Sze vs. Bureau of Internal Revenue

A petition is dismissed for being moot and academic when a supervening event renders the issue no longer justiciable, leaving no actual substantial relief that could be granted or negated by the dismissal. The final and executory dismissal of the criminal cases on the ground of prescription eliminated the need to resolve whether the Court of Appeals correctly found probable cause; an adjudication on the merits would serve no useful purpose.

The Bureau of Internal Revenue (BIR) issued Revenue Regulation 8-2001, establishing a Voluntary Assessment Program (VAP) that conferred audit priority privileges for taxable year 2000 and prior years under certain conditions. Chiat Sing Cardboard Corporation (Chiat Corp.) availed of the VAP for taxable years 1999 and 2000 and received a certificate of qualification. The BIR later conducted an examination of Chiat Corp.’s records after the corporation refused to present its accounting books despite successive notices. The investigation uncovered substantial underdeclarations of sales and income, unreported importations of raw materials, failure to withhold taxes on labor costs, and a deliberate misdeclaration of the taxable base. A deficiency tax assessment for 1999 and 2000 totaling ₱33,847,574.18 was issued and became final and executory. Criminal charges for tax evasion and fraud were subsequently filed against petitioners Imelda T. Sze, Sze Kou For, and Teresita A. Ng as responsible corporate officers.

• The Tax Assessment and Criminal Charges: Chiat Sing Cardboard Corporation availed of the BIR’s Voluntary Assessment Program for 1999 and 2000. Despite a Letter of Authority and subsequent notices, the corporation failed to present its accounting records. BIR’s investigation revealed that Chiat Corp. underdeclared sales by ₱160,588,321.63 (1999) and ₱113,578,182.69 (2000); underdeclared income; derived income from undeclared importations; failed to withhold taxes on ₱427,010,000.00 in claimed labor costs; and misdeclared its taxable base to evade payment of correct taxes, with a shortfall exceeding 30%. A Formal Letter of Demand and Final Assessment Notice were served on February 7, 2005, and the assessment of ₱33,847,574.18 became final and demandable for lack of protest. On May 19, 2005, the BIR charged petitioners Imelda T. Sze, Sze Kou For, and Teresita A. Ng with violation of multiple provisions of the National Internal Revenue Code of 1997 (NIRC).

• Defense of Petitioners: Petitioners denied the allegations, contending that there was no factual or legal basis for the charges; the filing was premature and violated due process; they did not receive the assessment notices; they were not responsible for the underdeclarations, misdeclarations, importations, or the preparation and filing of tax returns; Chiat Corp. had no assets to satisfy the assessed taxes; and the BIR merely presumed that raw materials were manufactured into final products and sold.

• Proceedings Before the State Prosecutor and DOJ: The State Prosecutor dismissed the complaint. The DOJ denied the BIR’s petition for review and subsequent motion for reconsideration, concluding that no probable cause existed.

• Court of Appeals Decision: The CA granted the BIR’s petition for certiorari, finding that the DOJ gravely abused its discretion by disregarding importation records from various government agencies that established probable cause for tax evasion. The CA noted that Chiat Corp. filed an application for business retirement shortly after availing of the VAP, a circumstance the CA considered suspicious and indicative of bad faith. The CA directed the DOJ to file the corresponding Informations.

• Supervening Dismissal by the CTA: Pursuant to the CA’s directive, Amended Informations in Criminal Case Nos. O-385 to O-392 were filed against petitioners before the CTA. On July 8, 2015, the CTA resolved the motion to quash and dismissed all cases on the ground of prescription. The CTA determined that the violations were deemed discovered on March 9, 2005 (30 days after service of the Final Assessment Notice), and the original Information was filed only on April 23, 2014—more than five years later—in violation of Section 281 of the NIRC. The CTA’s resolution became final and executory, and an entry of judgment was issued. No appeal or motion for reconsideration was filed by the public prosecutor.

• Mootness: Petitioners manifested before the Supreme Court that the CTA had already dismissed the criminal cases on prescription, and that this supervening event rendered the issue of the CA’s finding of probable cause moot and academic.

• Probable Cause: Petitioners maintained that the CA erred in finding probable cause for violation of the NIRC, as the State Prosecutor and the DOJ correctly determined that the evidence presented by the BIR was insufficient to establish a prima facie case. They argued that they did not receive the assessment notices, were not responsible for the tax returns or underdeclarations, and that the charges were premature and violative of due process.

• Probable Cause: The BIR argued that the CA correctly found probable cause because documentary evidence from the Department of Trade and Industry’s Bureau of Import Services, the BIR’s Audit Information Tax Exemption Incentive Division, and the Bureau of Customs’ Management Information System Technology Group showed deliberate underdeclaration, importation without proper reporting, and a pattern of misdeclaration that the DOJ ignored. The BIR maintained that the DOJ committed grave abuse of discretion in dismissing the complaint.

• Subsequent Acknowledgment: After the CTA dismissed the criminal cases, the BIR confirmed in its Manifestation and Comment that the DOJ had complied with the CA’s decision and filed the criminal Informations, and that the CTA had subsequently dismissed those cases on the ground of prescription.

• Probable Cause: Whether the Court of Appeals gravely abused its discretion in finding probable cause to charge petitioners with violation of the National Internal Revenue Code.

• Probable Cause: The issue of whether the CA erred in finding probable cause was rendered moot and academic by the supervening event of the CTA’s final and executory dismissal of the criminal cases on the ground of prescription. A case becomes moot and academic when it ceases to present a justiciable controversy because supervening events leave no practical value or use in an adjudication on the merits. There was no actual substantial relief that petitioners could obtain or that would be negated by the dismissal of the petition. The Court therefore abstained from passing upon the merits and dismissed the petition.

• Mootness Doctrine — A case or issue is moot and academic when supervening events extinguish the justiciable controversy, such that a declaration on the merits would be of no practical value or use. In such instances, courts generally decline jurisdiction and dismiss the case on the ground of mootness, because the judgment cannot be enforced and would serve no useful purpose. The Supreme Court applied this doctrine when the final and executory dismissal of the criminal cases on prescription removed any need to determine the correctness of the finding of probable cause.

• A case or issue is considered moot and academic when it ceases to present a justiciable controversy by virtue of supervening events, so that an adjudication of the case or a declaration on the issue would be of no practical value or use. In such instance, there is no actual substantial relief which a petitioner would be entitled to, and which would be negated by the dismissal of the petition. (Quoting Peñafrancia Sugar Mill, Inc. v. Sugar Regulatory Administration, 728 Phil. 535, 540 (2014))

• Peñafrancia Sugar Mill, Inc. v. Sugar Regulatory Administration, 728 Phil. 535 (2014) — Followed. The Court adopted the definition of a moot and academic case from this decision to justify the dismissal of the petition.

• Section 281, National Internal Revenue Code of 1997 (Republic Act No. 8424) — Prescribes a five-year period for violations of any provision of the Code, commencing from the day of the commission of the violation or, if not known at that time, from its discovery and the institution of judicial proceedings for investigation and punishment. The CTA applied this provision, read with Revenue Memorandum Circular 101-90, to determine that the original criminal Information was filed beyond the prescriptive period, resulting in the dismissal of the cases and the consequent mootness of the present petition.

Peralta, C.J. (Chairperson), Caguioa, J., and Lazaro-Javier, J. concurred. Lopez, J., was on official leave.

None.