Title
Source: Supreme Court
Commissioner of Internal Revenue vs. Court of Appeals
Case
G.R. No. 119322
Decision Date
Jun 4, 1996
Fortune Tobacco contested tax reclassification, alleging due process violations; courts upheld injunctions pending final tax liability determination.

Case Summary (G.R. No. 119322)

Applicable Law and Jurisdiction

The proceedings are governed primarily under the 1987 Philippine Constitution and the National Internal Revenue Code (NIRC). Petitions for certiorari and prohibition were filed challenging the RTC’s issuance of the injunctions. The Court of Appeals, exercising original concurrent jurisdiction, affirmed the RTC’s rulings that the prosecutors did not have jurisdiction to continue the investigations pending a final determination of tax liabilities by the Commissioner of Internal Revenue and that constitutional rights of respondents may have been violated.

Definition and Standard of Grave Abuse of Discretion

The Court clarified that “grave abuse of discretion” refers to a capricious and whimsical exercise of judgment tantamount to lack or excess of jurisdiction. It must be evident, arbitrary, or despotic to an extent that evades positive legal duty or refuses to act within the law.

Facts Underlying the Tax Evasion Allegations

The President created a task force to investigate tax evasion schemes involving manufacturers selling products via dummy marketing corporations to evade correct tax payments. This Task Force, chaired by the Commissioner of Internal Revenue, scrutinized Fortune Tobacco Corporation's tax compliance for 1992. A Revenue Memorandum reclassified Fortune’s best-selling cigarettes as foreign brands, subjecting them to a higher tax rate. The Commissioner later assessed Fortune for deficiency income, ad valorem, and value-added taxes totaling approximately P7.7 billion.

Fortune challenged the reclassification and sought reconsideration of the assessments. Meanwhile, the Commissioner filed criminal complaints before the DOJ, alleging fraudulent tax evasion involving underdeclared gross sales through fictitious sales to non-existent individuals and dummy corporations to disguise actual taxable sales.

Private Respondents' Motions and Court Orders

Respondents filed a verified motion to dismiss or suspend preliminary investigations, arguing lack of jurisdiction, absence of evidence, violation of due process and equal protection, and premature filing of criminal complaints before a final tax liability determination. The prosecuting panel denied these motions and continued the investigation. Respondents then petitioned the RTC for certiorari and prohibition and sought preliminary injunctions to stop the investigations, which the RTC granted on multiple occasions. These orders enjoined preliminary investigations pending legal and factual resolution of tax liability and procedural regularity issues.

Regional Trial Court’s Rationale for Granting Injunctions

The RTC found:

  • The tax liability of Fortune for the years in question had not been finally determined by the Commissioner;
  • The “Daily Manufacturer’s Sworn Statements," critical evidence for the tax evasion allegation, were not produced by the petitioners;
  • The application of appropriate legal provisions (Section 127(b) vs. Section 142(c) of the NIRC) raised prejudicial questions not yet resolved;
  • The preliminary investigations and criminal complaints appeared premature and potentially violated constitutional rights, including due process and equal protection;
  • There was an appearance of overzealous and selective prosecution, as other cigarette manufacturers similarly situated were not subjected to criminal complaints despite comparable tax practices;
  • The prosecutors acted hastily in issuing subpoenas and denying motions without thorough study of voluminous evidence.

Court of Appeals’ Affirmance of RTC Decisions

The Court of Appeals upheld the RTC decisions, holding that:

  • The RTC did not commit grave abuse of discretion merely by issuing interlocutory writs of preliminary injunctions to protect respondents’ constitutional rights during ongoing investigations;
  • Errors in judgment or incorrect legal interpretations do not amount to grave abuse that would justify certiorari or prohibition;
  • The investigation had procedural irregularities warranting the protection of respondents through injunction;
  • The remedy available to the petitioners was to file an answer and appeal adverse trial court rulings rather than special civil actions prematurely;
  • The case was still pending, and the merits were to be decided after trial, preserving the orderly administration of justice without dismissing the criminal allegations.

Grounds for the Petition for Review to the Supreme Court

The petitioners contended:

  • There was no valid prejudicial or legal question to justify the suspension of the investigation;
  • Respondents’ constitutional rights to due process, equal protection, and presumption of innocence were not violated; rather, the State was denied due process;
  • Admission of supplemental petitions by the RTC was improper;
  • Selective prosecution allegations were unsubstantiated;
  • Factual allegations in the motion to dismiss should not be hypothetically admitted;
  • Issuance of writs of preliminary injunction were interlocutory and not final merits decisions.

Supreme Court Majority Decision

The Supreme Court, applying the 1987 Philippine Constitution, ruled to dismiss the petition, finding:

  • The preliminary investigation was premature insofar as a final tax liability assessment had not been issued and that a previous assessment of correct taxes due is necessary before criminal prosecution for tax evasion could proceed;
  • The registered wholesale price of cigarettes, approved and monitored closely by BIR officers, is presumed correct absent contrary evidence, so allegations of fraudulent underdeclaration are premature;
  • Fraud or willful attempt to evade taxes cannot be presumed; such serious charges require clear and convincing evidence, which was lacking at the stage of preliminary investigation;
  • The prosecutors acted with haste by issuing subpoenas one day after filing a voluminous complaint; denial of motions to produce critical documents and for inhibition warranted judicial intervention to protect constitutional rights;
  • Courts have recognized exceptions that permit injunctive relief to stop criminal prosecutions or investigations, particularly to prevent harassment, oppression, violation of constitutional rights, or where there is a prejudicial question pending resolution;
  • The RTC and Court of Appeals did not commit grave abuse of discretion in issuing the writs of preliminary injunction or denying motions to dismiss because their decisions aimed to protect constitutional rights during premature and potentially oppressive investigations;
  • Petitioners’ remedy lies in answering the petition and appealing unfavorable decisions rather than special civil actions for certiorari;
  • Certiorari and prohibition are narrow remedies limited to correcting jurisdictional defects, not as tools for correcting alleged procedural or factual errors;
  • The issues raised regarding tax classification, assessment validity, and possible fraud are better determined on full trial and cannot be foreclosed by interlocutory writs or early dismissal of the investigations.

Concurring and Dissenting Opinions

  • Justice Bellosillo concurred with the majority’s conclusion that the RTC did not commit grave abuse of discretion but dissented insofar as the Court accepted the existence of selective prosecution, emphasizing the prosecutorial discretion in deciding whom to prosecute absent bad faith or malice.
  • Justice Padilla dissented strongly, arguing the RTC committed grave abuse of discretion by stopping the investigations prematurely. He opined that prosecutors act within jurisdiction, that a prior final tax assessment is not a prerequisite for criminal prosecution of fraudulent tax evasion, citing the Ungab v. Cusi doctrine that criminal liability attaches upon willful fraudulent returns regardless of pending assessments. He maintained that preliminary investigations should not be enjoined except under extreme circumstances, which were not present, criticizing the majority for usurping prosecutorial functions and undermining public interest in combating massive tax evasion.
  • Justice Vitug also dissented, expressing concern about judicial interferen

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