents' application for preliminary injunction and denying herein, petitioners' motion to dismiss. If upon the facts established after trial and the applicable law, dissolution of the writ of preliminary injunction allowed to be issued by the respondent Court is called for and a judgment favorable to herein petitioners is demanded, the respondent Court is duty bound to render judgment accordingly. WHEREFORE, the instant petition for certiorari and prohibition with application for issuance of restraining order and writ of preliminary injunction is DISMISSED. Costs de officio. (references to annexes and citations omitted)11 Petitioners' motion for reconsideration of the aforequoted judgment was denied by respondent appellate court on 23 February 1995, hence, the present petition for review on certiorari based on the following grounds: GROUNDS FOR THE PETITION THE RESPONDENT COURTS COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN HOLDING THAT: I. THERE IS A PREJUDICIAL AND/OR LEGAL QUESTION TO JUSTIFY THE SUSPENSION OF THE PRELIMINARY INVESTIGATION II. PRIVATE RESPONDENTS' RIGHTS TO DUE PROCESS, EQUAL PROTECTION AND PRESUMPTION OF INNOCENCE WERE VIOLATED; ON THE CONTRARY, THE STATE ITSELF WAS DEPRIVED OF DUE PROCESS III. THE ADMISSION OF PRIVATE RESPONDENTS' SUPPLEMENTAL PETITIONS WERE PROPER IV. THERE WAS SELECTIVE PROSECUTION V THE FACTUAL ALLEGATIONS IN THE PETITION ARE HYPOTHETICALLY ADMITTED IN A MOTION TO DISMISS BASED ON JURISDICTIONAL GROUNDS VI. THE ISSUANCE OF THE WRITS OF INJUNCTION IS NOT A DECISION ON THE MERITS OF THE PETITION BEFORE THE LOWER COURT12 DISCUSSION At the outset, it should be pointed out that respondent appellate court's observations to the effect that herein petitioners' recourse to said court through a special civil action of certiorari and prohibition was improper (as discussed in the aforequoted portion of the CA decision) actually and appropriately apply to private respondents when they resorted to the remedy of certiorari and prohibition with application for preliminary injunction with the respondent Regional Trial Court to stop the preliminary investigation being conducted by the DOJ Revenue Cases Task Force of the BIR complaints for fraudulent tax evasion against private respondents. It is to be noted that the proceedings before the investigators (preliminary
investigation before the DOJ Revenue Cases Task Force) are far from terminated. In fact, private respondents were merely subpoenaed and asked to submit counter-affidavits. They instead resorted to the courts for redress after denial of their motion to dismiss. The proper procedure on the part of private respondents after their motion to dismiss was denied by the investigating panel, should have been an appeal from such an adverse resolution to the Secretary of Justice, not a special civil action for certiorari and prohibition with application for preliminary injunction before the respondent trial court. As a corollary, the respondent trial court should have desisted from entertaining private respondents' original petition for certiorari and prohibition with prayer for preliminary injunction because a court order to stop a preliminary investigation is an act of interference with the investigating officers' discretion, absent any showing of grave abuse of discretion on the part of the latter in conducting such preliminary investigation. The rule is settled that the fiscal (prosecutor) cannot be prohibited from conducting and finishing his preliminary investigation. 13 The private respondents' petition before the trial court in this case was clearly premature since the case did not fall within any of the exceptions when prohibition lies to stop a preliminary investigation.14 The decision of the majority in this case clearly constitutes an untenable usurpation of the primary duty and function of the prosecutors to conduct the preliminary investigation of a criminal offense and the power of the Secretary of Justice to review the resolution of said prosecutors. In Guingona, supra, the Court en banc ruled thus: "As a general rule, an injunction will not be granted to restrain a criminal prosecution". With more reason will injunction not lie when the case is still at the preliminary investigation stage. This Court should not usurp the primary function of the City Fiscal to conduct the preliminary investigation of the estafa charge and of the petitioners' countercharge for perjury, which was consolidated with the estafa charge. The City Fiscal's office should be allowed to finish its investigation and make its factual findings. This Court should not conduct the preliminary investigation. It is not a trier of facts. (Reference to footnotes omitted). Before resolving the main issue in this petition, as earlier stated in this opinion, several preliminary issues raised by private respondents in their "Verified Motion To Dismiss; Alternatively, Motion To Suspend" need to be addressed, namely: A.) Private respondent Fortune's right to due process and equal protection of the laws have been violated because of the subject preliminary investigation before the DOJ Revenue Cases Task Force. B.) Jurisdiction over Fortune's tax liability pertains to the Court of Tax Appeals and not the Regional Trial Courts, thus, the Department of Justice, through its state prosecutors, is without jurisdiction to conduct the subject preliminary investigation. C.) The complaints for fraudulent tax evasion are unsupported by any evidence to serve as basis for the issuance of a subpoena. D.) The lack of final determination of Fortune's tax liability precludes criminal prosecution. 1. On the alleged violation of Fortune's rights to due process and equal protection of the laws, I fail to see any violation of said rights. Fortune, its corporate officers, nine (9) other corporations and their respective corporate officers alleged by the BIR to be mere "dummies" or conduits of Fortune in the fraudulent tax evasion on the Government,
were given the opportunity to file their counter-affidavits to refute the allegations in the BIR complaints, together with their supporting documents. It is only after submission of counter-affidavits that the investigators will determine whether or not there is enough evidence to file in court criminal charges for fraudulent tax evasion against private respondents or to dismiss the BIR complaints. At this stage of the preliminary investigation, the constitutional right of private respondents to due process is adequately protected because they have been given the opportunity to be heard, i.e., to file counter-affidavits. Nor can it be said, as respondents falsely argue, that there was no ground or basis for requiring the private respondents to file such counter-affidavits. As respondent Court of Appeals admitted in its here assailed decision, the BIR complaint (1st complaint) signed by the Commissioner of Internal Revenue consisted of fourteen (14) pages supported by an annex consisting of seventeen (17) pages in the form of a joint affidavit of eight (8) revenue officers, to which were attached voluminous documents as annexes which, when put together, constituted a formidable network of evidence tending to show fraudulent tax evasion on the part of private respondents. When, on the basis of such BIR complaint and its supporting documents, the investigating Task Force saw a need to proceed with the inquiry and, consequently, required private respondents to file their counter-affidavits, grave abuse of discretion could hardly be imputed to said investigators. 2. On respondents' assertions that there is selective prosecution (no equal protection of the laws) since other corporations similarly situated as they are, are not being prosecuted and/or investigated, the argument is quite ludicrous, to say the least. As pointed out by the Solicitor General, more than one thousand (1,000) criminal cases for tax evasion have been filed in Metro Manila alone. This number, even if it seems to represent but a small fraction of "cases of actual tax evasion, undoubtedly show that respondents are not being singled out. It is of note that the memorandum issued by the President of the Philippines creating a task force to investigate tax evasion schemes of manufacturers was issued three (3) months before the complaints against private respondents were filed. This makes any charge of selective prosecution baseless since it could not then be shown, nor has it been shown by private respondents that only they (respondents) were being investigated/prosecuted. In fact, up to this time, respondents have failed to substantiate this allegation of selective prosecution against them. Moreover, assuming arguendo that other corporate manufacturers are guilty of using similar schemes for tax evasion, allegedly used by respondents, the Solicitor General correctly points out that the remedy is not dismissal of the complaints against private respondents or stoppage of the investigations of said complaints, but investigation and prosecution of other similar violators (fraudulent tax evaders). 3. Private respondents' allegations that the Assistant Quezon City Prosecutor (among those investigating the complaints against them) lacks impartiality, are so unsubstantiated, imaginary, speculative and indeed puerile. They need not be elaborately refuted as a mere denial would suffice under the circumstances. 4. On the issue of jurisdiction, the rule is settled that city and state prosecutors are authorized to conduct preliminary investigations of criminal offenses under the National Internal Revenue Code. Said criminal offenses are within the jurisdiction of the Regional Trial Court. 15 5. The issue of whether or not the evidence submitted by petitioners is sufficient to warrant the filing of criminal informations for fraudulent tax evasion is prematurely raised. 16 To argue, as private respondents do, that one piece of evidence, i.e. the Daily Manufacturer's Sworn Statements, should be produced at a particular stage of the investigation, in order to determine the probable guilt of the accused, is to dictate to the investigating officers the procedure by which evidence should be presented and examined. Further, "a preliminary investigation is not the occasion for the full and exhaustive display of the parties' evidence; it is for the presentation of such evidence only as may engender a well grounded belief that an offense has been committed and that the accused is probably guilty thereof . . ." 17
Besides, the preliminary investigation has not yet been terminated. The proper procedure then should be to allow the investigators, who undeniably have jurisdiction, to conduct and finish the preliminary investigation and to render a resolution. The party aggrieved by said resolution can then appeal it to the Secretary of Justice,18 as required by the settled doctrine of exhaustion of administrative remedies. What special qualification or privilege, I may ask, do private respondents have, particularly Fortune and Lucio Tan, as to exempt them from the operation of this rooted principle and entitle them to immediate judicial relief from the respondent trial court in this case? 6. The respondents Court of Appeals and the trial court maintain, as private respondents do, that a previous assessment of the correct amount of taxes due is necessary before private respondents may be charged criminally for fraudulent tax evasion. This view is decidedly not supported by law and jurisprudence. The lack of a final determination of respondent Fortune's exact or correct tax liability is not a bar to criminal prosecution for fraudulent tax evasion. While a precise computation and assessment is required for a civil action to collect a tax deficiency, the National Internal Revenue Code does not require such computation and assessment prior to criminal prosecution for fraudulent tax evasion. Thus, as this Court had earlier ruled -An assessment of a deficiency is not necessary to a criminal prosecution for willful attempt to defeat and evade the income tax. A crime is complete when the violator has knowingly and willfully filed a fraudulent return with intent to evade and defeat the tax. The perpetration of the crime is grounded upon knowledge on the part of the taxpayer that he has made an inaccurate return, and the government's failure to discover the error and promptly to assess has no connections with the commission of the crime. 19 It follows that, under the Ungab doctrine, the filing of a criminal complaint for fraudulent tax evasion would be proper even without a previous assessment of the correct tax. The argument that the Ungab doctrine will not apply to the case at bar because it involves a factual setting different from that of the case at bar, is erroneous. The Ungab case involved the filing of a fraudulent income tax return because the defendant failed to report his income derived from sale of banana saplings. In the case at bar, the complaints filed before the DOJ for investigation charge private wholesale respondents with fraudulent concealment of the actual price of products sold through declaration of registered wholesale prices lower than the actual wholesale prices, resulting in underpayment of income, ad valorem, and value-added taxes. Both cases involve, therefore, fraudulent schemes to evade payment to the Government of correct taxes. The Court in Ungab stated further as follows: The petitioner also claims that the filing of the informations was precipitate and premature since the Commissioner of Internal Revenue has not yet resolved his protests against the assessment of the Revenue District Officer; and that he was denied recourse to the Court of Tax Appeals. The contention is without merit. What is involved here is not the collection of taxes where the assessment of the Commissioner of Internal Revenue may be reviewed by the Court of Tax Appeals, but a criminal prosecution for violations of the National Internal Code which is within the cognizance of courts of first instance. While there can be no civil action to enforce collection before the assessment procedures provided in the Code have been followed, there is no requirement for the precise computation and assessment of the tax before there can be a criminal prosecution under the Code.
The contention is made, and is here rejected, that an assessment of the deficiency tax due is necessary before the taxpayer can be prosecuted criminally for the charges preferred. The crime is complete when the violator has, as in this case, knowingly and wilfully filed fraudulent returns with intent to evade and defeat a part or all of the tax . [Guzik vs. U.S., 54 F2d 618] (emphasis supplied) The ruling in the Ungab case is undisputably on all fours with, and conclusive to the case at bar. It should be stressed and pointed out that in Ungab the Court denied the prayer of therein petitioner to quash informations for tax evasion that had already been filed in court. In other words, the prosecutors in Ungab had already found probable cause to try therein petitioner for tax evasion. Despite this fact there was no finding by the Court of violation of any of petitioner's constitutional rights. In the present case, private respondents were merely being required to submit counter-affidavits to the complaints filed. If no violation of constitutional rights was committed in Ungab, upon the filing of the criminal informations in Court, how can there now be a violation of private respondents' constitutional rights upon a requirement by the investigators that private respondents submit their counter-affidavits. The Court has not been presented any compelling or persuasive argument why the Ungab doctrine has to be abandoned. It is good law and should be the nemesis of fraudulent tax evaders. It gives teeth to the proper enforcement of our tax laws. 7. Private respondents argue that a case earlier file before the Court of Tax Appeals (CTA) and now before this Court 20 involves a prejudicial question justifying or requiring suspension of the preliminary investigation of the complaints for fraudulent tax evasion against private respondents. Said case involves the validity of BIR Revenue Memorandum Circular No. 37-93 dated 1 July 1993 which reclassified cigarettes manufactured by respondent Fortune. The circular subjects cigarettes with brand names "Hope", "More" and "Champion" to a 10% increase in ad valorem taxes starting 2 July 1993. Respondent Fortune has assailed the validity of said revenue circular and the case has yet to be decided with finality. But the foregoing issue is irrelevant to the issue of fraudulent tax evasion involved in this case. A final decision either upholding or nullifying the aforementioned revenue circular will not affect private respondents' criminal liability for fraudulent tax evasion, for the following reasons: a) The revenue circular involved in the other case pertains to ad valorem taxes on sales of Fortune's named cigarette brands after 1 July 1993 while the fraudulent tax evasion involved in the present case pertains to years 1990, 1991 and 1992. b) The fraudulent scheme allegedly utilized by Fortune and its dummies, as described in the BIR complaints pending with the DOJ Revenue Cases Task Force, which resulted in the misdeclaration/underdeclaration of Fortune's gross sales receipts resulting in turn in underpayment of ad valorem, value-added and income taxes was actually a "built-in" tax evasion device already in place even before the assailed revenue circular was issued. The scheme is particularly designed to result in the underpayment of ad valorem, value-added and income taxes regardless of the tax rate fixed by the government on cigarette products. 8. Respondents also argue that the issue of whether Section 127(b) or Section 142(c) of the National Internal Revenue Code is applicable to private respondents should first be settled before any criminal cases can be filed against them. This argument is both misleading and erroneous. The aforementioned provisions read: Sec. 127. . . .
(b) Determination of gross selling price of goods subject to ad valorem tax. -- Unless otherwise provided, the price, excluding the value-added tax, at which the goods are sold at wholesale in the place of production or through their sales agents to the public shall constitute the gross selling price. If the manufacturer also sells or allows such goods to be sold at wholesale price in another establishment of which he is the owner or in the profits at which he has an interest, the wholesale price in such establishment shall constitute the gross selling price. Should such price be less than the cost of manufacture plus expenses incurred until the goods are finally sold, then a proportionate margin of profit, not less than 10% of such manufacturing cost and expenses, shall be added to constitute the gross selling price. Sec. 142 . . . (c) Cigarettes packed in twenties. -- There shall be levied, assessed and collected on cigarettes packed in twenties an ad valorem tax at the rates prescribed below based on the manufacturer's registered wholesale price: (1) On locally manufactured cigarettes bearing a foreign brand, fifty-five percent (55%): Provided, That this rate shall apply regardless of whether or not the right to use or title to the foreign brand was sold or transferred by its owner to the local manufacturer. Whenever it has to be determined whether or not a cigarette bears a foreign brand, the listing of brands manufactured in foreign countries appearing in the current World Tobacco Directory shall govern. (2) On other locally manufactured cigarettes, forty-five percent (45%). Duly registered or existing brands of cigarettes packed in twenties shall not be allowed to be packed in thirties. When the existing registered wholesale price, including tax, of cigarettes packed in twenties does not exceed P4.00 per pack, the rate shall be twenty percent (20%). As the Solicitor General correctly points out, the two (2) aforequoted provisions of the Tax Code are both applicable in determining the amount of tax due. Section 127(b) provides for the method of determining the gross wholesale price to be registered with the BIR while Section 142(c) provides for the rate of ad valorem tax to be paid. Said rate is expressed as a percentage of the registered gross selling price which is determined, in turn, based on Section 127(b). The aforementioned two (2) provisions of the Tax Code are certainly not determinative of private respondents' criminal liability, if any. A reading of the BIR complaints pending with the DOJ Revenue Cases Task Force shows that private respondent Fortune is being accused of using "dummy" corporations and business conduits as well as non-existent individuals and entities to enable the company (Fortune) to report gross receipts from sales of its cigarette brands lower than gross receipts which are actually derived from such sales. Such lower gross receipts of the company, as reported by respondent Fortune thus result in lower ad valorem, value-added and income taxes paid to the government. Stated a little differently, respondent Fortune is accused of selling at wholesale prices its cigarette brands through dummy entities in the profits of which it has a controlling interest. Under Section 127(b), the gross selling price of the goods should be the wholesale price of such dummy -- entities to its buyers but it is alleged by the government that respondent Fortune has purposely made use of such entities to evade payment of higher but legally correct taxes. 9. As to respondents' additional claim that with regard to ad valorem tax, they merely based their liability on the wholesale price registered with the Bureau of Internal Revenue (BIR) following the method used by all
cigarette manufacturers, said claim cannot absolve Fortune and its officers from criminal liability. 21 Payment of ad valoremand other taxes based on the wholesale price registered with the BIR presupposes and naturally assumes that the registered wholesale price correspond to the actual wholesale prices at which the manufacturer sells the product. If a manufacturer makes use of a method or device to make it appear that products are sold at a wholesale price lower than the amounts that the manufacturer actually realizes from such wholesale of its products, as what respondent Fortune is accused of doing, through the use of dummy entities, then there arises criminal liability under the penal provisions of the Tax Code. This is clear from Section 127(b) aforequoted in relation to the penal provisions of the Tax Code. 10. Private respondents contend that the registration with the BIR of manufacturer's wholesale price and the corresponding close supervision and monitoring by BIR officials of the business operations of cigarette companies, ensure payment of correct taxes. The argument is baseless. It does not follow that the cited procedure is a guarantee against fraudulent schemes resorted to by tax-evading individuals or entities. It only indicates that taxpayers bent on evading payment of taxes would explore more creative devices or mechanisms in order to defraud the government of its sources of income even under its very nose. It is precisely to avoid and detect cases like this that the President issued a Memorandum on 1 June 1993 creating a task force to investigate tax liabilities of manufacturers engaged in tax evasion schemes, such as selling products through dummy marketing companies at underdeclared wholesale prices registered with the BIR. Moreover, the Manufacturer's Declaration which is the basis for determining the "Manufacturer's Registered Wholesale Price" (which in turn becomes the basis for the imposition of ad valorem tax), even if verified by revenue officers and approved by the Commissioner of Internal Revenue, does not necessarily reflect the actual wholesale price at which the cigarettes are sold. This is why manufacturers are still required to file other documents, like the "daily manufacturer's sworn statements" in order to assist in determining whether or not correct taxes have been paid. In fine, even if BIR officials may have verified Fortunes' BIR registered wholesale price for its products, the same does not estop or preclude the Government from filing criminal complaints for fraudulent tax evasion based on evidence subsequently gathered to the effect that such BIR registered wholesale prices were a misdeclaration or underdeclaration of the actual wholesale price. It is hornbook law that the Government is not bound or estopped by the mistakes, inadvertence, and what more, connivance of its officials and employees with fraudulent schemes to defraud the Government. 22 Even on the assumption that official duty of BIR officials and employees has been regularly performed, the allegations in the complaints are clear enough in that private respondents allegedly made use of schemes to make it appear that respondent Fortune's tax liabilities are far less than what it (Fortune) should be actually liable for under the law. The very nature of the offense for which respondents are being investigated, certainly makes regularity/irregularity in the performance of official duties irrelevant. It should also be pointed out that the offense allegedly committed by private respondents' consists in' the intentional use of "dummy" entities to make it appear that respondent Fortune sells its products at lower wholesale prices, which prices would correspond to the wholesale prices registered by Fortune with the BIR, but not to the prices at which its products are sold by Fortune's dummies. The difference between Fortune's BIR-reported wholesale prices and the prices at which its dummies sell Fortune's products thus constitutes amounts for which Fortune should actually incur tax liabilities but for which it allegedly never paid taxes because of the operation of the tax evasion scheme founded on a combined underdeclaration with the BIR of Fortune's wholesale price of its products and the sale of such products to is "dummy" corporations or to non- existing individuals or entities. This is the obvious reason why the government has sought to investigate the alleged tax evasion scheme purportedly utilized by respondent Fortune and its dummy corporations.
Based on the foregoing discussions, it follows that the answer to the main issue formulated earlier in this opinion is in the negative since the private respondents have not shown that there exist, in this case, exceptional grounds removing it from the general rule that preliminary investigations of criminal offenses and criminal prosecutions cannot be stayed or enjoined by the courts. 23 11. The trial court's ruling that private respondents' constitutional rights have been violated, rests on untenable grounds. It must be remembered, in this connection, that exceptions to a settled rule, by their nature, must be strictly applied. And any claim to an exception must be fully substantiated. In other words, it must have real basis for existing. The exceptions to the general rule against restraining orders or injunctions to stop preliminary investigations or criminal prosecutions are enumerated in Brocka vs. Enrile.24 One specific exception is when an injunction is needed for the adequate protection of the accused's constitutional rights. The exception definitely does not apply in the case at bar. Before proceeding to illustrate this point, it is important to stress that in a preliminary investigation, the investigating officers' sole duty is to determine, before the presentation of evidence by the prosecution and by the defense, if the latter should wish to present any, whether or not there are reasonable grounds for proceeding formally against the accused. 25 This is in conformity with the purpose of a preliminary investigation which is to secure the innocent against hasty, malicious, and oppressive prosecutions, and to protect him from an open and public accusation of crime, from the trouble, expense and anxiety of public trial, and also to protect the state from useless and expensive trials. 26 As restated by the illustrious late Chief Justice Manuel V. Moran -. . . the purpose of a preliminary investigation is to afford the accused an opportunity to show by his own evidence that there is no reasonable ground to believe that he is guilty of the offense charged and that, therefore, there is no good reason for further holding him to await trial in the Court of First Instance.27 Prescinding from the tenets above-discussed, it is clear from the inception that there had been no violation of private respondents' constitutional rights to presumption of innocence, due process and equal protection of the laws. The preliminary investigation, I repeat, has not yet been terminated. At this stage, only the complainant has finished presenting its affidavits and supporting documents. Obviously then, the investigating panel found that there were grounds to continue with the inquiry, hence, the issuance of subpoena and an order for the submission of counter-affidavits by private respondents. Instead of filing counter-affidavits, private respondents filed a Verified Motion to Dismiss; Alternatively, Motion to Suspend. At this point, it may be asked, how could private respondents' constitutional right to presumption of innocence be violated when, in all stages of the preliminary investigation, they were presumed innocent? Declaring that there are reasonable grounds to continue with the inquiry is not the same as pronouncing that a respondent is guilty or probably guilty of the offense charged. 12. Private respondents cannot also claim that they were not afforded due process and equal protection of the laws. In fact, the investigating panel was concerned with just that when it ordered the submission of private respondents' counter-affidavits. This procedure afforded private respondents the opportunity to show by their own evidence that no reasonable grounds exist for the filing of informations against them. Furthermore, contrary to the findings of the trial court and the Court of Appeals, the alleged haste by which the subpoena was issued to private respondents (the day after the filing of the 600-page annexed complaint) does not lessen the investigating panel's ability to study and examine the complainant's evidence. Neither does such act merit the conclusion that the investigating panel was less than objective in conducting the preliminary investigation. Consequently, the general and settled rule must apply that the courts cannot interfere with the discretion of the investigating officer to determine the specificity and
adequacy of the averments in the complaint filed, except in very exceptional circumstances, 28 which do not obtain here. Therefore, private respondents' act of filing a petition for certiorari and prohibition before the Regional Trial Court was rather untimely and uncalled for, not only because private respondents failed to exhaust their administrative remedies but also because the grounds cited in their petition before the trial court were highly speculative -- more fancied than real. Finally, Hernandez v. Albano (19 SCRA 95), cited by the majority to support the conclusion that preliminary investigation can be stayed by the courts, clearly states that preliminary investigation can be stayed by court order only in extreme cases. Hernandez also states that: By statute, the prosecuting officer of the City of Manila and his assistants are empowered to investigate crimes committed within the city's territorial jurisdiction. Not a mere privilege, it is the sworn duty of a Fiscal to conduct an investigation of a criminal charge filed with his office. The power to investigate postulates the other obligation on the part of the Fiscal to investigate promptly and file the case of as speedily. Public interest -- the protection of society -so demands. Agreeably to the foregoing, a rule -- now of long standing and frequent application -- was formulated that ordinarily criminal prosecution may not be blocked by court prohibition or injunction. Really, if at every turn investigation of a crime will be halted by a court order, the administration of criminal justice will meet with an undue setback. Indeed, the investigative power of the Fiscal may suffer such a tremendous shrinkage that it may end up in hollow sound rather than as a part and parcel of the machinery of criminal justice. It should be noted that while Hernandez lays down the extreme grounds when preliminary investigation of criminal offenses may be restrained by the courts, the dispositive portion of the decision affirmed the decision of the trial court dismissing a petition for certiorari and prohibition with prayer for preliminary injunction filed to stay the preliminary investigation of criminal complaints against petitioner Hernandez. The other case cited by the majority to support its decision in this case, Fortun v. Labang29 involves criminal complaints filed against a judge of the Court of First Instance by disgruntled lawyers who had lost their cases in the judge's sala. Clearly, the basis for the Court to stay preliminary investigation in Fortun was a finding that said complaints were filed merely as a form of harassment against the judge and which "could have no other purpose than to place petitioner-judge in contempt and disrepute". The factual situation in the case at bar is poles apart from the factual situation in Fortun. Further, in Fortun there was an express finding by the Court that complaints against judges of the Courts of First Instance are properly filed with the Supreme Court under Executive Order No. 264 (1970) since the Court is considered as the department head of the judiciary. In the present case it cannot be disputed that jurisdiction to conduct preliminary investigation over fraudulent tax evasion cases lies with the state prosecutors (fiscals). It cannot therefore be denied that neither Hernandez nor Fortun supports with any plausibility the majority's disposition of the issues in the present case. On the other hand, it appears to me all too clearly that the majority opinion, in this case, has altered the entire rationale and concept of preliminary investigation of alleged criminal offenses. That alteration has, of course, served the purposes of distinguished private respondents. But I will have no part in the shocking process especially in light of the fact that Government cries out that the people have been cheated and defrauded of their taxes to the tune allegedly of P25.6 billion pesos, and yet, it is not given by this Court even a beggar's chance to prove it!
13. There is great and vital public interest in the successful investigation and prosecution of criminal offenses involving fraudulent tax evasion. Said public interest is much more compelling in the present case since private respondents are not only accused of violating tax and penal laws but are also, as a consequence of such violations, possibly depriving the government of a primary source of revenue so essential to the life, growth and development of the nation and for the prestation of essential services to the people. 14. It should be made clear, at this point, however, that this opinion is not a pre-judgment or predetermination of private respondents' guilt of the offense charged. No one, not even the prosecutors investigating the cases for fraudulent tax evasion, is, at this stage of the proceedings, when private respondents have yet to file their counter-affidavits, in a position to determine and state with finality or conclusiveness whether or not private respondents are guilty of the offense charged in the BIR complaints, now with the DOJ Revenue Cases Task Force. It is precisely through the preliminary investigation that the DOJ Task Force on Revenue Cases can determine whether or not there are grounds to file informations in court or to dismiss the BIR complaints. 15. I see no grave abuse of discretion committed by the state prosecutors in requiring private respondents to submit counter-affidavits to the complaints for fraudulent tax evasion and to determine the existence or absence of probable criminal liability. The Rules on Criminal Procedure do not even require, as a condition sine qua non to the validity of a preliminary investigation, the presence of the respondent as long as efforts to reach him are made and an opportunity to controvert the complainant's evidence is accorded him. The purpose of the rule is to check attempts of unscrupulous respondents to thwart criminal investigations by not appearing or employing dilatory tactics.30 16. Since the preliminary investigation in the DOJ Revenue Cases Task Force against private respondents for alleged fraudulent tax evasion is well within its jurisdiction and constitutes no grave abuse of discretion, it was in fact the respondent trial court that committed grave abuse of discretion, amounting to lack or excess of jurisdiction, when it stayed such preliminary investigation. 17. The successful prosecution of criminal offenders is not only a right but the duty of the state. Only when the state's acts clearly violate constitutional rights can the courts step in to interfere with the state's exercise of such right and performance of such duty. I am indubitably impressed that there is no violation of private respondents' constitutional rights in this case. 18. Lastly, the consolidation of the three (3) complaints in the DOJ against private respondents should be allowed since they all involve the same scheme allegedly used by private respondents to fraudulently evade payment of taxes. Consolidation will not only avoid multiplicity of suits but will also enable private respondents to more conveniently prepare whatever responsive pleadings are required or expected of them. It is, therefore, my considered view that the decision of the Court of Appeals of 19 December 1994 in CA G.R. SP No. 33599 should be SET ASIDE. The respondent trial court should be ENJOINED from proceeding in any manner in Civil Case No. Q-94-19790, or at least until further orders from this Court. The preliminary investigation of the BIR complaints docketed as I.S. Nos. 93-508, 93-17942 and 93-584 with the Department of Justice Revenue Cases Task Force, being constitutionally and legally in order, should be allowed to resume until their final conclusion or completion, with private respondents given a non-extendible period of ten (10) days from notice to submit to the investigating panel their respective counter-affidavits and supporting documents, if any.
VITUG, J., dissenting: I see in the petition the overriding issue of whether or not judicial relief could be resorted to in order to stop state prosecutors from going through with their investigation of complaints lodged against private respondents. Almost invariably, this Court has resolved not to unduly interfere, let alone to peremptorily prevent, the prosecuting agencies or offices of the government in their investigatorial work or in their own evaluation of the results of investigation. It would indeed be, in my view, an act precipitate for the courts to take on a case even before the complaint or information is filed by the prosecution. Of course, one cannot preclude the possibility that at times compelling reasons may dictate otherwise; I do not think, however, that the instant case could be the right occasion for it. While I do understand the concern expressed by some of my colleagues, i.e., that stopping the trial court from now proceeding with Civil Case No. Q-94-9170 would, effectively, mean a disposition of the main case without its merits having first been fully heard in the court below, in this particular situation before the Court, however, the parties have since exhaustively and adequately presented their respective cases. In the interest of good order, the practical measure of enjoining the trial court from taking further cognizance of the case would not thus appear to be really all that unwarranted. A final word: The matter affecting the civil liability for the due payment of internal revenue taxes, including the applicable remedies and proceedings in the determination thereof, must be considered apart from and technically independent of the criminal aspect that may be brought to bear in appropriate cases. A recourse in one is not necessarily preclusive of, nor would the results thereof be conclusive on, the other. Accordingly, I vote to grant the petition.
Separate Opinions BELLOSILLO, J., concurring and dissenting: I am in full accord with the conclusion of the majority that the trial court committed no grave abuse of discretion in issuing the assailed injunctive writs. But I am constrained to dissent insofar as it finds that there was "selective prosecution" in charging private respondents. Let me first touch on "selective prosecution." There is no showing that petitioner Commissioner of Internal Revenue is not going after others who may be suspected of being big tax evaders and that only private respondents are being prosecuted, or even merely investigated, for tax evasion. As pointed out by the Solicitor General, assuming ex hypothesi that other corporate manufacturers are guilty of using similar schemes for tax evasion, the proper remedy is not the dismissal of the complaints against private respondents, but the prosecution of other similar evaders. In this regard, in the absence of willful or malicious prosecution, or so-called "selective prosecution," the choice on whom to prosecute ahead of the others belongs legitimately, and rightly so, to the public prosecutors. But, I share the view of the majority that the trial court did not commit grave abuse of discretion amounting to lack of jurisdiction. At once it must be pointed out that the trial court merely issued writs of preliminary injunction. However to grant the prayer of herein petitioners would effectively dismiss the petition for certiorari and prohibition filed by private respondents with the trial court even before the issues in the main case could be joined, which seems to me to be a procedural lapse since the main case is already being resolved when the only issue before the Court is the propriety of the ancillary or provisional remedy. The trial court granted the writs of preliminary injunction upon finding, after hearing for the purpose, that private respondents sufficiently established that "they are entitled to certain constitutional rights and that these rights have been violated," 1 and that they have complied with the requirements of Sec. 3, Rule 58,
Rules of Court.2 In support of its conclusion, the trial court enumerated its reasons: first, inspite of the motion of respondent Fortune Tobacco Corporation, petitioner Commissioner of Internal Revenue failed to present the "daily manufacturer's sworn statements submitted to the BIR by the taxpayer," supposedly stating that the total taxable sales of respondent Corporation for the year 1992 is P16,686,372,295.00, which is the basis of petitioner Commissioner's allegation that private respondents failed to pay the correct taxes since it declared in its VAT returns that its total taxable sales in 1992 was only P11,736,658.580.00; second, the proper application of Sec. 142, par. (c), of the National Internal Revenue Code is a prejudicial question which must first be resolved by the Court of Tax Appeals to determine whether a tax liability which is an essential element of tax evasion exists before criminal proceedings may be pursued; third, from the evidence submitted, it appears that the Bureau of Internal Revenue has not yet made a final determination of the tax liability of private respondents with respect to its ad valorem, value added and income taxes for 1992; and, fourth, the precipitate issuance by the prosecutors of subpoenas to private respondents one (1) day after the filing of the complaint, consisting of about 600 pages, inclusive of the 14-page complaint, 17-page joint affidavit of eight (8) revenue officers and the annexes attached thereto, and their hasty denial of private respondents' 135-page motion to dismiss, after a recess of only about 20 minutes, show that private respondents' constitutional rights may have been violated. These circumstances as well as the other traces of discrimination mentioned by the trial court, i.e., the announcement by the PCGG that it would take over the various corporations associated with respondent Lucio C. Tan; the creation of the Task Force on Revenue Cases among the functions of which is to "[i]nvestigate the tax liabilities of manufacturers that engage in well-known tax evasion schemes, such as selling products through dummy marketing companies to evade the payment of the correct internal revenue taxes," the very charge against respondent Tan; the reclassification of respondent corporation's best selling cigarettes as foreign brands thereby imposing upon them a higher tax rate that would price them out of the market without notice and hearing; the singling out of private respondents as subjects of a complaint for tax evasion when other cigarette manufacturers have been using the same basis private respondents are using in paying ad valorem, value added and income taxes; and, the failure of petitioner Commissioner to wait for the expiration of the 30-day period she herself gave to private respondents to pay the supposed tax deficiencies before the filing of the complaint, obviously impelled the trial court to issue the writ of preliminary injunction. Practically the same grounds were found by the trial court when it provisionally restrained the investigation of the two (2) other complaints, i.e., tax evasion complaints for FYs 1990 and 1991. On the basis of the findings of the trial court, it indeed appears that private respondents' constitutional rights to due process of law and equal protection of the laws may have been for the moment set aside, if not outright violated. The trial court was convinced that the tell-tale signs of malice and partiality were indications that the constitutional rights of private respondents may not have been afforded adequate protection. Accordingly I see no manifest abuse, much less grave, on the part of the trial court in issuing the injunctive writs. Thus it is my opinion that the trial court did not commit grave abuse of discretion in granting the assailed writs. Well entrenched is the rule that the issuance of the writ of preliminary injunction as an ancillary or preventive remedy to secure the rights of a party in a pending case rests upon the sound discretion of the court hearing it. The exercise of sound judicial discretion by the trial court in injunctive matters should not be interfered with except in case of manifest abuse, 3 which is not true in the case before us. Equally well settled is that under Sec. 7, Rule 58, Rules of Court, 4 a wide latitude is given to the trial court. 5 This is because the conflicting claims in an application for a provisional writ more often than not involves a factual determination which is not the function of this Court, or even respondent appellate court. Thus in the case at bar the ascertainment of the actual tax liability, if any, based on the evidence already presented and still to be presented, is more within the competence of the trial court before which the parties have raised the
very same issue in the main case. The truth or falsity of the divergent statements that there was deliberate haste in issuing the subpoenas and in denying private respondents' motion to dismiss may be confirmed not by this Court but by the trial court during that hearing on the merits. In fine, no grave abuse of discretion can be attributed to a judge or body in the issuance of a writ of preliminary injunction where a party was not deprived of its day in court as it was heard and had exhaustively presented all its arguments and defenses.6 It is undisputed that in the case before us petitioners and private respondents were given sufficient time and opportunity to present their respective pieces of evidence as well as arguments in support of their positions. Consequently, I concur with the finding of the majority that the trial court committed no grave abuse of discretion. As respondent appellate court said, "[g]rave abuse of discretion as a ground for issuance of writs of certiorari and prohibition implies capricious and whimsical exercise of judgment as is equivalent to lack of jurisdiction, or where the power is exercised in an arbitrary or despotic manner by reason of passion, prejudice or personal hostility amounting to an evasion of positive duty or to a virtual refusal to perform the duty enjoined, or to act at all in contemplation of law. 7 For such writs to lie there must be capricious, arbitrary and whimsical exercise of power, the very antithesis of the judicial prerogative in accordance with centuries of both civil and common law traditions." 8 The trial court, to my mind, is not guilty of any of these. Thus I accord respect to the exercise of the trial court's sound judicial discretion and hold that the same should not be interfered with. To permanently enjoin the trial court from proceeding in any manner in Civil Case No. Q-94-19790 and allow the preliminary investigation of the complaints docketed as I.S. Nos. 93-508, 93-17942 and 93-584 with the Department of Justice to resume until their final conclusion and completion would go against the prevailing rule that courts should avoid issuing a writ or preliminary injunction which would in effect dispose of the main case without trial.9 Due process considerations dictate that the assailed injunctive writs are not judgments on the merits but merely orders for the grant of a provisional and ancillary remedy to preserve the status quo until the merits of the case can be heard. The hearing on the application for issuance of a writ of preliminary injunction is separate and distinct from the trial on the merits of the main case. The quantum of evidence required for one is different from that for the other, so that it does not necessarily follow that if the court grants and issues the temporary writ applied for the same court will now have to rule in favor of the petition for prohibition and ipso facto make the provisional injunction permanent. If grave abuse of discretion attended the issuance of the writ of preliminary injunction, then by all means nullify the abusive act -- but only that. The main case should be allowed to proceed according to due process. The trial court should receive the evidence from the contending parties, weigh and evaluate the same and then make its findings. Clearly, the dismissal of the main case as a result of a mere incident relative to the issuance of an ancillary writ is procedurally awkward and violates due process, as it deprives private respondents of their right to present their case in court and support it with its evidence. In resolving the fundamental issue at hand, i.e., whether the trial court committed grave abuse of discretion in issuing the subject writs of preliminary injunction, we cannot avoid balancing on the scales the power of the State to tax and its inherent right to prosecute perceived transgressors of the law on one side, and the constitutional rights of a citizen to due process of law and the equal protection of the laws on the other. Obviously the scales must tilt in favor of the individual, for a citizen's right is amply protected by the Bill of Rights of the Constitution. Thus while "taxes are the lifeblood of the government," the power to tax has its limits, inspite of all its plenitude. Hence in Commissioner of Internal Revenue v. Algue, Inc.,10 we said -Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary
to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved. xxx xxx xxx It is said that taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for the lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard-earned income to taxing authorities, every person who is able to must contribute his share in the running of the government. The government for its part is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power. But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts will then came to his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate . . . that the law has not been observed. In the instant case, it seems that due to the overzealousness in collecting taxes from private respondents and to some accident of immediate overwhelming interest which distressingly impassions and distorts judgment, the State has unwittingly ignored the citizens' constitutional rights. Thus even the rule that injunction will not lie to prevent a criminal prosecution has admitted exceptions, which we enumerated in Brocka v. Enrile11 and in Ocampo IV v. Ombudsman12 -- (a) to afford adequate protection to the constitutional rights of the accused; (b) when necessary for the orderly administration of justice or to avoid oppression or multiplicity of actions; (c) when there is a prejudicial question which is sub-judice; (d) when the acts of the officer are without or in excess of authority; (e) where the prosecution is under an invalid law, ordinance or regulation; (f) when double jeopardy is clearly apparent; (g) when the court has no jurisdiction over the offense; (h) where it is a case of persecution rather than prosecution; (i) where the charges are manifestly false and motivated by lust for vengeance; (j) when there is clearly no prima facie case against the accused and a motion to quash on that ground has been denied; and, (k) to prevent a threatened unlawful arrest. Finally, courts indeed should not hesitate to invoke the constitutional guarantees to give adequate protection to the citizens when faced with the enormous powers of the State, even when what is in issue are only provisional remedies, as in the case at hand. In days of great pressure, it is alluring to take short cuts by borrowing dictatorial techniques. But when we do, we set in motion an arbitrary or subversive influence by our own design which destroys us from within. Let not the present case dangerously sway towards that trend. For all the foregoing, I vote to dismiss the instant petition for lack of merit, and to order the trial court to proceed with Civil Case No. Q-94-19790 with reasonable dispatch.
PADILLA, J., dissenting: Because of what I humbly perceive to be the crippling, chilling and fatal effects of the majority opinion on the power of the state to investigate fraudulent tax evasion in the country, I am constrained to dissent, as vigorously as I can, from the majority opinion.
THE ISSUE The main issue in this petition for review on certiorari is whether or not there are valid grounds to stop or stay the preliminary investigation of complaints filed by the Bureau of Internal Revenue (BIR) with the Department of Justice (DOJ) Revenue Cases Task Force against private respondents for alleged fraudulent tax evasion for the years 1990, 1991 and 1992. Stated differently, the issue is: did respondent trial court commit grave abuse of discretion amounting to lack or excess of jurisdiction in stopping the subject preliminary investigation? THE CASE AND THE FACTS On 7 September 1993, petitioner Commissioner of Internal Revenue filed a complaint with the DOJ against private respondents Fortune Tobacco Corporation (hereinafter referred to simply as "Fortune"), its corporate officers, nine (9) other corporations, and their respective corporate officers, for alleged fraudulent tax evasion for the year 1992. The complaint, docketed as I.S. No. 93-508, was referred to the DOJ Task Force on Revenue Cases which found sufficient grounds to further investigate the allegation that Fortune fraudulently evaded payment of income, value-added and ad valorem taxes for the year 1992 thus depriving the Government of revenue allegedly in excess of seven and one-half (7 1/2) billion pesos. The fraudulent scheme allegedly adopted and employed by private respondents, is described by the BIR as follows: In order to evade payment of said taxes, [Fortune] made fictitious and simulated sales of its cigarette products to non-existent individuals and to entities incorporated and existing only for the purpose of such fictitious sales by declaring registered wholesale prices with the BIR lower than [Fortune's] actual wholesale prices which are required for determination of [Fortune's] correct ad valorem, income and value-added tax liabilities. These "ghost wholesale buyers" then ostensibly sold the product to consumers and other wholesalers/retailers at higher wholesale prices determined by [Fortune]. The tax returns and manufacturer's sworn statements filed by [Fortune] as aforesaid declare the fictitious sales it made to the conduit corporations and non-existent individual buyers as its gross sales.1 Based on the initial evaluation of the DOJ Task Force, private respondents were subpoenaed and required to submit their counter-affidavits not later than 20 September 1993. 2 Instead of filing counter-affidavits, private respondents filed a "Verified Motion to Dismiss; Alternatively, Motion to Suspend." 3 Said motion was denied by the DOJ Task Force and treated as private respondents' counter-affidavit, in an order dated 15 October 1993.4 Private respondents sought reconsideration of the aforementioned order of denial and likewise filed motions to require submission by the Bureau of Internal Revenue (BIR) of certain documents to support the verified motion to dismiss or suspend the investigation, and for the inhibition of the state prosecutors assigned to the case for alleged lack of impartiality.5 On 20 December 1993, an omnibus order was issued by the investigating Task Force: 6 a. denying reconsideration; b. denying suspension of investigation; and c. denying the motion to inhibit the investigating state prosecutors.
Thereupon, or on 4 January 1994, private respondents went to court. They filed a petition for certiorari and prohibition with prayer for preliminary injunction in the Regional Trial Court, Branch 88, Quezon City, praying that the proceedings (investigation) before the DOJ Task Force be stopped. The petition was docketed as Civil Case No. Q-94-19790.7 On 17 January 1994, petitioners filed with the trial court a motion to dismiss the aforesaid petition. 8 On 25 January 1994, the trial court issued instead an order granting the herein private respondents' prayer for a writ of preliminary injunction,9 to stop the preliminary investigation in the DOJ Revenue Cases Task Force. On 26 January 1994, private respondents filed with the trial court a Motion to Admit Supplemental Petition seeking this time the issuance of another writ of preliminary injunction against a second complaint of the BIR with the DOJ docketed as I.S. No. 93-17942 likewise against herein private respondents for fraudulent tax evasion for the year 1990. Private respondents averred in their aforesaid motion with the trail court that -a. no supporting documents nor copies of the complaint were attached to the subpoena in I.S. No. 9317942; b. the abovementioned subpoena violates private respondents' constitutional rights to due process, equal protection and presumption of innocence; c. I.S. No. 93-17942 is substantially the same as I.S. No. 93-508 except that it concerns the year 1990; d. no tax assessment has been issued by the Commissioner of Internal Revenue and since taxes already paid have not been challenged by the BIR, no tax liability exists; e. Assistant Quezon City Prosecutor Leopoldo E. Baraquia was a former classmate of then Presidential Legal Counsel Antonio T. Carpio, thus, he cannot conduct the preliminary investigation in an impartial manner. On 28 January 1994, private respondents filed with the trial court a second supplemental petition 10 this time seeking to stay the preliminary investigation in I.S. No. 93-548, a third BIR complaint with the DOJ against private respondents for fraudulent tax evasion for the year 1991. On 31 January 1994, the trial court admitted the two (2) supplemental petitions and issued a temporary restraining order stopping the preliminary investigation of the two (2) later complaints with the DOJ against private respondents for alleged fraudulent tax evasion for the years 1990 and 1991. On 7 February 1994, the trial court also issued an order denying herein petitioners' motion to dismiss private respondents' petition seeking to stay the preliminary investigation in I.S. No. 93-508. The trial court ruled that the issue of whether Sec. 127(b) of the National Internal Revenue (Tax) Code should be the basis of herein private respondents' tax liability, as contended by the Bureau of Internal Revenue, or whether it is Sec. 142(c) of the same code that applies, as argued by herein private respondents, should first be settled before any criminal complaint for fraudulent tax evasion can be initiated or maintained. On 14 February 1994, the trial court issued a supplemental writ of preliminary injunction this time enjoining the preliminary investigations of the two (2) other BIR complaints with the DOJ for fraudulent tax evasion. The trial court then denied motions to dismiss the two (2) supplemental petitions, filed by therein respondents Commissioner of Internal Revenue and the DOJ Revenue Cases Task Force investigators. On 7 March 1994, herein petitioners filed with this Court a petition for certiorari and prohibition with prayer for preliminary injunction which questioned the orders issued by the trial court granting the private respondents' prayer for preliminary injunction to stop the preliminary investigation in the DOJ of the BIR's complaints for fraudulent tax evasions against private respondents and denying petitioners' motions to
dismiss private respondents' various petitions with the trial court. The petition was referred by this Court to the Court of Appeals which has original concurrent jurisdiction over the petition. On 19 December 1994, the Court of Appeals rendered a decision which, in part, reads: In making such conclusion the respondent Court (the Regional Trial Court of Quezon City, Branch 88) must have understood from herein petitioner Commissioner's letter-complaint of 14 pages and the joint affidavit of eight revenue officers of 17 pages attached thereto and its annexes, that the charge against herein respondents is for tax evasion for non-payment by herein respondent Fortune of the correct amounts of income tax, ad valorem tax and value added tax, not necessarily "fraudulent tax evasion". Hence, the need for previous assessment of the correct amount by herein petitioner Commissioner before herein respondents may be charged criminally. Certiorari will not be issued to cure errors in proceedings or correct erroneous conclusions of law or fact. As long as a Court acts within its jurisdiction, any alleged error committed in the exercise of its jurisdiction, will amount to nothing more than errors of judgment which are reviewable by timely appeal and not by a special civil action of certiorari. The questioned orders issued after hearing being but interlocutory, review thereof by this court is inappropriate until final judgment is rendered, absent a showing of grave abuse of discretion on the part of the issuing court. The factual and legal issues involved in the main case still before the respondent Court are best resolved after trial. Petitioners, therefore, instead of resorting to this petition for certiorari and prohibition should have filed an answer to the petition as ordained in Section 4, Rule 16, in connection with Rule 11 of the Revised Rules of Court, interposing as defense or defenses the objection or objections raised in their motion to dismiss, then proceed to trial in order that thereafter the case may be decided on the merits by the respondent Court. In case of an adverse decision, they may appeal therefrom by which the entire record of the case would be elevated for review. Therefore, certiorari and prohibition resorted to by herein petitioners will not lie in view of the remedy open to them. Thus, the resulting delay in the final disposition of the case before the respondent Court would not have been incurred. Grave abuse of discretion as a ground for issuance of writs of certiorari and prohibition implies capricious and whimsical exercise of judgment as is equivalent to lack of jurisdiction, or where the power is exercised in an arbitrary or despotic manner by reason of passion, prejudice, or personal hostility, amounting to an evasion of positive duty or to a virtual refusal to perform the duty enjoined, or to act at all in contemplation of law. For such writs to lie, there must be capricious, arbitrary and whimsical exercise of power, the very antithesis of the judicial prerogative in accordance with centuries of both civil law and common law traditions. Certiorari and prohibition are remedies narrow in scope and inflexible in character. They are not general utility tools in the legal workshop. Their function is but limited to correction of defects of jurisdiction solely, not to be used for any other purpose, such as to cure errors in proceedings or to correct erroneous conclusions of law or fact. Due regard for the foregoing teachings enunciated in the decision cited can not bring about a decision other than what has been reached herein. Needless to say, the case before the respondent Court involving those against herein respondents for alleged non-payment of the correct amount due as income tax, ad valorem tax and value-added tax for the years 1990, 1991, and 1992 is not ended by this decision. The respondent Court is still to try the case and decide it on the merits. All that is decided here is but the validity of the orders of the respondent Court granting herein
respondents' application for preliminary injunction and denying herein, petitioners' motion to dismiss. If upon the facts established after trial and the applicable law, dissolution of the writ of preliminary injunction allowed to be issued by the respondent Court is called for and a judgment favorable to herein petitioners is demanded, the respondent Court is duty bound to render judgment accordingly. WHEREFORE, the instant petition for certiorari and prohibition with application for issuance of restraining order and writ of preliminary injunction is DISMISSED. Costs de officio. (references to annexes and citations omitted)11 Petitioners' motion for reconsideration of the aforequoted judgment was denied by respondent appellate court on 23 February 1995, hence, the present petition for review on certiorari based on the following grounds: GROUNDS FOR THE PETITION THE RESPONDENT COURTS COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN HOLDING THAT: I. THERE IS A PREJUDICIAL AND/OR LEGAL QUESTION TO JUSTIFY THE SUSPENSION OF THE PRELIMINARY INVESTIGATION II. PRIVATE RESPONDENTS' RIGHTS TO DUE PROCESS, EQUAL PROTECTION AND PRESUMPTION OF INNOCENCE WERE VIOLATED; ON THE CONTRARY, THE STATE ITSELF WAS DEPRIVED OF DUE PROCESS III. THE ADMISSION OF PRIVATE RESPONDENTS' SUPPLEMENTAL PETITIONS WERE PROPER IV. THERE WAS SELECTIVE PROSECUTION V THE FACTUAL ALLEGATIONS IN THE PETITION ARE HYPOTHETICALLY ADMITTED IN A MOTION TO DISMISS BASED ON JURISDICTIONAL GROUNDS VI. THE ISSUANCE OF THE WRITS OF INJUNCTION IS NOT A DECISION ON THE MERITS OF THE PETITION BEFORE THE LOWER COURT12 DISCUSSION At the outset, it should be pointed out that respondent appellate court's observations to the effect that herein petitioners' recourse to said court through a special civil action of certiorari and prohibition was improper (as discussed in the aforequoted portion of the CA decision) actually and appropriately apply to private respondents when they resorted to the remedy of certiorari and prohibition with application for preliminary injunction with the respondent Regional Trial Court to stop the preliminary investigation being conducted by the DOJ Revenue Cases Task Force of the BIR complaints for fraudulent tax evasion against private respondents. It is to be noted that the proceedings before the investigators (preliminary investigation before the DOJ Revenue Cases Task Force) are far from terminated. In fact, private respondents were merely subpoenaed and asked to submit counter-affidavits. They instead resorted to the courts for redress after denial of their motion to dismiss. The proper procedure on the part of private respondents after their motion to dismiss was denied by the investigating panel, should have been an appeal from such an adverse resolution to the Secretary of Justice, not a special civil action for certiorari and prohibition with application for preliminary injunction before the respondent trial court. As a corollary, the respondent trial court should have desisted from entertaining private respondents' original petition for certiorari and prohibition with prayer for preliminary injunction because a court order to
stop a preliminary investigation is an act of interference with the investigating officers' discretion, absent any showing of grave abuse of discretion on the part of the latter in conducting such preliminary investigation. The rule is settled that the fiscal (prosecutor) cannot be prohibited from conducting and finishing his preliminary investigation. 13 The private respondents' petition before the trial court in this case was clearly premature since the case did not fall within any of the exceptions when prohibition lies to stop a preliminary investigation.14 The decision of the majority in this case clearly constitutes an untenable usurpation of the primary duty and function of the prosecutors to conduct the preliminary investigation of a criminal offense and the power of the Secretary of Justice to review the resolution of said prosecutors. In Guingona, supra, the Court en banc ruled thus: "As a general rule, an injunction will not be granted to restrain a criminal prosecution". With more reason will injunction not lie when the case is still at the preliminary investigation stage. This Court should not usurp the primary function of the City Fiscal to conduct the preliminary investigation of the estafa charge and of the petitioners' countercharge for perjury, which was consolidated with the estafa charge. The City Fiscal's office should be allowed to finish its investigation and make its factual findings. This Court should not conduct the preliminary investigation. It is not a trier of facts. (Reference to footnotes omitted). Before resolving the main issue in this petition, as earlier stated in this opinion, several preliminary issues raised by private respondents in their "Verified Motion To Dismiss; Alternatively, Motion To Suspend" need to be addressed, namely: A.) Private respondent Fortune's right to due process and equal protection of the laws have been violated because of the subject preliminary investigation before the DOJ Revenue Cases Task Force. B.) Jurisdiction over Fortune's tax liability pertains to the Court of Tax Appeals and not the Regional Trial Courts, thus, the Department of Justice, through its state prosecutors, is without jurisdiction to conduct the subject preliminary investigation. C.) The complaints for fraudulent tax evasion are unsupported by any evidence to serve as basis for the issuance of a subpoena. D.) The lack of final determination of Fortune's tax liability precludes criminal prosecution. 1. On the alleged violation of Fortune's rights to due process and equal protection of the laws, I fail to see any violation of said rights. Fortune, its corporate officers, nine (9) other corporations and their respective corporate officers alleged by the BIR to be mere "dummies" or conduits of Fortune in the fraudulent tax evasion on the Government, were given the opportunity to file their counter-affidavits to refute the allegations in the BIR complaints, together with their supporting documents. It is only after submission of counter-affidavits that the investigators will determine whether or not there is enough evidence to file in court criminal charges for fraudulent tax evasion against private respondents or to dismiss the BIR complaints. At this stage of the preliminary investigation, the constitutional right of private respondents to due process is adequately protected because they have been given the opportunity to be heard, i.e., to file counter-affidavits. Nor can it be said, as respondents falsely argue, that there was no ground or basis for requiring the private respondents to file such counter-affidavits. As respondent Court of Appeals admitted in its here assailed
decision, the BIR complaint (1st complaint) signed by the Commissioner of Internal Revenue consisted of fourteen (14) pages supported by an annex consisting of seventeen (17) pages in the form of a joint affidavit of eight (8) revenue officers, to which were attached voluminous documents as annexes which, when put together, constituted a formidable network of evidence tending to show fraudulent tax evasion on the part of private respondents. When, on the basis of such BIR complaint and its supporting documents, the investigating Task Force saw a need to proceed with the inquiry and, consequently, required private respondents to file their counter-affidavits, grave abuse of discretion could hardly be imputed to said investigators. 2. On respondents' assertions that there is selective prosecution (no equal protection of the laws) since other corporations similarly situated as they are, are not being prosecuted and/or investigated, the argument is quite ludicrous, to say the least. As pointed out by the Solicitor General, more than one thousand (1,000) criminal cases for tax evasion have been filed in Metro Manila alone. This number, even if it seems to represent but a small fraction of "cases of actual tax evasion, undoubtedly show that respondents are not being singled out. It is of note that the memorandum issued by the President of the Philippines creating a task force to investigate tax evasion schemes of manufacturers was issued three (3) months before the complaints against private respondents were filed. This makes any charge of selective prosecution baseless since it could not then be shown, nor has it been shown by private respondents that only they (respondents) were being investigated/prosecuted. In fact, up to this time, respondents have failed to substantiate this allegation of selective prosecution against them. Moreover, assuming arguendo that other corporate manufacturers are guilty of using similar schemes for tax evasion, allegedly used by respondents, the Solicitor General correctly points out that the remedy is not dismissal of the complaints against private respondents or stoppage of the investigations of said complaints, but investigation and prosecution of other similar violators (fraudulent tax evaders). 3. Private respondents' allegations that the Assistant Quezon City Prosecutor (among those investigating the complaints against them) lacks impartiality, are so unsubstantiated, imaginary, speculative and indeed puerile. They need not be elaborately refuted as a mere denial would suffice under the circumstances. 4. On the issue of jurisdiction, the rule is settled that city and state prosecutors are authorized to conduct preliminary investigations of criminal offenses under the National Internal Revenue Code. Said criminal offenses are within the jurisdiction of the Regional Trial Court. 15 5. The issue of whether or not the evidence submitted by petitioners is sufficient to warrant the filing of criminal informations for fraudulent tax evasion is prematurely raised. 16 To argue, as private respondents do, that one piece of evidence, i.e. the Daily Manufacturer's Sworn Statements, should be produced at a particular stage of the investigation, in order to determine the probable guilt of the accused, is to dictate to the investigating officers the procedure by which evidence should be presented and examined. Further, "a preliminary investigation is not the occasion for the full and exhaustive display of the parties' evidence; it is for the presentation of such evidence only as may engender a well grounded belief that an offense has been committed and that the accused is probably guilty thereof . . ." 17 Besides, the preliminary investigation has not yet been terminated. The proper procedure then should be to allow the investigators, who undeniably have jurisdiction, to conduct and finish the preliminary investigation and to render a resolution. The party aggrieved by said resolution can then appeal it to the Secretary of Justice,18 as required by the settled doctrine of exhaustion of administrative remedies. What special qualification or privilege, I may ask, do private respondents have, particularly Fortune and Lucio Tan, as to exempt them from the operation of this rooted principle and entitle them to immediate judicial relief from the respondent trial court in this case?
6. The respondents Court of Appeals and the trial court maintain, as private respondents do, that a previous assessment of the correct amount of taxes due is necessary before private respondents may be charged criminally for fraudulent tax evasion. This view is decidedly not supported by law and jurisprudence. The lack of a final determination of respondent Fortune's exact or correct tax liability is not a bar to criminal prosecution for fraudulent tax evasion. While a precise computation and assessment is required for a civil action to collect a tax deficiency, the National Internal Revenue Code does not require such computation and assessment prior to criminal prosecution for fraudulent tax evasion. Thus, as this Court had earlier ruled -An assessment of a deficiency is not necessary to a criminal prosecution for willful attempt to defeat and evade the income tax. A crime is complete when the violator has knowingly and willfully filed a fraudulent return with intent to evade and defeat the tax. The perpetration of the crime is grounded upon knowledge on the part of the taxpayer that he has made an inaccurate return, and the government's failure to discover the error and promptly to assess has no connections with the commission of the crime. 19 It follows that, under the Ungab doctrine, the filing of a criminal complaint for fraudulent tax evasion would be proper even without a previous assessment of the correct tax. The argument that the Ungab doctrine will not apply to the case at bar because it involves a factual setting different from that of the case at bar, is erroneous. The Ungab case involved the filing of a fraudulent income tax return because the defendant failed to report his income derived from sale of banana saplings. In the case at bar, the complaints filed before the DOJ for investigation charge private wholesale respondents with fraudulent concealment of the actual price of products sold through declaration of registered wholesale prices lower than the actual wholesale prices, resulting in underpayment of income, ad valorem, and value-added taxes. Both cases involve, therefore, fraudulent schemes to evade payment to the Government of correct taxes. The Court in Ungab stated further as follows: The petitioner also claims that the filing of the informations was precipitate and premature since the Commissioner of Internal Revenue has not yet resolved his protests against the assessment of the Revenue District Officer; and that he was denied recourse to the Court of Tax Appeals. The contention is without merit. What is involved here is not the collection of taxes where the assessment of the Commissioner of Internal Revenue may be reviewed by the Court of Tax Appeals, but a criminal prosecution for violations of the National Internal Code which is within the cognizance of courts of first instance. While there can be no civil action to enforce collection before the assessment procedures provided in the Code have been followed, there is no requirement for the precise computation and assessment of the tax before there can be a criminal prosecution under the Code. The contention is made, and is here rejected, that an assessment of the deficiency tax due is necessary before the taxpayer can be prosecuted criminally for the charges preferred. The crime is complete when the violator has, as in this case, knowingly and wilfully filed fraudulent returns with intent to evade and defeat a part or all of the tax . [Guzik vs. U.S., 54 F2d 618] (emphasis supplied) The ruling in the Ungab case is undisputably on all fours with, and conclusive to the case at bar. It should be stressed and pointed out that in Ungab the Court denied the prayer of therein petitioner to quash
informations for tax evasion that had already been filed in court. In other words, the prosecutors in Ungab had already found probable cause to try therein petitioner for tax evasion. Despite this fact there was no finding by the Court of violation of any of petitioner's constitutional rights. In the present case, private respondents were merely being required to submit counter-affidavits to the complaints filed. If no violation of constitutional rights was committed in Ungab, upon the filing of the criminal informations in Court, how can there now be a violation of private respondents' constitutional rights upon a requirement by the investigators that private respondents submit their counter-affidavits. The Court has not been presented any compelling or persuasive argument why the Ungab doctrine has to be abandoned. It is good law and should be the nemesis of fraudulent tax evaders. It gives teeth to the proper enforcement of our tax laws. 7. Private respondents argue that a case earlier file before the Court of Tax Appeals (CTA) and now before this Court 20 involves a prejudicial question justifying or requiring suspension of the preliminary investigation of the complaints for fraudulent tax evasion against private respondents. Said case involves the validity of BIR Revenue Memorandum Circular No. 37-93 dated 1 July 1993 which reclassified cigarettes manufactured by respondent Fortune. The circular subjects cigarettes with brand names "Hope", "More" and "Champion" to a 10% increase in ad valorem taxes starting 2 July 1993. Respondent Fortune has assailed the validity of said revenue circular and the case has yet to be decided with finality. But the foregoing issue is irrelevant to the issue of fraudulent tax evasion involved in this case. A final decision either upholding or nullifying the aforementioned revenue circular will not affect private respondents' criminal liability for fraudulent tax evasion, for the following reasons: a) The revenue circular involved in the other case pertains to ad valorem taxes on sales of Fortune's named cigarette brands after 1 July 1993 while the fraudulent tax evasion involved in the present case pertains to years 1990, 1991 and 1992. b) The fraudulent scheme allegedly utilized by Fortune and its dummies, as described in the BIR complaints pending with the DOJ Revenue Cases Task Force, which resulted in the misdeclaration/underdeclaration of Fortune's gross sales receipts resulting in turn in underpayment of ad valorem, value-added and income taxes was actually a "built-in" tax evasion device already in place even before the assailed revenue circular was issued. The scheme is particularly designed to result in the underpayment of ad valorem, value-added and income taxes regardless of the tax rate fixed by the government on cigarette products. 8. Respondents also argue that the issue of whether Section 127(b) or Section 142(c) of the National Internal Revenue Code is applicable to private respondents should first be settled before any criminal cases can be filed against them. This argument is both misleading and erroneous. The aforementioned provisions read: Sec. 127. . . . (b) Determination of gross selling price of goods subject to ad valorem tax. -- Unless otherwise provided, the price, excluding the value-added tax, at which the goods are sold at wholesale in the place of production or through their sales agents to the public shall constitute the gross selling price. If the manufacturer also sells or allows such goods to be sold at wholesale price in another establishment of which he is the owner or in the profits at which he has an interest, the wholesale price in such establishment shall constitute the gross selling price. Should such price be less than the cost of manufacture plus expenses incurred until the goods are finally sold, then a proportionate margin of profit, not less than
10% of such manufacturing cost and expenses, shall be added to constitute the gross selling price. Sec. 142 . . . (c) Cigarettes packed in twenties. -- There shall be levied, assessed and collected on cigarettes packed in twenties an ad valorem tax at the rates prescribed below based on the manufacturer's registered wholesale price: (1) On locally manufactured cigarettes bearing a foreign brand, fifty-five percent (55%): Provided, That this rate shall apply regardless of whether or not the right to use or title to the foreign brand was sold or transferred by its owner to the local manufacturer. Whenever it has to be determined whether or not a cigarette bears a foreign brand, the listing of brands manufactured in foreign countries appearing in the current World Tobacco Directory shall govern. (2) On other locally manufactured cigarettes, forty-five percent (45%). Duly registered or existing brands of cigarettes packed in twenties shall not be allowed to be packed in thirties. When the existing registered wholesale price, including tax, of cigarettes packed in twenties does not exceed P4.00 per pack, the rate shall be twenty percent (20%). As the Solicitor General correctly points out, the two (2) aforequoted provisions of the Tax Code are both applicable in determining the amount of tax due. Section 127(b) provides for the method of determining the gross wholesale price to be registered with the BIR while Section 142(c) provides for the rate of ad valorem tax to be paid. Said rate is expressed as a percentage of the registered gross selling price which is determined, in turn, based on Section 127(b). The aforementioned two (2) provisions of the Tax Code are certainly not determinative of private respondents' criminal liability, if any. A reading of the BIR complaints pending with the DOJ Revenue Cases Task Force shows that private respondent Fortune is being accused of using "dummy" corporations and business conduits as well as non-existent individuals and entities to enable the company (Fortune) to report gross receipts from sales of its cigarette brands lower than gross receipts which are actually derived from such sales. Such lower gross receipts of the company, as reported by respondent Fortune thus result in lower ad valorem, value-added and income taxes paid to the government. Stated a little differently, respondent Fortune is accused of selling at wholesale prices its cigarette brands through dummy entities in the profits of which it has a controlling interest. Under Section 127(b), the gross selling price of the goods should be the wholesale price of such dummy -- entities to its buyers but it is alleged by the government that respondent Fortune has purposely made use of such entities to evade payment of higher but legally correct taxes. 9. As to respondents' additional claim that with regard to ad valorem tax, they merely based their liability on the wholesale price registered with the Bureau of Internal Revenue (BIR) following the method used by all cigarette manufacturers, said claim cannot absolve Fortune and its officers from criminal liability. 21 Payment of ad valoremand other taxes based on the wholesale price registered with the BIR presupposes and naturally assumes that the registered wholesale price correspond to the actual wholesale prices at which the manufacturer sells the product. If a manufacturer makes use of a method or device to make it appear that products are sold at a wholesale price lower than the amounts that the manufacturer actually realizes from such wholesale of its products, as what respondent Fortune is accused of doing, through the use of dummy entities, then there arises criminal liability under the penal provisions of the Tax Code. This is clear from Section 127(b) aforequoted in relation to the penal provisions of the Tax Code.
10. Private respondents contend that the registration with the BIR of manufacturer's wholesale price and the corresponding close supervision and monitoring by BIR officials of the business operations of cigarette companies, ensure payment of correct taxes. The argument is baseless. It does not follow that the cited procedure is a guarantee against fraudulent schemes resorted to by tax-evading individuals or entities. It only indicates that taxpayers bent on evading payment of taxes would explore more creative devices or mechanisms in order to defraud the government of its sources of income even under its very nose. It is precisely to avoid and detect cases like this that the President issued a Memorandum on 1 June 1993 creating a task force to investigate tax liabilities of manufacturers engaged in tax evasion schemes, such as selling products through dummy marketing companies at underdeclared wholesale prices registered with the BIR. Moreover, the Manufacturer's Declaration which is the basis for determining the "Manufacturer's Registered Wholesale Price" (which in turn becomes the basis for the imposition of ad valorem tax), even if verified by revenue officers and approved by the Commissioner of Internal Revenue, does not necessarily reflect the actual wholesale price at which the cigarettes are sold. This is why manufacturers are still required to file other documents, like the "daily manufacturer's sworn statements" in order to assist in determining whether or not correct taxes have been paid. In fine, even if BIR officials may have verified Fortunes' BIR registered wholesale price for its products, the same does not estop or preclude the Government from filing criminal complaints for fraudulent tax evasion based on evidence subsequently gathered to the effect that such BIR registered wholesale prices were a misdeclaration or underdeclaration of the actual wholesale price. It is hornbook law that the Government is not bound or estopped by the mistakes, inadvertence, and what more, connivance of its officials and employees with fraudulent schemes to defraud the Government. 22 Even on the assumption that official duty of BIR officials and employees has been regularly performed, the allegations in the complaints are clear enough in that private respondents allegedly made use of schemes to make it appear that respondent Fortune's tax liabilities are far less than what it (Fortune) should be actually liable for under the law. The very nature of the offense for which respondents are being investigated, certainly makes regularity/irregularity in the performance of official duties irrelevant. It should also be pointed out that the offense allegedly committed by private respondents' consists in' the intentional use of "dummy" entities to make it appear that respondent Fortune sells its products at lower wholesale prices, which prices would correspond to the wholesale prices registered by Fortune with the BIR, but not to the prices at which its products are sold by Fortune's dummies. The difference between Fortune's BIR-reported wholesale prices and the prices at which its dummies sell Fortune's products thus constitutes amounts for which Fortune should actually incur tax liabilities but for which it allegedly never paid taxes because of the operation of the tax evasion scheme founded on a combined underdeclaration with the BIR of Fortune's wholesale price of its products and the sale of such products to is "dummy" corporations or to non- existing individuals or entities. This is the obvious reason why the government has sought to investigate the alleged tax evasion scheme purportedly utilized by respondent Fortune and its dummy corporations. Based on the foregoing discussions, it follows that the answer to the main issue formulated earlier in this opinion is in the negative since the private respondents have not shown that there exist, in this case, exceptional grounds removing it from the general rule that preliminary investigations of criminal offenses and criminal prosecutions cannot be stayed or enjoined by the courts. 23 11. The trial court's ruling that private respondents' constitutional rights have been violated, rests on untenable grounds. It must be remembered, in this connection, that exceptions to a settled rule, by their nature, must be strictly applied. And any claim to an exception must be fully substantiated. In other words, it must have real basis for existing.
The exceptions to the general rule against restraining orders or injunctions to stop preliminary investigations or criminal prosecutions are enumerated in Brocka vs. Enrile.24 One specific exception is when an injunction is needed for the adequate protection of the accused's constitutional rights. The exception definitely does not apply in the case at bar. Before proceeding to illustrate this point, it is important to stress that in a preliminary investigation, the investigating officers' sole duty is to determine, before the presentation of evidence by the prosecution and by the defense, if the latter should wish to present any, whether or not there are reasonable grounds for proceeding formally against the accused. 25 This is in conformity with the purpose of a preliminary investigation which is to secure the innocent against hasty, malicious, and oppressive prosecutions, and to protect him from an open and public accusation of crime, from the trouble, expense and anxiety of public trial, and also to protect the state from useless and expensive trials. 26 As restated by the illustrious late Chief Justice Manuel V. Moran -. . . the purpose of a preliminary investigation is to afford the accused an opportunity to show by his own evidence that there is no reasonable ground to believe that he is guilty of the offense charged and that, therefore, there is no good reason for further holding him to await trial in the Court of First Instance.27 Prescinding from the tenets above-discussed, it is clear from the inception that there had been no violation of private respondents' constitutional rights to presumption of innocence, due process and equal protection of the laws. The preliminary investigation, I repeat, has not yet been terminated. At this stage, only the complainant has finished presenting its affidavits and supporting documents. Obviously then, the investigating panel found that there were grounds to continue with the inquiry, hence, the issuance of subpoena and an order for the submission of counter-affidavits by private respondents. Instead of filing counter-affidavits, private respondents filed a Verified Motion to Dismiss; Alternatively, Motion to Suspend. At this point, it may be asked, how could private respondents' constitutional right to presumption of innocence be violated when, in all stages of the preliminary investigation, they were presumed innocent? Declaring that there are reasonable grounds to continue with the inquiry is not the same as pronouncing that a respondent is guilty or probably guilty of the offense charged. 12. Private respondents cannot also claim that they were not afforded due process and equal protection of the laws. In fact, the investigating panel was concerned with just that when it ordered the submission of private respondents' counter-affidavits. This procedure afforded private respondents the opportunity to show by their own evidence that no reasonable grounds exist for the filing of informations against them. Furthermore, contrary to the findings of the trial court and the Court of Appeals, the alleged haste by which the subpoena was issued to private respondents (the day after the filing of the 600-page annexed complaint) does not lessen the investigating panel's ability to study and examine the complainant's evidence. Neither does such act merit the conclusion that the investigating panel was less than objective in conducting the preliminary investigation. Consequently, the general and settled rule must apply that the courts cannot interfere with the discretion of the investigating officer to determine the specificity and adequacy of the averments in the complaint filed, except in very exceptional circumstances, 28 which do not obtain here. Therefore, private respondents' act of filing a petition for certiorari and prohibition before the Regional Trial Court was rather untimely and uncalled for, not only because private respondents failed to exhaust their administrative remedies but also because the grounds cited in their petition before the trial court were highly speculative -- more fancied than real.
Finally, Hernandez v. Albano (19 SCRA 95), cited by the majority to support the conclusion that preliminary investigation can be stayed by the courts, clearly states that preliminary investigation can be stayed by court order only in extreme cases. Hernandez also states that: By statute, the prosecuting officer of the City of Manila and his assistants are empowered to investigate crimes committed within the city's territorial jurisdiction. Not a mere privilege, it is the sworn duty of a Fiscal to conduct an investigation of a criminal charge filed with his office. The power to investigate postulates the other obligation on the part of the Fiscal to investigate promptly and file the case of as speedily. Public interest -- the protection of society -so demands. Agreeably to the foregoing, a rule -- now of long standing and frequent application -- was formulated that ordinarily criminal prosecution may not be blocked by court prohibition or injunction. Really, if at every turn investigation of a crime will be halted by a court order, the administration of criminal justice will meet with an undue setback. Indeed, the investigative power of the Fiscal may suffer such a tremendous shrinkage that it may end up in hollow sound rather than as a part and parcel of the machinery of criminal justice. It should be noted that while Hernandez lays down the extreme grounds when preliminary investigation of criminal offenses may be restrained by the courts, the dispositive portion of the decision affirmed the decision of the trial court dismissing a petition for certiorari and prohibition with prayer for preliminary injunction filed to stay the preliminary investigation of criminal complaints against petitioner Hernandez. The other case cited by the majority to support its decision in this case, Fortun v. Labang29 involves criminal complaints filed against a judge of the Court of First Instance by disgruntled lawyers who had lost their cases in the judge's sala. Clearly, the basis for the Court to stay preliminary investigation in Fortun was a finding that said complaints were filed merely as a form of harassment against the judge and which "could have no other purpose than to place petitioner-judge in contempt and disrepute". The factual situation in the case at bar is poles apart from the factual situation in Fortun. Further, in Fortun there was an express finding by the Court that complaints against judges of the Courts of First Instance are properly filed with the Supreme Court under Executive Order No. 264 (1970) since the Court is considered as the department head of the judiciary. In the present case it cannot be disputed that jurisdiction to conduct preliminary investigation over fraudulent tax evasion cases lies with the state prosecutors (fiscals). It cannot therefore be denied that neither Hernandez nor Fortun supports with any plausibility the majority's disposition of the issues in the present case. On the other hand, it appears to me all too clearly that the majority opinion, in this case, has altered the entire rationale and concept of preliminary investigation of alleged criminal offenses. That alteration has, of course, served the purposes of distinguished private respondents. But I will have no part in the shocking process especially in light of the fact that Government cries out that the people have been cheated and defrauded of their taxes to the tune allegedly of P25.6 billion pesos, and yet, it is not given by this Court even a beggar's chance to prove it! 13. There is great and vital public interest in the successful investigation and prosecution of criminal offenses involving fraudulent tax evasion. Said public interest is much more compelling in the present case since private respondents are not only accused of violating tax and penal laws but are also, as a consequence of such violations, possibly depriving the government of a primary source of revenue so essential to the life, growth and development of the nation and for the prestation of essential services to the people. 14. It should be made clear, at this point, however, that this opinion is not a pre-judgment or predetermination of private respondents' guilt of the offense charged. No one, not even the prosecutors
investigating the cases for fraudulent tax evasion, is, at this stage of the proceedings, when private respondents have yet to file their counter-affidavits, in a position to determine and state with finality or conclusiveness whether or not private respondents are guilty of the offense charged in the BIR complaints, now with the DOJ Revenue Cases Task Force. It is precisely through the preliminary investigation that the DOJ Task Force on Revenue Cases can determine whether or not there are grounds to file informations in court or to dismiss the BIR complaints. 15. I see no grave abuse of discretion committed by the state prosecutors in requiring private respondents to submit counter-affidavits to the complaints for fraudulent tax evasion and to determine the existence or absence of probable criminal liability. The Rules on Criminal Procedure do not even require, as a condition sine qua non to the validity of a preliminary investigation, the presence of the respondent as long as efforts to reach him are made and an opportunity to controvert the complainant's evidence is accorded him. The purpose of the rule is to check attempts of unscrupulous respondents to thwart criminal investigations by not appearing or employing dilatory tactics.30 16. Since the preliminary investigation in the DOJ Revenue Cases Task Force against private respondents for alleged fraudulent tax evasion is well within its jurisdiction and constitutes no grave abuse of discretion, it was in fact the respondent trial court that committed grave abuse of discretion, amounting to lack or excess of jurisdiction, when it stayed such preliminary investigation. 17. The successful prosecution of criminal offenders is not only a right but the duty of the state. Only when the state's acts clearly violate constitutional rights can the courts step in to interfere with the state's exercise of such right and performance of such duty. I am indubitably impressed that there is no violation of private respondents' constitutional rights in this case. 18. Lastly, the consolidation of the three (3) complaints in the DOJ against private respondents should be allowed since they all involve the same scheme allegedly used by private respondents to fraudulently evade payment of taxes. Consolidation will not only avoid multiplicity of suits but will also enable private respondents to more conveniently prepare whatever responsive pleadings are required or expected of them. It is, therefore, my considered view that the decision of the Court of Appeals of 19 December 1994 in CA G.R. SP No. 33599 should be SET ASIDE. The respondent trial court should be ENJOINED from proceeding in any manner in Civil Case No. Q-94-19790, or at least until further orders from this Court. The preliminary investigation of the BIR complaints docketed as I.S. Nos. 93-508, 93-17942 and 93-584 with the Department of Justice Revenue Cases Task Force, being constitutionally and legally in order, should be allowed to resume until their final conclusion or completion, with private respondents given a non-extendible period of ten (10) days from notice to submit to the investigating panel their respective counter-affidavits and supporting documents, if any.
VITUG, J., dissenting: I see in the petition the overriding issue of whether or not judicial relief could be resorted to in order to stop state prosecutors from going through with their investigation of complaints lodged against private respondents. Almost invariably, this Court has resolved not to unduly interfere, let alone to peremptorily prevent, the prosecuting agencies or offices of the government in their investigatorial work or in their own evaluation of the results of investigation. It would indeed be, in my view, an act precipitate for the courts to take on a case even before the complaint or information is filed by the prosecution. Of course, one cannot
preclude the possibility that at times compelling reasons may dictate otherwise; I do not think, however, that the instant case could be the right occasion for it. While I do understand the concern expressed by some of my colleagues, i.e., that stopping the trial court from now proceeding with Civil Case No. Q-94-9170 would, effectively, mean a disposition of the main case without its merits having first been fully heard in the court below, in this particular situation before the Court, however, the parties have since exhaustively and adequately presented their respective cases. In the interest of good order, the practical measure of enjoining the trial court from taking further cognizance of the case would not thus appear to be really all that unwarranted. A final word: The matter affecting the civil liability for the due payment of internal revenue taxes, including the applicable remedies and proceedings in the determination thereof, must be considered apart from and technically independent of the criminal aspect that may be brought to bear in appropriate cases. A recourse in one is not necessarily preclusive of, nor would the results thereof be conclusive on, the other. Accordingly, I vote to grant the petition.
FIRST DIVISION
LUCAS G. ADAMSON, THERESE G.R. No. 120935 JUNE D. ADAMSON, and SARA S. DE LOS REYES, in their capacities as President, Treasurer and Secretary of Adamson Management Corporation, Petitioners, - versus COURT OF APPEALS and LIWAYWAY VINZONS-CHATO, in her capacity as Commissioner of the Bureau of Internal Revenue, Respondents. x-- - - - - - - - - - - - - - - - - - - - - - - - x COMMISSIONER OF G.R. No. 124557 INTERNAL REVENUE, Petitioner,
Present: -versus- PUNO, C.J., Chairperson, CARPIO, CORONA, COURT OF APPEALS, COURT LEONARDO-DE CASTRO, and OF TAX APPEALS, ADAMSON BERSAMIN, JJ. MANAGEMENT CORPORATION, LUCAS G. ADAMSON, THERESE JUNE D. ADAMSON, and SARA Promulgated: S. DE LOS REYES, Respondents. May 21, 2009 x--------------------------------------------------x DECISION PUNO, C.J.: Before the Court are the consolidated cases of G.R. No. 120935 and G.R. No. 124557. G.R. No. 120935 involves a petition for review on certiorari filed by petitioners LUCAS G. ADAMSON, THERESE JUNE D. ADAMSON, and SARA S. DE LOS REYES (private respondents), in their respective capacities as president, treasurer and secretary of Adamson Management Corporation (AMC) against then Commissioner of Internal Revenue Liwayway Vinzons-Chato (COMMISSIONER), under Rule 45 of the Revised Rules of Court. They seek to review and reverse the Decision promulgated on March 21, 1995 and Resolution issued on July 6, 1995 of the Court of Appeals in CA-G.R. SP No. 35488 (Liwayway Vinzons-Chato, et al. v. Hon. Judge Erna Falloran-Aliposa, et al.). G.R. No. 124557 is a petition for review on certiorari filed by the Commissioner, assailing the Decision dated March 29, 1996 of the Court of Appeals in CA-G.R. SP No. 35520, titled Commissioner of Internal Revenue v. Court of Tax Appeals, Adamson Management Corporation, Lucas G. Adamson, Therese June D. Adamson and Sara S. de
los Reyes. In the said Decision, the Court of Appeals upheld the Resolution promulgated on September 19, 1994 by the Court of Tax Appeals (CTA) in C.T.A. Case No. 5075 (Adamson Management Corporation, Lucas G. Adamson, Therese Adamson and Sara de los Reyes v. Commissioner of Internal Revenue). The facts, as culled from the findings of the appellate court, follow: On June 20, 1990, Lucas Adamson and AMC sold 131,897 common shares of stock in Adamson and Adamson, Inc. (AAI) to APAC Holding Limited (APAC). The shares were valued at P7,789,995.00.[1] On June 22, 1990, P159,363.21 was paid as capital gains tax for the transaction. On October 12, 1990, AMC sold to APAC Philippines, Inc. another 229,870 common shares of stock in AAI for P17,718,360.00. AMC paid the capital gains tax of P352,242.96. On October 15, 1993, the Commissioner issued a Notice of Taxpayer to AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes, informing them of deficiencies on their payment of capital gains tax and Value Added Tax (VAT). The notice contained a schedule for preliminary conference. The events preceding G.R. No. 120935 are the following: On October 22, 1993, the Commissioner filed with the Department of Justice (DOJ) her Affidavit of Complaint[2] against AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes for violation of Sections 45 (a) and (d)[3], and 110[4], in relation to Section 100[5], as penalized under Section 255,[6] and for violation of Section 253[7], in relation to Section 252 (b) and (d) of the National Internal Revenue Code (NIRC).[8] AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes filed with the DOJ a motion to suspend proceedings on the ground of prejudicial question, pendency of a civil case with the Supreme Court, and pendency of their letter-request for re-investigation with the Commissioner. After the preliminary investigation, State
Prosecutor Alfredo P. Agcaoili found probable cause. The Motion for Reconsideration against the findings of probable cause was denied by the prosecutor. On April 29, 1994, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes were charged before the Regional Trial Court (RTC) of Makati, Branch 150 in Criminal Case Nos. 94-1842 to 94-1846. They filed a Motion to Dismiss or Suspend the Proceedings. They invoked the grounds that there was yet no final assessment of their tax liability, and there were still pending relevant Supreme Court and CTA cases. Initially, the trial court denied the motion. A Motion for Reconsideration was however filed, this time assailing the trial courts lack of jurisdiction over the nature of the subject cases. On August 8, 1994, the trial court granted the Motion. It ruled that the complaints for tax evasion filed by the Commissioner should be regarded as a decision of the Commissioner regarding the tax liabilities of Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes, and appealable to the CTA. It further held that the said cases cannot proceed independently of the assessment case pending before the CTA, which has jurisdiction to determine the civil and criminal tax liability of the respondents therein. On October 10, 1994, the Commissioner filed a Petition for Review with the Court of Appeals assailing the trial courts dismissal of the criminal cases. She averred that it was not a condition prerequisite that a formal assessment should first be given to the private respondents before she may file the aforesaid criminal complaints against them. She argued that the criminal complaints for tax evasion may proceed independently from the assessment cases pending before the CTA. in a criminal prosecution for tax evasion, assessment of tax deficiency is not required because the offense of tax evasion is complete or consummated when the offender has knowingly and willfully filed a fraudulent return with intent to evade the tax.[9] It ruled that private respondents filed false and fraudulent returns with intent to evade taxes, and acting thereupon, petitioner filed an Affidavit of Complaint with On March 21, 1995, the Court of Appeals reversed the trial courts decision and reinstated the criminal complaints. The appellate court held that, the Department of
Justice, without an accompanying assessment of the tax deficiency of private respondents, in order to commence criminal action against the latter for tax evasion.[10] Private respondents filed a Motion for Reconsideration, but the trial court denied the motion on July 6, 1995. Thus, they filed the petition in G.R. No. 120935, raising the following issues: 1. WHETHER OR NOT THE RESPONDENT HONORABLE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE IN UNGAB V. CUSI (Nos. L-41919-24, May 30, 1980, 97 SCRA 877) TO THE CASE AT BAR. 2. WHETHER OR NOT AN ASSESSMENT IS REQUIRED UNDER THE SECOND CATEGORY OF THE OFFENSE IN SECTION 253 OF THE NIRC. 3. WHETHER OR NOT THERE WAS A VALID ASSESSMENT MADE BY THE COMMISSIONER IN THE CASE AT BAR. 4. WHETHER OR NOT THE FILING OF A CRIMINAL COMPLAINT SERVES AS AN IMPLIED ASSESSMENT ON THE TAX LIABILITY OF THE TAXPAYER. 5. WHETHER OR NOT THE FILING OF THE CRIMINAL INFORMATION FOR TAX EVASION IN THE TRIAL COURT IS PREMATURE BECAUSE THERE IS YET NO BASIS FOR THE CRIMINAL CHARGE OF WILLFULL INTENT TO EVADE THE PAYMENT OF A TAX. 6. WHETHER OR NOT THE DOCTRINES LAID DOWN IN THE CASES OF YABES V. FLOJO (No. L-46954, July 20, 1982, 115 SCRA 286) AND CIR V. UNION SHIPPING CORP. (G.R. No. 66160, May 21, 1990, 185 SCRA 547) ARE APPLICABLE TO THE CASE AT BAR. 7. WHETHER OR NOT THE COURT OF TAX APPEALS HAS JURISDICTION OVER THE DISPUTE ON WHAT CONSTITUTES THE PROPER TAXES DUE FROM THE TAXPAYER.
In parallel circumstances, the following events preceded G.R. No. 124557:
On December 1, 1993, AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes filed a letter request for re-investigation with the Commissioner of the Examiners Findings earlier issued by the Bureau of Internal Revenue (BIR), which pointed out the tax deficiencies. On March 15, 1994 before the Commissioner could act on their letter-request, AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes filed a Petition for Review with the CTA. They assailed the Commissioners finding of tax evasion against them. The Commissioner moved to dismiss the petition, on the ground that it was premature, as she had not yet issued a formal assessment of the tax liability of therein petitioners. On September 19, 1994, the CTA denied the Motion to Dismiss. It considered the criminal complaint filed by the Commissioner with the DOJ as an implied formal assessment, and the filing of the criminal informations with the RTC as a denial of petitioners protest regarding the tax deficiency. The Commissioner repaired to the Court of Appeals on the ground that the CTA acted with grave abuse of discretion. She contended that, with regard to the protest provided under Section 229 of the NIRC, there must first be a formal assessment issued by the Commissioner, and it must be in accord with Section 6 of Revenue Regulation No. 1285. She maintained that she had not yet issued a formal assessment of tax liability, and the tax deficiency amounts mentioned in her criminal complaint with the DOJ were given only to show the difference between the tax returns filed and the audit findings of the revenue examiner. The Court of Appeals sustained the CTAs denial of the Commissioners Motion to Dismiss. Thus, the Commissioner filed the petition for review under G.R. No. 124557, raising the following issues: 1. WHETHER OR NOT THE INSTANT PETITION SHOULD BE DISMISSED FOR FAILURE TO COMPLY WITH THE MANDATORY REQUIREMENT OF A CERTIFICATION UNDER OATH AGAINST FORUM SHOPPING;
2. WHETHER OR NOT THE CRIMINAL CASE FOR TAX EVASION IN THE CASE AT BAR CAN PROCEED WITHOUT AN ASSESSMENT; 3. WHETHER OR NOT THE COMPLAINT FILED WITH THE DEPARTMENT OF JUSTICE CAN BE CONSTRUED AS AN IMPLIED ASSESSMENT; and 4. WHETHER OR NOT THE COURT OF TAX APPEALS HAS JURISDICTION TO ACT ON PRIVATE RESPONDENTS PETITION FOR REVIEW FILED WITH THE SAID COURT.
The issues in G.R. No. 124557 and G.R. No. 120935 can be compressed into three: 1. WHETHER THE COMMISSIONER HAS ALREADY RENDERED AN ASSESSMENT (FORMAL OR OTHERWISE) OF THE TAX LIABILITY OF AMC, LUCAS G. ADAMSON, THERESE JUNE D. ADAMSON AND SARA S. DE LOS REYES; 2. WHETHER THERE IS BASIS FOR THE CRIMINAL CASES FOR TAX EVASION TO PROCEED AGAINST AMC, LUCAS G. ADAMSON, THERESE JUNE D. ADAMSON AND SARA S. DE LOS REYES; and 3. WHETHER THE COURT OF TAX APPEALS HAS JURISDICTION TO TAKE COGNIZANCE OF BOTH THE CIVIL AND THE CRIMINAL ASPECTS OF THE TAX LIABILITY OF AMC, LUCAS G. ADAMSON, THERESE JUNE D. ADAMSON AND SARA S. DE LOS REYES.
The case of CIR v. Pascor Realty, et al.[11] is relevant. In this case, then BIR Commissioner Jose U. Ong authorized revenue officers to examine the books of accounts and other accounting records of Pascor Realty and Development Corporation (PRDC) for 1986, 1987 and 1988. This resulted in a recommendation for the issuance of an assessment in the amounts of P7,498,434.65 and P3,015,236.35 for the years 1986 and 1987, respectively.
On March 1, 1995, the Commissioner filed a criminal complaint before the DOJ against PRDC, its President Rogelio A. Dio, and its Treasurer Virginia S. Dio, alleging evasion of taxes in the total amount of P10,513,671.00. Private respondents filed an Urgent Request for Reconsideration/Reinvestigation disputing the tax assessment and tax liability. The Commissioner denied the urgent request for reconsideration/reinvestigation because she had not yet issued a formal assessment. Private respondents then elevated the Decision of the Commissioner to the CTA on a petition for review. The Commissioner filed a Motion to Dismiss the petition on the ground that the CTA has no jurisdiction over the subject matter of the petition, as there was yet no formal assessment issued against the petitioners. The CTA denied the said motion to dismiss and ordered the Commissioner to file an answer within thirty (30) days. The Commissioner did not file an answer nor did she move to reconsider the resolution.Instead, the Commissioner filed a petition for review of the CTA decision with the Court of Appeals. The Court of Appeals upheld the CTA order. However, this Court reversed the Court of Appeals decision and the CTA order, and ordered the dismissal of the petition. We held: An assessment contains not only a computation of tax liabilities, but also a demand for payment within a prescribed period. It also signals the time when penalties and interests begin to accrue against the taxpayer. To enable the taxpayer to determine his remedies thereon, due process requires that it must be served on and received by the taxpayer. Accordingly, an affidavit, which was executed by revenue officers stating the tax liabilities of a taxpayer and attached to a criminal complaint for tax evasion, cannot be deemed an assessment that can be questioned before the Court of Tax Appeals. Neither the NIRC nor the revenue regulations governing the protest of assessments[12] provide a specific definition or form of an assessment. However, the NIRC defines the specific functions and effects of an assessment. To consider the affidavit attached to the Complaint as a proper assessment is to subvert the nature of an assessment and to set a bad precedent that will prejudice innocent taxpayers.
True, as pointed out by the private respondents, an assessment informs the taxpayer that he or she has tax liabilities. But not all documents coming from the BIR containing a computation of the tax liability can be deemed assessments. To start with, an assessment must be sent to and received by a taxpayer, and must demand payment of the taxes described therein within a specific period. Thus, the NIRC imposes a 25 percent penalty, in addition to the tax due, in case the taxpayer fails to pay the deficiency tax within the time prescribed for its payment in the notice of assessment. Likewise, an interest of 20 percent per annum, or such higher rate as may be prescribed by rules and regulations, is to be collected from the date prescribed for its payment until the full payment.[13] The issuance of an assessment is vital in determining the period of limitation regarding its proper issuance and the period within which to protest it. Section 203[14] of the NIRC provides that internal revenue taxes must be assessed within three years from the last day within which to file the return. Section 222,[15] on the other hand, specifies a period of ten years in case a fraudulent return with intent to evade was submitted or in case of failure to file a return. Also, Section 228[16] of the same law states that said assessment may be protested only within thirty days from receipt thereof. Necessarily, the taxpayer must be certain that a specific document constitutes an assessment. Otherwise, confusion would arise regarding the period within which to make an assessment or to protest the same, or whether interest and penalty may accrue thereon. It should also be stressed that the said document is a notice duly sent to the taxpayer. Indeed, an assessment is deemed made only when the collector of internal revenue releases, mails or sends such notice to the taxpayer.[17] In the present case, the revenue officers Affidavit merely contained a computation of respondents tax liability. It did not state a demand or a period for payment. Worse, it was addressed to the justice secretary, not to the taxpayers. Respondents maintain that an assessment, in relation to taxation, is simply understood to mean: A notice to the effect that the amount therein stated is due as tax and a demand for payment thereof.[18] Fixes the liability of the taxpayer and ascertains the facts and furnishes the data for the proper presentation of tax rolls.[19]
Even these definitions fail to advance private respondents case. That the BIR examiners Joint Affidavit attached to the Criminal Complaint contained some details of the tax liabilities of private respondents does not ipso facto make it an assessment. The purpose of the Joint Affidavit was merely to support and substantiate the Criminal Complaint for tax evasion. Clearly, it was not meant to be a notice of the tax due and a demand to the private respondents for payment thereof. The fact that the Complaint itself was specifically directed and sent to the Department of Justice and not to private respondents shows that the intent of the commissioner was to file a criminal complaint for tax evasion, not to issue an assessment. Although the revenue officers recommended the issuance of an assessment, the commissioner opted instead to file a criminal case for tax evasion. What private respondents received was a notice from the DOJ that a criminal case for tax evasion had been filed against them, not a notice that the Bureau of Internal Revenue had made an assessment. Private respondents maintain that the filing of a criminal complaint must be preceded by an assessment. This is incorrect, because Section 222 of the NIRC specifically states that in cases where a false or fraudulent return is submitted or in cases of failure to file a return such as this case, proceedings in court may be commenced without an assessment. Furthermore, Section 205 of the same Code clearly mandates that the civil and criminal aspects of the case may be pursued simultaneously. In Ungab v. Cusi, [20] petitioner therein sought the dismissal of the criminal Complaints for being premature, since his protest to the CTA had not yet been resolved. The Court held that such protests could not stop or suspend the criminal action which was independent of the resolution of the protest in the CTA. This was because the commissioner of internal revenue had, in such tax evasion cases, discretion on whether to issue an assessment or to file a criminal case against the taxpayer or to do both. Private respondents insist that Section 222 should be read in relation to Section 255 of the NIRC,[21] which penalizes failure to file a return. They add that a tax assessment should precede a criminal indictment. We disagree. To reiterate, said Section 222 states that an assessment is not necessary before a criminal charge can be filed. This is the general rule. Private respondents failed to show that they are entitled to an exception. Moreover, the criminal charge need only be supported by a prima facie showing of failure to file a required return. This fact need not be proven by an assessment. The issuance of an assessment must be distinguished from the filing of a complaint. Before an assessment is issued, there is, by practice, a pre-assessment notice sent to the taxpayer. The taxpayer is then given a chance to submit position papers and documents to prove that the assessment is unwarranted. If the commissioner is unsatisfied, an assessment signed by him or her is then sent to the taxpayer informing
the latter specifically and clearly that an assessment has been made against him or her. In contrast, the criminal charge need not go through all these. The criminal charge is filed directly with the DOJ. Thereafter, the taxpayer is notified that a criminal case had been filed against him, not that the commissioner has issued an assessment. It must be stressed that a criminal complaint is instituted not to demand payment, but to penalize the taxpayer for violation of the Tax Code.
In the cases at bar, the Commissioner denied that she issued a formal assessment of the tax liability of AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes. She admits though that she wrote the recommendation letter[22] addressed to the Secretary of the DOJ recommending the filing of criminal complaints against AMC and the aforecited persons for fraudulent returns and tax evasion. The first issue is whether the Commissioners recommendation letter can be considered as a formal assessment of private respondents tax liability. In the context in which it is used in the NIRC, an assessment is a written notice and demand made by the BIR on the taxpayer for the settlement of a due tax liability that is there definitely set and fixed. A written communication containing a computation by a revenue officer of the tax liability of a taxpayer and giving him an opportunity to contest or disprove the BIR examiners findings is not an assessment since it is yet indefinite.[23] We rule that the recommendation letter of the Commissioner cannot be considered a formal assessment. Even a cursory perusal of the said letter would reveal three key points: 1. It was not addressed to the taxpayers. 2. There was no demand made on the taxpayers to pay the tax liability, nor a period for payment set therein. 3. The letter was never mailed or sent to the taxpayers by the Commissioner. In fine, the said recommendation letter served merely as the prima facie basis for filing criminal informations that the taxpayers had violated Section 45 (a) and (d), and 110, in
relation to Section 100, as penalized under Section 255, and for violation of Section 253, in relation to Section 252 9(b) and (d) of the Tax Code.[24] The next issue is whether the filing of the criminal complaints against the private respondents by the DOJ is premature for lack of a formal assessment. Section 269 of the NIRC (now Section 222 of the Tax Reform Act of 1997) provides: Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court after the collection of such tax may be begun without assessment, at any time within ten years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for collection thereof
The law is clear. When fraudulent tax returns are involved as in the cases at bar, a proceeding in court after the collection of such tax may be begun without assessment. Here, the private respondents had already filed the capital gains tax return and the VAT returns, and paid the taxes they have declared due therefrom. Upon investigation of the examiners of the BIR, there was a preliminary finding of gross discrepancy in the computation of the capital gains taxes due from the sale of two lots of AAI shares, first to APAC and then to APAC Philippines, Limited. The examiners also found that the VAT had not been paid for VAT-liable sale of services for the third and fourth quarters of 1990.Arguably, the gross disparity in the taxes due and the amounts actually declared by the private respondents constitutes badges of fraud. Thus, the applicability of Ungab v. Cusi[25] is evident to the cases at bar. In this seminal case, this Court ruled that there was no need for precise computation and formal assessment in order for criminal complaints to be filed against him. It quoted Mertens Law of Federal Income Taxation, Vol. 10, Sec. 55A.05, p. 21, thus: An assessment of a deficiency is not necessary to a criminal prosecution for willful attempt to defeat and evade the income tax. A crime is complete when the violator has knowingly and willfully filed a fraudulent return, with intent to evade and defeat the
tax. The perpetration of the crime is grounded upon knowledge on the part of the taxpayer that he has made an inaccurate return, and the governments failure to discover the error and promptly to assess has no connections with the commission of the crime.
This hoary principle still underlies Section 269 and related provisions of the present Tax Code. We now go to the issue of whether the CTA has no jurisdiction to take cognizance of both the criminal and civil cases here at bar. Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals) as amended, the rulings of the Commissioner are appealable to the CTA, thus: SEC. 7. Jurisdiction. The Court of Tax Appeals shall exercise exclusive appellate jurisdiction to review by appeal, as herein provided (1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the National Internal Revenue Code or other laws or part of law administered by the Bureau of Internal Revenue;
Republic Act No. 8424, titled An Act Amending the National Internal Revenue Code, As Amended, And For Other Purposes, later expanded the jurisdiction of the Commissioner and, correspondingly, that of the CTA, thus: SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. The power to interpret the provisions of this Code and other tax laws shall be under the exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance. The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under this Code or other laws or portions thereof administered by the Bureau of Internal Revenue is vested in the Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals.
The latest statute dealing with the jurisdiction of the CTA is Republic Act No. 9282. [26] It provides: SEC. 7. Section 7 of the same Act is hereby amended to read as follows: Sec. 7. Jurisdiction. The CTA shall exercise: (a) Exclusive appellate jurisdiction to review by appeal, as herein provided: (1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue or other laws administered by the Bureau of Internal Revenue; (2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where the National Internal Revenue Code provides a specific period of action, in which case the inaction shall be deemed a denial; (3) Decisions, orders or resolutions of the Regional Trial Courts in local tax cases originally decided or resolved by them in the exercise of their original or appellate jurisdiction; xxx (b) Jurisdiction over cases involving criminal offenses as herein provided: (1) Exclusive original jurisdiction over all criminal offenses arising from violations of the National Internal Revenue Code or Tariff and Customs Code and other laws administered by the Bureau of Internal Revenue or the Bureau of Customs: Provided, however, That offenses or felonies mentioned in this paragraph where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is less than One million pesos (P1,000,000.00) or where there is no specified amount claimed shall be tried by the regular courts and the jurisdiction of the CTA shall be appellate. Any provision of law or the Rules of Court to the contrary notwithstanding, the criminal action and the corresponding civil action for the recovery of civil liability for taxes and penalties shall at all times be simultaneously instituted with, and jointly determined in the same proceeding by the CTA, the filing
of the criminal action being deemed to necessarily carry with it the filing of the civil action, and no right to reserve the filling of such civil action separately from the criminal action will be recognized. (2) Exclusive appellate jurisdiction in criminal offenses: (a) Over appeals from the judgments, resolutions or orders of the Regional Trial Courts in tax cases originally decided by them, in their respected territorial jurisdiction. (b) Over petitions for review of the judgments, resolutions or orders of the Regional Trial Courts in the exercise of their appellate jurisdiction over tax cases originally decided by the Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial Courts in their respective jurisdiction. (c) Jurisdiction over tax collection cases as herein provided: (1) Exclusive original jurisdiction in tax collection cases involving final and executory assessments for taxes, fees, charges and penalties: Provided, however, That collection cases where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is less than One million pesos (P1,000,000.00) shall be tried by the proper Municipal Trial Court, Metropolitan Trial Court and Regional Trial Court. (2) Exclusive appellate jurisdiction in tax collection cases: (a) Over appeals from the judgments, resolutions or orders of the Regional Trial Courts in tax collection cases originally decided by them, in their respective territorial jurisdiction. (b) Over petitions for review of the judgments, resolutions or orders of the Regional Trial Courts in the exercise of their appellate jurisdiction over tax collection cases originally decided by the Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial Courts, in their respective jurisdiction.
These laws have expanded the jurisdiction of the CTA. However, they did not change the jurisdiction of the CTA to entertain an appeal only from a final decision or assessment of the Commissioner, or in cases where the Commissioner has not acted
within the period prescribed by the NIRC. In the cases at bar, the Commissioner has not issued an assessment of the tax liability of private respondents. Finally, we hold that contrary to private respondents stance, the doctrines laid down in CIR v. Union Shipping Co. and Yabes v. Flojo are not applicable to the cases at bar. In these earlier cases, the Commissioner already rendered an assessment of the tax liabilities of the delinquent taxpayers, for which reason the Court ruled that the filing of the civil suit for collection of the taxes due was a final denial of the taxpayers request for reconsideration of the tax assessment. IN VIEW WHEREOF, premises considered, judgment is rendered: 1. In G.R. No. 120935, AFFIRMING the CA decision dated March 21, 1995, which set aside the Regional Trial Courts Order dated August 8, 1994, and REINSTATING Criminal Case Nos. 94-1842 to 94-1846 for further proceedings before the trial court; and 2. In G.R. No. 124557, REVERSING and SETTING ASIDE the Decision of the Court of Appeals dated March 29, 1996, and ORDERING the dismissal of C.T.A. Case No. 5075. No costs. SO ORDERED.
SECOND DIVISION G.R. No. 197590
November 24, 2014
BUREAU OF INTERNAL REVENUE, as represented by the COMMISSIONER OF INTERNAL REVENUE,Petitioner, vs. COURT OF APPEALS, SPOUSES ANTONIO VILLAN MANLY, and RUBY ONG MANLY, Respondents. DECISION DEL CASTILLO, J.: There is grave abuse of discretion when the determination of probable cause is exercised in an arbitrary or despotic manner, due to passion or personal hostility, so patent and gross as to amount to an evasion of a positive duty or a virtual refusal to perform a duty enjoined by law. 1 This Petition for Certiorari2 under Rule 65 of the Rules of Court assails the Decision 3 dated October 28, 2010 and the Resolution 4 dated May 10, 2011 of the Court of Appeals (CA) in CA-G.R. SP No. 112479. Factual Antecedents Respondent Antonio Villan Manly (Antonio) is a stockholder and the Executive Vice-President of Standard Realty Corporation, a family-owned corporation.5 He is also engaged in rental business. 6 His spouse, respondent Ruby Ong Manly, is a housewife.7 On April 27, 2005, petitioner Bureau of Internal Revenue (BIR) issued Letter of Authority No. 2001 000123878authorizing its revenue officers to investigate respondent spouses’ internal revenue tax liabilities for taxable year 2003 and prior years. On June 6, 2005, petitioner issued a letter 9 to respondent spouses requiring them to submit documentary evidence to substantiate the source of their cash purchase of a 256-square meter log cabin in Tagaytay City worth ₱17,511,010.00. Respondent spouses, however, failed to comply with the letter.10 On June 23, 2005, the revenue officers executed a Joint Affidavit 11 alleging that respondent Antonio’s reported or declared annual income for the taxable years 1998-2003 are as follows: Taxable Compensation Income
Net Profit Rental Business (1169-73 G. Masangkay St., Tondo, Manila
1998
[P]133,532.36
1999
Total sources of Funds
Tax Due/paid
[P] 191,915.10
[P] 325,447.46
[P]55,834.00<
[P] 269,613.46
142,550.50
260,961.78
403,512.28
79,254.00
324,258.28
2000
141,450.00
213,740.67
355,190.67
64,757.21
290,433.46
2001
151,500.00
233,396.62
384,896.62
73,669.00
311,227.62
2002
148,500.00
186,106.62
334,606.62
58,581.00
276,025.62
2003
148,100.00
152,817.53
300.917.93
48,729.00
252,188.93
₱1,238,938.32 ₱2,104,571.58
₱380,824.21
₱1,723,747.3712
CASH
[Total]
₱865,633.26
and that despite his modest income for the said years, respondent spouses were able to purchase in cash the following properties: 1) a luxurious vacation house in Tagaytay City valued at ₱17,511,010.00 13 in the year 2000, evidenced by a Deed of Absolute Sale14 dated October 24, 2000; 2) a Toyota RAV4 for ₱1,350,000.00 in the year 2001, evidenced by a Sales Invoice 15 dated June 28, 2001; and 3) a Toyota Prado for ₱2,000,000.00 in 2003, evidenced by a Deed of Sale 16 dated July 9, 2003.17 Since respondent spouses failed to show the source of their cash purchases, the revenue officers concluded that respondent Antonio’s Income Tax Returns (ITRs) for taxable years 2000, 2001,and 2003 were underdeclared.18 And since the under declaration exceeded 30% of the reported or declared income, it was considered a prima facie evidence of fraud with intent to evade the payment of proper taxes due to the government.19 The revenue officers, thus, recommended the filing of criminal cases against respondent spouses for failing to supply correct and accurate information intheir ITRs for the years 2000, 2001, and 2003, punishable under Sections 254 20 and 25521 in relation to Section 248(B)22 of Republic Act No. 8424 or the "Tax Reform Act of 1997," hereinafter referred to as the National Internal Revenue Code (NIRC). 23 Respondent spouses, in their Joint Counter-Affidavit, 24 denied the accusations hurled against them and alleged that they used their accumulated savings from their earnings for the past 24 years in purchasing the properties.25 They also contended that the criminal complaint should be dismissed because petitioner failed to issue a deficiency assessment against them.26 In response, the revenue officers executed a Joint Reply-Affidavit. 27 Respondent spouses, in turn, executed a Joint Rejoinder-Affidavit.28 Ruling of the State Prosecutor On August 31, 2006, State Prosecutor Ma. Cristina A. Montera-Barot issued a Resolution 29 in I.S. No. 2005-573 recommending the filing of criminal charges30 against respondent spouses, to wit: WHEREFORE, premises considered, it is respectfully recommended that [respondent] spouses ANTONIO VILLAN MANLY and RUBY ONG MANLY be charged [with] the following: (1) Three (3) counts of Violation of Section 254 – Attempt to Evade or Defeat Tax of the NIRC for taxable years 2000, 2001, and 2003; (2) Three (3) counts for Violation of Section 255 of the NIRC – Failure to Supply Correct and Accurate Information for taxable years 2000, 2001 and 2003; (3) Three counts of Violation ofSection 255 of the NIRC – Failure to Pay, as a consequence of [respondent spouses’] failure to supply correct and accurate information on their tax returns for taxable years 2000, 2001, and 2003.31 Respondent spouses moved for reconsideration 32 but the State Prosecutor denied the same in a Resolution33 dated November 29, 2007. Ruling of the Secretary of Justice On appeal to the Secretary of Justice via a Petition for Review, 34 Acting Justice Secretary Agnes VST Devanadera (Devanadera) reversed the Resolution of the State Prosecutor. She found no willful failure to
pay or attempt to evade or defeat the tax on the part of respondent spouses as petitioner allegedly failed to specify the amount of tax due and the likely source of income from which the same was based. 35 She also pointed out petitioner’s failure to issue a deficiency tax assessment against respondentspouses which is a prerequisite to the filing of a criminal case for tax evasion. 36 The dispositive portion of the Resolution37 dated July 27, 2009 reads: WHEREFORE, the assailed Resolution is hereby REVERSED and SET ASIDE. The Chief State Prosecutor ishereby directed to withdraw the Information filed against [respondent spouses] Antonio Villan Manly and Ruby Ong Manly, if one has been filed, and report the action taken thereon within ten (10) days from receipt hereto. SO ORDERED.38 Petitioner sought reconsideration39 but Acting Justice Secretary Devanadera denied the same in a Resolution40dated November 5, 2009. Ruling of the Court of Appeals Unfazed, petitioner filed a Petition for Certiorari 41 with the CA imputing grave abuse of discretion on the part of Acting Justice Secretary Devanadera in finding no probable cause to indict respondent spouses for willful attempt to evade or defeat tax and willful failure to supply correct and accurate information for taxable years 2000, 2001 and 2003. On October 28, 2010, the CA rendered the assailed Decision 42 dismissing the Petition for Certiorari. Although it disagreed that an assessment is a condition sine qua non in filing a criminal case for tax evasion, the CA, nevertheless, ruled that there was no probable cause to charge respondent spouses as petitioner allegedly failed to state their exact tax liability and to show sufficient proof of their likely source of income.43 The CA further said that before one could be prosecuted for tax evasion, the fact that a tax is due must first be proved.44 Thus: IN LIGHT OF ALL THE FOREGOING, the instant petition is hereby DENIED, and the assailed Resolution of the Secretary of Justice dated July 27, 2009 dismissing I.S. No. 2005-573 against private respondents, AFFIRMED. However, the dismissal of the instant case is without prejudice to the refiling by the BIR of a complaint sufficient in form and substance before the appropriate tribunal. SO ORDERED.45 The CA likewise denied petitioner’s Motion for Reconsideration46 in its Resolution47 dated May 10, 2011. Issues Hence, petitioner filed the instant Petition contending that the CA committed grave abuse of discretion amounting to lackor excess of jurisdiction in holding that: I. A CATEGORICAL FINDING OF THE EXACT AMOUNT OF TAX DUE FROM THE PRIVATE RESPONDENT SHOULD BE SPECIFICALLY ALLEGED [AND THAT] SINCE THE BIR FAILED TO MAKE SUCH FINDINGS THEY CONSEQUENTLY FAILED TO BUILD A CASE FOR TAX EVASION AGAINST [RESPONDENT SPOUSES] DESPITE THE WELL ESTABLISHED DOCTRINE THAT IN TAX EVASION CASES, A PRECISE COMPUTATION OF THE [TAX] DUE IS NOT NECESSARY. II. THE BIR FAILED TO SHOW SUFFICIENT PROOF OF A LIKELY SOURCE OF [RESPONDENT SPOUSES’] INCOME DESPITE THE FACT THAT THE BIR WAS SUFFICIENTLY ABLE TO SHOW PROOF OF SUCH INCOME.48 Petitioner’s Arguments
Petitioner imputes grave abuse of discretion on the part of the CA in affirming the dismissal of the criminal cases against respondent spouses. Petitioner contends that in filing a criminal case for tax evasion, a prior computation or assessment of tax is not required because the crime is complete when the violator knowingly and willfully filed a fraudulent return with intent to evade a part or all of the tax. 49 In this case, an analysis of respondent spouses’ income and expenditure shows that their cash expenditure is grossly disproportionate to their reported or declared income, leading petitioner to believe that they under declared their income.50 In computing the unreported or undeclared income, which was likely sourced from respondent Antonio’s rental business,51 petitioner used the expenditure method of reconstructing income, a method used to determine a taxpayer’s income tax liability when his records are inadequate or inaccurate.52 And since respondent spouses failed to explain the alleged unreported or undeclared income, petitioner asserts that criminal charges for tax evasion should be filed against them. Respondent spouses’ Arguments Respondent spouses, on the other hand, argue that the instant Petition should be dismissed as petitioner availed of the wrong remedy in filing a Petition for Certiorari under Rule 65 of the Rules of Court. 53 And even if the Petition is given due course, the same should still be dismissed because no grave abuse of discretion can be attributed to the CA. 54 They maintain that petitioner miserably failed to prove that a tax is actually due.55 Neither was it able to show the source of the alleged unreported or undeclared income as required by Revenue Memorandum Order No. 15-95, Guidelines and Investigative Procedures in the Development of Tax Fraud Cases for Internal Revenue Officers. 56 As to the method used by petitioner, they claim that it completely ignored their lifetime savings because it was limited to the years 1998-2003. 57 Our Ruling The Petition is meritorious. Before discussing the merits of thiscase, we shall first discuss the procedural matter raised by respondent spouses that petitioner availed of the wrong remedy in filing a Petition for Certiorari under Rule 65 of the Rules of Court, instead of a Petition for Review on Certiorari under Rule 45. Indeed, the remedy of a party aggrieved by a decision, final order, or resolution of the CA is to file a Petition for Review on Certiorari under Rule 45 of the Rules of Court, which is a continuation of the appellate process over the original case.58 And as a rule, if the remedy of an appeal is available, an action for certiorari under Rule 65 of the Rules of Court, which is anoriginal or independent action based on grave abuse of discretion amounting to lack or excess of jurisdiction, will not prosper 59 because it is not a substitute for a lost appeal.60 There are, however, exceptions to this rule, to wit: 1) when public welfare and the advancement of public policy dictate; 2) when the broader interest of justice so requires; 3) when the writs issued are null and void; 4) when the questioned order amounts to an oppressive exercise of judicial authority; 5) when, for persuasive reasons, the rules may be relaxed to relieve a litigant of an injustice not commensurate with his failure to comply with the prescribed procedure; 6) when the judgment or order is attended by grave abuse of discretion; or 7) in other meritorious cases.61 In this case, after considering the arguments raised by the parties, we find that there is reason to give due course to the instant Petition for Certiorari as petitioner was able to convincingly show that the CA committed grave abuse of discretion when it affirmed the dismissal of the criminal charges against respondent spouses despite the fact that there is probable cause to indict them. Although the Court has consistently adopted the policy of non-interference in the conduct and determination of probable cause,62 which is exclusively within the competence of the Executive Department, through the Secretary of Justice, 63 judicial intrusion, in the form of judicial review, is allowed
when there is proof that the Executive Department gravely abused its discretion in making its determination and in arriving at the conclusion it reached.64 Grave abuse of discretion is defined as a capricious and whimsical exercise of judgment tantamount to lack or excess of jurisdiction, a blatant abuse of authority so grave and so severe as to deprive the court of its very power to dispense justice, or an exercise of power in an arbitrary and despotic manner, due to passion, prejudice or personal hostility, so patent and gross as to amount to an evasion or to a unilateral refusal to perform the duty enjoined or to act in contemplation of the law. 65 Such is the situation in this case. Having resolved the foregoing procedural matter, we shall now proceed to determine the main issue in this case. Sections 254 and 255 of the NIRC pertinently provide: SEC. 254. Attempt to Evade or Defeat Tax. – Any person who willfully attempts in any manner to evade or defeat any tax imposed under this Code or the payment thereof shall, in addition to other penalties provided by law, upon conviction thereof, be punished by a fine of not less than Thirty thousand pesos (₱30,000.00) but not more than One hundred thousand pesos (₱100,000.00) and suffer imprisonment of not less than two (2) years but not more than four (4) years: Provided, That the conviction or acquittal obtained under this Section shall not be a bar to the filing of a civil suit for the collection of taxes. SEC. 255. Failure to File Return, Supply Correct and Accurate Information, Pay Tax, Withhold and Remit Tax and Refund Excess Taxes Withheld on Compensation. – Any person required under this Code or by rules and regulations promulgated thereunder to pay any tax, make a return, keep any record, or supply correct and accurate information, who willfully fails to pay such tax, make such return, keep such record, or supply such correct and accurate information, or withhold or remit taxes withheld, or refund excess taxes withheld on compensation at the time or times required by law or rules and regulations shall, in addition to other penalties provided by law, upon conviction thereof, be punished by a fine of not less than Ten thousand pesos (₱10,000.00) and suffer imprisonment of not less than one (1) year but not more than ten (10) years. In Ungab v. Judge Cusi, Jr.,66 we ruled that tax evasion is deemed complete when the violator has knowingly and willfully filed a fraudulent return with intent to evade and defeat a part or all of the tax.67 Corollarily, an assessment of the tax deficiency is notrequired in a criminal prosecution for tax evasion.68 However, in Commissioner of Internal Revenue v. Court of Appeals, 69 we clarified that although a deficiency assessment is not necessary, the fact that a tax is due must first be proved before one can be prosecuted for tax evasion.70 In the case of income, for it to be taxable, there must be a gain realized or received by the taxpayer, which is not excluded by law or treaty from taxation. 71 The government is allowed to resort to all evidence or resources available to determine a taxpayer’s income and to use methods to reconstruct his income. 72 A method commonly used by the government is the expenditure method, which is a method of reconstructing a taxpayer’s income by deducting the aggregate yearly expenditures from the declared yearly income.73 The theory of this method is that when the amount of the money that a taxpayer spends during a given year exceeds his reported or declared income and the source of such money is unexplained, it may be inferred that such expenditures represent unreported or undeclared income. 74 In the case at bar, petitioner used this method to determine respondent spouses’ tax liability. Petitioner deducted respondent spouses’ major cash acquisitions from their available funds. Thus: 1âwphi1
Cash
Loans
Withdrawal
Funds
Major
Unexplained
(business) 1998
P 269,613.46
1999
324,258.28
2000
of Capital
available
900,000.00 130,638.98
Sources of Funds
1,300,252.44
39,281.87
1,263,792.59
290,433.46
- 102,024.97
1,656,251.02
2001
311,227.62
- 406,309.70
717,537.32
2002
276,025.62
(100,000.00 184,092.03 )
360,117.65
2003
252,188.93
- 245,167.97
857,474.55
[Total: ]
(400,000.00 )
Acquisitions
17,511,010.00 (15,854,758.98) 1,350,000.00
(632,462.68)
2,000,000.00
(1,142,525.45)
20,861,010.00 (17,629,747.11)
₱1,723,747.3
75
7 2000
2001
2003
Unexplained funds – under declaration
[P]15,854,758. 98
[P]632,462.68
[P] 1,142,525.45
Taxable income
[P]15,854,758. 98
[P]632,462.68
[P] 1,142,525.45
125,000.00
125,000.00
125,000.00
In excess of Php500,000.00
4,913,522.87
42,388.06
205,608.14
Total income tax due (net tax paid)
4,973,765.66
93,719.06
281,879.14
Add: 50% Surcharge
2,486,882.83
46,859.53
165,304.07
20% Interest (up to 5/31/2005) - 825
4,104,376.29
77,337.43
272,751.72
Total Tax Due inclusive of Increments
[P]11,565,024. 79
[P]217,916.02
[P] 655,369.01
Income Tax due thereon: First Php500,000.00
Particulars
2000
2001
2003
Unexplained Funds [Underdeclaration]
[P]15,854,758.98
[P]632,462.68
[P]1,142,525.45
Sources of Funds as per Financial Statements as attached to the Income Tax Return
[P]1,656,251.02
[P]717,537.32
[P]817,474.55
957.27%
88.14%
133.24%77
Percentage of underdeclaration
76
And since the underdeclaration is more than 30%of respondent spouses’ reported or declared income, which under Section 248(B) of the NIRC constitutes as prima facie evidence of false or fraudulent return,
petitioner recommended the filing of criminal cases against respondent spouses under Sections 254 and 255, in relation to Section 248(B) of the NIRC. The CA, however, found no probable cause to indict respondent spouses for tax evasion. It agreed with Acting Justice Secretary Devanadera that petitioner failed to make "a categorical finding of the exact amount of tax due from [respondent spouses]" and "to show sufficient proof of a likely source of [respondent spouses’] income that enabled them to purchase the real and personal properties adverted to x x x."78 We find otherwise. The amount of tax due from respondent spouses was specifically alleged in the Complaint-Affidavit. 79 The computation, as well as the method used in determining the tax liability, was also clearly explained. The revenue officers likewise showed that the under declaration exceeded 30% of the reported or declared income. The revenue officers also identified the likely source of the unreported or undeclared income intheir ReplyAffidavit. The pertinent portion reads: 7. x x x x [Respondent spouses] are into rental business and the net profit for six (6) years before tax summed only to ₱1,238,938.32 (an average of more or less Php200,000.00 annually). We asked respondent [Antonio] if we can proceed to his rented property to [appraise] the earning capacity of the building [for] lease/ rent, but he declined our proposition. Due to such refusal made by the respondent, [petitioner], thru its examiners, took pictures of the subject property and came up with the findings that indeed the unexplained funds sought to have been used in acquiring the valuable property in Tagaytay x x x came from the underdeclaration of rental income.80 Apparently, the revenue officers considered respondent Antonio’s rental business to be the likely source of their unreported or undeclared income due to his unjustified refusal to allow the revenue officers to inspect the building. Respondent spouses’ defense that they had sufficient savings to purchase the properties remains selfserving at this point since they have not yet presented any evidence to support this. And since there is no evidence yet to suggest that the money they used to buy the properties was from an existing fund, it is safe to assume that that money is income or a flowof wealth other than a mere return on capital. It is a basic concept in taxation that income denotes a flow of wealth during a definite period of time, while capital is a fund or property existing at one distinct point in time. 81 Moreover, by just looking at the tables presented by petitioner, there is a manifest showing that respondent spouses had under declared their income. The huge disparity between respondent Antonio’s reported or declared annual income for the past several years and respondent spouses’ cash acquisitions for the years 2000, 2001, and 2003 cannot be ignored. In fact, it makes uswonder how they were able to purchase the properties in cash given respondent Antonio’s meager income. In view of the foregoing, we are convinced that there is probable cause to indict respondent spouses for tax evasion as petitioner was able to show that a tax is due from them. Probable cause, for purposes of filing a criminal information, is defined as such facts that are sufficient to engender a well-founded belief that a crime has been committed, that the accused is probably guilty thereof, and that he should be held for trial.82 It bears stressing that the determination of probable cause does not require actual or absolute certainty, nor clear and convincing evidence of guilt; it only requires reasonable belief or probability that more likely than not a crime has been committed by the accused.83
In completely disregarding the evidence presented and in affirming the ruling of the Acting Justice Secretary Devanadera that no probable cause exists, we find that the CA committed grave abuse of discretion amounting to lack or excess of jurisdiction. As we have said, if there is grave abuse of discretion, the court may step in and proceed to make its own independent determination of probable cause as judicial review is allowed to ensure that the Executive Department acts within the permissible bounds of its authority or does not gravely abuse the same.84 We must make it clear, however, that we are only here to determine probable cause. As to whether respondent spouses are guilty of tax evasion is an issue that must be resolved during the trial of the criminal case, where the quantum of proof required is proof beyond reasonable doubt. 1âwphi1
Before we close, we must stress that our ruling in this case should not be interpreted as an unbridled license for our tax officials to engage in fishing expeditions and witch-hunting. They should not abuse their investigative powers, instead they should exercise the same within the bounds of the law. They must properly observe the guidelines in making assessments and investigative procedures to ensure that the constitutional rights of the taxpayers are well protected as we cannot allow the floodgates to be opened for frivolous and malicious tax suits. WHEREFORE, the Petition is hereby GRANTED. The Decision dated October 28, 2010 and the Resolution dated May 10, 2011 of the Court of Appeals in CA-G.R. SP No. 112479 are hereby REVERSED and SET ASIDE. The Resolutions dated August 31, 2006 and November 29, 2007 of State Prosecutor Ma. Cristina A. Montera-Barot in LS. No. 2005-573 finding probable cause to indict respondent spouses Antonio Villan Manly and Ruby Ong Manly for Violation of Sections 254 and 255 of the National Internal Revenue Code are hereby REINSTATED. SO ORDERED.
G.R. No. 222743 MEDICARD PHILIPPINES, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.
INC., Petitioner,
DECISION REYES,, J.: This appeal by Petition for Review 1 seeks to reverse and set aside the Decision 2 dated September 2, 2015 and Resolution3 dated January 29, 2016 of the Court of Tax Appeals (CTA) en bane in CTA EB No. 1224, affirming with modification the Decision4 dated June 5, 2014 and the Resolution 5 dated September 15, 2014.in CTA Case No. 7948 of the CTA Third Division, ordering petitioner Medicard Philippines, Inc. (MEDICARD), to pay respondent Commissioner of Internal Revenue (CIR) the deficiency Value-Added Tax. (VAT) assessment in the aggregate amount of ₱220,234,609.48, plus 20% interest per annum starting January 25, 2007, until fully paid, pursuant to Section 249(c) 6 of the National Internal Revenue Code (NIRC) of 1997. The Facts MEDICARD is a Health Maintenance Organization (HMO) that provides prepaid health and medical insurance coverage to its clients. Individuals enrolled in its health care programs pay an annual membership fee and are entitled to various preventive, diagnostic and curative medical services provided by duly licensed physicians, specialists and other professional technical staff participating in the group practice health delivery system at a hospital or clinic owned, operated or accredited by it. 7 MEDICARD filed its First, Second, and Third Quarterly VAT Returns through Electronic Filing and Payment System (EFPS) on April 20, 2006, July 25, 2006 and October 20, 2006, respectively, and its Fourth Quarterly VAT Return on January 25, 2007.8 Upon finding some discrepancies between MEDICARD's Income Tax Returns (ITR) and VAT Returns, the CIR informed MEDICARD and issued a Letter Notice (LN) No. 122-VT-06-00-00020 dated September 20, 2007. Subsequently, the CIR also issued a Preliminary Assessment Notice (PAN) against MEDICARD for deficiency VAT. A Memorandum dated December 10, 2007 was likewise issued recommending the issuance of a Formal Assessment Notice (FAN) against MEDICARD.9 On. January 4, 2008, MEDICARD received CIR's FAN dated December' 10, 2007 for alleged deficiency VAT for taxable year 2006 in the total amount of Pl 96,614,476.69,10 inclusive of penalties. 11 According to the CIR, the taxable base of HMOs for VAT purposes is its gross receipts without any deduction under Section 4.108.3(k) of Revenue Regulation (RR) No. 16-2005. Citing Commissioner of Internal Revenue v. Philippine Health Care Providers, Inc., 12 the CIR argued that since MEDICARD. does not actually provide medical and/or hospital services, but merely arranges for the same, its services are not VAT exempt.13 MEDICARD argued that: (1) the services it render is not limited merely to arranging for the provision of medical and/or hospital services by hospitals and/or clinics but include actual and direct rendition of medical and laboratory services; in fact, its 2006 audited balance sheet shows that it owns x-ray and laboratory facilities which it used in providing medical and laboratory services to its members; (2) out of the ₱l .9 Billion membership fees, ₱319 Million was received from clients that are registered with the Philippine Export Zone Authority (PEZA) and/or Bureau of Investments; (3) the processing fees amounting to ₱l 1.5 Million should be excluded from gross receipts because P5.6 Million of which represent advances for professional fees due from clients which were paid by MEDICARD while the remainder was already
previously subjected to VAT; (4) the professional fees in the amount of Pl 1 Million should also be excluded because it represents the amount of medical services actually and directly rendered by MEDICARD and/or its subsidiary company; and (5) even assuming that it is liable to pay for the VAT, the 12% VAT rate should not be applied on the entire amount but only for the period when the 12% VAT rate was already in effect, i.e., on February 1, 2006. It should not also be held liable for surcharge and deficiency interest because it did not pass on the VAT to its members.14 On February 14, 2008, the CIR issued a Tax Verification Notice authorizing Revenue Officer Romualdo Plocios to verify the supporting documents of MEDICARD's Protest. MEDICARD also submitted additional supporting documentary evidence in aid of its Protest thru a letter dated March 18, 2008. 15 On June 19, 2009, MEDICARD received CIR's Final Decision on Disputed Assessment dated May 15, 2009, denying MEDICARD's protest, to wit: IN VIEW HEREOF, we deny your letter protest and hereby reiterate in toto assessment of deficiency [VAT] in total sum of ₱196,614,476.99. It is requested that you pay said deficiency taxes immediately. Should payment be made later, adjustment has to be made to impose interest until date of payment. This is our final decision. If you disagree, you may take an appeal to the [CTA] within the period provided by law, otherwise, said assessment shall become final, executory and demandable. 16 On July 20, 2009, MEDICARD proceeded to file a petition for review before the CT A, reiterating its position before the tax authorities. 17 On June 5, 2014, the CTA Division rendered a Decision 18 affirming with modifications the CIR's deficiency VAT assessment covering taxable year 2006, viz.: WHEREFORE, premises considered, the deficiency VAT assessment issued by [CIR] against [MEDICARD] covering taxable year 2006 ·is hereby AFFIRMED WITH MODIFICATIONS. Accordingly, [MEDICARD] is ordered to pay [CIR] the amount of P223,l 73,208.35, inclusive of the twenty-five percent (25%) surcharge imposed under -Section 248(A)(3) of the NIRC of 1997, as amended, computed as follows: Basic Deficiency VAT
₱l78,538,566.68
Add: 25% Surcharge
44,634,641.67
Total
₱223.173.208.35
In addition, [MEDICARD] is ordered to pay: a. Deficiency interest at the rate of twenty percent (20%) per annum on the basis deficiency VAT of Pl 78,538,566.68 computed from January 25, 2007 until full payment thereof pursuant to Section 249(B) of the NIRC of 1997, as amended; and b. Delinquency interest at the rate of twenty percent (20%) per annum on the total amount of ₱223,173,208.35 representing basic deficiency VAT of ₱l78,538,566.68 and· 25% surcharge of ₱44,634,64 l .67 and on the 20% deficiency interest which have accrued as afore-stated in (a), computed from June 19, 2009 until full payment thereof pursuant to Section 249(C) of the NIRC of 1997. SO ORDERED.19 The CTA Division held that: (1) the determination of deficiency VAT is not limited to the issuance of Letter of Authority (LOA) alone as the CIR is granted vast powers to perform examination and assessment
functions; (2) in lieu of an LOA, an LN was issued to MEDICARD informing it· of the discrepancies between its ITRs and VAT Returns and this procedure is authorized under Revenue Memorandum Order (RMO) No. 30-2003 and 42-2003; (3) MEDICARD is estopped from questioning the validity of the assessment on the ground of lack of LOA since the assessment issued against MEDICARD contained the requisite legal and factual bases that put MEDICARD on notice of the deficiencies and it in fact availed of the remedies provided by law without questioning the nullity of the assessment; (4) the amounts that MEDICARD earmarked , and eventually paid to doctors, hospitals and clinics cannot be excluded from · the computation of its gross receipts under the provisions of RR No. 4-2007 because the act of earmarking or allocation is by itself an act of ownership and management over the funds by MEDICARD which is beyond the contemplation of RR No. 4-2007; (5) MEDICARD's earnings from its clinics and laboratory facilities cannot be excluded from its gross receipts because the operation of these clinics and laboratory is merely an incident to MEDICARD's main line of business as HMO and there is no evidence that MEDICARD segregated the amounts pertaining to this at the time it received the premium from its members; and (6) MEDICARD was not able to substantiate the amount pertaining to its January 2006 income and therefore has no basis to impose a 10% VAT rate.20 Undaunted, MEDICARD filed a Motion for Reconsideration but it was denied. Hence, MEDICARD elevated the matter to the CTA en banc. In a Decision21 dated September 2, 2015, the CTA en banc partially granted the petition only insofar as the 10% VAT rate for January 2006 is concerned but sustained the findings of the CTA Division in all other matters, thus: WHEREFORE, in view thereof, the instant Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the Decision date June 5, 2014 is hereby MODIFIED, as follows: "WHEREFORE, premises considered, the deficiency VAT assessment issued by [CIR] against [MEDICARD] covering taxable year 2006 is hereby AFFIRMED WITH MODIFICATIONS. Accordingly, [MEDICARD] is ordered to pay [CIR] the amount of ₱220,234,609.48, inclusive of the 25% surcharge imposed under Section 248(A)(3) of the NIRC of 1997, as amended, computed as follows: Basic Deficiency VAT
₱76,187,687.58
Add: 25% Surcharge
44,046,921.90
₱220,234.609.48
Total In addition, [MEDICARD] is ordered to pay:
(a) Deficiency interest at the rate of 20% per annum on the basic deficiency VAT of ₱l 76,187,687.58 computed from January 25, 2007 until full payment thereof pursuant to Section 249(B) of the NIRC of 1997, as amended; and (b) Delinquency interest at the rate of 20% per annum on the total amount of ₱220,234,609.48 (representing basic deficiency VAT of ₱l76,187,687.58 and 25% surcharge of ₱44,046,921.90) and on the deficiency interest which have accrued as afore-stated in (a), computed from June 19, 2009 until full payment thereof pursuant to Section 249(C) of the NIRC of 1997, as amended." SO ORDERED.22 Disagreeing with the CTA en bane's decision, MEDICARD filed a motion for reconsideration but it was denied.23Hence, MEDICARD now seeks recourse to this Court via a petition for review on certiorari. The Issues
l. WHETHER THE ABSENCE OF THE LOA IS FATAL; and 2. WHETHER THE AMOUNTS THAT MEDICARD EARMARKED AND EVENTUALLY PAID TO THE MEDICAL SERVICE PROVIDERS SHOULD STILL FORM PART OF ITS GROSS RECEIPTS FOR VAT PURPOSES.24 Ruling of the Court The petition is meritorious. The absence of an LOA violated MEDICARD's right to due process An LOA is the authority given to the appropriate revenue officer assigned to perform assessment functions. It empowers or enables said revenue officer to examine the books of account and other accounting records of a taxpayer for the purpose of collecting the correct amount of tax. 25 An LOA is premised on the fact that the examination of a taxpayer who has already filed his tax returns is a power that statutorily belongs only to the CIR himself or his duly authorized representatives. Section 6 of the NIRC clearly provides as follows: SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax Administration and Enforcement. – (A) Examination of Return and Determination of Tax Due.- After a return has been filed as required under the provisions of this Code, the Commissioner or his duly authorized representative may authorize the examination of any taxpayer and the assessment of the correct amount of tax: Provided, however, That failure to file a return shall not prevent the Commissioner from authorizing the examination of any taxpayer. x x x x (Emphasis and underlining ours) Based on the afore-quoted provision, it is clear that unless authorized by the CIR himself or by his duly authorized representative, through an LOA, an examination of the taxpayer cannot ordinarily be undertaken. The circumstances contemplated under Section 6 where the taxpayer may be assessed through best-evidence obtainable, inventory-taking, or surveillance among others has nothing to do with the LOA. These are simply methods of examining the taxpayer in order to arrive at .the correct amount of taxes. Hence, unless undertaken by the CIR himself or his duly authorized representatives, other tax agents may not validly conduct any of these kinds of examinations without prior authority. With the advances in information and communication technology, the Bureau of Internal Revenue (BIR) promulgated RMO No. 30-2003 to lay down the policies and guidelines once its then incipient centralized Data Warehouse (DW) becomes fully operational in conjunction with its Reconciliation of Listing for Enforcement System (RELIEF System).26 This system can detect tax leaks by matching the data available under the BIR's Integrated Tax System (ITS) with data gathered from third-party sources. Through the consolidation and cross-referencing of third-party information, discrepancy reports on sales and purchases can be generated to uncover under declared income and over claimed purchases of Goods and services. Under this RMO, several offices of the BIR are tasked with specific functions relative to the RELIEF System, particularly with regard to LNs. Thus, the Systems Operations Division (SOD) under the Information Systems Group (ISG) is responsible for: (1) coming up with the List of Taxpayers with discrepancies within the threshold amount set by management for the issuance of LN and for the systemgenerated LNs; and (2) sending the same to the taxpayer and to the Audit Information, Tax Exemption and Incentives Division (AITEID). After receiving the LNs, the AITEID under the Assessment Service (AS), in coordination with the concerned offices under the ISG, shall be responsible for transmitting the LNs to the investigating offices [Revenue District Office (RDO)/Large Taxpayers District Office
(LTDO)/Large Taxpayers Audit and Investigation Division (LTAID)]. At the level of these investigating offices, the appropriate action on the LN s issued to taxpayers with RELIEF data discrepancy would be determined. RMO No. 30-2003 was supplemented by RMO No. 42-2003, which laid down the "no-contact-audit approach" in the CIR's exercise of its ·power to authorize any examination of taxpayer arid the assessment of the correct amount of tax. The no-contact-audit approach includes the process of computerized matching of sales and purchases data contained in the Schedules of Sales and Domestic Purchases and Schedule of Importation submitted by VAT taxpayers under the RELIEF System pursuant to RR No. 7-95, as amended by RR Nos. 13-97, 7-99 and 8-2002. This may also include the matching of data from other information or returns filed by the taxpayers with the BIR such as Alphalist of Payees subject to Final or Creditable Withholding Taxes. Under this policy, even without conducting a detailed examination of taxpayer's books and records, if the computerized/manual matching of sales and purchases/expenses appears to reveal discrepancies, the same shall be communicated to the concerned taxpayer through the issuance of LN. The LN shall serve as a discrepancy notice to taxpayer similar to a Notice for Informal Conference to the concerned taxpayer. Thus, under the RELIEF System, a revenue officer may begin an examination of the taxpayer even prior to the issuance of an LN or even in the absence of an LOA with the aid of a computerized/manual matching of taxpayers': documents/records. Accordingly, under the RELIEF System, the presumption that the tax returns are in accordance with law and are presumed correct since these are filed under the penalty of perjury27 are easily rebutted and the taxpayer becomes instantly burdened to explain a purported discrepancy. Noticeably, both RMO No. 30-2003 and RMO No. 42-2003 are silent on the statutory requirement of an LOA before any investigation or examination of the taxpayer may be conducted. As provided in the RMO No. 42-2003, the LN is merely similar to a Notice for Informal Conference. However, for a Notice of Informal Conference, which generally precedes the issuance of an assessment notice to be valid, the same presupposes that the revenue officer who issued the same is properly authorized in the first place. With this apparent lacuna in the RMOs, in November 2005, RMO No. 30-2003, as supplemented by RMO No. 42-2003, was amended by RMO No. 32-2005 to fine tune existing procedures in handing assessments against taxpayers'· issued LNs by reconciling various revenue issuances which conflict with the NIRC. Among the objectives in the issuance of RMO No. 32-2005 is to prescribe procedure in the resolution of LN discrepancies, conversion of LNs to LOAs and assessment and collection of deficiency taxes. IV. POLICIES AND GUIDELINES xxxx 8. In the event a taxpayer who has been issued an LN refutes the discrepancy shown in the LN, the concerned taxpayer will be given an opportunity to reconcile its records with those of the BIR within One Hundred and Twenty (120) days from the date of the issuance of the LN. However, the subject taxpayer shall no longer be entitled to the abatement of interest and penalties after the lapse of the sixty (60)-day period from the LN issuance. 9. In case the above discrepancies remained unresolved at the end of the One Hundred and Twenty (120)-day period, the revenue officer (RO) assigned to handle the LN shall recommend the issuance of [LOA) to replace the LN. The head of the concerned investigating office shall submit a summary list of LNs for conversion to LAs (using the herein prescribed format in Annex "E" hereof) to the OACIR-LTS I ORD for the preparation of the corresponding LAs with the notation "This LA cancels LN_________ No. "
xxxx V. PROCEDURES xxxx B. At the Regional Office/Large Taxpayers Service xxxx 7. Evaluate the Summary List of LNs for Conversion to LAs submitted by the RDO x x x prior to approval. 8. Upon approval of the above list, prepare/accomplish and sign the corresponding LAs. xxxx Decision 11 G.R. No. 222743 xxxx 10. Transmit the approved/signed LAs, together with the duly accomplished/approved Summary List of LNs for conversion to LAs, to the concerned investigating offices for the encoding of the required information x x x and for service to the concerned taxpayers. xxxx C. At the RDO x x x xxxx 11. If the LN discrepancies remained unresolved within One Hundred and Twenty (120) days from issuance thereof, prepare a summary list of said LN s for conversion to LAs x x x. xxxx 16. Effect the service of the above LAs to the concerned taxpayers.28 In this case, there is no dispute that no LOA was issued prior to the issuance of a PAN and FAN against MED ICARD. Therefore no LOA was also served on MEDICARD. The LN that was issued earlier was also not converted into an LOA contrary to the above quoted provision. Surprisingly, the CIR did not even dispute the applicability of the above provision of RMO 32-2005 in the present case which is clear and unequivocal on the necessity of an LOA for the· assessment proceeding to be valid. Hence, the CTA's disregard of MEDICARD's right to due process warrant the reversal of the assailed decision and resolution. In the case of Commissioner of Internal Revenue v. Sony Philippines, Inc. ,29 the Court said that: Clearly, there must be a grant of authority before any revenue officer can conduct an examination or assessment. Equally important is that the revenue officer so authorized must not go beyond the authority given. In the absence of such an authority, the assessment or examination is a nullity.30 (Emphasis and underlining ours) The Court cannot convert the LN into the LOA required under the law even if the same was issued by the CIR himself. Under RR No. 12-2002, LN is issued to a person found to have underreported sales/receipts per data generated under the RELIEF system. Upon receipt of the LN, a taxpayer may avail of the BIR's Voluntary Assessment and Abatement Program. If a taxpayer fails or refuses to avail of the said program, the BIR may avail of administrative and criminal .remedies, particularly closure, criminal action, or audit and investigation. Since the law specifically requires an LOA and RMO No. 32-2005 requires the conversion of the previously issued LN to an LOA, the absence thereof cannot be simply swept under the rug, as the CIR
would have it. In fact Revenue Memorandum Circular No. 40-2003 considers an LN as a notice of audit or investigation only for the purpose of disqualifying the taxpayer from amending his returns. The following differences between an LOA and LN are crucial. First, an LOA addressed to a revenue officer is specifically required under the NIRC before an examination of a taxpayer may be had while an LN is not found in the NIRC and is only for the purpose of notifying the taxpayer that a discrepancy is found based on the BIR's RELIEF System. Second, an LOA is valid only for 30 days from date of issue while an LN has no such limitation. Third, an LOA gives the revenue officer only a period of 10days from receipt of LOA to conduct his examination of the taxpayer whereas an LN does not contain such a limitation. 31 Simply put, LN is entirely different and serves a different purpose than an LOA. Due process demands, as recognized under RMO No. 32-2005, that after an LN has serve its purpose, the revenue officer should have properly secured an LOA before proceeding with the further examination and assessment of the petitioner. Unfortunarely, this was not done in this case. Contrary to the ruling of the CTA en banc, an LOA cannot be dispensed with just because none of the financial books or records being physically kept by MEDICARD was examined. To begin with, Section 6 of the NIRC requires an authority from the CIR or from his duly authorized representatives before an examination "of a taxpayer" may be made. The requirement of authorization is therefore not dependent on whether the taxpayer may be required to physically open his books and financial records but only on whether a taxpayer is being subject to examination. The BIR's RELIEF System has admittedly made the BIR's assessment and collection efforts much easier and faster. The ease by which the BIR's revenue generating objectives is achieved is no excuse however for its non-compliance with the statutory requirement under Section 6 and with its own administrative issuance. In fact, apart from being a statutory requirement, an LOA is equally needed even under the BIR's RELIEF System because the rationale of requirement is the same whether or not the CIR conducts a physical examination of the taxpayer's records: to prevent undue harassment of a taxpayer and level the playing field between the government' s vast resources for tax assessment, collection and enforcement, on one hand, and the solitary taxpayer's dual need to prosecute its business while at the same time responding to the BIR exercise of its statutory powers. The balance between these is achieved by ensuring that any examination of the taxpayer by the BIR' s revenue officers is properly authorized in the first place by those to whom the discretion to exercise the power of examination is given by the statute. That the BIR officials herein were not shown to have acted unreasonably is beside the point because the issue of their lack of authority was only brought up during the trial of the case. What is crucial is whether the proceedings that led to the issuance of VAT deficiency assessment against MEDICARD had the prior approval and authorization from the CIR or her duly authorized representatives. Not having authority to examine MEDICARD in the first place, the assessment issued by the CIR is inescapably void. At any rate, even if it is assumed that the absence of an LOA is not fatal, the Court still partially finds merit in MEDICARD's substantive arguments. The amounts earmarked and eventually paid by MEDICARD to the medical service providers do not form part of gross receipts.for VAT purposes MEDICARD argues that the CTA en banc seriously erred in affirming the ruling of the CT A Division that the gross receipts of an HMO for VAT purposes shall be the total amount of money or its equivalent actually received from members undiminished by any amount paid or payable to the owners/operators of hospitals, clinics and medical and dental practitioners. MEDICARD explains that its business as an HMO involves two
different although interrelated contracts. One is between a corporate client and MEDICARD, with the corporate client's employees being considered as MEDICARD members; and the other is between the health care institutions/healthcare professionals and MED ICARD. Under the first, MEDICARD undertakes to make arrangements with healthcare institutions/healthcare professionals for the coverage of MEDICARD members under specific health related services for a specified period of time in exchange for payment of a more or less fixed membership fee. Under its contract with its corporate clients, MEDICARD expressly provides that 20% of the membership fees per individual, regardless of the amount involved, already includes the VAT of 10%/20% excluding the remaining 80o/o because MED ICARD would earmark this latter portion for medical utilization of its members. Lastly, MEDICARD also assails CIR's inclusion in its gross receipts of its earnings from medical services which it actually and directly rendered to its members. Since an HMO like MEDICARD is primarily engaged m arranging for coverage or designated managed care services that are needed by plan holders/members for fixed prepaid membership fees and for a specified period of time, then MEDICARD is principally engaged in the sale of services. Its VAT base and corresponding liability is, thus, determined under Section 108(A) 32 of the Tax Code, as amended by Republic Act No. 9337. Prior to RR No. 16-2005, an HMO, like a pre-need company, is treated for VAT purposes as a dealer in securities whose gross receipts is the amount actually received as contract price without allowing any deduction from the gross receipts. 33 This restrictive tenor changed under RR No. 16-2005. Under this RR, an HMO's gross receipts and gross receipts in general were defined, thus: Section 4.108-3. xxx xxxx HMO's gross receipts shall be the total amount of money or its equivalent representing the service fee actually or constructively received during the taxable period for the services performed or to be performed for another person, excluding the value-added tax. The compensation for their services representing their service fee, is presumed to be the total amount received as enrollment fee from their members plus other charges received. Section 4.108-4. x x x. "Gross receipts" refers to the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits applied as payments for services rendered, and advance payments actually or constructively received during the taxable period for the services performed or to be performed for another person, excluding the VAT. 34 In 2007, the BIR issued RR No. 4-2007 amending portions of RR No. 16-2005, including the definition of gross receipts in general.35 According to the CTA en banc, the entire amount of membership fees should form part of MEDICARD's gross receipts because the exclusions to the gross receipts under RR No. 4-2007 does not apply to MEDICARD. What applies to MEDICARD is the definition of gross receipts of an HMO under RR No. 162005 and not the modified definition of gross receipts in general under the RR No. 4-2007. The CTA en banc overlooked that the definition of gross receipts under. RR No. 16-2005 merely presumed that the amount received by an HMO as membership fee is the HMO's compensation for their services. As a mere presumption, an HMO is, thus, allowed to establish that a portion of the amount it received as membership fee does NOT actually compensate it but some other person, which in this case are the medical service providers themselves. It is a well-settled principle of legal hermeneutics that words of a
statute will be interpreted in their natural, plain and ordinary acceptation and signification, unless it is evident that the legislature intended a technical or special legal meaning to those words. The Court cannot read the word "presumed" in any other way. It is notable in this regard that the term gross receipts as elsewhere mentioned as the tax base under the NIRC does not contain any specific definition. 36 Therefore, absent a statutory definition, this Court has construed the term gross receipts in its plain and ordinary meaning, that is, gross receipts is understood as comprising the entire receipts without any deduction.37 Congress, under Section 108, could have simply left the term gross receipts similarly undefined and its interpretation subjected to ordinary acceptation,. Instead of doing so, Congress limited the scope of the term gross receipts for VAT purposes only to the amount that the taxpayer received for the services it performed or to the amount it received as advance payment for the services it will render in the future for another person. In the proceedings ·below, the nature of MEDICARD's business and the extent of the services it rendered are not seriously disputed. As an HMO, MEDICARD primarily acts as an intermediary between the purchaser of healthcare services (its members) and the healthcare providers (the doctors, hospitals and clinics) for a fee. By enrolling membership with MED ICARD, its members will be able to avail of the prearranged medical services from its accredited healthcare providers without the necessary protocol of posting cash bonds or deposits prior to being attended to or admitted to hospitals or clinics, especially during emergencies, at any given time. Apart from this, MEDICARD may also directly provide medical, hospital and laboratory services, which depends upon its member's choice. Thus, in the course of its business as such, MED ICARD members can either avail of medical services from MEDICARD's accredited healthcare providers or directly from MEDICARD. In the former, MEDICARD members obviously knew that beyond the agreement to pre-arrange the healthcare needs of its ·members, MEDICARD would not actually be providing the actual healthcare service. Thus, based on industry practice, MEDICARD informs its would-be member beforehand that 80% of the amount would be earmarked for medical utilization and only the remaining 20% comprises its service fee. In the latter case, MEDICARD's sale of its services is exempt from VAT under Section 109(G). The CTA's ruling and CIR's Comment have not pointed to any portion of Section 108 of the NIRC that would extend the definition of gross receipts even to amounts that do not only pertain to the services to be performed: by another person, other than the taxpayer, but even to amounts that were indisputably utilized not by MED ICARD itself but by the medical service providers. It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a statute shall be considered surplusage or superfluous, meaningless, void and insignificant. To this end, a construction which renders every word operative is preferred over that which makes some words idle and nugatory. This principle is expressed in the maxim Ut magisvaleat quam pereat, that is, we choose the interpretation which gives effect to the whole of the statute – it’s every word. In Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue, 38the Court adopted the principal object and purpose object in determining whether the MEDICARD therein is engaged in the business of insurance and therefore liable for documentary stamp tax. The Court held therein that an HMO engaged in preventive, diagnostic and curative medical services is not engaged in the business of an insurance, thus: To summarize, the distinctive features of the cooperative are the rendering of service, its extension, the bringing of physician and patient together, the preventive features, the regularization of service as well as payment, the substantial reduction in cost by quantity purchasing in short, getting the medical job done and paid for; not, except incidentally to these features, the indemnification for cost after .the services is rendered. Except the last, these are not distinctive or generally
characteristic of the insurance arrangement. There is, therefore, a substantial difference between contracting in this way for the rendering of service, even on the contingency that it be needed, and contracting merely to stand its cost when or after it is rendered. 39 (Emphasis ours) In sum, the Court said that the main difference between an HMO arid an insurance company is that HMOs undertake to provide or arrange for the provision of medical services through participating physicians while insurance companies simply undertake to indemnify the insured for medical expenses incurred up to a preagreed limit. In the present case, the VAT is a tax on the value added by the performance of the service by the taxpayer. It is, thus, this service and the value charged thereof by the taxpayer that is taxable under the NIRC. To be sure, there are pros and cons in subjecting the entire amount of membership fees to VAT. 40 But the Court's task however is not to weigh these policy considerations but to determine if these considerations in favor of taxation can even be implied from the statute where the CIR purports to derive her authority. This Court rules that they cannot because the language of the NIRC is pretty straightforward and clear. As this Court previously ruled: What is controlling in this case is the well-settled doctrine of strict interpretation in the imposition of taxes, not the similar doctrine as applied to tax exemptions. The rule in the interpretation of tax laws is that a statute will not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously. A tax cannot be imposed without clear and express words for that purpose. Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication. In answering the question of who is subject to tax statutes, it is basic that in case of doubt, such statutes are to be construed most strongly against the government and in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond what statutes expressly and clearly import. As burdens, taxes should not be unduly exacted nor assumed beyond the plain meaning of the tax laws. 41 (Citation omitted and emphasis and underlining ours) For this Court to subject the entire amount of MEDICARD's gross receipts without exclusion, the authority should have been reasonably founded from the language of the statute. That language is wanting in this case. In the scheme of judicial tax administration, the need for certainty and predictability in the implementation of tax laws is crucial. Our tax authorities fill in the details that Congress may not have the opportunity or competence to provide. The regulations these authorities issue are relied upon by taxpayers, who are certain that these will be followed by the courts. Courts, however, will not uphold these authorities' interpretations when dearly absurd, erroneous or improper. 42 The CIR's interpretation of gross receipts in the present case is patently erroneous for lack of both textual and non-textual support. As to the CIR's argument that the act of earmarking or allocation is by itself an act of ownership and management over the funds, the Court does not agree. On the contrary, it is MEDICARD's act of earmarking or allocating 80% of the amount it received as membership fee at the time of payment that weakens the ownership imputed to it. By earmarking or allocating 80% of the amount, MEDICARD unequivocally recognizes that its possession of the funds is not in the concept of owner but as a mere administrator of the same. For this reason, at most, MEDICARD's right in relation to these amounts is a mere inchoate owner which would ripen into actual ownership if, and only if, there is underutilization of the membership fees at the end of the fiscal year. Prior to that, MEDI CARD is bound to pay from the amounts it had allocated as an administrator once its members avail of the medical services of MEDICARD's healthcare providers. 1âwphi1
Before the Court, the parties were one in submitting the legal issue of whether the amounts MEDICARD earmarked, corresponding to 80% of its enrollment fees, and paid to the medical service providers should
form part of its gross receipt for VAT purposes, after having paid the VAT on the amount comprising the 20%. It is significant to note in this regard that MEDICARD established that upon receipt of payment of membership fee it actually issued two official receipts, one pertaining to the VAT able portion, representing compensation for its services, and the other represents the non-vatable portion pertaining to the amount earmarked for medical utilization.: Therefore, the absence of an actual and physical segregation of the amounts pertaining to two different kinds · of fees cannot arbitrarily disqualify MEDICARD from rebutting the presumption under the law and from proving that indeed services were rendered by its healthcare providers for which it paid the amount it sought to be excluded from its gross receipts. With the foregoing discussions on the nullity of the assessment on due process grounds and violation of the NIRC, on one hand, and the utter lack of legal basis of the CIR's position on the computation of MEDICARD's gross receipts, the Court finds it unnecessary, nay useless, to discuss the rest of the parties' arguments and counter-arguments. In fine, the foregoing discussion suffices for the reversal of the assailed decision and resolution of the CTA en banc grounded as it is on due process violation. The Court likewise rules that for purposes of determining the VAT liability of an HMO, the amounts earmarked and actually spent for medical utilization of its members should not be included in the computation of its gross receipts. WHEREFORE, in consideration of the foregoing disquisitions, the petition is hereby GRANTED. The Decision dated September 2, 2015 and Resolution dated January 29, 2016 issued by the Court of Tax Appeals en bane in CTA EB No. 1224 are REVERSED and SET ASIDE. The definition of gross receipts under Revenue Regulations Nos. 16-2005 and 4-2007, in relation to Section 108(A) of the National Internal Revenue Code, as amended by Republic Act No. 9337, for purposes of determining its Value-Added Tax liability, is hereby declared to EXCLUDE the eighty percent (80%) of the amount of the contract price earmarked as fiduciary funds for the medical utilization of its members. Further, the Value-Added Tax deficiency assessment issued against Medicard Philippines, Inc. is hereby declared unauthorized for having been issued without a Letter of Authority by the Commissioner of Internal Revenue or his duly authorized representatives. SO ORDERED.
BIENVENID L. REYES, Associate Justice G.R. No. 136975
March 31, 2005
COMMISSION OF INTERNAL REVENUE, Petitioner, vs. HANTEX TRADING CO., INC., respondent. DECISION CALLEJO, SR., J.: Before us is a petition for review of the Decision 1 of the Court of Appeals (CA) which reversed the Decision2 of the Court of Tax Appeals (CTA) in CTA Case No. 5126, upholding the deficiency income and sales tax assessments against respondent Hantex Trading Co., Inc. The Antecedents The respondent is a corporation duly organized and existing under the laws of the Philippines. Being engaged in the sale of plastic products, it imports synthetic resin and other chemicals for the manufacture of its products. For this purpose, it is required to file an Import Entry and Internal Revenue Declaration (Consumption Entry) with the Bureau of Customs under Section 1301 of the Tariff and Customs Code. Sometime in October 1989, Lt. Vicente Amoto, Acting Chief of Counter-Intelligence Division of the Economic Intelligence and Investigation Bureau (EIIB), received confidential information that the respondent had imported synthetic resin amounting to P115,599,018.00 but only declared P45,538,694.57.3 According to the informer, based on photocopies of 77 Consumption Entries furnished by another informer, the 1987 importations of the respondent were understated in its accounting records.4 Amoto submitted a report to the EIIB Commissioner recommending that an inventory audit of the respondent be conducted by the Internal Inquiry and Prosecution Office (IIPO) of the EIIB. 5 Acting on the said report, Jose T. Almonte, then Commissioner of the EIIB, issued Mission Order No. 398896 dated November 14, 1989 for the audit and investigation of the importations of Hantex for 1987. The IIPO issued subpoena duces tecum and ad testificandum for the president and general manager of the respondent to appear in a hearing and bring the following: 1. Books of Accounts for the year 1987; 2. Record of Importations of Synthetic Resin and Calcium Carbonate for the year 1987; 3. Income tax returns & attachments for 1987; and 4. Record of tax payments.7 However, the respondent’s president and general manager refused to comply with the subpoena, contending that its books of accounts and records of importation of synthetic resin and calcium bicarbonate had been investigated repeatedly by the Bureau of Internal Revenue (BIR) on prior occasions. 8 The IIPO explained that despite such previous investigations, the EIIB was still authorized to conduct an investigation pursuant to Section 26-A of Executive Order No. 127. Still, the respondent refused to comply with the subpoena issued by the IIPO. The latter forthwith secured certified copies of the Profit and Loss Statements for 1987 filed by the respondent with the Securities and Exchange Commission (SEC).9 However, the IIPO failed to secure certified copies of the respondent’s 1987 Consumption Entries from the Bureau of Customs since, according to the custodian thereof, the original copies had been eaten by termites.10
In a Letter dated June 28, 1990, the IIPO requested the Chief of the Collection Division, Manila International Container Port, and the Acting Chief of the Collection Division, Port of Manila, to authenticate the machine copies of the import entries supplied by the informer. However, Chief of the Collection Division Merlita D. Tomas could not do so because the Collection Division did not have the original copies of the entries. Instead, she wrote the IIPO that, as gleaned from the records, the following entries had been duly processed and released after the payment of duties and taxes: IMPORTER – HANTEX TRADING CO., INC. – SERIES OF 1987 ENTRY NO.
DATE RELEASED
ENTRY NO.
DATE RELEASED
03058-87
1/30/87 50265-87
12/9/87
09120-87
3/20/87 46427-87
11/27/87
18089-87
5/21/87 30764-87
8/21/87
19439-87
6/2/87 30833-87
8/20/87
19441-87
6/3/87 34690-87
9/16/87
11667-87
4/15/87 34722-87
9/11/87
23294-87
7/7/87 43234-87
11/2/87
45478-87
11/16/87 44850-87
11/16/87
45691-87
12/2/87 44851-87
11/16/87
25464-87
7/16/87 46461-87
11/19/87
26483-87
7/23/87 46467-87
11/18/87
29950-87
8/11/87 48091-87
11-27-8711
Acting Chief of the Collection Division of the Bureau of Customs Augusto S. Danganan could not authenticate the machine copies of the import entries as well, since the original copies of the said entries filed with the Bureau of Customs had apparently been eaten by termites. However, he issued a certification that the following enumerated entries were filed by the respondent which were processed and released from the Port of Manila after payment of duties and taxes, to wit: Hantex Trading Co., Inc. Entry No.
Date Released Entry No.
Date Released
3903
1/29/87
22869
4/8/87
4414
1/20/87
19441
3/31/87
10683
2/17/87
24189
4/21/87
12611
2/24/87
26431
4/20/87
12989
2/26/87
45478
7/3/87
17050
3/13/87
26796
4/23/87
17169
3/13/87
28827
4/30/87
18089
3/16/87
31617
5/14/87
19439
4/1/87
39068
6/5/87
21189
4/3/87
42581
6/21/87
43451
6/29/87
42793
6/23/87
42795
6/23/87
45477
7/3/87
35582
not received
85830
11/13/87
45691
7/3/87
86650
not received
46187
7/8/87
87647
11/18/87
46427
7/3/87
88829
11/23/87
57669
8/12/87
92293
12/3/87
62471
8/28/87
93292
12/7/87
63187
9/2/87
96357
12/16/87
66859
9/15/87
96822
12/15/87
67890
9/17/87
98823
not received
68115
9/15/87
99428
12/28/87
69974
9/24/87
99429
12/28/87
72213
10/2/87
99441
12/28/87
77688
10/16/87
101406
1/5/87
84253
11/10/87
101407
1/8/87
85534
11/11/87
3118
1-19-8712
Bienvenido G. Flores, Chief of the Investigation Division, and Lt. Leo Dionela, Lt. Vicente Amoto and Lt. Rolando Gatmaitan conducted an investigation. They relied on the certified copies of the respondent’s Profit and Loss Statement for 1987 and 1988 on file with the SEC, the machine copies of the Consumption Entries, Series of 1987, submitted by the informer, as well as excerpts from the entries certified by Tomas and Danganan. Based on the documents/records on hand, inclusive of the machine copies of the Consumption Entries, the EIIB found that for 1987, the respondent had importations totaling P105,716,527.00 (inclusive of advance sales tax). Compared with the declared sales based on the Profit and Loss Statements filed with the SEC, the respondent had unreported sales in the amount of P63,032,989.17, and its corresponding income tax liability was P41,916,937.78, inclusive of penalty charge and interests. EIIB Commissioner Almonte transmitted the entire docket of the case to the BIR and recommended the collection of the total tax assessment from the respondent. 13 On February 12, 1991, Deputy Commissioner Deoferio, Jr. issued a Memorandum to the BIR Assistant Commissioner for Special Operations Service, directing the latter to prepare a conference letter advising the respondent of its deficiency taxes.14 Meanwhile, as ordered by the Regional Director, Revenue Enforcement Officers Saturnino D. Torres and Wilson Filamor conducted an investigation on the 1987 importations of the respondent, in the light of the records elevated by the EIIB to the BIR, inclusive of the photocopies of the Consumption Entries. They were to ascertain the respondent’s liability for deficiency sales and income taxes for 1987, if any. Per Torres’ and Filamor’s Report dated March 6, 1991 which was based on the report of the EIIB and the documents/records appended thereto, there was a prima facie case of fraud against the respondent in filing its 1987 Consumption Entry reports with the Bureau of Customs. They found that the respondent had unrecorded importation in the total amount of P70,661,694.00, and that the amount was not declared in its income tax return for 1987. The District Revenue Officer and the Regional Director of the BIR concurred with the report.15 Based on the said report, the Acting Chief of the Special Investigation Branch wrote the respondent and invited its representative to a conference at 10:00 a.m. of March 14, 1991 to discuss its deficiency internal revenue taxes and to present whatever documentary and other evidence to refute the same. 16 Appended to the letter was a computation of the deficiency income and sales tax due from the respondent, inclusive of increments: B. Computations: 1. Cost of Sales Ratio
A2/A1
85.492923%
2. Undeclared Sales – Imported
A3/B1
110,079,491.61
3. Undeclared Gross Profit
B2-A3
15,969,316.61
C. Deficiency Taxes Due: 1. Deficiency Income Tax
B3 x 35%
5,589,261.00
50% Surcharge
C1 x 50%
2,794,630.50
Interest to 2/28/91
C1 x 57.5%
3,213,825.08
Total
11,597,825.58
2. Deficiency Sales Tax at 10%
7,290,082.72
at 20%
10,493,312.31 Total Due
17,783,395.03
Less: Advanced Sales Taxes Paid
11,636,352.00
Deficiency Sales Tax
6,147,043.03
50% Surcharge
C2 x 50%
Interest to 2/28/91
3,073,521.52 5,532,338.73
Total
14,752,903.2817
The invitation was reiterated in a Letter dated March 15, 1991. In his Reply dated March 15, 1991, Mariano O. Chua, the President and General Manager of the respondent, requested that the report of Torres and Filamor be set aside on the following claim:
… [W]e had already been investigated by RDO No. 23 under Letters of Authority Nos. 0322988 RR dated Oct. 1, 1987, 0393561 RR dated Aug. 17, 1988 and 0347838 RR dated March 2, 1988, and re-investigated by the Special Investigation Team on Aug. 17, 1988 under Letter of Authority No. 0357464 RR, and the Intelligence and Investigation Office on Sept. 27, 1988 under Letter of Authority No. 0020188 NA, all for income and business tax liabilities for 1987. The Economic Intelligence and Investigation Bureau on Nov. 20, 1989, likewise, confronted us on the same information for the same year. In all of these investigations, save your request for an informal conference, we welcomed them and proved the contrary of the allegation. Now, with your new inquiry, we think that there will be no end to the problem.
Madam, we had been subjected to so many investigations and re-investigations for 1987 and nothing came out except the payment of deficiency taxes as a result of oversight. Tax evasion through underdeclaration of income had never been proven. 18 Invoking Section 23519 of the 1977 National Internal Revenue Code (NIRC), as amended, Chua requested that the inquiry be set aside. The petitioner, the Commissioner of Internal Revenue, through Assistant Commissioner for Collection Jaime M. Maza, sent a Letter dated April 15, 1991 to the respondent demanding payment of its deficiency income tax of P13,414,226.40 and deficiency sales tax of P14,752,903.25, inclusive of surcharge and interest.20 Appended thereto were the Assessment Notices of Tax Deficiency Nos. FAS-1-87-91-001654 and FAS-4-87-91-001655.21 On February 12, 1992, the Chief of the Accounts Receivables/Billing Division of the BIR sent a letter to the respondent demanding payment of its tax liability due for 1987 within ten (10) days from notice, on pain of the collection tax due via a warrant of distraint and levy and/or judicial action. 22 The Warrant of Distraint and/or Levy23was actually served on the respondent on January 21, 1992. On September 7, 1992, it wrote the Commissioner of Internal Revenue protesting the assessment on the following grounds: I. THAT THE ASSESSMENT HAS NO FACTUAL AS WELL AS LEGAL BASIS, THE FACT THAT NO INVESTIGATION OF OUR RECORDS WAS EVER MADE BY THE EIIB WHICH RECOMMENDED ITS ISSUANCE.24 II. THAT GRANTING BUT WITHOUT ADMITTING THAT OUR PURCHASES FOR 1987 AMOUNTED TO P105,716,527.00 AS CLAIMED BY THE EIIB, THE ASSESSMENT OF A DEFICIENCY INCOME TAX IS STILL DEFECTIVE FOR IT FAILED TO CONSIDER OUR REAL PURCHASES OF P45,538,694.57.25 III. THAT THE ASSESSMENT OF A DEFICIENCY SALES TAX IS ALSO BASELESS AND UNFOUNDED CONSIDERING THAT WE HAVE DUTIFULLY PAID THE SALES TAX DUE FROM OUR BUSINESS.26 In view of the impasse, administrative hearings were conducted on the respondent’s protest to the assessment. During the hearing of August 20, 1993, the IIPO representative presented the photocopies of the Consumption and Import Entries and the Certifications issued by Tomas and Danganan of the Bureau of Customs. The IIPO representative testified that the Bureau of Customs failed to furnish the EIIB with certified copies of the Consumption and Import Entries; hence, the EIIB relied on the machine copies from their informer.27 The respondent wrote the BIR Commissioner on July 12, 1993 questioning the assessment on the ground that the EIIB representative failed to present the original, or authenticated, or duly certified copies of the Consumption and Import Entry Accounts, or excerpts thereof if the original copies were not readily available; or, if the originals were in the official custody of a public officer, certified copies thereof as provided for in Section 12, Chapter 3, Book VII, Administrative Procedure, Administrative Order of 1987. It stated that the only copies of the Consumption Entries submitted to the Hearing Officer were mere machine copies furnished by an informer of the EIIB. It asserted that the letters of Tomas and Danganan were unreliable because of the following: In the said letters, the two collection officers merely submitted a listing of alleged import entry numbers and dates released of alleged importations by Hantex Trading Co., Inc. of merchandise in 1987, for which they certified that the corresponding duties and taxes were paid after being processed in their offices. In said letters, no amounts of the landed costs and advance sales tax
and duties were stated, and no particulars of the duties and taxes paid per import entry document was presented. The contents of the two letters failed to indicate the particulars of the importations per entry number, and the said letters do not constitute as evidence of the amounts of importations of Hantex Trading Co., Inc. in 1987.28 The respondent cited the following findings of the Hearing Officer:
… [T]hat the import entry documents do not constitute evidence only indicate that the tax assessments in question have no factual basis, and must, at this point in time, be withdrawn and cancelled. Any new findings by the IIPO representative who attended the hearing could not be used as evidence in this hearing, because all the issues on the tax assessments in question have already been raised by the herein taxpayer.29 The respondent requested anew that the income tax deficiency assessment and the sales tax deficiency assessment be set aside for lack of factual and legal basis. The BIR Commissioner30 wrote the respondent on December 10, 1993, denying its letter-request for the dismissal of the assessments.31 The BIR Commissioner admitted, in the said letter, the possibility that the figures appearing in the photocopies of the Consumption Entries had been tampered with. She averred, however, that she was not proscribed from relying on other admissible evidence, namely, the Letters of Torres and Filamor dated August 7 and 22, 1990 on their investigation of the respondent’s tax liability. The Commissioner emphasized that her decision was final. 32 The respondent forthwith filed a petition for review in the CTA of the Commissioner’s Final Assessment Letter dated December 10, 1993 on the following grounds: First. The alleged 1987 deficiency income tax assessment (including increments) and the alleged 1987 deficiency sales tax assessment (including increments) are void ab initio, since under Sections 16(a) and 49(b) of the Tax Code, the Commissioner shall examine a return after it is filed and, thereafter, assess the correct amount of tax. The following facts obtaining in this case, however, are indicative of the incorrectness of the tax assessments in question: the deficiency interests imposed in the income and percentage tax deficiency assessment notices were computed in violation of the provisions of Section 249(b) of the NIRC of 1977, as amended; the percentage tax deficiency was computed on an annual basis for the year 1987 in accordance with the provision of Section 193, which should have been computed in accordance with Section 162 of the 1977 NIRC, as amended by Pres. Decree No. 1994 on a quarterly basis; and the BIR official who signed the deficiency tax assessments was the Assistant Commissioner for Collection, who had no authority to sign the same under the NIRC. Second. Even granting arguendo that the deficiency taxes and increments for 1987 against the respondent were correctly computed in accordance with the provisions of the Tax Code, the facts indicate that the above-stated assessments were based on alleged documents which are inadmissible in either administrative or judicial proceedings. Moreover, the alleged bases of the tax computations were anchored on mere presumptions and not on actual facts. The alleged undeclared purchases for 1987 were based on mere photocopies of alleged import entry documents, not the original ones, and which had never been duly certified by the public officer charged with the custody of such records in the Bureau of Customs. According to the respondent, the alleged undeclared sales were computed based on mere presumptions as to the alleged gross profit contained in its 1987 financial statement. Moreover, even the alleged financial statement of the respondent was a mere machine copy and not an official copy of the 1987 income and business tax returns. Finally, the respondent was following the accrual method of accounting in 1987, yet,
the BIR investigator who computed the 1987 income tax deficiency failed to allow as a deductible item the alleged sales tax deficiency for 1987 as provided for under Section 30(c) of the NIRC of 1986. 33 The Commissioner did not adduce in evidence the original or certified true copies of the 1987 Consumption Entries on file with the Commission on Audit. Instead, she offered in evidence as proof of the contents thereof, the photocopies of the Consumption Entries which the respondent objected to for being inadmissible in evidence.34 She also failed to present any witness to prove the correct amount of tax due from it. Nevertheless, the CTA provisionally admitted the said documents in evidence, subject to its final evaluation of their relevancy and probative weight to the issues involved. 35 On December 11, 1997, the CTA rendered a decision, the dispositive portion of which reads: IN THE LIGHT OF ALL THE FOREGOING, judgment is hereby rendered DENYING the herein petition. Petitioner is hereby ORDERED TO PAY the respondent Commissioner of Internal Revenue its deficiency income and sales taxes for the year 1987 in the amounts of P11,182,350.26 and P12,660,382.46, respectively, plus 20% delinquency interest per annum on both deficiency taxes from April 15, 1991 until fully paid pursuant to Section 283(c)(3) of the 1987 Tax Code, with costs against the petitioner. SO ORDERED.36 The CTA ruled that the respondent was burdened to prove not only that the assessment was erroneous, but also to adduce the correct taxes to be paid by it. The CTA declared that the respondent failed to prove the correct amount of taxes due to the BIR. It also ruled that the respondent was burdened to adduce in evidence a certification from the Bureau of Customs that the Consumption Entries in question did not belong to it. On appeal, the CA granted the petition and reversed the decision of the CTA. The dispositive portion of the decision reads: FOREGOING PREMISES CONSIDERED, the Petition for Review is GRANTED and the December 11, 1997 decision of the CTA in CTA Case No. 5162 affirming the 1987 deficiency income and sales tax assessments and the increments thereof, issued by the BIR is hereby REVERSED. No costs. 37 The Ruling of the Court of Appeals The CA held that the income and sales tax deficiency assessments issued by the petitioner were unlawful and baseless since the copies of the import entries relied upon in computing the deficiency tax of the respondent were not duly authenticated by the public officer charged with their custody, nor verified under oath by the EIIB and the BIR investigators. 38 The CA also noted that the public officer charged with the custody of the import entries was never presented in court to lend credence to the alleged loss of the originals.39 The CA pointed out that an import entry is a public document which falls within the provisions of Section 19, Rule 132 of the Rules of Court, and to be admissible for any legal purpose, Section 24, Rule 132 of the Rules of Court should apply. 40 Citing the ruling of this Court in Collector of Internal Revenue v. Benipayo,41 the CA ruled that the assessments were unlawful because they were based on hearsay evidence. The CA also ruled that the respondent was deprived of its right to due process of law. The CA added that the CTA should not have just brushed aside the legal requisites provided for under the pertinent provisions of the Rules of Court in the matter of the admissibility of public documents, considering that substantive rules of evidence should not be disregarded. It also ruled that the certifications made by the two Customs Collection Chiefs under the guise of supporting the respondent’s alleged tax deficiency assessments invoking the best evidence obtainable rule under the Tax Code should not be permitted to supplant the best evidence rule under Section 7, Rule 130 of the Rules of Court.
Finally, the CA noted that the tax deficiency assessments were computed without the tax returns. The CA opined that the use of the tax returns is indispensable in the computation of a tax deficiency; hence, this essential requirement must be complied with in the preparation and issuance of valid tax deficiency assessments.42 The Present Petition The Commissioner of Internal Revenue, the petitioner herein, filed the present petition for review under Rule 45 of the Rules of Court for the reversal of the decision of the CA and for the reinstatement of the ruling of the CTA. As gleaned from the pleadings of the parties, the threshold issues for resolution are the following: (a) whether the petition at bench is proper and complies with Sections 4 and 5, Rule 7 of the Rules of Court; (b) whether the December 10, 1991 final assessment of the petitioner against the respondent for deficiency income tax and sales tax for the latter’s 1987 importation of resins and calcium bicarbonate is based on competent evidence and the law; and (c) the total amount of deficiency taxes due from the respondent for 1987, if any. On the first issue, the respondent points out that the petition raises both questions of facts and law which cannot be the subject of an appeal by certiorari under Rule 45 of the Rules of Court. The respondent notes that the petition is defective because the verification and the certification against forum shopping were not signed by the petitioner herself, but only by the Regional Director of the BIR. The respondent submits that the petitioner should have filed a motion for reconsideration with the CA before filing the instant petition for review.43 We find and so rule that the petition is sufficient in form. A verification and certification against forum shopping signed by the Regional Director constitutes sufficient compliance with the requirements of Sections 4 and 5, Rule 7 of the Rules of Court. Under Section 10 of the NIRC of 1997, 44 the Regional Director has the power to administer and enforce internal revenue laws, rules and regulations, including the assessment and collection of all internal revenue taxes, charges and fees. Such power is broad enough to vest the Revenue Regional Director with the authority to sign the verification and certification against forum shopping in behalf of the Commissioner of Internal Revenue. There is no other person in a better position to know the collection cases filed under his jurisdiction than the Revenue Regional Director. Moreover, under Revenue Administrative Order No. 5-83, 45 the Regional Director is authorized to sign all pleadings filed in connection with cases referred to the Revenue Regions by the National Office which, otherwise, require the signature of the petitioner. We do not agree with the contention of the respondent that a motion for reconsideration ought to have been filed before the filing of the instant petition. A motion for reconsideration of the decision of the CA is not a condition sine qua non for the filing of a petition for review under Rule 45. As we held in Almora v. Court of Appeals:46 Rule 45, Sec. 1 of the Rules of Court, however, distinctly provides that: A party may appeal by certiorari from a judgment of the Court of Appeals, by filing with the Supreme Court a petition for certiorari within fifteen (15) days from notice of judgment, or of the denial of his motion for reconsideration filed in due time. (Emphasis supplied) The conjunctive "or" clearly indicates that the 15-day reglementary period for the filing of a petition for certiorari under Rule 45 commences either from notice of the questioned judgment or from notice of denial of the appellant’s motion for reconsideration. A prior motion for reconsideration is not indispensable for a petition for review on certiorari under Rule 45 to prosper. … 47
While Rule 45 of the Rules of Court provides that only questions of law may be raised by the petitioner and resolved by the Court, under exceptional circumstances, the Court may take cognizance thereof and resolve questions of fact. In this case, the findings and conclusion of the CA are inconsistent with those of the CTA, not to mention those of the Commissioner of Internal Revenue. The issues raised in this case relate to the propriety and the correctness of the tax assessments made by the petitioner against the respondent, as well as the propriety of the application of Section 16, paragraph (b) of the 1977 NIRC, as amended by Pres. Decree Nos. 1705, 1773, 1994 and Executive Order No. 273, in relation to Section 3, Rule 132 of the Rules of Evidence. There is also an imperative need for the Court to resolve the threshold factual issues to give justice to the parties, and to determine whether the CA capriciously ignored, misunderstood or misinterpreted cogent facts and circumstances which, if considered, would change the outcome of the case. On the second issue, the petitioner asserts that since the respondent refused to cooperate and show its 1987 books of account and other accounting records, it was proper for her to resort to the best evidence obtainable – the photocopies of the import entries in the Bureau of Customs and the respondent’s financial statement filed with the SEC. 48 The petitioner maintains that these import entries were admissible as secondary evidence under the best evidence obtainable rule, since they were duly authenticated by the Bureau of Customs officials who processed the documents and released the cargoes after payment of the duties and taxes due.49 Further, the petitioner points out that under the best evidence obtainable rule, the tax return is not important in computing the tax deficiency.50 The petitioner avers that the best evidence obtainable rule under Section 16 of the 1977 NIRC, as amended, legally cannot be equated to the best evidence rule under the Rules of Court; nor can the best evidence rule, being procedural law, be made strictly operative in the interpretation of the best evidence obtainable rule which is substantive in character. 51 The petitioner posits that the CTA is not strictly bound by technical rules of evidence, the reason being that the quantum of evidence required in the said court is merely substantial evidence.52 Finally, the petitioner avers that the respondent has the burden of proof to show the correct assessments; otherwise, the presumption in favor of the correctness of the assessments made by it stands. 53 Since the respondent was allowed to explain its side, there was no violation of due process. 54 The respondent, for its part, maintains that the resort to the best evidence obtainable method was illegal. In the first place, the respondent argues, the EIIB agents are not duly authorized to undertake examination of the taxpayer’s accounting records for internal revenue tax purposes. Hence, the respondent’s failure to accede to their demands to show its books of accounts and other accounting records cannot justify resort to the use of the best evidence obtainable method. 55 Secondly, when a taxpayer fails to submit its tax records upon demand by the BIR officer, the remedy is not to assess him and resort to the best evidence obtainable rule, but to punish the taxpayer according to the provisions of the Tax Code. 56 In any case, the respondent argues that the photocopies of import entries cannot be used in making the assessment because they were not properly authenticated, pursuant to the provisions of Sections 24 57 and 2558 of Rule 132 of the Rules of Court. It avers that while the CTA is not bound by the technical rules of evidence, it is bound by substantial rules. 59 The respondent points out that the petitioner did not even secure a certification of the fact of loss of the original documents from the custodian of the import entries. It simply relied on the report of the EIIB agents that the import entry documents were no longer available because they were eaten by termites. The respondent posits that the two collectors of the Bureau of Customs never authenticated the xerox copies of the import entries; instead, they only issued certifications stating therein the import entry numbers which were processed by their office and the date the same were released.60
The respondent argues that it was not necessary for it to show the correct assessment, considering that it is questioning the assessments not only because they are erroneous, but because they were issued without factual basis and in patent violation of the assessment procedures laid down in the NIRC of 1977, as amended.61 It is also pointed out that the petitioner failed to use the tax returns filed by the respondent in computing the deficiency taxes which is contrary to law; 62 as such, the deficiency assessments constituted deprivation of property without due process of law. 63 Central to the second issue is Section 16 of the NIRC of 1977, as amended, 64 which provides that the Commissioner of Internal Revenue has the power to make assessments and prescribe additional requirements for tax administration and enforcement. Among such powers are those provided in paragraph (b) thereof, which we quote: (b) Failure to submit required returns, statements, reports and other documents. – When a report required by law as a basis for the assessment of any national internal revenue tax shall not be forthcoming within the time fixed by law or regulation or when there is reason to believe that any such report is false, incomplete or erroneous, the Commissioner shall assess the proper tax on the best evidence obtainable. In case a person fails to file a required return or other document at the time prescribed by law, or willfully or otherwise files a false or fraudulent return or other document, the Commissioner shall make or amend the return from his own knowledge and from such information as he can obtain through testimony or otherwise, which shall be prima facie correct and sufficient for all legal purposes.65 This provision applies when the Commissioner of Internal Revenue undertakes to perform her administrative duty of assessing the proper tax against a taxpayer, to make a return in case of a taxpayer’s failure to file one, or to amend a return already filed in the BIR. The petitioner may avail herself of the best evidence or other information or testimony by exercising her power or authority under paragraphs (1) to (4) of Section 7 of the NIRC: (1) To examine any book, paper, record or other data which may be relevant or material to such inquiry; (2) To obtain information from any office or officer of the national and local governments, government agencies or its instrumentalities, including the Central Bank of the Philippines and government owned or controlled corporations; (3) To summon the person liable for tax or required to file a return, or any officer or employee of such person, or any person having possession, custody, or care of the books of accounts and other accounting records containing entries relating to the business of the person liable for tax, or any other person, to appear before the Commissioner or his duly authorized representative at a time and place specified in the summons and to produce such books, papers, records, or other data, and to give testimony; (4) To take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry; …66 The "best evidence" envisaged in Section 16 of the 1977 NIRC, as amended, includes the corporate and accounting records of the taxpayer who is the subject of the assessment process, the accounting records of other taxpayers engaged in the same line of business, including their gross profit and net profit sales.67 Such evidence also includes data, record, paper, document or any evidence gathered by internal revenue officers from other taxpayers who had personal transactions or from whom the subject taxpayer
received any income; and record, data, document and information secured from government offices or agencies, such as the SEC, the Central Bank of the Philippines, the Bureau of Customs, and the Tariff and Customs Commission. The law allows the BIR access to all relevant or material records and data in the person of the taxpayer. It places no limit or condition on the type or form of the medium by which the record subject to the order of the BIR is kept. The purpose of the law is to enable the BIR to get at the taxpayer’s records in whatever form they may be kept. Such records include computer tapes of the said records prepared by the taxpayer in the course of business.68 In this era of developing information-storage technology, there is no valid reason to immunize companies with computer-based, record-keeping capabilities from BIR scrutiny. The standard is not the form of the record but where it might shed light on the accuracy of the taxpayer’s return. In Campbell, Jr. v. Guetersloh,69 the United States (U.S.) Court of Appeals (5th Circuit) declared that it is the duty of the Commissioner of Internal Revenue to investigate any circumstance which led him to believe that the taxpayer had taxable income larger than reported. Necessarily, this inquiry would have to be outside of the books because they supported the return as filed. He may take the sworn testimony of the taxpayer; he may take the testimony of third parties; he may examine and subpoena, if necessary, traders’ and brokers’ accounts and books and the taxpayer’s book accounts. The Commissioner is not bound to follow any set of patterns. The existence of unreported income may be shown by any practicable proof that is available in the circumstances of the particular situation. Citing its ruling in Kenney v. Commissioner,70 the U.S. appellate court declared that where the records of the taxpayer are manifestly inaccurate and incomplete, the Commissioner may look to other sources of information to establish income made by the taxpayer during the years in question. 71 We agree with the contention of the petitioner that the best evidence obtainable may consist of hearsay evidence, such as the testimony of third parties or accounts or other records of other taxpayers similarly circumstanced as the taxpayer subject of the investigation, hence, inadmissible in a regular proceeding in the regular courts.72 Moreover, the general rule is that administrative agencies such as the BIR are not bound by the technical rules of evidence. It can accept documents which cannot be admitted in a judicial proceeding where the Rules of Court are strictly observed. It can choose to give weight or disregard such evidence, depending on its trustworthiness. However, the best evidence obtainable under Section 16 of the 1977 NIRC, as amended, does not include mere photocopies of records/documents. The petitioner, in making a preliminary and final tax deficiency assessment against a taxpayer, cannot anchor the said assessment on mere machine copies of records/documents. Mere photocopies of the Consumption Entries have no probative weight if offered as proof of the contents thereof. The reason for this is that such copies are mere scraps of paper and are of no probative value as basis for any deficiency income or business taxes against a taxpayer. Indeed, in United States v. Davey,73 the U.S. Court of Appeals (2nd Circuit) ruled that where the accuracy of a taxpayer’s return is being checked, the government is entitled to use the original records rather than be forced to accept purported copies which present the risk of error or tampering. 74 In Collector of Internal Revenue v. Benipayo,75 the Court ruled that the assessment must be based on actual facts. The rule assumes more importance in this case since the xerox copies of the Consumption Entries furnished by the informer of the EIIB were furnished by yet another informer. While the EIIB tried to secure certified copies of the said entries from the Bureau of Customs, it was unable to do so because the said entries were allegedly eaten by termites. The Court can only surmise why the EIIB or the BIR, for that matter, failed to secure certified copies of the said entries from the Tariff and Customs Commission or from the National Statistics Office which also had copies thereof. It bears stressing that under Section 1306 of the Tariff and Customs Code, the Consumption Entries shall be the required number of copies as prescribed by regulations.76 The Consumption Entry is accomplished in sextuplicate copies and
quadruplicate copies in other places. In Manila, the six copies are distributed to the Bureau of Customs, the Tariff and Customs Commission, the Declarant (Importer), the Terminal Operator, and the Bureau of Internal Revenue. Inexplicably, the Commissioner and the BIR personnel ignored the copy of the Consumption Entries filed with the BIR and relied on the photocopies supplied by the informer of the EIIB who secured the same from another informer. The BIR, in preparing and issuing its preliminary and final assessments against the respondent, even ignored the records on the investigation made by the District Revenue officers on the respondent’s importations for 1987. The original copies of the Consumption Entries were of prime importance to the BIR. This is so because such entries are under oath and are presumed to be true and correct under penalty of falsification or perjury. Admissions in the said entries of the importers’ documents are admissions against interest and presumptively correct.77 In fine, then, the petitioner acted arbitrarily and capriciously in relying on and giving weight to the machine copies of the Consumption Entries in fixing the tax deficiency assessments against the respondent. The rule is that in the absence of the accounting records of a taxpayer, his tax liability may be determined by estimation. The petitioner is not required to compute such tax liabilities with mathematical exactness. Approximation in the calculation of the taxes due is justified. To hold otherwise would be tantamount to holding that skillful concealment is an invincible barrier to proof. 78 However, the rule does not apply where the estimation is arrived at arbitrarily and capriciously.79 We agree with the contention of the petitioner that, as a general rule, tax assessments by tax examiners are presumed correct and made in good faith. All presumptions are in favor of the correctness of a tax assessment. It is to be presumed, however, that such assessment was based on sufficient evidence. Upon the introduction of the assessment in evidence, a prima facie case of liability on the part of the taxpayer is made.80 If a taxpayer files a petition for review in the CTA and assails the assessment, the prima facie presumption is that the assessment made by the BIR is correct, and that in preparing the same, the BIR personnel regularly performed their duties. This rule for tax initiated suits is premised on several factors other than the normal evidentiary rule imposing proof obligation on the petitioner-taxpayer: the presumption of administrative regularity; the likelihood that the taxpayer will have access to the relevant information; and the desirability of bolstering the record-keeping requirements of the NIRC. 81 However, the prima facie correctness of a tax assessment does not apply upon proof that an assessment is utterly without foundation, meaning it is arbitrary and capricious. Where the BIR has come out with a "naked assessment," i.e., without any foundation character, the determination of the tax due is without rational basis.82 In such a situation, the U.S. Court of Appeals ruled 83 that the determination of the Commissioner contained in a deficiency notice disappears. Hence, the determination by the CTA must rest on all the evidence introduced and its ultimate determination must find support in credible evidence. The issue that now comes to fore is whether the tax deficiency assessment against the respondent based on the certified copies of the Profit and Loss Statement submitted by the respondent to the SEC in 1987 and 1988, as well as certifications of Tomas and Danganan, is arbitrary, capricious and illegal. The CTA ruled that the respondent failed to overcome the prima facie correctness of the tax deficiency assessment issued by the petitioner, to wit: The issue should be ruled in the affirmative as petitioner has failed to rebut the validity or correctness of the aforementioned tax assessments. It is incongruous for petitioner to prove its cause by simply drawing an inference unfavorable to the respondent by attacking the source documents (Consumption Entries) which were the bases of the assessment and which were certified by the Chiefs of the Collection Division, Manila International Container Port and the Port of Manila, as having been processed and released in the name of the petitioner after payment of
duties and taxes and the duly certified copies of Financial Statements secured from the Securities and Exchange Commission. Any such inference cannot operate to relieve petitioner from bearing its burden of proof and this Court has no warrant of absolution. The Court should have been persuaded to grant the reliefs sought by the petitioner should it have presented any evidence of relevance and competence required, like that of a certification from the Bureau of Customs or from any other agencies, attesting to the fact that those consumption entries did not really belong to them. The burden of proof is on the taxpayer contesting the validity or correctness of an assessment to prove not only that the Commissioner of Internal Revenue is wrong but the taxpayer is right (Tan Guan v. CTA, 19 SCRA 903), otherwise, the presumption in favor of the correctness of tax assessment stands (Sy Po v. CTA, 164 SCRA 524). The burden of proving the illegality of the assessment lies upon the petitioner alleging it to be so. In the case at bar, petitioner miserably failed to discharge this duty.84 We are not in full accord with the findings and ratiocination of the CTA. Based on the letter of the petitioner to the respondent dated December 10, 1993, the tax deficiency assessment in question was based on (a) the findings of the agents of the EIIB which was based, in turn, on the photocopies of the Consumption Entries; (b) the Profit and Loss Statements of the respondent for 1987 and 1988; and (c) the certifications of Tomas and Danganan dated August 7, 1990 and August 22, 1990: In reply, please be informed that after a thorough evaluation of the attending facts, as well as the laws and jurisprudence involved, this Office holds that you are liable to the assessed deficiency taxes. The conclusion was arrived at based on the findings of agents of the Economic Intelligence & Investigation Bureau (EIIB) and of our own examiners who have painstakingly examined the records furnished by the Bureau of Customs and the Securities & Exchange Commission (SEC). The examination conducted disclosed that while your actual sales for 1987 amounted to P110,731,559.00, you declared for taxation purposes, as shown in the Profit and Loss Statements, the sum of P47,698,569.83 only. The difference, therefore, of P63,032,989.17 constitutes as undeclared or unrecorded sales which must be subjected to the income and sales taxes. You also argued that our assessment has no basis since the alleged amount of underdeclared importations were lifted from uncertified or unauthenticated xerox copies of consumption entries which are not admissible in evidence. On this issue, it must be considered that in letters dated August 7 and 22, 1990, the Chief and Acting Chief of the Collection Division of the Manila International Container Port and Port of Manila, respectively, certified that the enumerated consumption entries were filed, processed and released from the port after payment of duties and taxes. It is noted that the certification does not touch on the genuineness, authenticity and correctness of the consumption entries which are all xerox copies, wherein the figures therein appearing may have been tampered which may render said documents inadmissible in evidence, but for tax purposes, it has been held that the Commissioner is not required to make his determination (assessment) on the basis of evidence legally admissible in a formal proceeding in Court (Mertens, Vol. 9, p. 214, citing Cohen v. Commissioner). A statutory notice may be based in whole or in part upon admissible evidence (Llorente v. Commissioner, 74 TC 260 (1980); Weimerskirch v. Commissioner, 67 TC 672 (1977); and Rosano v. Commissioner, 46 TC 681 (1966). In the case also of Weimerskirch v. Commissioner (1977), the assessment was given due course in the presence of admissible evidence as to how the Commissioner arrived at his determination, although there was no admissible evidence with respect to the substantial issue of whether the taxpayer had unreported or undeclared income from narcotics sale. … 85
Based on a Memorandum dated October 23, 1990 of the IIPO, the source documents for the actual cost of importation of the respondent are the machine copies of the Consumption Entries from the informer which the IIPO claimed to have been certified by Tomas and Danganan: The source documents for the total actual cost of importations, abovementioned, were the different copies of Consumption Entries, Series of 1987, filed by subject with the Bureau of Customs, marked Annexes "F-1" to "F-68." The total cost of importations is the sum of the Landed Costs and the Advance Sales Tax as shown in the annexed entries. These entries were duly authenticated as having been processed and released, after payment of the duties and taxes due thereon, by the Chief, Collection Division, Manila International Container Port, dated August 7, 1990, "Annex-G," and the Port of Manila, dated August 22, 1990, "Annex-H." So, it was established that subjectimportations, mostly resins, really belong to HANTEX TRADING CO., INC. 86 It also appears on the worksheet of the IIPO, as culled from the photocopies of the Consumption Entries from its informer, that the total cost of the respondent’s importation for 1987 was P105,761,527.00. Per the report of Torres and Filamor, they also relied on the photocopies of the said Consumption Entries: The importations made by taxpayer verified by us from the records of the Bureau of Customs and xerox copies of which are hereto attached shows the big volume of importations made and not declared in the income tax return filed by taxpayer. Based on the above findings, it clearly shows that a prima facie case of fraud exists in the herein transaction of the taxpayer, as a consequence of which, said transaction has not been possibly entered into the books of accounts of the subject taxpayer. 87 In fine, the petitioner based her finding that the 1987 importation of the respondent was underdeclared in the amount of P105,761,527.00 on the worthless machine copies of the Consumption Entries. Aside from such copies, the petitioner has no other evidence to prove that the respondent imported goods costing P105,761,527.00. The petitioner cannot find solace on the certifications of Tomas and Danganan because they did not authenticate the machine copies of the Consumption Entries, and merely indicated therein the entry numbers of Consumption Entries and the dates when the Bureau of Customs released the same. The certifications of Tomas and Danganan do not even contain the landed costs and the advance sales taxes paid by the importer, if any. Comparing the certifications of Tomas and Danganan and the machine copies of the Consumption Entries, only 36 of the entry numbers of such copies are included in the said certifications; the entry numbers of the rest of the machine copies of the Consumption Entries are not found therein. Even if the Court would concede to the petitioner’s contention that the certification of Tomas and Danganan authenticated the machine copies of the Consumption Entries referred to in the certification, it appears that the total cost of importations inclusive of advance sales tax is only P64,324,953.00 – far from the amount of P105,716,527.00 arrived at by the EIIB and the BIR, 88 or even the amount of P110,079,491.61 arrived at by Deputy Commissioner Deoferio, Jr.89 As gleaned from the certifications of Tomas and Danganan, the goods covered by the Consumption Entries were released by the Bureau of Customs, from which it can be presumed that the respondent must have paid the taxes due on the said importation. The petitioner did not adduce any documentary evidence to prove otherwise. Thus, the computations of the EIIB and the BIR on the quantity and costs of the importations of the respondent in the amount of P105,761,527.00 for 1987 have no factual basis, hence, arbitrary and capricious. The petitioner cannot rely on the presumption that she and the other employees of the BIR had regularly performed their duties. As the Court held in Collector of Internal Revenue v. Benipayo,90 in order to stand judicial scrutiny, the assessment must be based on facts. The presumption of the correctness of an assessment, being a mere presumption, cannot be made to rest on another presumption.
Moreover, the uncontroverted fact is that the BIR District Revenue Office had repeatedly examined the 1987 books of accounts of the respondent showing its importations, and found that the latter had minimal business tax liability. In this case, the presumption that the District Revenue officers performed their duties in accordance with law shall apply. There is no evidence on record that the said officers neglected to perform their duties as mandated by law; neither is there evidence aliunde that the contents of the 1987 and 1988 Profit and Loss Statements submitted by the respondent with the SEC are incorrect. Admittedly, the respondent did not adduce evidence to prove its correct tax liability. However, considering that it has been established that the petitioner’s assessment is barren of factual basis, arbitrary and illegal, such failure on the part of the respondent cannot serve as a basis for a finding by the Court that it is liable for the amount contained in the said assessment; otherwise, the Court would thereby be committing a travesty. On the disposition of the case, the Court has two options, namely, to deny the petition for lack of merit and affirm the decision of the CA, without prejudice to the petitioner’s issuance of a new assessment against the respondent based on credible evidence; or, to remand the case to the CTA for further proceedings, to enable the petitioner to adduce in evidence certified true copies or duplicate original copies of the Consumption Entries for the respondent’s 1987 importations, if there be any, and the correct tax deficiency assessment thereon, without prejudice to the right of the respondent to adduce controverting evidence, so that the matter may be resolved once and for all by the CTA. In the higher interest of justice to both the parties, the Court has chosen the latter option. After all, as the Tax Court of the United States emphasized in Harbin v. Commissioner of Internal Revenue,91 taxation is not only practical; it is vital. The obligation of good faith and fair dealing in carrying out its provision is reciprocal and, as the government should never be over-reaching or tyrannical, neither should a taxpayer be permitted to escape payment by the concealment of material facts. IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The Decision of the Court of Appeals is SET ASIDE. The records are REMANDED to the Court of Tax Appeals for further proceedings, conformably with the decision of this Court. No costs. SO ORDERED. Puno, (Chairman), Austria-Martinez, Tinga, and Chico-Nazario, JJ., concur.
G.R. No. L-12798
May 30, 1960
VISAYAN CEBU TERMINAL CO., INC., petitioner-appellant, vs. COLLECTOR OF INTERNAL REVENUE, respondent-appellee. Duterte and Rodriguez for petitioner. Assistant Solicitor General Jose P. Alejandro and Atty. Sixto J. Javier for respondent. CONCEPCION, J.: Petitioner Visayan Cebu Terminal Co., Inc., seeks a review of the decision of the Court of Tax Appeals in the above entitled case. The dispositive part of said decision reads as follows: FOR THE FOREGOING CONSIDERATIONS, the decision appealed from is hereby modified, and appellant is hereby ordered to pay the Collector of Internal Revenue, within a reasonable period to be fixed by the latter, the sum of P15,517.00, computed below:
Net income per return Disallowances: (1) Salaries (2) Representation As claimed by appellant Allowed 10,000.00 (3) Miscellaneous expenses ———— Net income subject to tax Tax due on P100,000.00 at 20% P13,720.00 at 28% 3,842.00 Less tax previously assessed and ———— Deficiency tax P15,517.00
P41,596.45 500.00 Expenses: 75,855.88 65,855.88 5,768.00
paid
P113,720.33 P113,720.33: P20,000.00 P23,842.00 8,325.00
With costs against appellant. The facts, which are not disputed, are set forth in the aforementioned decision, from which we quote: "The appellant, Visayan Terminal Co. Inc., is a corporation organized for the purpose of handling arrastre operations in the port of Cebu. It was awarded the contract for the said arrastre operations by the Bureau of Customs, pursuant to Act No. 3002, as amended. "On March 1, 1952, appellant filed its income tax return for 1951 reporting a gross income of P420,633.40 and claimed deductions amounting to P379,036.95, leaving a net income of P41,596.45 on which it paid income tax in the sum of P8,319.20. The sum of P379,036.95 claimed as deductions consisted of various items, among which were the following: 1. Salaries (a) Salary and bonus of Eugenio Lo (b) Salary of Felix Go Chan (c) Salary of Teomino Tiam 250.00 P 2. Representation expenses 3. Miscellaneous (a) Christmas bonus given various persons (b) Tips to ships' officers 4,800.00 TOTAL P84,530.88
— Juan P1,875.00 250.00 Tiu 2,375.00 75,855.88 expenses to P1,500.00 6,300.00
The said sums of P2,375.00, P75,855.88 and P6,300.00, representing salaries, representation expenses and miscellaneous expenses, respectively, or a total of P84,530.88, were disallowed by the Collector of Internal Revenue, thus giving rise to a deficiency assessment of P18,991.00. xxx
xxx
xxx
Upon request for reconsideration, the Collector modified the deficiency income tax assessment by allowing the deduction from appellant's gross income of the salary of Juan Eugenio Lo in the sum of P1,875.00 and miscellaneous expenses amounting to P532.00, at the same time maintaining the disallowance of the full amount of P75,855.88 as representation expenses. The revised deficiency
assessment is itemized in the letter of the Collector dated March 26, 1955, and is reproduced below: Net income as per return Disallowances: per salaries of officers P allowed per reaudit 1,875.00 per investigation and representation expenses per investigation, expenses allowed per reaudit 532.00 ——— Net income subject to tax reaudit Tax due on P100,000.00 at 20% P23,720.00 at 28% 6,642.00 ———— Less tax previously assessed and paid ————— Deficiency tax Add: 5% surcharge 1% monthly interest 5/31/53 to 4/30/55 Compromise for late payment ————— Total amount due on April 30,1955 P23,485.76
P41.596.45 investigation: 2,375.00 500.00 reaudit, 75,855.88 miscellaneous 6,300.00 5,768.00 ———— per P123,720.33 P123,720.33: P20,000.00 P26,642.00 8,325.00 P18,317.00 915.85 from 4,212.91 40.00
Appellant has agreed to the disallowance of the sum P500.00 representing the salaries of Felix Go Chan and Teotimo Tiu Tiam at P250.00 each, and the sum of P5,768.00, representing miscellaneous expenses. The only issue raised in this appeal relates to the deductibility of the sum of P75,855.88 as representation expenses. Passing upon said issue, which is, also, the only one raised in this appeal, the lower court held that "representation ... expenses fall under the category of business expenses which" are allowable deductions from gross income if they meet the conditions prescribed by law", particularly section 30(a) (1) of the National Internal Revenue Code; that, to be deductible, said business expenses must "ordinary and necessary expenses paid or incurred in carrying on any trade or business"; that those expenses "must also, meet the further test of reasonableness in amount", this test being "inherent in the phase `ordinary and necessary'"; that some of the representation expenses claimed by appellant had been evidenced by vouchers or chits, but others were reimbursed "without presentation of supporting papers; that the aforementioned vouchers or chits were allegedly "destroyed when the house of Buenaventura M. Veloso, treasurer of appellant, where the records were kept was burned"; that, accordingly, "it is not possible to determine the actual amount covered by supporting papers and the amount without supporting papers"; that the court should, therefore, "determine from all available data the amount properly deductible as representation expenses"; that "during the period of four (4) years from 1949 to 1952, appellant had gross income, net income, net profits and claimed representation expenses as follows:
Year Gross Income Expenses 1949 P722,135.42 1950 451,303.21 1951 420,479.39 1952 425,326.86 34,207.31 63,618.64
Net
Profit
P61,257.53 33,023.78 41,596.45
Representation P83,703.54 10,424.39 75,855.88
and that "from the above figures, we may infer that the sum of P10,000 may be considered reasonably necessary for entertainment expenses of appellant in 1951, it having claimed a little over the amount in 1950, when its gross income was more than its gross income in 1951 and 1952", and because "it allegedly spent for entertainment purposes in 1948 the sum of P500.00 only." Hence, the lower court modified the assessment of the taxes due from appellant herein the manner set forth in the beginning of this decision. In its brief, appellant does not assail any of the premises upon which the aforementioned conclusion of the lower court was predicated. What is more, it relied upon, and, even, quoted some of the views expressed in the decision appealed from. Appellant, however, maintains that said court had acted arbitrarily in considering the representation expenses in 1950, not those incurred in 1949 and 1952, in fixing the amount deductible in 1951. This pretense is clearly untenable. It appears: (a) that part of the alleged representation expenses had never had any supporting paper; (b) that the vouchers and chits covering other representation expenses had been allegedly destroyed; (c) that there is no documentary evidence on record of any of the representation expenses in question; (d) that no testimonial evidence has been introduced on any specific item of said alleged expenses; (e) that there is no more than oral proof to the effect that payments had been made to appellant's officers for representation expenses allegedly made by the latter and about the general nature of such alleged expenses; (f) that the gross income in 1950 exceeded the gross income in 1951 and 1952, and (g) that the representation expenses in 1948 amounted to P500 only. Under these circumstances, the lower court was fully justified in concluding that the representation expenses in 1951 should be slightly less than those incurred in 1950. Upon the other hand, appellant has not even tried to show why its representation expenses in 1951 should be deemed bigger than the amount allowed by the lower court. In fact, the latter had been patently fair and reasonable, if not rather liberal, in allowing appellant to deduct P10,000.00 as representation expenses for 1951, there being absolutely no concrete evidence of the sums then actually spent for purposes of representation. It may not be amiss to note that the explanation to the effect that the supporting paper of some of those expenses had been destroyed when the house of the treasurer was burned, can hardly be regarded as satisfactory, for appellant's records are supposed to be kept in its offices, not in the residence of one of its officers. Being in accordance with the facts and the law, the decision appealed from is hereby affirmed, with costs against petitioner-appellant, Visayan Cebu Terminal Co., Inc. It is so ordered. Paras, C J., Bengzon, Montemayor, Bautista Angelo, Labrador, Barrera, and Gutierrez David JJ., concur.
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
G.R. No. 185371 Present: CARPIO, J., Chairperson,
NACHURA, PERALTA, ABAD, and MENDOZA, JJ.
- versus -
METRO STAR SUPERAMA, INC., Respondent.
Promulgated: December 8, 2010
x -------------------------------------------------------------------------------------- x
DECISION MENDOZA, J.: This petition for review on certiorari under Rule 45 of the Rules of Court filed by the petitioner Commissioner of Internal Revenue (CIR) seeks to reverse and set aside the 1] September 16, 2008 Decision[1] of the Court of Tax Appeals En Banc (CTA-En Banc), in C.T.A. EB No. 306 and 2] its November 18, 2008 Resolution[2] denying petitioners motion for reconsideration.
The CTA-En Banc affirmed in toto the decision of its Second Division (CTA-Second Division) in CTA Case No. 7169 reversing the February 8, 2005 Decision of the CIR which assessed respondent Metro Star Superama, Inc. (Metro Star) of deficiency valueadded tax and withholding tax for the taxable year 1999. Based on a Joint Stipulation of Facts and Issues[3] of the parties, the CTA Second Division summarized the factual and procedural antecedents of the case, the pertinent portions of which read: Petitioner is a domestic corporation duly organized and existing by virtue of the laws of the Republic of the Philippines, x x x.
On January 26, 2001, the Regional Director of Revenue Region No. 10, Legazpi City, issued Letter of Authority No. 00006561 for Revenue Officer Daisy G. Justiniana to examine petitioners books of accounts and other accounting records for income tax and other internal revenue taxes for the taxable year 1999. Said Letter of Authority was revalidated on August 10, 2001 by Regional Director Leonardo Sacamos. For petitioners failure to comply with several requests for the presentation of records and Subpoena Duces Tecum, [the] OIC of BIR Legal Division issued an Indorsement dated September 26, 2001 informing Revenue District Officer of Revenue Region No. 67, Legazpi City to proceed with the investigation based on the best evidence obtainable preparatory to the issuance of assessment notice. On November 8, 2001, Revenue District Officer Socorro O. RamosLafuente issued a Preliminary 15-day Letter, which petitioner received on November 9, 2001. The said letter stated that a post audit review was held and it was ascertained that there was deficiency value-added and withholding taxes due from petitioner in the amount of P292,874.16. On April 11, 2002, petitioner received a Formal Letter of Demand dated April 3, 2002 from Revenue District No. 67, Legazpi City, assessing petitioner the amount of Two Hundred Ninety Two Thousand Eight Hundred Seventy Four Pesos and Sixteen Centavos (P292,874.16.) for deficiency value-added and withholding taxes for the taxable year 1999, computed as follows:
ASSESSMENT NOTICE NO. 067-99-003-579-072 VALUE ADDED TAX Gross Sales P1,697,718.90 Output Tax P 154,338.08
Less: Input Tax VAT Payable P 154,338.08 Add: 25% Surcharge P 38,584.54 20% Interest 79,746.49 Compromise Penalty Late Payment P16,000.00 Failure to File VAT returns 2,400.00 18,400.00 136,731.01 TOTAL P 291,069.09 WITHHOLDING TAX Compensation 2,772.91 Expanded 110,103.92 Total Tax Due P 112,876.83 Less: Tax Withheld 111,848.27 Deficiency Withholding Tax P 1,028.56 Add: 20% Interest p.a. 576.51 Compromise Penalty 200.00 TOTAL P 1,805.07 *Expanded Withholding Tax P1,949,334.25 x 5% 97,466.71 Film Rental 10,000.25 x 10% 1,000.00 Audit Fee 193,261.20 x 5% 9,663.00 Rental Expense 41,272.73 x 1% 412.73 Security Service 156,142.01 x 1% 1,561.42 Service Contractor P 110,103.92 Total SUMMARIES OF DEFICIENCIES VALUE ADDED TAX P 291,069.09 WITHHOLDING TAX 1,805.07 TOTAL P 292,874.16 Subsequently, Revenue District Office No. 67 sent a copy of the Final Notice of Seizure dated May 12, 2003, which petitioner received on May 15, 2003, giving the latter last opportunity to settle its deficiency tax liabilities within ten (10) [days] from receipt thereof, otherwise respondent BIR shall be constrained to serve and execute
the Warrants of Distraint and/or Levy and Garnishment to enforce collection. On February 6, 2004, petitioner received from Revenue District Office No. 67 a Warrant of Distraint and/or Levy No. 67-0029-23 dated May 12, 2003 demanding payment of deficiency value-added tax and withholding tax payment in the amount of P292,874.16. On July 30, 2004, petitioner filed with the Office of respondent Commissioner a Motion for Reconsideration pursuant to Section 3.1.5 of Revenue Regulations No. 12-99. On February 8, 2005, respondent Commissioner, through its authorized representative, Revenue Regional Director of Revenue Region 10, Legaspi City, issued a Decision denying petitioners Motion for Reconsideration. Petitioner, through counsel received said Decision on February 18, 2005. x x x.
Denying that it received a Preliminary Assessment Notice (PAN) and claiming that it was not accorded due process, Metro Star filed a petition for review[4] with the CTA. The parties then stipulated on the following issues to be decided by the tax court: 1. Whether the respondent complied with the due process requirement as provided under the National Internal Revenue Code and Revenue Regulations No. 12-99 with regard to the issuance of a deficiency tax assessment; 1.1 Whether petitioner is liable for the respective amounts of P291,069.09 and P1,805.07 as deficiency VAT and withholding tax for the year 1999; 1.2. Whether the assessment has become final and executory and demandable for failure of petitioner to
protest the same within 30 days from its receipt thereof on April 11, 2002, pursuant to Section 228 of the National Internal Revenue Code; 2. Whether the deficiency assessments issued by the respondent are void for failure to state the law and/or facts upon which they are based. 2.2 Whether petitioner was informed of the law and facts on which the assessment is made in compliance with Section 228 of the National Internal Revenue Code; 3. Whether or not petitioner, as owner/operator of a movie/cinema house, is subject to VAT on sales of services under Section 108(A) of the National Internal Revenue Code; 4. Whether or not the assessment is based on the best evidence obtainable pursuant to Section 6(b) of the National Internal Revenue Code.
The CTA-Second Division found merit in the petition of Metro Star and, on March 21, 2007, rendered a decision, the decretal portion of which reads: WHEREFORE, premises considered, the Petition for Review is hereby GRANTED. Accordingly, the assailed Decision dated February 8, 2005 is hereby REVERSED and SET ASIDE and respondent is ORDERED TO DESIST from collecting the subject taxes against petitioner. The CTA-Second Division opined that [w]hile there [is] a disputable presumption that a mailed letter [is] deemed received by the addressee in the ordinary course of mail, a direct denial of the receipt of mail shifts the burden upon the party favored by the presumption to prove that the mailed letter was indeed received by the addressee.[5] It also found that there was no clear showing that Metro Star actually received the alleged PAN, dated January 16, 2002. It, accordingly, ruled that the Formal Letter of Demand
dated April 3, 2002, as well as the Warrant of Distraint and/or Levy dated May 12, 2003 were void, as Metro Star was denied due process.[6] The CIR sought reconsideration[7] of the decision of the CTA-Second Division, but the motion was denied in the latters July 24, 2007 Resolution.[8] Aggrieved, the CIR filed a petition for review[9] with the CTA-En Banc, but the petition was dismissed after a determination that no new matters were raised. The CTA-En Bancdisposed:
WHEREFORE, the instant Petition for Review is hereby DENIED DUE COURSE and DISMISSED for lack of merit. Accordingly, the March 21, 2007 Decision and July 27, 2007 Resolution of the CTA Second Division in CTA Case No. 7169 entitled, Metro Star Superama, Inc., petitioner vs. Commissioner of Internal Revenue, respondent are hereby AFFIRMED in toto. SO ORDERED.
The motion for reconsideration[10] filed by the CIR was likewise denied by the CTA-En Banc in its November 18, 2008 Resolution.[11] The CIR, insisting that Metro Star received the PAN, dated January 16, 2002, and that due process was served nonetheless because the latter received the Final Assessment Notice (FAN), comes now before this Court with the sole issue of whether or not Metro Star was denied due process. The general rule is that the Court will not lightly set aside the conclusions reached by the CTA which, by the very nature of its functions, has accordingly developed an exclusive expertise on the resolution unless there has been an abuse or improvident exercise of authority.[12] In Barcelon, Roxas Securities, Inc. (now known as UBP Securities, Inc.) v. Commissioner of Internal Revenue,[13] the Court wrote:
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. On the matter of service of a tax assessment, a further perusal of our ruling in Barcelon is instructive, viz: Jurisprudence is replete with cases holding that if the taxpayer denies ever having received an assessment from the BIR, it is incumbent upon the latter to prove by competent evidence that such notice was indeed received by the addressee. The onus probandi was shifted to respondent to prove by contrary evidence that the Petitioner received the assessment in the due course of mail. The Supreme Court has consistently held that while a mailed letter is deemed received by the addressee in the course of mail, this is merely a disputable presumption subject to controversion and a direct denial thereof shifts the burden to the party favored by the presumption to prove that the mailed letter was indeed received by the addressee (Republic vs. Court of Appeals, 149 SCRA 351). Thus as held by the Supreme Court in Gonzalo P. Nava vs. Commissioner of Internal Revenue, 13 SCRA 104, January 30, 1965: "The facts to be proved to raise this presumption are (a) that the letter was properly addressed with postage
prepaid, and (b) that it was mailed. Once these facts are proved, the presumption is that the letter was received by the addressee as soon as it could have been transmitted to him in the ordinary course of the mail. But if one of the said facts fails to appear, the presumption does not lie. (VI, Moran, Comments on the Rules of Court, 1963 ed, 56-57 citing Enriquez vs. Sunlife Assurance of Canada, 41 Phil 269)." x x x. What is essential to prove the fact of mailing is the registry receipt issued by the Bureau of Posts or the Registry return card which would have been signed by the Petitioner or its authorized representative. And if said documents cannot be located, Respondent at the very least, should have submitted to the Court a certification issued by the Bureau of Posts and any other pertinent document which is executed with the intervention of the Bureau of Posts. This Court does not put much credence to the self serving documentations made by the BIR personnel especially if they are unsupported by substantial evidence establishing the fact of mailing. Thus: "While we have held that an assessment is made when sent within the prescribed period, even if received by the taxpayer after its expiration (Coll. of Int. Rev. vs. Bautista, L-12250 and L-12259, May 27, 1959), this ruling makes it the more imperative that the release, mailing or sending of the notice be clearly and satisfactorily proved. Mere notations made without the taxpayers intervention, notice or control, without adequate supporting evidence cannot suffice; otherwise, the taxpayer would be at the mercy of the revenue offices, without adequate protection or defense." (Nava vs. CIR, 13 SCRA 104, January 30, 1965). x x x. The failure of the respondent to prove receipt of the assessment by the Petitioner leads to the conclusion that no assessment was issued.
Consequently, the governments right to issue an assessment for the said period has already prescribed. (Industrial Textile Manufacturing Co. of the Phils., Inc. vs. CIR CTA Case 4885, August 22, 1996). (Emphases supplied.)
The Court agrees with the CTA that the CIR failed to discharge its duty and present any evidence to show that Metro Star indeed received the PAN dated January 16, 2002. It could have simply presented the registry receipt or the certification from the postmaster that it mailed the PAN, but failed. Neither did it offer any explanation on why it failed to comply with the requirement of service of the PAN. It merely accepted the letter of Metro Stars chairman dated April 29, 2002, that stated that he had received the FAN dated April 3, 2002, but not the PAN; that he was willing to pay the tax as computed by the CIR; and that he just wanted to clarify some matters with the hope of lessening its tax liability. This now leads to the question: Is the failure to strictly comply with notice requirements prescribed under Section 228 of the National Internal Revenue Code of 1997 and Revenue Regulations (R.R.) No. 12-99 tantamount to a denial of due process? Specifically, are the requirements of due process satisfied if only the FAN stating the computation of tax liabilities and a demand to pay within the prescribed period was sent to the taxpayer?
The answer to these questions require an examination of Section 228 of the Tax Code which reads: SEC. 228. Protesting of Assessment. - When the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings: provided, however, that a preassessment notice shall not be required in the following cases:
(a) When the finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face of the return; or (b) When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or (c) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or (d) When the excise tax due on exciseable articles has not been paid; or (e) When the article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons. The taxpayers shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void. Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized representative shall issue an assessment based on his findings. Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final. If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of
documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of one hundred eighty (180)-day period; otherwise, the decision shall become final, executory and demandable. (Emphasis supplied).
Indeed, Section 228 of the Tax Code clearly requires that the taxpayer must first be informed that he is liable for deficiency taxes through the sending of a PAN. He must be informed of the facts and the law upon which the assessment is made. The law imposes a substantive, not merely a formal, requirement. To proceed heedlessly with tax collection without first establishing a valid assessment is evidently violative of the cardinal principle in administrative investigations - that taxpayers should be able to present their case and adduce supporting evidence.[14] This is confirmed under the provisions R.R. No. 12-99 of the BIR which pertinently provide: SECTION 3. Due Process Requirement in the Issuance of a Deficiency Tax Assessment. 3.1 Mode of procedures in the issuance of a deficiency tax assessment: 3.1.1 Notice for informal conference. The Revenue Officer who audited the taxpayer's records shall, among others, state in his report whether or not the taxpayer agrees with his findings that the taxpayer is liable for deficiency tax or taxes. If the taxpayer is not amenable, based on the said Officer's submitted report of investigation, the taxpayer shall be informed, in writing, by the Revenue District Office or by the Special Investigation Division, as the case may be (in the case Revenue Regional Offices) or by the Chief of Division concerned (in the case of the BIR National Office) of the discrepancy or discrepancies in the taxpayer's payment of his internal revenue taxes, for the purpose of "Informal Conference," in order to afford the taxpayer with an opportunity to present his side
of the case. If the taxpayer fails to respond within fifteen (15) days from date of receipt of the notice for informal conference, he shall be considered in default, in which case, the Revenue District Officer or the Chief of the Special Investigation Division of the Revenue Regional Office, or the Chief of Division in the National Office, as the case may be, shall endorse the case with the least possible delay to the Assessment Division of the Revenue Regional Office or to the Commissioner or his duly authorized representative, as the case may be, for appropriate review and issuance of a deficiency tax assessment, if warranted. 3.1.2 Preliminary Assessment Notice (PAN). If after review and evaluation by the Assessment Division or by the Commissioner or his duly authorized representative, as the case may be, it is determined that there exists sufficient basis to assess the taxpayer for any deficiency tax or taxes, the said Office shall issue to the taxpayer, at least by registered mail, a Preliminary Assessment Notice (PAN) for the proposed assessment, showing in detail, the facts and the law, rules and regulations, or jurisprudence on which the proposed assessment is based (see illustration in ANNEX A hereof). If the taxpayer fails to respond within fifteen (15) days from date of receipt of the PAN, he shall be considered in default, in which case, a formal letter of demand and assessment notice shall be caused to be issued by the said Office, calling for payment of the taxpayer's deficiency tax liability, inclusive of the applicable penalties. 3.1.3 Exceptions to Prior Notice of the Assessment. The notice for informal conference and the preliminary assessment notice shall not be required in any of the following cases, in which case, issuance of the formal assessment notice for the payment of the taxpayer's deficiency tax liability shall be sufficient: (i) When the finding for any deficiency tax is the result of mathematical error in the computation of the tax appearing on the face of the tax return filed by the taxpayer; or
(ii) When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or (iii) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or (iv) When the excise tax due on excisable articles has not been paid; or
(v) When an article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to nonexempt persons. 3.1.4 Formal Letter of Demand and Assessment Notice. The formal letter of demand and assessment notice shall be issued by the Commissioner or his duly authorized representative. The letter of demand calling for payment of the taxpayer's deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based, otherwise, the formal letter of demand and assessment notice shall be void (see illustration in ANNEX B hereof). The same shall be sent to the taxpayer only by registered mail or by personal delivery. If sent by personal delivery, the taxpayer or his duly authorized representative shall acknowledge receipt thereof in the duplicate copy of the letter of demand, showing the following: (a) His name;
(b) signature; (c) designation and authority to act for and in behalf of the taxpayer, if acknowledged received by a person other than the taxpayer himself; and (d) date of receipt thereof. x x x. From the provision quoted above, it is clear that the sending of a PAN to taxpayer to inform him of the assessment made is but part of the due process requirement in the issuance of a deficiency tax assessment, the absence of which renders nugatory any assessment made by the tax authorities. The use of the word shall in subsection 3.1.2 describes the mandatory nature of the service of a PAN. The persuasiveness of the right to due process reaches both substantial and procedural rights and the failure of the CIR to strictly comply with the requirements laid down by law and its own rules is a denial of Metro Stars right to due process.[15] Thus, for its failure to send the PAN stating the facts and the law on which the assessment was made as required by Section 228 of R.A. No. 8424, the assessment made by the CIR is void. The case of CIR v. Menguito[16] cited by the CIR in support of its argument that only the non-service of the FAN is fatal to the validity of an assessment, cannot apply to this case because the issue therein was the non-compliance with the provisions of R. R. No. 12-85 which sought to interpret Section 229 of the old tax law. RA No. 8424 has already amended the provision of Section 229 on protesting an assessment. The old requirement of merely notifying the taxpayer of the CIRs findings was changed in 1998 to informing the taxpayer of not only the law, but also of the facts on which an assessment would be made. Otherwise, the assessment itself would be invalid.[17] The regulation then, on the other hand, simply provided that a notice be sent to the respondent in the form prescribed, and that no consequence would ensue for failure to comply with that form. The Court need not belabor to discuss the matter of Metro Stars failure to file its protest, for it is well-settled that a void assessment bears no fruit.[18]
It is an elementary rule enshrined in the 1987 Constitution that no person shall be deprived of property without due process of law.[19] In balancing the scales between the power of the State to tax and its inherent right to prosecute perceived transgressors of the law on one side, and the constitutional rights of a citizen to due process of law and the equal protection of the laws on the other, the scales must tilt in favor of the individual, for a citizens right is amply protected by the Bill of Rights under the Constitution. Thus, while taxes are the lifeblood of the government, the power to tax has its limits, in spite of all its plenitude. Hence in Commissioner of Internal Revenue v. Algue, Inc.,[20] it was said Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved. xxx xxx xxx It is said that taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for the lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of ones hard-earned income to taxing authorities, every person who is able to must contribute his share in the running of the government. The government for its part is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power. But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the taxpayer has a right to complain and
the courts will then come to his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate x x x that the law has not been observed. [21] (Emphasis supplied).
WHEREFORE, the petition is DENIED. SO ORDERED.
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
- versus -
G.R. No. 185371 Present: CARPIO, J., Chairperson, NACHURA, PERALTA, ABAD, and MENDOZA, JJ.
METRO STAR SUPERAMA, INC., Respondent.
Promulgated: December 8, 2010
x -------------------------------------------------------------------------------------- x
DECISION MENDOZA, J.: This petition for review on certiorari under Rule 45 of the Rules of Court filed by the petitioner Commissioner of Internal Revenue (CIR) seeks to reverse and set aside the 1] September 16, 2008 Decision[1] of the Court of Tax Appeals En Banc (CTA-En Banc), in C.T.A. EB No. 306 and 2] its November 18, 2008 Resolution[2] denying petitioners motion for reconsideration.
The CTA-En Banc affirmed in toto the decision of its Second Division (CTA-Second Division) in CTA Case No. 7169 reversing the February 8, 2005 Decision of the CIR which assessed respondent Metro Star Superama, Inc. (Metro Star) of deficiency valueadded tax and withholding tax for the taxable year 1999. Based on a Joint Stipulation of Facts and Issues[3] of the parties, the CTA Second Division summarized the factual and procedural antecedents of the case, the pertinent portions of which read: Petitioner is a domestic corporation duly organized and existing by virtue of the laws of the Republic of the Philippines, x x x. On January 26, 2001, the Regional Director of Revenue Region No. 10, Legazpi City, issued Letter of Authority No. 00006561 for Revenue Officer Daisy G. Justiniana to examine petitioners books of accounts and other accounting records for income tax and other
internal revenue taxes for the taxable year 1999. Said Letter of Authority was revalidated on August 10, 2001 by Regional Director Leonardo Sacamos. For petitioners failure to comply with several requests for the presentation of records and Subpoena Duces Tecum, [the] OIC of BIR Legal Division issued an Indorsement dated September 26, 2001 informing Revenue District Officer of Revenue Region No. 67, Legazpi City to proceed with the investigation based on the best evidence obtainable preparatory to the issuance of assessment notice. On November 8, 2001, Revenue District Officer Socorro O. RamosLafuente issued a Preliminary 15-day Letter, which petitioner received on November 9, 2001. The said letter stated that a post audit review was held and it was ascertained that there was deficiency value-added and withholding taxes due from petitioner in the amount of P292,874.16. On April 11, 2002, petitioner received a Formal Letter of Demand dated April 3, 2002 from Revenue District No. 67, Legazpi City, assessing petitioner the amount of Two Hundred Ninety Two Thousand Eight Hundred Seventy Four Pesos and Sixteen Centavos (P292,874.16.) for deficiency value-added and withholding taxes for the taxable year 1999, computed as follows:
ASSESSMENT NOTICE NO. 067-99-003-579-072 VALUE ADDED TAX Gross Sales P1,697,718.90 Output Tax P 154,338.08 Less: Input Tax VAT Payable P 154,338.08 Add: 25% Surcharge P 38,584.54 20% Interest 79,746.49
Compromise Penalty Late Payment P16,000.00 Failure to File VAT returns 2,400.00 18,400.00 136,731.01 TOTAL P 291,069.09 WITHHOLDING TAX Compensation 2,772.91 Expanded 110,103.92 Total Tax Due P 112,876.83 Less: Tax Withheld 111,848.27 Deficiency Withholding Tax P 1,028.56 Add: 20% Interest p.a. 576.51 Compromise Penalty 200.00 TOTAL P 1,805.07 *Expanded Withholding Tax P1,949,334.25 x 5% 97,466.71 Film Rental 10,000.25 x 10% 1,000.00 Audit Fee 193,261.20 x 5% 9,663.00 Rental Expense 41,272.73 x 1% 412.73 Security Service 156,142.01 x 1% 1,561.42 Service Contractor P 110,103.92 Total SUMMARIES OF DEFICIENCIES VALUE ADDED TAX P 291,069.09 WITHHOLDING TAX 1,805.07 TOTAL P 292,874.16 Subsequently, Revenue District Office No. 67 sent a copy of the Final Notice of Seizure dated May 12, 2003, which petitioner received on May 15, 2003, giving the latter last opportunity to settle its deficiency tax liabilities within ten (10) [days] from receipt thereof, otherwise respondent BIR shall be constrained to serve and execute the Warrants of Distraint and/or Levy and Garnishment to enforce collection.
On February 6, 2004, petitioner received from Revenue District Office No. 67 a Warrant of Distraint and/or Levy No. 67-0029-23 dated May 12, 2003 demanding payment of deficiency value-added tax and withholding tax payment in the amount of P292,874.16. On July 30, 2004, petitioner filed with the Office of respondent Commissioner a Motion for Reconsideration pursuant to Section 3.1.5 of Revenue Regulations No. 12-99. On February 8, 2005, respondent Commissioner, through its authorized representative, Revenue Regional Director of Revenue Region 10, Legaspi City, issued a Decision denying petitioners Motion for Reconsideration. Petitioner, through counsel received said Decision on February 18, 2005. x x x.
Denying that it received a Preliminary Assessment Notice (PAN) and claiming that it was not accorded due process, Metro Star filed a petition for review[4] with the CTA. The parties then stipulated on the following issues to be decided by the tax court: 1. Whether the respondent complied with the due process requirement as provided under the National Internal Revenue Code and Revenue Regulations No. 12-99 with regard to the issuance of a deficiency tax assessment; 1.1 Whether petitioner is liable for the respective amounts of P291,069.09 and P1,805.07 as deficiency VAT and withholding tax for the year 1999; 1.2. Whether the assessment has become final and executory and demandable for failure of petitioner to protest the same within 30 days from its receipt thereof on April 11, 2002, pursuant to Section 228 of the National Internal Revenue Code;
2. Whether the deficiency assessments issued by the respondent are void for failure to state the law and/or facts upon which they are based. 2.2 Whether petitioner was informed of the law and facts on which the assessment is made in compliance with Section 228 of the National Internal Revenue Code; 3. Whether or not petitioner, as owner/operator of a movie/cinema house, is subject to VAT on sales of services under Section 108(A) of the National Internal Revenue Code; 4. Whether or not the assessment is based on the best evidence obtainable pursuant to Section 6(b) of the National Internal Revenue Code.
The CTA-Second Division found merit in the petition of Metro Star and, on March 21, 2007, rendered a decision, the decretal portion of which reads: WHEREFORE, premises considered, the Petition for Review is hereby GRANTED. Accordingly, the assailed Decision dated February 8, 2005 is hereby REVERSED and SET ASIDE and respondent is ORDERED TO DESIST from collecting the subject taxes against petitioner. The CTA-Second Division opined that [w]hile there [is] a disputable presumption that a mailed letter [is] deemed received by the addressee in the ordinary course of mail, a direct denial of the receipt of mail shifts the burden upon the party favored by the presumption to prove that the mailed letter was indeed received by the addressee.[5] It also found that there was no clear showing that Metro Star actually received the alleged PAN, dated January 16, 2002. It, accordingly, ruled that the Formal Letter of Demand dated April 3, 2002, as well as the Warrant of Distraint and/or Levy dated May 12, 2003 were void, as Metro Star was denied due process.[6]
The CIR sought reconsideration[7] of the decision of the CTA-Second Division, but the motion was denied in the latters July 24, 2007 Resolution.[8] Aggrieved, the CIR filed a petition for review[9] with the CTA-En Banc, but the petition was dismissed after a determination that no new matters were raised. The CTA-En Bancdisposed:
WHEREFORE, the instant Petition for Review is hereby DENIED DUE COURSE and DISMISSED for lack of merit. Accordingly, the March 21, 2007 Decision and July 27, 2007 Resolution of the CTA Second Division in CTA Case No. 7169 entitled, Metro Star Superama, Inc., petitioner vs. Commissioner of Internal Revenue, respondent are hereby AFFIRMED in toto. SO ORDERED.
The motion for reconsideration[10] filed by the CIR was likewise denied by the CTA-En Banc in its November 18, 2008 Resolution.[11] The CIR, insisting that Metro Star received the PAN, dated January 16, 2002, and that due process was served nonetheless because the latter received the Final Assessment Notice (FAN), comes now before this Court with the sole issue of whether or not Metro Star was denied due process. The general rule is that the Court will not lightly set aside the conclusions reached by the CTA which, by the very nature of its functions, has accordingly developed an exclusive expertise on the resolution unless there has been an abuse or improvident exercise of authority.[12] In Barcelon, Roxas Securities, Inc. (now known as UBP Securities, Inc.) v. Commissioner of Internal Revenue,[13] the Court wrote: 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. On the matter of service of a tax assessment, a further perusal of our ruling in Barcelon is instructive, viz: Jurisprudence is replete with cases holding that if the taxpayer denies ever having received an assessment from the BIR, it is incumbent upon the latter to prove by competent evidence that such notice was indeed received by the addressee. The onus probandi was shifted to respondent to prove by contrary evidence that the Petitioner received the assessment in the due course of mail. The Supreme Court has consistently held that while a mailed letter is deemed received by the addressee in the course of mail, this is merely a disputable presumption subject to controversion and a direct denial thereof shifts the burden to the party favored by the presumption to prove that the mailed letter was indeed received by the addressee (Republic vs. Court of Appeals, 149 SCRA 351). Thus as held by the Supreme Court in Gonzalo P. Nava vs. Commissioner of Internal Revenue, 13 SCRA 104, January 30, 1965: "The facts to be proved to raise this presumption are (a) that the letter was properly addressed with postage prepaid, and (b) that it was mailed. Once these facts are proved, the presumption is that the letter was received by the addressee as soon as it could have been transmitted to him in the ordinary course of the mail. But if one of
the said facts fails to appear, the presumption does not lie. (VI, Moran, Comments on the Rules of Court, 1963 ed, 56-57 citing Enriquez vs. Sunlife Assurance of Canada, 41 Phil 269)." x x x. What is essential to prove the fact of mailing is the registry receipt issued by the Bureau of Posts or the Registry return card which would have been signed by the Petitioner or its authorized representative. And if said documents cannot be located, Respondent at the very least, should have submitted to the Court a certification issued by the Bureau of Posts and any other pertinent document which is executed with the intervention of the Bureau of Posts. This Court does not put much credence to the self serving documentations made by the BIR personnel especially if they are unsupported by substantial evidence establishing the fact of mailing. Thus: "While we have held that an assessment is made when sent within the prescribed period, even if received by the taxpayer after its expiration (Coll. of Int. Rev. vs. Bautista, L-12250 and L-12259, May 27, 1959), this ruling makes it the more imperative that the release, mailing or sending of the notice be clearly and satisfactorily proved. Mere notations made without the taxpayers intervention, notice or control, without adequate supporting evidence cannot suffice; otherwise, the taxpayer would be at the mercy of the revenue offices, without adequate protection or defense." (Nava vs. CIR, 13 SCRA 104, January 30, 1965). x x x. The failure of the respondent to prove receipt of the assessment by the Petitioner leads to the conclusion that no assessment was issued. Consequently, the governments right to issue an assessment for the said period has already prescribed. (Industrial Textile Manufacturing Co. of the Phils., Inc. vs. CIR CTA Case 4885, August 22, 1996). (Emphases supplied.)
The Court agrees with the CTA that the CIR failed to discharge its duty and present any evidence to show that Metro Star indeed received the PAN dated January 16, 2002. It could have simply presented the registry receipt or the certification from the postmaster that it mailed the PAN, but failed. Neither did it offer any explanation on why it failed to comply with the requirement of service of the PAN. It merely accepted the letter of Metro Stars chairman dated April 29, 2002, that stated that he had received the FAN dated April 3, 2002, but not the PAN; that he was willing to pay the tax as computed by the CIR; and that he just wanted to clarify some matters with the hope of lessening its tax liability. This now leads to the question: Is the failure to strictly comply with notice requirements prescribed under Section 228 of the National Internal Revenue Code of 1997 and Revenue Regulations (R.R.) No. 12-99 tantamount to a denial of due process? Specifically, are the requirements of due process satisfied if only the FAN stating the computation of tax liabilities and a demand to pay within the prescribed period was sent to the taxpayer?
The answer to these questions require an examination of Section 228 of the Tax Code which reads: SEC. 228. Protesting of Assessment. - When the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings: provided, however, that a preassessment notice shall not be required in the following cases: (a) When the finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face of the return; or
(b) When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or (c) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or (d) When the excise tax due on exciseable articles has not been paid; or (e) When the article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons. The taxpayers shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void. Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized representative shall issue an assessment based on his findings. Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final. If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of one
hundred eighty (180)-day period; otherwise, the decision shall become final, executory and demandable. (Emphasis supplied).
Indeed, Section 228 of the Tax Code clearly requires that the taxpayer must first be informed that he is liable for deficiency taxes through the sending of a PAN. He must be informed of the facts and the law upon which the assessment is made. The law imposes a substantive, not merely a formal, requirement. To proceed heedlessly with tax collection without first establishing a valid assessment is evidently violative of the cardinal principle in administrative investigations - that taxpayers should be able to present their case and adduce supporting evidence.[14] This is confirmed under the provisions R.R. No. 12-99 of the BIR which pertinently provide: SECTION 3. Due Process Requirement in the Issuance of a Deficiency Tax Assessment. 3.1 Mode of procedures in the issuance of a deficiency tax assessment: 3.1.1 Notice for informal conference. The Revenue Officer who audited the taxpayer's records shall, among others, state in his report whether or not the taxpayer agrees with his findings that the taxpayer is liable for deficiency tax or taxes. If the taxpayer is not amenable, based on the said Officer's submitted report of investigation, the taxpayer shall be informed, in writing, by the Revenue District Office or by the Special Investigation Division, as the case may be (in the case Revenue Regional Offices) or by the Chief of Division concerned (in the case of the BIR National Office) of the discrepancy or discrepancies in the taxpayer's payment of his internal revenue taxes, for the purpose of "Informal Conference," in order to afford the taxpayer with an opportunity to present his side of the case. If the taxpayer fails to respond within fifteen (15) days from date of receipt of the notice for informal conference, he shall be considered in default, in which case, the Revenue District Officer or
the Chief of the Special Investigation Division of the Revenue Regional Office, or the Chief of Division in the National Office, as the case may be, shall endorse the case with the least possible delay to the Assessment Division of the Revenue Regional Office or to the Commissioner or his duly authorized representative, as the case may be, for appropriate review and issuance of a deficiency tax assessment, if warranted. 3.1.2 Preliminary Assessment Notice (PAN). If after review and evaluation by the Assessment Division or by the Commissioner or his duly authorized representative, as the case may be, it is determined that there exists sufficient basis to assess the taxpayer for any deficiency tax or taxes, the said Office shall issue to the taxpayer, at least by registered mail, a Preliminary Assessment Notice (PAN) for the proposed assessment, showing in detail, the facts and the law, rules and regulations, or jurisprudence on which the proposed assessment is based (see illustration in ANNEX A hereof). If the taxpayer fails to respond within fifteen (15) days from date of receipt of the PAN, he shall be considered in default, in which case, a formal letter of demand and assessment notice shall be caused to be issued by the said Office, calling for payment of the taxpayer's deficiency tax liability, inclusive of the applicable penalties. 3.1.3 Exceptions to Prior Notice of the Assessment. The notice for informal conference and the preliminary assessment notice shall not be required in any of the following cases, in which case, issuance of the formal assessment notice for the payment of the taxpayer's deficiency tax liability shall be sufficient: (i) When the finding for any deficiency tax is the result of mathematical error in the computation of the tax appearing on the face of the tax return filed by the taxpayer; or (ii) When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or
(iii) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or (iv) When the excise tax due on excisable articles has not been paid; or
(v) When an article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to nonexempt persons. 3.1.4 Formal Letter of Demand and Assessment Notice. The formal letter of demand and assessment notice shall be issued by the Commissioner or his duly authorized representative. The letter of demand calling for payment of the taxpayer's deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based, otherwise, the formal letter of demand and assessment notice shall be void (see illustration in ANNEX B hereof). The same shall be sent to the taxpayer only by registered mail or by personal delivery. If sent by personal delivery, the taxpayer or his duly authorized representative shall acknowledge receipt thereof in the duplicate copy of the letter of demand, showing the following: (a) His name; (b) signature; (c) designation and authority to act for and in behalf of the taxpayer, if acknowledged received by a person other than the taxpayer himself; and (d) date of receipt thereof.
x x x. From the provision quoted above, it is clear that the sending of a PAN to taxpayer to inform him of the assessment made is but part of the due process requirement in the issuance of a deficiency tax assessment, the absence of which renders nugatory any assessment made by the tax authorities. The use of the word shall in subsection 3.1.2 describes the mandatory nature of the service of a PAN. The persuasiveness of the right to due process reaches both substantial and procedural rights and the failure of the CIR to strictly comply with the requirements laid down by law and its own rules is a denial of Metro Stars right to due process.[15] Thus, for its failure to send the PAN stating the facts and the law on which the assessment was made as required by Section 228 of R.A. No. 8424, the assessment made by the CIR is void. The case of CIR v. Menguito[16] cited by the CIR in support of its argument that only the non-service of the FAN is fatal to the validity of an assessment, cannot apply to this case because the issue therein was the non-compliance with the provisions of R. R. No. 12-85 which sought to interpret Section 229 of the old tax law. RA No. 8424 has already amended the provision of Section 229 on protesting an assessment. The old requirement of merely notifying the taxpayer of the CIRs findings was changed in 1998 to informing the taxpayer of not only the law, but also of the facts on which an assessment would be made. Otherwise, the assessment itself would be invalid.[17] The regulation then, on the other hand, simply provided that a notice be sent to the respondent in the form prescribed, and that no consequence would ensue for failure to comply with that form. The Court need not belabor to discuss the matter of Metro Stars failure to file its protest, for it is well-settled that a void assessment bears no fruit.[18] It is an elementary rule enshrined in the 1987 Constitution that no person shall be deprived of property without due process of law.[19] In balancing the scales between the power of the State to tax and its inherent right to prosecute perceived transgressors of
the law on one side, and the constitutional rights of a citizen to due process of law and the equal protection of the laws on the other, the scales must tilt in favor of the individual, for a citizens right is amply protected by the Bill of Rights under the Constitution. Thus, while taxes are the lifeblood of the government, the power to tax has its limits, in spite of all its plenitude. Hence in Commissioner of Internal Revenue v. Algue, Inc.,[20] it was said Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved. xxx xxx xxx It is said that taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for the lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of ones hard-earned income to taxing authorities, every person who is able to must contribute his share in the running of the government. The government for its part is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power. But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer
can demonstrate x x x that the law has not been observed. [21] (Emphasis supplied).
WHEREFORE, the petition is DENIED. SO ORDERED. G.R. No. 172509, February 04, 2015 CHINA BANKING CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. DECISION SERENO, C.J.: This Rule 45 Petition1 requires this Court to address the question of prescription of the government’s right to collect taxes. Petitioner China Banking Corporation (CBC) assails the Decision 2 and Resolution3 of the Court of Tax Appeals (CTA) En Banc in CTA En Banc Case No. 109. The CTA En Banc affirmed the Decision4 in CTA Case No. 6379 of the CTA Second Division, which had also affirmed the validity of Assessment No. FAS-5-82/85-89-000586 and FAS-5-86-8900587. The Assessment required petitioner CBC to pay the amount of P11,383,165.50, plus increments accruing thereto, as deficiency documentary stamp tax (DST) for the taxable years 1982 to 1986. cralawre d
FACTS Petitioner CBC is a universal bank duly organized and existing under the laws of the Philippines. For the taxable years 1982 to 1986, CBC was engaged in transactions involving sales of foreign exchange to the Central Bank of the Philippines (now Bangko Sentral ng Pilipinas), commonly known as SWAP transactions.5 Petitioner did not file tax returns or pay tax on the SWAP transactions for those taxable years. On 19 April 1989, petitioner CBC received an assessment from the Bureau of Internal Revenue (BIR) finding CBC liable for deficiency DST on the sales of foreign bills of exchange to the Central Bank. The deficiency DST was computed as follows: chanroblesvirtuallawlibrary
Deficiency Documentary Stamp Tax
Amount For the years 1982 to 1985 For calendar year 1986 Add : Surcharge
P 8,280,696.00 P 2,481 ,975.60 P 620,493.90
P 3,102.469.50 P11 ,383,165.506
On 8 May 1989, petitioner CBC, through its vice-president, sent a letter of protest to the BIR. CBC raised the following defenses: (1) double taxation, as the bank had previously paid the DST on all its transactions involving sales of foreign bills of exchange to the Central Bank; (2) absence of liability, as the liability for the DST in a sale of foreign exchange through telegraphic transfers to the Central Bank falls on the buyer ? in this case, the Central Bank; (3) due process violation, as the bank’s records were never formally examined by the BIR examiners; (4) validity of the assessment, as it did not include the factual basis therefore; (5) exemption, as neither the tax-exempt entity nor the other party was liable for the payment of DST before the effectivity of Presidential Decree Nos. (PD) 1177 and 1931 for the years 1982 to 1986.7 In the protest, the taxpayer requested a reinvestigation so as to substantiate its assertions. 8
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On 6 December 2001, more than 12 years after the filing of the protest, the Commissioner of Internal Revenue (CIR) rendered a decision reiterating the deficiency DST assessment and ordered the payment thereof plus increments within 30
days
from
receipt
of
Decision.9
the
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On 18 January 2002, CBC filed a Petition for Review with the CTA. On 11 March 2002, the CIR filed an Answer with a demand
for
CBC
to
pay
the
DST.10
assessed
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On 23 February 2005, and after trial on the merits, the CTA Second Division denied the Petition of CBC. The CTA ruled that a SWAP arrangement should be treated as a telegraphic transfer subject to documentary stamp tax. 11
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On 30 March 2005, petitioner CBC filed a Motion for Reconsideration, but it was denied in a Resolution dated 14 July 2005. On 5 August 2005, petitioner appealed to the CTA En Banc. The appellate tax court, however, dismissed the Petition for Review in a Decision dated 1 December 2005. CBC filed a Motion for Reconsideration on 21 December 2005, but it was denied in a 20 March 2006 Resolution. The taxpayer now comes to this Court with a Rule 45 Petition, reiterating the arguments it raised at the CTA level and invoking for the first time the argument of prescription. Petitioner CBC states that the government has three years from 19 April 1989, the date the former received the assessment of the CIR, to collect the tax. Within that time frame, however, neither a warrant of distraint or levy was issued, nor a collection case filed in court. On 17 October 2006, respondent CIR submitted its Comment in compliance with the Court’s Resolution dated 26 June 2006.12 The
Comment
did
not
have
any
discussion
on
the
question
of
prescription.
On 21 February 2007, the Court issued a Resolution directing the parties to file their respective Memoranda. Petitioner CBC filed its Memorandum13 on 26 April 2007. The CIR, on the other hand, filed on 17 April 2007 a Manifestation stating that it was adopting the allegations and authorities in its Comment in lieu of the required Memorandum. 14
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ISSUE Given the facts and the arguments raised in this case, the resolution of this case hinges on this issue: whether the right of the BIR to collect the assessed DST from CBC is barred by prescription.15
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RULING OF THE COURT We grant the Petition on the ground that the right of the BIR to collect the assessed DST is barred by the statute of limitations. Prescription
Has
Set
In.
To recall, the Bureau of Internal Revenue (BIR) issued the assessment for deficiency DST on 19 April 1989, when the applicable rule was Section 319(c) of the National Internal Revenue Code of 1977, as amended. 16 In that provision, the time limit for the government to collect the assessed tax is set at three years, to be reckoned from the date when the BIR mails/releases/sends the assessment notice to the taxpayer. Further, Section 319(c) states that the assessed tax must be collected by distraint or levy and/or court proceeding within the three-year period. With these rules in mind, we shall now determine whether the claim of the BIR is barred by time. In this case, the records do not show when the assessment notice was mailed, released or sent to CBC. Nevertheless, the latest possible date that the BIR could have released, mailed or sent the assessment notice was on the same date that CBC received it, 19 April 1989. Assuming therefore that 19 April 1989 is the reckoning date, the BIR had three years to collect the assessed DST. However, the records of this case show that there was neither a warrant of distraint or levy served on CBC's properties nor a collection case filed in court by the BIR within the three-year period. The attempt of the BIR to collect the tax through its Answer with a demand for CBC to pay the assessed DST in the CTA on 11 March 2002 did not comply with Section 319(c) of the 1977 Tax Code, as amended. The demand was
made almost thirteen years from the date from which the prescriptive period is to be reckoned. Thus, the attempt to collect the tax was made way beyond the three-year prescriptive period. The BIR’s Answer in the case filed before the CTA could not, by any means, have qualified as a collection case as required by law. Under the rule prevailing at the time the BIR filed its Answer, the regular courts, and not the CTA, had jurisdiction over judicial actions for collection of internal revenue taxes. It was only on 23 April 2004, when Republic Act Number 9282 took effect,17 that the jurisdiction of the CTA was expanded to include, among others, original jurisdiction over collection cases in which the principal amount involved is one million pesos or more. Consequently, the claim of the CIR for deficiency DST from petitioner is forever lost, as it is now barred by time. This Court has no other option but to dismiss the present case. The limitations by
running
of
the
was the
statute not
request
for
of suspended reinvestigation.
The fact that the taxpayer in this case may have requested a reinvestigation did not toll the running of the three-year prescriptive period. Section 320 of the 1977 Tax Code states: chanroblesvirtuallawlibrary
Sec. 320. Suspension of running of statute.—The running of the statute of limitations provided in Sections 318 or 319 on the making of assessment and the beginning of distraint or levy or a proceeding in court for collection, in respect of any deficiency, shall be suspended for the period during which the Commissioner is prohibited from making the assessment or beginning distraint or levy or a proceeding in court and for sixty days thereafter; when the taxpayer requests for a re-investigation which is granted by the Commissioner; when the taxpayer cannot be located in the address given by him in the return filed upon which a tax is being assessed or collected: Provided, That if the taxpayer informs the Commissioner of any change in address, the running of the statute of limitations will not be suspended; when the warrant of distraint and levy is duly served upon the taxpayer, his authorized representative, or a member of his household with sufficient discretion, and no property could be located; and when the taxpayer is out of the Philippines. (Emphasis supplied)
The provision is clear. A request for reinvestigation alone will not suspend the statute of limitations. Two things must concur: there must be a request for reinvestigation and the CIR must have granted it. BPI v. Commissioner of Internal Revenue18 emphasized this rule by stating:
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In the case of Republic of the Philippines v. Gancayco, taxpayer Gancayco requested for a thorough reinvestigation of the assessment against him and placed at the disposal of the Collector of Internal Revenue all the [evidence] he had for such purpose; yet, the Collector ignored the request, and the records and documents were not at all examined. Considering the given facts, this Court pronounced that — x x x. The act of requesting a reinvestigation alone does not suspend the period. The request should first be granted, in order to effect suspension. (Collector v. Suyoc Consolidated, supra; also Republic v. Ablaza, supra). Moreover, the Collector gave appellee until April 1, 1949, within which to submit his evidence, which the latter did one day before. There were no impediments on the part of the Collector to file the collection case from April 1, 1949 x x x. In Republic of the Philippines v. Acebedo, this Court similarly found that — . . . [T]he defendant, after receiving the assessment notice of September 24, 1949, asked for a reinvestigation thereof on October 11, 1949 (Exh. “A”). There is no evidence that this request was considered or acted upon. In fact, on October 23, 1950 the then Collector of Internal Revenue issued a warrant of distraint and levy for the full amount of the assessment (Exh. “D”), but there was follow-up of this warrant. Consequently, the request for reinvestigation did not suspend the running of the period for filing an action for collection. (Emphasis in the original) The Court went on to declare that the burden of proof that the request for reinvestigation had been actually granted shall be on the CIR. Such grant may be expressed in its communications with the taxpayer or implied from the action of the CIR or his authorized representative in response to the request
for
reinvestigation.
There is nothing in the records of this case which indicates, expressly or impliedly, that the CIR had granted the request for reinvestigation filed by BPI. What is reflected in the records is the piercing silence and inaction of the CIR on the request for reinvestigation, as he considered BPI's letters of protest to be.
In the present case, there is no showing from the records that the CIR ever granted the request for reinvestigation filed by CBC. That being the case, it cannot be said that the running of the three-year prescriptive period was effectively suspended. Failure to administrative defense is of no moment.
raise level/lower
prescription court
When the pleadings or the evidence show that the claim is barred the court must dismiss the claim even is not raised as a defense.
at as on by
if
the a record prescription, prescription
We note that petitioner has raised the issue of prescription for the first time only before this Court. While we are mindful of the established rule of remedial law that the defense of prescription must be raised at the trial court that has also been applied for tax cases. 19 Thus, as a rule, the failure to raise the defense of prescription at the administrative level prevents the taxpayer from raising it at the appeal stage. This
rule,
however,
is
not
absolute.
The facts of the present case are substantially identical to those in the 2014 case, Bank of the Philippine Islands (BPI) v. Commissioner of Internal Revenue. 20 In that case, petitioner received an assessment notice from the BIR for deficiency DST based on petitioner’s SWAP transactions for the year 1985 on 16 June 1989. On 23 June 1989, BPI, through its counsel, filed a protest requesting the reinvestigation and/or reconsideration of the assessment for lack of legal or factual bases. Almost ten years later, the CIR, in a letter dated 4 August 1998, denied the protest. On 4 January 1999, BPI filed a Petition for Review with the CTA. On 23 February 1999, the CIR filed an Answer with a demand for BPI to pay the assessed DST. It was only when the case ultimately reached this Court that the issue of prescription was brought up. Nevertheless, the Court ruled that the CIR could no longer collect the assessed tax due to prescription. Basing its ruling on Section 1, Rule 9 of the Rules of Court and on jurisprudence, the Court held as follows: chanroblesvirtuallawlibrary
In a Resolution dated 5 August 2013, the Court, through the Third Division, found that the assailed tax assessment may be invalidated because the statute of limitations on the collection of the alleged deficiency DST had already expired, conformably with Section 1, Rule 9 of the Rules of Court and the Bank of the Philippine Islands v. Commissioner of Internal Revenue decision. However, to afford due process, the Court required both BPI and CIR to submit their respective comments on the issue of prescription. Only the CIR filed his comment on 9 December 2013. In his Comment, the CIR argues that the issue of prescription cannot be raised for the first time on appeal. The CIR further alleges that even assuming that the issue of prescription can be raised, the protest letter interrupted the prescriptive period to collect the assessed DST, unlike in the Bank of the Philippine Islands case. x
x
x
x
We deny the right of the BIR to collect the assessed DST on the ground of prescription. Section 1, Rule 9 of the Rules of Court expressly provides that:
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Section 1. Defenses and objections not pleaded. - Defenses and objections not pleaded either in a motion to dismiss or in the answer are deemed waived. However, when it appears from the pleadings or the evidence on record that the court has no jurisdiction over the subject matter, that there is another action pending between the same parties for the
same cause, or that the action is barred by prior judgment or by the statute of limitations, the court shall dismiss the claim. If the pleadings or the evidence on record show that the claim is barred by prescription, the court is mandated to dismiss the claim even if prescription is not raised as a defense. In Heirs of Valientes v. Ramas, we ruled that the CA may motu proprio dismiss the case on the ground of prescription despite failure to raise this ground on appeal. The court is imbued with sufficient discretion to review matters, not otherwise assigned as errors on appeal, if it finds that their consideration is necessary in arriving at a complete and just resolution of the case. More so, when the provisions on prescription were enacted to benefit and protect taxpayers from investigation after a reasonable period of time. Thus, we proceed to determine whether the period to collect the assessed DST for the year 1985 has prescribed. To determine prescription, what is essential only is that the facts demonstrating the lapse of the prescriptive period were sufficiently and satisfactorily apparent on the record either in the allegations of the plaintiff’s complaint, or otherwise established by the evidence. Under the then applicable Section 319(c) [now, 222(c)] of the National Internal Revenue Code (NIRC) of 1977, as amended, any internal revenue tax which has been assessed within the period of limitation may be collected by distraint or levy, and/or court proceeding within three years following the assessment of the tax. The assessment of the tax is deemed made and the three-year period for collection of the assessed tax begins to run on the date the assessment notice had been released, mailed or sent by the BIR to the taxpayer. In the present case, although there was no allegation as to when the assessment notice had been released, mailed or sent to BPI, still, the latest date that the BIR could have released, mailed or sent the assessment notice was on the date BPI received the same on 16 June 1989. Counting the three-year prescriptive period from 16 June 1989, the BIR had until 15 June 1992 to collect the assessed DST. But despite the lapse of 15 June 1992, the evidence established that there was no warrant of distraint or levy served on BPI’s properties, or any judicial proceedings initiated by the BIR. The earliest attempt of the BIR to collect the tax was when it filed its answer in the CTA on 23 February 1999, which was several years beyond the three-year prescriptive period. However, the BIR’s answer in the CTA was not the collection case contemplated by the law. Before 2004 or the year Republic Act No. 9282 took effect, the judicial action to collect internal revenue taxes fell under the jurisdiction of the regular trial courts, and not the CTA. Evidently, prescription has set in to bar the collection of the assessed DST. (Emphasis supplied)
BPI thus provides an exception to the rule against raising the defense of prescription for the first time on appeal: the exception arises when the pleadings or the evidence on record show that the claim is barred by prescription. In this case, the fact that the claim of the government is time-barred is a matter of record. As can be seen from previous discussion on the determination of the prescription of the right of the government to claim deficiency DST, conclusion that prescription has set in was arrived at using the evidence on record. The date of receipt of assessment notice was not disputed, and the date of the attempt to collect was determined by merely checking records as to when the Answer of the CIR containing the demand to pay the tax was filed. Estoppel or waiver from invoking the issue of prescription for the first time on appeal.
prevents rule
the against
raising
the the the the
government the
In this case, petitioner may have raised the question of prescription only on appeal to this Court. The BIR could have crushed the defense by the mere invocation of the rule against setting up the defense of prescription only at the appeal stage. The government, however, failed to do so. On the contrary, the BIR was silent despite having the opportunity to invoke the bar against the issue of prescription. It is worthy of note that the Court ordered the BIR to file a Comment. The government, however, did not offer any argument in its Comment about the issue of prescription, even if petitioner raised it in the latter’s Petition. It merely fell silent on the issue. It was given another opportunity to meet the challenge when this Court ordered both parties to file their respective memoranda. The CIR, however, merely filed a Manifestation that it would no longer be filing a Memorandum and, in lieu thereof, it would be merely adopting the arguments raised in its Comment. Its silence spoke loudly of its intent to waive its right to object to the argument of prescription.
We are mindful of the rule in taxation that estoppel does not prevent the government from collecting taxes; it is not bound by the mistake or negligence of its agents. The rule is based on the political law concept “the king can do no wrong,”21 which likens a state to a king: it does not commit mistakes, and it does not sleep on its rights. The analogy fosters inequality between the taxpayer and the government, with the balance tilting in favor of the latter. This concept finds justification in the theory and reality that government is necessary, and it must therefore collect taxes if it is to survive. Thus, the mistake or negligence of government officials should not bind the state, lest it bring harm to the government
and
ultimately
the
people,
in
whom
sovereignty
resides. 22
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Republic v. Ker & Co. Ltd. 23 involved a collection case for a final and executory assessment. The taxpayer nevertheless raised the prescription of the right to assess the tax as a defense before the Court of First Instance. The Republic, instead of objecting to the invocation of prescription as a defense by the taxpayer, litigated on the issue and thereafter submitted it for resolution. The Supreme Court ruled for the taxpayer, treating the actuations of the government as a waiver of the right to invoke the defense of prescription. Ker effectively applied to the government the rule of estoppel. Indeed, the no-estoppel rule is not absolute. The same ingredients in Ker - procedural matter and injustice - obtain in this case. The procedural matter consists in the failure to raise the issue of prescription at the trial court/administrative level, and injustice in the fact that the BIR has unduly delayed the assessment and collection of the DST in this case. The fact is that it took more than 12 years for it to take steps to collect the assessed tax. The BIR definitely caused untold prejudice to petitioner, keeping the latter in the dark for so long, as to whether it is liable for DST and, if so, for how much. cralawred
CONCLUSION Inasmuch as the government’s claim for deficiency DST is barred by prescription, it is no longer necessary to dwell on the validity of the assessment.
chanrobleslaw
WHEREFORE, the Petition is GRANTED. The Court of Tax Appeals En Banc Decision dated 1 December 2005 and its Resolution dated 20 March 2006 in CTA EB Case No. 109 are hereby REVERSED and SET ASIDE. A new ruling is entered DENYING respondent’s claim for deficiency DST in the amount of P11,383,165.50. SO ORDERED.
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FIRST DIVISION
ANGELES CITY, Petitioner,
G.R. No. 166134 Present:
- versus -
CORONA, C. J., Chairperson, VELASCO, JR., LEONARDO-DE CASTRO,
ANGELES CITY ELECTRIC DEL CASTILLO, and CORPORATION and PEREZ, JJ. REGIONAL TRIAL COURT BRANCH 57, ANGELES CITY, Promulgated: Respondents. June 29, 2010 x------------------------------------------------------------------x
DECISION
DEL CASTILLO, J.: The prohibition on the issuance of a writ of injunction to enjoin the collection of taxes applies only to national internal revenue taxes, and not to local taxes. This Petition[1] for Certiorari under Rule 65 of the Rules of Court seeks to set aside the Writ of Preliminary Injunction issued by the Regional Trial Court (RTC) of Angeles City, Branch 57, in Civil Case No. 11401, enjoining Angeles City and its City Treasurer from levying, seizing, disposing and selling at public auction the properties owned by Angeles Electric Corporation (AEC). Factual Antecedents On June 18, 1964, AEC was granted a legislative franchise under Republic Act No. (RA) 4079[2] to construct, maintain and operate an electric light, heat, and power system for the purpose of generating and distributing electric light, heat and power for sale in Angeles City, Pampanga. Pursuant to Section 3-A thereof,[3] AECs payment of franchise tax for gross earnings from electric current sold was in lieu of all taxes, fees and assessments. On September 11, 1974, Presidential Decree No. (PD) 551 reduced the franchise tax of electric franchise holders. Section 1 of PD 551 provided that:
SECTION 1. Any provision of law or local ordinance to the contrary notwithstanding, the franchise tax payable by all grantees of franchises to generate, distribute and sell electric current for light, heat and power shall be two percent (2%) of their gross receipts received from the sale of electric current and from transactions incident to the generation, distribution and sale of electric current. Such franchise tax shall be payable to the Commissioner of Internal Revenue or his duly authorized representative on or before the twentieth day of the month following the end of each calendar quarter or month as may be provided in the respective franchise or pertinent municipal regulation and shall, any provision of the Local Tax Code or any other law to the contrary notwithstanding, be in lieu of all taxes and assessments of whatever nature imposed by any national or local authority on earnings, receipts, income and privilege of generation, distribution and sale of electric current.
On January 1, 1992, RA 7160 or the Local Government Code (LGC) of 1991 was passed into law, conferring upon provinces and cities the power, among others, to impose tax on businesses enjoying franchise.[4] In accordance with the LGC, the Sangguniang Panlungsod of Angeles City enacted on December 23, 1993 Tax Ordinance No. 33, S-93, otherwise known as the Revised Revenue Code of Angeles City (RRCAC). On February 7, 1994, a petition seeking the reduction of the tax rates and a review of the provisions of the RRCAC was filed with the Sangguniang Panlungsod by Metro Angeles Chamber of Commerce and Industry Inc. (MACCI) of which AEC is a member. There being no action taken by the Sangguniang Panlungsod on the matter, MACCI elevated the petition[5] to the Department of Finance, which referred the same to the Bureau of Local Government Finance (BLGF). In the petition, MACCI alleged that the RRCAC is oppressive, excessive, unjust and confiscatory; that it was published only once, simultaneously on January 22, 1994; and that no public hearings were conducted prior to its enactment. Acting on the petition, the BLGF issued a First Indorsement[6] to the City Treasurer of Angeles City, instructing the latter to make representations with the Sangguniang Panlungsod for the
appropriate amendment of the RRCAC in order to ensure compliance with the provisions of the LGC, and to make a report on the action taken within five days. Thereafter, starting July 1995, AEC has been paying the local franchise tax to the Office of the City Treasurer on a quarterly basis, in addition to the national franchise tax it pays every quarter to the Bureau of Internal Revenue (BIR). Proceedings before the City Treasurer On January 22, 2004, the City Treasurer issued a Notice of Assessment[7] to AEC for payment of business tax, license fee and other charges for the period 1993 to 2004 in the total amount of P94,861,194.10. Within the period prescribed by law, AEC protested the assessment claiming that: (a)
pursuant to RA 4079, it is exempt from paying local business tax;
(b) since it is already paying franchise tax on business, the payment of business tax would result in double taxation; (c) the period to assess had prescribed because under the LGC, taxes and fees can only be assessed and collected within five (5) years from the date they become due; and (d) the assessment and collection of taxes under the RRCAC cannot be made retroactive to 1993 or prior to its effectivity.[8] On February 17, 2004, the City Treasurer denied the protest for lack of merit and requested AEC to settle its tax liabilities.[9] Proceedings before the RTC Aggrieved, AEC appealed the denial of its protest to the RTC of Angeles City via a Petition for Declaratory Relief,[10] docketed as Civil Case No. 11401.
On April 5, 2004, the City Treasurer levied on the real properties of AEC.[11] A Notice of Auction Sale[12] was published and posted announcing that a public auction of the levied properties of AEC would be held on May 7, 2004. This prompted AEC to file with the RTC, where the petition for declaratory relief was pending, an Urgent Motion for Issuance of Temporary Restraining Order and/or Writ of Preliminary Injunction[13] to enjoin Angeles City and its City Treasurer from levying, annotating the levy, seizing, confiscating, garnishing, selling and disposing at public auction the properties of AEC. Meanwhile, in response to the petition for declaratory relief filed by AEC, Angeles City and its City Treasurer filed an Answer with Counterclaim[14] to which AEC filed a Reply.[15] After due notice and hearing, the RTC issued a Temporary Restraining Order (TRO)[16] on May 4, 2004, followed by an Order[17] dated May 24, 2004 granting the issuance of a Writ of Preliminary Injunction, conditioned upon the filing of a bond in the amount of P10,000,000.00. Upon AECs posting of the required bond, the RTC issued a Writ of Preliminary Injunction on May 28, 2004,[18] which was amended on May 31, 2004 due to some clerical errors.[19] On August 5, 2004, Angeles City and its City Treasurer filed a Motion for Dissolution of Preliminary Injunction and Motion for Reconsideration of the Order dated May 24, 2004, [20]which was opposed by AEC.[21] Finding no compelling reason to disturb and reconsider its previous findings, the RTC denied the joint motion on October 14, 2004.[22]
Issue Being a special civil action for certiorari, the issue in the instant case is limited to the determination of whether the RTC gravely abused its discretion in issuing the writ of
preliminary injunction enjoining Angeles City and its City Treasurer from levying, selling, and disposing the properties of AEC. All other matters pertaining to the validity of the tax assessment and AECs tax exemption must therefore be left for the determination of the RTC where the main case is pending decision. Petitioners Arguments Petitioners main argument is that the collection of taxes cannot be enjoined by the RTC, citing Valley Trading Co., Inc. v. Court of First Instance of Isabela, Branch II,[23] wherein the lower courts denial of a motion for the issuance of a writ of preliminary injunction to enjoin the collection of a local tax was upheld. Petitioner further reasons that since the levy and auction of the properties of a delinquent taxpayer are proper and lawful acts specifically allowed by the LGC, these cannot be the subject of an injunctive writ. Petitioner likewise insists that AEC must first pay the tax before it can protest the assessment. Finally, petitioner contends that the tax exemption claimed by AEC has no legal basis because RA 4079 has been expressly repealed by the LGC. Private respondents Arguments Private respondent AEC on the other hand asserts that there was no grave abuse of discretion on the part of the RTC in issuing the writ of preliminary injunction because it was issued after due notice and hearing, and was necessary to prevent the petition from becoming moot. In addition, AEC claims that the issuance of the writ of injunction was proper since the tax assessment issued by the City Treasurer is not yet final, having been seasonably appealed pursuant to Section 195[24] of the LGC. AEC likewise points out that following the case of Pantoja v. David,[25]proceedings to invalidate a warrant of distraint and levy to restrain the collection of taxes do not violate the prohibition against injunction to restrain the collection of taxes because the proceedings are directed at the right of the City Treasurer to collect the tax by distraint or levy. As to its tax liability, AEC maintains that it is exempt from paying local business tax. In any case, AEC counters that the issue of whether it is liable to pay the assessed local business tax is a factual issue that should be determined by the RTC and not by the Supreme Court via a petition for certiorari under Rule 65 of the Rules of Court.
Our Ruling We find the petition bereft of merit. The LGC does not specifically prohibit an injunction enjoining the collection of taxes
A principle deeply embedded in our jurisprudence is that taxes being the lifeblood of the government should be collected promptly,[26] without unnecessary hindrance[27] or delay. [28]In line with this principle, the National Internal Revenue Code of 1997 (NIRC) expressly provides that no court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge imposed by the code.[29] An exception to this rule obtains only when in the opinion of the Court of Tax Appeals (CTA) the collection thereof may jeopardize the interest of the government and/or the taxpayer.[30] The situation, however, is different in the case of the collection of local taxes as there is no express provision in the LGC prohibiting courts from issuing an injunction to restrain local governments from collecting taxes. Thus, in the case of Valley Trading Co., Inc. v. Court of First Instance of Isabela, Branch II, cited by the petitioner, we ruled that: Unlike the National Internal Revenue Code, the Local Tax Code[31] does not contain any specific provision prohibiting courts from enjoining the collection of local taxes. Such statutory lapse or intent, however it may be viewed, may have allowed preliminary injunction where local taxes are involved but cannot negate the procedural rules and requirements under Rule 58.[32]
In light of the foregoing, petitioners reliance on the above-cited case to support its view that the collection of taxes cannot be enjoined is misplaced. The lower courts denial of the motion for the issuance of a writ of preliminary injunction to enjoin the collection of the local tax was upheld in that case, not because courts are prohibited from granting such injunction, but because the circumstances required for the issuance of writ of injunction were not present.
Nevertheless, it must be emphasized that although there is no express prohibition in the LGC, injunctions enjoining the collection of local taxes are frowned upon. Courts therefore should exercise extreme caution in issuing such injunctions. No grave abuse of discretion was committed by the RTC
Section 3, Rule 58, of the Rules of Court lays down the requirements for the issuance of a writ of preliminary injunction, viz: (a) That the applicant is entitled to the relief demanded, and the whole or part of such relief consists in restraining the commission or continuance of the acts complained of, or in the performance of an act or acts, either for a limited period or perpetually; (b) That the commission, continuance or non-performance of the act or acts complained of during the litigation would probably work injustice to the applicant; or (c) That a party, court, or agency or a person is doing, threatening, or attempting to do, or is procuring or suffering to be done, some act or acts probably in violation of the rights of the applicant respecting the subject of the action or proceeding, and tending to render the judgment ineffectual.
Two requisites must exist to warrant the issuance of a writ of preliminary injunction, namely: (1) the existence of a clear and unmistakable right that must be protected; and (2) an urgent and paramount necessity for the writ to prevent serious damage.[33] In issuing the injunction, the RTC ratiocinated that: It is very evident on record that petitioner[34] resorted and filed an urgent motion for issuance of a temporary restraining order and preliminary injunction to stop
the scheduled auction sale only when a warrant of levy was issued and published in the newspaper setting the auction sale of petitioners property by the City Treasurer, merely few weeks after the petition for declaratory relief has been filed, because if the respondent will not be restrained, it will render this petition moot and academic. To the mind of the Court, since there is no other plain, speedy and adequate remedy available to the petitioner in the ordinary course of law except this application for a temporary restraining order and/or writ of preliminary injunction to stop the auction sale and/or to enjoin and/or restrain respondents from levying, annotating the levy,seizing, confiscating, garnishing, selling and disposing at public auction the properties of petitioner, or otherwise exercising other administrative remedies against the petitioner and its properties, this alone justifies the move of the petitioner in seeking the injunctive reliefs sought for. Petitioner in its petition is questioning the assessment or the ruling of the City Treasurer on the business tax and fees, and not the local ordinance concerned. This being the case, the Court opines that notice is not required to the Solicitor General since what is involved is just a violation of a private right involving the right of ownership and possession of petitioners properties. Petitioner, therefore, need not comply with Section 4, Rule 63 requiring such notice to the Office of the Solicitor General. The Court is fully aware of the Supreme Court pronouncement that injunction is not proper to restrain the collection of taxes. The issue here as of the moment is the restraining of the respondent from pursuing its auction sale of the petitioners properties. The right of ownership and possession of the petitioner over the properties subject of the auction sale is at stake. Respondents assert that not one of the witnesses presented by the petitioner have proven what kind of right has been violated by the respondent, but merely mentioned of an injury which is only a scenario based on speculation because of petitioners claim that electric power may be disrupted. Engr. Abordos testimony reveals and even his Affidavit Exhibit S showed that if the auction sale will push thru, petitioner will not only lose control and operation of its facility, but its employees will also be denied access to equipments vital to petitioners operations, and since only the petitioner has the capability to operate
Petersville sub station, there will be a massive power failure or blackout which will adversely affect business and economy, if not lives and properties in Angeles City and surrounding communities. Petitioner, thru its witnesses, in the hearing of the temporary restraining order, presented sufficient and convincing evidence proving irreparable damages and injury which were already elaborated in the temporary restraining order although the same may be realized only if the auction sale will proceed. And unless prevented, restrained, and enjoined, grave and irreparable damage will be suffered not only by the petitioner but all its electric consumers in Angeles, Clark, Dau and Bacolor, Pampanga. The purpose of injunction is to prevent injury and damage from being incurred, otherwise, it will render any judgment in this case ineffectual. As an extraordinary remedy, injunction is calculated to preserve or maintain the status quo of things and is generally availed of to prevent actual or threatened acts, until the merits of the case can be heard (Cagayan de Oro City Landless Res. Assn. Inc. vs. CA, 254 SCRA 220) It appearing that the two essential requisites of an injunction have been satisfied, as there exists a right on the part of the petitioner to be protected, its right[s] of ownership and possession of the properties subject of the auction sale, and that the acts (conducting an auction sale) against which the injunction is to be directed, are violative of the said rights of the petitioner, the Court has no other recourse but to grant the prayer for the issuance of a writ of preliminary injunction considering that if the respondent will not be restrained from doing the acts complained of, it will preempt the Court from properly adjudicating on the merits the various issues between the parties, and will render moot and academic the proceedings before this court.[35]
As a rule, the issuance of a preliminary injunction rests entirely within the discretion of the court taking cognizance of the case and will not be interfered with, except where there is grave abuse of discretion committed by the court.[36] For grave abuse of discretion to prosper as a ground for certiorari, it must be demonstrated that the lower court or tribunal has exercised its
power in an arbitrary and despotic manner, by reason of passion or personal hostility, and it must be patent and gross as would amount to an evasion or to a unilateral refusal to perform the duty enjoined or to act in contemplation of law.[37] In other words, mere abuse of discretion is not enough.[38] Guided by the foregoing, we find no grave abuse of discretion on the part of the RTC in issuing the writ of injunction. Petitioner, who has the burden to prove grave abuse of discretion, [39] failed to show that the RTC acted arbitrarily and capriciously in granting the injunction. Neither was petitioner able to prove that the injunction was issued without any factual or legal justification. In assailing the injunction, petitioner primarily relied on the prohibition on the issuance of a writ of injunction to restrain the collection of taxes. But as we have already said, there is no such prohibition in the case of local taxes. Records also show that before issuing the injunction, the RTC conducted a hearing where both parties were given the opportunity to present their arguments. During the hearing, AEC was able to show that it had a clear and unmistakable legal right over the properties to be levied and that it would sustain serious damage if these properties, which are vital to its operations, would be sold at public auction. As we see it then, the writ of injunction was properly issued. A final note. While we are mindful that the damage to a taxpayers property rights generally takes a back seat to the paramount need of the State for funds to sustain governmental functions,[40] this rule finds no application in the instant case where the disputed tax assessment is not yet due and demandable. Considering that AEC was able to appeal the denial of its protest within the period prescribed under Section 195 of the LGC, the collection of business taxes[41] through levy at this time is, to our mind, hasty, if not premature.[42] The issues of tax exemption, double taxation, prescription and the alleged retroactive application of the RRCAC, raised in the protest of AEC now pending with the RTC, must first be resolved before the properties of AEC can be levied. In the meantime, AECs rights of ownership and possession must be respected. WHEREFORE, the petition is hereby DISMISSED. SO ORDERED.