Legazpi City Water District v. Bureau of Internal Revenue

SPECIAL TENTH DIVISION [CA-G.R. SP NO. 128320. September 15, 2014.] LEGAZPI CITY WATER DISTRICT, duly rep. by its Officer-in-Charge, MA. LOURDES B. BIEN , petitioner-appellant , vs. THE BUREAU OF INTERNAL REVENUE (BIR), AS REP. BY ITS OIC REGIONAL DIRECTOR MR. EDGARDO P. CLAVERIA, BIR REVENUE REGION NO. 10, LEGAZPI CITY, ET AL. , respondents-appellees. DECISION ANTONIO-VALENZUELA , J p : This is the appeal filed by Legazpi City Water District ("petitioner-appellant LCWD"), assailing the Decision dated 6 September 2012 1 ("assailed Decision") issued by the Regional Trial Court, Branch 7, Legazpi City ("RTC"), in Civil Case No. 10748 (a special civil action for prohibition filed under Rule 65 of the Rules of Court), entitled "Legazpi City Water District, duly represented by its General Manager, Dr. Raul L. Chua v. The Bureau of Internal Revenue (BIR), as represented by its OIC Regional Director Mr. Edgardo P. Claveria, BIR Revenue Region No. 10, Legazpi City, et al." The facts are as follows: on 9 July 2007, the Regional Director of the Bureau of Internal Revenue ("respondent-appellee BIR"), Revenue Region No. 10, Legazpi City issued the Preliminary Assessment Notice 2 and the Formal Letter of Demand, 3 imposing on petitioner-appellant LCWD the payment of income tax (Php5,052,839.00), interests (Php2,779,061.45), and compromise penalty (Php25,000.00), covering the taxable year 2002; on 21 November 2007, respondent-appellee BIR issued the Preliminary Collection Letter against petitioner-appellant LCWD, to which petitioner-appellant LCWD filed the Request for Reinvestigation/Reconsideration of its alleged tax deficiencies covering the taxable year 2002; 4 on 4 February 2008, respondent-appellee BIR denied petitioner-appellant LCWD's reinvestigation/reconsideration of its 2002 internal revenue tax liabilities and issued the Final Notice Before Seizure; 5 on 21 July 2008, respondent-appellee BIR issued the Warrant of Distraint and/or Levy 6 which directed the distraint of the personal properties of petitioner-appellant LCWD, and the levy on the real properties or interests/rights to real properties of petitioner-appellant LCWD, to satisfy petitioner-appellant LCWD's tax obligations amounting to Php7,831,900.45. On 31 July 2008, petitioner LCWD filed the Petition for Prohibition with prayer for a Writ of Preliminary Injunction and/or Temporary Restraining Order 7 before the RTC. AScHCD The Petition alleged: petitioner-appellant LCWD, as a public water utility and a government owned and controlled corporation, was exempt from income taxes pursuant to Section 46 of Presidential Decree No. 198, as amended; 8 Section 32 (B) (7b) of the National Internal Revenue Code (NIRC) states that income derived from any public utility was exempt from gross income; respondent-appellee BIR's authority to assess the tax liability of petitioner-appellant LCWD for taxable year 2002 had prescribed in April 2006, reckoned from the period of the scheduled filing of the return in April 2003. The Petition prayed for the issuance of a temporary restraining order against respondent-appellee BIR, to desist and to refrain from implementing the Warrant of Distraint and/or Levy, and a permanent writ of preliminary injunction. On 4 August 2008, the RTC issued the Temporary Restraining Order enjoining respondent-appellee BIR from enforcing the Warrant of Distraint and/or Levy. 9 Respondent-appellee BIR filed the Comment/Opposition (On LCWD's Petition for Prohibition with prayer for a Writ of Preliminary Injunction and/or Temporary Restraining Order) 10 and countered: tax assessments are presumed correct thus the courts should not restrain the collection of the taxes; the RTC had no jurisdiction over the petition because the validity of tax assessments falls within the exclusive jurisdiction of the Court of Tax Appeals ("CTA"). Petitioner-appellant LCWD filed the Reply to Comment/Opposition 11 and alleged: the Petition before the RTC did not involve disputed assessments, and was filed pursuant to Rule 65, Section 2 of the Rules of Court, to question the propriety of the issuance of the Warrant of Distraint and/or Levy against petitioner-appellant LCWD. The parties filed their respective pre-trial briefs. 12 Petitioner-appellant LCWD filed the Manifestation and Motion 13 which stated that on 11 March 2010, Republic Act No. 10026 ("R.A. No. 10026") 14 was enacted, which granted tax exemption privileges to all water districts, including petitioner-appellant LCWD, and condoned all the unpaid taxes of the water districts from the period starting 13 August 1996 until 11 March 2010; thus, with the enactment of the said law, respondent-appellee BIR's Warrant of Distraint and/or Levy was moot. Respondent-appellee BIR filed the Comment/Opposition 15 and countered: the claim for condonation and/or exemption was premature because there were no implementing rules and regulations issued by the appropriate agencies. The parties filed simultaneous memoranda. 16 On 6 September 2012, the RTC issued the assailed Decision 17 which dismissed the Petition for lack of jurisdiction and in view of the enactment of R.A. No. 10026. AcICHD The assailed Decision held: R.A. No. 10026 was applicable to petitioner-appellant LCWD, however the law prescribes certain conditions to be complied with by the local water district prior to the condonation of unpaid taxes; petitioner-appellant LCWD did not show that it complied with the conditions for the condonation of the unpaid taxes; pending compliance of the conditions, the RTC had no jurisdiction to issue the prohibition prayed for by petitioner-appellant LCWD. Petitioner-appellant LCWD filed Motion for Reconsideration, 18 and the Supplemental Motion for Reconsideration. 19 On 15 November 2012, the RTC denied petitioner-appellant LCWD's Motion for Reconsideration, and the Supplemental Motion for Reconsideration. 20 Thus, this appeal by petitioner-appellant LCWD, with the following issues: I. WHETHER OR NOT THE HONORABLE COURT HAS JURISDICTION OVER THE ISSUES IN THE CASE. II. WHETHER OR NOT LCWD IS LIABLE TO PAY INCOME TAX, FRANCHISE TAX, VALUE ADDED TAX AND OTHER PERCENTAGE TAXES. III. WHETHER OR NOT LCWD IS LIABLE TO PAY INCREMENTS FOR THE ALLEGED DEFICIENCY INCOME AND PERCENTAGE TAXES FOR TAXABLE YEAR 2002. IV. WHETHER OR NOT LCWD IS ENTITLED TO THE ISSUANCE OF A WRIT OF PROHIBITION. The pivotal issue is whether the RTC had jurisdiction to issue the writ of prohibition to command the respondent-appellee BIR to desist in the implementation of the subject Warrant of Distraint and/or Levy against the properties of petitioner-appellant LCWD. THE PETITIONER-APPELLANT LCWD'S ARGUMENTS Anent the first issue, petitioner-appellant LCWD answers in the affirmative. The RTC had jurisdiction to issue the writ of prohibition. Petitioner-appellant LCWD's Memorandum 21 thrusts: the Petition for Prohibition was not filed against a disputed tax assessment which is within the jurisdiction of the CTA; petitioner-appellant LCWD did not question the assessment but only raised the issue of the propriety of the issuance of the warrant of garnishment against the public funds of petitioner-appellant LCWD, which was within the jurisdiction of the RTC; petitioner-appellant LCWD's funds are public funds which are not subject to garnishment, seizure, encumbrance, or disposition; the implementation of the Warrant of Distraint and/or Levy should be enjoined because it was void as it violated R.A. No. 10026 which exempted local water districts from payment of income taxes and condoned all unpaid taxes due from a local water district for the period starting 13 August 1996 until the effectivity date of R.A. No. 10026. TAIaHE Respondent-appellee BIR did not file memorandum despite receipt of notice to file. THE COURT'S RULING We rule in the negative. The RTC had no jurisdiction to issue the writ of prohibition sought by petitioner-appellant LCWD. Petitioner-appellant LCWD filed the Petition for Prohibition with prayer for a writ of preliminary injunction and/or temporary restraining order via Rule 65 of the Rules of Court before the RTC. Perusal of the Petition shows that it sought to enjoin respondent-appellee BIR from collecting the assessed taxes covering the taxable year 2002, and the allegations in the Petition actually pertained to an action for injunction under Rule 58 of the Rules of Court. Thus, although the Petition was denominated as Petition for Prohibition under Rule 65, it was essentially one for Injunction under Rule 58. However, under Section 218 22 of the NIRC, regular courts have no authority to grant an injunction to restrain the collection of taxes under the NIRC. This Court is cognizant that the underlying principle of the prohibition against injunction is due to the principle deeply embedded in our jurisprudence, that is, taxes being the lifeblood of the government should be collected promptly, without unnecessary hindrance or delay. 23 In line with this principle, the NIRC expressly provides that no court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge imposed by the code. An exception to this rule obtains only when in the opinion of the CTA the collection thereof may jeopardize the interest of the government and/or the taxpayer. Notably, Republic Act No. 9282 24 (R.A. No. 9282) expanded the jurisdiction of the CTA, amended Section 11 of the Republic Act No. 1125, 25 and provided as follows: Section 9. Section 11 of the same Act is hereby amended to read as follows: "Section 11. Who May Appeal; Mode of Appeal; Effect of Appeal. Any party adversely affected by a decision, ruling or inaction of the Commissioner of Internal Revenue, the Commissioner of Customs, the Secretary of Finance, the Secretary of Trade and Industry or the Secretary of Agriculture or the Central Board of Assessment Appeals or the Regional Trial Courts may file an appeal with the CTA within thirty (30) days after the receipt of such decision or ruling or after the expiration of the period fixed by law for action as referred to in Section 7(a)(2) herein. "Appeal shall be made by filing a petition for review under a procedure analogous to that provided for under Rule 42 of the 1997 Rules of Civil Procedure with the CTA within thirty (30) days from the receipt of the decision or ruling or in the case of inaction as herein provided, from the expiration of the period fixed by law to act thereon. A Division of the CTA shall hear the appeal: Provided, however, That with respect to decisions or rulings of the Central Board of Assessment Appeals and the Regional Trial Court in the exercise of its appellate jurisdiction, appeal shall be made by filing a petition for review under a procedure analogous to that provided for under rule 43 of the 1997 Rules of Civil Procedure with the CTA, which shall hear the case en banc. cDHAES "All other cases involving rulings, orders or decisions filed with the CTA as provided for in Section 7 shall be raffled to its Divisions. A party adversely affected by a ruling, order or decision of a Division of the CTA may file a motion for reconsideration of new trial before the same Division of the CTA within fifteen (15) days from notice thereof: Provided, however, That in criminal cases, the general rule applicable in regular Courts on matters of prosecution and appeal shall likewise apply. "No appeal taken to the CTA from the decision of the Commissioner of Internal Revenue or the Commissioner of Customs or the Regional Trial Court, provincial, city or municipal treasurer or the Secretary of Finance, the Secretary of Trade and Industry or the Secretary of Agriculture, as the case may be, shall suspend the payment, levy, distraint, and/or sale of any property of the taxpayer for the satisfaction of his tax liability as provided by existing law: Provided, however, That when in the opinion of the Court the collection by the aforementioned government agencies may jeopardize the interest of the Government and/or the taxpayer the Court any stage of the proceeding may suspend the said collection and require the taxpayer either to deposit the amount claimed or to file a surety bond for not more than double the amount with the Court. "In criminal and collection cases covered respectively by Section 7(b) and (c) of this Act, the Government may directly file the said cases with the CTA covering amounts within its exclusive and original jurisdiction." (Emphasis supplied.) As above-quoted, the CTA, in its discretion, may grant injunction to suspend the collection of taxes subject to the requirement of the deposit of the amount claimed or the filing of the surety bond for not more than double the amount claimed with the CTA. The defenses raised by petitioner-appellant LCWD pertaining to its assessed taxes ( i.e. , condonation of its unpaid taxes pursuant to R.A. No. 10026; illegality of the implementation of the subject Warrant of Distraint and/or Levy; irreparable damage to its operations as a local water district) are matters best addressed to the sound discretion of the CTA, and not to the regular courts. We DISMISS the appeal filed by Legazpi City Water District and AFFIRM the Decision dated 6 September 2012 issued by the Regional Trial Court, Branch 7, Legazpi City. ASEcHI IT IS SO ORDERED. Veloso and Diy, * JJ., concur. Footnotes * Per Office Order No. 373-14-ABR dated 29 August 2014. 1. Records, pp. 530-53 5. 2. Records, pp. 24-26. 3. Records, pp. 27-28. 4. Records, pp. 29-38. 5. Records, p. 51. 6. Records, p. 22. 7. Records, pp. 1-135. 8. Section 46. Exemption from taxes. A district shall (1) be exempted from paying income taxes, and (2) shall be exempt from the payment of (a) all National Government, local government, and municipal taxes and fees, including any franchise, filing, recordation, license or permit fees or taxes and fees, charges or costs involved in any court of administrative proceeding which may be a party and (b) all duties or imposts on imported machinery, equipment and materials required for its operations. As amended by Section 20, PD No. 768. 9. Records, pp. 145-146. 10. Records, pp. 152-156. 11. Records, pp. 157-162. 12. Records, pp. 201-213 (Pre-Trial Brief of petitioner-appellant LCWD); Records, pp. 215-217 (Pre-Trial Brief of respondent-appellee BIR). 13. Records, pp. 279-287. 14. "An Act Granting Income Tax Exemption to Local Water Districts by Amending Section 27 (c) of the National Internal Revenue Code of 1997, as Amended, and Adding Section 289-A to the Code, for the Purpose." 15. Records, pp. 291-294. 16. Records, pp. 378-381 (Memorandum of respondent-appellee BIR); Records, pp. 391-490 (Memorandum of petitioner-appellant LCWD). 17. Supra note 1. 18. Records, pp. 538-543. 19. Records, pp. 546-588. 20. Records, pp. 591-592. 21. C.A. Rollo , pp. 23-38. 22. Section 218. Injunction not Available to Restrain Collection of Tax. No court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge imposed by this Code. 23. Angeles City v. Angeles Electric Corporation, et al. , G.R. No. 166134, 29 June 2010 citing Filipino Metals Corp. v. Secretary of the Dept. of Trade and Industry , 502 Phil. 191, 198 (2005); Republic v. Caguioa , G.R. No. 168584, October 15, 2007, 536 SCRA 193, 223-224; Valley Trading Co., Inc. v. Court of First Instance of Isabela, Branch II , 253 Phil. 494 (1989). 24. "An Act Expanding the Jurisdiction of the Court of Tax Appeals (CTA), Elevating its Rank to the Level of a Collegiate Court with Special Jurisdiction and Enlarging its Membership, Amending for the Purpose Certain Sections of Republic Act No. 1125, as Amended, Otherwise Known as the Law Creating the Court of Tax Appeals, and for Other Purposes." 25. "An Act Creating the Court of Tax Appeals."