CIR vs CA, Gr. No.

119322, June 4, 1996

FACTS:

On June 1, 1993, the President issued a Memorandum creating a Task Force to

investigate the tax liabilities of manufacturers engaged in tax evasion scheme, such as
selling products through dummy marketing corporations to avoid payment of correct
internal revenue tax, to collect from them any tax liabilities discovered from such
investigation, and to file the necessary criminal actions against those who may have
violated the tax code. The task force was composed of the Commissioner of Internal
Revenue as Chairman, a representative of the Department of Justice and a
representative of the Executive Secretary.
On July 1, 1993, the Commissioner of Internal Revenue issued a Revenue
Memorandum Circular No. 37-93 reclassifying best selling cigarettes bearing the brands
Hope, More, and Champion as cigarettes of foreign brands subject to a higher rate of
tax.
On August 3, 1993, respondent Fortune Tobacco Corporation (Fortune) questioned
the validity of the reclassification of said brands of cigarettes as violative of its right to
due process and equal protection of law. Parenthetically, on September 8, 1993, the
Court of Tax Appeals by resolution ruled that the reclassification made by the
Commissioner is of doubtful legality and enjoined its enforcement.
In a letter of August 13, 1993 which was received by Fortune on August 24, 1993,
the Commissioner assessed against Fortune the total amount of P7,685,942,221.66
representing deficiency income, ad valorem and value-added tax for the year 1992 with
the request that the said amount be paid within thirty (30) days upon receipt
thereof. Fortune on September 17, 1993 moved for reconsideration of the
4

assessments.
On September 7, 1993, the Commissioner of Internal Revenue filed a complaint
with the Department of Justice against respondent Fortune, its corporate officers, nine
(9) other corporations and their respective corporate officers for alleged fraudulent tax
evasion for supposed non-payment by Fortune of the correct amount of income tax, ad
valorem tax and value-added tax for the year 1992. The complaint alleged, among
others, that:
In the said income tax return Based mainly on documentary evidence submitted by
the taxpayer itself, these declarations are false and fraudulent because the correct
taxable income of the corporation for the said year, This underdeclaration which
resulted in the evasion of the amount of P723,773,759.79 as deficiency income tax for
the year 1992 is a violation of Section 45 of the Tax Code, penalized under
Section 253 in relation to Sections 252(b) and (d) and 253 thereof, thus: x x x.
Fortune Tobacco Corporation, through its Vice-President for Finance, Roxas Chua,
likewise filed value-added tax returns for the 1st, 2nd, 3rd and 4th quarters of 1992 with
the Rev. District Office of Marikina, Metro Manila, declaring therein gross taxable sales,
as follows:
 However, contrary to what have been reported in the said value-added tax returns,
and based on documentary evidence obtained from the taxpayer, the total actual
taxable sales of the corporation for the year 1992 amounted to P16,158,575,035.00
instead of P 11,929,322,334.52 as declared by the corporation in the said VAT returns.
These fraudulent under declarations which resulted in the evasion of value-added
taxes in the aggregate amount of P 1,169,688,645.63 for the entire year 1992 are
violations of Section 110 in relation to Section 100 of the Tax Code, which are likewise
penalized under the aforequoted Section 253, in relation to Section 252, thereof.
Sections 110 and 100 provide:
Furthermore, based on the corporations VAT returns, the corporation reported its
taxable sales for 1992 in the amount of P11,736,658,580. This declaration is likewise
false and fraudulent because based on the daily manufacturers sworn statements
submitted to the BIR by the taxpayer, As a result thereof, the corporation was able to
evade the payment of ad valorem taxes
The complaint docketed as I.S. No. 93-508, was referred to the Department of
Justice Task Force on revenue cases which found sufficient basis to further investigate
the allegations that Fortune, through fraudulent means, evaded payment of income tax,
ad valorem tax, and value-added tax for the year 1992 thus, depriving the government
of revenues in the amount of Seven and One-half (P7.5) Billion Pesos.
The fraudulent scheme allegedly adopted by private respondents consisted of
making fictitious and simulated sales of Fortunes cigarette products to non-existing
individuals and to entities incorporated and existing only for the purpose of such
fictitious sales by declaring registered wholesale prices with the BIR lower than
Fortunes actual wholesale prices which are required for determination of Fortunes
correct income, ad valorem, and value-added tax liabilities. The ghosts wholesale
buyers then ostensibly sold the products to customers and other wholesalers/retailers at
higher wholesale prices determined by Fortune. The tax returns and manufacturers
sworn statements filed by Fortune would then declare the fictitious sales it made to the
conduit corporators and non-existing individual buyers as its gross sales. 5

On September 8, 1993, the Department of Justice Task Force issued a subpoena

directing private respondents to submit their counter-affidavits not later than September
20, 1993.6

Instead of filing their counter-affidavits, the private respondents on October

15, 1993 filed a Verified Motion to Dismiss; Alternatively Motion to Suspend, based7

principally on the following grounds:

1. The complaint of petitioner Commissioner follows a pattern of prosecution against
private respondents in violation of their right to due process and equal protection of the
law.
2. Petitioner Commissioner and the Court of Tax Appeals have still to determine
Fortunes tax liability for 1992 in question; without any tax liability, there can be no tax
evasion.
 3. Exclusive jurisdiction to determine tax liability is vested in the Court of Tax
Appeals; therefore, the DOJ is without jurisdiction to conduct preliminary investigation.
4. The complaint of petitioner Commissioner is not supported by any evidence to
serve as adequate basis for the issuance of subpoena to private respondents and to put
them to their defense.
Upon reconvening, the panel of prosecutors denied the motion to dismiss and
treated the same as private respondents counter-affidavits. 8

On October 20, 1993, private respondents filed a motion for reconsideration of the
order of October 15, 1993. On October 21, 1993, private respondents filed a motion to
9

require the submission by the Bureau of Internal Revenue of certain documents in

further support of their Verified Motion to Dismiss. Among the documents sought to be
produced are the Daily Manufacturers Sworn Statements which according to petitioner
Commissioner in her complaint were submitted by Fortune to the BIR and which were
the basis of her conclusion that Fortunes tax declarations were false and fraudulent.
Fortune claimed that without the Daily Manufacturers Sworn Statements, there is no
evidence to support the complaint, hence, warranting its outright dismissal.
On October 26, 1993, private respondents moved for the inhibition of the State
Prosecutors assigned to the case for alleged lack of impartiality. Private respondents
10

also sought the production of the Daily Manufacturers Sworn Statements submitted by
certain cigarette companies similarly situated as Fortune but were not proceeded
against, thus, private respondents charged that Fortune and its officers were being
singled out for criminal prosecution which is discriminatory and in violation of the equal
protection clause of the Constitution.
On December 20, 1993, the panel of prosecutors issued an Omnibus
Order denying private respondents motion for reconsideration, motion for suspension
11

of investigation, motion to inhibit the State Prosecutors, and motion to require

submission by the BIR of certain documents to further support private respondents
motion to dismiss.
On January 4, 1994, private respondents filed a petition for certiorari and prohibition
with prayer for preliminary injunction with the Regional Trial Court, Branch 88, Quezon
City, docketed as Q-94-18790, praying that the complaint of the Commissioner of
Internal Revenue and the orders of the prosecutors in I.S. No. 93-508 be dismissed or
set aside, alternatively, the proceedings on the preliminary investigation be suspended
pending final determination by the Commissioner of Fortunes motion for
reconsideration/reinvestigation of the August 13, 1993 assessment of the taxes due. 12

On January 17, 1994, petitioners filed a motion to dismiss the petition on the
13

grounds that (a) the trial court is bereft of jurisdiction to enjoin a criminal prosecution
under preliminary investigation; (b) a criminal prosecution for tax fraud can proceed
independently of criminal or administrative action; (c) there is no prejudicial question to
justify suspension of the preliminary investigation; (d) private respondents rights to due
process was not violated; and (e) selective prosecution is not a valid defense in this
jurisdiction.
 . Petitioners responded by praying that their motion to dismiss the petition for
certiorari and prohibition be considered as their opposition to private respondents
application for the issuance of a writ of preliminary injunction.
On January 25, 1994, the trial court issued an order granting the prayer for the
issuance of a preliminary injunction. The trial court rationalized its order in this wise:
14

a) It is private respondents claim that the ad valorem tax for the year 1992 was
levied, assessed and collected by the BIR under Section 142(c) of the Tax Code on the
basis of the manufacturers registered wholesale price duly approved by the BIR.
Fortunes taxable sales for 1992 was in the amount of P11,736,658,580.00.
b) On the other hand, it is petitioners contention that Fortunes declaration was false
and fraudulent because, based on its daily manufacturers sworn statements submitted
to the BIR, its taxable sales in 1992 were P 16,686,372,295.00, as a result of which,
Fortune was able to evade the payment of ad valorem tax in the aggregate amount of
P5,792,479,816.24.
c) At the hearing for preliminary investigation, the Daily Manufacturers Sworn
Statements which, according to petitioners, were submitted to the BIR by private
respondents and made the basis of petitioner Commissioners complaint that the total
taxable sales of Fortune in 1992 amounted to P16,686,372, 295.00 were not produced
as part of the evidence for petitioners. In fact, private respondents had filed a motion to
require petitioner Commissioner to submit the aforesaid daily manufacturers sworn
statements before the DOJ panel of prosecutors to show that Fortunes actual taxable
sales totaled P16,686,373,295.00, but the motion was denied.
d) There is nothing on record in the preliminary investigation before the panel of
investigators which supports the allegation that Fortune made a fraudulent declaration
of its 1992 taxable sales.
e) Since, as alleged by private respondents, the ad valorem tax for the year 1992
should be based on the manufacturers registered wholesale price while, as claimed by
petitioners, the ad valorem taxes should be based on the wholesale price at which the
manufacturer sold the cigarettes, which is a legal issue as admitted by a BIR lawyer
during the hearing for preliminary injunction, the correct interpretation of the law
involved, which is Section 142(c) of the Tax Code, constitutes a prejudicial question
which must first be resolved before criminal proceedings for tax evasion may be
pursued. In other words, the BIR must first make a final determination, which it has not,
of Fortunes tax liability relative to its 1992 ad valorem, value-added and income taxes
before the taxpayer can be made liable for tax evasion.
f) There was a precipitate issuance by the panel of prosecutors of subpoenas to
private respondents, on the very day following the filing of the complaint with the DOJ
consisting of about 600 pages, and the precipitate denial by the panel of prosecutors,
after a recess of about twenty (20) minutes, of private respondents motion to dismiss,
consisting of one hundred and thirty-five (135) pages.
g) Private respondents had been especially targeted by the government for
prosecution. Prior to the filing of the complaint in I.S. No. 93-508, petitioner
Commissioner issued Revenue Memorandum Circular No. 37-93 reclassifying Fortunes
best selling cigarettes, namely Hope, More, and Champion as cigarettes bearing a
foreign brand, thereby imposing upon them a higher rate of tax that would price them
out of the market.
h) While in petitioner Commissioners letter of August 13, 1993, she gave Fortune a
period of thirty (30) days from receipt thereof within which to pay the alleged tax
deficiency assessments, she filed the criminal complaint for tax evasion before the
period lapsed.
i) Based on the foregoing, the criminal complaint against private respondents was
filed prematurely and in violation of their constitutional right to equal protection of the
laws.
On January 26, 1994, private respondents filed with the trial court a Motion to Admit
Supplemental Petition and sought the issuance of a writ of preliminary injunction to
enjoin the State Prosecutors from continuing with the preliminary investigation filed by
them against private respondents with the Quezon City Prosecutors Office, docketed as
I.S. 93-17942, for alleged fraudulent tax evasion, committed by private respondents for
the taxable year 1990. Private respondents averred in their motion that no supporting
documents or copies of the complaint were attached to the subpoena in I.S. 93-17942;
that the subpoena violates private respondents constitutional right to due process, equal
protection and presumption of innocence; that IS. 93-17942 is substantially the same as
I. S. 93-508; that no tax assessment has been issued by the Commission of Internal
Revenue and considering that taxes paid have not been challenged, no tax liability
exists; and that since Assistant City Prosecutor Baraquia was a former classmate of
Presidential Legal Counsel Antonio T. Carpio, the former cannot conduct the preliminary
investigation in an impartial manner.
On January 28, 1994, private respondents filed with the trial court a second
supplemental petition, also seeking to stay the preliminary investigation in I.S. 93-584,
15

which was the third complaint filed against private respondents with the DOJ for alleged
fraudulent tax evasion for the taxable year 1991.
On February 7, 1994, the trial court issued an order denying petitioners motion to
dismiss private respondents petition seeking to stay preliminary investigation in I.S. 93-
508, ruling that the issue of whether Sec. 127(b) of the National Tax Revenue Code
should be the basis of private respondents tax liability as contended by the Bureau of
Internal Revenue, or whether it is Section 142(c) of the same Code that applies, as
argued by herein private respondents, should first be settled before any complaint for
fraudulent tax evasion can be initiated.
17

On February 14, 1994, the trial court issued an order granting private respondents
petition for a supplemental writ of preliminary injunction, likewise enjoining the
preliminary investigation of the two (2) other complaints filed with the Quezon City
Prosecutors Office and the DOJ for fraudulent tax evasion, I.S. 93-17942 and I.S. 93-
584, for alleged tax evasion for the taxable years 1990 and 1991, respectively. In 18

granting the supplemental writ, the trial court stated that the two other complaints are
the same as in I.S. 93-508, except that the former refer to the taxable years 1990 and
1991.
On March 7, 1994, petitioners filed a petition for certiorari and prohibition with
prayer for preliminary injunction before this Court. However, the petition was referred to
the Court of Appeals for disposition by virtue of its original concurrent jurisdiction over
the petition.
On December 19, 1994, the Court of Appeals in CA-G.R. No. SP-33599 rendered a
decision denying the petition. The Court of Appeals ruled that the trial court committed
no grave abuse of discretion in ordering the issuance of writs of preliminary injunction
and in denying petitioners motion to dismiss. In upholding the reasons and conclusions
given by the trial court in its orders for the issuance of the questioned writs, the Court of
Appeals said in part:
In making such conclusion the respondent Court must have understood from herein
petitioner Commissioners letter-complaint of 14 pages (pp. 477-490, rollo of this case)
and the joint affidavit of eight revenue officers of 17 pages attached thereto (pp. 491-
507, supra) and its annexes (pp. 508-1077, supra) , that the charge against herein
respondents is for tax evasion for non-payment by herein respondent Fortune of the
correct amounts of income tax, ad valorem tax and value added tax, not necessarily
fraudulent tax evasion. Hence, the need for previous assessment of the correct amount
by herein petitioner Commissioner before herein respondents may be charged
criminally. Certiorari will not be issued to cure errors in proceedings or correct erroneous
conclusions of law or fact. As long as a Court acts within its jurisdiction, any alleged
error committed in the exercise of its jurisdiction, will amount to nothing more than
errors of judgment which are reviewable by timely appeal and not by a special civil
action of certiorari (Santos, Jr. vs. Court of Appeals, 152 SCRA 378; Gold City
Integrated Port Services, Inc. vs. Intermediate Appellate Court, 171 SCRA 579).
Grave abuse of discretion as a ground for issuance of writs of certiorari and
prohibition implies capricious and whimsical exercise of judgment as is equivalent to
lack of jurisdiction, or where the power is exercised in an arbitrary or despotic manner
by reason of passion, prejudice, or personal hostility, amounting to an evasion of
positive duty or to a virtual refusal to perform the duty enjoined, or to act at all in
contemplation of law (Confederation of Citizens Labor Union vs. NLRC, 60 SCRA 84;
Bustamante vs. Commission on Audit, 216 SCRA 134). For such writs to lie, there must
be capricious, arbitrary and whimsical exercise of power, the very antithesis of the
judicial prerogative in accordance with centuries of both civil law and common law
traditions (Young vs. Sulit, 162 SCRA 659, 664; FCC vs. IAC, 166 SCRA 155;
Purefoods Corp. vs. NLRC, 171 SCRA 45). Certiorari and prohibition are remedies
narrow in scope and inflexible in character. They are not general utility tools in the legal
workshop (Vda. de Guia vs. Veloso, 158 SCRA 340, 344). Their function is but limited to
correction of defects of jurisdiction solely, not to be used for any other purpose (Garcia
vs. Ranada, 166 SCRA 9), such as to cure errors in proceedings or to correct erroneous
conclusions of law or fact (Gold City Integrated Ports Services vs. IAC, 171 SCRA 579).
Due regard for the foregoing teachings enunciated in the decisions cited can not bring
about a decision other than what has been reached herein.
 Needless to say, the case before the respondent court involving those against
herein respondents for alleged non-payment of the correct amounts due as income tax,
ad valorem tax and value added tax for the years 1990, 1991 and 1992 (Civil Case
No. Q-94-18790) is not ended by this decision.
The respondent Court is still to try the case and decide it on the merits. All that is
decided here is but the validity of the orders of the respondent Court granting herein
respondents application for preliminary injunction and denying herein petitioners motion
to dismiss. If upon the facts established after trial and the applicable law, dissolution of
the writ of preliminary injunction allowed to be issued by the respondent Court is called
for and a judgment favorable to herein petitioners is demanded, the respondent Court is
duty bound to render judgment accordingly.
WHEREFORE, the instant petition for certiorari and prohibition with application for
issuance of restraining order and writ of preliminary injunction is DISMISSED. Costs de
officio.
19

Their motion for reconsideration having been denied by respondent appellate court
on February 23, 1995, petitioners filed the present petition for review based on the
following grounds:

THE RESPONDENT COURTS COMMITTED GRAVE ABUSE OF DISCRETION

AMOUNTING TO LACK OR EXCESS OFJURISDICTION IN HOLDING THAT:

I. THERE IS A PREJUDICIAL AND/OR LEGAL QUESTION TO JUSTIFY THE

SUSPENSION OF THE PRELIMINARY INVESTIGATION.
II. PRIVATE RESPONDENTS RIGHTS TO DUE PROCESS, EQUAL PROTECTION
AND PRESUMPTION OF INNOCENCE WERE VIOLATED; ON THE CONTRARY,
THE STATE ITSELF WAS DEPRIVED OF DUE PROCESS.
III. THE ADMISSION OF PRIVATE RESPONDENTS SUPPLEMENTAL PETITIONS
WERE PROPER.
IV. THERE WAS SELECTIVE PROSECUTION.
V. THE FACTUAL ALLEGATIONS IN THE PETITION ARE HYPOTHETICALLY
ADMITTED IN A MOTION TO DISMISS BASED ON JURISDICTIONAL GROUNDS.
VI. THE ISSUANCE OF THE WRITS OF INJUNCTION IS NOT A DECISION ON THE
MERITS OF THE PETITION BEFORE THE LOWER COURT.20

HELD:
The petition is bereft of merit.
In essence, the complaints in I.S. Nos. 93-508, 93-584 and 93-17942 charged
private respondents with fraudulent tax evasion or wilfully attempting to evade or defeat
payment of income tax, ad valorem tax and value-added tax for the year 1992, as well
as for the years 1990-1991.
 The pertinent provisions of law involved are Sections 127(b) and 142(c) of the
National Internal Revenue Code which state:
Sec. 127.xxx
(b) Determination of gross selling price of goods subject to ad valorem tax.
-Unless otherwise provided, the price, excluding the value-added tax, at which the
goods are sold at wholesale in the place of production or through their sales agents to
the public shall constitute the gross selling price. If the manufacturer also sells or allows
such goods to be sold at wholesale price in another establishment of which he is the
owner or in the profits at which he has an interest, the wholesale price in such
establishment shall constitute the gross selling price. Should such price be less than the
costs of manufacture plus expenses incurred until the goods are finally sold, then a
proportionate margin of profit, not less than 10% of such manufacturing costs and
expenses, shall be added to constitute the gross selling price.
Sec. 142.xxx
(c) Cigarettes packed in twenties. There shall be levied, assessed and collected
on cigarettes packed in twenties an ad valorem tax at the rates prescribed below based
on the manufacturers registered wholesale price:
xxx xxx xxx
Private respondents contend that per Fortunes VAT returns, correct taxable sales
for 1992 was in the amount of P11,736,658,580.00 which was the manufacturers
registered wholesale price in accordance with Section 142(c) of the Tax Code and paid
the amount of P4,805,254,523 as ad valorem tax.
On the other hand, petitioners allege, as specifically worded in the complaint in I.S.
No. 93 -508, that based on the daily manufacturers sworn statements submitted to the
BIR by the Taxpayer (Fortunes) total taxable sales during the year 1992 is
P16,686,372,295.00, as a result of which Fortune was able to evade the payment of ad
valorem taxes in the aggregate amount of P5,792,479,816.24 xxx.
Petitioners now argue that Section 127(b) lays down the rule that in determining the
gross selling price of goods subject to ad valorem tax, it is the price, excluding the
value-added tax, at which the goods are sold at wholesale price in the place of
production or through their sales agents to the public. The registered wholesale price
shall then be used for computing the ad valorem tax which is imposable upon removal
of the taxable goods from the place of production. However, petitioners claim that
Fortune used the manufacturers registered wholesale price in selling the goods to
alleged fictitious individuals and dummy corporations for the purpose of evading the
payment of the correct ad valorem tax.
There can be no question that under Section 127(b), the ad valorem tax should be
based on the correct price excluding the value-added tax, at which goods are sold at
wholesale in the place of production. It is significant to note that among the goods
subject to ad valorem tax, the law specifically Section 142(c) requires that the
corresponding tax on cigarettes shall be levied, assessed and collected at the rates
based on the manufacturers registered wholesale price. Why does the wholesale price
need to be registered and what is the purpose of the registration? The reason is self-
evident, which is to ensure the payment of the correct taxes by the manufacturers of
cigarettes through close supervision, monitoring and checking of the business
operations of the cigarette companies. As pointed out by private respondents, no
industry is as intensely supervised by the BIR and also by the National Tobacco
Administration (NTA). Thus, the purchase and use of raw materials are subject to prior
authorization and approval by the NTA. Importations of bobbins or cigarette paper, the
manufacture, sale, and utilization of the same, are subject to BIR supervision and
approval 21

Moreover, as pointed to by private respondents, for purposes of closer supervision

by the BIR over the production of cigarettes, Revenue Enforcement Officers are detailed
on a 24-hour basis in the premises of the manufacturer to secure production and
removal of finished products. Composite Mobile Teams conduct counter-security on the
business operations as well as the performance of the Revenue Enforcement Officers
detailed thereat. Every transfer of any raw material is not allowed unless, in addition to
the required permits, accompanied by Revenue Enforcement Officer. For the purpose of
determining the Manufacturers Registered Wholesale Price a cigarette manufacturer is
required to file a Manufacturers Declaration (BIR Form No. 31.03) for each brand of
cigarette manufactured, stating: a.) Materials; b) Labor; c) Overhead; d) Tax Burden and
the Wholesale Price by Case. The data submitted therewith is verified by the Revenue
Officers and approved by the Commission of Internal Revenue. Any change in the
manufacturers registered wholesale price of any brand cannot be effected without
submitting the corresponding Sworn Manufacturers Declaration and verified by the
Revenue Officer and approved by the Commissioner on Internal Revenue. The amount
22

of ad valorem tax payments together with the Payment Order and Confirmation Receipt
Nos. must be indicated in the sales and delivery invoices and together with the
Manufacturers Sworn Declarations on (a) the quantity of raw materials used during the
days operations; (b) the total quantity produced according to brand; and (c) the
corresponding quantity removed during the day, the corresponding wholesale price
thereof, and the VAT paid thereon must be presented to the corresponding BIR
representative for authentication before removal.
Thus, as observed by the trial court in its order of January 25, 1994 granting private
respondents prayer for the issuance of a writ of preliminary injunction, Fortunes
registered wholesale price (was) duly approved by the BIR, which fact is not disputed by
petitioners.
Now, if every step in the production of cigarettes was closely monitored and
supervised by the BIR personnel specifically assigned to Fortunes premises, and
considering that the Manufacturers Sworn Declarations on the data required to be
submitted by the manufacturer were scrutinized and verified by the BIR and, further,
since the manufacturers wholesale price was duly approved by the BIR, then it is
presumed that such registered wholesale price is the same as, or approximates the
price, excluding the value-added tax, at which the goods are sold at wholesale in the
place production, otherwise, the BIR would not have approved the registered wholesale
price of the goods for purposes of imposing the ad valorem tax due. In such case, and
in the absence of contrary evidence, it was precipitate and premature to conclude that
private respondents made fraudulent returns or wilfully attempted to evade payment of
taxes due. Wilful means premeditated; malicious; done with intent, or with bad motive or
purpose, or with indifference to the natural consequence x x x Fraud in its general
24

sense, is deemed to comprise anything calculated to deceive, including all acts,

omissions, and concealment involving a breach of legal or equitable duty, trust or
confidence justly reposed, resulting in the damage to another, or by which an undue and
unconscionable advantage taken of another. 25

Fraud cannot be presumed. If there was fraud or wilful attempt to evade payment of
ad valorem taxes by private respondents through the manipulation of the registered
wholesale price of the cigarettes, it must have been with the connivance or cooperation
of certain BIR officials and employees who supervised and monitored Fortunes
production activities to see to it that the correct taxes were paid. But there is no
allegation, much less evidence, of BIR personnels malfeasance. In the very least, there
is the presumption that the BIR personnel performed their duties in the regular course in
ensuring that the correct taxes were paid by Fortune. 26

It is the opinion of both the trial court and respondent Court of Appeals, that before
Fortune and the other private respondents could be prosecuted for tax evasion under
Sections 253 and 255 of the Tax Code, the fact that the deficiency income, ad valorem
and value-added taxes were due from Fortune for the year 1992 should first be
established. Fortune received from the Commissioner of Internal Revenue the
deficiency assessment notices in the total amount of P7,685,942,221.06 on August 24,
1993. However, under Section 229 of the Tax Code, the taxpayer has the right to move
for reconsideration of the assessment issued by the Commissioner of Internal Revenue
within thirty (30) days from receipt of the assessment; and if the motion for
reconsideration is denied, it may appeal to the Court of Appeals within thirty (30) days
from receipt of the Commissioners decision. Here, Fortune received the Commissioners
assessment notice dated August 13, 1993 on August 24, 1993 asking for the payment of
the deficiency taxes. Within thirty (30) days from receipt thereof, Fortune moved for
reconsideration. The Commissioner has not resolved the request for reconsideration up
to the present.
We share with the view of both the trial court and Court of Appeals that before the
tax liabilities of Fortune are first finally determined, it cannot be correctly asserted that
private respondents have willfully attempted to evade or defeat the taxes sought to be
collected from Fortune. In plain words, before one is prosecuted for willful attempt to
evade or defeat any tax under Sections 253 and 255 of the Tax Code, the fact that a tax
is due must first be proved.
Suppose the Commissioner eventually resolves Fortunes motion for reconsideration
of the assessments by pronouncing that the taxpayer is not liable for any deficiency
assessment, then, the criminal complaints filed against private respondents will have no
leg to stand on.
In view of the foregoing reasons, we cannot subscribe to the petitioners thesis
citing, Ungad v. Cusi, that the lack of a final determination of Fortunes exact or correct
27

tax liability is not a bar to criminal prosecution, and that while a precise computation and
assessment is required for a civil action to collect tax deficiencies, the Tax Code does
not require such computation and assessment prior to criminal prosecution.
Reading Ungad carefully, the pronouncement therein that deficiency assessment is
not necessary prior to prosecution is pointedly and deliberately qualified by the Court
with following statement quoted from Guzik v. U.S.: The crime is complete when the
28

violator has knowingly and wilfully filed a fraudulent return with intent to evade and
defeat a part or all of the tax. In plain words, for criminal prosecution to proceed before
assessment, there must be a prima.facie showing of a wilful attempt to evade taxes.
There was a wilful attempt to evade tax in Ungad because of the taxpayers failure to
declare in his income tax return his income derived from banana saplings. In the mind of
the trial court and the Court of Appeals, Fortunes situation is quite apart factually since
the registered wholesale price of the goods, approved by the BIR, is presumed to be the
actual wholesale price, therefore, not fraudulent and unless and until the BIR has made
a final determination of what is supposed to be the correct taxes, the taxpayer should
not be placed in the crucible of criminal prosecution. Herein lies a whale of difference
between Ungad and the case at bar.
This brings us to the erroneous disquisition that private respondents recourse to the
trial court by way of special civil action of certiorari and prohibition was improper
because:
a) the proceedings before the state prosecutors (preliminary injunction) were far from
terminated private respondents were merely subpoenaed and asked to submit counter
affidavits, matters that they should have appealed to the Secretary of Justice; b) it is
only after the submission of private respondents counter affidavits that the prosecutors
will determine whether or not there is enough evidence to file in court criminal charges
for fraudulent tax evasion against private respondents; and c) the proper procedure is to
allow the prosecutors to conduct and finish the preliminary investigation and to render a
resolution, after which the aggrieved party can appeal the resolution to the Secretary of
Justice.
We disagree.
As a general rule, criminal prosecutions cannot be enjoined: However, there are
recognized exceptions which, as summarized in Brocka v. Enrile are:
29

a. To afford adequate protection to the constitutional rights of the accused (Hernandez

vs. Albano, et al., L-19272, January 25, 1967, 19 SCRA 95);

b. When necessary for the orderly administration of justice or to avoid oppression or

multiplicity of actions (Dimayuga, et al. vs. Fernandez, 43 Phil. 304;
Hernandez vs. Albano, supra; Fortun vs. Labang, et al., L-38383, May 27, 1981, 104
SCRA 607);

c. When there is a prejudicial question which is sub judice (De Leon vs. Mabanag, 70
Phil. 202);
d. When the acts of the officer are without or in excess of authority (Planas vs. Gil, 67
Phil. 62);

e. Where the prosecution is under an invalid law, ordinance or regulation

(Young vs. Rafferty, 33 Phil. 556; Yu Cong Eng vs. Trinidad, 47 Phil. 385, 389);

f. When double jeopardy is clearly apparent (Sangalang vs. People and Alvendia, 109
Phil. 1140);

g. Where the court had no jurisdiction over the offense (Lopez vs. City Judge, L-
25795, October 29, 1966, 18 SCRA 616);

h. Where it is a case of persecution rather than prosecution (Rustia vs. Ocampo, CA-
G.R. No. 4760, March 25, 1960);

i. Where the charges are manifestly false and motivated by the lust for vengeance
(Recto vs. Castelo, 18 L.J., cited in Rano vs. Alvenia, CA-G.R. No. 30720-R, October
8, 1962; Cf. Guingona, et al. vs. City Fiscal, L-60033, April 4, 1984, 128 SCRA 577);
and

j. When there is clearly no prima facie case against the accused and a motion to quash
on that ground has been denied (Salonga vs. Pano, et al., L-59524, February 18, 1985,
134 SCRA 438).

In issuing the questioned orders granting the issuance of a writ of preliminary

injunction, the trial court believed that said orders were warranted to afford private
respondents adequate protection of their constitutional rights, particularly in reference to
presumption of innocence, due process and equal protection of the laws. The trial court
also found merit in private respondents contention that preliminary injunction should be
issued to avoid oppression and because the acts of the state prosecutors were without
or in excess of authority and for the reason that there was a prejudicial question.
Contrary to petitioners submission, preliminary investigation may be enjoined where
exceptional circumstances so warrant. In Hernandez v. Albano and Fortun v.30

Labang, injunction was issued to enjoin a preliminary investigation. In the case at bar,
31

private respondents filed a motion to dismiss the complaint against them before the
prosecution and alternatively, to suspend the preliminary investigation on the grounds
cited hereinbefore, one of which is that the complaint of the Commissioner is not
supported by any evidence to serve as adequate basis for the issuance of the subpoena
to them and put them to their defense.
Indeed, the purpose of a preliminary injunction is to secure the innocent against
hasty, malicious and oppressive prosecution and to protect him from an open and public
accusation of crime, from the trouble, expense and anxiety of a public trial and also to
protect the state from useless and expensive trials. Thus, the pertinent provisions of
32

Rule 112 of the Rules of Court state:

SECTION. 3. Procedure. Except as provided for in Section 7 hereof, no complaint
or information for an offense cognizable by the Regional Trial Court shall be filed without
a preliminary investigation having been first conducted in the following manner:
(a) The complaint shall state the known address of the respondent and be
accompanied by affidavits of the complainant and his witnesses as well as other
supporting documents, in such number of copies as there are respondents, plus two (2)
copies for the official file. The said affidavits shall be sworn to before any fiscal, state
prosecutor or government official authorized to administer oath, or, in their absence or
unavailability, a notary public, who must certify that he personally examined the affiants
and that he is satisfied that they voluntarily executed and understood their affidavits.
(b) Within ten (10) days after the filing of the complaint, the investigating officer shall
either dismiss the same if he finds no ground to continue with the inquiry, or issue a
subpoena to the respondent, attaching thereto a copy of the complaint, affidavits and
other supporting documents. Within ten (10) days from receipt thereof, the respondent
shall submit counter-affidavits and other supporting documents. He shall have the right
to examine all other evidence submitted by the complainant.
(c) Such counter-affidavits and other supporting evidence submitted by the
respondent shall also be sworn to and certified as prescribed in paragraph (a) hereof
and copies thereof shall be furnished by him to the complainant.
(d) If the respondent cannot be subpoenaed, or if subpoenaed, does not submit
counter-affidavits within the ten (10) day period, the investigating officer shall base his
resolution on the evidence presented by the complainant.
(e) If the investigating officer believes that there are matters to be clarified, he may
set a hearing to propound clarificatory questions to the parties or their witnesses, during
which the parties shall be afforded an opportunity to be present but without the right to
examine or cross-examine. If the parties so desire, they may submit questions to the
investigating officer which the latter may propound to the parties or witnesses
concerned.
(f) Thereafter, the investigation shall be deemed concluded, and the investigating
officer shall resolve the case within ten (10) days therefrom. Upon the evidence thus
adduced, the investigating officer shall determine whether or not there is sufficient
ground to hold the respondent for trial.
As found by the Court of Appeals, there was obvious haste by which the subpoena
was issued to private respondents, just the day after the complaint was filed, hence,
without the investigating prosecutors being afforded material time to examine and study
the voluminous documents appended to the complaint for them to determine if
preliminary investigation should be conducted. The Court of Appeals further added that
the precipitate haste in the issuance of the subpoena justified private respondents
misgivings regarding the objectivity and neutrality of the prosecutors in the conduct of
the preliminary investigation and so, the appellate court concluded, the grant of
preliminary investigation by the trial court to afford adequate protection to private
respondents constitutional rights and to avoid oppression does not constitute grave
abuse of discretion amounting to lack of jurisdiction.
The complaint filed by the Commissioner on Internal Revenue states itself that the
primary evidence establishing the falsity of the declared taxable sales in 1992 in the
amount of P 11,736,658,580.00 were the Daily Manufacturers Sworn Statements
submitted by the taxpayer which would show that the total taxable sales in 1992 are in
the amount of P 16,686,372,295.00. However, the Commissioner did not present the
Daily Manufacturers Sworn Statements supposedly submitted to the BIR by the
taxpayer, prompting private respondents to move for their production in order to verify
the basis of petitioners computation. Still, the Commissioner failed to produce the
declarations. In Borja v. Moreno, it was held that the act of the investigator in
33

proceeding with the hearing without first acting on respondents motion to dismiss is a
manifest disregard of the requirement of due process. Implicit in the opinion of the trial
court and the Court of Appeals is that, if upon the examination of the complaint, it was
clear that there was no ground to continue with the inquiry, the investigating prosecutor
was duty bound to dismiss the case. On this point, the trial court stressed that the
prosecutors conducting the preliminary investigation should have allowed the production
of the Daily Manufacturers Sworn Statements submitted by Fortune without which there
was no valid basis for the allegation that private respondents wilfully attempted to evade
payment of the correct taxes. The prosecutors should also have produced the Daily
Manufacturers Sworn Statements by other cigarette companies, as sought by private
respondents, to show that these companies which had paid the ad valorem taxes on the
same basis and in the same manner as Fortune were not similarly criminally charged.
But the investigating prosecutors denied private respondents motion, thus, indicating
that only Fortune was singled out for prosecution. The trial court and the Court of
Appeals maintained that at that stage of the preliminary investigation, where the
complaint and the accompanying affidavits and supporting documents did not show any
violation of the Tax Code providing penal sanctions, the prosecutors should have
dismissed the complaint outright because of total lack of evidence, instead of requiring
private respondents to submit their counter affidavits under Section 3(b) of Rule 112.
We believe that the trial court in issuing its questioned orders, which are
interlocutory in nature, committed no grave abuse of discretion amounting to lack of
jurisdiction. There are factual and legal bases for the assailed orders. On the other
hand, the burden is upon the petitioners to demonstrate that the questioned orders
constitute a whimsical and capricious exercise of judgment, which they have not. For
certiorari will not be issued to cure errors in proceedings or correct erroneous
conclusions of law or fact. As long as a court acts within its jurisdiction, any alleged
errors committed in the exercise of its jurisdiction will amount to nothing more than
errors of judgment which are reviewable by timely appeal and not by a special civil
action of certiorari. Consequently, the Regional Trial Court acted correctly and
34

judiciously, and as demanded by the facts and the law, in issuing the orders granting the
writs of preliminary injunction, in denying petitioners motion to dismiss and in admitting
the supplemental petitions. What petitioners should have done was to file an answer to
the petition filed in the trial court, proceed to the hearing and appeal the decision of the
court if adverse to them.
WHEREFORE, the instant petition is hereby DISMISSED.
SO ORDERED.