Commissioner of Internal Revenue v. Court of Tax Appeals

FIRST DIVISION [CA-G.R. SP No. 36564. July 3, 1996.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . COURT OF TAX APPEALS and SPOUSES ANTONIO L. SANCHEZ , respondents . D E C I S I O N MARTIN , JR . , J p : This is a petition for certiorari and prohibition under Rule 65 of the Revised Rules of Court to annul and set aside the Resolutions hereafter stated of the Court of Tax Appeals entitled "Spouses Antonio L. Sanchez and Editha Vito-Sanchez, petitioners, versus, Commissioner of Internal Revenue, respondent," issued allegedly in grave abuse of discretion amounting to lack of jurisdiction, to wit: (1) Resolution dated May 24, 1994 denying the petitioner's motion to dismiss for lack of merit (Annex "F" of the Petition; pp. 62-70, Rollo; pp. 105-113, Original Records) (2) Resolution dated November 24, 1994 denying petitioner's subsequent motion for reconsideration (Annex "H" of the Petition; pp. 78-80. Rollo; pp. 141-143, id .) No comment having been filed by private respondents despite receipt of this Court's resolution of March 2, 1995 the Court, therefore, considers such failure as a waiver to file a comment. The uncontroverted facts which gave rise to the instant petition are as follows: On September 29, 1993, petitioner Commissioner of Internal Revenue (CIR for brevity) sent notice to the private respondent spouses Antonio Sanchez and Editha Vita-Sanchez regarding a finding due for the years 1987, 1989, 1990, 1991 and 1992. Private respondents were likewise directed in the same notice to appear with counsel at the scheduled informal conference on October 12, 1993 to explain their side of the case pursuant to Section 229 of the National Internal Revenue Code (Annex "A" of the Petition; pp. 21. Rollo; pp. 27, Original Records). In their reply under a letter dated October 19, 1993, private respondent spouses contested the findings of petitioner's investigators and prayed for the deferment of the tax investigation until after the resolution of the courts on the forfeiture and escheat petitions filed against them (Annex "B" of the Petition; pp. 22-27, Rollo; pp. 29-34, id .) Meanwhile, petitioner CIR in a letter to Secretary of Justice recommended to the latter the criminal prosecution of private respondents Sanchezes for willful attempt to evade or defeat the income taxes penalized under Section 253 of the National Internal Revenue Code. (Annex "C" of the Petition; pp. 28-32. Rollo; pp. 67-71, id .) Without waiting for the issuance of a formal assessment against them, private respondent files with the respondent court a petition for review claiming substantially that their appeal was based on the final decision of the herein petitioner on the tax evasion complaint filed against them with the Department of Justice. (Annex "D" of the Petition; pp. 33-53, Rollo; pp. 1-21, id .) Petitioner CIR filed a motion to dismiss asseverating that the respondent court is without jurisdiction for want of formal assessment pursuant to Section 299 of the National Internal Revenue Code and that the subject complaint for tax evasion is not an appealable final decision contemplated under section 7 Republic Act No. 1125 (Annex "E" of the Petition; pp. 54-61, Rollo; pp. 52-59, id .). On May 24, 1994, the respondent court handed down a resolution denying the petitioner's motion to dismiss as earlier adverted to (Annex "F" of the Petition; pp. 62-70, Rollo; pp. 105-113, id .). Petitioner CIR moved to reconsider the foregoing resolution of denial (pp. 117-123, id .) but the motion was likewise denied for lack of merit (Annex "H" of the Petition; pp. 78-79, Rollo; pp. 141-143, id .). Hence, the instant petition for certiorari. Petitioner CIR contends that the respondent courts committed grave abuse of discretion amounting to lack of jurisdiction in denying her motion to dismiss and subsequent motion for reconsideration because the records showed that petitioner never issued a formal assessment, and the filing of a tax evasion case cannot be considered a final decision of petitioner on the private respondents' objections to its findings. After a careful study of the records of the instant case, the provisions of law in point and the applicable jurisprudence, We find the petition impressed with merit. It is petitioner's argument that the petition for review of the private respondents was prematurely filed with the respondent court for lack of formal assessment and, notwithstanding the statement of deficiency tax liability in its subsequent tax evasion case, the same cannot be considered an "implied formal assessment". We agree. The provision of the National Internal Revenue Code applicable on the matter is reproduced as follows: SECTION 229. PROTESTING OF ASSESSMENT . When the Commissioner of Internal Revenue or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings, within a period to be prescribed by implementing regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner shall issue an assessment based on his findings . Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation in such form and manner as may be prescribed by implementing regulations within thirty (30) days from receipt of the assessment; otherwise, the assessment shall be final and unappealable. If the protest is denied in whole or in part, the individual, association or corporation adversely affected by the decision on the protest may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision; otherwise, the decision shall become final, executory, and demandable . Conformably with the foregoing provision, Revenue Regulation no. 12-85 mandatorily requires that after the issuance of the proposed assessment or pre-assessment notice, the Bureau of Internal revenue shall issue the necessary assessment notice otherwise known as "official or formal assessment" in case the taxpayer fails to respond to the pre-assessment notice within the reglementary period or in the event of a response, if it still believes that taxes should be assessed (Aban, Law of Basic Taxation in the Philippines, 1994 Edition, pp. 202-203; De Leon. The National Internal Revenue Code Annotated, 1994 Edition, p. 29; p. 605). In the case at bench, the records show that petitioner CIR never issued any formal assessment. What is clear from the evidence is that after the proposed assessment (Annex "A" of the Petition; p. 21, Rollo), the private respondents merely replied thereto with prayer for the deferment of the tax investigation (Annex "B" of the Petition; pp. 22-27, Rollo). Realizing afterwards that private respondents should be prosecuted for tax evasion pursuant to Section 253 of the National Internal Revenue Code because of findings of fraud, petitioner recommended the criminal prosecution of private respondents in a letter to the Department of Justice (Annex "C" of the Petition; pp. 28-32. Rollo). In this regard, respondent court cannot treat the tax deficiency liability stated in said criminal complaint as "implied formal assessment" in lieu of the supposed formal assessment required by law to be issued by petitioner in this case because in the first place, an assessment of deficiency is not indispensable to a criminal prosecution for willful attempt to evade payment of the income tax. Any allegation as to the amount in the tax assessment in the tax evasion complaint would require a showing of how private respondents intentionally violated the Tax Code by filing inaccurate return The crime of tax evasion is complete as long as the private respondents knowingly and fraudulently filed an inaccurate return with intent to evade tax payment and defeat the law. If we were to sustain the assailed rulings of the respondent court, We would in effect render nugatory the procedural and substantive safeguards set forth under Section 299 of the National Internal Revenue Code and pertinent provisions on administrative protests under Revenue Regulation No. 12-85. In the matter of a criminal prosecution for violation of the Tax Code, the Supreme Court in the case of Ungab vs. Cusi, Jr., 97 SCRA 877, said: "What is involved here is not the collection of taxes where assessment of the Commissioner of Internal Revenue may be received by the Court of Tax Appeals, but a criminal prosecution for violation of the National Internal Revenue Code which is within the cognizance of the Court of First Instance. While there can be no civil action to enforce collection before the assessment procedures provided in the code has been followed, there is no requirement for the precise computation and assessment of the tax before there can be a criminal prosecution under the Code " (Emphasis supplied; p. 883) The distinction lies in that where there is a finding of fraud committed by the taxpayer as in the case of respondent spouses, amounting to a willful intent to evade the payment of income taxes, a prosecution will lie even in the absence of formal assessment. We agree with the petitioner that the tax evasion case filed against private respondents does not constitute a final decision on the reply letter which the private respondents claimed was their administrative protest. It must be noted that the filing of the criminal complaint does not constitute a decision on a disputed assessment. We agree with the Solicitor General in his position on the matter, and we quote with approval, thus: ". . . Here, the civil aspect, i.e., deficiency income taxes assessment is not deemed included in the criminal complaint filed against respondent spouses. This is so because the amounts of the proposed tax assessment were merely mentioned in the criminal complaint to show the discrepancy between the amounts indicate in the Income Tax Returns and the findings shown in the investigation/audit report submitted by petitioner's revenue examiners. This is in consonance with the ruling of the Supreme Court in the Ungab case (supra)" (Ungab vs. Cusi, Jr., 97 SCRA 877). The law provides that the Court of Tax Appeals shall have exclusive appellate jurisdiction to review by appeal decisions of the Commissioner of Internal Revenue involving disputed assessments of internal revenue taxes (Section 7(1), Republic Act No. 1125). Hence, as a condition precedent, the taxpayer's right to appeal can only be pursued if he disputes or questions the Commissioner's action administratively, and requests the Commissioner to reconsider or cancel the assessment (Lukban and Tabios, Principles and Remedies for income Tax Management, 1993 Edition, p. 409 citing the cases of St. Stephen's Association vs. Collector, 55 O.G. 2243 and Baguio Country Club Corporation vs. Collectors, 105 Phil. 1269-1270). Considering that no formal assessment was issued by petitioner, the private respondents have no basis upon which they can dispute the assessment administratively. It is incumbent upon the petitioner to issue first a formal assessment before the private respondents can file their administrative protest, either by a motion for reconsideration or by asking for a reinvestigation. What the private respondents did was to send to the petitioner a mere reply letter (pp. 22-27, Rollo) objecting to the findings of petitioner's examiners as mentioned in the earlier pre-assessment notice of the petitioner. In this regard, the respondent court cannot assume that the criminal complaint for tax evasion may be considered as the final denial on the assessment because there is here no disputed assessment upon which petitioner acted with finality. The conclusion of respondent court that the petitioner will not recommend the filing of a criminal action unless she is sure of the finality of her findings (p. 5, CTA Decision; p. 109, Rollo) is flawed because the petitioner is required by law to state unequivocably that the decision under consideration is her "final decision" and that she will not entertain further requests for reconsideration. In the recent case of Commissioner of Internal Revenue vs. Union Shipping Corporation, 185 SCRA 547, citing the case of Surigao Electric Corporation Incorporated vs. Court of Tax Appeals, 57 SCRA 523, 528, the Supreme Court held: "We deem it appropriate to state that the Commissioner of Internal Revenue should always indicate to the taxpayer in clear and unequivocal language whenever his action on an assessment questioned by a taxpayer constitutes his final determination on the disputed assessment, as contemplated by Section 7 and 11 of Republic Act 1125, as amended . On the basis of this statement indubitably showing that the Commissioner's communicated action is his final decision on the contested assessment, the aggrieved taxpayer would then be able to take recourse to the tax court at the opportune time. Without needless difficulty, the taxpayer would be able to determine when his right to appeal to the tax court accrues. This rule of conduct would also obviate all desire and opportunity on the part of the taxpayer to continually delay the finality of the assessment and consequently, the collection of the amount demanded as taxes-by repeated requests for recomputation and reconsideration. On the part of the Commissioner, this would encourage his office to conduct a careful and thorough study of every questioned assessment and render a correct and definite decision thereon in the first instance. This would also deter the Commissioner from unfairly making the taxpayer grope in the dark speculate as to which action constitutes the decision appealable to the tax court. Of greater import, this rule of conduct would meet a pressing need for fair play, regularity and orderliness in administrative action ." (Emphasis supplied; p. 553) In the case at bar, We hold that there is yet no final formal assessment issued against private respondent spouses. The filing of the criminal complaint for tax evasion against them with the Department of Justice cannot be construed as a final decision on their protest which is appealable by petition for review to the Court of Tax Appeals. Accordingly, respondent Court of Tax Appeals is without jurisdiction to act on the petition filed by respondent spouses. For the jurisdiction of the Tax Court is to review by appeal decisions of the Commissioner of Internal Revenue on disputed assessments, that is, decisions of the Commissioner on the protests of the taxpayers against the assessment (Commissioner of Internal Revenue vs. Villa, 22 SCRA 3, p. 7). Since in the instant case respondent spouses already filed a petition for review of the assessment of the Commissioner of Internal Revenue without awaiting the decision on their protest against said assessment, the appeal was premature and respondent Court of Tax Appeals has no jurisdiction to entertain said petition. As a general rule, an order or resolution denying a motion to dismiss is interlocutory and cannot be the subject of a petition for certiorari, an exception to this rule lies as when the trial court clearly acted outside of its jurisdiction or with grave abuse of discretion in denying the motion to dismiss (Mendoza vs. Court of Appeals, 201 SCRA 342, 352). In the case at bar, We find that respondent Court of Tax Appeals acted with grave abuse of discretion when it denied the petitioner's motion to dismiss. WHEREFORE, the instant petition for certiorari is GRANTED. The questioned Resolutions dated May 24, 1994 and November 24, 1994 are annulled and set aside. Accordingly, C.T.A. Case No. 5044 is dismissed. No Pronouncement as to costs. SO ORDERED. De Pano Jr . and Morales, JJ., concur.