Bureau of Internal Revenue vs. Court of Appeals

A prior deficiency tax assessment is not a condition sine qua non to a criminal prosecution for tax evasion, because the crime is complete once the violator knowingly and willfully files a fraudulent return with intent to evade tax; it suffices that the fact that a tax is due is first proved, and probable cause may be established through the expenditure method of reconstructing income.

Respondent Antonio Villan Manly is a stockholder and the Executive Vice-President of Standard Realty Corporation, a family-owned corporation, and is likewise engaged in the rental business; his spouse, respondent Ruby Ong Manly, is a housewife. The case arises from the BIR's investigation of the spouses' internal revenue tax liabilities for taxable year 2003 and prior years under the National Internal Revenue Code, as amended by Republic Act No. 8424 (Tax Reform Act of 1997). The statutory framework relevant to the dispute is supplied by Sections 254 and 255 of the NIRC, which penalize attempts to evade or defeat tax and the willful failure to supply correct and accurate information, respectively, and by Section 248(B), which treats a substantial underdeclaration exceeding thirty percent (30%) of declared income as prima facie evidence of a false or fraudulent return.

Respondent Antonio Villan Manly is a stockholder and the Executive Vice-President of Standard Realty Corporation, a family-owned corporation, and is also engaged in the rental business; his spouse, respondent Ruby Ong Manly, is a housewife. On April 27, 2005, the Bureau of Internal Revenue issued Letter of Authority No. 2001 00012387 authorizing its revenue officers to investigate the spouses' internal revenue tax liabilities for taxable year 2003 and prior years. On June 6, 2005, the BIR sent the spouses a letter requiring them to submit documentary evidence to substantiate the source of their cash purchase of a 256-square meter log cabin in Tagaytay City worth ₱17,511,010.00. The spouses failed to comply with the letter.

On June 23, 2005, the revenue officers executed a Joint Affidavit alleging that Antonio's reported or declared annual income for the taxable years 1998 to 2003 consisted of compensation income and net profit from his rental business, totaling ₱2,104,571.58 in combined sources of funds, with tax due or paid amounting to ₱380,824.21. Despite this modest income, the spouses were able to purchase in cash the following properties: (a) a luxurious vacation house in Tagaytay City valued at ₱17,511,010.00 in the year 2000, evidenced by a Deed of Absolute Sale dated October 24, 2000; (b) a Toyota RAV4 for ₱1,350,000.00 in the year 2001, evidenced by a Sales Invoice dated June 28, 2001; and (c) a Toyota Prado for ₱2,000,000.00 in 2003, evidenced by a Deed of Sale dated July 9, 2003. Because the spouses failed to show the source of their cash purchases, the revenue officers concluded that Antonio's income tax returns for taxable years 2000, 2001, and 2003 were underdeclared; and since the underdeclaration exceeded thirty percent (30%) of the reported or declared income, it was considered prima facie evidence of fraud with intent to evade the payment of proper taxes. The revenue officers thus recommended the filing of criminal cases against the spouses under Sections 254 and 255 in relation to Section 248(B) of Republic Act No. 8424, the National Internal Revenue Code.

In their Joint Counter-Affidavit, the spouses denied the accusations and alleged that they used their accumulated savings from their earnings for the past twenty-four years in purchasing the properties. They also contended that the criminal complaint should be dismissed because the BIR failed to issue a deficiency assessment against them. In response, the revenue officers executed a Joint Reply-Affidavit, and the spouses in turn executed a Joint Rejoinder-Affidavit. In the Reply-Affidavit, the revenue officers stated that they had asked Antonio whether they could proceed to his rented property to appraise the earning capacity of the building for lease or rent, but he declined the proposition; because of this refusal, the examiners took pictures of the subject property and concluded that the unexplained funds used to acquire the Tagaytay property came from the underdeclaration of rental income.

On August 31, 2006, State Prosecutor Ma. Cristina A. Montera-Barot issued a Resolution in I.S. No. 2005-573 recommending the filing of criminal charges against the spouses for three counts of violation of Section 254, three counts of violation of Section 255 for failure to supply correct and accurate information, and three counts of violation of Section 255 for failure to pay. The spouses moved for reconsideration, but the State Prosecutor denied the same in a Resolution dated November 29, 2007. On appeal to the Secretary of Justice, Acting Justice Secretary Agnes VST Devanadera reversed the State Prosecutor, finding no willful failure to pay or attempt to evade or defeat the tax on the part of the spouses because the BIR allegedly failed to specify the amount of tax due and the likely source of income from which the same was based, and because of the BIR's failure to issue a deficiency tax assessment, which she considered a prerequisite to the filing of a criminal case for tax evasion. The BIR sought reconsideration, but Acting Justice Secretary Devanadera denied the same in a Resolution dated November 5, 2009.

The BIR then filed a Petition for Certiorari with the Court of Appeals, imputing grave abuse of discretion on the part of Acting Justice Secretary Devanadera in finding no probable cause to indict the spouses. On October 28, 2010, the Court of Appeals rendered its Decision dismissing the Petition. Although it disagreed that an assessment is a condition sine qua non in filing a criminal case for tax evasion, the Court of Appeals nevertheless ruled that there was no probable cause to charge the spouses because the BIR allegedly failed to state their exact tax liability and to show sufficient proof of their likely source of income, adding that before one could be prosecuted for tax evasion, the fact that a tax is due must first be proved. The Court of Appeals likewise denied the BIR's Motion for Reconsideration in its Resolution dated May 10, 2011.

• No Prior Assessment Required: Petitioner contended that in filing a criminal case for tax evasion, a prior computation or assessment of tax is not required because the crime is complete when the violator knowingly and willfully filed a fraudulent return with intent to evade a part or all of the tax.
• Disproportionate Expenditure: Petitioner argued that an analysis of the spouses' income and expenditure showed that their cash expenditure was grossly disproportionate to their reported or declared income, leading it to believe that they underdeclared their income.
• Expenditure Method: Petitioner maintained that in computing the unreported or undeclared income, which was likely sourced from respondent Antonio's rental business, it used the expenditure method of reconstructing income—a method used to determine a taxpayer's income tax liability when his records are inadequate or inaccurate.
• Failure to Explain: Petitioner asserted that since the spouses failed to explain the alleged unreported or undeclared income, criminal charges for tax evasion should be filed against them.

• Wrong Remedy: Respondent spouses argued that the instant Petition should be dismissed because petitioner availed of the wrong remedy in filing a Petition for Certiorari under Rule 65 of the Rules of Court instead of a Petition for Review on Certiorari under Rule 45.
• No Grave Abuse of Discretion: Respondent spouses maintained that even if the Petition were given due course, it should still be dismissed because no grave abuse of discretion could be attributed to the Court of Appeals.
• Failure to Prove Tax Due: Respondent spouses argued that petitioner miserably failed to prove that a tax is actually due.
• Failure to Show Source of Income: Respondent spouses contended that petitioner failed to show the source of the alleged unreported or undeclared income as required by Revenue Memorandum Order No. 15-95, the Guidelines and Investigative Procedures in the Development of Tax Fraud Cases for Internal Revenue Officers.
• Disregard of Lifetime Savings: Respondent spouses claimed that the method used by petitioner completely ignored their lifetime savings because it was limited to the years 1998 to 2003.

• Exact Amount of Tax Due: Whether a categorical finding of the exact amount of tax due from the taxpayer must be specifically alleged before a criminal case for tax evasion may be filed.
• Likely Source of Income: Whether the BIR showed sufficient proof of a likely source of the spouses' income to support a finding of probable cause for tax evasion.

• Exact Amount of Tax Due: No. A prior deficiency assessment is not required in a criminal prosecution for tax evasion, the crime being complete upon the knowing and willful filing of a fraudulent return; the amount of tax due was in fact specifically alleged in the Complaint-Affidavit and the computation and method used were clearly explained.
• Likely Source of Income: Yes. The revenue officers identified respondent Antonio's rental business as the likely source of the unreported or undeclared income, and the expenditure method showed an underdeclaration exceeding thirty percent (30%) of reported income, which under Section 248(B) of the NIRC constitutes prima facie evidence of a false or fraudulent return.

• Exact Amount of Tax Due: Sections 254 and 255 of the NIRC penalize the willful attempt to evade or defeat tax and the willful failure to supply correct and accurate information. Under Ungab vs. Judge Cusi, Jr., tax evasion is deemed complete when the violator has knowingly and willfully filed a fraudulent return with intent to evade and defeat a part or all of the tax, and an assessment of the tax deficiency is not required in a criminal prosecution for tax evasion. Commissioner of Internal Revenue vs. Court of Appeals clarified, however, that although a deficiency assessment is not necessary, the fact that a tax is due must first be proved before one can be prosecuted for tax evasion. Applying these rules, the Court found that the amount of tax due from the spouses was specifically alleged in the Complaint-Affidavit, and the computation as well as the method used in determining the tax liability was clearly explained. The revenue officers likewise showed that the underdeclaration exceeded thirty percent (30%) of the reported or declared income. The Court thus rejected the Court of Appeals' contrary finding that the BIR failed to make a categorical finding of the exact amount of tax due.

• Likely Source of Income: The revenue officers identified the likely source of the unreported or undeclared income in their Reply-Affidavit, stating that the spouses were engaged in the rental business and that the net profit for six years before tax summed only to ₱1,238,938.32, an average of more or less ₱200,000.00 annually. When respondent Antonio declined the examiners' request to inspect the rented property to appraise its earning capacity, the examiners took pictures of the subject property and concluded that the unexplained funds used to acquire the Tagaytay property came from the underdeclaration of rental income. The Court held that the revenue officers thus considered respondent Antonio's rental business to be the likely source of the unreported or undeclared income due to his unjustified refusal to allow inspection. The spouses' defense that they had sufficient savings to purchase the properties remained self-serving since they had not yet presented any evidence to support it; absent evidence that the money used to buy the properties came from an existing fund, it was safe to assume that the money was income or a flow of wealth other than a mere return on capital, consistent with the basic concept that income denotes a flow of wealth during a definite period of time while capital is a fund or property existing at one distinct point in time. The manifest disparity between respondent Antonio's reported annual income and the spouses' cash acquisitions for 2000, 2001, and 2003 could not be ignored. The Court concluded that there was probable cause to indict the spouses for tax evasion because the BIR was able to show that a tax was due from them. Probable cause, for purposes of filing a criminal information, is defined as such facts as are sufficient to engender a well-founded belief that a crime has been committed, that the accused is probably guilty thereof, and that he should be held for trial; it does not require actual or absolute certainty, nor clear and convincing evidence of guilt, but only reasonable belief or probability that more likely than not a crime has been committed. In completely disregarding the evidence presented and in affirming the Acting Justice Secretary's ruling that no probable cause existed, the Court of Appeals committed grave abuse of discretion amounting to lack or excess of jurisdiction, warranting judicial review and an independent determination of probable cause. The Court stressed that it was only determining probable cause, and that whether the spouses were guilty of tax evasion was an issue to be resolved during trial where the quantum of proof required is proof beyond reasonable doubt.

• Tax Evasion as a Continuing Crime Completed Upon Filing of a Fraudulent Return — Tax evasion is deemed complete when the violator has knowingly and willfully filed a fraudulent return with intent to evade and defeat a part or all of the tax. Consequently, an assessment of the tax deficiency is not required in a criminal prosecution for tax evasion. The Court applied this doctrine in holding that the absence of a prior deficiency assessment did not bar the filing of criminal charges against the Manly spouses.
• Requirement That the Fact of Tax Due Be First Proved — Although a deficiency assessment is not necessary for a criminal prosecution for tax evasion, the fact that a tax is due must first be proved before one can be prosecuted. The Court found this requisite satisfied because the BIR specifically alleged the amount of tax due in the Complaint-Affidavit and clearly explained the computation and method used.
• Expenditure Method of Income Reconstruction — A method commonly used by the government to reconstruct a taxpayer's income by deducting the aggregate yearly expenditures from the declared yearly income. Its theory is that when the amount of money a taxpayer spends during a given year exceeds his reported or declared income and the source of such money is unexplained, it may be inferred that such expenditures represent unreported or undeclared income. The Court upheld the BIR's use of this method in establishing probable cause.
• Substantial Underdeclaration as Prima Facie Evidence of Fraud — Under Section 248(B) of the NIRC, a substantial underdeclaration of taxable income, defined as a failure to report income exceeding thirty percent (30%) of that declared per return, constitutes prima facie evidence of a false or fraudulent return. The Court relied on the revenue officers' showing that the underdeclaration exceeded thirty percent (30%) of the spouses' reported income.
• Probable Cause for Filing a Criminal Information — Such facts as are sufficient to engender a well-founded belief that a crime has been committed, that the accused is probably guilty thereof, and that he should be held for trial. It does not require actual or absolute certainty, nor clear and convincing evidence of guilt; it only requires reasonable belief or probability that more likely than not a crime has been committed by the accused. The Court applied this standard in finding probable cause to indict the spouses.
• Grave Abuse of Discretion — A capricious and whimsical exercise of judgment tantamount to lack or excess of jurisdiction, a blatant abuse of authority so grave and so severe as to deprive the court of its very power to dispense justice, or an exercise of power in an arbitrary and despotic manner, due to passion, prejudice, or personal hostility, so patent and gross as to amount to an evasion or to a unilateral refusal to perform the duty enjoined or to act in contemplation of the law. The Court found this standard met by the Court of Appeals' affirmance of the dismissal despite the existence of probable cause.
• Judicial Review of Probable Cause Determinations — Although the Court has consistently adopted a policy of non-interference in the conduct and determination of probable cause, which is exclusively within the competence of the Executive Department through the Secretary of Justice, judicial intrusion in the form of judicial review is allowed when there is proof that the Executive Department gravely abused its discretion in making its determination and in arriving at the conclusion it reached.
• Income Distinguished from Capital — Income denotes a flow of wealth during a definite period of time, while capital is a fund or property existing at one distinct point in time. The Court used this distinction to reject the spouses' claim that the funds used to purchase the properties came from an existing fund.

• "There is grave abuse of discretion when the determination of probable cause is exercised in an arbitrary or despotic manner, due to passion or personal hostility, so patent and gross as to amount to an evasion of a positive duty or a virtual refusal to perform a duty enjoined by law." — This opening passage states the standard of grave abuse of discretion that the Court applied in reviewing the Court of Appeals' affirmance of the dismissal of the criminal complaint.
• "Corollarily, an assessment of the tax deficiency is not required in a criminal prosecution for tax evasion." — This is the ratio decidendi on the first issue, establishing that the absence of a prior deficiency assessment does not bar a criminal prosecution for tax evasion.
• "However, in Commissioner of Internal Revenue v. Court of Appeals, we clarified that although a deficiency assessment is not necessary, the fact that a tax is due must first be proved before one can be prosecuted for tax evasion." — This passage qualifies the rule by imposing the requirement that the fact of tax due be proved, which the Court found satisfied in this case.
• "It bears stressing that the determination of probable cause does not require actual or absolute certainty, nor clear and convincing evidence of guilt; it only requires reasonable belief or probability that more likely than not a crime has been committed by the accused." — This excerpt defines the quantum of evidence for probable cause, a formulation frequently cited in subsequent jurisprudence on the standard for filing criminal informations.

• Ungab vs. Judge Cusi, Jr., 186 Phil. 604 (1980) — Controlling precedent holding that tax evasion is deemed complete when the violator has knowingly and willfully filed a fraudulent return with intent to evade and defeat a part or all of the tax, and that an assessment of the tax deficiency is not required in a criminal prosecution for tax evasion. The Court relied on this ruling to reject the requirement of a prior assessment.
• Commissioner of Internal Revenue vs. Court of Appeals, 327 Phil. 1 (1996) — Clarified that although a deficiency assessment is not necessary, the fact that a tax is due must first be proved before one can be prosecuted for tax evasion. The Court applied this qualification in finding that the BIR had sufficiently shown that a tax was due.
• Chamber of Real Estate and Builders' Associations, Inc. vs. Romulo, G.R. No. 160756, March 9, 2010 — Cited for the proposition that for income to be taxable, there must be a gain realized or received by the taxpayer not excluded by law or treaty from taxation, and for the distinction between income as a flow of wealth and capital as a fund existing at one distinct point in time.
• Li Yao vs. Collector of Internal Revenue, 119 Phil. 207 (1963) — Cited for the rule that the government is allowed to resort to all evidence or resources available to determine a taxpayer's income and to use methods to reconstruct his income.
• Collector of Internal Revenue vs. Jamir, 114 Phil. 650 (1962) — Cited in connection with the expenditure method of reconstructing a taxpayer's income by deducting the aggregate yearly expenditures from the declared yearly income.
• Advincula vs. Court of Appeals, 397 Phil. 641 (2000) — Cited for the definition of probable cause for purposes of filing a criminal information as such facts as are sufficient to engender a well-founded belief that a crime has been committed, that the accused is probably guilty thereof, and that he should be held for trial.
• Alberto vs. Court of Appeals, G.R. Nos. 182130 and 182132, June 19, 2013 — Cited for the rule that the determination of probable cause does not require actual or absolute certainty, nor clear and convincing evidence of guilt, but only reasonable belief or probability that more likely than not a crime has been committed.
• Aguilar vs. Department of Justice, G.R. No. 197522, September 11, 2013 — Cited for the rule that where there is grave abuse of discretion, the court may step in and proceed to make its own independent determination of probable cause, judicial review being allowed to ensure that the Executive Department acts within the permissible bounds of its authority.
• Elma vs. Jacobi, G.R. No. 155996, June 27, 2012 — Cited for the policy of non-interference in the conduct and determination of probable cause, which is exclusively within the competence of the Executive Department through the Secretary of Justice, and for the exception allowing judicial review upon proof of grave abuse of discretion.
• People vs. Lagos, G.R. No. 184658, March 6, 2013 — Cited for the definition of grave abuse of discretion as a capricious and whimsical exercise of judgment tantamount to lack or excess of jurisdiction.
• Spouses Chua vs. Ang, 614 Phil. 416 (2009) — Cited for the definition of grave abuse of discretion as an exercise of power in an arbitrary and despotic manner, due to passion, prejudice, or personal hostility, so patent and gross as to amount to an evasion or to a unilateral refusal to perform the duty enjoined or to act in contemplation of the law.

• Section 254, Republic Act No. 8424 (National Internal Revenue Code of 1997) — Penalizes any person who willfully attempts in any manner to evade or defeat any tax imposed under the Code or the payment thereof, with a fine of not less than ₱30,000.00 but not more than ₱100,000.00 and imprisonment of not less than two (2) years but not more than four (4) years. The Court cited this provision as one of the bases for the criminal charges recommended against the spouses.
• Section 255, Republic Act No. 8424 — Penalizes any person required under the Code or by rules and regulations to pay any tax, make a return, keep any record, or supply correct and accurate information, who willfully fails to do so, with a fine of not less than ₱10,000.00 and imprisonment of not less than one (1) year but not more than ten (10) years. The Court cited this provision as the other basis for the recommended criminal charges.
• Section 248(B), Republic Act No. 8424 — Provides that in case of willful neglect to file a return or in case a false or fraudulent return is willfully made, the penalty shall be fifty percent (50%) of the tax or deficiency tax; a substantial underdeclaration of taxable income, defined as a failure to report sales, receipts, or income exceeding thirty percent (30%) of that declared per return, constitutes prima facie evidence of a false or fraudulent return. The Court relied on this provision in finding that the underdeclaration exceeded thirty percent (30%) of the spouses' reported income.
• Rule 65, Rules of Court — Governs the Petition for Certiorari filed by the BIR, an original or independent action based on grave abuse of discretion amounting to lack or excess of jurisdiction. The Court held that while the remedy of appeal under Rule 45 is generally the proper recourse, exceptions exist, and the Petition was given due course because the Court of Appeals committed grave abuse of discretion.
• Rule 45, Rules of Court — Governs the Petition for Review on Certiorari, which is the remedy of a party aggrieved by a decision, final order, or resolution of the Court of Appeals and is a continuation of the appellate process over the original case. The Court discussed this rule in resolving the procedural issue raised by the spouses.
• Revenue Memorandum Order No. 15-95 — The Guidelines and Investigative Procedures in the Development of Tax Fraud Cases for Internal Revenue Officers, cited by the spouses for the requirement of showing the source of the alleged unreported or undeclared income. Its Annex "A" was also cited in connection with the expenditure method of reconstructing income.

• Justice Antonio T. Carpio (Chairperson)
• Justice Arturo D. Brion
• Justice Jose Catral Mendoza
• Justice Marvic M.V.F. Leonen