CIR v. CA

G.R. No. 119322 (June 4, 1996)

Facts:

On June 1, 1993, the President of the Philippines issued a Memorandum creating a Task Force to investigate tax liabilities of manufacturers suspected of engaging in tax evasion schemes. This Task Force was composed of the Commissioner of Internal Revenue, a representative from the Department of Justice, and a representative from the Executive Secretary. Subsequently, on July 1, 1993, the Commissioner of Internal Revenue issued Revenue Memorandum Circular No. 37-93, which reclassified certain cigarette brands as foreign brands, subjecting them to a higher tax rate.

On August 13, 1993, the Commissioner assessed Fortune Tobacco Corporation (Fortune) with a total deficiency tax amounting to approximately P7.7 billion for the year 1992. Fortune contested this assessment on September 17, 1993. On September 7, 1993, the Commissioner filed a complaint with the Department of Justice against Fortune and its corporate officers, alleging fraudulent tax evasion due to underreported income and sales.

The complaint alleged that Fortune had declared a net taxable income significantly lower than its actual income, resulting in substantial tax evasion. The Department of Justice Task Force found sufficient basis to investigate the allegations further and issued subpoenas for the private respondents to submit counter-affidavits.

Instead of complying, the private respondents filed a Verified Motion to Dismiss, arguing that the complaint violated their rights to due process and equal protection, and that the Department of Justice lacked jurisdiction to conduct the preliminary investigation. The motion was denied, and the respondents subsequently filed a petition for certiorari and prohibition with the Regional Trial Court, seeking to stop the preliminary investigation.

The Regional Trial Court granted a writ of preliminary injunction, halting the investigation and ruling that the determination of Fortune's tax liability must first be established before any criminal prosecution could proceed. The court found that the complaint lacked sufficient evidence to support the allegations of tax evasion and that the preliminary investigation was conducted in haste, potentially violating the respondents' rights.

The petitioners, consisting of various state prosecutors and the Commissioner of Internal Revenue, filed a petition for certiorari and prohibition with the Court of Appeals, challenging the trial court's orders. The Court of Appeals upheld the trial court's decision, stating that there was no grave abuse of discretion in issuing the injunction and that the trial court acted within its jurisdiction.

Legal Issues:

1. Did the Regional Trial Court commit grave abuse of discretion in issuing the writs of preliminary injunction and denying the motion to dismiss the civil case?
2. Was the preliminary investigation by the Department of Justice valid despite the lack of a final determination of Fortune's tax liability?
3. Did the private respondents' rights to due process and equal protection under the law get violated during the preliminary investigation?

Arguments:

Petitioners' Arguments:

• The trial court lacked jurisdiction to enjoin a criminal prosecution under preliminary investigation.
• The Department of Justice had the authority to conduct the preliminary investigation independently of any administrative action by the Bureau of Internal Revenue.
• The trial court's issuance of the injunction was an overreach and interfered with the prosecutorial discretion of the state.

Respondents' Arguments:

• The trial court correctly found that the preliminary investigation was conducted in haste and without sufficient evidence to support the allegations of tax evasion.
• The determination of tax liability must precede any criminal prosecution for tax evasion, as the absence of a final assessment renders the criminal complaint premature.
• The respondents' rights to due process and equal protection were violated due to the selective prosecution and the lack of impartiality in the investigation.

Court's Decision and Legal Reasoning:

The Court of Appeals affirmed the trial court's decision, ruling that the trial court did not commit grave abuse of discretion in issuing the writs of preliminary injunction. The appellate court emphasized that the trial court acted within its jurisdiction and that the issues raised by the private respondents warranted judicial intervention to protect their constitutional rights.

The court highlighted that the preliminary investigation should not proceed without a clear determination of the tax liabilities, as the allegations of fraudulent tax evasion were based on unverified claims. The appellate court also noted that the procedural safeguards of due process must be upheld, particularly in cases involving potential criminal liability.

The court established that the issuance of a writ of preliminary injunction is permissible to protect constitutional rights, especially when there are indications of selective prosecution or when the prosecutorial actions may infringe upon the rights of the accused.

Significant Legal Principles Established:

• The necessity of a final determination of tax liability before initiating criminal prosecution for tax evasion.
• The court's authority to issue a writ of preliminary injunction to protect constitutional rights against potential abuses in the prosecutorial process.
• The recognition of selective prosecution as a valid defense in tax evasion cases, warranting judicial scrutiny.