Case Summary (G.R. No. 197590)
Petitioner and Respondent
Petitioner: Bureau of Internal Revenue (BIR), represented by the Commissioner.
Respondents: Spouses Antonio Villan Manly and Ruby Ong Manly.
Key Dates
• April 27, 2005 – BIR issued a Letter of Authority.
• June 6, 2005 – BIR requested documentary proof of cash acquisitions.
• June 23, 2005 – Revenue officers filed a Joint Affidavit on underdeclared income.
• August 31, 2006 – State Prosecutor recommended filing criminal charges.
• November 29, 2007 – Denial of respondents’ motion for reconsideration.
• July 27, 2009 – Secretary of Justice reversed the Prosecutor’s resolution.
• November 5, 2009 – Denial of BIR’s motion for reconsideration before the Secretary.
• October 28, 2010 – Court of Appeals (CA) dismissed BIR’s certiorari petition.
• May 10, 2011 – CA denied reconsideration.
• November 24, 2014 – SC resolved G.R. No. 197590.
• June 15, 2015 – Decision promulgated by the Supreme Court.
Applicable Law
1987 Philippine Constitution; National Internal Revenue Code (Tax Reform Act of 1997), especially Sections 248(B), 254, and 255; Rules of Court, Rules 45 and 65.
Factual Background
From 1998 to 2003, Antonio reported total income of P2,104,571.58 (compensation and rental profits). During that period, the spouses made cash acquisitions of approximately P20.86 million—a Tagaytay vacation house and two vehicles—without substantiating the source.
Initial Investigation and Determination of Probable Cause
Using the expenditure method, BIR officers reconstructed income by comparing declared income against cash expenditures. They found underdeclarations exceeding 30% for tax years 2000, 2001, and 2003, giving rise to prima facie evidence of fraud under Section 248(B). They recommended criminal charges under Sections 254 (attempt to evade tax) and 255 (failure to supply correct information).
State Prosecutor’s Resolution and Denial of Reconsideration
On August 31, 2006, State Prosecutor Montera-Barot issued a resolution to file six counts of tax evasion and related offenses. Respondents’ motion for reconsideration was denied on November 29, 2007.
Secretary of Justice’s Review and Reversal
Acting Justice Secretary Devanadera, on July 27, 2009, reversed the State Prosecutor’s finding of probable cause, citing BIR’s failure to specify the exact tax due and the absence of a formal deficiency assessment. A motion for reconsideration was denied on November 5, 2009.
Court of Appeals Proceedings
BIR filed a certiorari petition under Rule 65 claiming grave abuse of discretion by the Secretary. The CA dismissed the petition on October 28, 2010, ruling that no probable cause was shown. Reconsideration was denied on May 10, 2011.
Issues for Supreme Court Review
Whether the CA gravely abused its discretion by requiring a prior formal assessment and specific proof of tax liability and source of funds before finding probable cause for tax evasion.
Petitioner’s Contentions
• No deficiency assessment is required for criminal tax evasion; the crime is complete upon willful filing of a fraudulent return.
• The expenditure method properly reconstructed unreported income.
• Underdeclaration exceeded statutory thresholds, establishing probable cause.
Respondents’ Contentions
• Certiorari under Rule 65 was the wrong remedy.
• BIR failed to prove actual tax due and to identify the source of funds as required by RMO 15-95.
• The expenditure method ignored lifetime savings.
Procedural Consideration on Proper Remedy
While an appeal under Rule 45 is generally appropriate, certiorari under Rule 65 may lie where there is grave abuse of discretion—an arbitrary or despotic exercise of judgment—by the Executive Department in determining probable cause.
Legal Standards on Probable Cause and Tax Evasion
Probable cause for filing an information requires a well-founded belief that a crime has been committed. Tax evasion is complete upon willful filing of a fraudulent return with intent to evade tax; while no formal assessment is needed, proof that tax is due must be established. The expenditure method infers unreported income when expenditures exceed declared income and the source is unexplained.
Analysis of Income Reconstruction and Underdeclaration
BIR’s calculations showed unexplaine
...continue readingCase Syllabus (G.R. No. 197590)
Facts
- Antonio Villan Manly is a stockholder and Executive Vice-President of Standard Realty Corporation and operates a rental business; his spouse Ruby Ong Manly is a housewife.
- On April 27, 2005, the BIR issued Letter of Authority No. 2001 00012387 to audit the spouses’ tax liabilities for 2003 and prior years.
- A June 6, 2005 BIR letter demanded documentary proof of the spouses’ P17,511,010 cash purchase of a Tagaytay log cabin; they did not comply.
- A June 23, 2005 Joint Affidavit detailed declared compensation and rental profits for 1998–2003 and identified three cash acquisitions exceeding reported income.
- The three acquisitions were: a Tagaytay vacation house (P17,511,010 in 2000), a Toyota RAV4 (P1,350,000 in 2001), and a Toyota Prado (P2,000,000 in 2003).
- Because underdeclaration exceeded 30% of reported income for 2000, 2001, and 2003, the BIR considered it prima facie evidence of fraud under Section 248(B), NIRC, and recommended criminal charges under Sections 254 and 255, NIRC.
Procedural History
- Respondents filed a Joint Counter-Affidavit denying wrongdoing, alleging lifetime savings funded the purchases and noting no deficiency assessment was issued.
- The BIR submitted a Joint Reply-Affidavit; respondents thereafter filed a Joint Rejoinder-Affidavit.
- On August 31, 2006, the State Prosecutor found probable cause and recommended three counts each of violating Sections 254 and 255, NIRC, for taxable years 2000, 2001, and 2003. A motion for reconsideration was denied on November 29, 2007.
- Acting Justice Secretary Devanadera, in a July 27, 2009 Resolution, reversed the State Prosecutor’s findings—citing lack of specified tax due, deficiency assessment, and proof of intent—and directed withdrawal of the information. Reconsideration was denied on November 5, 2009.
- The BIR filed a Rule 65 petition for certiorari with the CA. On October 28, 2010, the CA dismissed it for lack of probable cause, holding that exact tax amounts and sources of undeclared income were not sufficiently alleged. The CA denied reconsideration on May 10, 2011.
- The BIR then elevated the case to the Supreme Court by another Rule 65 petition alleging grave abuse of discretion by the CA.
Issues
- Whether the CA gravely abused its discretion in requiring the BIR to allege the exact amount of tax due and to prove the source of undeclared income before finding probable cause.