SECOND DIVISION DEL CASTILLO, J.

: Spouses Manly denied the accusations hurled against them and

G.R. No. 197590           November 24, 2014 alleged that they used their accumulated savings from their
earnings for the past 24 years in purchasing the properties. They
also contended that the criminal complaint should be dismissed
BUREAU OF INTERNAL REVENUE, as represented by the
because petitioner failed to issue a deficiency assessment against
COMMISSIONER OF INTERNAL REVENUE, Petitioner, 
them.
vs.
COURT OF APPEALS, SPOUSES ANTONIO VILLAN MANLY,
and RUBY ONG MANLY, Respondents. Ruling of the State Prosecutor

FACTS: State Prosecutor Ma. Cristina A. Montera-Barot recommended the

filing of criminal charges.
Antonio Villan Manly is a stockholder and the Executive Vice-
President of Standard Realty Corporation, a family-owned Ruling of the Secretary of Justice
corporation. He is also engaged in rental business. His spouse,
respondent Ruby Ong Manly, is a housewife.
Acting Justice Secretary Agnes VST Devanadera reversed the
Resolution of the State Prosecutor. She found no willful failure to
The BIR issued Letter of Authority No. 2001 00012387 authorizing pay or attempt to evade or defeat the tax on the part of spouses
its revenue officers to investigate spouses Manly’ internal revenue Manly as BIR allegedly failed to specify the amount of tax due and
tax liabilities for taxable year 2003 and prior years. the likely source of income from which the same was based. She
also pointed out BIR’s failure to issue a deficiency tax assessment
against spouses Manly which is a prerequisite to the filing of a
BIR issued a letter to spouses Manly requiring them to submit
criminal case for tax evasion. 
documentary evidence to substantiate the source of their cash
purchase of a 256-square meter log cabin in Tagaytay City worth
₱17,511,010.00. Spouses Manly, however, failed to comply with the Ruling of the Court of Appeals
letter.
Unfazed, the BIR filed a Petition for Certiorari with the CA imputing
Later, the revenue officers executed a Joint Affidavit alleging that grave abuse of discretion on the part of Acting Justice Secretary
Antonio Manly’s reported or declared annual income for the taxable Devanadera in finding no probable cause to indict respondent
years 1998-2003 are as follows: spouses for willful attempt to evade or defeat tax and willful failure
to supply correct and accurate information for taxable years 2000,
2001 and 2003.
Net Profit
Taxable Rental Business
Total sources Tax
  Compensation (1169-73 G. CASH
of Funds Due/paid
Income Masangkay St., On October 28, 2010, the CA dismissed the Petition for Certiorari.
Tondo, Manila
Although it disagreed that an assessment is a condition sine qua
1998 [P]133,532.36 [P] 191,915.10 [P] 325,447.46 [P]55,834.00 [P] 269,613.46 non in filing a criminal case for tax evasion, the CA, nevertheless,
ruled that there was no probable cause to charge spouses Manly as
1999 142,550.50 260,961.78 403,512.28 79,254.00 324,258.28
BIR allegedly failed to state their exact tax liability and to show
2000 141,450.00 213,740.67 355,190.67 64,757.21 290,433.46 sufficient proof of their likely source of income. The CA further said
2001 151,500.00 233,396.62 384,896.62 73,669.00 311,227.62
that before one could be prosecuted for tax evasion, the fact that a
tax is due must first be proved. 
2002 148,500.00 186,106.62 334,606.62 58,581.00 276,025.62

2003 148,100.00 152,817.53 300.917.93 48,729.00 252,188.93 Petitioner’s Arguments

[Total] ₱865,633.26 ₱1,238,938.32 ₱2,104,571.58 ₱380,824.21 ₱1,723,747.37 BIR imputes grave abuse of discretion on the part of the CA in
affirming the dismissal of the criminal cases against spouses Manly.

and that despite his modest income for the said years, respondent
spouses were able to purchase in cash the following properties: BIR contends that in filing a criminal case for tax evasion, a prior
computation or assessment of tax is not required because the crime
1) a luxurious vacation house in Tagaytay City valuedat is complete when the violator knowingly and willfully filed a
₱17,511,010.00 in the year 2000, evidenced by a Deed of fraudulent return with intent to evade a part or all of the tax. In this
Absolute Sale dated October 24, 2000; case, an analysis of spouses Manly’s income and expenditure
2) a Toyota RAV4 for ₱1,350,000.00 in the year 2001, shows that their cash expenditure is grossly disproportionate to their
evidenced by a Sales Invoice dated June 28, 2001; and reported or declared income, leading BIR to believe that they under
3) a Toyota Prado for ₱2,000,000.00 in 2003, evidenced by a declared their income. In computing the unreported or undeclared
Deed of Sale dated July 9, 2003. income, which was likely sourced from Antonio’s rental
business, BIR used the expenditure method of reconstructing
income, a method used to determine a taxpayer’s income tax
Since spouses Manly failed to show the source of their cash liability when his records are inadequate or inaccurate. And since
purchases, the revenue officers concluded that Antonio Manly’s spouses Manly failed to explain the alleged unreported or
Income Tax Returns (ITRs) for taxable years 2000, 2001, and 2003 undeclared income, BIR asserts that criminal charges for tax
were underdeclared.  evasion should be filed against them.

And since the under declaration exceeded 30% of the reported or Respondent spouses’ Arguments
declared income, it was considered a prima facie evidence of fraud
with intent to evade the payment of proper taxes due to the
government. The revenue officers, thus, recommended the filing of Spouses Manly, on the other hand, argue that the instant Petition
criminal cases against respondent spouses for failing to supply should be dismissed as BIR availed of the wrong remedy in filing a
correct and accurate information in their ITRs for the years 2000, Petition for Certiorari under Rule 65 of the Rules of Court. 
2001, and 2003, punishable under Sections 254 and 255 in relation
to Section 248(B) of Republic Act No. 8424 or the "Tax Reform Act And even if the Petition is given due course, the same should still
of 1997," hereinafter referred to as the National Internal Revenue be dismissed because no grave abuse of discretion can be
Code (NIRC). attributed to the CA. They maintain that BIR miserably failed to
prove that a tax is actually due. Neither was it able to show the under this Code or the payment thereof shall, in addition to other
source of the alleged unreported or undeclared income as required penalties provided by law, upon conviction thereof, be punished by
by Revenue Memorandum Order No. 15-95, Guidelines and a fine of not less than Thirty thousand pesos (₱30,000.00) but not
Investigative Procedures in the Development of Tax Fraud Cases more than One hundred thousand pesos (₱100,000.00) and suffer
for Internal Revenue Officers. As to the method used by BIR, they imprisonment of not less than two (2) years but not more than four
claim that it completely ignored their lifetime savings because it was (4) years: Provided, That the conviction or acquittal obtained under
limited to the years 1998-2003. this Section shall not be a bar to the filing of a civil suit for the
collection of taxes.
ISSUES/RULING:
SEC. 255. Failure to File Return, Supply Correct and Accurate
Information, Pay Tax, Withhold and Remit Tax and Refund Excess
The Petition is meritorious.
Taxes Withheld on Compensation. – Any person required under this
Code or by rules and regulations promulgated thereunder to pay
1. WON BIR availed of the wrong remedy in filing a Petition for any tax, make a return, keep any record, or supply correct and
Certiorari under Rule 65 of the Rules of Court, instead of a Petition accurate information, who willfully fails to pay such tax, make such
for Review on Certiorari under Rule 45. NO return, keep such record, or supply such correct and accurate
information, or withhold or remit taxes withheld, or refund excess
taxes withheld on compensation at the time or times required by law
Indeed, the remedy of a party aggrieved by a decision, final order, or rules and regulations shall, in addition to other penalties provided
or resolution of the CA is to file a Petition for Review on Certiorari by law, upon conviction thereof, be punished by a fine of not less
under Rule 45 of the Rules of Court, which is a continuation of the than Ten thousand pesos (₱10,000.00) and suffer imprisonment of
appellate process over the original case. And as a rule, if the not less than one (1) year but not more than ten (10) years.
remedy of an appeal is available, an action for certiorari under Rule
65 of the Rules of Court, which is an original or independent action
based on grave abuse of discretion amounting to lack or excess of In Ungab v. Judge Cusi, Jr., we ruled that tax evasion is deemed
jurisdiction, will not prosper because it is not a substitute for a lost complete when the violator has knowingly and willfully filed a
appeal. fraudulent return with intent to evade and defeat a part or all of the
tax. Corollarily, an assessment of the tax deficiency is not required
in a criminal prosecution for tax evasion. However, in Commissioner
There are, however, exceptions to this rule, to wit: of Internal Revenue v. Court of Appeals, we clarified that although a
1) when public welfare and the advancement of public policy deficiency assessment is not necessary, the fact that a tax is due
dictate; must first be proved before one can be prosecuted for tax evasion.
2) when the broader interest of justice so requires;
3) when the writs issued are null and void;
4) when the questioned order amounts to an oppressive exercise of In the case of income, for it to be taxable, there must be a gain
judicial authority; realized or received by the taxpayer, which is not excluded by law
5) when, for persuasive reasons, the rules may be relaxed to relieve or treaty from taxation. The government is allowed to resort to all
a litigant of an injustice not commensurate with his failure to comply evidence or resources available to determine a taxpayer’s income
with the prescribed procedure; and to use methods to reconstruct his income. A method commonly
6) when the judgment or order is attended by grave abuse of used by the government is the expenditure method, which is a
discretion; or method of reconstructing a taxpayer’s income by deducting the
7) in other meritorious cases. aggregate yearly expenditures from the declared yearly
income. The theory of this method is that when the amount of the
money that a taxpayer spends during a given year exceeds his
In this case, after considering the arguments raised by the parties, reported or declared income and the source of such money is
we find that there is reason to give due course to the instant Petition unexplained, it may be inferred that such expenditures represent
for Certiorari as BIR was able to convincingly show that the CA unreported or undeclared income.
committed grave abuse of discretion when it affirmed the dismissal
of the criminal charges against spouses Manly despite the fact that
there is probable cause to indict them. In the case at bar, BIR used this method to determine respondent
spouses’ tax liability. BIR deducted spouses Manly’s major cash
acquisitions from their available funds.
Although the Court has consistently adopted the policy of non-
interference in the conduct and determination of probable
cause, which is exclusively within the competence of the Executive And since the underdeclaration is more than 30% of spouses
Department, through the Secretary of Justice, judicial intrusion, in Manly’s reported or declared income, which under Section 248(B) of
the form of judicial review, is allowed when there is proof that the the NIRC constitutes as prima facie evidence of false or fraudulent
Executive Department gravely abused its discretion in making its return, BIR recommended the filing of criminal cases against
determination and in arriving at the conclusion it reached. respondent spouses under Sections 254 and 255, in relation to
Section 248(B) of the NIRC.
Grave abuse of discretion is defined as a capricious and whimsical
exercise of judgment tantamount to lack or excess of jurisdiction, a The CA, however, found no probable cause to indict respondent
blatant abuse of authority so grave and so severe as to deprive the spouses for tax evasion. It agreed with Acting Justice Secretary
court of its very power to dispense justice, or an exercise of power Devanadera that BIR failed to make "a categorical finding of the
in an arbitrary and despotic manner, due to passion, prejudice or exact amount of tax due from [spouses Manly]" and "to show
personal hostility, so patent and gross as to amount to an evasion sufficient proof of a likely source of [spouses Manly’s] income that
or to a unilateral refusal to perform the duty enjoined or to act in enabled them to purchase the real and personal properties adverted
contemplation of the law.65 Such is the situation in this case. to x x x." We find otherwise.

2. WON there is probable cause to indict spouses BIR for tax The amount of tax due from spouses Manly was specifically alleged
evasion as the BIR was able to show that a tax is due from them. in the Complaint-Affidavit. The computation, as well as the method
YES used in determining the tax liability, was also clearly explained. The
revenue officers likewise showed that the under declaration
exceeded 30% of the reported or declared income.
Sections 254 and 255 of the NIRC pertinently provide:

The revenue officers also identified the likely source of the

SEC. 254. Attempt to Evade or Defeat Tax. – Any person who unreported or undeclared income in their Reply-Affidavit. The
willfully attempts in any manner to evade or defeat any tax imposed pertinent portion reads:
 protected as we cannot allow the floodgates to be opened for
7. x x x x frivolous and malicious tax suits.
[Respondent spouses] are into rental business and the net
profit for six (6) years before tax summed only to
WHEREFORE, the Petition is hereby GRANTED. The Decision
₱1,238,938.32 (an average of more or less Php200,000.00
dated October 28, 2010 and the Resolution dated May 10, 2011 of
annually). We asked respondent [Antonio] if we can proceed to
the Court of Appeals in CA-G.R. SP No. 112479 are hereby
his rented property to [appraise] the earning capacity of the
REVERSED and SET ASIDE. The Resolutions dated August 31,
building [for] lease/ rent, but he declined our proposition. Due
2006 and November 29, 2007 of State Prosecutor Ma. Cristina A.
to such refusal made by the respondent, [petitioner], thru its
Montera-Barot in LS. No. 2005-573 finding probable cause to indict
examiners, took pictures of the subject property and came up
respondent spouses Antonio Villan Manly and Ruby Ong Manly for
with the findings that indeed the unexplained funds sought to
Violation of Sections 254 and 255 of the National Internal Revenue
have been used in acquiring the valuable property in Tagaytay
Code are hereby REINSTATED.
x x x came from the underdeclaration of rental income.

SO ORDERED.
Apparently, the revenue officers considered respondent Antonio’s
rental business to be the likely source of their unreported or
undeclared income due to his unjustified refusal to allow the
revenue officers to inspect the building.

Respondent spouses’ defense that they had sufficient savings to

purchase the properties remains self-serving at this point since they
have not yet presented any evidence to support this. And since
there is no evidence yet to suggest that the money they used to buy
the properties was from an existing fund, it is safe to assume that
that money is income or a flow of wealth other than a mere return
on capital. It is a basic concept in taxation that income denotes a
flow of wealth during a definite period of time, while capital is a fund
or property existing at one distinct point in time.81

Moreover, by just looking at the tables presented by petitioner, there

is a manifest showing that respondent spouses had under declared
their income. The huge disparity between respondent Antonio’s
reported or declared annual income for the past several years and
respondent spouses’ cash acquisitions for the years 2000, 2001,
and 2003 cannot be ignored. In fact, it makes us wonder how they
were able to purchase the properties in cash given respondent
Antonio’s meager income.

In view of the foregoing, we are convinced that there is probable

cause to indict respondent spouses for tax evasion as the BIR was
able to show that a tax is due from them. Probable cause, for
purposes of filing a criminal information, is defined as such facts
that are sufficient to engender a well-founded belief that a crime has
been committed, that the accused is probably guilty thereof, and
that he should be held for trial.82 It bears stressing that the
determination of probable cause does not require actual or absolute
certainty, nor clear and convincing evidence of guilt; it only requires
reasonable belief or probability that more likely than not a crime has
been committed by the accused.83

In completely disregarding the evidence presented and in affirming

the ruling of the Acting Justice Secretary Devanadera that no
probable cause exists, we find that the CA committed grave abuse
of discretion amounting to lack or excess of jurisdiction. As we have
said, if there is grave abuse of discretion, the court may step in and
proceed to make its own independent determination of probable
cause as judicial review is allowed to ensure that the Executive
Department acts within the permissible bounds of its authority or
does not gravely abuse the same.84

We must make it clear, however, that we are only here to determine

probable cause. As to whether respondent spouses are guilty of tax
evasion is an issue that must be resolved during the trial of the
criminal case, where the quantum of proof required is proof beyond
reasonable doubt.

Before we close, we must stress that our ruling in this case should
not be interpreted as an unbridled license for our tax officials to
engage in fishing expeditions and witch-hunting. They should not
abuse their investigative powers, instead they should exercise the
same within the bounds of the law. They must properly observe the
guidelines in making assessments and investigative procedures to
ensure that the constitutional rights of the taxpayers are well