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[ G.R. No. L-38702. August 9, 1999]

REP. OF THE PHIL. vs. HON. FELICIANO BELMONTE, ET AL.

THIRD DIVISION

Gentlemen:

Quoted hereunder, for your information, is a resolution of this Court dated AUG 9, 1999.

G.R. No. L-38702 (Republic of the Philippines, petitioner, vs. Honorable Feliciano Belmonte, as Judge of the Court of First Instance of Baguio and Benguet, Branch II, and Juan D. Nassr, respondents.)

This is a petitioner for review on certiorari under Rule 45 of the Revised Rules of Court, filed by the Bureau of Internal Revenue (BIR) through the Solicitor General, assailing the decision dated February 6, 1974 of the former Court of First Instance of Baguio and Benguet, Branch II, in Civil Case No. 2485, dismissing in part the complaint of the BIR for collection of unpaid amusement taxes for the period from 1956 to 1962, against the Estate of the late Elisea Laperal, and ordering respondent Juan Nassr to pay deficiency amusement taxes for the years 1963, 1964 and 1965, including lawful penalties, surcharges and interest thereon, from the time subject assessments were made until full payment thereof.

The antecedents facts are as follows:

Private respondent succeeded his late wife in the operation of the Session Theater in Baguio City, from 1963 up to the filing of the tax collection suit against him in 1972. Prior to 1962, his late wife, Elisea Laperal, was the one operating the said theater.

Elisea Laperal, deceased wife of the private respondent, died in 1965. Proceedings for the settlement of her estate commenced in 1966. On April 26, 1966, the Bureau of Internal Revenue applied for and obtained from the City Court of Baguio Search Warrant No. 434 against the private respondent for the search of the premises of Session Theater.

Armed with such search warrant, a combined BIR-Baguio Police Team raided the Session Theater on the same day, April 26, 1966, and seized theater ticket stubs and unused tickets for which the raiding team gave private respondent three separate receipts.

On Agust 26, 1966, the BIR issued to the private respondent Assessment BT-66-271 for P220,415.84 representing amusement taxes due on the operation of the Session Theater from 1956 to 1966.

On October 21, 1966, the BIR issued a revised assessment for the same taxes, confining the assessment to the period from 1961 to 1966 but increasing to P247,760.02 the amount of the tax due for said years.

On January 15, 1968, respondent Nassr questioned the legality of Search Warrant No. 434 before the City Court of Baguio, which subsequently ordered the quashal of the search warrant in question and the return of the items seized on March 29, 1968 by virtue thereof. The motion for reconsideration interposed by the BIR was denied, prompting the BIR to appeal to the then Court of First Instance of Baguio and Benguet.

On February 9, 1968, during the pendency of the proceedings for the quashal of subject search warrant, the BIR revised the assessment for deficiency amusement taxes against the private respondent, splitting the same into two periods, thus:

(a) Assessment BT-68-124 for the years 1956 to 1961 in the amount ofP81,197.78 issued against the estate of Elisea Laperal; and

(b) BT-68-125 for the years 1962 to 1966 in the amount of P355,766.54 against the private respondent himself.

What the private respondent did was to bring before the Court of Tax Appeals petitions questioning the latest revised assessments, docketed as CTA Cases Nos. 1938 and 2016; private respondent suing in his capacity as executor of the Estate of Elisea Laperal, in CTA Case No. 2016.

On September 23, 1968, the former Court of First Instance of Baguio and Benguet upheld the quashal of Search Warrant 434. BIR's motion for reconsideration was denied with modification, in that "fake tickets whether stubs, used or unused admission tickets shall not be returned to the defendant (private respondent) but shall be forfeited in favor of the government".

The BIR elevated the orders of the same Court of First Instance to the Supreme Court, under G.R. L-32609, but before the Supreme Court could act thereon, the Solicitor General presented a motion to withdraw the appeal on the ground that the orders of the court below were "in accordance with law and need not be the subject of a petition for review x x x". The motion of the Solicitor General was granted by the Court in its Resolution of October 28, 1970.

On May 10, 1972, the Court of Tax Appeals ordered the dismissal of CTA Case Nos. 1938 and 2016, Case 1938 "for lack of interest on the part of petitioner to prosecute his appeal", and Case 2016 "for failure of petitioner to prosecute".

On December 15, 1972, the BIR brought a complaint for the collection of unpaid deficiency amusement taxes for the years 1956 to 1961 and 1962 to 1966, in the respective amounts of P81,197.78 and P355,766.54 against respondents Nassr, docketed as Civil Case No. 2485 before the former Court of First Instance of Baguio and Benguet.

Private respondent moved to dismiss the complaint but his motion to dismiss was denied. He was then ordered to file his Answer. The Order denying the motion to dismiss was elevated by the herein private respondent to this Court via a petition for prohibition and certiorari with preliminary injunction but the same was dismissed on May 21, 1973.

On February 6, 1974, the respondent court came out with a decision dismissing the complaint with respect to all the assessments against the estate of the late Elisea Laperal and ordering respondent Nassr to pay the deficiency amusement taxes for the years 1963, 1964 and 1965 in the total amount of P13,192.04 together with the lawful penalties and surcharges and/or interest thereon from the time the assessments were made up to their full payment."

On April 29, 1974, the said decision was amended in view of the fact that the bank account of private respondent in the amount of P59,977.54 was ordered garnished on October 14, 1966. The decision, thus amended, ordered the government t reimburse private respondent the full balance, after deducting the amount of P13,192.04.

Hence, the present petition anchored on the assignment of errors, that:

I

RESPONDENT COURT ERRED IN NOT FINDING THAT IT HAS NO JURISDICTION TO RULE ON THE VALIDITY OF THE TAX ASSESSMENTS AGAINST RESPONDENT JUAN D. NASSR.

II

RESPONDENT COURT, IN ANY CASE, ERRED IN NOT HOLDING THAT THE CORRECTNESS, LEGALITY OR NULLITY OF AN ASSESSMENT IS BEYOND ITS JURISDICTION TO DETERMINE, THE COURT OF TAX APPEALS BEING THE PROPER FORUM.

III

RESPONDENT COURT ERRED IN NOT FINDING THAT PETITIONER;S RIGHT TO ASSESS DEFICIENCY TAXES FOR YEARS 1956-1962 DUE ON RESPONDENT NASSR'S RETURNS, HAS NOT PRESCRIBED.

Being interrelated, the first and second assigned errors shall be discussed and passed upon concurrently.

Petitioner contends that the dismissal by the Court of Tax Appeals of the protest of private respondent rendered subject assessments final, executory and demandable such that the validity and correctness of such assessments and their enforceability can no longer be questioned in the action for collection, and the respondent court was without jurisdiction to entertain the same. It is petitioner's submission that the issues/defenses put up should have been raised and ventilated in the appeal before the Court of Tax Appeals. The said assessments having become final and demandable, the respondent court before which a collection suit was filed could no longer inquire into the legality of such assessments, the determination of which is the exclusive function of the Court of Tax Appeals.

On the other hand, the private respondent and the respondent court are in accord that subject assessments made on the basis of the papers seized under the invalidated search warrant cannot be enforced. Since the said assessments were derived from or based on illegality seized documents, they are null and void and could not have become final, demandable and enforceable; respondents argue.

The question posed is whether or not an assessment based on illegally seized evidence is valid and can acquire finality. Stated differently, the crucial issue here is whether evidence seized during an unlawful search may be used to support a valid assessment binding on the taxpayer.

To the fore is the ruling in the cited case of Bache and Co. (Phil.), Inc. and Frederick Seggerman vs. Hon, Judge Vivencio Ruiz, et al.1 [37 SCRA 823.], promulgated by this Court on February 27, 1971. In that case, the BIR conducted a search at the office of Bache and Co. and seized several boxes of documents. While the action for the dissolution of the search warrant was pending, the BIR issued tax assessments on Bache and Co. Which were based almost entirely on the documents seized during the challenged search.

Speaking through Justice Villamor, and mindful of the landmark case of Stonehill vs. Diokno2 [20 SCRA 383 (June 19, 1967)], this Court rules:

"The tax assessments referred to earlier in this opinion were, if not entirely - as claimed by petitioners- at least partly - as in effect admitted by respondents - based on the documents seized by virtue of Search Warrant No. 2-M-70. Furthermore, the fact that the assessments were made some one and one-half months after the search and seizure on February 25, 1970, is a strong indication that the documents thus seized served as basis for the assessments. Those assessments should therefore not be enforced.

PERMISES CONSIDERED, the petition is granted. Accordingly, Search Warrant No. 2-M-70 issued by respondent Judge is declared null and void; respondents are permanently enjoined enforcing the said search warrant; the papers and effects seized thereunder are ordered to be returned to petitioners; and respondent officials of the Bureau of Internal Revenue and their representatives are permanently enjoined from enforcing the assessments mentioned in Annex 'G' of the present petition, as well as other assessments based on the documents, papers and effects seized under the search warrant herein nullified, and from the using the same against petitioners in any criminal or other proceeding. x x x"

Petitioner claims that the dismissal by the Court of Tax Appeal of the protests lodged by the private respondent and the latter's failure to appeal the same rendered subject BIR assessments final and executory and therefore, incontestable. The import of such a contention is that, notwithstanding the fact that the documentary proofs were illegally seized, the same can still be used as bases for tax assessments and thereafter, for tax collection proceedings against the respondent.

The stance of petitioner is palpably discordant with the aforecited ruling and the prevailing jurisprudence laid down in the case of Stonehill vs. Diokno - that illegally seized documents are not admissible in evidence and cannot be used in any other proceeding against the person(s) involved. This exclusionary rule is applicable to administrative proceedings.

The rationale behind the exclusionary rule was explained by the Court, thus:

"The exclusion of such evidence is the only practical means of enforcing the constitutional injunction against unreasonable searches and seizures. The non-exclusionary rule is contrary to the letter and spirit of the prohibition against unreasonable searches and seizures. If there is competent evidence to establish probable cause of the commission of a given crime by the party against whom the warrant is intended, then there is no reason why the applicant should not comply with the constitutional requirements. If he has no such evidence, then it is not possible for the judge to find that there is a probable cause, and hence, no justification for the issuance of the warrant. The only possible explanation for the issuance in that case is the necessity of fishing for evidence of the commission of a crime. Such a fishing expedition is indicative of the absence of evidence to establish a probable cause."3 [Stonehill vs. Diokno, supra.]

Petitioner theorizes that the present case differs from that of Bache and Co. Because in the latter case, the petition for the dissolution of the search warrant was already dismissed by the Court of First Instance when the assailed assessments were issued, while in the petition under consideration, the assessments were issued before the quashal of the warrant.

The Court believes the said point is of little significance. Consequential is the fact that in Bache and in the present case, the challenged assessment were both based on documents unlawfully obtained under an invalidated search warrant.

Furthermore, the Court ruled in said case that: "the BIR is permanently enjoined from enforcing the assessments as well as other assessments based on the documents, papers and effects seized under the nullified search warrant." The reference to "other assessments" is unqualified. Consequently, all assessments premised on the seized documents, whether issued before or after the search warrant had been declared null and void, and whether or not final, are unenforceable. It is impossible for a collection suit predicated on such permanently unenforceable. It is impossible for a collection suit predicated on such permanently unenforceable assessments, to prosper.

Also noteworthy is the fact that in the Bache case, subject assessments had likewise become final and executory. The assessments there were issued on April 16, 1970 and the period within which the assessments may be appealed to the CTA was thirty (30) days. Therefore, after the lapse of thirty days, the assessments became final. It petitioner's contention were correct, the assessments having become final, they could no longer be challenged and collection must proceed. Despite such finality, however, the Supreme Court ruling promulgated on February 21, 1971, permanently enjoined the enforcement of the assessments in the said case.

Is it the submission of petitioner that assuming arguendo that subject assessments were legally defective, the respondent Court of First Instance could not declare the same null and void, as the Court of Tax Appeals has exclusive jurisdiction to rule on the validity of a tax assessment.

While it is true that the Court of Tax Appeals is vested with jurisdiction over disputed assessments, and in contesting the assessments before the said court, the private respondent did allege the nullity of subject assessments, it is undeniable that the appeals taken by the private respondent were dismissed by the Court of Tax Appeals for failure to prosecute. But the said dismissal should be without prejudice as the stance ofp r is meritorious.

In the case of Ventura vs. Baysa,4 [4 SCRA 167.] this Court ruled that while the trial court correctly dismissed the action because the plaintiff failed to ask the trial court to schedule the trial of his case for four years, the dismissal should not have been with prejudice it appearing that the plaintiff's claim is meritorious.

Conformably, although in this case the dismissal for failure to prosecute may be correct, such a dismissal should be without prejudice for the reason that the pivotal issue, whether or not an assessment based on an unlawful search is valid, is yet to be resolved.

Moreover, as proceedings for the dissolution of the search warrant were pending at the time the appeals involved were likewise pending before the Court of Tax Appeals, the latter court could not possibly rule on the validity of the assessments because they were assailed for being based on evidence obtained under an invalid search warrant. The determination of the legality or illegality of a search warrant not being within the jurisdiction of the Court of Tax Appeals, it would have been pointless to pursue the case before it. And whatever may be the decision of the Court of Tax Appeals, it will necessarily have to be based on the validity of the search.

There is no reason why the case under scrutiny should be any different from the aforesaid cases. Neither is there any justification to permit the government to collect taxes assessed on the basis of illegality seized evidence. To allow such assessments to acquire finality and the tax due thereunder to be collected would be to sanction the use of unlawfully seized evidence, which is strictly proscribed in this jurisdiction. The assessments under attack did not become final as they are not valid for the reason that they were based on unlawfully seized documents, which are not admissible as evidence. Like a void judgment, subject assessments can never acquire finality and may be susceptible to direct as well as collateral attack.5 [Estoesta, Sr. vs. Court of Appeals, 179 SCRA 203.]

Anent the second assigned error, petitioner avers that the protests lodged before the Court of Tax Appeals suspended the running of the five year period to collect the taxes assessed in 1968, such that the collection suit was seasonably filed on May 10, 1972.

Petitioner, however, missed the point. The defense of prescription invoked by the private respondent refers to the period within which to make an assessment and not the period for collection.

Section 331 of the Internal Revenue Code, at that time, provided:

Sec. 331. Period of limitation upon assessment and collection. - except as provided in the succeeding section, internal revenue taxes shall be assessed within five years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period. For purposes of this section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day: Provided, That this limitation shall not apply to cases already investigated prior to the approval of this Code.

The parties' stipulation of facts admits, among others, that the respondent "from 1962, and his predecessor as operator from 1956 to 1961, had been submitting returns to the BIR on amusement taxes for the Session Theater and paying the taxes due thereunder."

BIR assessed deficiency amusement taxes on the private respondent from 1956 to 1965. However, since the latter has been regularly filing tax returns with the BIR since 1956, the five (5) year period within which BIR can make assessments should start to run from the time subject returns were filed. Thus, correct is the ruling of the respondent court that the questioned assessment for deficiency taxes for the years 1956 to 1962 can no longer prosper by reason of the lapse of the five year period for assessment.

Petitioner, to bolster its posture, argues that, in any case, the assessment period has not prescribed since Section 332 of the Tax Code provides that in the event of a false or fraudulent return, or of failure to file a return, the tax may be assessed at any time within ten years from the discovery of the fraud, falsity or omission.6 [Sec. 332. Exceptions as to period of limitation of assessment and collection of taxes. - (a) In the case of false o fraudulent return with intent or evade tax or of a failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment at any time within ten years after the discovery of the falsity, fraud, or omission.]

However, as held in the case of Republic vs. Ker.7 [18 SCRA 207; Sept. 29, 1966.]:

"x x x fraud is a question of fact which must be alleged and proved. Fraud is a serious charge and, to be sustained, it must be supported by clear and convincing proof. Accordingly, fraud should have been alleged and proved in the lower court. x x x."

In that case, the Court rejected the theory of the Republic that the finding by the Commissioner of Internal Revenue as to the existence of fraud has become final and need not be proved because the corresponding assessment itself was already final and executory. But notwithstanding the finality of the assessment, this Court stressed that fraud being a serious charge must be alleged and proved by clear and convincing proof.

Here, the formal demand letters of BIR to respondent Nassr merely charged deficiency amusement taxes based on undeclared sales of tickets and understatement of applicable amusement tax rate. The protests before the Court of Tax Appeals were dismissed for failure to prosecute. Thus, even assuming that fraud was alleged by the petitioner in answer to private respondent's protests, the supposed fraud was not proved and the said court could not have made any finding on fraud either, because the dismissal was for lack of interest and/or failure to prosecute.

Even if the allegation of fraud is discounted and reliance made on the falsity of the returns, still, falsity is likewise a question of fact which petitioner must prove before the Court of Tax Appeals and the lower court. Petitioner's demand letters mentioned understatement of applicable tax rates but it failed to show the applicable tax rates,, how the tax rates were applied, how the correct amount of deficiency taxes were arrived at, and where respondents committed the error.

Thus, petitioner's failure to prove that the deficiency taxes assessed against the private respondent falls within the ambit of Section 332 of the Tax Code and therefore, the regular prescriptive period of five years under Section 331 applies. In light of the foregoing, the lower court erred not in holding that the taxes corresponding to the years 1956 to 1962 are no longer collectible as the five-year period for assessment had lapsed.

WHEREFORE, for lack of merit the petition if DENIED and the appealed decision AFFIRMED. No pronouncement as to costs.

SO ORDERED.

Very truly yours,

(SGD.) JULIETA Y. CARREON

Clerk of Court