Guialani vs. Court of Appeals

A settlement agreement reducing a taxpayer's deficiency local business tax constitutes a tax relief and a contract under Section 22(c) of the Local Government Code, requiring prior authorization from the Sanggunian before the local chief executive or local treasurer may validly execute it on behalf of the local government unit; failure to secure such authorization renders the executing official administratively liable for simple misconduct, but not grave misconduct absent proof of corruption, willful intent to violate the law, or flagrant disregard of established rules.

William Guialani, former Punong Barangay of Taglimao, Cagayan de Oro City, initiated the administrative complaint as a taxpayer and self-styled graft and corruption crusader. The respondents are Oscar S. Moreno, elected Mayor of Cagayan de Oro City in 2013, and Dr. Glenn C. Bañez, whom Moreno designated as Officer-in-Charge of the City Treasurer's Office. The dispute centers on the scope of authority delegated to local government officials under Republic Act No. 7160, the Local Government Code of 1991, specifically whether the power to assess, collect, and adjust local taxes includes the authority to enter into a compromise or settlement agreement with a taxpayer without prior approval from the Sangguniang Panlungsod. The Office of the Ombudsman, which initially found both respondents guilty of grave misconduct, and the Department of the Interior and Local Government, which was directed to implement the dismissal order, are also parties to the consolidated petitions.

After being elected Mayor of Cagayan de Oro City in 2013, Oscar Moreno designated Dr. Glenn Bañez as Officer-in-Charge of the City Treasurer's Office. Upon assumption of office, Bañez reviewed the records of tax payments of all business establishments in the city. On November 27, 2013, the City Treasurer's Office, through Bañez, issued a Notice of Assessment to Ajinomoto Philippines Corporation demanding payment of deficiency tax in the total amount of ₱2,924,428.34 for calendar years 2006 to 2012, which resulted from the reclassification of monosodium glutamate from an essential to a non-essential commodity.

Ajinomoto assailed the deficiency tax assessment and filed a Petition for Review against Cagayan de Oro City, through Mayor Moreno and the Office of the City Treasurer through OIC Bañez, docketed as Civil Case No. 2014-093 and assigned to the Regional Trial Court of Misamis Oriental, Branch 17. Ajinomoto protested the retroactive application of the reclassification and asserted that it should not be penalized for the erroneous classification made by the previous administration, nor should it be imposed surcharges considering that it was updated in its business tax payments. During pre-trial, the RTC referred the case to the Philippine Mediation Center. In the course of court-assisted mediation, Ajinomoto and the City Government, represented by Bañez as OIC City Treasurer, signed a Settlement Agreement whereby Ajinomoto agreed to dismiss its suit in exchange for a compromised tax assessment of ₱300,000.00, inclusive of increments such as interest and surcharges, as full settlement of the assessed local business tax for years 2006 to 2012. A Joint Motion to Dismiss was thereafter filed by Ajinomoto and the City Government, through Assistant Legal Officer Atty. Raymond Q. Villablanca, and the RTC approved the motion in an Order dated August 22, 2014.

On March 13, 2015, William Guialani, former Punong Barangay of Taglimao, Cagayan de Oro City, filed a Verified Complaint before the Office of the Ombudsman charging Moreno and Bañez with Grave Abuse of Authority, Grave Misconduct, and violation of Republic Act No. 6713. Guialani asserted that Bañez had no authority to enter into any tax compromise with Ajinomoto and that the settlement agreement could not be validly executed without the consent of the Sangguniang Panlungsod in the form of an ordinance, as required under the Local Government Code. He alleged that Moreno abused his authority when he induced Bañez and conspired with the latter to divert public funds for a purpose not approved by the Sanggunian. In their counter-affidavits, Bañez claimed that he found Ajinomoto's offer favorable after consulting with the City Government's lawyers and accepted the payment, arguing that he could not be made administratively liable because the settlement was initiated by the mediator and duly approved by the court. Moreno averred that he was not aware of the settlement agreement but was happy when he found out, considering that the City Government gained revenues and saved litigation costs.

The Office of the Ombudsman, in a Decision dated August 14, 2015, found both respondents guilty of Grave Misconduct and imposed the penalty of dismissal from service, including accessory penalties of cancellation of eligibility, forfeiture of retirement benefits, and perpetual disqualification for re-employment. The Ombudsman directed the DILG to implement the penalty within ten days. Respondents filed separate motions for reconsideration and, while awaiting resolution, filed petitions for certiorari under Rule 65 before the Court of Appeals praying for a TRO and/or writ of preliminary injunction to enjoin their dismissal. The CA issued a TRO on November 13, 2015, and subsequently granted the writ of preliminary injunction on January 11, 2016. After the Ombudsman denied their motions for reconsideration on February 15, 2016, respondents filed petitions for review under Rule 43 before the CA, which were consolidated with the Rule 65 petitions. On October 13, 2016, the CA reversed the Ombudsman's Decision, dismissing the administrative charges for lack of merit and dismissing the Rule 65 petitions as moot. The CA held that no prior Sanggunian approval was required because the settlement agreement was a continuation of the tax assessment, a purely local treasurer's function, and did not create new obligations for the city government. Guialani and the Office of the Ombudsman moved for reconsideration, which was denied on February 9, 2017, prompting the present consolidated petitions before the Supreme Court.

• Sanggunian Authorization Required: Guialani argued that the settlement agreement entered into by Bañez with Ajinomoto on behalf of the City Mayor needs the approval of the Sanggunian as required by Section 22(c) of the Local Government Code. He maintained that the settlement agreement is a contract within the definition of Quisumbing vs. Garcia because it created a juridical necessity or obligation on the part of the City Government to assess, demand, and collect the tax deficiency, and that Bañez could not validly enter into it without first securing Sanggunian approval.
• Moreno's Implied Approval: Guialani contended that Moreno impliedly approved the settlement agreement considering that he had direct supervision over Bañez and had impliedly consented to the latter's act after learning of the transaction, even if Moreno had no active participation and did not affix his signature on the agreement.
• Grave Misconduct: Guialani maintained that both respondents are guilty of grave misconduct and that their failure to secure Sanggunian approval on the settlement agreement is tantamount to intentional wrongdoing or deliberate violation of a rule of law or standard of behavior.
• Invalidity of CA Injunctive Reliefs: In G.R. Nos. 221253-54, Guialani assailed the issuance of the TRO and writ of preliminary injunction by the CA for being issued without or in excess of jurisdiction or with grave abuse of discretion, asserting that respondents had no clear and unmistakable right to the offices of City Mayor and City Treasurer as they had been legally removed, and that there was no material and substantial invasion of their rights nor irreparable damage to be prevented.
• Ombudsman's Position on Taxing Power: The Office of the Ombudsman argued that while the Local Government Code enumerates the powers of the local treasurer relating to assessment, collection, and adjustment of local taxes, the same is limited or regulated by the Sanggunian through appropriate ordinances. The Ombudsman maintained that only the Sangguniang Panlungsod has the power to impose taxes and grant tax exemptions, incentives, or reliefs through the enactment of ordinances, and that the local treasurer's power to "adjust" tax assessments is not unbridled but limited by tax rates and computations set out by law.

• Purely Executive Function: Respondents Moreno and Bañez contended before the CA that the settlement agreement was an exercise of a purely executive function — the assessment of local taxes — and therefore did not require Sanggunian authorization.
• Bañez's Good Faith: Bañez claimed that he found Ajinomoto's offer favorable after consulting with the City Government's lawyers, accepted the payment in check from Ajinomoto, and argued that he could not be made administratively liable because the settlement agreement was initiated by the mediator and was duly approved by the court.
• Moreno's Non-Participation: Moreno argued that he did not give Bañez authority to sign the settlement agreement on his behalf and became aware of it only after Bañez reported the outcome of the case. The execution of the settlement agreement and the Joint Motion to Dismiss did not show his participation, as his signatures did not appear therein, and thus there was no substantial evidence to hold him liable for grave misconduct. Respondents posited that the settlement agreement was the necessary consequence of the series of mediation conferences between Bañez and Ajinomoto after the tax assessment was disputed.

• Sanggunian Authorization: Whether the settlement agreement reducing Ajinomoto's tax deficiency from ₱2,924,428.34 to ₱300,000.00 required prior authorization from the Sangguniang Panlungsod of Cagayan de Oro City.
• Grave Misconduct of Bañez: Whether respondent Bañez is guilty of grave misconduct for executing the settlement agreement without prior Sanggunian authorization.
• Liability of Moreno: Whether respondent Moreno is administratively liable for the execution of the settlement agreement, whether by direct participation, authorization, or supervision over Bañez.
• Validity of CA Injunctive Reliefs: Whether the CA's issuance of a TRO and writ of preliminary injunction enjoining the DILG from enforcing the Ombudsman's dismissal order was issued without or in excess of jurisdiction or with grave abuse of discretion.

• Sanggunian Authorization: Yes. The settlement agreement constituted a tax relief under Section 192 and a contract under Section 22(c) of the Local Government Code, both of which require prior Sanggunian authorization through an ordinance duly approved.
• Grave Misconduct of Bañez: No, not grave misconduct. Bañez was found guilty only of simple misconduct, the elements of corruption, clear intent to violate the law, or flagrant disregard of established rules being absent. The penalty imposed was three months' suspension without pay.
• Liability of Moreno: No. The evidence was insufficient to establish Moreno's liability or culpability over the transaction, no proof having been adduced that he authorized, participated in, or supervised the execution of the settlement agreement.
• Validity of CA Injunctive Reliefs: Dismissed as moot and academic. The CA's issuance of the TRO and injunction was within its inherent powers, but the issue was no longer justiciable because the CA had already dismissed the Rule 65 petitions upon the filing of respondents' Rule 43 petitions.

• Sanggunian Authorization: The power to impose a tax, fee, or charge at the local level lies with the Sanggunian of the local government unit through the passage of ordinances, pursuant to Section 132 of the Local Government Code. This power is derived from Article X, Section 5 of the Constitution, which grants local government units the power to create their own sources of revenue and levy taxes, subject to guidelines and limitations prescribed by Congress. Corollary to the power to impose tax, the Sanggunian has the power to grant tax exemptions, incentives, or reliefs through ordinances duly approved under Section 192. The settlement agreement, which resulted in a substantial diminution of Ajinomoto's tax deficiency from ₱2,924,428.34 to ₱300,000.00, was in the nature of a tax relief and therefore required Sanggunian approval through an ordinance. The imposition of tax and the grant of tax reliefs are legislative functions and cannot be left to the discretion of the City Mayor or City Treasurer. To allow the latter to settle a tax deficiency unilaterally would make the agreement susceptible to corruption, as the amount of settlement would rest entirely on their discretion. The CA erred in ruling that no prior authorization was required. The CA relied on Sections 183 and 195 of the Local Government Code, which enumerate the local treasurer's powers to collect delinquent taxes and decide protests. However, Bañez failed to act on Ajinomoto's protest within 60 days, prompting Ajinomoto to appeal to the RTC. By his failure to decide the protest within the prescribed period, he was precluded from claiming a residual power to adjust the deficiency tax assessment arbitrarily or whimsically without legal justification. Moreover, the settlement agreement was a contract within the purview of Section 22(c), which requires prior Sanggunian authorization before the local chief executive may enter into contracts on behalf of the local government unit. A compromise or settlement agreement is a contract whereby the parties make reciprocal concessions to resolve their differences and put an end to litigation. The act of entering into the settlement agreement involved an obligation to demand and collect payment on the part of the City Government, binding the local government unit to new obligations within the definition in Quisumbing vs. Garcia. In California Manufacturing Co., Inc. vs. City of Las Piñas, the Court approved a compromise agreement that was validly executed with the required City Resolution authorizing the City Mayor and/or City Treasurer to accept the settlement offer — underscoring that prior Sanggunian authority should have been secured in the present case.

• Grave Misconduct of Bañez: In administrative cases, the quantum of proof required is substantial evidence — such relevant evidence as a reasonable mind may accept as adequate to support a conclusion. Misconduct generally means wrongful, improper, or unlawful conduct motivated by premeditated, obstinate, or intentional purpose, and must relate to the performance of official functions and duties. In grave misconduct, as distinguished from simple misconduct, the elements of corruption, clear intent to violate the law, or flagrant disregard of an established rule must be manifest. Corruption consists in the unlawful and wrongful use of one's station or character to procure some benefit for oneself or another, at the expense of the rights of others. Bañez was found administratively liable for disregarding the provision of the Local Government Code requiring prior Sanggunian authorization for contracts entered into on behalf of the local government unit. The law was intended to prevent abuse by the City Treasurer or City Mayor in assessing a taxpayer a deficiency tax only to adjust it unilaterally without legal basis or standard. However, since the elements of corruption, clear intent to violate the law, or flagrant disregard of established rules were indubitably absent, and there was no evidence that Bañez benefitted from the transaction, he was liable only for simple misconduct, classified as a less grave offense punishable by suspension for one month and one day to six months for the first offense. With no mitigating or aggravating circumstances appreciated, the medium penalty of three months' suspension without pay was imposed.

• Liability of Moreno: Guialani accused Moreno of authorizing Bañez to settle the tax deficiency and of conspirpiring with Bañez to divert public funds. However, no evidence was adduced to prove the allegation of diversion of public funds, nor were any overt acts shown tending to prove a conspiracy between Moreno and Bañez for that purpose. Moreno's supervision over Bañez was not a sufficient basis to hold him liable, as the power of supervision involves oversight of a subordinate to ensure that rules are followed, but the records were bereft of evidence that Bañez's act of executing the settlement agreement was under Moreno's supervision and instruction. Moreno's signature did not appear on the settlement agreement, nor was it established that he gave Bañez authority to sign on his behalf as chief executive. It must be clearly proven that by his acts Moreno sanctioned the execution of the settlement agreement; absent such proof, he could not be held accountable. The charges of grave abuse of authority and violation of R.A. No. 6713 were likewise dismissed for lack of substantial evidence.

• Validity of CA Injunctive Reliefs: The power of the CA to issue a restraining order or injunctive writ to enjoin orders issued by the Office of the Ombudsman is an inherent power incidental to its appellate jurisdiction, as explained in Carpio-Morales vs. Court of Appeals. The grant of appellate jurisdiction includes the power necessary to exercise it effectively, to make all orders that preserve the subject of the action, and to give effect to the final determination of the appeal. The CA, having jurisdiction to review decisions of the Office of the Ombudsman in administrative cases, necessarily has the inherent power to issue injunctive writs to protect its jurisdiction. Nevertheless, the issue of whether the CA properly issued the TRO and injunction was no longer justiciable because the CA had already dismissed the Rule 65 petitions on account of mootness, they having been superseded by respondents' filing of Rule 43 petitions which constituted the plain, speedy, and adequate remedy at law. An issue becomes moot and academic when it ceases to present a justiciable controversy, such that no actual substantial relief would be available to the petitioner.

• Tax Relief as Legislative Function — The power to impose taxes and the power to grant tax exemptions, incentives, or reliefs at the local level are legislative functions vested in the Sanggunian of the local government unit through the enactment of ordinances. These powers cannot be left to the discretion of the local chief executive or local treasurer. A settlement agreement that results in a substantial diminution or decrease of a taxpayer's deficiency is in the nature of a tax relief and must be duly approved by the Sanggunian through an ordinance.

• Compromise/Settlement Agreement as a Contract Under Section 22(c) — A compromise or settlement agreement is a contract whereby the parties make reciprocal concessions to resolve their differences and put an end to litigation. Under Section 22(c) of the Local Government Code, no contract may be entered into by the local chief executive on behalf of the local government unit without prior authorization by the Sanggunian concerned. A settlement agreement arising from a tax assessment dispute binds the local government unit to new obligations and therefore falls within the coverage of Section 22(c), requiring prior Sanggunian authorization.

• Grave Misconduct vs. Simple Misconduct — Misconduct is wrongful, improper, or unlawful conduct motivated by premeditated, obstinate, or intentional purpose, relating to the performance of official functions and duties. Grave misconduct is distinguished from simple misconduct by the presence of corruption, clear intent to violate the law, or flagrant disregard of an established rule. Corruption consists in the unlawful and wrongful use of one's station or character to procure some benefit for oneself or another, at the expense of the rights of others. Where these elements are absent and there is no evidence that the official benefitted from the transaction, only simple misconduct may be found.

• Supervision vs. Authorization — The power of supervision involves oversight of a subordinate to ensure that rules are followed. Mere supervisory authority over a subordinate, without evidence that the subordinate's act was undertaken under the supervisor's instruction or with the supervisor's authorization, is not sufficient basis to hold the supervisor administratively liable. It must be clearly proven by overt acts that the superior sanctioned the execution of the questioned act.

• Inherent Power of Appellate Courts to Issue Injunctive Reliefs — The grant of appellate jurisdiction includes the power necessary to exercise it effectively, to make all orders that preserve the subject of the action, and to give effect to the final determination of the appeal. A court endowed with a particular jurisdiction has powers necessary to enable it to act effectively within such jurisdiction, including the authority to issue provisional injunctive reliefs in aid of its appellate jurisdiction.

• "Since it effectively waives a part of the revenues belonging to the government, it must be done in accordance with law." — This passage articulates the fundamental rationale for requiring Sanggunian authorization in tax settlement agreements: because a compromise reduces government revenues, it must comply with statutory procedures to prevent abuse.

• "The imposition of tax and the grant of tax reliefs are legislative functions and as such, cannot be left to the discretion of the City Mayor or City Treasurer." — This statement defines the doctrinal boundary between legislative and executive functions in local taxation, establishing that tax relief through settlement is a legislative act requiring Sanggunian action.

• "Without any such authority, respondents Moreno and Bañez, on their own, have the power to settle a tax deficiency or enter into settlement agreements or compromise with a taxpayer. To do so would only make the agreement susceptible to corruption since the amount of settlement would rest entirely upon the discretion of the City Mayor or the City Treasurer." — This passage explains the policy behind requiring prior Sanggunian authorization: to prevent corruption by ensuring that the reduction of tax liabilities is governed by an ordinance rather than left to individual discretion.

• "By his failure to decide the protest, he is now precluded from claiming his residual power to adjust the deficiency tax assessment arbitrarily or whimsically without any legal justification." — This statement establishes that a local treasurer who fails to act on a taxpayer's protest within the 60-day period prescribed by Section 195 of the Local Government Code forfeits the authority to thereafter adjust the assessment unilaterally.

• Quisumbing vs. Garcia, 593 Phil. 655 (2008) — Followed. Defines "contracts" under Section 22(c) of the Local Government Code as those which bind the local government unit into new obligations, with their corresponding terms and conditions, for which the local chief executive needs prior authority from the Sanggunian. The Court applied this definition to hold that the settlement agreement was a contract requiring prior Sanggunian authorization.

• California Manufacturing Co., Inc. vs. City of Las Piñas, 608 Phil. 214 (2009) — Followed. The Court had approved a compromise agreement that was validly executed with the required City Resolution approving the compromise offer and authorizing the City Mayor and/or City Treasurer to accept the settlement. Used as a model for the proper procedure that should have been followed in the present case.

• Carpio-Morales vs. Court of Appeals, 772 Phil. 672 (2015) — Followed. Explained the power of the CA to issue provisional injunctive reliefs in aid of its appellate jurisdiction over decisions of the Office of the Ombudsman in administrative cases. The Court relied on this case to uphold the CA's inherent power to issue the TRO and injunction.

• Chu vs. Spouses Cunanan, 673 Phil. 12 (2011) — Cited for the definition of a compromise or settlement agreement as a contract whereby the parties make reciprocal concessions to resolve their differences and put an end to litigation.

• Film Development Council of the Philippines vs. Colon Heritage Realty Corporation, 760 Phil. 519 (2015) — Cited for the principle that the authority of local government units to create their own sources of revenue and levy taxes is not inherent and may be exercised only to the extent delegated by the Constitution or statute.

• Section 132, Republic Act No. 7160 (Local Government Code of 1991) — Provides that the power to impose a tax, fee, or charge or to generate revenue shall be exercised by the Sanggunian of the local government unit concerned through an appropriate ordinance. Applied to establish that the power to tax at the local level is a legislative function vested in the Sanggunian.

• Section 192, Republic Act No. 7160 — Provides that local government units may, through ordinances duly approved, grant tax exemptions, incentives, or reliefs under such terms and conditions as they may deem necessary. Applied to hold that the settlement agreement, which resulted in a substantial diminution of Ajinomoto's tax deficiency, was in the nature of a tax relief requiring Sanggunian approval through an ordinance.

• Section 22(c), Republic Act No. 7160 — Provides that no contract may be entered into by the local chief executive on behalf of the local government unit without prior authorization by the Sanggunian concerned. Applied to hold that the settlement agreement was a contract binding the local government unit to new obligations and therefore required prior Sanggunian authorization.

• Section 195, Republic Act No. 7160 — Governs the protest of assessment, giving the local treasurer the power to issue a notice of assessment and to decide a taxpayer's protest within 60 days by cancelling wholly or partially the assessment if the protest is found meritorious. The Court noted that Bañez failed to act on Ajinomoto's protest within the 60-day period, precluding him from claiming a residual power to adjust the assessment thereafter.

• Section 183, Republic Act No. 7160 — Authorizes the local government unit to enforce collection of delinquent taxes through judicial action, with the civil action to be filed by the local treasurer. Cited by the CA below, but the Supreme Court found it inapplicable to justify the settlement agreement without Sanggunian authority.

• Article X, Section 5, 1987 Constitution — Grants local government units the power to create their own sources of revenue and to levy taxes, fees, and charges, subject to such guidelines and limitations as Congress may provide. Applied as the constitutional source of the delegated taxing power of local government units.

Gesmundo, C.J., Caguioa, Zalameda, and Gaerlan, JJ., concurred.