G.R. No. 104151 March 10, 1995

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.COURT OF APPEALS, ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION and COURT OF TAX APPEALS, respondents.

G.R No. 105563 March 10, 1995

ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION, petitioner, vs.COURT OF APPEALS COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

 

REGALADO, J.:

Before us for joint adjudication are two petitions for review on certiorari separately filed by the Commissioner of Internal Revenue in G.R. No. 104151, and by Atlas Consolidated Mining and Development Corporation in G.R. No. 105563, which respectively seek the aside of the judgments of respondent Court of Appeals in CA-G.R. SP No. 25945 promulgated on February 12, 1992 1 and in CA-G.R. SP No. 26087 promulgated on May 22, 1992. 2

Atlas Consolidated Mining and Development Corporation (herein also referred to as ACMDC) is a domestic corporation which owns and operates a mining concession at Toledo City, Cebu, the products of which are exported to Japan and other foreign countries. On April 9, 1980, the Commissioner of Internal Revenue (also Commissioner, for brevity), acting on the basis of the report of the examiners of the Bureau of Internal Revenue (BIR), caused the service of an assessment notice and demand for payment of the amount of P12,391,070.51 representing deficiency ad valorem percentage and fixed taxes, including increments, for the taxable year 1975 against ACMDC. 3

Likewise, on the basis. of the BIR examiner's report in another investigation separately conducted, the Commissioner had another assessment notice, with a demand for payment of the amount of P13,531,466.80 representing the 1976 deficiency ad

valorem and business taxes with P5,000.00 compromise penalty, served on ACMDC on September 23, 1980. 4

ACMDC protested both assessments but the. same were denied, hence it filed two separate petitions for review in the Court of Tax Appeals (also, tax court) where they were docketed as C.T.A. Cases Nos. 3467 and 3825. These two cases, being substantially identical in most respects except for the taxable periods and the amounts involved, were eventually consolidated.

On May 31, 1991, the Court of Tax Appeals rendered a consolidated decision holding, inter alia, that ACMDC was not liable for deficiency ad valorem taxes on copper and silver for 1975 and 1976 in the respective amounts of P11,276,540.79 and P12,882,760.80 thereby effectively sustaining the theory of ACMDC that in computing the ad valorem tax on copper mineral, the refining and smelting charges should be deducted, in addition to freight and insurance charges, from the London Metal Exchange (LME) price of manufactured copper.

However, the tax court held ACMDC liable for the amount of P1,572,637.48, exclusive of interest, consisting of 25% surcharge for late payment of the ad valorem tax and late filing of notice of removal of silver, gold and pyrite extracted during certain periods, and for alleged deficiency manufacturer's sales tax and contractor's tax.

The particulars of the reduced amount of said tax obligation is enumerated in detail in the dispositive portion of the questioned judgment of the tax court, thus:

WHEREFORE, petitioner should and is hereby ORDERED to pay the total amount of the following:

a) P297,900.39 as 25% surcharge on silver extracted during the period November 1, 1974 to December 31, 1975.

b) P161,027.53 as 25% surcharge on silver extracted for the taxable year 1976.

c) P315,027.30 as 25% surcharge on gold extracted during the period November 1, 1974 to December 31, 1975.

d) P260,180.55 as 25% surcharge on gold during the taxable year 1976.

e) P53,585.30 as 25% surcharge on pyrite extracted during the period November 1, 1974 to December 31, 1975.

f) P53,283.69 as 25% surcharge on pyrite extracted during the taxable year 1976.

g) P316,117.53 as deficiency manufacturer's sales tax and surcharge during the taxable year 1975; plus 14% interest from January 21, 1976 until fully paid as provided under Section 183 of P.D. No. 69.

h) P23,631.44 as deficiency contractor's tax and surcharge on the lease of personal property during the taxable year 1975; plus 14% interest from January 21, 1976 until fully paid as provided under Section 183 of P.D. 69.

i) P91,883.75 as deficiency contractor's tax and surcharge on the lease of personal property during the taxable year 1976, plus 14% interest from April 21, 1976 until fully paid as provided under. Section 183 of P.D. No. 69.

With costs against petitioner. 5

As a consequence, both parties elevated their respective contentions to respondent Court of Appeals in two separate petitions for review. The petition filed by the Commissioner, which was docketed as CA-G.R. SP No. 25945, questioned the portion of the judgment of the tax court deleting the ad valorem tax on copper and silver, while the appeal filed by ACMDC and docketed as CA-G.R. SP No. 26087 assailed that part of the decision ordering it to pay P1,572,637.48 representing alleged deficiency assessment.

On February 12, 1992, judgment was rendered by respondent Court of Appeals in CA-G.R. SP No. 25945, dismissing the petition

and affirming the tax court's decision on the manner of computing the ad valorem tax. 6 Hence, the Commissioner of Internal Revenue filed a petition before- us in G.R. No. 104151, raising the sole issue of whether or not, in computing the ad valorem tax on copper, charges for smelting and refining should also be deducted, in addition to freight and insurance costs, from the price of copper concentrates.

On May 22, 1992, judgment was likewise rendered by the same respondent court in CA-G.R. SP No. 26087, modifying the judgment of the tax court and further reducing the tax liability of ACMDC by deleting therefrom the following items:

(1) the award under paragraph (a) of P297,900.39 as 25% surcharge on silver extracted during the period November 1, 1974 to December 31, 1975;

(2) the award under paragraph (c) thereof of P315,027.30 as 25% surcharge on gold extracted during the period November 1, 1974 to December 31, 1975; and

(3) the award under paragraph (e) thereof of P53,585.30 as 24% (sic, 25%) surcharge on pyrite extracted during the period November 1, 1974 to December 31, 1975. 7

Still not satisfied with the said judgment which had reduced its tax liability to P906,124.49, as a final recourse ACMDC came to this Court on a petition for review on certiorari in G.R. No. 105563, claiming that it is not liable at all for any deficiency. tax assessments for 1975 and 1976. In our resolution of September 1, 1993, G.R. No. 104151 was ordered consolidated with G.R. No. 105563. 8

I. G.R No. 104151

The Commissioner of Internal Revenue claims that the Court of Appeals and the tax court erred in allowing the deduction of refining and smelting charges from the price of copper concentrates. It is the contention of the Commissioner that the actual market value of the mineral products should be the gross sales realized from copper concentrates, deducting therefrom mining, milling, refining, transporting, handling, marketing or any other expenses. He submits that the phrase "or any other

expenses" includes smelting and refining charges and that the law allows deductions for actual cost of ocean freight and insurance only in instances where the minerals or mineral products are sold or consigned abroad by the lessees or owner of the mine under C.I.F. terms, hence it is error to allow smelting and refining charges as deductions.

We are not persuaded by his postulation and find the arguments adduced in support thereof untenable.

The pertinent provisions of the National Internal Revenue Code (tax code, for facility) at the time material to this controversy, read as follows:

Sec. 243. Ad valorem taxes on output of mineral lands not covered by lease. — There is hereby imposed on the actual market value of the annual gross output of the minerals mineral products extracted or produced from all mineral lands not covered by lease, an ad valorem tax in the amount of two per centum of the value of the output except gold which shall pay one and one-half per centum.

Before the minerals or mineral products are removed from the mines, the Commissioner of Internal Revenue or his representatives shall first be notified of such removal on a form prescribed for the purpose. (As amended by Rep. Act No. 6110.)

Sec. 246. Definitions of the terms "gross output," "minerals" and "mineral products." — Disposition of royalties and ad valorem taxes. The term "gross output" shall be interpreted as the actual market value of minerals or mineral products, or of bullion from each mine or mineral lands operated as a separate entity without any deduction from mining, milling, refining, transporting, handling, marketing, or any other expenses: Provided, however, That if the minerals or mineral products are sold or consigned. abroad by the lessee or owner of the mine under C.I.F. terms, the actual cost of ocean freight and insurance shall be deducted. The output of any group of contiguous mining claim shall not be subdivided. The word "minerals" shall mean all inorganic substances found in nature whether in solid, liquid, gaseous, or any intermediate state. The term "mineral products" shall mean things produced by the lessee, concessionaire or owner of mineral lands, at least eighty per cent of which things must be

minerals extracted by such lessee, concessionaire, or owner of mineral lands. Ten per centum of the royalties and ad valorem taxes herein provided shall accrue to the municipality and ten per centum to the province where the-mines are situated, and eighty per centum to the National Treasury. (As amended by Rep. Acts Nos. 834, 1299, and by Rep. Act No. 1510, approved June 16, 1956)."

To rephrase, under the aforequoted provisions, the ad valorem tax of 2% is imposed on the actual market value of the annual gross output of the minerals or mineral products extracted or produced from all mineral lands not covered by lease. In computing the tax, the term "gross output" shall be the actual market value of minerals or mineral products, or of bullion from each mine or mineral lands operated as a separate entity, without any deduction for mining, milling, refining, transporting, handling, marketing or any other expenses. If the minerals or mineral products are sold or consigned abroad by the lessee or owner of the mine under C.I.F. terms, the actual cost of ocean freight and insurance shall be deducted.

In other words, the assessment shall be based, not upon the cost of production or extraction of said minerals or mineral products, but on the price which the same — before or without undergoing a process of manufacture — would command in the ordinary course of business. 9

In the instant case, the allowance by the tax court of smelting and refining charges as deductions is not contrary to the above-mentioned provisions of the tax code which ostensibly prohibit any form of deduction except freight and insurance charges. A review of the records will show that it was the London Metal Exchange price on wire bar which was used as tax base by ACMDC for purposes of the 2% ad valorem tax on copper concentrates since there was no available market price quotation in the commodity exchange or markets of the world for copper concentrates nor was there any market quotation locally obtainable. 10 Hence, the charges for smelting and refining were assessed not on the basis of the price of the copper extracted at the mine site which is prohibited by law, but on the basis of the actual market value of the manufactured copper which in this case

is the price quoted for copper wire bar by the London Metal Exchange.

The issue of whether the ad valorem tax should be based upon the value of the finished product, or the value upon extraction of the raw materials or minerals used in the manufacture of said finished products, has been passed upon by us in several cases wherein we held that the ad valorem tax is to be computed on the basis of the market value of the mineral in its condition at the time of such removal and before it undergoes a chemical change through manufacturing process, as distinguished from a purely physical process which does not necessarily involve the change or transformation of the raw material into a composite distinct product. 11

Thus, in the case of Cebu Portland Cement Co. vs. Commissioner of Internal Revenue, 12 this Court ruled:

. . . ad valorem tax is a tax not on the minerals, but upon the privilege of severing or extracting the same from the earth, the government's right to exact the said impost springing from the Regalian theory of State ownership of its natural resources.

. . . While cement is composed of 80% minerals, it is not merely an admixture or blending of raw materials, as lime, silica, shale and others. It is the result of a definite the crushing of minerals, grinding, mixing, calcining, cooling, adding of retarder or raw gypsum. In short, before cement reaches its saleable form, the minerals had already undergone a chemical change through manufacturing process, This could not have been the state of mineral products' that the law contemplates for purposes of imposing the ad valorem tax. . . . this tax is imposed on the privilege of extracting or severing the minerals from the mines. To our minds, therefore the inclusion of the term mineral products is intended to comprehend cases where the mined or quarried elements may not be usable in its original state without application of simple treatments . . . which process does not necessarily involve the change or transformation of the raw materials into a composite, distinct product. . . . While the selling price of cement may reflect the actual market value of cement, said selling price cannot be taken as the market value also of the minerals composing the cement. And it was not the cement

that was mined, only the minerals composing the finished product.

This view was subsequently affirmed in the resolution of the Court denying the motion for reconsideration of its aforesaid decision, 13 reiterated that the pertinent part of which reiterated that —

. . . the ad valorem tax in question should be based on the actual market value of the quarried minerals used in producing cement, . . . the law intended to impose the ad valorem tax upon the market value of the component mineral products in their original state before processing into cement. . . . the law does not impose a tax on cement qua cement, but on mineral products at least 80% of which must be minerals extracted by the lessee, concessionaire or owner of mineral lands.

The Court did not, and could not, rule that cement is a manufactured product subject to sales tax, for the reason that such liability had never been litigated by the parties. What it did declare is that, while cement is a mineral product, it is no longer in the state or condition contemplated by the law; hence the market value of the cement could not be the basis for computing the ad valorem tax, since the ad valorem tax is a severance tax i.e., a charge upon the privilege of severing or extracting minerals from the earth, (Dec. p. 4) and is due and payable upon removal of the mineral product from its bed or mine (Tax Code s. 245).

Therefore, the imposable ad valorem tax should be based on the selling price of the quarried minerals, which is its actual market value, and not on the price of the manufactured product. If the market value chosen for the reckoning is the value of the manufactured. or finished product, as in the case at bar, then all expenses of processing or manufacturing should be deducted in order to approximate as closely as is humanly possible the actual market value of the raw mineral at the mine site.

It was copper ore that was extracted by ACMDC from its mine site which, through a simple physical process of removing impurities therefrom, was converted into copper concentrate In turn, this copper concentrate underwent the process of smelting and refining, and the finished product is called copper cathode or copper wire bar.

The copper wire bar is the manufactured copper. It is not the mineral extracted from the mine site nor can it be considered a mineral product since it has undergone a manufacturing process, to wit:

I. The physical process involved in the production of copper concentrate are the following (p. 19, BIR records; Exh. ‘H’, p. 43, Folder I of Exhibits.)

A Mining Process —

(1) Blasting — The ore body is broken up by blasting.

(2) Loading — The ore averaging about 1/2 percent copper is loaded into ore trucks by electric shovels.

(3) Hauling — The trucks of ore are hauled to the mill.

B Milling Process —

(1) Crushing — The ore is crushed to pieces the size of peanuts.

(2) Grinding — The crushed ore is ground to powder form.

(3) Concentrating — The mineral bearing particles in the powdered ore are concentrated.

The ores or rocks, transported by conveyors, are crushed repeatedly by steel balls into size of peanuts, when they are ground and pulverized. The powder is fed into concentrators where it is mixed with water and other reagents. This is known in the industry as a flotation phase. The copper-bearing materials float while the non-copper materials in the rock sink. The material that floats is scooped and dried and piled. This is known as copper concentrate. The material at the bottom is waste, and is known in the industry as tailings. In Toledo City, tailings are disposed of through metal pipes from the flotation mills to the open sea. Copper concentrate of petitioner contains 28-31% copper. The concentrate is loaded in ocean

vessels and shipped to Mitsubishi Metal Corporation mills in Japan, where the smelting, refining and fabricating processes are done. (Memorandum of petitioner, p. 71, CTA records.)

II. The chemical or manufacturing process in the production of wire bar is as follows: (Exh. 'H', p. 43, Folder I of exhibits.)

A. Smelting —

(1) Drying — The copper concentrates (averaging about 30 percent copper) are dried.

1. Flash Furnace — The dried concentrate is smelted autogenously and a matte containing 65 percent is produced.

2. Converter — The matte is converted to blister copper with a purity of about 99 per cent.

B. Refining —

(1) Casting Wheel — Blister copper is treated in an anode furnace where. copper requiring further treatment is sent to the casting wheel to produce cathode copper.

(2) Electrolytic Refining — Anode copper is further refined by electrolytic refining to produce cathode copper.

C. Fabricating —

(1) Rolling — Fire refined or electroly-tic copper-and/or brass (a mixture Of copper and zinc) is made into tubes, sheets, rods and wire.

(2) Extruding — Sheet tubes, rods and wire are further fabricated into the copper articles in everyday use.

The records show that cathodes, with purity of 99.985% are cast or fabricated into various shapes, depending on their industrial destination. Cathodes are metal sheets of copper 1 meter x 1 meter x 16-16 millimeter thick and 160 kilograms in weight, although this thickness is not uniform for all the sheets. Cathodes sheets are not suitable for direct fabrication, hence, are further fabricated into the desired shape, like wire

bar, billets and cakes. (p. 1, deposition, London,) Wire bars are rectangular pieces, 100 millimeter x 100 millimeter x 1.37 meters long and weigh some 125 kilos. They are suited for copper wires and copper rods. Billets are fabricated into tubes and heavy electric sections. Cakes are in the form of thick sheets and strips. (pp. 13, 18-21, deposition, Japan, Exhs. "C" & "G", Japan, pp. 1-2, deposition, London, see pp. 70-72, CTA records.) 14

Significantly, the finding that copper wire bar is a product of a manufacturing process finds support in the definition of a "manufacturer" in Section 194 (x) of the aforesaid tax code which provides:

"Manufacturer" includes every person who by physical or chemical process alters the exterior texture or form or inner substance of any raw material or manufactured or partially manufactured product in such a manner as to prepare it for a special use or uses to which it could not have been put in its original condition, or who by any such process alters the quality of any such raw material or manufactured or partially manufactured product so as to reduce it to marketable shape or prepare it for any of the uses of industry, or who by any such process combines any such raw material or manufactured or partially manufactured products with other materials: or products of the same or different kinds and in such manner that the finished product of such process or manufacture can be put to a special use or uses to which such raw material or manufactured or partially manufactured products, or combines the same to produce such finished products for the purpose of their sale or distribution to others and not for his own use or consumption.

Moreover, it is also worth noting at this point that the decision of the tax court was based on its previous ruling in the case of Atlas Consolidated Mining and Development Corporation vs. Commissioner of Internal Revenue, 15 dated January 23, 1981, which we quote with approval:

. . . The controlling law is clear and specific; it should therefore be applied as Since the mineral or mineral product removed from its bed or mine at Toledo City by petitioner is copper concentrate as admitted by respondent himself, not copper wire bar, the actual market value of such copper concentrate in its condition at the time of such removal without any

deduction from mining, milling, refining, transporting, handling, marketing, or any other expenses should be the basis of the 2% ad valorem tax.

The conclusion reached is rendered clearer when it is taken into consideration that the ad valorem tax is a severance tax, a charge upon the privilege of severing or extracting minerals from the earth, and is due and payable upon removal of the mineral product from its bed or mine, the tax being computed on the basis of the market value of the mineral in its condition at the time of such removal and before its being substantially changed by chemical or manufacturing (as distinguished from purely physical) processing. (Cebu Portland Cement Co. vs. Commissioner of Internal Revenue, supra.) Copper wire bars, as discussed above,, have already undergone chemical or manufacturing processing in Japan, they are not extracted or produced from the earth by petitioner in its mine site at Toledo City. Since the ad valorem tax is computed on the basis of the actual market value of the mineral in its condition at the time of its removal from the earth, which in this case is copper concentrate, there is no basis therefore for an assertion that such tax should be measured on the basis of the London Metal Exchange price quotation of the manufactured wire bars without any deduction of smelting and refining charges.

In resume:

1. The mineral or mineral product of petitioner the extraction or severance from the soil. of which the ad valorem tax is directed is copper concentrate.

2. The ad valorem tax is computed on the basis of the actual market value of the copper concentrate in its condition at the time of removal from the earth and before substantially changed by chemical or manufacturing process without any deduction milling, refining, from mining, transporting, handling, marketing, or any other expenses. However, since the copper concentrate is sold abroad by petitioner under C.I.F. terms, the actual cost of ocean freight and insurance is deductible.

3. There being no market price quotation of copper concentrate locally or in the commodity exchanges or markets of the world, the London

Metal Exchange price quotation of copper wire bar, which is used by petitioner and Mitsubishi Metal Corporation as reference to determine the selling price of copper concentrate, may likewise be employed in this case as reference point in ascertaining the actual market value of copper concentrate for ad valorem tax purposes. By deducting from the London Metal Exchange price quotation of copper wire bar all charges and costs incurred after the copper concentrate has been shipped from Toledo City to the time the same has been manufactured into wire bar, namely, smelting, electrolytic refining and fabricating, the remainder represents to a reasonable degree the actual market value of the copper concentrate in its condition at the time of extraction or removal from its bed in Toledo City for the purposes of the ad valorem tax.

The Commissioner of Internal Revenue argues that the ruling in the case above stated is not binding, considering that the incumbent Commissioner of Internal Revenue is not bound by decisions or rulings of his predecessor when he finds that a different construction of the law should be adopted, invoking therefor the doctrine enunciated in Hilado vs. Collector of internal Revenue, et a1, 16 This trenches on specious reasoning. What was involved in the Hilado case was a previous ruling of a former Commissioner of Internal Revenue. In the case at bar, the Commissioner based his findings on a previous decision rendered by the Court of Tax Appeals itself.

The Court of Tax Appeals is not a mere superior administrative agency or tribunal but is a part of the judicial system of the Philippines. 17 It was created by Congress pursuant to Republic Act No. 1125, effective June 16, 1954, as a centralized court specializing in tax cases. It is a regular court vested with exclusive appellate jurisdiction over cases arising under the National Internal Revenue Code, the Tariff and Customs Code, and the Assessment Law. 18

Although only the decisions of the Supreme Court establish jurisprudence or doctrines in this jurisdiction, nonetheless the decisions of subordinate courts have a persuasive effect and may

serve as judicial guides. It is even possible that such a conclusion or pronouncement can be raised to the status of a doctrine if, after it has been subjected to test in the crucible of analysis and revision the Supreme Court should find that it has merits and qualities sufficient for its consecration as a rule of jurisprudence. 19

Furthermore, as a matter of practice and principle, the Supreme Court will not set aside the conclusion reached by an agency such as the Court of Tax Appeals, which is, by the very nature of its function, dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise of authority on its part. 20

II. G.R. No. 105563

The petition herein raises the following issues for resolution:

A. Whether or not petitioner is liable for payment, of the 25% surcharge for alleged late filing of notice of removal/late payment of the ad valorem tax on silver, gold and pyrite extracted during the taxable year 1976.

B. Whether or not petitioner is liable for payment of the manufacturer' s sales tax and surcharge during the taxable year 1975, plus interest, on grinding steel balls borrowed by its competitor; and

C. 'Whether or not petitioner is liable for payment of the contractor's tax and surcharge on the alleged lease of personal property during the taxable years 1975 and 1976 plus interest. 21

A. Surcharge on Silver, Gold and Pyrite

ACMDC argues that the Court of Appeals erred in holding it liable to pay 25% surcharge on silver, gold and pyrite extracted by it during tax year 1976.

Sec. 245 of the then tax code states:

Sec. 245. Time and manner of payment of royalties or ad valorem taxes. — The royalties or ad valorem taxes as the case may be, shall be due and payable upon the removal of the mineral products from the locality where mined. However, the output of the mine may be removed from such locality without the pre-payment of such royalties or ad valorem taxes if the lessee, owner, or operator shall file a bond in the form and amount and with such sureties as the Commissioner of Internal Revenue may require,. conditioned upon the payment of such royalties or ad valorem taxes, in which case it shall be the duty of every lessee, owner, or operator of a mine to make a true and complete return in duplicate under oath setting forth the quantity and the actual market value of the output of his mine removed during each calendar quarter and pay the royalties or ad valorem taxes due thereon within twenty days after the close of said quarter.

In case the royalties or ad valorem taxes are not paid within the period prescribed above, there shall be added thereto a surcharge of twenty-five per centum. Where a false or fraudulent return is made, there shall be added to the royalties or ad valorem taxes a surcharge of fifty per centum of their amount. The surcharge So, added: shall be collected in the same manner and as part of the royalties or ad valorem taxes, as the case may be.

Under the aforesaid provision, the payment of the ad valorem tax shall be made upon removal of the mineral products from the mine site or if payment cannot be made, by filing a bond in the form and amount to be approved by the Commissioner conditioned upon the payment of the said tax.

In the instant case, the records show that the payment of the ad valorem tax on gold, silver and pyrite was belatedly made. ACMDC, however, maintains that it should not be required to pay the 25% surcharge because the correct quantity of gold and silver could be determined only after the copper concentrates had gone through the process of smelting and refining in Japan while the amount of pyrite cannot be determined until after the flotation process separating the copper mineral from the waste material was finished.

Prefatorily, it must not be lost sight of that bad faith is ; not essential for the imposition of the 25% surcharge for late payment of the ad valorem tax. Hence,

MISSING PAGE 19Q. Now, what do you do with the result of your analysis?

A. These are tabulated and then averaged out to represent one shipment.

Q. Will you tell this Honorable Court whether in that laboratory testing you physically separate the gold, you physically separate the silver and you physically separate the copper content of that 40 to 50 kilos?

A. No, no, we analyze this in one sample. This sample is analyzed for gold, silver, and copper, but there is no recovery made.

Q. You mean there is no physical separation?

A. No, no physical separation.

Q. So these three minerals — copper, gold and silver — are in that same powder that you have tested?

A Yes, it is in the same powder.

Q. Now how do you reflect the results of the testing?

A. You mean in analysis?

Q. In the analysis, yes.

A. Copper is reported in percent.

Q. Percentage?

A. Yes.

Q. How about gold?

A. Gold and silver part is represented as grams per dmt or parts per million.

Q. Based on the results of your data gathered in the laboratory?

A. Yes.

Q. Now where do you submit the results of the laboratory testing?

A When a shipment is made we prepare a certificate of analysis signed by me and then which (sic) is sent to Manila.

Q. Now, as far as you know in connection with your duty do you know what Manila what do you say, Manila, ACMDC?

A. Makati.

Q. Makati. What does Makati ACMDC do with your assay report?

A. As far as I know it is used as the basis for the payment of ad valorem tax. 24

The above-quoted testimony accordingly supports these findings of the tax court in its decision in this case:

We see it (sic) that even if the silver and gold cannot as yet be physically separated from the copper concentrate until the process of smelting and refining was completed, the estimated commercial quantity of the silver and gold could have been determined in much the same way that petitioner is able to estimate the commercial quantity of copper during the assay. If, as stated by petitioner, it is able to estimate the grade of the copper ore, and it has determined the grade not only of the copper but also those of the gold and silver during the assay (Petitioner's Memorandum, p. 207, Record), ergo, the estimated commercial quantity of the silver and gold subject to ad valorem tax could have also been determined and provisionally paid as for copper. 25

The other allegation of ACMDC is that there was no removal of pyrite from the mine site because the pyrite was delivered to its sister company, Atlas Fertilizer Corporation, whose plant is located inside the mineral concession of ACMDC in Sangi, Toledo City. ACMDC, however, is already barred by estoppel in pais from putting that matter in issue.

An ad valorem tax on pyrite for the same tax year was already declared and paid by ACMDC. In fact, that payment was used as the basis for computing the 25% surcharge. It was only when ACMDC was assessed for the 25% surcharge that said issue was raised by it. Also, the evidence shows that deliveries of pyrite were not exclusively made to its sister company, Atlas Fertilizer Corporation. There were shipments of pyrite to other companies located outside of its mine site, in addition to those delivered to its aforesaid sister company. 26

B. Manufacturer's Tax and Contractor's Tax

The manufacturer's tax is imposed under Section 186 of the tax code then in force which provides:

Sec. 186. Percentage tax on sales of other articles. — There shall be levied, assessed and collected once only on every original sale, barter, exchange, or similar transaction either for nominal or valuable consideration, intended to transfer ownership of, or title to, the articles not enumerated in sections one hundred and eighty-four-A, one hundred and eighty five, one hundred and eighty-five-A, one hundred eighty-five-B, and one hundred eighty-six-B, a tax equivalent to seven per centum of the gross selling price or gross value in money of the articles so sold, bartered, exchanged, or transferred, such tax to be paid by the manufacturer or producer: Provided, That where the articles subject to tax under this Section are manufactured out of materials likewise subject to tax under this section and section one hundred eighty-nine, the total cost of such materials, as duly established, shall be deductible from the gross selling price or gross value in money of such manufactured articles. (As amended by Rep. Act No. 6110 and by Pres. Decree No. 69.)

On the other hand, the contractor's tax is provided for under Section 191 of the same code, paragraph 17 of which declares that

lessors of personal property shall be subject to a contractor's tax of 3% of the gross receipts.

Sections 186 and 191 fall under Title V of the tax code, entitled "Privilege Taxes on Business and Occupation." These "privilege taxes on business" are taxes imposed upon the privilege of engaging in business. They are essentially excise taxes. 27 To be held liable for the payment of a privilege tax, the person or entity must be engaged in business, as shown by the fact that the drafters of the tax code had purposely grouped said provisions under the general heading adverted to above.

"To engage" is to embark on a business or to employ oneself therein. The word "engaged" connotes more than a single act or a single transaction; it involves some continuity of action. "To engage in business" is uniformly construed as signifying an employment or occupation which occupies one's time, attention, and labor for the purpose of a livelihood or profit. The expressions "engage in business," "carrying on business" or "doing business" do not have different meanings, but separately or connectedly convey the idea of progression, continuity, or sustained activity. "Engaged in business" means occupied or employed in business; carrying on business" does not mean the performance of a single disconnected act, but means conducting, prosecuting, and continuing business by performing progressively all the acts normally incident thereto; while "doing business" conveys the idea of business being done, not from time to time, but all the time. 28

The foregoing notwithstanding, it has likewise been ruled that one act may be sufficient to constitute carrying on a business according to the intent with which the act is done. A single sale of liquor by one who intends to continue selling is sufficient to render him liable for "engaging in or carrying on" the business of a liquor dealer. 29

There may be a business without any sequence of acts, for if an isolated transaction, which if repeated would be a transaction in a business, is proved to have been undertaken with the intent that it should be the first of several transactions, that is, with the intent of carrying on a business, then it is a first transaction in an existing business. 30

Thus, where the end sought is to make a profit, the act constitutes "doing- business." This is not without basis. The term "business," as used in the law imposing a license tax on business, trades, and so forth, ordinarily means business in the trade or commercial sense only, carried on with a view to profit or livelihood; 31 It is thus restricted to activities or affairs where profit is the purpose, or livelihood is the motive. Since the term "business" is being used without any qualification in our aforesaid tax code, it should therefore be therefore be construed in its plain and ordinary meaning, restricted to activities for profit or livelihood. 32

In the case at bar, ACMDC claims exemptions from the payment of manufacturer's tax. It asserts that it is not engaged in the business of selling grinding steel balls, but it only produces grinding steel balls solely for its own use or consumption, However, it admits having lent its grinding steel balls to other entities but only in very isolated cases.

After a careful review of the records and on the basis of the legal concept of "engaging in business" hereinbefore discussed, we are inclined to agree with ACMDC that it should not and cannot be held liable for the payment of the manufacturer's tax.

First, under the tax code then in force, the 7% manufacturer's sales tax is imposed on the manufacturer for every original sale, barter, exchange and other similar transaction intended to transfer ownership of articles. As hereinbefore quoted, and we repeat the same for facility of reference, the term "manufacturer" is defined in the tax code as including "every person who by physical or chemical process alters the exterior texture or form or inner substance of any raw material or manufactured or partially manufactured product in such manner as to prepare it for a special use or uses to which it could not have been put in its original condition, or who by any such process alters the quality of any such raw material or manufactured or partially manufactured product so as to reduce it to marketable shape or prepare it for any of the uses of industry, or who by any such process combines any such raw material or manufactured or partially manufactured products with other materials or products of the same or of different kinds and in such manner that the finished product of such process or manufacture can be put to a special use or uses

to which such raw materials or manufactured or partially manufactured products in their original condition could not have been put, and who in addition alters such raw material or manufactured or partially manufactured products, or combines the same to produce such finished products for the purpose of their sale or distribution to others and not for his own use or consumption. 33

Thus, a manufacturer, in order to be subjected to the necessity of paying the percentage tax imposed by Section 186 of the tax code, must be 'engaged' in the sale, barter or exchange of; personal property. Under a statute which imposes a tax on persons engaged in the sale, barter or exchange of merchandise, a person must be occupied or employed in the sale, barter or exchange of personal property. A person can hardly be considered as occupied or employed in the sale, barter or exchange of personal property when he has made one purchase and sale only. 34

Second, it cannot be legally asserted, for purposes of this particular assessment only, that ACMDC was engaged in the business of selling grinding steel balls on the basis of the isolated transaction entered into by it in 1975. There is no showing that said transaction was undertaken by ACMDC with a view to gaining profit. therefrom and with the intent of carrying on a business therein. On the contrary, what is clear for us is that the sale was more of an accommodation to the other mining companies, and that ACMDC was subsequently replaced by other suppliers shortly thereafter.

This finding is strengthened by the investigation report, dated March 11, 1980, of the B.I.R. Investigation Team itself which found that —

ACMDC has a foundry shop located at Sangi, Toledo City, and manufactures grinding steel balls for use in its ball mills in pulverizing the minerals before they go to the concentrators, For the grinding steel balls manufactured by ACMDC and used in its operation, we found it not subject to any business tax. But there were times in 1975 when other mining companies were short of grinding steel balls and ACMDC supplied them with these materials manufactured in its foundry shop. According to the informant, these were merely

accommodations and they were replaced by the other suppliers. 35

At most, whatever profit ACMDC may have realized from that single transaction was just incidental to its primordial purpose of accommodating other mining companies. Well-settled is the rule that anything done as a mere incident to, or as a necessary consequence of, the principal business is not ordinarily taxed as an independent business in itself. 36 Where a person or corporation is engaged in a distinct business and, as a feature thereof, in an activity merely incidental which serves no other person or business, the incidental and restricted activity is not considered as intended to be separately taxed. 37

In fine, on this particular aspect, we are consequently of the considered opinion and so hold that ACMDC was not a manufacturer subject to the percentage tax imposed by Section 186 of the tax code.

The same conclusion; however, cannot be made with respect to the contractor's tax being imposed on ACMDC. It cannot validly claim that the leasing out of its personal properties was merely an isolated transaction. Its book of accounts shows that several distinct payments were made for the use of its personal properties such as its plane, motor boat and dump truck. 38 The series of transactions engaged in by ACMDC for the lease of its aforesaid properties could also be deduced from the fact that for the tax years 1975 and 1976 there were profits earned and reported therefor. It received a rental income of P630,171.56 for tax year 39 and P2,450,218.62 for tax year 1976. 40

Considering that there was a series of transactions involved, plus the fact that there was an apparent and protracted intention to profit from such activities, it can be safely concluded that ACMDC was habitually engaged in the leasing out of its plane, motor boat and dump truck, and is perforce subject to the contractor's tax.

The allegation of ACMDC that it did not realize any profit from the leasing out of its said personal properties, since its income therefrom covered only the costs of operation such as salaries and fuel, is not supported by any documentary or substantial evidence. We are not, therefore, convinced by such disavowal.

Assessments are prima facie presumed correct and made in good faith. Contrary to the theory of ACMDC, it is the taxpayer and not the Bureau of Internal Revenue who has the duty of proving otherwise. It is an elementary rule that in the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed. All presumptions are in favor of tax assessments. 41 Verily, failure to present proof of error in assessments will justify judicial affirmance of said assessment. 42

Finally, we deem it opportune to emphasize the oft-repeated rule that tax statutes are to receive a reasonable construction with a view to carrying out their purposes and intent. 43 They should not be construed as to permit the taxpayer to easily evade the payment of the tax. 44 On this note, and under the confluence of the weighty. considerations and authorities earlier discussed, the challenged assessment against ACMDC for contractor's tax must be upheld.

WHEREFORE, the impugned judgment of respondent Court of Appeals in CA-G.R. SP No. 25945, subject of the present petition in G.R. No. 104151 is hereby AFFIRMED; and its assailed judgment in CA-G.R SP No. 26087 is hereby MODIFIED by exempting Atlas Consolidated Mining and Development Corporation, petitioner in G.R. No. 105563 of this Court, from the payment of manufacturer's sales tax, surcharge and interest during the taxable year 1975.

SO ORDERED.

Narvasa, C.J., Bidin, Puno and Mendoza, JJ., concur.

G.R. No. L-19470             January 30, 1965

GONZALO P. NAVA, petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, respondent.

E. P. Villar and A. Tordesillas for petitioner.Office of the Solicitor General for respondent.

REYES, J.B.L., J.:

Gonzalo P. Nava prosecuted this appeal against a decision dated September 25, 1961 by the Court of Tax Appeals (C.T.A. Case No. 568) holding him liable in the amount of P3,052.00 as deficiency income tax for the year 1950 as well as from its order dated February 10, 1962 denying a motion to reconsider said decision.

The undisputed facts are: that on May 15, 1951, Nava filed his income tax return for the year 1950, and, on the same date, he was assessed by respondent Commissioner (formerly Collector) of Internal Revenue in the sum of P4,952.00, based solely on said return. Nava paid one-half of the tax due, leaving a balance of P2,491.00. Subsequently, Nava offered his backpay certificate to pay said balance, but respondent refused the offer. On July 28, 1953, he requested the respondent to hold in abeyance the collection of said balance until the question of whether or not he was entitled to pay the same out of his backpay shall have been decided, but this was also rejected by the latter in a reply letter dated January 5, 1954. This rejection was followed by two more letters or notices demanding payment of the balance thereof, the last of which was dated February 22, 1955.

On March 30, 1955, after investigation of petitioner's 1950 income tax return, respondent Collector issued a deficiency income tax assessment notice (Exhibit "4") requiring petitioner to pay not later than April 30, 1955 the sum of P9,124.50, that included the balance of P2,491.00, still unpaid under the original assessment, plus a 50% surcharge. Several notices of this revised assessment are alleged to have been issued to the taxpayer, but Nava claims to have learned of it for the first time on December 19, 1956, more than five years since the original tax return was filed, and testified to that effect in the court below. In a letter of January 10, 1957, Nava called attention to the fact that more than six years had elapsed, protested the assessment, and contended that it was a closed issue. The Director insisted upon his demand that the new assessment be paid (registered letter of Mach 25, 1957, Exhibit "5"). Nava asked for reconsideration, and on June 16, 1958 was informed that reinvestigation would be granted provided the taxpayer waived the statute of limitations (Exh. "7"), a condition that was rejected (Exh. "8"). Thereupon, the reconsideration of the assessment was denied by the Collector's letter of July 22, 1958 (Exh. "9"), and on August 8, 1958 Nava filed a petition for review with the Court of Tax Appeals. The latter reduced the deficiency to P3,052.00, and cancelled the 50% surcharge. The petitioner appealed to this Court.

The principal issue in this appeal is whether the enforcement of the tax assessment has prescribed. The Court of Tax Appeals ruled that it had not, stating that:

The duplicate copy of the income tax assessment notice indicates that it was issued on March 30, 1955 (Exh. 4, page 7, B.I.R. records). "Call-up" letters were sent to petitioner reminding him of the obligation. These call-up letters or notices were recorded in Exh. C for petitioner (Exh. 3 for respondent, page 6, B.I.R. records), to wit:

1st notice 4/10/56

2nd notice 7/3/56

Final 9/25/56

In addition to the written notice sent to petitioner, he was also personally interviewed. A report on these written notices and personal interviews appears in the memorandum of an agent of the Bureau of Internal Revenue dated December 10, 1956, the pertinent portion of which reads as follows.

"Several call-up letters and repeated demands have been made to subject taxpayers but in spite of the considerable length of time that has elapsed the above accounts still remain unsettled. The warrant assemblies of the above-stated tax cases were assigned to Agent A. H. Aguilar and an interview with Mr. G. P. Nava revealed that the latter refused to pay alleging that these cases come within the purview of the Avelino case, hence, the B.I.R. has no more right to collect from him." (Exh. D, page 8, B.I.R. records).

Petitioner's claim that he came to know of the assessment only on or about December 19, 1956 can not be given much credence. We are inclined to believe that the assessment notice dated March 30, 1955 and the several call-up letters sent to him were received by him in due course of mail but that he ignored them because of his belief that the right of the Government to collect the tax had prescribed in view of the decision in the Avelino case. This conclusion finds support in a note sent or delivered by petitioner to an employee of the Bureau who interviewed him, wherein he stated:

"This is to certify that I have received today, second final notice from the Bureau of Internal Revenue delivered by Mrs. Canlas. My reply to your said final notice, as per your request, will be sent to you on or before January 3, 1957, in view of the fact that I may not be able to contact right away my Accountant." (Exh. E, page 9, B.I.R. records; Emphasis ours.)

The fact that petitioner admitted receipt of the "second final notice" without protest is an indication that he received the previous notices

Assuming that petitioner received the income tax assessment notice dated March 30, 1955 in due course of mail, that is, not later than April 10, 1955, the assessment was made within the five-year period since he filed his income tax return on May 15, 1951, even granting that the ten-year period applicable to fraud cases does not apply to this case. (The assessment includes the fraud penalty.) Since the deficiency income tax was assessed on or about April 10, 1955, the Government is authorized to collect the same by distraint or levy or by judicial action within five years from that date, or not later than April 10, 1960. Judicial action was instituted in the Court of First Instance of Manila in Civil Case No.

32796 for collection of said amount, followed by the institution of the instant appeal in this Court by petitioner himself on August 8, 1958, both within the five-year period. Therefore, we are of the opinion that the right of the Government to assess and collect said deficiency income tax has not prescribed." (Annex "O", petition, pp. 134-137, records).

It is to be noted that in its decision the Court of Tax Appeals relied mainly on the duplicate copy of the deficiency income tax notice found in the Bureau of Internal Revenue file of petitioner Nava (Exhibit "4", page 7, B.I.R. records). On the corresponding blank space for the date of issue of said duplicate copy was typed "3/30/55". Petitioner Nava denied having received the original copy of said notice. The Revenue Commissioner, on the other hand, presented a witness (Mr. Pablo Sangil, an employee [clerk] of the B.I.R.) who attempted to establish that the original copy thereof was actually issued or sent on March 30, 1955. This witness, however, disclaimed having personal knowledge of its issuance or release on said date either by mail or personal delivery because, according to him, he was assigned in the income tax section of the Bureau of Internal Revenue in October, 1956 only. Sangil also declared that there is no notation whatsover in said file copy (Exhibit "4"), nor even a slip of paper attached to the records, to show that the original copy of said exhibit was ever actually issued or sent to the taxpayer. He even admitted that he had no hand in the preparation or sending of written notices or demand letters of the Bureau of Internal Revenue to the taxpayers, his duties being merely to keep the dockets of taxpayers pertaining to income tax, to post and transmit papers to the other branches of the Bureau for action, and to keep letters of taxpayers, memorandum and other official matters. Respondent presented another witness, Mr. Eliseo B. Fernandez, whose duties, as record clerk of the Records Control Section of the Bureau of Internal Revenue since 1957 (already past the limitation period of this case), are to send mail and to keep a record book of letters which are mailed to the taxpayers. Insofar as the testimony of this witness is concerned, he only declared as to the fact that there appears in his record book a note (Exhibit "10") that a letter dated March 15, 1957 was mailed by special delivery with return card to Gonzalo P. Nava. He admitted, however, that he was not the one who prepared such entry in the record book. What was the nature of the letter does not appear; at any rate, it was mailed beyond the 5-year limitation period.

The lower court also relied on the supposed notices noted in ink (followed by an illegible initial) in Exhibit "3" for respondent (page 6, B.I.R. records), the first of which was purportedly sent on April 10, 1956, the second on July 3, 1956, and the final one on August 25, 1956, as well as on the supposed "call-up" or demand letters referred to in a memorandum of an agent (Mrs. Canlas) of the Bureau of Internal Revenue. (Exhibit "D", page 8, B.I.R. records). No witness for the respondent testified to the issuance or sending of any of these supposed written demand letters or notices, nor was there any duplicate or even a simple copy thereof found in petitioner Nava's Bureau of Internal Revenue file. Although witness Sangil testified as to the meaning of the dates noted in Exhibit "3", his testimony cannot be given much credence because those supposed notices were sent on or before August 25, 1956 at the latest, and, as hereinabove pointed out, the witness was

assigned in the income tax section of the Bureau of Internal Revenue since October, 1956 only.

Thus, contrary to the finding of the Court of Tax Appeals, respondent utterly failed to prove by substantial evidence that the assessment notice dated March 30, 1955 and the other supposed written demand letters or notices subsequent thereto were in fact issued or sent to taxpayer Nava. The presumption that a letter duly directed and mailed was received in the regular course of mail (Sec. 5 [v], Rule 131, revised Rules of Court) cannot be applied to the case at bar.

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. Sun Life Assurance of Canada, 41 Phil. 269) (Emphasis supplied).

Since none of these requirements have been shown, there has been no valid and effective issuance or release of said deficiency income tax assessment notice dated March 30, 1955 and of the other demand letters or notices subsequent thereto, the latest of which was purportedly sent on August 25, 1956, and these dates cannot be reckoned with in computing the period of prescription within which a court action to collect the same may be brought.

The fact that in Exhibit "E" Nava acknowledged receipt of the second final notice personally delivered to him is no proof that he received the first notice by mail. There is a difference between receiving a second final notice and receiving a final notice for the second time.

It being undisputed that an original assessment of Nava's 1950 income tax return was made on May 15, 1951, and no valid and effective notice of the re-assessment having been made against the petitioner after that date (May 15, 1951), it is evident that the period under Section 331 of the Tax Code within which to make a re-assessment expired on May 15, 1956. Since the notice of said deficiency income tax was effectively made on December 19, 1956 at the earliest, the judicial action to collect any deficiency tax on Nava's 1950 income tax return has already prescribed under Section 332 (c) of the Tax Code, it having been found by the Tax Appeals court that said return was not false or fraudulent.

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 taxpayer's 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.

Having reached the conclusion that the action to collect said deficiency income tax has already prescribed, it is unnecessary to discuss the other issues raised by petitioner Nava in the instant appeal.1äwphï1.ñët

WHEREFORE, the decision of the Court of Tax Appeals under review is reversed, without costs.

Bengzon, C.J., Concepcion, Barrera, Paredes, Dizon, Regala, Makalintal, Bengzon, J.P., and Zaldivar, JJ., concur.Bautista Angelo, J., took no part.

G.R. No. 96262 March 22, 1999

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.EMBROIDERY AND GARMENTS INDUSTRIES (PHIL.), INC., respondent.

 

PARDO, J.:

The case is an appeal via certiorari from a decision of the Court of Appeals 1 affirming that of the Court of Tax Appeals 2 absolving respondent from liability for deficiency income tax and advance sales tax in the amounts of P2,756,241.68, and P3,500,798.47, respectively, for the years 1959 to 1961.

The facts may be related as follows:

On September 21, 1964, on the basis of a sworn report of an informer, the Courts of First Instance of Manila and Bulacan issued search warrants for the seizure of certain documents from the offices of respondent Embroidery and Garments Industries (Phil.), Inc. in Manila and Valenzuela, Bulacan. Armed with the warrants, agents of the Anti-Technical Smuggling Unit, Bureau of Internal Revenue, seized various business records and documents from respondent's offices.

On January 4, 1966, petitioner assessed respondent the sum of P436,846.44, inclusive of 75% surcharge and penalty as advance sales tax for the years 1959 to 1961 and, on March 23, 1966, assessed deficiency income tax in the sum of P4,799,641.95, inclusive of 50% surcharge and 1/2% monthly interest for the years 1960 and 1961.

Respondent protested the assessments, and on December 9,1970, petitioner issued to respondent a revised assessment requiring the latter to pay the amount of P2,756,241.68, inclusive of 50% surcharge and 1/2% monthly interest as deficiency income tax for the years 1959 to 1961. On December 22, 1970, petitioner required respondent to pay P3,500,798.47, as advance sales tax and 75% surcharge corresponding to the same years.

On January 7, 1971, respondent filed with the Bureau of Internal Revenue a protest disputing the revised assessments and requesting further investigation. On the same date, petitioner denied the protest.

On January 20, 1971, respondent requested petitioner to reconsider the denial of its protest. On January 29, 1971, petitioner granted the request upon respondent's execution of a waiver of the statute of limitations.

On September 14, 1971, petitioner denied respondent's protest on the disputed assessments.

On October 14, 1971 , respondent filed with the Court of Tax Appeals a petition for review of the disputed tax assessments.

On March 29, 1972, respondent filed its answer to the petition praying for its dismissal.

On January 15, 1990, the Court of Tax Appeals rendered decision finding respondent not liable for deficiency income tax and advance sales tax assessed against it, and accordingly, reversed the BIR decision. In its decision, the Court of Tax Appeals held that the assessments were doubtful validity as they were based on the incompetent evidence consisting of an informant's report and the sworn statement of the disgruntled former general manager of respondent that in the years in question respondent sold all its dollar quotas to local Chinese textile traders at an overprice or premium on the dollar value of textile importation of 80% for suiting materials and 70.% for women's clothing materials and faked its invoices to reduce its costs of importation. On the other hand, respondent adduced evidence consisting of official records of the Bureau of Customs that its tax-free importation's had been re-exported to their suppliers in accordance with the Embroidery Law and cleared by the Bureau of Customs. The tax court ruled that the assessments must be based on actual facts and proved by competent evidence, not imposed based on unverified information supplied by an informant, or disputed presumptions.

On June 13, 1990, petitioner filed with the Court of Appeals a petition for review of the decision of the Court of Tax Appeals. 3

On November 9, 1990, the Court of Appeals promulgated its decision affirming the appealed decision of the tax court. 4

On December 4, 1990, petitioner filed a motion for reconsideration of the Court of Appeals' decision.

On February 7, 1991, the Court of Appeals denied the motion. 5

On March 18, 1991, within, the extended time granted, petitioner filed with the Supreme Court a petition for review on certiorari of the decision of the Court of Appeals. 6

In the petition, the Commissioner of Internal Revenue submits that the Court of Appeals erred:

(1) in not holding that respondent is liable for deficiency income tax and advance sales tax in view of its failure to declare its income realized for the years 1959 to 1961 from the sales of its dollar quota to local Chinese textile dealers at a premium of 70% to 80% of the dollar value, which dollar quota rights were allocated by the Central Bank of the Philippines to enable respondent to import tax-free textile raw materials to be manufactured into finished products for re-export pursuant to the provisions of the Embroidery Law (R. A. No. 3137), and

(2) in not holding that the imposition of 50% surcharge for fraud was legal and justified. 7

The issues raised are clearly factual and must be resolved on the basis of the evidence adduced before the tax court. The case tarried too long in the tax court. In the meantime, the star witness had died, and the needed originals of documentary evidence could no longer be located.

What is more, it is a, fundamental rule that on appeal via certiorari from a decision of the Court of Appeals to the Supreme Court may raise only questions of law, which must be distinctly set forth. 8 Findings of fact of the Court of Appeals and even of the tax court are final, binding or conclusive on the parties 9 and upon this Court, 10 which will not be reviewed 11 or disturbed on appeal unless these findings are not supported by evidence, 12 with certain well recognized exceptions, such as (1) when the conclusion is grounded entirely on speculations 13, surmises or conjectures; (2) when the inference made is manifestly mistaken, absurd or impossible; (3) where there is grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the findings of fact are conflicting; (6) when the Court of Appeals, in making its findings, went beyond the issues of the case and the same is contrary to the admissions of both appellant and appellee; (7) when the findings of the Court of Appeals are contrary to those of the trial courts; 14 (8) when the findings of fact are conclusions without citation of specific evidence on which they are based; (9) when the Court of Appeals overlooked certain relevant facts not disputed by the parties, which, if properly considered, would justify a different conclusion; and (10) when the findings of fact of the Court of Appeals are premised on the

absence of evidence and are contradicted by the evidence on record. 15 This case does not come within any of the exceptions.

WHEREFORE, the Court hereby AFFIRMS the appealed decision of the Court of Appeals in CA-G.R. SP No. 20813.

No costs.

SO ORDERED.

Davide, Jr, C.J., Melo and Kapunan, JJ., concur.

G.R. No. 167260               February 27, 2009

The CITY OF ILOILO, Mr. ROMEO V. MANIKAN, in his capacity as the Treasurer of Iloilo City, Petitioners, vs.SMART COMMUNICATIONS, INC. (SMART) Respondent.

D E C I S I O N

BRION, J.:

Before this Court is the appeal by certiorari filed by the City of Iloilo (petitioner) under Rule 45 of the Rules of Court seeking to set aside the decision of the Regional Trial Court (RTC) of Iloilo City, Branch 28, which declared that respondent SMART Communications, Inc. (SMART) is exempt from the payment of local franchise and business taxes.

BACKGROUND FACTS

The facts of the case are not in dispute. SMART received a letter of assessment dated February 12, 2002 from petitioner requiring it to pay deficiency local franchise and business taxes (in the amount of P764,545.29, plus interests and surcharges) which it incurred for the years 1997 to 2001. SMART protested the assessment by sending a letter dated February 15, 2002 to the City Treasurer. It claimed exemption from payment of local franchise and business taxes based on Section 9 of its legislative franchise under Republic Act (R.A.) No. 7294 (SMART’s franchise). Under SMART’s franchise, it was required to pay a franchise tax equivalent to 3% of all gross receipts, which amount shall be in lieu of all taxes. SMART contends that the "in lieu of all taxes" clause covers local franchise and business taxes.

SMART similarly invoked R.A. No. 7925 or the Public Telecommunications Policy Act (Public Telecoms Act) whose Section 23 declares that any existing privilege, incentive,

advantage, or exemption granted under existing franchises shall ipso facto become part of previously granted-telecommunications franchise. SMART contends that by virtue of Section 23, tax exemptions granted by the legislature to other holders of telecommunications franchise may be extended to and availed of by SMART.

Through a letter dated April 4, 2002, petitioner denied SMART’s protest, citing the failure of SMART to comply with Section 252 of R.A. No. 7160 or the Local Government Code (LGC) before filing the protest against the assessment. Section 252 of the LGC requires payment of the tax before any protest against the tax assessment can be made.

SMART objected to the petitioner’s denial of its protest by instituting a case against petitioner before the RTC of Iloilo City.1 The trial court ruled in favour of SMART and declared the telecommunications firm exempt from the payment of local franchise and business taxes;2 it agreed with SMART’s claim of exemption under Section 9 of its franchise and Section 23 of the Public Telecoms Act.3

From this judgment, petitioner files this petition for review on certiorari raising the sole issue of whether SMART is exempt from the payment of local franchise and business taxes.

THE COURT’S RULING

SMART relies on two provisions of law to support its claim for tax exemption: Section 9 of SMART’s franchise and Section 23 of the Public Telecoms Act. After a review of pertinent laws and jurisprudence – particularly of SMART Communications, Inc. v. City of Davao,4 a case which, except for the respondent, involves the same set of facts and issues – we find SMART’s claim for exemption to be unfounded. Consequently, we find the petition meritorious.1awphi1

The basic principle in the construction of laws granting tax exemptions has been very stable. As early as 1916, in the case of Government of the Philippine Islands v. Monte de Piedad,5 this Court has declared that he who claims an exemption from his share of the common burden of taxation must justify his claim by showing that the Legislature intended to exempt him by words too plain to be beyond doubt or mistake. This doctrine was repeated in the 1926 case of Asiatic Petroleum v. Llanes,6 as well as in the case of Borja v. Commissioner of Internal Revenue (CIR)7 decided in 1961. Citing American jurisprudence, the Court stated in E. Rodriguez, Inc. v. CIR:8

The right of taxation is inherent in the State. It is a prerogative essential to the perpetuity of the government; and he who claims an exemption from the common burden, must justify his claim by the clearest grant of organic or statute law xxx When exemption is claimed, it must be shown indubitably to exist. At the outset, every presumption is against it. A well-founded doubt is fatal to the claim; it is only when the terms of the concession are too explicit to admit fairly of any other construction that the proposition can be supported.

In the recent case of Digital Telecommunications, Inc. v. City Government of Batangas, et al.,9 we adhered to the same principle when we said:

A tax exemption cannot arise from vague inference...Tax exemptions must be clear and unequivocal. A taxpayer claiming a tax exemption must point to a specific provision of law conferring on the taxpayer, in clear and plain terms, exemption from a common burden. Any doubt whether a tax exemption exists is resolved against the taxpayer.

The burden therefore is on SMART to prove that, based on its franchise and the Public Telecoms Act, it is entitled to exemption from the local franchise and business taxes being collected by the petitioner.

Claim for Exemption under

SMART’s franchise

Section 9 of SMART’s franchise states:

Section 9. Tax provisions. — The grantee, its successors or assigns shall be liable to pay the same taxes on their real estate buildings and personal property, exclusive of' this franchise, as other persons or corporations which are now or hereafter may be required by law to pay. In addition thereto, the grantee, its successors or assigns shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of the business transacted under this franchise by the grantee, its successors or assigns and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof: Provided, That the grantee, its successors or assigns shall continue to be liable for income taxes payable under Title II of the National Internal Revenue Code pursuant to Section 2 of Executive Order No. 72 unless the latter enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto.

The grantee shall file the return with and pay the tax due thereon to the Commissioner of Internal Revenue or his duly authorized representative in accordance with the National Internal Revenue Code and the return shall be subject to audit by the Bureau of Internal Revenue. [Emphasis supplied.]

The petitioner posits that SMART’s claim for exemption under its franchise is not equivocal enough to prevail over the specific grant of power to local government units to exact taxes from businesses operating within its territorial jurisdiction under Section 137 in relation to Section 151 of the LGC. More importantly, it claimed that exemptions from taxation have already been removed by Section 193 of the LGC:

Section 193. Withdrawal of Tax Exemption Privileges. — Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including government-owned or controlled corporations, except local water districts, cooperatives duly registered under RA No. 6938, non-stock

and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code. [Emphasis supplied.]

The petitioner argues, too, that SMART’s claim for exemption from taxes under Section 9 of its franchise is not couched in plain and unequivocal language such that it restored the withdrawal of tax exemptions under Section 193 above. It claims that "if Congress intended that the tax exemption privileges withdrawn by Section 193 of RA 7160 [LGC] were to be restored in respondent’s [SMART’s] franchise, it would have so expressly provided therein and not merely [restored the exemption] by the simple expedient of including the ‘in lieu of all taxes’ provision in said franchise."10

We have indeed ruled that by virtue of Section 193 of the LGC, all tax exemption privileges then enjoyed by all persons, save those expressly mentioned, have been withdrawn effective January 1, 1992 – the date of effectivity of the LGC.11 The first clause of Section 137 of the LGC states the same rule.12 However, the withdrawal of exemptions, whether under Section 193 or 137 of the LGC, pertains only to those already existing when the LGC was enacted. The intention of the legislature was to remove all tax exemptions or incentives granted prior to the LGC.13 As SMART’s franchise was made effective on March 27, 1992 – after the effectivity of the LGC – Section 193 will therefore not apply in this case.

But while Section 193 of the LGC will not affect the claimed tax exemption under SMART’s franchise, we fail to find a categorical and encompassing grant of tax exemption to SMART covering exemption from both national and local taxes:

R.A. No 7294 does not expressly provide what kind of taxes SMART is exempted from. It is not clear whether the "in lieu of all taxes" provision in the franchise of SMART would include exemption from local or national taxation. What is clear is that SMART shall pay franchise tax equivalent to three percent (3%) of all gross receipts of the business transacted under its franchise. But whether the franchise tax exemption would include exemption from exactions by both the local and the national government is not unequivocal.

The uncertainty in the "in lieu of all taxes" clause in R.A. No. 7294 on whether SMART is exempted from both local and national franchise tax must be construed strictly against SMART which claims the exemption. [Emphasis supplied.]14

Justice Carpio, in his Separate Opinion in PLDT v. City of Davao,15 explains why:

The proviso in the first paragraph of Section 9 of Smart’s franchise states that the grantee shall "continue to be liable for income taxes payable under Title II of the National Internal Revenue Code." Also, the second paragraph of Section 9 speaks of tax returns filed and taxes paid to the "Commissioner of Internal Revenue or his duly authorized representative in accordance with the National Internal Revenue Code." Moreover, the same paragraph declares that the tax returns "shall be subject to audit by the Bureau of Internal Revenue." Nothing is mentioned in Section 9 about local taxes. The clear intent

is for the "in lieu of all taxes" clause to apply only to taxes under the National Internal Revenue Code and not to local taxes.

Nonetheless, even if Section 9 of SMART’s franchise can be construed as covering local taxes as well, reliance thereon would now be unavailing. The "in lieu of all taxes" clause basically exempts SMART from paying all other kinds of taxes for as long as it pays the 3% franchise tax; it is the franchise tax that shall be in lieu of all taxes, and not any other form of tax.16 Franchise taxes on telecommunications companies, however, have been abolished by R.A. No. 7716 or the Expanded Value-Added Tax Law (E-VAT Law), which was enacted by Congress on January 1, 1996.17 To replace the franchise tax, the E-VAT Law imposed a 10%18 value-added tax on telecommunications companies under Section 108 of the National Internal Revenue Code.19 The "in lieu of all taxes" clause in the legislative franchise of SMART has thus become functus officio, made inoperative for lack of a franchise tax.20

SMART’s claim for exemption from local business and franchise taxes based on Section 9 of its franchise is therefore unfounded.

Claim for Exemption

Under Public Telecoms Act

SMART additionally invokes the "equality clause" under Section 23 of the Public Telecoms Act:

SECTION 23. Equality of Treatment in the Telecommunications Industry. — Any advantage, favor, privilege, exemption, or immunity granted under existing franchises, or may hereafter be granted, shall ipso facto become part of previously granted telecommunications franchise and shall be accorded immediately and unconditionally to the grantees of such franchises: Provided, however, That the foregoing shall neither apply to nor affect provisions of telecommunications franchises concerning territory covered by the franchise, the life span of the franchise, or the type of service authorized by the franchise. [Emphasis supplied.]

As in the case of SMART v. City of Davao,21 SMART posits that since the franchise of telecommunications companies granted after the enactment of its franchise contained provisions exempting these companies from both national and local taxes, these privileges should extend to and benefit SMART, applying the "equality clause" above. The petitioner, on the other hand, believes that the claimed exemption under Section 23 of the Public Telecoms Act is similarly unfounded.

We agree with the petitioner.

Whether Section 23 of the cited law extends tax exemptions granted by Congress to new franchise holders to existing ones has been answered in the negative in the case of PLDT v. City of Davao.22 The term "exemption" in Section 23 of the Public Telecoms Act does

not mean tax exemption; rather, it refers to exemption from certain regulatory or reporting requirements imposed by government agencies such as the National Telecommunications Commission. The thrust of the Public Telecoms Act is to promote the gradual deregulation of entry, pricing, and operations of all public telecommunications entities, and thus to level the playing field in the telecommunications industry. The language of Section 23 and the proceedings of both Houses of Congress are bereft of anything that would signify the grant of tax exemptions to all telecommunications entities.23 Intent to grant tax exemption cannot therefore be discerned from the law; the term "exemption" is too general to include tax exemption and runs counter to the requirement that the grant of tax exemption should be stated in clear and unequivocal language too plain to be beyond doubt or mistake.

Surcharge and Interests

Since SMART cannot validly claim any tax exemption based either on Section 9 of its franchise or Section 23 of the Public Telecoms Act, it follows that petitioner can impose and collect the local franchise and business taxes amounting to P764,545.29 it assessed against SMART. Aside from these, SMART should also be made to pay surcharge and interests on the taxes due.lawphil.net

The settled rule is that good faith and honest belief that one is not subject to tax on the basis of previous interpretation of government agencies tasked to implement the tax laws are sufficient justification to delete the imposition of surcharges and interest.24 In refuting liability for the local franchise and business taxes, we do not believe SMART relied in good faith in the findings and conclusion of the Bureau of Local Government and Finance (BLGF).

In a letter dated August 13, 1998, the BLGF opined that SMART should be considered exempt from the franchise tax that the local government may impose under Section 137 of the LGC.25 SMART, relying on the letter-opinion of the BLGF, invoked the same in the administrative protest it filed against petitioner on February 15, 2002, as well as in the petition for prohibition that it filed before the RTC of Iloilo on April 30, 2002. However, in the 2001 case of PLDT v. City of Davao,26 we declared that we do not find BLGF’s interpretation of local tax laws to be authoritative and persuasive. The BLGF’s function is merely to provide consultative services and technical assistance to the local governments and the general public on local taxation, real property assessment, and other related matters.27 Unlike the Commissioner of Internal Revenue who has been given the express power to interpret the Tax Code and other national tax laws,28 no such power is given to the BLGF. SMART’s dependence on BLGF’s interpretation was thus misplaced.

WHEREFORE, we hereby GRANT the petition and REVERSE the decision of the RTC dated January 19, 2005 in Civil Case No. 02-27144 and find SMART liable to pay the local franchise and business taxes amounting to P764,545.29, assessed against it by petitioner, plus the surcharges and interest due thereon.

SO ORDERED.

ARTURO D. BRIONAssociate Justice

G.R. No. L-8685             January 31, 1957

THE COLLECTOR OF INTERNAL REVENUE, petitioner, vs.AURELIO P. REYES and COURT OF TAX APPEALS, respondents.

Office of the Solicitor General Ambrosio Padilla, Assistant Solicitor General Ramon L. Avanceña, Solicitor Jose P. Alejandro, Melquiades Gutierrez and Librada del Rosario-Natividad for petitioner.Meer, Meer and Meer for respondents.

FELIX, J.:

This is a petition for certiorari filed by the Collector if the Internal Revenue wherein he seeks to nullify the resolution of the Court of Tax Appeals restraining him from collecting, through summary administrative methods, taxes allegedly due from Dr. Aurelio P. Reyes. The facts of the case may be summarized as follows:

In a letter dated October 13, 1954, petitioner, the Collector of Internal Revenue demanded from Aurelio P. Reyes payment of his alleged deficiency income taxes, surcharges, interests and penalties for the tax years 1946 to 1950 amounting to P641,470.04 as of October 31, 1954, with the suggestion that the aforesaid tax liabilities be paid either to the Bureau of Internal Revenue or the City Treasurer of Manila. Together with said letter of assessment, respondent Aurelio P. Reyes received a warrant of distraint and levy on his properties in the event that he should fail to pay the alleged deficiency income taxes on or before October 31, 1954, Being informed by the City Treasurer of Manila by a letter dated November 4, 1954, that said Treasurer was instructed by petitioner to execute the warrant of distraint and levy on the amount demanded is not settled on or before November 10, 1954, Aurelio P. Reyes filed with the Court of Tax Appeals on November 15, 1954, a petition for review of the Collector's assessment of his alleged deficiency income tax liabilities. This was followed by an urgent petition, filed on November 16, 1954, to restrain the Collector of Internal Revenue from executing the warrant of distraint and levy on his properties, alleging among others, that the right of respondent to collect by summary proceedings the tax demanded had already prescribed in accordance with section 51 (d) of the National Internal Revenue Code, as his income tax returns for the tax years 1946 to 1950 had been filed more than three years ago, the last one being on April 27, 1951; that a distraint and levy on his properties would work injustice or irreparable injury to him and would tend to render any judgment of the Court in the main case meaningless and ineffectual; that the requisite if Section 11 of Republic Act No. 1125 for the filing of a bond or deposit before a writ of distraint and levy may be suspended is not applicable in this case; and that a greater

portion of his assets consists of real properties located in Manila and shares a stock in the Philippine Racing Club which are all encumbered in various financial institutions and therefore there is no possibility that he would abscond with his property or remove or conceal the same.

The Collector of Internal Revenue opposed said petition in November 19, 1954, on the ground that Court of Tax Appeals has no authority to restrain him from executing the warrant of distraint and levy on his properties of Aurelio P. Reyes in connection with the collection of the latter's deficiency income taxes; that said taxpayer has an adequate remedy in law by paying first and then seek for the recovery thereof; and that section 51 (d) does not preclude distraint and levy. By resolution of January 8, 1955, the Court of Tax Appeals upheld the stand of Aurelio P. Reyes and ordered the Collector of Internal Revenue to desist from collecting by administrative method the taxes allegedly due from Reyes pending the outcome of his appeal, without prejudice to other judicial remedy or remedies which the Collector may desire to pursue for the protection of the interest of the Government, pending the final decision of the case on the merits. On January 21, 1955, the Solicitor General filed a notice of appeal from said resolution and instituted in this Court the instant certiorari case on January 22, 1955.

It is not disputed that respondent Reyes filed his income tax returns for the years 1946 to 1950, and that the warrant of distraint and levy against the properties of said respondent was issued only on October 13, 1954, or 3 years, 5 months and 16 days after the respondent taxpayer has filed his returns for the tax year 1950, which he made on April 27, 1951. Therefore, the issues in this instances are: (1) whether the Court of Tax Appeals could restrain the Collector of Internal Revenue from enforcing collection of income tax deficiency by summary proceedings after the expiration of the three-year period provided for in section 51 (d) of the National Internal Revenue Code; and (2) granting that the Collector could be restrained, whether the Court of Tax Appeals had any power to grant an injunction without requiring the filing of a bond or making a deposit as prescribed by section 11 of Republic Act No. 1125.

Section 51 (d) of the National Internal Revenue Code reads as follows:

SEC. 51. Assessment and Payment of income Tax. —

x x x           x x x           x x x

(d) Refusal or neglect to make return; fraudulent returns, etc. — In cases of refusal or neglect to make return or in cases of erroneous, false or fraudulent returns, the Collector of Internal Revenue shall, upon discovery thereof, at any time within three years after said return is due, or has been made, make a return upon information obtained as provided for in this Code or by existing law, or require the necessary corrections to be made, and the assessment made by the Collector on Internal Revenue thereon shall be paid by such person or corporation immediately upon notification of the amount of said assessment.

and in a long line of cases this Court has already construed this just quoted provision to mean that the three year prescriptive period provided therein constituted a limitation to the right of the Government to enforce the collection of income taxes by the summary proceedings of distraint and levy though it could proceed to recover the taxes due by the institution of the corresponding civil action (Collector of Internal Revenue vs. Villegas, 56 Phil., 554, citing Holmes, Federal Income Tax, 2d., p. 581; Collector of Internal Revenue vs. Haygood, 65 Phil., 520; and Juan de la Viña vs. El Gobierno de las Filipinas, G.R. No. 42669, January 29, 1938). This doctrine was reiterated in the case of Philippine Sugar Estate Development Co., Inc., vs. Juan Posadas, 68 Phil., 216, wherein it was held that:

. . . after the three years have elapsed from the date to which income tax returns which have been found to be false, fraudulent or erroneous, may have been made, the Collector of Internal Revenue cannot make any summary collection through administrative methods, but must do so through judicial proceedings.

In the recent case of the Collector of Internal Revenue vs. Jose Avelino et al., supra, p. 327, promulgated November 19, 1956, this Court held:

It therefore appears that when it refers to the Collection of income tax it is mandatory that the right of the Collector of Internal Revenue to collect it by the summary methods of distraint and levy be exercised within the period of three years from the time the income tax return is filed, otherwise the right can only be enforced by judicial action. Since, admittedly, the deficiency taxes in question were assessed and the warrants for their collection by distraint and levy were issued after the period of three years from the filing of the returns, it is evident that said warrants, as well as the steps taken in connection with the sale of the properties of the taxpayer, were issued without authority of the law and, hence, the Court of Tax Appeals acted properly in enjoining their enforcement as prayed for by petitioner.

It is, however, contended by petitioner that the respondent Court of Tax Appeals acted in complete disregard of the prohibition of said section 305 of the National Internal Revenue Code when it restrained the former from executing the warrant of distraint and levy against the properties of respondent Aurelio P. Reyes. Said provision reads as follows:

SEC. 305. INJUNCTION NOT AVAILABLE TO RESTRAIN THE COLLECTION OF TAX. — No court shall have authority to grant an injunction to restrain the collection of any internal revenue tax, fee, or charge imposed by this Code (National Internal Revenue Code).

However, Section 11 of Republic Act No. 1125 prescribes the following:

SEC. 11. — Who may appeal; effect of appeal. — Any person, association or corporation adversely affected by a decision or ruling of the Collector of internal

Revenue,. may file an appeal in the Court of Tax Appeals within thirty days after receipt of such decision or ruling.

No appeal taken to the Court of Tax Appeals from the decision of the Collector of Internal Revenue . . . shall suspend the payment, levy, distraint, and/or sale of any property of the taxpayer for the satisfaction of his tax liability as provided by existing law: Provided, however, That when in the opinion of the Court the collection by the Bureau of Internal Revenue . . . may jeopardize the interest of the Government and/or the taxpayer the Court at any stage of the proceeding may suspend said collection and require the taxpayer either to deposit the amount claimed or to file a surety bond for not more than double the amount with the Court.

It can be inferred from the aforequoted provision that there may be instances like the one at bar, when the Collector of Internal Revenue could be restrained from proceeding with the collection, levy, distraint and/or sale of any property of the taxpayer. In this respect, this Court said in the case of Collector of Internal Revenue vs. Avelino et al., supra:

This section (Sec. 11 of Rep. Act No. 1125) must be deemed to have modified section 305 of the National Internal Revenue Code in view of the repeating clause contained in said Act to the effect that "any law or part of law, or any executive order, rule or regulation or part thereof, inconsistent with the provisions of this Act is hereby repealed" (Section 21).

But petitioner asserts that even assuming that under Section 11 of Republic Act No. 1125 respondent court is empowered to order him to desist from the collection of said taxes by extra-judicial methods, yet the Court erred in issuing the injunction without requiring the taxpayer either to deposit the amount claimed or file a surety bond for an amount not more than double the tax sought to be collected. We disagree with this contention. At first blush it might be as contended by the Solicitor General, but a careful analysis of the second paragraph of said Section 11 will lead us to the conclusion that the requirement of the bond as a condition precedent to the issuance of the writ of injunction applies only in cases where the processes by which the collection sought to be made by means thereof are carried out in consonance with the law for such cases provided and not when said processes are obviously in violation of the law to the extreme that they have to be SUSPENDED for jeopardizing the interests of the taxpayer.

Section 11 of Republic Act No. 1125 is therefore premised on the assumption that the collection by summary proceedings is by itself in accordance with existing law; and then what is suspended is the act of collecting, whereas, in the case at bar what the respondent Court suspended was the use of the method employed to verify the collection which was evidently illegal after the lapse of the three-year limitation period. The respondent Court issued the injunction in question on the basis of its finding that the means intended to be used by petitioner in the collection of the alleged deficiency taxes were in violation of law. It certainly would be an absurdity on the part of the Court of Tax Appeals to declare that the collection by the summary methods of distraint and levy was violative of law,

and then, on the same breath require the petitioner to deposit or file a bond as a prerequisite for the issuance of a writ of injunction. Let us suppose, for the sake of argument, that the Court a quo would have required the petitioner to post the bond in question and that the taxpayer would refuse or fail to furnish said bond, would the Court a quo be obliged to authorize or allow the Collector of Internal Revenue to proceed with the collection from the petitioner of the taxes due by a means it previously declared to be contrary to law?

The pronouncement made by the respondent Court, after due hearing, to the effect that summary methods of collection by distraint and levy would be improper in the instant case, was done in the exercise of its power to pass judgment on all matters brought before it. It was a lawful exercise of the jurisdiction vested in said Court which is well--provided for in section 7 of Republic Act No. 1125:

SEC. 7. Jurisdiction. — The Court of Tax Appeals shall exercise exclusive appellate jurisdiction to review by appeal, as herein provided —

(1) Decisions of the Collector 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 law or part of law administered by the Bureau of Internal Revenue.

There is another issue raised by respondent Aurelio P. Reyes that merits consideration. It does not appear from the records that a motion for reconsideration was ever filed by counsel for petitioner, although a notice of appeal, dated January 21, 1955, was filed in the court below. It is an established doctrine in this jurisdiction that the attention of the Court should first be called to its supposed error, and its correction asked for on a motion for reconsideration (Herrera vs. Barretto, 25 Phil., 245; Uy Chua vs. Imperial, 44 Phil., 27; Manila Post Publishing Co. vs. Sanchez, 81 Phil., 614 46 Off., Suppl. (1) 412; Alvarez vs. Ibañez, 83 Phil., 104, 46 Off. Gaz., 4233).

That failure of the petitioner to file with the court below a motion for reconsideration of the order subject of the certiorari proceedings is a fatal and insurmountable barrier, is further stressed in the case of Valeriano Nicolas et al. vs. The Hon. Modesto Castillo et al., (97 Phil., 336) wherein this Court held:

No motion for reconsideration was ever filed by petitioners in the court below, calling its attention to the alleged errors and irregularities now raised in this petition, to give it an opportunity to correct such errors and irregularities, if indeed any were committed. For his reason alone if not for any other, the writ was applied for should be denied.

Wherefore, the petition for certiorari is denied and the resolution of the respondent Court of Tax Appeals is hereby affirmed, without pronouncement as to costs. It is so ordered.

Paras, C.J., Bengzon, Padilla, Montemayor, Reyes, A., Bautista Angelo, Labrador and Endencia, JJ., concur.

Separate Opinions

REYES, J.B.L., J., concurring:

I concur in the result, subject to my dissenting opinion in the case of Collector of Internal Revenue vs. Avelino and the Court of Tax Appeals, (supra, p. 327) regarding the necessity of the taxpayer's posting a bond or depositing the amount of the taxes claimed, before the tax collection may be suspended.

G.R. No. 502             January 29, 1946

BASILIA CABRERA, plaintiff-appellee, vs.THE PROVINCIAL TREASURER OF TAYABAS and PEDRO J. CATIGBAC, defendants-appellants.

Lorenzo Sumulong for appellant.Jose W. Diokno for appellee.

PARAS, J.:

On October 30, 1940, the provincial treasurer of Tayabas issued a notice for the sale at public auction of numerous, real properties forfeited for tax delinquency, including a certain parcel of land located in the barrio of Buenavista, municipality of Candelaria, Province of Tayabas, and assessed in the name of Nemesio Cabrera, said sale to be held "on December 15, 1940 at 8 a.m. and every day thereafter at the same place and hour until all the properties shall have been sold to the highest bidder." Copy of the notice was sent by registered mail to Nemesio Cabrera, but the envelope containing the same was returned with the remark "Unclaimed," undoubtedly because Nemesio Cabrera had already died in 1935. The land was actually sold on May 12, 1941, for the sum of P74.34 to the appellant Pedro J. Catigbac, in whose favor the final bill of sale was executed on September 23, 1942. Thereafter the appellee, Basilia Cabrera, filed a complaint in the Court of First Instance of Tayabas against the provincial treasurer and the appellant, attacking the validity of the tax sale on the grounds that she was not notified therefore and that although the land had remained in the assessment book in the name of Nemesio Cabrera, a former owner, she has become its registered owner, since 1934 when a Torrens title (No. 8167) was issued to her by the register of deeds of Tayabas. From a judgment favorable to the appellee, the present appeal was taken by Pedro J. Catigbac.

Under the law (Commonwealth Act No. 470, section 35), the provincial treasurer is enjoined to set forth in the notice, among other particulars, the date of the tax sale. We are of the opinion that this mandatory requirement was not satisfied in the present case, because the announcement that the sale would take place on December 15, 1940 and every day thereafter, is as general and indefinite as a notice for the sale "within this or next year" or "some time within the month of December." In order to enable a taxpayer to protect his rights, he should at least appraised of the exact date of the proceeding by which he is to lose his property. When we consider the fact that the sale in favor of the appellant was executed on May 12, 1941, or nearly five months after December 15, 1940, the violation of the mandatory requirement becomes more obvious. Indeed, in his motion for reconsideration (see Record on Appeal, pp. 33-41), the appellant had admitted, unknowingly perhaps, that when he went to the office of the municipal treasurer after reading the notice of sale in December, 1940, to inquire about the advertised land, he was told to return on May 12, 1941. The implication that follows is that the tax officials had really adopted the view that they could sell any of the numerous forfeited lots on any date subsequent to December 15, 1940, without new notice, thereby making the resulting sale more private than public, likewise in violation of the law. It may be observed that as regards tax sales, unlike ordinary execution sales, the statute does not expressly authorize adjournment from day to day. The reminder may, however, be given that the tax officials will greatly be inconvenienced by following the law strictly, especially when numerous properties are, as in the present case (132 parcels), to be disposed of for tax delinquency. We will not venture to disagree, but it is believed that the officials who are ever solicitous in protecting private proprietary rights, shall have helped, to the same extent, in maintaining the solid foundation of the Government which they seek to serve and of which they themselves are a part.

What has been said is sufficient to decide this appeal, although it will not altogether be amiss to refer to details that further support the judgment of the lower court. The appellee was admittedly not notified of the auction sale, and this also vitiates the proceeding. She is the registered owner of the land and, since 1934, has become liable for the taxes thereon. For all purposes, she is the delinquent taxpayer "against whom the taxes were assessed," referred to in section 34 of Commonwealth Act No. 470. It cannot be Nemesio Cabrera for the latter's obligation to pay taxes ended where the appellee's liability began. Neither the alleged receipt by the appellee of a copy of certificate of sale dated May 12, 1941, nor her failure to redeem thereafter, had the effect of validating the prior tax proceeding. The sale in favor of the appellant cannot bind the appellee, since the land purportedly conveyed was owned by Nemesio Cabrera, not by the appellee; and, at the time of the sale, Nemesio Cabrera had no interest whatsoever in the land in question that could have passed to the appellant.

The appellee may be criticized for her failure to have the land transferred to her name in the assessment record. The circumstance, nevertheless, cannot supplant the absence of notice. Of course, it is the duty of any person acquiring at the time real property to prepare and submit a tax declaration within sixty days (Commonwealth Act No. 470, section 12), but it is no less true that when the owner refuses or fails to make the required declaration, the provincial assessor should himself declare the property in the name of the

defaulting owner (Commonwealth Act No. 470, section 14). In this case there is absolutely no showing that the appellee had deliberately failed to make the declaration to defraud the tax officials; and it may be remarked that there can be no reason why her Torrens title, which binds the whole world, cannot at least charge the Government which had issued it, with notice thereof. A little synchronization between the offices of the register of deeds and of the provincial assessor, with perhaps very negligible additional clerical work on the part of both, will surely result in a more efficient enforcement of the tax laws.

Not having appealed, the appellee cannot now pretend that the judgement of the lower court is erroneous in so far as it failed to award damages in her favor for the sum of P500. While an appellee can on appeal make a counter-assignment of error, it must be with a view merely to sustaining the judgement, not to obtaining other affirmative relief.

The appealed judgment is affirmed, with costs of both instances against the appellant. So ordered.

Moran, C.J., Jaranilla, and Pablo, JJ., concur.

Separate Opinions

FERIA, J., concurring and dissenting:

I concur except in the conclusion of the majority that the appellee may make a counter-assignment of error even in the sense therein stated, for it is misleading and erroneous. In no case may a counter-assignment of error be properly allowed. A counter-assignment of error means, as the prefix "counter" indicates, a proposition that the court committed an error opposite or contrary to that assigned by the adverse party. Appellee should not or need not make such counter-assignment in order to refute or disprove plaintiff's assignment of error.

Even if by counter-assignment is meant an assignment of error, it is improper and of no avail for an appellee to make it in ordinary civil cases. It is not incumbent on appellee, who occupies a purely defensive position, to make assignments of error. (Garcia Valdez vs. Soteraña Tuason, 40 Phil., 943.) He cannot, as appellee, obtain from the appellate court more or greater relief than that granted him by the trial court though the latter's decision be erroneous in that respect. When the trial judge decides a case in favor of a party on certain ground, the appellate court may base its decision upon some other point, ignored or erroneously decided in favor of the appellant by the trial court (do, do). Without any assignment of errors, appellee may point out in his brief any error committed by the lower court in not admitting certain evidence, or not taking into consideration certain points of law or fact, in support of the decision appealed from.

In election cases, however, the appellee may make an assignment of error although not required to do so, because as said cases are tried de novo on appeal, Mendoza vs. Mendiola (53 Phil., 267), appellee may seek affirmative relief and the appellate court grant or decide that appellee has received more votes than those adjudicated to him by the lower court.

BRIONES, M., concurrente:

Estoy conforme con la parte dispositivia de la sentencia por el unico fundamento de que cuando se verifico la venta por morosidad en el impuesto territorial, Basilia Cabrera, la demandante-apelada, era la dueña del terreno en cuestion con certificado de titulo Torrens registrado a su nombre. El articulo 35 de la Ley del Commonwealth No. 470 prescribe que una copia del anuncio de la venta debera enviarse al contribuyente moroso en su residencia si esta fuese conocida por el tesorero. Como acertadamente si dice en la ponecia, el titulo Torrens es obligatorio para todo el mundo; por tanto — añado — debe serlo mas para los agentes del fisco. En el presente caso era deber del tesorero enviar una copia del anuncio de venta a la damandante y apelada como dueña registrada del torreno, en vez de mandarla al dueño anterior que por cierto ya habia fallecido. Si esto hace imperativo que se de cuenta a las tesorerias de todos los traspasos inscritos y registrados en el Registro de la Propiedad, estimo que ello debe hacerse el implementando la maquinaria official al efecto. Razones de equidad y eficiencia administrativa demandan la rigida adopcion de semejante practica.

G.R. No. 130430 December 13, 1999

REPUBLIC OF THE PHILIPPINES, represented by the Commissioner of the Bureau of Internal Revenue (BIR), petitioner, vs.SALUD V. HIZON, respondent.

 

MENDOZA, J.:

This is a petition for review of the decision 1 of the Regional Trial Court, Branch 44, San Fernando, Pampanga, dismissing the suit filed by the Bureau of Internal Revenue for collection of tax.

The facts are as follows:

On July 18, 1986, the BIR issued to respondent Salud V. Hizon a deficiency income tax assessment of P1,113,359.68 covering the fiscal year 1981-1982.

Respondent not having contested the assessment, petitioner, on January 12, 1989, served warrants of distraint and levy to collect the tax deficiency. However, for reasons not known, it did not proceed to dispose of the attached properties.

More than three years later, or on November 3, 1992, respondent wrote the BIR requesting a reconsideration of her tax deficiency assessment. The BIR, in a letter dated August 11, 1994, denied the request. On January 1, 1997, it filed a case with the Regional Trial Court, Branch 44, San Fernando, Pampanga to collect the tax deficiency. The complaint was signed by Norberto Salud, Chief of the Legal Division, BIR Region 4, and verified by Amancio Saga, the Bureau's Regional Director in Pampanga.

Respondent moved to dismiss the case on two grounds: (1) that the complaint was not filed upon authority of the BIR Commissioner as required by §221 2 of the National Internal Revenue Code, and (2) that the action had already prescribed. Over petitioner's objection, the trial court, on August 28, 1997, granted the motion and dismissed the complaint. Hence, this petition. Petitioner raises the following issues: 3

I. WHETHER OR NOT THE INSTITUTION OF THE CIVIL CASE FOR COLLECTION OF TAXES WAS WITHOUT THE APPROVAL OF THE COMMISSIONER IN VIOLATION OF SECTION 221 OF THE NATIONAL INTERNAL REVENUE CODE.

II. WHETHER OR NOT THE ACTION FOR COLLECTION OF TAXES FILED AGAINST RESPONDENT HAD ALREADY BEEN BARRED BY THE STATUTE OF LIMITATIONS.

First. In sustaining respondent's contention that petitioner's complaint was filed without the authority of the BIR Commissioner, the trial court stated: 4

There is no question that the National Internal Revenue Code explicitly provides that in the matter of filing cases in Court, civil or criminal, for the collection of taxes, etc., the approval of the commissioner must first be secured. . . . [A]n action will not prosper in the absence of the commissioner's approval. Thus, in the instant case, the absence of the approval of the commissioner in the institution of the action is fatal to the cause of the plaintiff . . . .

The trial court arrived at this conclusion because the complaint filed by the BIR was not signed by then Commissioner Liwayway Chato.

Sec. 221 of the NIRC provides:

Form and mode of proceeding in actions arising under this Code. — Civil and criminal actions and proceedings instituted in behalf of the Government under the authority of this Code or other law enforced by the Bureau of Internal Revenue shall be brought in the name of the Government of the Philippines and shall be conducted by the provincial or city fiscal, or the Solicitor General, or by the legal officers of the Bureau of Internal Revenue deputized by the Secretary of Justice, but no civil and criminal actions for the recovery of taxes or the enforcement of

any fine, penalty or forfeiture under this Code shall begun without the approval of the Commissioner. (Emphasis supplied)

To implement this provision Revenue Administrative Order No. 5-83 of the BIR provides in pertinent portions:

The following civil and criminal cases are to be handled by Special Attorneys and Special Counsels assigned in the Legal Branches of Revenues Regions:

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II. Civil Cases

1. Complaints for collection on cases falling within the jurisdiction of the Region . . . .

In all the abovementioned cases, the Regional Director is authorized to sign all pleadings filed in connection therewith which, otherwise, requires the signature of the Commissioner.

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Revenue Administrative Order No. 10-95 specifically authorizes the Litigation and Prosecution Section of the Legal Division of regional district offices to institute the necessary civil and criminal actions for tax collection. As the complaint filed in this case was signed by the BIR's Chief of Legal Division for Region 4 and verified by the Regional Director, there was, therefore, compliance with the law.

However, the lower court refused to recognize RAO No. 10-95 and, by implication, RAO No. 5-83. It held:

[M]emorand[a], circulars and orders emanating from bureaus and agencies whether in the purely public or quasi-public corporations are mere guidelines for the internal functioning of the said offices. They are not laws which courts can take judicial notice of. As such, they have no binding effect upon the courts for such memorand[a] and circulars are not the official acts of the legislative, executive and judicial departments of the Philippines. . . . 5

This is erroneous. The rule is that as long as administrative issuances relate solely to carrying into effect the provisions of the law, they are valid and have the force of law. 6 The governing statutory provision in this case is §4(d) of the NIRC which provides:

Specific provisions to be contained in regulations. — The regulations of the Bureau of Internal Revenue shall, among other things, contain provisions specifying, prescribing, or defining:

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(d) The conditions to be observed by revenue officers, provincial fiscals and other officials respecting the institution and conduct of legal actions and proceedings.

RAO Nos. 5-83 and 10-95 are in harmony with this statutory mandate.

As amended by R.A. No. 8424, the NIRC is now even more categorical. Sec. 7 of the present Code authorizes the BIR Commissioner to delegate the powers vested in him under the pertinent provisions of the Code to any subordinate official with the rank equivalent to a division chief or higher, except the following:

(a) The power to recommend the promulgation of rules and regulations by the Secretary of Finance;

(b) The power to issue rulings of first impression or to reverse, revoke or modify any existing ruling of the Bureau;

(c) The power to compromise or abate under §204 (A) and (B) of this Code, any tax deficiency: Provided, however, that assessment issued by the Regional Offices involving basic deficiency taxes of five hundred thousand pesos (P500,000.00) or less, and minor criminal violations as may be determined by rules and regulations to be promulgated by the Secretary of Finance, upon the recommendation of the Commissioner, discovered by regional and district officials, may be compromised by a regional evaluation board which shall be composed of the Regional Director as Chairman, the Assistant Regional Director, heads of the Legal, Assessment and Collection Divisions and the Revenue District Officer having jurisdiction over the taxpayer, as members; and

(d) The power to assign or reassign internal revenue officers to establishments where articles subject to excise tax are produced or kept.

None of the exceptions relates to the Commissioner's power to approve the filing of tax collection cases.

Second. With regard to the issue that the case filed by petitioner for the collection of respondent's tax deficiency is barred by prescription, §223(c) of the NIRC provides:

Any internal revenue tax which has been assessed within the period of limitation above-prescribed may be collected by distraint or levy or by a proceeding in court within three years 7 following the assessment of the tax.

The running of the three-year prescriptive period is suspended 8 —

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 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 the 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.

Petitioner argues that, in accordance with this provision, respondent's request for reinvestigation of her tax deficiency assessment on November 3, 1992 effectively suspended the running of the period of prescription such that the government could still file a case for tax collection. 9

The contention has no merit. Sec. 229 10 of the Code mandates that a request for reconsideration must be made within 30 days from the taxpayer's receipt of the tax deficiency assessment, otherwise the assessment becomes final, unappealable and, therefore, demandable. 11 The notice of assessment for respondent's tax deficiency was issued by petitioner on July 18, 1986. On the other hand, respondent made her request for reconsideration thereof only on November 3, 1992, without stating when she received the notice of tax assessment. She explained that she was constrained to ask for a reconsideration in order to avoid the harassment of BIR collectors. 12 In all likelihood, she must have been referring to the distraint and levy of her properties by petitioner's agents which took place on January 12, 1989. Even assuming that she first learned of the deficiency assessment on this date, her request for reconsideration was nonetheless filed late since she made it more than 30 days thereafter. Hence, her request for reconsideration did not suspend the running of the prescriptive period provided under §223(c). Although the Commissioner acted on her request by eventually denying it on August 11, 1994, this is of no moment and does not detract from the fact that the assessment had long become demandable.

Nonetheless, it is contended that the running of the prescriptive period under §223(c) was suspended when the BIR timely served the warrants of distraint and levy on respondent on January 12, 1989. 13 Petitioner cites for this purpose our ruling in Advertising Associates Inc., v. Court of Appeals. 14 Because of the suspension, it is argued that the BIR could still avail of the other remedy under §223(c) of filing a case in court for collection of the tax deficiency, as the BIR in fact did on January 1, 1997.

Petitioner's reliance on the Court's ruling in Advertising Associates Inc. v. Court of Appeals is misplaced. What the Court stated in that case and, indeed, in the earlier case of Palanca v. Commissioner of Internal Revenue, 15 is that the timely service of a warrant of distraint or levy suspends the running of the period to collect the tax deficiency in the sense that the disposition of the attached properties might well take time to accomplish, extending even after the lapse of the statutory period for collection. In those cases, the BIR did not file any collection case but merely relied on the summary remedy of distraint and levy to collect the tax deficiency. The importance of this fact was not lost on the Court. Thus, in Advertising Associates, it was held: 16 "It should be noted that the Commissioner did not institute any judicial proceeding to collect the tax. He relied

on the warrants of distraint and levy to interrupt the running of the statute of limitations.

Moreover, if, as petitioner in effect says, the prescriptive period was suspended twice, i.e., when the warrants of distraint and levy were served on respondent on January 12, 1989 and then when respondent made her request for reinvestigation of the tax deficiency assessment on November 3, 1992, the three-year prescriptive period must have commenced running again sometime after the service of the warrants of distraint and levy. Petitioner, however, does not state when or why this took place and, indeed, there appears to be no reason for such. It is noteworthy that petitioner raised this point before the lower court apparently as an alternative theory, which, however, is untenable.

For the foregoing reasons, we hold that petitioner's contention that the action in this case had not prescribed when filed has no merit. Our holding, however, is without prejudice to the disposition of the properties covered by the warrants of distraint and levy which petitioner served on respondent, as such would be a mere continuation of the summary remedy it had timely begun. Although considerable time has passed since then, as held in Advertising Associates Inc. v. Court of Appeals 17 and Palanca v. Commissioner of Internal Revenue, 18 the enforcement of tax collection through summary proceedings may be carried out beyond the statutory period considering that such remedy was seasonably availed of.

WHEREFORE, the petition is DENIED.

Bellosillo, Quisumbing, Buena and De Leon, Jr., JJ., concur.

G.R. No. 119322 June 4, 1996

COMMISSIONER ON INTERNAL REVENUE, SENIOR STATE PROSECUTOR AURORA S. LAGMAN, SENIOR STATE PROSECUTOR BERNELITO R. FERNANDEZ, SENIOR STATE PROSECUTOR HENRICK P. GINGOYON, ROGELIO F. VISTA, STATE PROSECUTOR ALFREDO AGCAOILI, PROSECUTING ATTORNEY EMMANUEL VELASCO, CITY PROSECUTOR CANDIDO V. RIVERA, AND ASSISTANT CITY PROSECUTOR LEOPOLDO E. BARAQUIA, petitioners, vs.THE HONORABLE COURT OF APPEALS, THE HONORABLE TIRSO D'C VELASCO, PRESIDING JUDGE, REGIONAL TRIAL COURT OF QUEZON CITY, BRANCH 88, FORTUNE TOBACCO CORPORATION, LUCIO TAN, HARRY C. TAN, CARMEN KAO TAN, FLORENCIO SANTOS, SALVADOR MISON, CHUNG POE KEE, ROJAS CHUA, MARIANO TANENGLIAN, JUANITA LEE AND ANTONIO P. ABAYA, respondents.

DAGUPAN COMBINED COMMODITIES, INC., TOWNSMAN COMMERCIALS, INC., LANDMARK SALES AND MARKETING INC., CRIMSON CROCKER DISTRIBUTORS, INC., MOUNT MATUTUM MARKETING CORP., FIRST UNION TRADING CORP., CARLSBURG AND SONS, INC., OMAR ALI DISTRIBUTORS, INC., ORIEL AND COMPANY, NEMESIO TAN, QUINTIN CALLEJA, YOLANDA MANALILI, CARLOS CHAN, ROMEO TAN, VICENTE CO, WILLIAM YU, LETICIA LIM, GLORIA LOPEZ, ROBERT TANTAMCO, FELIPE LOY, ROLANDO CHUA, HONORINA TAN, WILLIE TANTAMCO, HENRY WEECHEE, JESUS LIM, TEODORO TAN, ANTONIO APOSTOL, DOMINGO TENG, CANDELARIO LI, ERLINDA CRUZ, CARLOS TUMPALAN, LARRY JOHN SY, ERNESTO ONG, WILFREDO MACROHON, ANTONIO TIU, ROSARIO LESTER, WILFREDO ONG, BONIFACIO CHUA, GO CHING CHUAN, HENRY CHUA, LOPE LIM GUAN, EMILIO TAN, FELIPE TAN SEH CHUAN, ANDRES CO, FELIPE KEE, HENRY GO CO, NARCISO GO, ADOLFO LIM, CO SHU, DANIEL YAO CABIGUN, GABRIELLE. QUINTELA, NELSON TE, EMILLIO GO, EDWIN LEE, CESAR LEDESMA, JR., JAO CHEP SENG, ARNULFO TAN, BENJAMIN T. HONG, PHILIP JAO, JOSE P. YU, AND DAVID R. CORTES, respondents-intervenors.

 

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. 37-93 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 of 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: . . .

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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 a prima 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. Enrile 29 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. Albano 30 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 counter-affidavits 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 counter-affidavits 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. Enrile 11 and in Ocampo IV v. Ombudsman 12 -- (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. 93-17942;

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 COURT 12

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 valorem and 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, arule -- 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. Labang 29 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 pre-determination 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. Enrile 11 and in Ocampo IV v. Ombudsman 12 -- (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. 93-17942;

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 COURT 12

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 valorem and 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, arule -- 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. Labang 29 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 pre-determination 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.