[G.R. No. 66838. December 2, 1991.

]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PROCTER & GAMBLE
PHILIPPINE MANUFACTURING CORPORATION and THE COURT OF TAX
APPEALS, respondents.
T.A. Tejada & C.N. Lim for private respondent.
SYLLABUS
1.
TAXATION; REFUND; QUESTION OF INCAPACITY OF CLAIMANT;
CANNOT BE RAISED FOR THE FIRST TIME ON APPEAL; CASE AT BAR.
There are certain preliminary aspects of the question of the capacity of P&G-Phil. to
bring the present claim for refund or tax credit, which need to be examined. This question
was raised for the first time on appeal, i.e., in the proceedings before this Court on the
Petition for Review filed by the Commissioner of Internal Revenue. The question was not
raised by the Commissioner on the administrative level, and neither was it raised by him
before the CTA. We believe that the Bureau of Internal Revenue ("BIR") should not be
allowed to defeat an otherwise valid claim for refund by raising this question of alleged
incapacity for the first time on appeal before this Court. This is clearly a matter of
procedure. Petitioner does not pretend that P&G-Phil., should it succeed in the claim for
refund, is likely to run away, as it were, with the refund instead of transmitting such
refund or tax credit to its parent and sole stockholder. It is commonplace that in the
absence of explicit statutory provisions to the contrary, the government must follow the
same rules of procedure which bind private parties. It is, for instance, clear that the
government is held to compliance with the provisions of Circular No. 1-88 of this Court
in exactly the same way that private litigants are held to such compliance, save only in
respect of the matter of filing fees from which the Republic of the Philippines is exempt
by the Rules of Court. More importantly, there arises here a question of fairness should
the BIR, unlike any other litigant, be allowed to raise for the first time on appeal
questions which had not been litigated either in the lower court or on the administrative
level. For, if petitioner had at the earliest possible opportunity, i.e., at the administrative
level, demanded that P&G-Phil. produce an express authorization from its parent
corporation to bring the claim for refund, then P&G-Phil. would have been able forthwith
to secure and produce such authorization before filing the action in the instant case. The
action here was commenced just before expiration of the two (2)-year prescriptive period.
2.
ID.; ID.; CLAIMING THEREOF BEFORE COMMISSIONER OF INTERNAL
REVENUE; ESSENTIAL FOR MAINTENANCE OF A SUIT FOR RECOVERY OF
TAXES ERRONEOUSLY OR ILLEGALLY COLLECTED. Under Section 306 of
the NIRC, a claim for refund or tax credit files with the Commissioner of Internal
Revenue is essential for maintenance of a suit for recovery of taxes allegedly erroneously
or illegally assessed or collected. Section 309 (3) of the NIRC, in turn, provides for the
Authority of Commissioner to Take Compromises and to Refund Taxes.
3.
ID.; ID.; CAPACITY OF WITHHOLDING AGENT TO CLAIM THEREOF;
WARRANTED IN CASE AT BAR; REASONS THEREOF. Since the claim for
refund was filed by P&G-Phil., the question which arises is: is P&G-Phil. a "taxpayer"
under Section 309 (3) of the NIRC? The term "taxpayer" is defined in our NIRC as
referring to "any person subject to tax imposed by the Title [on Tax on Income]." It thus
becomes important to note that under Section 53 (c) of the NIRC, the withholding agent
who is "required to deduct and withhold any tax" is made personally liable for such tax"

and indeed is indemnified against any claims and demands which the stockholder might
wish to make in questioning the amount of payments effected by the withholding agent in
accordance with the provisions of the NIRC. The withholding agent, P&G-Phil., is
directly and independently liable for the correct amount of the tax that should be withheld
from the dividend remittances. The withholding agent is, moreover, subject to and liable
for deficiency assessments, surcharges and penalties should the amount of the tax
withheld be finally found to be less than the amount that should have been withheld
under law. A "person liable for tax" has been held to be a "person subject to tax" and
properly considered a "taxpayer." The terms "liable for tax" and "subject to tax" both
connote legal obligation or duty to pay a tax. It is very difficult, indeed conceptually
impossible, to consider a person who is statutorily made "liable for tax" as not "subject to
tax." By any reasonable standard, such a person should be regarded as a party in interest,
or as a person having sufficient legal interest, to bring a suit for refund of taxes he
believes were illegally collected from him.
4.
ID.; ID.; WITHHOLDING AGENT; ACTS AS AN AGENT OF BOTH THE
GOVERNMENT AND TAXPAYER. In Philippine Guaranty Company, Inc. v.
Commissioner of Internal Revenue, (15 SCRA 1 (1965)) this Court pointed out that a
withholding agent is in fact the agent both of the government and of the taxpayer, and
that the withholding agent is not an ordinary government agent: "The law sets no
condition for the personal liability of the withholding agent to attach. The reason is to
compel the withholding agent to withhold the tax under all circumstances. In effect, the
responsibility for the collection of the tax as well as the payment thereof is concentrated
upon the person over whom the Government has jurisdiction. Thus, the withholding agent
is constituted the agent of both the Government and the taxpayer. With respect to the
collection and/or withholding of the tax, he is the Government's agent. In regard to the
filing of the necessary income tax return and the payment of the tax to the Government,
he is the agent of the taxpayer. The withholding agent, therefore, is no ordinary
government agent especially because under Section 53 (c) he is held personally liable for
the tax he is duty bound to withhold; whereas the Commissioner and his deputies are not
made liable by law." If, as pointed out in Philippine Guaranty, the withholding agent is
also an agent of the beneficial owner of the dividends with respect to the filing of the
necessary income tax return and with respect to actual payment of the tax to the
government, such authority may reasonably be held to include the authority to file a
claim for refund and to bring an action for recovery of such claim. This implied authority
is especially warranted where, as in the instant case, the withholding agent is the wholly
owned subsidiary of the parent-stockholder and therefore, at all times, under the effective
control of such parent-stockholder. In the circumstances of this case, it seems particularly
unreal to deny the implied authority of P&G-Phil. to claim a refund and to commence an
action for such refund.
5.
ID.; TAX ON FOREIGN CORPORATION; NON-RESIDENT
CORPORATION; APPLICABILITY OF THE REDUCED REMITTANCE OF
FIFTEEN PERCENT (15%) TAX RATE; RULE. The applicability to the dividend
remittances by P&G-Phil. to P&G-USA of the fifteen percent (15%) tax rate provided for
in Section 24 (b) (1) of the NIRC. The ordinary thirty-five (35%) tax rate applicable to
dividend remittances to non-resident corporate stockholders of a Philippine corporation,
goes down to fifteen percent (15%) if the country of domicile of the foreign stockholder

corporation "shall allow" such foreign corporation tax a credit for "taxes deemed paid in
the Philippines," applicable against the tax payable to the domiciliary country by the
foreign stockholder corporation. In other words, in the instant case, the reduced fifteen
percent (15%) dividend tax rate is applicable if the USA "shall allow" to P&G-USA a tax
credit for "taxes deemed paid in the Philippines" applicable against the US taxes of P&GUSA. The NIRC specifies that such tax credit for "taxes deemed paid in the Philippines"
must, as a minimum, reach an amount equivalent to twenty (20) percentage points which
represents the difference between the regular thirty-five percent (35%) dividend tax rate
and the preferred fifteen percent (15%) dividend tax rate. It is important to note that
Section 24 (b)(1), NIRC, does not require that the US must give a "deemed paid" tax
credit for the dividend tax (20 percentage points) waived by the Philippines in making
applicable the preferred dividend tax rate of fifteen percent (15%). In other words, our
NIRC does not require that the US tax law deem the parent-corporation to have paid the
twenty (20) percentage points of dividend tax waived by the Philippines. The NIRC only
requires that the US "shall allow" P&G-USA a "deemed paid" tax credit in an amount
equivalent to the twenty (20) percentage points waived by the Philippines.
6.
ID.; ID.; ID.; ID.; ID.; APPLICABLE IN CASE AT BAR. The parentcorporation P&G-USA is "deemed to have paid" a portion of the Philippine corporate
income tax although that tax was actually paid by its Philippine subsidiary, P&G-Phil.,
not by P&G-USA. This "deemed paid" concept merely reflects economic reality, since
the Philippine corporate income tax was in fact paid and deducted from revenues earned
in the Philippines, thus reducing the amount remittable as dividends to P&G-USA. In
other words, US tax law treats the Philippine corporate income tax as if it came out of the
pocket, as it were, of P&G-USA as a part of the economic cost of carrying on business
operations in the Philippines through the medium of P&G-Phil. and here earning profits.
What is, under US law, deemed paid by P&G-USA are not "phantom taxes" but instead
Philippine corporate income taxes actually paid here by P&G-Phil., which are very real
indeed. It is also useful to note that both (i) tax credit for the Philippine dividend tax
actually withheld, and (ii) the tax credit for the Philippine corporate income tax actually
paid by P&G-Phil. but "deemed paid" by P&G-USA, are tax credits available or
applicable against the US corporate income tax of P&G-USA. These tax credits are
allowed because of the US congressional desire to avoid or reduce double taxation of the
same income stream.
7.
ID.; ID.; ID.; ID.; ID.; DETERMINING FACTORS. In order to determine
whether US tax law complies with the requirements for applicability of the reduced or
preferential fifteen percent (15%) dividend tax rate under Section 24 (b) (1), NIRC, it is
necessary: a) to determine the amount of the 20 percentage points dividend tax waived by
the Philippine government under Section 24 (b) (1), NIRC, and which hence goes to
P&G-USA; b) to determine the amount of the "deemed paid" tax credit which US tax law
must allow to P&G-USA; and c) to ascertain that the amount of the "deemed paid" tax
credit allowed by US law is at least equal to the amount of the dividend tax waived by the
Philippine Government.
8.
ID.; ID.; ID.; ID.; "DEEMED PAID" TAX CREDIT; NEED NOT HAVE BEEN
GRANTED BEFORE THE PREFERENTIAL FIFTEEN PERCENT (15%) DIVIDEND
TAX RATE. Clearly, the "deemed paid" tax credit which, under Section 24 (b) (1),
NIRC, must be allowed by US law to P&G-USA, is the same "deemed paid tax credit

that Philippine law allows to a Philippine corporation with a wholly- or majority-owned

subsidiary in (for instance) the US. The "deemed paid" tax credit allowed in Section 902,
US Tax Code, is no more a credit for "phantom taxes" than is the "deemed paid" tax
credit granted in Section 30 (c) (8), NIRC. We believe, in the first place, that we must
distinguish between the legal question before this Court from questions of administrative
implementation arising after the legal question has been answered. The basic legal issue
is, of course, this: which is the applicable dividend tax rate in the instant case: the regular
thirty-five percent (35%) rate or the reduced fifteen percent (15%) rate? The question of
whether or not P&G-USA is in fact given by the US tax authorities a "deemed paid" tax
credit in the required amount, relates to the administrative implementation of the
applicable reduced tax rate. In the second place, Section 24 (b)(1), NIRC, does not in fact
require that the "deemed paid" tax credit shall have actually been granted before the
applicable dividend tax rate goes down from thirty-five percent (35%) to fifteen percent
(15%). As noted several time earlier, Section 24 (b)(1), NIRC, merely requires, in the
case at bar, that the USA "shall allow a credit against the tax due from [P&G-USA for]
taxes deemed to have been paid in the Philippines . . ." There is neither statutory
provision nor revenue regulation issued by the Secretary of Finance requiring the actual
grant of the "deemed paid" tax credit by the US Internal Revenue Service to P&G-USA
before the preferential fifteen percent (15%) dividend rate becomes applicable. Section
24 (b)(1), NIRC, does not create a tax exemption nor does it provide a tax credit; it is a
provision which specifies when a particular (reduced) tax rate is legally applicable.
9.
ID.; ID.; ID.; ID.; ADMINISTRATIVE IMPLEMENTATION THEREOF;
LODGED WITH THE BUREAU OF INTERNAL REVENUE. A requirement
relating to administrative implementation is not properly imposed as a condition for the
applicability, as a matter of law, of a particular tax rate. Upon the other hand, upon the
determination or recognition of the applicability of the reduced tax rate, there is nothing
to prevent the BIR from issuing implementation regulations that would require P&GPhil., or any Philippine corporation similarly situated, to certify to the BIR the amount of
the "deemed paid" tax credit actually subsequently granted by the US tax authorities to
P&G-USA or a US parent corporation for the taxable year involved. Since the US tax
laws can and do change, such implementing regulations could also provide that failure of
P&G-Phil. to submit such certification within a certain period of time, would result in the
imposition of a deficiency assessment for the twenty (20) percentage points differential.
The task of this Court is to settle which tax rate is applicable, considering the state of US
law at a given time. We should leave details relating to administrative implementation
where they properly belong with the BIR.
10.
ID.; ID.; ID.; ID.; PURPOSE OF THE REDUCTION. An interpretation of a
tax statute that produces a revenue flow for the government is not, for that reason alone,
necessarily the correct reading of the statute. There are many tax statutes or provisions
which are designed, not to trigger off an instant surge of revenues, but rather to achieve
longer-term and broader-gauge fiscal and economic objectives. The task of our Court is
to give effect to the legislative design and objectives as they are written into the statute
even if, as in the case at bar, some revenues have to be foregone in that process. The
economic objectives sought to be achieved by the Philippine Government by reducing the
thirty-five percent (35%) dividend rate to fifteen percent (15%) are set out in the
preambular clauses of P.D. No. 369 which amended Section 24 (b)(1), NIRC, into its

present form. More simply put, Section 24 (b)(1), NIRC, seeks to promote the in-flow of
foreign equity investment in the Philippines by reducing the tax cost of earning profits
here and thereby increasing the net dividends remittable to the investor. The foreign
investor, however, would not benefit from the reduction of the Philippine dividend tax
rate unless its home country gives it some relief from double taxation (i.e., second-tier
taxation) (the home country would simply have more "post-R.P. tax" income to subject to
its own taxing power) by allowing the investor additional tax credits which would be
applicable against the tax payable to such home country. Accordingly, Section 24 (b)(1),
NIRC, requires the home or domiciliary country to give the investor corporation a
"deemed paid" tax credit at least equal in amount to the twenty (20) percentage points of
dividend tax foregone by the Philippines, in the assumption that a positive incentive
effect would thereby be felt by the investor.
CRUZ, J., concurring:
TAXATION; TAX ON FOREIGN CORPORATION; NON-RESIDENT
CORPORATION; DIVIDEND REMITTANCE TAX RATE REDUCED FROM
THIRTY-FIVE PERCENT (35%) TO FIFTEEN PERCENT (15%); PURPOSE. The
intention of Section 24(b) of our Tax Code is to attract foreign investors to this country
by reducing their 35% dividend tax rate to 15% if their own state allows them a deemed
paid tax credit at least equal in amount to the 20% waived by the Philippines. This tax
credit would offset the tax payable by them on their profits to their home state. In effect,
both the Philippines and the home state of the foreign investors reduce their respective
tax "take" of those profits and the investors wind up with more left in their pockets.
Under this arrangement, the total taxes to be paid by the foreign investors may be
confined to the 35% corporate income tax and 15% dividend tax only, both payable to the
Philippines, with the US tax liability being offset wholly or substantially by the US
"deemed paid" tax credits. Without this arrangement, the foreign investors will have to
pay to the local state (in addition to the 35% corporate income tax) a 35% dividend tax
and another 35% or more to their home state or a total of 70% or more on the same
amount of dividends. In this circumstance, it is not likely that many such foreign
investors, given the onerous burden of the two-tier tax system, i.e., local state plus home
state, will be encouraged to do business in the local state. It is conceded that the law will
"not trigger off an instant surge of revenue," as indeed the tax collectible by the Republic
from the foreign investor is considerably reduced. This may appear unacceptable to the
superficial viewer. But this reduction is in fact the price we have to offer to persuade the
foreign company to invest in our country and contribute to our economic development.
The benefit to us may not be immediately available in instant revenues but it will be
realized later, and in greater measure, in terms of a more stable and robust economy.
BIDIN, J., concurring opinion:
1.
TAXATION; COMMISSIONER OF INTERNAL REVENUE; SUBJECT TO
THE SAME STRINGENT CONDITION APPLICABLE TO AN ORDINARY
LITIGANT. Mr. Justice Edgardo L. Paras in his dissenting opinion argues that the
failure of petitioner Commissioner of Internal Revenue to raise before the Court of Tax
Appeals the issue of who should be the real party in interest in claiming a refund cannot
prejudice the government, as such failure is merely a procedural defect; and that
moreover, the government can never be in estoppel, especially in matters involving taxes.
In a word, the dissenting opinion insists that errors of its agents should not jeopardize the

government's position. The above rule should not be taken absolutely and literally; if it
were, the government would never lose any litigation which is clearly not true. The issue
involved here is not merely one of procedure; it is also one of fairness: whether the
government should be subject to the same stringent conditions applicable to an ordinary
litigant. As the Court had declared in Wander: ". . . To allow a litigant to assume a
different posture when he comes before the court and challenge the position he had
accepted at the administrative level, would be to sanction a procedure whereby the Court
which is supposed to review administrative determinations would not review, but
determine and decide for the first time, a question not raised at the administrative forum. .
. ." (160 SCRA at 566-577) Had petitioner been forthright earlier and required from
private respondent proof of authority from its parent corporation, Procter and Gamble
USA, to prosecute the claim for refund, private respondent would doubtless have been
able to show proof of such authority. By any account, it would be rank injustice now at
this late stage to require petitioner to submit such proof.
2.
ID.; TAX CREDIT; CLAIMING THEREOF DOES NOT REQUIRE
DOCUMENTARY PROOF OF PARENT CORPORATION TO HAVE ACTUALLY
RECEIVED THE "DEEMED PAID" TAX CREDIT TO PROPER TAX AUTHORITY.
Paras, J., stressed that private respondent had failed: (1) to show the actual amount
credited by the US government against the income tax due from P & G USA on the
dividends received from private respondent; (2) to present the 1975 income tax return of
P & G USA when the dividends were received; and (3) to submit any duly authenticated
document showing that the US government credited the 20% tax deemed paid in the
Philippines. I agree with the main opinion of my colleague, Feliciano, J., specifically in
page 23 et seq. thereof, which, as I understand it, explains that the US tax authorities are
unable to determine the amount of the "deemed paid" credit to be given P & G USA so
long as the numerator of the fraction, i.e., dividends actually remitted by P & G to P & G
USA, is still unknown. Stated in other words, until dividends have actually been remitted
to the US (which presupposes an actual imposition and collection of the applicable
Philippine dividend tax rate), the US tax authorities cannot determine the "deemed paid"
portion of the tax credit sought by P & G USA. To require private respondent to show
documentary proof of its parent corporation having actually received the "deemed paid"
tax credit from the proper tax authorities, would be like putting the cart before the horse.
The only way of cutting through this (what Feliciano, J., termed) "circularity" is for our
BIR to issue rulings (as they have been doing) to the effect that the tax laws of particular
foreign jurisdictions, e.g., USA, comply with the requirements in our tax code for
applicability of the reduced 15% dividend tax rate. Thereafter, the taxpayer can be
required to submit, within a reasonable period, proof of the amount of "deemed paid" tax
credit actually granted by the foreign tax authority. Imposing such a resolutory condition
should resolve the knotty problem of circularity.
3.
ID.; TAX REFUND; STRICT CONSTRUCTION AGAINST CLAIMANT
THEREOF; MUST CONSIDER THE LEGISLATIVE INTENT IN IMPLEMENTING
THEREOF. Page 8 of the dissenting opinion of Paras, J., further declares that tax
refunds, being in the nature of tax exemptions, are to be construed strictissimi juris
against the person or entity claiming the exemption; and that refunds cannot be permitted
to exist upon "vague implications." Notwithstanding the foregoing canon of construction,
the fundamental rule is still that a judge must ascertain and give effect to the legislative

intent embodied in a particular provision of law. If a statute (including a tax statute

reducing a certain (tax rate) is clear, plain and free from ambiguity, it must be given its
ordinary meaning and applied without interpretation. In the instant case, the dissenting
opinion of Paras, J., itself concedes that the basic purpose of Pres. Decree No. 369, when
it was promulgated in 1975 to amend Section 24(b), [1] of the National Internal Revenue
Code, was "to decrease the tax liability" of the foreign capital investor and thereby to
promote more inward foreign investment. The same dissenting opinion hastens to add,
however, that the granting of a reduced dividend tax rate "is premised on reciprocity."
4.
ID.; REDUCED DIVIDEND REMITTANCE; CONDITION OF
RECIPROCITY; NOT REQUIRED TO GRANT THE PRIVILEGE. Nowhere in the
provisions of P.D. No. 369 or in the National Internal Revenue Code itself would one
find reciprocity specified as a condition for the granting of the reduced dividend tax rate
in Section 24 (b), [1], NIRC. Upon the other hand, where the law-making authority
intended to impose a requirement of reciprocity as a condition for grant of a privilege, the
legislature does so expressly and clearly. For example, the gross estate of non-citizens
and non-residents of the Philippines normally includes intangible personal property
situated in the Philippines, for purposes of application of the estate tax and donor's tax.
However, under Section 98 of the NIRC (as amended by P.D. 1457), no taxes will be
collected by the Philippines in respect of such intangible personal property if the law or
the foreign country of which the decedent was a citizen and resident at the time of his
death allows a similar exemption from transfer or death taxes in respect of intangible
personal property located in such foreign country and owned by Philippine citizens not
residing in that foreign country. There is no statutory requirement of reciprocity imposed
as a condition for grant of the reduced dividend tax rate of 15%. Moreover, for the Court
to impose such a requirement of reciprocity would be to contradict the basic policy
underlying P.D. 369 which amended Section 24(b), [1], NIRC. P.D. 369 was
promulgated in the effort to promote the inflow of foreign investment capital into the
Philippines. A requirement of reciprocity, i.e., a requirement that the U.S. grant a similar
reduction of U.S. subsidiaries of Philippine corporations, would assume a desire on the
part of the U.S. and of the Philippines to attract the flow of Philippine capital into the
U.S.. But the Philippines precisely is a capital importing, and not a capital exporting
country. If the Philippines had surplus capital to export, it would not need to import
foreign capital into the Philippines. In other words, to require dividend tax reciprocity
from a foreign jurisdiction would be to actively encourage Philippine corporations to
invest outside the Philippines, which would be inconsistent with the notion of attracting
foreign capital into the Philippines in the first place.
PARAS, J., dissenting:
1.
TAXATION; TAX ON FOREIGN CORPORATIONS; NON-RESIDENT
CORPORATION; WITHHOLDING AGENT THEREOF CANNOT CLAIM TAX
REFUND IN BEHALF OF PARENT CORPORATION. It is true that private
respondent, as withholding agent, is obliged by law to withhold and to pay over to the
Philippine government the tax on the income of the taxpayer, PMC-U.S.A. (parent
company). However, such fact does not necessarily connote that private respondent is the
real party in interest to claim reimbursement of the tax alleged to have been overpaid.
Payment of tax is an obligation physically passed off by law on the withholding agent, if
any, but the act of claiming tax refund is a right that, in a strict sense, belongs to the

taxpayer which is private respondent's parent company. The role or function of PMCPhils., as the remitter or payor of the dividend income, is merely to insure the collection
of the dividend income taxes due to the Philippine government from the taxpayer, "PMCU.S.A." the non-resident foreign corporation not engaged in trade or business in the
Philippines, as "PMC-U.S.A." is subject to tax equivalent to thirty five percent (35%) of
the gross income received from "PMC-Phils." in the Philippines "as . . . dividends . . ."
(Sec. 24 [b], Phil. Tax Code). Being a mere withholding agent of the government and the
real party in interest being the parent company in the United States, private respondent
cannot claim refund of the alleged overpaid taxes. Such right properly belongs to PMCU.S.A. It is therefore clear that as held by the Supreme Court in a series of cases, the
action in the Court of Tax Appeals as well as in this Court should have been brought in
the name of the parent company as petitioner and not in the name of the withholding
agent. This is because the action should be brought under the name of the real party in
interest. (See Salonga v. Warner Barnes, & Co., Ltd., 88 Phil. 125; Sutherland, Code
Pleading, Practice, & Forms, p. 11; Ngo The Hua v. Chung Kiat Hua, L-17091, Sept. 30,
1963, 9 SCRA 113, Gabutas v. Castellanes, L-17323, June 23, 1965, 14 SCRA 376; Rep.
v. PNB, L-16485, January 30, 1945). It is true that under the Internal Revenue Code the
withholding agent may be sued by itself if no remittance tax is paid, or if what was paid
is less than what is due. From this, Justice Feliciano claims that in case of an
overpayment (or claim for refund) the agent must be given the right to sue the
Commissioner by itself (that is, the agent here is also a real party in interest). He further
claims that to deny this right would be unfair. This is not so. While payment of the tax
due is an OBLIGATION of the agent, the obtaining of a refund is a RIGHT. While every
obligation has a corresponding right (and vice-versa), the obligation to pay the complete
tax has the corresponding right of the government to demand the deficiency; and the right
of the agent to demand a refund corresponds to the government's duty to refund.
Certainly. The obligation of the withholding agent to pay in full does not correspond to
its right to claim for the refund. It is evident therefore that the real party in interest in this
claim for reimbursement is the principal (the mother corporation) and NOT the agent.
2.
ID.; ID.; ID.; U.S. FOREIGN TAX CREDIT; OPERATES ONLY ON FOREIGN
TAXES ACTUALLY PAID BY U.S. CORPORATE TAXPAYER; CASE AT BAR.
The U.S. foreign tax credit system operates only on foreign taxes actually paid by U.S.
corporate taxpayers, whether directly or indirectly. Nowhere under a statute or under a
tax treaty, does the U.S. government recognize much less permit any foreign tax credit
for spared or ghost taxes, as in reality the U.S. foreign-tax credit mechanism under
Sections 901-905 of the U.S. Internal Revenue Code does not apply to phantom dividend
taxes in the form of dividend taxes waived, spared or otherwise considered "as if" paid by
any foreign taxing authority, including that of the Philippine government. Beyond that,
the private respondent failed: (1) to show the actual amount credited by the U.S.
government against the income tax due from PMC-U.S.A. on the dividends received
from private respondent; (2) to present the income tax return of its parent company for
1975 when the dividends were received; and (3) to submit any duly authenticated
document showing that the U.S. government credited the 20% tax deemed paid in the
Philippines.
3.
ID.; TAX REFUND; STRICTLY CONSTRUED AGAINST THE PERSON OR
ENTITY CLAIMING THEREOF. Tax refunds are in the nature of tax exemptions. As

such, they are regarded as in derogation or sovereign authority and to be construed

strictissimi juris against the person or entity claiming the exemption. The burden of proof
is upon him who claims the exemption in his favor and he must be able to justify his
claim by the clearest grant of organic or statute law . . . and cannot be permitted to exist
upon vague implications. (Asiatic Petroleum Co. v. Llanes, 49 Phil. 466; Northern Phil.
Tobacco Corp. v. Mun. of Agoo, La Union, 31 SCRA 304; Rogan v. Commissioner, 30
SCRA 968; Asturia Sugar Central, Inc. v. Commissioner of Customs, 29 SCRA 617;
Davao Light and Power Co. Inc. v. Commissioner of Custom, 44 SCRA 122). Thus,
when tax exemption is claimed, it must be shown indubitably to exist, for every
presumption is against it, and a well founded doubt is fatal to the claim (Farrington v.
Tennessee & Country Shelby, 95 U.S. 679, 686; Manila Electric Co. v. Vera, L-29987,
Oct. 22, 1975; Manila Electric Co. v. Tabios, L-23847, Oct. 22, 1975, 67 SCRA 451).
4.
ID.; TAX CREDIT APPERTAINING TO REMITTANCE ABROAD OF
DIVIDEND EARNED HERE IN THE PHILIPPINES; PURPOSE. It will be
remembered that the tax credit appertaining to remittances abroad of dividend earned
here in the Philippines was amplified in Presidential Decree No. 369 promulgated in
1975, the purpose of which was to "encourage more capital investment for large
projects." And its ultimate purpose is to decrease the tax liability of the corporation
concerned. But this granting of a preferential right is premised on reciprocity, without
which there is clearly a derogation of our country's financial sovereignty. No such
reciprocity has been proved, nor does it actually exist.
5.
CIVIL LAW; ESTOPPEL; DOES NOT APPLY TO GOVERNMENT
AGENCIES. Petitioner Commissioner of Internal Revenue's failure to raise before the
Court of Tax Appeals the issue relating to the real party in interest to claim the refund
cannot, and should not, prejudice the government. Such is merely a procedural defect. It
is axiomatic that the government can never be in estoppel, particularly in matters
involving taxes. Thus, for example, the payment by the tax-payer of income taxes,
pursuant to a BIR assessment does not preclude the government from making further
assessments. The errors or omissions of certain administrative officers should never be
allowed to jeopardize the government's financial position. (See: Phil. Long Distance Tel.
Co. v. Coll. of Internal Revenue, 90 Phil. 674; Lewin v. Galang, L-15253, Oct. 31, 1960;
Coll. of Internal Revenue v. Ellen Wood McGrath, L-12710, L-12721, Feb. 28, 1961;
Perez v. Perez, L-14874, Sept. 30, 1960; Republic v. Caballero, 79 SCRA 179; Favis v.
Municipality of Sabongan, L-26522, Feb. 27, 1963)
RESOLUTION
FELICIANO, J p:
For the taxable year 1974 ending on 30 June 1974, and the taxable year 1975 ending 30
June 1975, private respondent Procter and Gamble Philippine Manufacturing Corporation
("P&G-Phil.") declared dividends payable to its parent company and sole stockholder,
Procter and Gamble Co., Inc. (USA) ("P&G-USA"), amounting to P24,164,946.30, from
which dividends the amount of P8,457,731.21 representing the thirty-five percent (35%)
withholding tax at source was deducted.
On 5 January 1977, private respondent P&G-Phil. filed with petitioner Commissioner of
Internal Revenue a claim for refund or tax credit in the amount of P4,832,989.26
claiming, among other things, that pursuant to Section 24 (b) (1) of the National Internal
Revenue Code ("NIRC"), 1 as amended by Presidential Decree No. 369, the applicable

rate of withholding tax on the dividends remitted was only fifteen percent (15%) (and not
thirty-five percent [35%]) of the dividends.
There being no responsive action on the part of the Commissioner, P&G-Phil., on 13 July
1977, filed a petition for review with public respondent Court of Tax Appeals ("CTA")
docketed as CTA Case No. 2883. On 31 January 1984, the CTA rendered a decision
ordering petitioner Commissioner to refund or grant the tax credit in the amount of
P4,832,989.00.
On appeal by the Commissioner, the Court through its Second Division reversed the
decision of the CTA and held that:
(a)
P&G-USA, and not private respondent P&G-Phil., was the proper party to claim
the refund or tax credit here involved; prcd
(b)
"there is nothing in Section 902 or other provisions of the US Tax Code that
allows a credit against the US tax due from P&G-USA of taxes deemed to have been paid
in the Philippines equivalent to twenty percent (20%) which represents the difference
between the regular tax of thirty-five percent (35%) on corporations and the tax of fifteen
percent (15%) on dividends;" and
(c)
private respondent P&G-Phil. failed to meet certain conditions necessary in order
that "the dividends received by its non-resident parent company in the US (P&G-USA)
may be subject to the preferential tax rate of 15% instead of 35%."
These holdings were questioned in P&G-Phil.'s Motion for Reconsideration and we will
deal with them seriatim in this Resolution resolving that Motion.
I
1.
There are certain preliminary aspects of the question of the capacity of P&G-Phil.
to bring the present claim for refund or tax credit, which need to be examined. This
question was raised for the first time on appeal, i.e., in the proceedings before this Court
on the Petition for Review filed by the Commissioner of Internal Revenue. The question
was not raised by the Commissioner on the administrative level, and neither was it raised
by him before the CTA.
We believe that the Bureau of Internal Revenue ("BIR") should not be allowed to defeat
an otherwise valid claim for refund by raising this question of alleged incapacity for the
first time on appeal before this Court. This is clearly a matter of procedure. Petitioner
does not pretend that P&G-Phil., should it succeed in the claim for refund, is likely to run
away, as it were, with the refund instead of transmitting such refund or tax credit to its
parent and sole stockholder. It is commonplace that in the absence of explicit statutory
provisions to the contrary, the government must follow the same rules of procedure
which bind private parties. It is, for instance, clear that the government is held to
compliance with the Provisions of Circular No. 1-88 of this Court in exactly the same
way that private litigants are held to such compliance, save only in respect of the matter
of filing fees from which the Republic of the Philippines is exempt by the Rules of Court.
More importantly, there arises here a question of fairness should the BIR, unlike any
other litigant, be allowed to raise for the first time on appeal questions which had not
been litigated either in the lower court or on the administrative level. For, if petitioner
had at the earliest possible opportunity, i.e., at the administrative level, demanded that
P&G-Phil. produce an express authorization from its parent corporation to bring the
claim for refund, then P&G-Phil. would have been able forthwith to secure and produce

such authorization before filing the action in the instant case. The action here was
commenced just before expiration of the two (2)-year prescriptive period.
2.
The question of the capacity of P&G-Phil. to bring the claim for refund has
substantive dimensions as well which, as will be seen below, also ultimately relate to
fairness. LexLib
Under Section 306 of the NIRC, a claim for refund or tax credit filed with the
Commissioner of Internal Revenue is essential for maintenance of a suit for recovery of
taxes allegedly erroneously or illegally assessed or collected:
"SECTION 306.
Recovery of tax erroneously or illegally collected. No suit or
proceeding shall be maintained in any court for the recovery of any national internal
revenue tax hereafter alleged to have been erroneously or illegally assessed or collected,
or of any penalty claimed to have been collected without authority, or of any sum alleged
to have been excessive or in any manner wrongfully collected, until a claim for refund or
credit has been duly filed with the Commissioner of Internal Revenue; but such suit or
proceeding may be maintained, whether or not such tax, penalty, or sum has been paid
under protest or duress. In any case, no such suit or proceeding shall be begun after the
expiration of two years from the date of payment of the tax or penalty regardless of any
supervening cause that may arise after payment: . . ." (Emphasis supplied).
Section 309 (3) of the NIRC, in turn, provides:
"SECTION 309.
Authority of Commissioner to Take Compromises and to Refund
Taxes. The Commissioner may:
xxx
xxx
xxx
(3)
credit or refund taxes erroneously or illegally received, . . . No credit or refund of
taxes or penalties shall be allowed unless the taxpayer files in writing with the
Commissioner a claim for credit or refund within two (2) years after the payment of the
tax or penalty." (As amended by P.D. No. 69) (Emphasis supplied).
Since the claim for refund was filed by P&G-Phil., the question which arises is: is P&GPhil. a "taxpayer" under Section 309 (3) of the NIRC? The term "taxpayer" is defined in
our NIRC as referring to "any person subject to tax imposed by the Title [on Tax on
Income]." 2 It thus becomes important to note that under Section 53 (c) of the NIRC, the
withholding agent who is required to deduct and withhold any tax" is made "personally
liable for such tax" and indeed is indemnified against any claims and demands which the
stockholder might wish to make in questioning the amount of payments effected by the
withholding agent in accordance with the provisions of the NIRC. The withholding agent,
P&G-Phil., is directly and independently liable 3 for the correct amount of the tax that
should be withheld from the dividend remittances. The withholding agent is, moreover,
subject to and liable for deficiency assessments, surcharges and penalties should the
amount of the tax withheld be finally found to be less than the amount that should have
been withheld under law. cdll
A "person liable for tax" has been held to be a "person subject to tax"" and properly
considered a "taxpayer." 4 The terms liable for tax" and "subject to tax" both connote
legal obligation or duty to pay a tax. It is very difficult, indeed conceptually impossible,
to consider a person who is statutorily made liable for tax" as not "subject to tax." By any
reasonable standard, such a person should be regarded as a party in interest, or as a
person having sufficient legal interest, to bring a suit for refund of taxes he believes were
illegally collected from him.

In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, 5 this Court

pointed out that a withholding agent is in fact the agent both of the government and of the
taxpayer, and that the withholding agent is not an ordinary government agent:
"The law sets no condition for the personal liability of the withholding agent to attach.
The reason is to compel the withholding agent to withhold the tax under all
circumstances. In effect, the responsibility for the collection of the tax as well as the
payment thereof is concentrated upon the person over whom the Government has
jurisdiction. Thus, the withholding agent is constituted the agent of both the Government
and the taxpayer. With respect to the collection and/or withholding of the tax, he is the
Government's agent. In regard to the filing of the necessary income tax return and the
payment of the tax to the Government, he is the agent of the taxpayer. The withholding
agent, therefore, is no ordinary government agent especially because under Section 53 (c)
he is held personally liable for the tax he is duty bound to withhold; whereas the
Commissioner and his deputies are not made liable by law." 6 (Emphasis supplied).
If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the
beneficial owner of the dividends with respect to the filing of the necessary income tax
return and with respect to actual payment of the tax to the government, such authority
may reasonably be held to include the authority to file a claim for refund and to bring an
action for recovery of such claim. This implied authority is especially warranted where,
as in the instant case, the withholding agent is the wholly owned subsidiary of the parentstockholder and therefore, at all times, under the effective control of such parentstockholder. In the circumstances of this case, it seems particularly unreal to deny the
implied authority of P&G-Phil. to claim a refund and to commence an action for such
refund.
We believe that, even now, there is nothing to preclude the BIR from requiring P&GPhil. to show some written or telexed confirmation by P&G-USA of the subsidiary's
authority to claim the refund or tax credit and to remit the proceeds of the refund, or to
apply the tax credit to some Philippine tax obligation of, P&G-USA, before actual
payment of the refund or issuance of a tax credit certificate. What appears to be vitiated
by basic unfairness is petitioner's position that, although P&G-Phil. is directly and
personally liable to the Government for the taxes and any deficiency assessments to be
collected, the Government is not legally liable for a refund simply because it did not
demand a written confirmation of P&G-Phil.'s implied authority from the very beginning.
A sovereign government should act honorably and fairly at all times, even vis-a-vis
taxpayers.
We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly
regarded as a "taxpayer" within the meaning of Section 309, NIRC, and as impliedly
authorized to file the claim for refund and the suit to recover such claim. llcd
II
1.
We turn to the principal substantive question before us: the applicability to the
dividend remittances by P&G-Phil. to P&G-USA of the fifteen percent (15%) tax rate
provided for in the following portion of Section 24 (b) (1) of the NIRC:
"(b) Tax on foreign corporations.
(1)
Non-resident corporation. A foreign corporation not engaged in trade and
business in the Philippines, . . ., shall pay a tax equal to 35% of the gross income receipt
during its taxable year from all sources within the Philippines, as . . . dividends . . .

Provided, still further, that on dividends received from a domestic corporation liable to
tax under this Chapter, the tax shall be 15% of the dividends, which shall be collected and
paid as provided in Section 53 (d) of this Code, subject to the condition that the country
in which the non-resident foreign corporation is domiciled shall allow a credit against the
tax due from the non-resident foreign corporation, taxes deemed to have been paid in the
Philippines equivalent to 20% which represents the difference between the regular tax
(35%) on corporations and the tax (15%) on dividends as provided in this Section . . ."
The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to nonresident corporate stockholders of a Philippine corporation, goes down to fifteen percent
(15%) if the country of domicile of the foreign stockholder corporation "shall allow" such
foreign corporation a tax credit for "taxes deemed paid in the Philippines," applicable
against the tax payable to the domiciliary country by the foreign stockholder corporation.
In other words, in the instant case, the reduced fifteen percent (15%) dividend tax rate is
applicable if the USA "shall allow" to P&G-USA a tax credit for "taxes deemed paid in
the Philippines" applicable against the US taxes of P&G-USA. The NIRC specifies that
such tax credit for "taxes deemed paid in the Philippines" must, as a minimum, reach an
amount equivalent to twenty (20) percentage points which represents the difference
between the regular thirty-five percent (35%) dividend tax rate and the preferred fifteen
percent (15%) dividend tax rate.
It is important to note that Section 24 (b) (1), NIRC, does not require that the US must
give a "deemed paid" tax credit for the dividend tax (20 percentage points) waived by the
Philippines in making applicable the preferred dividend tax rate of fifteen percent (15%).
In other words, our NIRC does not require that the US tax law deem the parentcorporation to have paid the twenty (20) percentage points of dividend tax waived by the
Philippines. The NIRC only requires that the US "shall allow" P&G-USA a "deemed
paid" tax credit in an amount equivalent to the twenty (20) percentage points waived by
the Philippines.
2.
The question arises: Did the US law comply with the above requirement? The
relevant provisions of the US Internal Revenue Code ("Tax Code") are the following:
"SECTION 901 Taxes of foreign countries and possessions of United States.
(a)
Allowance of credit. If the taxpayer chooses to have the benefits of this
subpart, the tax imposed by this chapter shall, subject to the applicable limitation of
section 904, be credited with the amounts provided in the applicable paragraph of
subsection (b) plus, in the case of a corporation, the taxes deemed to have been paid
under sections 902 and 960. Such choice for any taxable year may be made or changed at
any time before the expiration of the period prescribed for making a claim for credit or
refund of the tax imposed by this chapter for each taxable year. The credit shall not be
allowed against the tax imposed by section 531 (relating to the tax on accumulated
earnings), against the additional tax imposed for the taxable year under section 1333
(relating to war loss recoveries) or under section 1351 (relating to recoveries of foreign
expropriation losses), or against the personal holding company tax imposed by section
541.
(b)
Amount allowed. Subject to the applicable limitation of section 904, the
following amounts shall be allowed as the credit under subsection (a):
(a)
Citizens and domestic corporations. In the case of a citizen of the United States
and of a domestic corporation, the amount of any income, war profits, and excess profits

taxes paid or accrued during the taxable year to any foreign country or to any possession
of the United States; and LexLib
xxx
xxx
xxx
SECTION 902. Credit for corporate stockholders in foreign corporation.
(A)
Treatment of Taxes Paid by Foreign Corporation. For purposes of this subject,
a domestic corporation which owns at least 10 percent of the voting stock of a foreign
corporation from which it receives dividends in any taxable year shall
xxx
xxx
xxx
(2)
to the extent such dividends are paid by such foreign corporation out of
accumulated profits [as defined in subsection (c) (1) (b)] of a year for which such foreign
corporation is a less developed country corporation, be deemed to have paid the same
proportion of any income, war profits, or excess profits taxes paid or deemed to be paid
by such foreign corporation to any foreign country or to any possession of the United
States on or with respect to such accumulated profits, which the amount of such
dividends bears to the amount of such accumulated profits.
xxx
xxx
xxx
(c)
Applicable Rules
(1)
Accumulated profits defined. For purposes of this section, the term
'accumulated profits' means with respect to any foreign corporation,
(A)
for purposes of subsections (a) (1) and (b) (1), the amount of its gains, profits, or
income computed without reduction by the amount of the income, war profits, and excess
profits taxes imposed on or with respect to such profits or income by any foreign country.
. . .; and
(B)
for purposes of subsections (a) (2) and (b) (2), the amount of its gains, profits, or
income in excess of the income, war profits, and excess profits taxes imposed on or with
respect to such profits or income.
The Secretary or his delegate shall have full power to determine from the accumulated
profits of what year or years such dividends were paid, treating dividends paid in the first
20 days of any year as having been paid from the accumulated profits of the preceding
year or years (unless to his satisfaction shows otherwise), and in other respects treating
dividends as having been paid from the most recently accumulated gains, profits, or
earning . . ." (Emphasis supplied).
Close examination of the above quoted provisions of the US Tax Code 7 shows the
following:
a.
US law (Section 901, Tax Code) grants P&G-USA a tax credit for the amount of
the dividend tax actually paid (i.e., withheld) from the dividend remittances to P&GUSA;
b.
US law (Section 902, US Tax Code) grants to P&G-USA a "deemed paid" tax
credit 8 for a proportionate part of the corporate income tax actually paid to the
Philippines by P&G-Phil.
The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine
corporate income tax although that tax was actually paid by its Philippine subsidiary,
P&G-Phil., not by P&G-USA. This "deemed paid" concept merely reflects economic
reality, since the Philippine corporate income tax was in fact paid and deducted from
revenues earned in the Philippines, thus reducing the amount remittable as dividends to
P&G-USA. In other words, US tax law treats the Philippine corporate income tax as if it

came out of the pocket, as it were, of P&G-USA as a part of the economic cost of
carrying on business operations in the Philippines through the medium of P&G-Phil. and
here earning profits. What is, under US law, deemed paid by P&G-USA are not
"phantom taxes" but instead Philippine corporate income taxes actually paid here by
P&G-Phil., which are very real indeed.
It is also useful to note that both (i) the tax credit for the Philippine dividend tax actually
withheld, and (ii) the tax credit for the Philippine corporate income tax actually paid by
P&G-Phil. but "deemed paid" by P&G-USA, are tax credits available or applicable
against the US corporate income tax of P&G-USA. These tax credits are allowed because
of the US congressional desire to avoid or reduce double taxation of the same income
stream. 9
In order to determine whether US tax law complies with the requirements for
applicability of the reduced or preferential fifteen percent (15%) dividend tax rate under
Section 24 (b) (1), NIRC, it is necessary:
a.
to determine the amount of the 20 percentage points dividend tax waived by the
Philippine government under Section 24 (b) (1), NIRC, and which hence goes to P&GUSA;
b.
to determine the amount of the "deemed paid" tax credit which US tax law must
allow to P&G-USA; and
c.
to ascertain that the amount of the "deemed paid" tax credit allowed by US law is
at least equal to the amount of the dividend tax waived by the Philippine Government.
prcd
Amount (a), i.e., the amount of the dividend tax waived by the Philippine government is
arithmetically determined in the following manner:
P100.00
Pretax net corporate income earned by P&G-Phil.
x 35%
Regular Philippine corporate income tax rate

P35.00
Paid to the BIR by P&G-Phil. as Philippine
corporate income tax.
P100.00
35.00

P65.00
Available for remittance as dividends to P&G-USA.
P65.00
Dividends remittable to P&G-USA
x 35%
Regular Philippine dividend tax rate under Section

24 (b) (1), NIRC

P 22.75
Regular dividend tax.
P65.00
Dividends remittable to P&G-USA
x 15%
Reduced dividend tax rate under Section 24 (b)

(1), NIRC
P 9.75
Reduced dividend tax
P22.75
Regular dividend tax under Section 24 (b) (1), NIRC
9.75
Reduced dividend tax under Section 24 (b) (1),

NIRC
P13.00
Amount of dividend tax waived by Philippine
government under Section 24 (b) (1), NIRC

Thus, amount (a) above is P13.00 for every P100.00 of pre-tax net income earned by
P&G-Phil. Amount (a) is also the minimum amount of the "deemed paid" tax credit that
US tax law shall allow if P&G-USA is to qualify for the reduced or preferential dividend
tax rate under Section 24 (b) (1), NIRC.
Amount (b) above, i.e., the amount of the "deemed paid" tax credit which US tax law
allows under Section 902, Tax Code, may be computed arithmetically as follows:
P65.00
Dividends remittable to P&G-USA
9.75
Dividend tax withheld at the reduced (15%) rate

P55.25
Dividends actually remitted to P&G-USA
P35.00
Philippine corporate income tax paid by P&G-Phil.
to the BIR.
Dividends actually
remitted by P&G-Phil.
to P&G-USA P 55.25

x P35.00 = P29.75 10
Amount of accumulated
P 65.00
profits earned by P&GPhil. in excess of income tax.
Thus, for every P55.25 of dividends actually remitted (after withholding at the rate of
15%) by P&G-Phil. to its US parent P&G-USA, a tax credit of P29.75 is allowed by
Section 902 US Tax Code for Philippine corporate income tax "deemed paid" by the
parent but actually paid by the wholly-owned subsidiary.
Since P29.75 is much higher than P13.00 (the amount of dividend tax waived by the
Philippine government), Section 902, US Tax Code, specifically and clearly complies
with the requirements of Section 24 (b) (1), NIRC.
3.
It is important to note also that the foregoing reading of Sections 901 and 902 of
the US Tax Code is identical with the reading of the BIR of Sections 901 and 902 as
shown by administrative rulings issued by the BIR.
The first Ruling was issued in 1976, i.e., BIR Ruling No. 76004, rendered by then Acting
Commissioner of Internal Revenue Efren I. Plana, later Associate Justice of this Court,
the relevant portion of which stated:
"However, after a restudy of the decision in the American Chicle Company case and the
Provisions of Section 901 and 902 of the U.S. Internal Revenue Code, we find merit in
your contention that our computation of the credit which the U.S. tax law allows in such
cases is erroneous as the amount of tax 'deemed paid' to the Philippine government for
purposes of credit against the U.S. tax by the recipient of dividends includes a portion of
the amount of income tax paid by the corporation declaring the dividend in addition to
the tax withheld from the dividend remitted. In other words, the U.S. government will
allow a credit to the U.S. corporation or recipient of the dividend, in addition to the
amount of tax actually withheld, a portion of the income tax paid by the corporation
declaring the dividend. Thus, if a Philippine corporation wholly owned by a U.S.
corporation has a net income of P100,000, it will pay P25,000 Philippine income tax
thereon in accordance with Section 24(a) of the Tax Code. The net income, after income
tax, which is P75,000, will then be declared as dividend to the U.S. corporation at 15%
tax, or P11,250, will be withheld therefrom. Under the aforementioned sections of the

U.S. Internal Revenue Code, U.S. corporation receiving the dividend can utilize as credit
against its U.S. tax payable on said dividends the amount of P30,000 composed of: LLjur
(1)
The tax 'deemed paid' or indirectly paid on the dividend arrived at as follows:
P75,000 x P25,000 = P18,750
100,000 *
(2)
The amount of 15% of
P75,000 withheld
=
11,250
P30,000
The amount of P18,750 deemed paid and to be credited against the US. tax on the
dividends received by the U.S. corporation from a Philippine subsidiary is clearly more
than 20% requirement of Presidential Decree No. 369 as 20% of P75,000.00 the
dividends to be remitted under the above example, amounts to P15,000.00 only.
In the light of the foregoing, BIR Ruling No. 75-005 dated September 10, 1975 is hereby
amended in the sense that the dividends to be remitted by your client to its parent
company shall be subject to the withholding tax at the rate of 15% only.
This ruling shall have force and effect only for as long as the present pertinent provisions
of the U.S. Federal Tax Code, which are the bases of the ruling, are not revoked,
amended and modified, the effect of which will reduce the percentage of tax deemed paid
and creditable against the U.S. tax on dividends remitted by a foreign corporation to a
U.S. corporation." (Emphasis supplied).
The 1976 Ruling was reiterated in, e.g., BIR Ruling dated 22 July 1981 addressed to
Basic Foods Corporation and BIR Ruling dated 20 October 1987 addressed to Castillo,
Laman, Tan and Associates. In other words, the 1976 Ruling of Hon. Efren I. Plana was
reiterated by the BIR even as the case at bar was pending before the CTA and this Court.
4.
We should not overlook the fact that the concept of "deemed paid" tax credit,
which is embodied in Section 902, US Tax Code, is exactly the same "deemed paid" tax
credit found in our NIRC and which Philippine tax law allows to Philippine corporations
which have operations abroad (say, in the United States) and which, therefore, pay
income taxes to the US government.
Section 30 (c) (3) and (8), NIRC, provides:
"SECTION 30.
Deductions from Gross Income. In computing net income, there
shall be allowed as deductions . . .
(c)
Taxes. . . .
xxx
xxx
xxx
(3)
Credits against tax for taxes of foreign countries. If the taxpayer signifies in his
return his desire to have the benefits of this paragraphs, the tax imposed by this Title shall
be credited with . . .
(a)
Citizen and Domestic Corporation. In the case of a citizen of the Philippines
and of domestic corporation the amount of net income, war profits or excess profits, taxes
paid or accrued during the taxable year to any foreign country." (Emphasis supplied)
Under Section 30 (c) (3) (a), NIRC, above, the BIR must give a tax credit to a Philippine
corporation for taxes actually paid by it to the US government e.g., for taxes collected
by the US government on dividend remittances to the Philippine corporation. This
Section of the NIRC is the equivalent of Section 901 of the US Tax Code.
Section 30 (c) (8), NIRC, is practically identical with Section 902 of the US Tax Code,
and provides as follows:

"(8) Taxes of foreign subsidiary. For the purposes of this subsection a domestic
corporation which owns a majority of the voting stock of a foreign corporation from
which it receives dividends in any taxable year shall be deemed to have paid the same
proportion of any income, war profits, or excess-profits taxes paid by such foreign
corporation to any foreign country, upon or with respect to the accumulated profits of
such foreign corporation from which such dividends were paid, which the amount of such
dividends bears to the amount of such accumulated profits: Provided, That the amount of
tax deemed to have been paid under this subsection shall in no case exceed the same
proportion of the tax against which credit is taken which the amount of such dividends
bears to the amount of the entire net income of the domestic corporation in which such
dividends are included. The term 'accumulated profits' when used in this subsection in
reference to a foreign corporation, means the amount of its gains, profits, or income in
excess of the income, war-profits, and excess-profits taxes imposed upon or with respect
to such profits or income; and the Commissioner of Internal Revenue shall have full
power to determine from the accumulated profits of what year or years such dividends
were paid; treating dividends paid in the first sixty days of any year as having been paid
from the accumulated profits of the preceding year or years (unless to his satisfaction
shown otherwise), and in other respects treating dividends as having been paid from the
most recently accumulated gains, profits, or earnings. In the case of a foreign corporation,
the income, war-profits, and excess-profits taxes of which are determined on the basis of
an accounting period of less than one year, the word 'year' as used in this subsection shall
be construed to mean such accounting period." (Emphasis supplied).
Under the above quoted Section 30 (c) (8), NIRC, the BIR must give a tax credit to a
Philippine parent corporation for taxes "deemed paid" by it, that is, e.g., for taxes paid to
the US by the US subsidiary of a Philippine-parent corporation. The Philippine parent or
corporate stockholder is "deemed under our NIRC to have paid a proportionate part of the
US corporate income tax paid by its US subsidiary, although such US tax was actually
paid by the subsidiary and not by the Philippine parent.
Clearly, the "deemed paid" tax credit which, under Section 24 (b) (1), NIRC, must be
allowed by US law to P&G-USA, is the same "deemed paid" tax credit that Philippine
law allows to a Philippine corporation with a wholly- or majority-owned subsidiary in
(for instance) the US. The "deemed paid" tax credit allowed in Section 902, US Tax
Code, is no more a credit for "phantom taxes" than is the "deemed paid" tax credit
granted in Section 30 (c) (8), NIRC.
III
1.
The Second Division of the Court, in holding that the applicable dividend tax rate
in the instant case was the regular thirty-five percent (35%) rate rather than the reduced
rate of fifteen percent (15%), held that P&G-Phil. had failed to prove that its parent,
P&G-USA, had in fact been given by the US tax authorities a "deemed paid" tax credit in
the amount required by Section 24 (b) (1), NIRC.
We believe, in the first place, that we must distinguish between the legal question before
this Court from questions of administrative implementation arising after the legal
question has been answered. The basic legal issue is of course, this: which is the
applicable dividend tax rate in the instant case: the regular thirty-five percent (35%) rate
or the reduced fifteen percent (15%) rate? The question of whether or not P&G-USA is in

fact given by the US tax authorities a "deemed paid" tax credit in the required amount,
relates to the administrative implementation of the applicable reduced tax rate.
In the second place, Section 24 (b) (1), NIRC, does not in fact require that the "deemed
paid" tax credit shall have actually been granted before the applicable dividend tax rate
goes down from thirty-five percent (35%) to fifteen percent (15%). As noted several
times earlier, Section 24 (b) (1), NIRC, merely requires, in the case at bar, that the USA
"shall allow a credit against the tax due from [P&G-USA for] taxes deemed to have been
paid in the Philippines . . ." There is neither statutory provision nor revenue regulation
issued by the Secretary of Finance requiring the actual grant of the "deemed paid" tax
credit by the US Internal Revenue Service to P&G-USA before the preferential fifteen
percent (15%) dividend rate becomes applicable. Section 24 (b) (1), NIRC, does not
create a tax exemption nor does it provide a tax credit; it is a provision which specifies
when a particular (reduced) tax rate is legally applicable. prcd
In the third place, the position originally taken by the Second Division results in a severe
practical problem of administrative circularity. The Second Division in effect held that
the reduced dividend tax rate is not applicable until the US tax credit for "deemed paid"
taxes is actually given in the required minimum amount by the US Internal Revenue
Service to P&G-USA. But, the US "deemed paid" tax credit cannot be given by the US
tax authorities unless dividends have actually been remitted to the US, which means that
the Philippine dividend tax, at the rate here applicable, was actually imposed and
collected. 11 It is this practical or operating circularity that is in fact avoided by our BIR
when it issues rulings that the tax laws of particular foreign jurisdictions (e.g., Republic
of Vanuatu, 12 Hongkong, 13 Denmark, 14 etc.) comply with the requirements set out in
Section 24 (b) (1), NIRC, for applicability of the fifteen percent (15%) tax rate. Once
such a ruling is rendered, the Philippine subsidiary begins to withhold at the reduced
dividend tax rate.
A requirement relating to administrative implementation is not properly imposed as a
condition for the applicability, as a matter of law, of a particular tax rate. Upon the other
hand, upon the determination or recognition of the applicability of the reduced tax rate,
there is nothing to prevent the BIR from issuing implementing regulations that would
require P&G-Phil., or any Philippine corporation similarly situated, to certify to the BIR
the amount of the "deemed paid" tax credit actually subsequently granted by the US tax
authorities to P&G-USA or a US parent corporation for the taxable year involved. Since
the US tax laws can and do change, such implementing regulations could also provide
that failure of P&G-Phil. to submit such certification within a certain period of time,
would result in the imposition of a deficiency assessment for the twenty (20) percentage
points differential. The task of this Court is to settle which tax rate is applicable,
considering the state of US law at a given time. We should leave details relating to
administrative implementation where they properly belong with the BIR.
2.
An interpretation of a tax statute that produces a revenue flow for the government
is not, for that reason alone, necessarily the correct reading of the statute. There are many
tax statutes or provisions which are designed, not to trigger off an instant surge of
revenues, but rather to achieve longer-term and broader-gauge fiscal and economic
objectives. The task of our Court is to give effect to the legislative design and objectives
as they are written into the statute even if, as in the case at bar, some revenues have to be
foregone in that process.

The economic objectives sought to be achieved by the Philippine Government by

reducing the thirty-five percent (35%) dividend rate to fifteen percent (15%) are set out in
the preambular clauses of P.D. No. 369 which amended Section 24 (b) (1), NIRC, into its
present form:
"WHEREAS, it is imperative to adopt measures responsive to the requirements of a
developing economy foremost of which is the financing of economic development
programs;
WHEREAS, nonresident foreign corporations with investments in the Philippines are
taxed on their earnings from dividends at the rate of 35%;
WHEREAS, in order to encourage more capital investment for large projects an
appropriate tax need be imposed on dividends received by non-resident foreign
corporations in the same manner as the tax imposed on interest on foreign loans;
xxx
xxx
xxx"
(Emphasis supplied)
More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-flow of foreign
equity investment in the Philippines by reducing the tax cost of earning profits here and
thereby increasing the net dividends remittable to the investor. The foreign investor,
however, would not benefit from the reduction of the Philippine dividend tax rate unless
its home country gives it some relief from double taxation (i.e., second-tier taxation) (the
home country would simply have more "post-R.P. tax" income to subject to its own
taxing power) by allowing the investor additional tax credits which would be applicable
against the tax payable to such home country. Accordingly, Section 24 (b) (1), NIRC,
requires the home or domiciliary country to give the investor corporation a "deemed
paid" tax credit at least equal in amount to the twenty (20) percentage points of dividend
tax foregone by the Philippines, in the assumption that a positive incentive effect would
thereby be felt by the investor.
The net effect upon the foreign investor may be shown arithmetically in the following
manner:
P65.00
Dividends remittable to P&G-USA (please
see page 392 above)
9.75
Reduced R.P. dividend tax withheld by P&G-Phil.

P55.25
Dividends actually remitted to P&G-USA.
P55.25
x 46%
Maximum US corporate income tax rate

P25.415
US corporate tax payable by P&G-USA without tax
credits.
P25.415
9. 75
US tax credit for RP dividend tax withheld by P&G
Phil, at 15% (Section 901, US Tax Code)
P15.66
US corporate income tax payable after Section 901
tax credit.
P55.25
15.66

P39.59
Amount received by P&G-USA net of R.P. and U.S.
taxes without "deemed paid" tax credit.
P25.415
29.75
"Deemed paid" tax credit under Section 902 US

Tax Code (please see page 18 above)

-O- US corporate income tax payable on dividends
remitted by P&G-Phil, to P&G-USA after Section
902 tax credit.
P55.25
Amount received by P&G-USA net of RP and US
taxes after Section 902 tax credit.
It will be seen that the "deemed paid" tax credit allowed by Section 902, US Tax Code,
could offset the US corporate income tax payable on the dividend remitted by P&G-Phil.
The result, in fine, could be that P&G-USA would after US tax credits, still wind up with
P55.25, the full amount of the dividends remitted to P&G-USA net of Philippine taxes. In
the calculation of the Philippine Government, this should encourage additional
investment or re-investment in the Philippines by P&G-USA. cdrep
3.
It remains only to note that under the Philippines-United States Convention "With
Respect to Taxes on Income," 15 the Philippines, by a treaty commitment, reduced the
regular rate of dividend tax to a maximum of twenty percent (20%) of the gross amount
of dividends paid to US parent corporations:
"ARTICLE 11. Dividends
xxx
xxx
xxx
(2)
The rate of tax imposed by one of the Contracting States on dividends derived
from sources within that Contracting State by a resident of the other Contracting State
shall not exceed
(a)
25 percent of the gross amount of the dividend; or
(b)
When the recipient is a corporation, 20 percent of the gross amount of the
dividend if during the part of the paying corporation's taxable year which precedes the
date of payment of the dividend and during the whole of its prior taxable year (if any), at
least 10 percent of the outstanding shares of the voting stock of the paying corporation
was owned by the recipient corporation."
xxx
xxx
xxx"
(Emphasis supplied)
The Tax Convention, at the same time, established a treaty obligation on the part of the
United States that it "shall allow" to a US parent corporation receiving dividends from its
Philippine subsidiary "a [tax] credit for the appropriate amount of taxes paid or accrued
to the Philippines by the Philippine [subsidiary] ." 16 This is, of course, precisely the
"deemed paid" tax credit provided for in Section 902, US Tax Code, discussed above.
Clearly, there is here on the part of the Philippines a deliberate undertaking to reduce the
regular dividend tax rate of thirty-five percent (35%). Since, however, the treaty rate of
twenty percent (20%) is a maximum rate, there is still a differential or additional
reduction of five (5) percentage points which compliance of US law (Section 902) with
the requirements of Section 24 (b) (1), NIRC, makes available in respect of dividends
from a Philippine subsidiary.
We conclude that private respondent P&G-Phil. is entitled to the tax refund or tax credit
which it seeks.

WHEREFORE, for all the foregoing, the Court Resolved to GRANT private respondent's
Motion for Reconsideration dated 11 May 1988, to SET ASIDE the Decision of the
Second Division of the Court promulgated on 15 April 1988, and in lieu thereof, to
REINSTATE and AFFIRM the Decision of the Court of Tax Appeals in CTA Case No.
2883 dated 31 January 1984 and to DENY the Petition for Review for lack of merit. No
pronouncement as to costs.
Narvasa, Gutierrez, Jr., Grio-Aquino, Medialdea and Romero, JJ., concur.
Fernan, C.J., is on leave.

[G.R. No. 12287. August 7, 1918.]

VICENTE MADRIGAL and his wife, SUSANA PATERNO, plaintiffs-appellants, vs.
JAMES J. RAFFERTY, Collector of Internal Revenue, and VENANCIO
CONCEPCION, Deputy Collector of Internal Revenue, defendants-appellees.
Gregorio Araneta, for appellants.
Assistant Attorney Round, for appellees.
SYLLABUS
1.
TAXATION; INCOME TAX; PURPOSES. The Income Tax Law of the
United States in force in the Philippine Islands has selected income as the test of faculty
in taxation. The aim has been to mitigate the evils arising from the inequalities of wealth
by a progressive scheme of taxation, which places the burden on those best able to pay.
To carry out this idea, public considerations have demanded an exemption roughly
equivalent to the minimum of subsistence. With these exceptions, the Income Tax Law is
supposed to reach the earnings of the entire non-governmental property of the country.
2.
ID.; ID.; INCOME CONTRACTED WITH CAPITAL AND PROPERTY.
Income as contrasted with capital or property is to be the test. The essential difference
between capital and income is that capital is a fund; income is a flow. Capital is wealth,
while income is the service of wealth. "The fact is that property is a tree, income is the
fruit; labor is a tree, income the fruit; capital is a tree, income the fruit." (Waring vs. City
of Savannah [1878], 60 Ga., 93.)
3.
ID.; ID.; "INCOME:," DEFINED. Income means profits or gains.
4.
ID.; ID.; CONJUGAL PARTNERSHIPS. The decisions of this court in Nable
Jose vs. Nable Jose [1916], 16 Off. Gaz., 871, and Manuel and Laxamana vs. Losano
[1918], 16 Off. Gaz., 1265, approved and followed. The provisions of the Civil Code
concerning conjugal partnerships have no application to the Income Tax Law.
5.
ID.; ID.; ID. M and P were legally married prior to January 1, 1914. The
marriage was contracted under the provisions concerning conjugal partnerships. The
claim is submitted that the income shown on the form presented for 1914 was in fact the
income of the conjugal partnership existing between M and P, and that in computing and
assessing the additional income tax, the income declared by M should be divided into two

equal parts, one-half to be considered the income of M and the other half the income of P.
Held: That P, the wife of M, has an inchoate right in the property of her husband M
during the life of the conjugal partnership, but that P has no absolute right to one-half of
the income of the conjugal partnership.
6.
ID.; ID.; ID. The higher schedules of the additional tax provided by the
Income Tax Law directed at the incomes of the wealthy may not be partially defeated by
reliance on provisions in our Civil Code dealing with the conjugal partnership. The aims
and purposes of the Income Tax Law must be given effect.
7.
ID.; ID.; ID. The Income Tax Law does not look on the spouses as individual
partners in an ordinary partnership.
8.
ID.; ID.; STATUTORY CONSTRUCTION. The Income Tax Law, being a
law of American origin and being peculiarly intricate in its provisions, the authoritative
decision of the official charged with enforcing it has peculiar force for the Philippines.
Great weight should be given to the construction placed upon a revenue law, whose
meaning is doubtful, by the department charged with its execution
DECISION
MALCOLM, J p:
This appeal calls for consideration of the Income Tax Law, a law of American origin,
with reference to the Civil Code, a law of Spanish origin.
STATEMENT OF THE CASE
Vicente Madrigal and Susana Paterno Were legally married prior to January 1, 1914. The
marriage was contracted under the provisions of law concerning conjugal partnerships
(sociedad de gananciales) . On February 25, 1915, Vicente Madrigal filed a sworn
declaration on the prescribed form with the Collector of Internal Revenue, showing, as
his total net income for the year 1914, the sum of P296,302.73. Subsequently Madrigal
submitted the claim that the said P296,302.73 did not represent his income for the year
1914, but was in fact the income of the conjugal partnership existing between himself and
his wife Susana Paterno, and that in computing and assessing the additional income tax
provided by the Act of Congress of October 3, 1913, the income declared by Vicente
Madrigal should be divided into two equal parts, one-half to be considered the income of
Vicente Madrigal and the other half the income of Susana Paterno. The general question
had in the meantime been submitted to the Attorney-General of the Philippine Islands
who in an opinion dated March 17, 1915, held with the petitioner Madrigal. The revenue
officers being still unsatisfied, the correspondence together with this opinion was
forwarded to Washington for a decision by the United States Treasury Department. The
United States Commissioner of Internal Revenue reversed the opinion of the AttorneyGeneral, and thus decided against the claim of Madrigal.
After payment under protest, and after the protest of Madrigal had been decided
adversely by the Collector of Internal Revenue, action was begun by Vicente Madrigal
and his wife Susana Paterno in the Court of First Instance of the city of Manila against
the Collector of Internal Revenue and the Deputy Collector of Internal Revenue for the
recovery of the sum of P3,786.08, alleged to have been wrongfully and illegally assessed
and collected by the defendants from the plaintiff, Vicente Madrigal, under the provisions
of the Act of Congress known as the Income Tax Law. The burden of the complaint was
that if the income tax for the year 1914 had been correctly and lawfully computed there
would have been due and payable by each of the plaintiffs the sum of P2,921.09, which

taken together amounts to a total of P5,842.18 instead of P9,668.21, erroneously and

unlawfully collected from the plaintiff Vicente Madrigal, with the result that plaintiff
Madrigal has paid ' as income tax for the year 1914, P3,786.08, in excess of the sum
lawfully due and payable.
The answer of the defendants, together with an analysis of the tax declaration, the
pleadings, and the stipulation, sets forth the basis of defendants' stand in the following
way: The income of Vicente Madrigal and his wife Susana Paterno for the year 1914 was
made up of three items: (1) P362,407.67, the profits made by Vicente Madrigal in his
coal and shipping business; (2) P4,086.50, the profits made by Susana Paterno in her
embroidery business; (3) P16,687.80, the profits made by Vicente Madrigal in a
pawnshop company. The sum of these three items is P383,181.97, the gross income of
Vicente Madrigal and Susana Paterno for the year 1914. General deductions were
claimed and allowed in the sum of P86,879.24. The resulting net income was
P296,302.73. For the purpose of assessing the normal tax of one per cent on the net
income there were allowed as specific deductions the following: (1) P16,687.80, the tax
upon which was to be paid at source, and (2) P8,000, the specific exemption granted to
Vicente Madrigal and Susana Paterno, husband and wife. The remainder, P271,614.93
was the sum upon which the normal tax of one per cent was assessed. The normal tax
thus arrived at was P2,716.15.
The dispute between the plaintiffs and the defendants concerned the additional tax
provided for in the Income Tax Law. The trial court in an exhausted decision found in
favor of defendants, without costs.
ISSUES.
The contentions of plaintiffs and appellants, having to do solely with the additional
income tax, is that it should be divided into two equal parts, because of the conjugal
partnership existing between them. The learned argument of counsel is mostly based
upon the provisions of the Civil Code establishing the sociedad de gananciales. The
counter contentions of appellees are that the taxes imposed by the Income Tax Law are as
the name implies taxes upon income and not upon capital and property; that the fact that
Madrigal was a married man, and his marriage contracted under the provisions governing
the conjugal partnership, has no bearing on income considered as income, and that the
distinction must be drawn between the ordinary form of commercial partnership and the
conjugal partnership of spouses resulting from the relation of marriage.
DECISION.
From the point of view of test of faculty in taxation, no less than five answers have been
given in the course of history. The final stage has been the selection of income as the
norm of taxation. (See Seligman, "The Income Tax," Introduction.) The Income Tax Law
of the United States, extended to the Philippine Islands, is the result of an effect on the
part of legislators to put into statutory form this canon of taxation and of social reform.
The aim has been to mitigate the evils arising from inequalities of wealth by a
progressive scheme of taxation, which places the burden on those best able to pay. To
carry out this idea, public considerations have demanded an exemption roughly
equivalent to the minimum of subsistence. With these exceptions, the income tax is
supposed to reach the earnings of the entire non governmental property of the country.
Such is the background of the Income Tax Law.

Income as contrasted with capital or property is to be the test. The essential difference
between capital and income is that capital is a fund; income is a flow. A fund of property
existing at an instant of time is called capital. A flow of services rendered by that capital
by the payment of money from it or any other benefit rendered by a fund of capital in
relation to such fund through a period of time is called income. Capital is wealth, while
income is the service of wealth. (See Fisher, "The Nature of Capital and Income.") The
Supreme Court of Georgia expresses the thought in the following figurative language:
"The fact is that property is a tree, income is the fruit; labor is a tree, income the fruit;
capital is a tree, income the fruit." (Waring vs. City of Savannah [1878], 60 Ga., 93.) A
tax on income is not a tax on property. "Income," as here used, can be defined as "profits
or gains." (London County Council vs. Attorney-General [1901], A. C., 26; 70 L. J. K. B.
N. S., 77; 83 L. T. N. S., 605; 49 Week. Rep., 686; 4 Tax Cas., 265. See further Foster's
Income Tax, second edition [1915.], Chapter IV; Black on Income Taxes, second edition
[1915], Chapter VIII; Gibbons vs. Mahon [1890], 136 U. S., 549; and Towne vs. Eisner,
decided by the United States Supreme Court, January 7, 1918.)
A regulation of the United States Treasury Department relative to returns by the husband
and wife not living apart, contains the following:
"The husband, as the head and legal representative of the household and general
custodian of its income, should make and render the return of the aggregate income of
himself and wife, and for the purpose of levying the income tax it is assumed that he can
ascertain the total amount of said income. If a wife has a separate estate managed by
herself as her own separate property, and receives an income of more than $3,000, she
may make return of her own income, and if the husband has other net income, making the
aggregate of both incomes more than $4,000, the wife's return should be attached to the
return of her husband, or his income should be included in her return, in order that a
deduction of $4,000 may be made from the aggregate of both incomes. The tax in such
case, however, will be imposed only upon so much of the aggregate income of both as
shall exceed $4,000. If either husband or wife separately has an income equal to or in
excess of $3,000, a return of annual net income is required under the law, and such return
must include the income of both, and in such case the return must be made even though
the combined income of both be less than $4,000. If the aggregate net income of both
exceeds $4,000, an annual return of their combined incomes must be made in the manner
stated, although neither one separately has an income of $3,000 per annum. They are
jointly and separately liable for such return and for the payment of the tax. The single or
married status of the person claiming the specific exemption shall be determined as of the
time of claiming such exemption if such claim be made within the year for which return
is made, otherwise the status at the close of the year."
With these general observations relative to the Income Tax Law in force in the Philippine
Islands, we turn for a moment to consider the provisions of the Civil Code dealing with
the conjugal partnership. Recently in two elaborate decisions in which a long line of
Spanish authorities were cited, this court, in speaking of the conjugal partnership, decided
that "prior to the liquidation, the interest of the wife, and in case of her death, of her heirs,
is an interest inchoate, a mere expectancy, which constitutes neither a legal nor an
equitable estate, and does not ripen into title until there appears that there are assets in the
community as a result of the liquidation and settlement." (Nable Jose vs. Nable Jose
[1916], 15 Off. Gaz., 871; Manuel and Laxamana vs. Losano [1918], 16 Off. Gaz., 1265.)

Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the property of her
husband Vicente Madrigal during the life of the conjugal partnership. She has an interest
in the ultimate property rights and in the ultimate ownership of property acquired as
income after such income has become capital. Susana Paterno has no absolute right to
one-half the income of the conjugal partnership. Not being seized of a separate estate,
Susana Paterno cannot make a separate return in order to receive the benefit of the
exemption which would arise by reason of the additional tax. As she has no estate and
income, actually and legally vested in her and entirely distinct from her husband's
property, the income cannot properly be considered the separate income of the wife for
the purposes of the additional tax. Moreover, the Income Tax Law does not look on the
spouses as individual partners in an ordinary partnership. The husband and wife are only
entitled to the exemption of P8,000, specifically granted by the law. The higher schedules
of the additional tax directed at the incomes of the wealthy may not be partially defeated
by reliance on provisions in our Civil Code dealing with the conjugal partnership and
having no application to the Income Tax Law. The aims and purposes of the Income Tax
Law must be given effect.
The point we are discussing has heretofore been considered by the Attorney-General of
the Philippine Islands and the United States Treasury Department. The decision of the
latter overruling the opinion of the Attorney-General is as follows:
"TREASURY DEPARTMENT, Washington.
"Income Tax.
"FRANK MCINTYRE,
"Chief, Bureau of Insular Affairs, War Department,
"Washington, D.C.
"SIR: This office is in receipt of your letter of June 22, 1915, transmitting copy of
correspondence 'from the Philippine authorities relative to the method of submission of
income tax returns by married persons.'
"You advise that 'The Governor-General, in forwarding the papers to the Bureau, advises
that the Insular Auditor has been authorized to suspend action on the warrants in question
until an authoritative decision on the points raised can be secured from the Treasury
Department.'
"From the correspondence it appears that Gregorio Araneta, married and living with his
wife, had an income of an amount sufficient to require the imposition of the additional
tax provided by the statute; that the net income was properly computed and then both
income and deductions and the specific exemption were divided in half and two returns
made, one return for each half in the names respectively of the husband and wife, so that
under the returns as filed there would be an escape from the additional tax; that Araneta
claims the returns are correct on the ground that under the Philippine law his wife is
entitled to half of his earnings; that Araneta has dominion over the income and under the
Philippine law, the right to determine its use and disposition; that in this case the wife has
no 'separate estate' within the contemplation of the Act of October 3, 1913, levying an
income tax.
"It appears further from the correspondence that upon the foregoing explanation, tax was
assessed against the entire net income against Gregorio Araneta; that the tax was paid and

an application for refund made, and that the application for refund was rejected,
whereupon the matter was submitted to the Attorney-General of the Islands who holds
that the returns were correctly rendered, and that the refund should be allowed; and
thereupon the question at issue is submitted through the Governor-General of the Islands
and Bureau of Insular Affairs for the advisory opinion of this office.
"By paragraph M of the statute, its provisions are extended to the Philippine Islands, to be
administered as in the United States but by the appropriate internal-revenue officers of
the Philippine Government. You are therefore advised that upon the facts as stated, this
office holds that for the Federal Income Tax (Act of October 3, 1913), the entire net
income in this case was taxable to Gregorio Araneta, both for the normal and additional
tax, and that the application for refund was properly rejected.
"The separate estate of a married woman within the contemplation of the Income Tax
Law is that which belongs to her solely and separate and apart from her husband, and
over which her husband has no right in equity. It may consist of lands or chattels.
"The statute and the regulations promulgated in accordance therewith provide that each
person of lawful age (not excused from so doing) having a net income of $3,000 or over
for the taxable year shall make a return showing the facts; that from the net income so
shown there shall be deducted $3,000 where the person making the return is a single
person, or married and not living with consort, and $1,000 additional where the person
making the return is married and living with consort; but that where the husband and wife
both make returns (they living together), the amount of deduction from the aggregate of
their several incomes shall not exceed $4,000.
"The only occasion for a wife making a return is where she has income from a sole and
separate estate in excess of $3,000, or where the husband and wife neither separately
have an income of $3,000, but together they have an income in excess of $4,000, in
which latter event either the husband or wife may make the return but not both. In all
instances the income of husband and wife whether from separate estates or not, is taken
as a whole for the purpose of the normal tax. Where the wife has income from a separate
estate and makes return thereof, or where her income is separately shown in the return
made by her husband, while the incomes are added together for the purpose of the normal
tax they are taken separately for the purpose of the additional tax. In this case, however,
the wife has no separate income within the contemplation of the Income Tax Law.
"Respectfully,
"DAVID A. GATES,
"Acting Commissioner."
In connection with the decision above quoted, it is well to recall a few basic ideas. The
Income Tax Law was drafted by the Congress of the United States and has been by the
Congress extended to the Philippine Islands. Being thus a law of American origin and
being peculiarly intricate in its provisions, the authoritative decision of the official who is
charged with enforcing it has peculiar force for the Philippines. It has come to be a wellsettled rule that great weight should be given to the construction placed upon a revenue
law, whose meaning is doubtful, by the department charged with its execution. (U. S. vs.
Cerecedo Hermanos y Cia. [1907], 209 U. S., 338; In re Allen [1903], 2 Phil., 630;
Government of the Philippine Islands vs. Municipality of Binalonan, and Roman Catholic
Bishop of Nueva Segovia [1915], 32 Phil., 634.)

We conclude that the judgment should be as it is hereby affirmed with costs against
appellants. So ordered
Torres, Johnson, Carson, Street and Fisher, JJ.; concur.

Eisner v. Macomber
FACTS
-Mrs. Macomber owned 2,200 shares in Standard Oil. Standard Oil declared a 50% stock dividend and she received 1,100
additional shares, of which about $20,000 in par value represented earnings accumulated by the company
recapitalized rather than distributedsince the effective date of the original tax law.
-Current statute expressly included stock dividends in income, and the government contended that those certificates
should be taxed as income to Mrs. Macomber as though the corporation had distributed money to her.
-Mrs. Macomber sued Mr. Mark Eisner, the Collector of Internal Revenue, for a refund.
ISSUE
-Whether in legal or accounting terms the stock dividend was to be regarded as a taxable event.
HOLDING
-This stock dividend was not a realization of income by the taxpayer-shareholder for purposes of the Sixteenth
Amendment
RULES
-"We are clear that not only does a stock dividend really take nothing from the property of the corporation and add
nothing to that of the shareholder, but that the antecedent accumulation of profits evidenced thereby, while
indicating that the shareholder is richer because of an increase of his capital, at the same time shows he has not
realized or received any income in the transaction."
ANALYSIS
-In Towne v. Eisner, court stated that stock dividends were not income, as nothing of value was received by Towne the company was not worth any less than it was when the dividend was declared, and the total value of Towne's stock
had not changed.
-Although the Eisner v. Macomber Court acknowledged the power of the Federal Government to tax income under the
Sixteenth Amendment, the Court essentially said this did not give Congress the power to tax as income anything other
than income, i.e., that Congress did not have the power to re-define the term income as it appeared in the
Constitution:
-Throughout the argument of the Government, in a variety of forms, runs the fundamental error already mentioned, a
failure to appraise correctly the force of the term "income" as used in the Sixteenth Amendment, or at least to give
practical effect to it. Thus, the Government contends that the tax "is levied on income derived from corporate
earnings," when in truth the stockholder has "derived" nothing except paper certificates which, so far as they have any
effect, deny him [or "her" in this case, Mrs. Macomber] present participation in such earnings. It [the government]
contends that the tax may be laid when earnings "are received by the stockholder," whereas [s]he has received none;
that the profits are "distributed by means of a stock dividend," although a stock dividend distributes no profits; that
under the Act of 1916 "the tax is on the stockholder's share in corporate earnings," when in truth a stockholder has no
such share, and receives none in a stock dividend; that "the profits are segregated from his [her] former capital, and
[s]he has a separate certificate representing his [her] invested profits or gains," whereas there has been no segregation
of profits, nor has [s]he any separate certificate representing a personal gain, since the certificates, new and old, are
alike in what they representa capital interest in the entire concerns of the corporation.
CONCLUSION
The Court ordered that Macomber be refunded the tax she overpaid. - See more at:

Raytheon

Brief Fact Summary. Raytheon, Taxpayer, alleged that the illegal conduct of R.C.A. in violation of
anti-trust acts destroyed the profitable interstate and foreign commerce of Raytheon and cause in
excess of $3 million in damage.

Synopsis of Rule of Law. Damages recovered for violations of anti-trust acts are treated as income
when they represent compensation for loss of profits.
Facts. Raytheon, Taxpayer, alleged that the illegal conduct of R.C.A. in violation of anti-trust acts
destroyed the profitable interstate and foreign commerce of Raytheon and cause in excess of $3
million in damage.
Issue. Is the settlement required to be included in Taxpayers gross income?
Held. Circuit Judge Mahoney issued the opinion for the United States First Circuit Court of Appeals in
holding that the compensation for Taxpayers loss of good will in excess of its cost is gross income.
Discussion. The Court of Appeals notes that the question to be asked is what was the nature of the
recovery? There was nothing to indicate that the recovery by Taxpayer was for lost profits. Rather, the
evidence showed that the recovery was for the value of the goodwill and the busine

BIR RULING

CAPITAL GAINS TAX; Pacto de retro - The terms of the agreement between CBBOL and TMBC calling for the transfer of its assets, although denominated as Deed of
Assignment with Right to Repurchase, is in reality an equitable mortgage created
over the said properties. Instruments covering a sale with right to repurchase may
be captioned or labeled as such. However, when any or more of the circumstances
enumerated under Article 1602, Civil Code, obtain in the agreement, the contract
shall be presumed as an equitable mortgage. (BIR Ruling No. 217-81 dated
November 6, 1981). This is relevant in determining whether or not the transaction
had is subject to the corresponding taxes, i.e. capital gains tax documentary stamp
tax. Insofar as corporations are concerned, its liability to the capital gains tax
imposed on the presumed gains realized from the sale, exchange or disposition of
lands and/or buildings is governed by Section 27(D)(5) of the Tax Code of 1997.
Thus, for a corporation to be liable to the tax, a true sale, exchange or disposition of
capital assets must have transpired. Unlike in transactions made by individuals under
Section 24(D)(1) of the Code, where all sales of real property classified as capital
assets, including pacto de retro or other forms of conditional sales are subject to the
capital gains tax, no similar qualifications exist for capital asset transaction of a
corporation. Hence, the latter is subject to such tax only upon a close and completed
transaction in which income is realized. Accordingly, this Office holds that only upon
the executing of the final or absolute deed of sale covering the properties of the bank
subject of the pacto de retro, will the payment of the 6% capital gains tax apply. By
the same token, since no actual conveyance of real property is to be made, the
stamp tax on deeds of sale and conveyances of real property imposed under Section
196 shall not apply. However, since the transaction is in the nature of an equitable
mortgage and made primarily as a security for the payment of a pre-existing loan,
the same is subject instead to the rate of documentary stamp tax imposed under
Section 195. (BIR Ruling No. 091-99 dated July 8, 1999)

[G.R. No. 66416. March 21, 1990.]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. TOURS SPECIALISTS, INC., and THE COURT OF TAX APPEALS,
respondents.
Gadioma Law Offices for private respondent.
SYLLABUS

1.
REMEDIAL LAW; CIVIL PROCEDURE; FINDINGS OF FACTS OF COURT OF TAX APPEALS; BINDING WITH THE
SUPREME COURT IF SUPPORTED BY SUBSTANTIAL EVIDENCE. The well-settled doctrine is that the findings of facts of
the Court of Tax Appeals are binding on this Court and absent strong reasons for this Court to delve into facts, only
questions of law are open for determination. (Nilsen v. Commissioner of Customs, 89 SCRA 43 [1979]; Balbas v.
Domingo, 21 SCRA 444 [1967]; Raymundo v. De Joya, 101 SCRA 495 [1980]). In the recent case of Sy Po v. Court of
Appeals, (164 SCRA 524 [1988]), we ruled that the factual findings of the Court of Tax Appeals are binding upon this
court and can only be disturbed on appeal if not supported by substantial evidence.
2.
TAXATION; CONTRACTOR'S TAX; HOTEL ROOM CHARGES HELD IN TRUST BY TRAVEL AGENCY FOR FOREIGN
TOURIST AND PAID TO LOCAL HOST HOTEL; NOT SUBJECT THEREOF. Goss receipts subject to tax under the Tax Code
do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the
taxpayer's benefit; and it is not necessary that there must be a law or regulation which would exempt such monies and
receipts within the meaning of gross receipts under the Tax Code. Parenthetically, the room charges entrusted by the
foreign travel agencies to the private respondent do not form part of its gross receipts within the definition of the Tax
Code. The said receipts never belonged to the private respondent. The private respondent never benefited from their
payment to the local hotels. As stated earlier, this arrangement was only to accommodate the foreign travel agencies.
3.
ID.; ID.; PRES. DECREE NO. 31; PURPOSE. The significance of P.D. 31 is clearly established in determining
whether or not hotel room charges of foreign tourists in local hotels are subject to the 3% contractor's tax. As the
respondent court aptly stated: ". . . Of the hotel room charges entrusted to petitioner will be subjected to 3%
contractor's tax as what respondent would want to do in this case, that would in effect do indirectly what P.D. 31
would not like hotel room charges of foreign tourists to be subjected to hotel room tax. Although, respondent may
claim that the 3% contractor's tax is imposed upon a different incidence, i.e. the gross receipts of petitioner tourist
agency which he asserts includes the hotel room charges entrusted to it, the effect would be to impose a tax, and
though different, it nonetheless imposes a tax actually on room charges. One way or the other, it would not have the
effect of promoting tourism in the Philippines as that would increase the costs or expenses by the addition of a hotel
room tax in the overall expenses of said tourists."
DECISION
GUTIERREZ, JR., J p:
This is a petition to review on certiorari the decision of the Court of Tax Appeals which ruled that the money entrusted
to private respondent Tours Specialists, Inc., earmarked and paid for hotel room charges of tourists, travelers and/or
foreign travel agencies does not form part of its gross receipts subject to the 3% independent contractor's tax under
the National Internal Revenue Code of 1977. LLjur
We adopt the findings of facts of the Court of Tax Appeals as follows:
"For the years 1974 to 1976, petitioner (Tours Specialists, Inc.) had derived income from its activities as a travel
agency by servicing the needs of foreign tourists and travelers and Filipino 'Balikbayans' during their stay in this
country. Some of the services extended to the tourists consist of booking said tourists and travelers in local hotels for
their lodging and board needs; transporting these foreign tourists from the airport to their respective hotels, and from
the latter to the airport upon their departure from the Philippines, transporting them from their hotels to various
embarkation points for local tours, visits and excursions; securing permits for them to visit places of interest; and
arranging their cultural entertainment, shopping and recreational activities.
"In order to ably supply these services to the foreign tourists, petitioner and its correspondent counterpart tourist
agencies abroad have agreed to offer a package fee for the tourists. Although the fee to be paid by said tourists is
quoted by the petitioner, the payments of the hotel room accommodations, food and other personal expenses of said
tourists, as a rule, are paid directly either by tourists themselves, or by their foreign travel agencies to the local hotels
(Pp. 77, t.s.n., Feb. 2, 1981; Exhs. O & O-1, p. 29, CTA rec.; pp. 2425, t.s.n., ibid) and restaurants or shops, as the
case may be. prcd
"It is also the case that some tour agencies abroad request the local tour agencies, such as the petitioner in the case,
that the hotel room charges, in some specific cases, be paid through them. (Exh. Q, Q-1, p. 29 CTA rec., p. 25, T.s.n.,
ibid., pp. 5-6, 17-18, t.s.n., Aug. 20, 1981.; See also Exh. "U", pp. 22-23, t.s.n., Oct. 9, 1981, pp. 3-4, 11., t.s.n., Aug.
10, 1982). By this arrangement, the foreign tour agency entrusts to the petitioner Tours Specialists, Inc., the fund for
hotel room accommodation, which in turn is paid by petitioner tour agency to the local hotel when billed. The
procedure observed is that the billing hotel sends the bill to the petitioner. The local hotel identifies the individual
tourist, or the particular groups of tourists by code name or group designation and also the duration of their stay for
purposes of payment. Upon receipt of the bill, the petitioner then pays the local hotel with the funds entrusted to it by
the foreign tour correspondent agency. cdll
"Despite this arrangement, respondent Commissioner of Internal Revenue assessed petitioner for deficiency 3%
contractor's tax as independent contractor by including the entrusted hotel room charges in its gross receipts from
services for the years 1974 to 1976. Consequently, on December 6, 1979, petitioner received from respondent the 3%
deficiency independent contractor's tax assessment in the amount of P122,946.93 for the years 1974 to 1976, inclusive,
computed as follows:
1974 deficiency percentage tax
per investigation P3,995.63
15% surcharge for late payment
998.91
_________
P4,994.54
14% interest computed by quarters
up to 12-28-79
3,953.18 P8,847.72
1975 deficiency percentage tax
per investigation P8,427.39
25% surcharge for late payment
2,106.85

__________
P10,534.24
14% interest computed by
quarters up to 12-28-79
6,808.47 P17,342.71
1976 deficiency percentage
tax per investigation
P54,276.42
25% surcharge for late payment
13,569.11
__________
P67,845.53
14% interest computed by quarters
up to 12-28-79
28,910.97 P96,756.50
_________
__________
Total amount due
P122,946.93
=========
"In addition to the deficiency contractor's tax of P122,946.93, petitioner was assessed to pay a compromise penalty of
P500.00.
"Subsequently, on December 11, 1979, petitioner formally protested the assessment made by respondent on the ground
that the money received and entrusted to it by the tourists, earmarked to pay hotel room charges, were not considered
and have never been considered by it as part of its taxable gross receipts for purposes of computing and paying its
contractor's tax. prLL
"During one of the hearings in this case, a witness, Serafina Sazon, Certified Public Accountant and in charge of the
Accounting Department of petitioner, had testified, her credibility not having been destroyed on cross examination,
categorically stated that the amounts entrusted to it by the foreign tourist agencies intended for payment of hotel
room charges, were paid entirely to the hotel concerned, without any portion thereof being diverted to its own funds.
(t.s.n., Feb. 2, 1981, pp. 7, 25; t.s.n., Aug 20, 1981, pp. 5-9, 17-18). The testimony of Serafina Sazon was corroborated
by Gerardo Isada, General Manager of petitioner, declaring to the effect that payments of hotel accommodation are
made through petitioner without any increase in the room charged (t.s.n., Oct. 9, 1981, pp. 21-25) and that the reason
why tourists pay their room charge, or through their foreign tourists agencies, is the fact that the room charge is
exempt from hotel room tax under P.D. 31. (t.s.n., Ibid., pp. 25-29.) Witness Isada stated, on cross-examination, that
if their payment is made, thru petitioner's tour agency, the hotel cost or charges 'is only an act of accommodation on
our (its) part' or that the 'agent abroad instead of sending several telexes and saving on bank charges they take the
option to send money to us to be held in trust to be endorsed to the hotel.' (pp. 3-4, t.s.n. Aug 10, 1982.).
"Nevertheless, on June 2, 1980, respondent without deciding the petitioner's written protest, caused the issuance of a
warrant of distraint and levy. (p. 51, BIR Rec.) And later, respondent had petitioner's bank deposits garnished. (pp. 4950, BIR Rec.)
"Taking this action of respondent as the adverse and final decision on the disputed assessment, petitioner appealed to
this Court." (Rollo, pp. 40-45)
The petitioner raises the lone issue in this petition as follows:
"WHETHER AMOUNTS RECEIVED BY A LOCAL TOURIST AND TRAVEL AGENCY INCLUDED IN A PACKAGE FEE FROM TOURISTS
OR FOREIGN TOUR AGENCIES, INTENDED OR EARMARKED FOR HOTEL ACCOMMODATIONS FORM PART OF GROSS RECEIPTS
SUBJECT TO 3% CONTRACTOR'S TAX." (Rollo, p. 23)
The petitioner premises the issue raised on the following assumptions:
"Firstly, the ruling overlooks the fact that the amounts received, intended for hotel room accommodations, were
received as part of the package fee and, therefore, form part of 'gross receipts' as defined by law.
Secondly, there is no showing and is not established by the evidence, that the amounts received and 'earmarked' are
actually what had been paid out as hotel room charges. The mere possibility that the amounts actually paid could be
less than the amounts received is sufficient to destroy the validity of the ruling." (Rollo, pp. 26-27)
In effect, the petitioner's lone issue is based on alleged error in the findings of facts of the respondent court.
The well-settled doctrine is that the findings of facts of the Court of Tax Appeals are binding on this Court and absent
strong reasons for this Court to delve into facts, only questions of law are open for determination. (Nilsen v.
Commissioner of Customs, 89 SCRA 43 [1979]; Balbas v. Domingo, 21 SCRA 444 [1967]; Raymundo v. De Joya, 101 SCRA
495 [1980]). In the recent case of Sy Po v. Court of Appeals, (164 SCRA 524 [1988]), we ruled that the factual findings
of the Court of Tax Appeals are binding upon this court and can only be disturbed on appeal if not supported by
substantial evidence.
In the instant case, we find no reason to disregard and deviate from the findings of facts of the Court of Tax Appeals.
As quoted earlier, the Court of Tax Appeals sufficiently explained the services of a local travel agency, like the herein
private respondent, rendered to foreign customers. The respondent differentiated between the package fee offered by
both the local travel agency and its correspondent counterpart tourist agencies abroad and the requests made by some
tour agencies abroad to local tour agencies wherein the hotel room charges in some specific cases, would be paid to
the local hotels through them. In the latter case, the correspondent court found as a fact ". . . that the foreign tour
agency entrusts to the petitioner Tours Specialists, Inc. the fund for hotel room accommodation, which in turn is paid
by petitioner tour agency to the local hotel when billed." (Rollo, p. 42) The following procedure is followed: The billing
hotel sends the bill to the respondent; the local hotel then identifies the individual tourist, or the particular group of
tourists by code name or group designation plus the duration of their stay for purposes of payment; upon receipt of the
bill the private respondent pays the local hotel with the funds entrusted to it by the foreign tour correspondent
agency. Cdpr
Moreover, evidence presented by the private respondent shows that the amounts entrusted to it by the foreign tourist
agencies to pay the room charges of foreign tourists in local hotels were not diverted to its funds; this arrangement
was only an act of accommodation on the part of the private respondent. This evidence was not refuted.

In essence, the petitioner's assertion that the hotel room charges entrusted to the private respondent were part of the
package fee paid by foreign tourists to the respondent is not correct. The evidence is clear to the effect that the
amounts entrusted to the private respondent were exclusively for payment of hotel room charges of foreign tourists
entrusted to it by foreign travel agencies.
As regards the petitioner's second assumption, the respondent court stated:
". . . [C]ontrary to the contention of respondent, the records show, firstly, in the Examiners' Worksheet (Exh. T, p. 22,
BIR Rec.), that from July to December 1976 alone, the following sums made up the hotel room accommodations:
July 1976 P102,702.97
Aug. 1976121,167.19
Sept. 1976
53,209.61

P282,079.77
==========
Oct. 1976 P 71,134.80
Nov. 1976409,019.17
Dec. 1976142,761.55
__________
622,915.51

Grand Total
P904,995.29
==========
"It is not true, therefore, as stated by respondent, that there is no evidence proving the amounts earmarked for hotel
room charges. Since the BIR examiners could not have manufactured the above figures representing 'advances for hotel
room accommodations,' these payments must have certainly been taken from the records of petitioner, such as the
invoices, hotel bills, official receipts and other pertinent documents." (Rollo, pp. 48-49) LLjur
The factual findings of the respondent court are supported by substantial evidence, hence binding upon this Court.
With these clarifications, the issue to be threshed out is as stated by the respondent court, to wit:
". . . [W]hether or not the hotel room charges held in trust for foreign tourists and travelers and or correspondent
foreign travel agencies and paid to local host hotels form part of the taxable gross receipts for purposes of the 3%
contractor's tax." (Rollo, p. 45)
The petitioner opines that the gross receipts which are subject to the 3% contractor's tax pursuant to Section 191
(Section 205 of the National Internal Revenue Code of 1977) of the Tax Code include the entire gross receipts of a
taxpayer undiminished by any amount. According to the petitioner, this interpretation is in consonance with B.I.R.
Ruling No. 68-027, dated 23 October, 1968 (implementing Section 191 of the Tax Code) which states that the 3%
contractor's tax prescribed by Section 191 of the Tax Code is imposed on the gross receipts of the contractor, "no
deduction whatever being allowed by said law " The petitioner contends that the only exception to this rule is when
there is a law or regulation which would d exempt such gross receipts from being subjected to the 3% contractor's tax
citing the case of Commissioner of Internal Revenue v. Manila Jockey Club, Inc. (108 Phil. 821 [1960]). Thus, the
petitioner argues that since there is no law or regulation that money entrusted, earmarked and paid for hotel room
charges should not form part of the gross receipts, then the said hotel room charges are included in the private
respondent's gross receipts for purposes of the 3% contractor's tax.
In the case of Commissioner of Internal Revenue v. Manila Jockey Club, Inc. (supra), the Commissioner appealed two
decisions of the Court of Tax Appeals disapproving his levy of amusement taxes upon the Manila Jockey Club, a duly
constituted corporation authorized to hold horse races in Manila. The facts of the case show that the monies sought to
be taxed never really belonged to the club. The decision shows that during the period November 1946 to 1950, the
Manila Jockey Club paid amusement tax on its commission but without including the 5-1/2% which pursuant to
Executive Order 320 and Republic Act 309 went to the Board of Races, the owner of horses and jockeys. Section 260 of
the Internal Revenue Code provides that the amusement tax was payable by the operator on its "gross receipts". The
Manila Jockey Club, however, did not consider as part of its "gross receipts" subject to amusement tax the amounts
which it had to deliver to the Board on Races, the horse owners and the jockeys. This view was fully sustained by three
opinions of the Secretary of Justice, to wit: cdll
"There is no question that the Manila Jockey, Inc., owns only 7-1/2% of the total bets registered by the Totalizer. This
portion represents its share or commission in the total amount of money it handles and goes to the funds thereof as its
own property which it may legally disburse for its own purposes. The 5% does not belong to the club. It is merely held
in trust for distribution as prizes to the owners of winning horses. It is destined for no other object than the payment
of prizes and the club cannot otherwise appropriate this portion without incurring liability to the owners of winning
horses. It cannot be considered as an item of expense because the sum used for the payment of prizes is not taken
from the funds of the club but from a certain portion of the total bets especially earmarked for that purpose.
"In view of all the foregoing, I am of the opinion that in the submission of the returns for the amusement tax of 10%
(now it is 20% of the 'gross receipts', provided for in Section 260 of the National Internal Revenue Code), the 5% of the
total bets that is set aside for prizes to owners of winning horses should not be included by the Manila Jockey Club,
Inc."
The Collector of the Internal Revenue, however had a different opinion on the matter and demanded payment of
amusement taxes. The Court of Tax Appeals reversed the Collector.
We affirmed the decision of the Court of Tax Appeals and stated:
"The Secretary's opinion was correct. The Government could not have meant to tax as gross receipt of the Manila
Jockey Club the 1/2% which it directs same Club to turn over to the Board on Races. The latter being a Government
institution, there would be double taxation, which should be avoided unless the statute admits of no other
interpretation. In the same manner, the Government could not have intended to consider as gross receipt the portion

of the funds which it directed the Club to give, or knew the Club would give, to winning horses and jockeys
admittedly 5%. It is true that the law says that out of the total wager funds 12-1/2% shall be set aside as the
'commission' of the race track owner, but the law itself takes official notice, and actually approves or directs payment
of the portion that goes to owners of horses as prizes and bonuses of jockeys, which portion is admittedly 5% out of
that 12-1/2% commission. As it did not at that time contemplate the application of 'gross receipts' revenue principle,
the law in making a distribution of the total wager funds, took no trouble of separating one item from the other; and
for convenience, grouped three items under one common denomination. cdphil
"Needless to say, gross receipts of the proprietor of the amusement place should not include any money which although
delivered to the amusement place has been especially earmarked by law or regulation for some person other than the
proprietor." (The situation thus differs from one in which the owner of the amusement place, by a private contract,
with its employees or partners, agrees to reserve for them a portion of the proceeds of the establishment. (See Wong &
Lee v. Coll. 104 Phil. 469; 55 Off Gaz. [51] 10539; Sy Chuico v. Coll., 107 Phil., 428; 59 Off Gaz., [6] 896)."
In the second case, the facts of the case are:
"The Manila Jockey Club holds once a year a so called 'special Novato race', wherein only 'novato' horses, (i.e. horses
which are running for the first time in an official [of the club] race), may take part. Owners of these horses must pay
to the Club an inscription fee of P1.00, and a declaration fee of P1.00 per horse. In addition, each of them must
contribute to a common fund (P10.00 per horse). The Club contributes an equal amount (P10.00 per horse) to such
common fund, the total amount of which is added to the 5% participation of horse owners already described hereinabove in the first case.
"Since the institution of this yearly special novato race in 1950, the Manila Jockey Club never paid amusement tax on
the moneys thus contributed by horse owners (P10.00 each) because it entertained the belief that in accordance with
the three opinions of the Secretary of Justice herein-above described, such contributions never formed part of its gross
receipts. On the inscription fee of the P1.00 per horse, it paid the tax. It did not on the declaration fee of P1.00
because it was imposed by the Municipal Ordinance of Manila and was turned over to the City officers.
"The Collector of Internal Revenue required the Manila Jockey Club to pay amusement tax on such contributed fund
P10.00 per horse in the special novato race, holding they were part of its gross receipts. The Manila Jockey Club
protested and resorted to the Court of Tax Appeals, where it obtained favorable judgment on the same grounds
sustained by said Court in connection with the 5% of the total wager funds in the herein-mentioned first case; they
were not receipts of the Club." prLL
We resolved the issue in the following manner:
"We think the reasons for upholding the Tax Court's decision in the first case apply to this one. The ten-peso
contribution never belonged to the Club. It was held by it as a trust fund. And then, after all, when it received the tenpeso contribution, it at the same time contributed ten pesos out of its own pocket, and thereafter distributed both
amounts as prizes to horse owners. It would seem unreasonable to regard the ten-peso contribution of the horse
owners as taxable receipt of the Club, since the latter, at the same moment it received the contribution necessarily
lost ten pesos too."
As demonstrated in the above-mentioned case, gross receipts subject to tax under the Tax Code do not include monies
or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer's benefit; and it
is not necessary that there must be a law or regulation which would exempt such monies and receipts within the
meaning of gross receipts under the Tax Code.
Parenthetically, the room charges entrusted by the foreign travel agencies to the private respondent do not form part
of its gross receipts within the definition of the Tax Code. The said receipts never belonged to the private respondent.
The private respondent never benefited from their payment to the local hotels. As stated earlier, this arrangement was
only to accommodate the foreign travel agencies. cdll
Another objection raised by the petitioner is to the respondent court's application of Presidential Decree 31 which
exempts foreign tourists from payment of hotel room tax. Section 1 thereof provides:
"Sec. 1. Foreign tourists and travelers shall be exempt from payment of any and all hotel room tax for the entire
period of their stay in the country."
The petitioner now alleges that P.D. 31 has no relevance to the case. He contends that the tax under Section 191 of
the Tax Code is in the nature of an excise tax; that it is a tax on the exercise of the privilege to engage in business as a
contractor and that it is imposed on, and collectible from the person exercising the privilege. He sums his arguments
by stating that "while the burden may be shifted to the person for whom the services are rendered by the contractor,
the latter is not relieved from payment of the tax." (Rollo, p. 28)
The same arguments were submitted by the Commissioner of Internal Revenue in the case of Commissioner of Internal
Revenue v. John Gotamco & Son., Inc. (148 SCRA 36 [1987]), to justify his imposition of the 3% contractor's tax under
Section 191 of the National Internal Revenue Code on the gross receipts John Gotamco & Sons, Inc., realized from the
construction of the World Health Organization (WHO) office building in Manila. We rejected the petitioner's arguments
and ruled:
"We agree with the Court of Tax Appeals in rejecting this contention of the petitioner. Said the respondent court:
"'In context, direct taxes are those that are demanded from the very person who, it is intended or desired, should pay
them; while indirect taxes are those that are demanded in the first instance from one person in the expectation and
intention that he can shift the burden to someone else. (Pollock v. Farmers, L & T Co., 1957 US 429, 15 S. Ct. 673, 39
Law. ed. 759). The contractor's tax is of course payable by the contractor but in the last analysis it is the owner of the
building that shoulders the burden of the tax because the same is shifted by the contractor to the owner as a matter of
self-preservation. Thus, it is an indirect tax. And it is an indirect tax on the WHO because, although it is payable by the
petitioner, the latter can shift its burden on the WHO. In the last analysis it is the WHO that will pay the tax indirectly
through the contractor and it certainly cannot be said that 'this tax has no bearing upon the World Health
Organization.'"

"Petitioner claims that under the authority of the Philippine Acetylene Company versus Commissioner of Internal
Revenue, et al., (127 Phil. 461) the 3% contractor's tax falls directly on Gotamco and cannot be shifted to the WHO.
The Court of Tax Appeals, however, held that the said case is not controlling in this case, since the Host Agreement
specifically exempts the WHO from 'indirect taxes.' We agree. The Philippine Acetylene case involved a tax on sales of
goods which under the law had to be paid by the manufacturer or producer; the fact that the manufacturer or
producer might have added the amount of the tax to the price of the goods did not make the sales tax 'a tax on the
purchaser.' The Court held that the sales tax must be paid by the manufacturer or producer even if the sale is made to
tax-exempt entities like the National Power Corporation, an agency of the Philippine Government, and to the Voice of
America, an agency of the United States Government. LexLib
"The Host Agreement, in specifically exempting the WHO from 'indirect taxes,' contemplates taxes which, although not
imposed upon or paid by the Organization directly, form part of the price paid or to be paid by it."
Accordingly, the significance of P.D. 31 is clearly established in determining whether or not hotel room charges of
foreign tourists in local hotels are subject to the 3% contractor's tax. As the respondent court aptly stated:
". . . If the hotel room charges entrusted to petitioner will be subjected to 3% contractor's tax as what respondent
would want to do in this case, that would in effect do indirectly what P.D. 31 would not like hotel room charges of
foreign tourists to be subjected to hotel room tax. Although, respondent may claim that the 3% contractor's tax is
imposed upon a different incidence, i.e. the gross receipts of petitioner tourist agency which he asserts includes the
hotel room charges entrusted to it, the effect would be to impose a tax, and though different, it nonetheless imposes a
tax actually on room charges. One way or the other, it would not have the effect of promoting tourism in the
Philippines as that would increase the costs or expenses by the addition of a hotel room tax in the overall expenses of
said tourists." (Rollo, pp. 51-52).
WHEREFORE, the instant petition is DENIED. The decision of the Court of Tax Appeals is AFFIRMED. No pronouncement
as to costs.
SO ORDERED.
Fernan, C.J., Narvasa, Melencio-Herrera, Cruz, Paras, Feliciano, Gancayco, Padilla, Bidin, Sarmiento, Cortes, GrioAquino, Medialdea and Regalado, JJ., concur.
[G.R. No. 78953. July 31, 1991.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MELCHOR J. JAVIER, JR. and THE COURT OF TAX APPEALS,
respondents.
Elison G. Natividad for accused-appellant.
SYLLABUS
1.
TAXATION; INCOME TAX; SURCHARGES FOR RENDERING FALSE AND FRAUDULENT RETURN. Under the then
Section 72 of the Tax Code (now Section 248 of the 1988 National Internal Revenue Code), a taxpayer who files a false
return is liable to pay the fraud penalty of 50% of the tax due from him or of the deficiency tax in case payment has
been made on the basis of the return filed before the discovery of the falsity or fraud.
2.
ID.; ID.; FILING OF FRAUDULENT RETURN; MUST BE ACTUAL AND INTENTIONAL THROUGH WILLFUL AND
DELIBERATE MISLEADING OF THE GOVERNMENT AGENCY. In Aznar v. Court of Tax Appeals (L-20569, promulgated on
August 23, 1974, 58 SCRA 519), fraud in relation to the filing of income tax return, was discussed in this manner: . . .
The fraud contemplated by law is actual and not constructive. It must be intentional fraud, consisting of deception
willfully and deliberately done or resorted to in order to induce another to give up some legal right. Negligence,
whether slight or gross, is not equivalent to the fraud with intent to evade the tax contemplated by law. It must
amount to intentional wrong-doing with the sole object of avoiding the tax. It necessarily follows that a mere mistake
cannot be considered as fraudulent intent, and if both petitioner and respondent Commissioner of Internal Revenue
committed mistakes in making entries in the returns and in the assessment, respectively, under the inventory method
of determining tax liability, it would be unfair to treat the mistakes of the petitioner as tainted with fraud and those of
the respondent as made in good faith. Fraud is never imputed and the courts never sustain findings of fraud upon
circumstances which, at most, create only suspicion and the mere understatement of a tax is not itself proof of fraud
for the purpose of tax evasion.
3.
ID.; ID.; ID.; NOT PRESENT IN CASE AT BAR. In the case at bar, there was no actual and intentional fraud
through willful and deliberate misleading of the government agency concerned, the Bureau of Internal Revenue,
headed by the herein petitioner. The government was not induced to give up some legal right and place itself at a
disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities because Javier did not conceal
anything. Error or mistake of law is not fraud. The petitioner's zealousness to collect taxes from the unearned windfall
to Javier is highly commendable. Unfortunately, the imposition of the fraud penalty in this case is not justified by the
extant facts. Javier may be guilty of swindling charges, perhaps even for greed by spending most of the money he
received, but the records lack a clear showing of fraud committed because he did not conceal the fact that he had
received an amount of money although it was a "subject of litigation." As ruled by respondent Court of Tax Appeals, the
50% surcharge imposed as fraud penalty by the petitioner against the private respondent in the deficiency assessment
should be deleted.
DECISION
SARMIENTO, J p:
Central in this controversy is the issue as to whether or not a taxpayer who merely states as a footnote in his income
tax return that a sum of money that he erroneously received and already spent is the subject of a pending litigation
and there did not declare it as income is liable to pay the 50% penalty for filing a fraudulent return.
This question is the subject of the petition for review before the Court of the portion of the Decision 1 dated July 27,
1983 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 3393, entitled, "Melchor J. Javier, Jr. vs. Ruben B. Ancheta,

in his capacity as Commissioner of Internal Revenue," which orders the deletion of the 50% surcharge from Javier's
deficiency income tax assessment on his income for 1977.
The respondent CTA in a Resolution 2 dated May 25, 1987, denied the Commissioner's Motion for Reconsideration 3 and
Motion for New Trial 4 on the deletion of the 50% surcharge assessment or imposition.
The pertinent facts as are accurately stated in the petition of private respondent Javier in the CTA and incorporated in
the assailed decision now under review, read as follows:
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2.
That on or about June 3, 1977, Victoria L. Javier, the wife of the petitioner (private respondent herein),
received from the Prudential Bank and Trust Company in Pasay City the amount of US$999,973.70 remitted by her
sister, Mrs. Dolores Ventosa, through some banks in the United States, among which is Mellon Bank, N.A.
3.
That on or about June 29, 1977, Mellon Bank, N.A. filed a complaint with the Court of First Instance of Rizal
(now Regional Trial Court), (docketed as Civil Case No. 26899), against the petitioner (private respondent herein), his
wife and other defendants, claiming that its remittance of US$1,000,000.00 was a clerical error and should have been
US$1,000.00 only, and praying that the excess amount of US$999,000.00 be returned on the ground that the defendants
are trustees of an implied trust for the benefit of Mellon Bank with the clear, immediate, and continuing duty to return
the said amount from the moment it was received.
4.
That on or about November 5, 1977, the City Fiscal of Pasay City filed an Information with the then Circuit
Criminal Court (docketed as CCC-VII-3369-P.C.) charging the petitioner (private respondent herein) and his wife with
the crime of estafa, alleging that they misappropriated, misapplied, and converted to their own personal use and
benefit the amount of US$999,000.00 which they received under an implied trust for the benefit of Mellon Bank and as
a result of the mistake in the remittance by the latter.
5.
That on March 15, 1978, the petitioner (private respondent herein) filed his Income Tax Return for the
taxable year 1977 showing a gross income of P53,053.38 and a net income of P48,053.88 and stating in the footnote of
the return that "Taxpayer was recipient of some money received from abroad which he presumed to be a gift but
turned out to be an error and is now subject of litigation."
6.
That on or before December 15, 1980, the petitioner (private respondent herein) received a letter from the
acting Commissioner of Internal Revenue dated November 14, 1980, together with income assessment notices for the
years 1976 and 1977, demanding that petitioner (private respondent herein) pay on or before December 15, 1980 the
amount of P1,615.96 and P9,287,297.51 as deficiency assessments for the years 1976 and 1977 respectively . . .
7.
That on December 15, 1980, the petitioner (private respondent herein) wrote the Bureau of Internal Revenue
that he was paying the deficiency income assessment for the year 1976 but denying that he had any undeclared income
for the year 1977 and requested that the assessment for 1977 be made to await final court decision on the case filed
against him for filing an allegedly fraudulent return . . .
8.
That on November 11, 1981, the petitioner (private respondent herein) received from Acting Commissioner of
Internal Revenue Romulo Villa a letter dated October 8, 1981 stating in reply to his December 15, 1980 letter-protest
that "the amount of Mellon Bank's erroneous remittance which you were able to dispose, is definitely taxable.". . . 5
The Commissioner also imposed a 50% fraud penalty against Javier.
Disagreeing, Javier filed an appeal 6 before the respondent Court of Tax Appeals on December 10, 1981.
The respondent CTA, after the proper proceedings, rendered the challenged decision. We quote the concluding
portion:
We note that in the deficiency income tax assessment under consideration, respondent (petitioner here) further
requested petitioner (private respondent here) to pay 50% surcharge as provided for in Section 72 of the Tax Code, in
addition to the deficiency income tax of P4,888,615.00 and interest due thereon. Since petitioner (private respondent)
filed his income tax return for taxable year 1977, the 50% surcharge was imposed, in all probability, by respondent
(petitioner) because he considered the return filed false or fraudulent. This additional requirement, to our mind, is
much less called for because petitioner (private respondent), as stated earlier, reflected in his 1977 return as footnote
that "Taxpayer was recipient of some money received from abroad which he presumed to be gift but turned out to be
an error and is now subject of litigation."
From this, it can hardly be said that there was actual and intentional fraud, consisting of deception willfully and
deliberately done or resorted to by petitioner (private respondent) in order to induce the Government to give up some
legal right, or the latter, due to a false return, was placed at a disadvantage so as to prevent its lawful agents from
proper assessment of tax liabilities. (Aznar vs. Court of Tax Appeals, L-20569, August 23, 1974, 56 (sic) SCRA 519),
because petitioner literally "laid his cards on the table" for respondent to examine. Error or mistake of fact or law is
not fraud. (Insular Lumber vs. Collector, L-7100, April 28, 1956.). Besides, Section 29 is not too plain and simple to
understand. Since the question involved in this case is of first impression in this jurisdiction, under the circumstances,
the 50% surcharge imposed in the deficiency assessment should be deleted. 7
The Commissioner of Internal Revenue, not satisfied with the respondent CTA's ruling, elevated the matter to us, by
the present petition, raising the main issue as to:
WHETHER OR NOT PRIVATE RESPONDENT IS LIABLE FOR THE 50% FRAUD PENALTY? 8
On the other hand, Javier candidly stated in his Memorandum, 9 that he "did not appeal the decision which held him
liable for the basic deficiency income tax (excluding the 50% surcharge for fraud)." However, he submitted in the same
memorandum "that the issue may be raised in the case not for the purpose of correcting or setting aside the decision
which held him liable for deficiency income tax, but only to show that there is no basis for the imposition of the
surcharge." This subsequent disavowal therefore renders moot and academic the posturings articulated in his Comment
10 on the non-taxability of the amount he erroneously received and the bulk of which he had already disbursed. In any
event, an appeal at that time (of the filing of the Comments) would have been already too late to be seasonable. llcd
The petitioner, through the office of the Solicitor General, stresses that:
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The record however is not ambivalent, as the record clearly shows that private respondent is self-convinced, and so
acted, that he is the beneficial owner, and of which reason is liable to tax. Put another way, the studied insinuation
that private respondent may not be the beneficial owner of the money or income flowing to him as enhanced by the
studied claim that the amount is "subject of litigation" is belied by the record and clearly exposed as a fraudulent ploy,
as witness what transpired upon receipt of the amount.
Here, it will be noted that the excess in the amount erroneously remitted by MELLON BANK for the amount of private
respondent's wife was $999,000.00 after opening a dollar account with Prudential Bank in the amount of $999,993.70,
private respondent and his wife, with haste and dispatch, within a span of eleven (11) electric days, specifically from
June 3 to June 14, 1977, effected a total massive withdrawal from the said dollar account in the sum of $975,000.00 or
P7,020,000.00 . . . 11
In reply, the private respondent argues:
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xxx
xxx
The petitioner contends that the private respondent committed fraud by not declaring the "mistaken remittance" in his
income tax return and by merely making a footnote thereon which read: "Taxpayer was the recipient of some money
from abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation." It is
respectfully submitted that the said return was not fraudulent. The footnote was practically an invitation to the
petitioner to make am investigation, and to make the proper assessment.
The rule in fraud cases is that the proof "must be clear and convincing" (Griffiths v. Comm., 50 F [2d] 782), that is, it
must be stronger than the "mere preponderance of evidence" which would be sufficient to sustain a judgment on the
issue of correctness of the deficiency itself apart from the fraud penalty. (Frank A. Neddas, 40 BTA 572). The following
circumstances attendant to the case at bar show that in filing the questioned return, the private respondent was
guided, not by that "willful and deliberate intent to prevent the Government from making a proper assessment" which
constitute fraud, but by an honest doubt as to whether or not the "mistaken remittance" was subject to tax.
First, this Honorable Court will take judicial notice of the fact that so-called "million dollar case" was given very, very
wide publicity by media; and only one who is not in his right mind would have entertained the idea that the BIR would
not make an assessment if the amount in question was indeed subject to the income tax.
Second, as the respondent Court ruled, "the question involved in this case is of first impression in this jurisdiction" (See
p. 15 of Annex "A" of the Petition). Even in the United States, the authorities are not unanimous in holding that similar
receipts are subject to the income tax. It should be noted that the decision in the Rutkin case is a five-to-four
decision; and in the very case before this Honorable Court, one out of three Judges of the respondent Court was of the
opinion that the amount in question is not taxable. Thus, even without the footnote, the failure to declare the
"mistaken remittance" is not fraudulent.
Third, when the private respondent filed his income tax return on March 15, 1978 he was being sued by the Mellon
Bank for the return of the money, and was being prosecuted by the Government for estafa committed allegedly by his
failure to return the money and by converting it to his personal benefit. The basic tax amounted to P4,899,377.00 (See
p. 6 of the Petition) and could not have been paid without using part of the mistaken remittance. Thus, it was not
unreasonable for the private respondent to simply state in his income tax return that the amount received was still
under litigation. If he had paid the tax, would that not constitute estafa for using the funds for his own personal
benefit? and would the Government refund it to him if the courts ordered him to refund the money to the Mellon Bank?
12
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xxx
xxx
Under the then Section 72 of the Tax Code (now Section 248 of the 1988 National Internal Revenue Code), a taxpayer
who files a false return is liable to pay the fraud penalty of 50% of the tax due from him or of the deficiency tax in case
payment has been made on the basis of the return filed before the discovery of the falsity or fraud. LibLex
We are persuaded considerably by the private respondent's contention that there is no fraud in the filing of the return
and agree fully with the Court of Tax Appeals' interpretation of Javier's notation on his income tax return filed on
March 15, 1978 thus: "Taxpayer was the recipient of some money from abroad which he presumed to be a gift but
turned out to be an error and is now subject of litigation," that it was an "error or mistake of fact or law" not
constituting fraud, that such notation was practically an invitation for investigation and that Javier had literally "laid
his cards on the table." 13
In Aznar v. Court of Tax Appeals, 14 fraud in relation to the filing of income tax return, was discussed in this manner:
. . . The fraud contemplated by law is actual and not constructive. It must be intentional fraud, consisting of deception
willfully and deliberately done or resorted to in order to induce another to give up some legal right. Negligence,
.whether slight or gross, is not equivalent to the fraud with intent to evade the tax contemplated by law. It must
amount to intentional wrong-doing with the sole object of avoiding the tax. It necessarily follows that a mere mistake
cannot be considered as fraudulent intent, and if both petitioner and respondent Commissioner of Internal Revenue
committed mistakes in making entries in the returns and in the assessment, respectively, under the inventory method
of determining tax liability, it would be unfair to treat the mistakes of the petitioner as tainted with fraud and those of
the respondent as made in good faith.
Fraud is never imputed and the courts never sustain findings of fraud upon circumstances which, at most, create only
suspicion and the mere understatement of a tax is not itself proof of fraud for the purpose of tax evasion. 15
A "fraudulent return" is always an attempt to evade a tax, but a merely "false return" may not be. Rick v. U.S., App.
D.C., 161 F. 2d 897, 898. 16
In the case at bar, there was no actual and intentional fraud through willful and deliberate misleading of the
government agency concerned, the Bureau of Internal Revenue, headed by the herein petitioner. The government was
not induced to give up some legal right and place itself at a disadvantage so as to prevent its lawful agents from proper
assessment of tax liabilities because Javier did not conceal anything. Error or mistake of law is not fraud. The
petitioner's zealousness to collect taxes from the unearned windfall to Javier is highly commendable. Unfortunately,
the imposition of the fraud penalty in this case is not justified by the extant facts. Javier may be guilty of swindling

charges, perhaps even for greed by spending most of the money he received, but the records lack a clear showing of
fraud committed because he did not conceal the fact that he had received an amount of money although it was a
"subject of litigation." As ruled by respondent Court of Tax Appeals, the 50% surcharge imposed as fraud penalty by the
petitioner against the private respondent in the deficiency assessment should be deleted. prcd
WHEREFORE, the petition is DENIED and the decision appealed from the Court of Tax Appeals is AFFIRMED. No costs.
SO ORDERED.
Melencio-Herrera, Padilla and Regalado, JJ ., concur.
Paras, J ., took no part.