Pointers to Review for Business Organization 1

Mid-term Examination

A. Prelim Term discussions
1. Partnership
a. as a contract (1767)
b. as a person (1768)
2. Tests to determine existence of partnership (1769)
3. Forms of partnership (1771 to 1773)
4. Kinds of partnership (1778, 1780, 1783, 1785, 1843)
5. Life of a partnership
a. Commencement (1784)
b. Formation
i. Contribution (1790)
ii. Property Rights (1810 to 1812)
c. Operation
i. Rules on industrial partners (1789)
ii. Rules on capitalist partners (1808)
iii. Rules on profit sharing (1797 to 1799)
iv. Rules on management (1800)
d. Dissolution (1828, 1830)
e. Liquidation(1828)

B. Midterm discussions
1. Agency (1868)
2. Forms of Agency - (1869)
a. Couched in general terms (1877)
b. Special Power of Attorney (1878)
3. Kinds of Agency / Agents
a. As to consideration onerous, gratuitous (1875)
b. As to business general, special (1876)
c. Commission Agents (1903 to 1905)
4. Principles involving agency
a. Agents authority (1881)
i. If advantageous to Principal (1882)
ii. If imminent loss to Principal (1888)
iii. Solidary agents (1894)
b. Agents conflict of interest (1889)
c. Principals obligation (1910)
i. When agent exceeds power (1910)
ii. When principal allowed agent to exceed power (1911)
iii. Solidary principals (1915)
5. Extinguishment of Agency (1919, 1926 to 1932)





Digest: Woodhouse vs Halili
Posted in Digest: BusOrg 1 (PAT) Tagged BusOrg, digest, law school Leave a comment
CHARLES F. WOODHOUSE, plaintiff-appellant, vs.
FORTUNATO F. HALILI, defendant-appellant.
G.R. No. L-4811 July 31, 1953
Subject: BusOrg 1 (PAT)
Doctrine: Fraud
FACTS
On November 29, 1947, plaintiff Woodhouse entered into a written agreement with defendant
Halili stating among others that: 1) that they shall organize a partnership for the bottling and
distribution of Missionsoft drinks, plaintiff to act as industrial partner or manager, and the
defendant as a capitalist, furnishing the capital necessary therefore; 2) that plaintiff was to secure
the Mission Soft Drinks franchise for and in behalf of the proposed partnership and 3) that the
plaintiff was to receive 30 per cent of the net profits of the business.
Prior to entering into this agreement, plaintiff had informed the Mission Dry Corporation of Los
Angeles, California, that he had interested a prominent financier (defendant herein) in the
business, who was willing to invest half a milliondollars in the bottling and distribution of the
said beverages, and requested, in order that he may close the deal with him, that the right to
bottle and distribute be granted him for a limited time under the condition that it will finally be
transferred to the corporation. Pursuant to this request, plaintiff was given a thirty days option
on exclusive bottling and distribution rights for the Philippines. The contract was finally signed
by plaintiff on December 3, 1947.
When the bottling plant was already in operation, plaintiff demanded of defendant that the
partnership papers be executed. Defendant Halili gave excuses and would not execute said
agreement, thus the complaint by the plaintiff.
Plaintiff prays for the : 1.execution of the contract of partnership; 2) accounting of profits and
3)share thereof of 30 percent with 4) damages in the amount of P200,000. The Defendant on the
other hand claims that: 1) the defendants consent to the agreement, was secured by the
representation of plaintiff that he was the owner, or was about to become owner of an exclusive
bottling franchise, which representation was false, and that plaintiff did not secure the franchise
but was given to defendant himself 2) that defendant did not fail to carry out his undertakings,
but that it was plaintiff who failed and 3)that plaintiff agreed to contribute to the exclusive
franchise to the partnership, but plaintiff failed to do so with a 4) counterclaim for P200,00 as
damages.
The CFI ruling: 1) accounting of profits and to pay plaintiff 15 % of the profits and that the 2)
execution of contract cannot be enforced upon parties. Lastly, the 3) fraud wasnt proved
ISSUES

1. WON plaintiff falsely represented that he had an exclusive franchise to bottle Mission
beverages
2. WON false representation, if it existed, annuls the agreement to form the partnership
HELD

1. Yes. Plaintiff did make false representations and this can be seen through his letters to Mission
Dry Corporation asking for the latter to grant him temporary franchise so that he could settle the
agreement with defendant. The trial court reasoned, and the plaintiff on this appeal argues, that
plaintiff only undertook in the agreement to secure the Mission Dry franchise for and in behalf
of the proposed partnership. The existence of this provision in the final agreement does not
militate against plaintiff having represented that he had the exclusive franchise; it rather
strengthens belief that he did actually make the representation. The defendant believed, or was
made to believe, that plaintiff was the grantee of an exclusive franchise. Thus it is that it was also
agreed upon that the franchise was to be transferred to the name of the partnership, and that,
upon its dissolution or termination, the same shall be reassigned to the plaintiff.
Again, the immediate reaction of defendant, when in California he learned that plaintiff did not
have the exclusive franchise, was to reduce, as he himself testified, plaintiffs participation in the
net profits to one half of that agreed upon. He could not have had such a feeling had not plaintiff
actually made him believe that he(plaintiff) was the exclusive grantee of the franchise.
2. No. In consequence, article 1270 of the Spanish Civil Code distinguishes two kinds of (civil)
fraud, the causal fraud, which may be ground for the annulment of a contract, and the incidental
deceit, which only renders the party who employs it liable for damages only. The Supreme Court
has held that in order that fraud may vitiate consent, it must be the causal (dolo causante), not
merely the incidental (dolo incidente) inducement to the making of the contract.
The record abounds with circumstances indicative of the fact that the principal consideration, the
main cause that induced defendant to enter into the partnership agreement with plaintiff, was the
ability of plaintiff to get the exclusive franchise to bottle and distribute for the defendant or for
the partnership. The original draft prepared by defendants counsel was to the effect that plaintiff
obligated himself to secure a franchise for the defendant. But if plaintiff was guilty of a false
representation, this was not the causal consideration, or the principal inducement, that led
plaintiff to enter into the partnership agreement. On the other hand, this supposed ownership of
an exclusive franchise was actually the consideration or price plaintiff gave in exchange for the
share of 30 per cent granted him in the net profits of the partnership business. Defendant agreed
to give plaintiff 30 per cent share in the net profits because he was transferring his exclusive
franchise to the partnership.
Having arrived at the conclusion that the contract cannot be declared null and void, may the
agreement be carried out or executed? The SC finds no merit in the claim of plaintiff that the
partnership was already a fait accompli from the time of the operation of the plant, as it is
evident from the very language of the agreement that the parties intended that the execution of
the agreement to form a partnership was to be carried out at a later date. , The defendant may not
be compelled against his will to carry out the agreement nor execute the partnership papers. The
law recognizes the individuals freedom or liberty to do an act he has promised to do, or not to
do it, as he pleases.
Dispostive Postion: With modification above indicated, the judg

Digest: Litton vs Hill & Ceron
Posted in Digest, Digest: BusOrg 1 (PAT) Leave a comment
GEORGE LITTON, petitioner-appellant,
vs.
HILL & CERON, ET AL., respondents-appellees.
G.R. No. L-45624 April 25, 1939
Subject: BusOrg 1
Facts:
This is a petition to review on certiorari the decision of the Court of Appeals. On February 14,
1934, Litton sold and delivered to Carlos Ceron, who is one of the managing partners of Hill &
Ceron, a certain number of mining claims, and by virtue of said transaction, Ceron delivered to
plaintiff adocument (receipt) acknowledging that he received from Litton certain share
certificates of Big Wedge Mining Company totaling P1870. Ceron paid to the plaintiff the sum
or P1,150 leaving an unpaid balance of P720, and unable to collect this sum either from Hill &
Ceron or from its surety Visayan Surety & Insurance Corporation, Litton filed a complaint in the
Court of First Instance of Manila against the said defendants for the recovery of the said balance.
The lower court, after trial, ordered Carlos Ceron personally to pay the amount claimed and
absolved the partnership Hill & Ceron, Robert Hill and the Visayan Surety & Insurance
Corporation. On appeal to the CA, the latter affirmed the decision of the lower court, having
reached the conclusion that Ceron did not intend to represent and did not act for the firm Hill &
Ceron in the transaction involved in this litigation.
Issue: WON Cerons act binds the partnership.
Held:
Yes, we reach the conclusion that the transaction made by Ceron with the plaintiff should be
understood in law as effected by Hill & Ceron and binding upon it.
In the first place, it is an admitted fact by Robert Hill when he testified at the trial that he and
Ceron, during the partnership, had the same power to buy and sell; that in said partnership Hill as
well as Ceron made the transaction as partners in equal parts; that on the date of the transaction,
February 14, 1934, the partnership between Hill and Ceron was in existence.
According to the articles of copartnership of Hill & Ceron, a written contract of the firm can
only be signed by one of the partners if the other partner consented. Without the consent of one
partner, the other cannot bind the firm by a written contract. Now, assuming for the moment that
Ceron attempted to represent the firm in this contract with the plaintiff (the plaintiff conceded
that the firm name was not mentioned at that time), the latter has failed to prove that Hill had
consented to such contract. Also, third persons, like the plaintiff, are not bound in entering into a
contract with any of the two partners, to ascertain whether or not this partner with whom the
transaction is made has the consent of the other partner. The public need not make inquires as to
the agreements had between the partners. Its knowledge, is enough that it is contracting with the
partnership which is represented by one of the managing partners.
The respondent argues in its brief that even admitting that one of the partners could not, in his
individual capacity, engage in a transaction similar to that in which the partnership is engaged
without binding the latter, nevertheless there is no law which prohibits a partner in the stock
brokerage business for engaging in other transactions different from those of the partnership, as
it happens in the present case, because the transaction made by Ceron is a mere personal loan,
and this argument, so it is said, is corroborated by the Court of Appeals. We do not find this
alleged corroboration because the only finding of fact made by the Court of Appeals is to the
effect that the transaction made by Ceron with the plaintiff was in his individual capacity.
The appealed decision is reversed and the defendants are ordered to pay to the plaintiff, jointly
and severally, the sum of P720, with legal interest, from the date of the filing of the complaint,
minus the commission of one-half per cent (%) from the original price of P1,870, with the
costs to the respondents. So ordered.































Bachrach v La Protectora
Facts:
Nicolas Segundo, Antonio Adiarte, Ignacio Flores and Modesto Serrano (defendants) formed a civil
partnership called La Protectora for the purpose of engaging in the business of transporting
passengers and freight at Laoag, Ilocos Norte. Marcelo Barba, acting as manager, negotiated for the
purchase of 2 automobile trucks from E. M. Bachrach for P16,500. Barba paid P3,000 in cash and for the
balance executed promissory notes.
One of these promissory notes was signed in the following manner:
P.P La Protectora, By Marcelo Barba Marcelo Barba
The other 2 notes were signed in the same way but the word by was omitted. It was obvious that in
signing the notes, Barba intended to bind both the partnership and himself.
The defendants executed a document in which they declared that they were members of La Protectora
and that they had granted to its president full authority to contract for the purchase of the 2
automobiles. The document was delivered by Barba to Bachrach at the time the vehicles were
purchased.
Barba incurred a debt amounting to P2,617.57 and Bachrach foreclosed a chattel mortgage on the
trucks but there was still balance. To recover the balance, action was instituted against the defendants.
Judgment was rendered against the defendants.

Issue:
a.Whether or not the defendants are liable for the firm debts.
b.Whether or not Barba had authority to incur expenses for the partnership (relevant issue)

Held:
a.Yes. Promissory notes constitute the obligation exclusively of La Protectora and Barba. They do not
constitute an obligation directly binding the defendants. Their liability is based on the principles of
partnership liability. A member is not liable in solidum with his fellows for the entire indebtedness but is
liable with them or his aliquot part.
SC obiter: the document was intended merely as an authority to enable Barba to bind the partnership
and that the parties to the instrument did not intend to confer upon Barba an authority to bind them
personally.
b. Yes. Under Art 1804, every partner may associate another person with him in his share. All partners
are considered agents of the partnership. Barba must be held to have authority to incur these expenses.
He is shown to have been in fact the president/manager, and there can be no doubt that he had actual
authority to incur obligation.












.R. No. L-5236 January 10, 1910
PEDRO MARTINEZ, plaintiff-appellee,
vs.
ONG PONG CO and ONG LAY, defendants.
ONG PONG CO., appellant.
Fernando de la Cantera for appellant.
O'Brien and DeWitt for appellee.
ARELLANO, C.J .:
On the 12th of December, 1900, the plaintiff herein delivered P1,500 to the defendants who, in a
private document, acknowledged that they had received the same with the agreement, as stated
by them, "that we are to invest the amount in a store, the profits or losses of which we are to
divide with the former, in equal shares."
The plaintiff filed a complaint on April 25, 1907, in order to compel the defendants to render him
an accounting of the partnership as agreed to, or else to refund him the P1,500 that he had given
them for the said purpose. Ong Pong Co alone appeared to answer the complaint; he admitted the
fact of the agreement and the delivery to him and to Ong Lay of the P1,500 for the purpose
aforesaid, but he alleged that Ong Lay, who was then deceased, was the one who had managed
the business, and that nothing had resulted therefrom save the loss of the capital of P1,500, to
which loss the plaintiff agreed.
The judge of the Court of First Instance of the city of Manila who tried the case ordered Ong
Pong Co to return to the plaintiff one-half of the said capital of P1,500 which, together with Ong
Lay, he had received from the plaintiff, to wit, P750, plus P90 as one-half of the profits,
calculated at the rate of 12 per cent per annum for the six months that the store was supposed to
have been open, both sums in Philippine currency, making a total of P840, with legal interest
thereon at the rate of 6 per cent per annum, from the 12th of June, 1901, when the business
terminated and on which date he ought to have returned the said amount to the plaintiff, until the
full payment thereof with costs.
From this judgment Ong Pong Co appealed to this court, and assigned the following errors:
1. For not having taken into consideration the fact that the reason for the closing of the
store was the ejectment from the premises occupied by it.
2. For not having considered the fact that there were losses.
3. For holding that there should have been profits.
4. For having applied article 1138 of the Civil Code.
5. and 6. For holding that the capital ought to have yielded profits, and that the latter
should be calculated 12 per cent per annum; and
7. The findings of the ejectment.
As to the first assignment of error, the fact that the store was closed by virtue of ejectment
proceedings is of no importance for the effects of the suit. The whole action is based upon the
fact that the defendants received certain capital from the plaintiff for the purpose of organizing a
company; they, according to the agreement, were to handle the said money and invest it in a
store which was the object of the association; they, in the absence of a special agreement vesting
in one sole person the management of the business, were the actual administrators thereof; as
such administrators they were the agent of the company and incurred the liabilities peculiar to
every agent, among which is that of rendering account to the principal of their transactions, and
paying him everything they may have received by virtue of the mandatum. (Arts. 1695 and 1720,
Civil Code.) Neither of them has rendered such account nor proven the losses referred to by Ong
Pong Co; they are therefore obliged to refund the money that they received for the purpose of
establishing the said store the object of the association. This was the principal pronouncement
of the judgment.
With regard to the second and third assignments of error, this court, like the court below, finds
no evidence that the entire capital or any part thereof was lost. It is no evidence of such loss to
aver, without proof, that the effects of the store were ejected. Even though this were proven, it
could not be inferred therefrom that the ejectment was due to the fact that no rents were paid, and
that the rent was not paid on account of the loss of the capital belonging to the enterprise.
With regard to the possible profits, the finding of the court below are based on the statements of
the defendant Ong Pong Co, to the effect that "there were some profits, but not large ones." This
court, however, does not find that the amount thereof has been proven, nor deem it possible to
estimate them to be a certain sum, and for a given period of time; hence, it can not admit the
estimate, made in the judgment, of 12 per cent per annum for the period of six months.
Inasmuch as in this case nothing appears other than the failure to fulfill an obligation on the part
of a partner who acted as agent in receiving money for a given purpose, for which he has
rendered no accounting, such agent is responsible only for the losses which, by a violation of the
provisions of the law, he incurred. This being an obligation to pay in cash, there are no other
losses than the legal interest, which interest is not due except from the time of the judicial
demand, or, in the present case, from the filing of the complaint. (Arts. 1108 and 1100, Civil
Code.) We do not consider that article 1688 is applicable in this case, in so far as it provides "that
the partnership is liable to every partner for the amounts he may have disbursed on account of
the same and for the proper interest," for the reason that no other money than that contributed as
is involved.
As in the partnership there were two administrators or agents liable for the above-named amount,
article 1138 of the Civil Code has been invoked; this latter deals with debts of a partnership
where the obligation is not a joint one, as is likewise provided by article 1723 of said code with
respect to the liability of two or more agents with respect to the return of the money that they
received from their principal. Therefore, the other errors assigned have not been committed.
In view of the foregoing judgment appealed from is hereby affirmed, provided, however, that the
defendant Ong Pong Co shall only pay the plaintiff the sum of P750 with the legal interest
thereon at the rate of 6 per cent per annum from the time of the filing of the complaint, and the
costs, without special ruling as to the costs of this instance. So ordered.
Torres, Johnson, Carson, and Moreland, JJ., concur.

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Sunday, May 6, 2012
Commissioner of Internal Revenue vs. Suter, 27 SCRA 152, L-25532, February
28, 1969
Posted by Alchemy Business Center and Marketing Consultancy at 9:15 PM Labels: 1969, 27 SCRA 152,
Civil Law Review, Commissioner of Internal Revenue vs. Suter, February 28, L-25532

Commissioner of Internal Revenue vs. Suter, 27 SCRA 152, L-25532, February 28, 1969
G.R. No. L-25532 February 28, 1969
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
WILLIAM J. SUTER and THE COURT OF TAX APPEALS, respondents.
Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete and
Special Attorneys B. Gatdula, Jr. and T. Temprosa Jr. for petitioner.
A. S. Monzon, Gutierrez, Farrales and Ong for respondents.
REYES, J.B.L., J.:
A limited partnership, named "William J. Suter 'Morcoin' Co., Ltd.," was formed on 30 September
1947 by herein respondent William J. Suter as the general partner, and Julia Spirig and Gustav Carlson,
as the limited partners. The partners contributed, respectively, P20,000.00, P18,000.00 and P2,000.00 to
the partnership. On 1 October 1947, the limited partnership was registered with the Securities and
Exchange Commission. The firm engaged, among other activities, in the importation, marketing,
distribution and operation of automatic phonographs, radios, television sets and amusement machines,
their parts and accessories. It had an office and held itself out as a limited partnership, handling and
carrying merchandise, using invoices, bills and letterheads bearing its trade-name, maintaining its own
books of accounts and bank accounts, and had a quota allocation with the Central Bank.
In 1948, however, general partner Suter and limited partner Spirig got married and, thereafter, on
18 December 1948, limited partner Carlson sold his share in the partnership to Suter and his wife. The
sale was duly recorded with the Securities and Exchange Commission on 20 December 1948.
The limited partnership had been filing its income tax returns as a corporation, without objection
by the herein petitioner, Commissioner of Internal Revenue, until in 1959 when the latter, in an
assessment, consolidated the income of the firm and the individual incomes of the partners-spouses
Suter and Spirig resulting in a determination of a deficiency income tax against respondent Suter in the
amount of P2,678.06 for 1954 and P4,567.00 for 1955.
Respondent Suter protested the assessment, and requested its cancellation and withdrawal, as not
in accordance with law, but his request was denied. Unable to secure a reconsideration, he appealed to
the Court of Tax Appeals, which court, after trial, rendered a decision, on 11 November 1965, reversing
that of the Commissioner of Internal Revenue.
The present case is a petition for review, filed by the Commissioner of Internal Revenue, of the tax
court's aforesaid decision. It raises these issues:
(a) Whether or not the corporate personality of the William J. Suter "Morcoin" Co., Ltd. should be
disregarded for income tax purposes, considering that respondent William J. Suter and his wife, Julia
Spirig Suter actually formed a single taxable unit; and
(b) Whether or not the partnership was dissolved after the marriage of the partners, respondent
William J. Suter and Julia Spirig Suter and the subsequent sale to them by the remaining partner, Gustav
Carlson, of his participation of P2,000.00 in the partnership for a nominal amount of P1.00.
The theory of the petitioner, Commissioner of Internal Revenue, is that the marriage of Suter and
Spirig and their subsequent acquisition of the interests of remaining partner Carlson in the partnership
dissolved the limited partnership, and if they did not, the fiction of juridical personality of the
partnership should be disregarded for income tax purposes because the spouses have exclusive
ownership and control of the business; consequently the income tax return of respondent Suter for the
years in question should have included his and his wife's individual incomes and that of the limited
partnership, in accordance with Section 45 (d) of the National Internal Revenue Code, which provides as
follows:
(d) Husband and wife. In the case of married persons, whether citizens, residents or non-
residents, only one consolidated return for the taxable year shall be filed by either spouse to cover the
income of both spouses; ....
In refutation of the foregoing, respondent Suter maintains, as the Court of Tax Appeals held, that
his marriage with limited partner Spirig and their acquisition of Carlson's interests in the partnership in
1948 is not a ground for dissolution of the partnership, either in the Code of Commerce or in the New
Civil Code, and that since its juridical personality had not been affected and since, as a limited
partnership, as contra distinguished from a duly registered general partnership, it is taxable on its
income similarly with corporations, Suter was not bound to include in his individual return the income of
the limited partnership.
We find the Commissioner's appeal unmeritorious.
The thesis that the limited partnership, William J. Suter "Morcoin" Co., Ltd., has been dissolved by
operation of law because of the marriage of the only general partner, William J. Suter to the originally
limited partner, Julia Spirig one year after the partnership was organized is rested by the appellant upon
the opinion of now Senator Tolentino in Commentaries and Jurisprudence on Commercial Laws of the
Philippines, Vol. 1, 4th Ed., page 58, that reads as follows:
A husband and a wife may not enter into a contract of general copartnership, because under the
Civil Code, which applies in the absence of express provision in the Code of Commerce, persons
prohibited from making donations to each other are prohibited from entering
into universal partnerships. (2 Echaverri 196) It follows that the marriage of partners necessarily brings
about the dissolution of a pre-existing partnership. (1 Guy de Montella 58)
The petitioner-appellant has evidently failed to observe the fact that William J. Suter "Morcoin"
Co., Ltd. wasnot a universal partnership, but a particular one. As appears from Articles 1674 and 1675 of
the Spanish Civil Code, of 1889 (which was the law in force when the subject firm was organized in
1947), a universal partnership requires either that the object of the association be all the present
property of the partners, as contributed by them to the common fund, or else "all that the partners may
acquire by their industry or work during the existence of the partnership". William J. Suter "Morcoin"
Co., Ltd. was not such a universal partnership, since the contributions of the partners were fixed sums of
money, P20,000.00 by William Suter and P18,000.00 by Julia Spirig and neither one of them was an
industrial partner. It follows that William J. Suter "Morcoin" Co., Ltd. was not a partnership that spouses
were forbidden to enter by Article 1677 of the Civil Code of 1889.
The former Chief Justice of the Spanish Supreme Court, D. Jose Casan, in his Derecho Civil, 7th
Edition, 1952, Volume 4, page 546, footnote 1, says with regard to the prohibition contained in the
aforesaid Article 1677:
Los conyuges, segun esto, no pueden celebrar entre si el contrato de sociedad universal, pero o
podran constituir sociedad particular? Aunque el punto ha sido muy debatido, nos inclinamos a la tesis
permisiva de los contratos de sociedad particular entre esposos, ya que ningun precepto de nuestro
Codigo los prohibe, y hay que estar a la norma general segun la que toda persona es capaz para
contratar mientras no sea declarado incapaz por la ley. La jurisprudencia de la Direccion de los Registros
fue favorable a esta misma tesis en su resolution de 3 de febrero de 1936, mas parece cambiar de
rumbo en la de 9 de marzo de 1943.
Nor could the subsequent marriage of the partners operate to dissolve it, such marriage not being
one of the causes provided for that purpose either by the Spanish Civil Code or the Code of Commerce.
The appellant's view, that by the marriage of both partners the company became a single
proprietorship, is equally erroneous. The capital contributions of partners William J. Suter and Julia
Spirig were separately owned and contributed by them before their marriage; and after they were
joined in wedlock, such contributions remained their respective separate property under the Spanish
Civil Code (Article 1396):
The following shall be the exclusive property of each spouse:
(a) That which is brought to the marriage as his or her own; ....
Thus, the individual interest of each consort in William J. Suter "Morcoin" Co., Ltd. did not become
common property of both after their marriage in 1948.
It being a basic tenet of the Spanish and Philippine law that the partnership has a juridical
personality of its own, distinct and separate from that of its partners (unlike American and English law
that does not recognize such separate juridical personality), the bypassing of the existence of the limited
partnership as a taxpayer can only be done by ignoring or disregarding clear statutory mandates and
basic principles of our law. The limited partnership's separate individuality makes it impossible to equate
its income with that of the component members. True, section 24 of the Internal Revenue Code merges
registered general co-partnerships (compaias colectivas) with the personality of the individual partners
for income tax purposes. But this rule is exceptional in its disregard of a cardinal tenet of our partnership
laws, and can not be extended by mere implication to limited partnerships.
The rulings cited by the petitioner (Collector of Internal Revenue vs. University of the Visayas, L-
13554, Resolution of 30 October 1964, and Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 504) as authority for
disregarding the fiction of legal personality of the corporations involved therein are not applicable to the
present case. In the cited cases, the corporations were already subject to tax when the fiction of their
corporate personality was pierced; in the present case, to do so would exempt the limited partnership
from income taxation but would throw the tax burden upon the partners-spouses in their individual
capacities. The corporations, in the cases cited, merely served as business conduits or alter egos of the
stockholders, a factor that justified a disregard of their corporate personalities for tax purposes. This is
not true in the present case. Here, the limited partnership is not a mere business conduit of the partner-
spouses; it was organized for legitimate business purposes; it conducted its own dealings with its
customers prior to appellee's marriage, and had been filing its own income tax returns as such
independent entity. The change in its membership, brought about by the marriage of the partners and
their subsequent acquisition of all interest therein, is no ground for withdrawing the partnership from
the coverage of Section 24 of the tax code, requiring it to pay income tax. As far as the records show,
the partners did not enter into matrimony and thereafter buy the interests of the remaining partner
with the premeditated scheme or design to use the partnership as a business conduit to dodge the tax
laws. Regularity, not otherwise, is presumed.
As the limited partnership under consideration is taxable on its income, to require that income to
be included in the individual tax return of respondent Suter is to overstretch the letter and intent of the
law. In fact, it would even conflict with what it specifically provides in its Section 24: for the appellant
Commissioner's stand results in equal treatment, tax wise, of a general copartnership (compaia
colectiva) and a limited partnership, when the code plainly differentiates the two. Thus, the code taxes
the latter on its income, but not the former, because it is in the case of compaias colectivas that the
members, and not the firm, are taxable in their individual capacities for any dividend or share of the
profit derived from the duly registered general partnership (Section 26, N.I.R.C.; Araas, Anno. & Juris.
on the N.I.R.C., As Amended, Vol. 1, pp. 88-89).lawphi1.nt
But it is argued that the income of the limited partnership is actually or constructively the income
of the spouses and forms part of the conjugal partnership of gains. This is not wholly correct. As pointed
out in Agapito vs. Molo 50 Phil. 779, and People's Bank vs. Register of Deeds of Manila, 60 Phil. 167, the
fruits of the wife's parapherna become conjugal only when no longer needed to defray the expenses for
the administration and preservation of the paraphernal capital of the wife. Then again, the appellant's
argument erroneously confines itself to the question of the legal personality of the limited partnership,
which is not essential to the income taxability of the partnership since the law taxes the income of even
joint accounts that have no personality of their own. 1 Appellant is, likewise, mistaken in that it assumes
that the conjugal partnership of gains is a taxable unit, which it is not. What is taxable is the "income of
both spouses" (Section 45 [d] in their individual capacities. Though the amount of income (income of the
conjugal partnership vis-a-vis the joint income of husband and wife) may be the same for a given taxable
year, their consequences would be different, as their contributions in the business partnership are not
the same.
The difference in tax rates between the income of the limited partnership being consolidated with,
and when split from the income of the spouses, is not a justification for requiring consolidation; the
revenue code, as it presently stands, does not authorize it, and even bars it by requiring the limited
partnership to pay tax on its own income.
FOR THE FOREGOING REASONS, the decision under review is hereby affirmed. No costs.








The Case
afisco insurance

These are the main questions raised in the Petition for Review on Certiorari before us, assailing
the October 11, 1993 Decisioni[1] of the Court of Appealsii[2]in CA-GR SP 29502, which
dismissed petitioners appeal of the October 19, 1992 Decisioniii[3]

of the Court of Tax
Appealsiv[4] (CTA) which had previously sustained petitioners liability for deficiency income
tax, interest and withholding tax. The Court of Appeals ruled:
WHEREFORE, the petition is DISMISSED, with costs against petitioners.v[5]
The petition also challenges the November 15, 1993 Court of Appeals (CA) Resolutionvi[6]
denying reconsideration.
The Facts

The antecedent facts,vii[7] as found by the Court of Appeals, are as follows:
The petitioners are 41 non-life insurance corporations, organized and existing under the laws of
the Philippines. Upon issuance by them of Erection, Machinery Breakdown, Boiler Explosion
and Contractors All Risk insurance policies, the petitioners on August 1, 1965 entered into a
Quota Share Reinsurance Treaty and a Surplus Reinsurance Treaty with the Munchener
Ruckversicherungs-Gesselschaft (hereafter called Munich), a non-resident foreign insurance
corporation. The reinsurance treaties required petitioners to form a [p]ool. Accordingly, a pool
composed of the petitioners was formed on the same day.
On April 14, 1976, the pool of machinery insurers submitted a financial statement and filed an
Information Return of Organization Exempt from Income Tax for the year ending in 1975, on
the basis of which it was assessed by the Commissioner of Internal Revenue deficiency corporate
taxes in the amount of P1,843,273.60, and withholding taxes in the amount of P1,768,799.39 and
P89,438.68 on dividends paid to Munich and to the petitioners, respectively. These assessments
were protested by the petitioners through its auditors Sycip, Gorres, Velayo and Co.
On January 27, 1986, the Commissioner of Internal Revenue denied the protest and ordered the
petitioners, assessed as Pool of Machinery Insurers, to pay deficiency income tax, interest, and
with[h]olding tax, itemized as follows:
Net income per information
return P3,737,370.00
===========
Income tax due thereon P1,298,080.00
Add: 14% Int. fr. 4/15/76
to 4/15/79 545,193.60
TOTAL AMOUNT DUE & P1,843,273.60
COLLECTIBLE ===========
Dividend paid to Munich
Reinsurance Company P3,728,412.00
===========
35% withholding tax at
source due thereon P1,304,944.20
Add: 25% surcharge 326,236.05
14% interest from
1/25/76 to 1/25/79 137,019.14
Compromise penalty-
non-filing of return 300.00
late payment 300.00
TOTAL AMOUNT DUE & P1,768,799.39
COLLECTIBLE ===========
Dividend paid to Pool Members P 655,636.00
===========
10% withholding tax at
source due thereon P 65,563.60
Add: 25% surcharge 16,390.90
14% interest from
1/25/76 to 1/25/79 6,884.18
Compromise penalty-
non-filing of return 300.00
late payment 300.00
TOTAL AMOUNT DUE & P 89,438.68
COLLECTIBLE ===========viii[8]
The CA ruled in the main that the pool of machinery insurers was a partnership taxable as a
corporation, and that the latters collection of premiums on behalf of its members, the ceding
companies, was taxable income. It added that prescription did not bar the Bureau of Internal
Revenue (BIR) from collecting the taxes due, because the taxpayer cannot be located at the
address given in the information return filed. Hence, this Petition for Review before us.ix[9]
The Issues

Before this Court, petitioners raise the following issues:
1.Whether or not the Clearing House, acting as a mere agent and performing strictly
administrative functions, and which did not insure or assume any risk in its own name, was a
partnership or association subject to tax as a corporation;
2.Whether or not the remittances to petitioners and MUNICHRE of their respective shares of
reinsurance premiums, pertaining to their individual and separate contracts of reinsurance, were
dividends subject to tax; and
3.Whether or not the respondent Commissioners right to assess the Clearing House had already
prescribed.x[10]
The Courts Ruling

The petition is devoid of merit. We sustain the ruling of the Court of Appeals that the pool is
taxable as a corporation, and that the governments right to assess and collect the taxes had not
prescribed.
First Issue:

Pool Taxable as a Corporation

Petitioners contend that the Court of Appeals erred in finding that the pool or clearing house was
an informal partnership, which was taxable as a corporation under the NIRC. They point out that
the reinsurance policies were written by them individually and separately, and that their
liability was limited to the extent of their allocated share in the original risks thus
reinsured.xi[11] Hence, the pool did not act or earn income as a reinsurer.xii[12] Its role was
limited to its principal function of allocating and distributing the risk(s) arising from the original
insurance among the signatories to the treaty or the members of the pool based on their ability to
absorb the risk(s) ceded[;] as well as the performance of incidental functions, such as records,
maintenance, collection and custody of funds, etc.xiii[13]
Petitioners belie the existence of a partnership in this case, because (1) they, the reinsurers, did
not share the same risk or solidary liability;xiv[14] (2) there was no common fund;xv[15] (3)
the executive board of the pool did not exercise control and management of its funds, unlike the
board of directors of a corporation;xvi[16] and (4) the pool or clearing house was not and
could not possibly have engaged in the business of reinsurance from which it could have derived
income for itself.xvii[17]
The Court is not persuaded. The opinion or ruling of the Commission of Internal Revenue, the
agency tasked with the enforcement of tax laws, is accorded much weight and even finality,
when there is no showing that it is patently wrong,xviii[18] particularly in this case where the
findings and conclusions of the internal revenue commissioner were subsequently affirmed by
the CTA, a specialized body created for the exclusive purpose of reviewing tax cases, and the
Court of Appeals.xix[19] Indeed,
[I]t has been the long standing policy and practice of this Court to respect the conclusions of
quasi-judicial agencies, such as the Court of Tax Appeals which, by the nature of its functions, is
dedicated exclusively to the study and consideration of tax problems and has necessarily
developed an expertise on the subject, unless there has been an abuse or improvident exercise of
its authority.xx[20]
This Court rules that the Court of Appeals, in affirming the CTA which had previously sustained
the internal revenue commissioner, committed no reversible error. Section 24 of the NIRC, as
worded in the year ending 1975, provides:
SEC. 24. Rate of tax on corporations. -- (a) Tax on domestic corporations. -- A tax is
hereby imposed upon the taxable net income received during each taxable year from all sources
by every corporation organized in, or existing under the laws of the Philippines, no matter how
created or organized, but not including duly registered general co-partnership (compaias
colectivas), general professional partnerships, private educational institutions, and building and
loan associations xxx.
Ineludibly, the Philippine legislature included in the concept of corporations those entities that
resembled them such as unregistered partnerships and associations. Parenthetically, the NLRCs
inclusion of such entities in the tax on corporations was made even clearer by the Tax Reform
Act of 1997,xxi[21] which amended the Tax Code. Pertinent provisions of the new law read as
follows:
SEC. 27. Rates of Income Tax on Domestic Corporations. --
(A) In General. -- Except as otherwise provided in this Code, an income tax of thirty-five
percent (35%) is hereby imposed upon the taxable income derived during each taxable year from
all sources within and without the Philippines by every corporation, as defined in Section 22 (B)
of this Code, and taxable under this Title as a corporation xxx.
SEC. 22. -- Definition. -- When used in this Title:
xxx xxx xxx
(B) The term corporation shall include partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participacion),
associations, or insurance companies, but does not include general professional
partnerships [or] a joint venture or consortium formed for the purpose of undertaking
construction projects or engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating or consortium agreement under a service contract
without the Government. General professional partnerships are partnerships
formed by persons for the sole purpose of exercising their common profession, no part
of the income of which is derived from engaging in any trade or business.
xxx xxx xxx."
Thus, the Court in Evangelista v. Collector of Internal Revenuexxii[22] held that Section 24
covered these unregistered partnerships and even associations or joint accounts, which had no
legal personalities apart from their individual members.xxiii[23] The Court of Appeals astutely
applied Evangelista:xxiv[24]
xxx Accordingly, a pool of individual real property owners dealing in real estate business was
considered a corporation for purposes of the tax in sec. 24 of the Tax Code in Evangelista v.
Collector of Internal Revenue, supra. The Supreme Court said:
The term partnership includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business, financial
operation, or venture is carried on. * * * (8 Mertens Law of Federal Income Taxation, p.
562 Note 63)
Article 1767 of the Civil Code recognizes the creation of a contract of partnership when two or
more persons bind themselves to contribute money, property, or industry to a common fund, with
the intention of dividing the profits among themselves.xxv[25] Its requisites are: (1) mutual
contribution to a common stock, and (2) a joint interest in the profits.xxvi[26] In other words,
a partnership is formed when persons contract to devote to a common purpose either money,
property, or labor with the intention of dividing the profits between themselves.xxvii[27]
Meanwhile, an association implies associates who enter into a joint enterprise x x x for the
transaction of business.xxviii[28]
In the case before us, the ceding companies entered into a Pool Agreementxxix[29] or an
associationxxx[30] that would handle all the insurance businesses covered under their quota-
share reinsurance treatyxxxi[31] and surplus reinsurance treatyxxxii[32]with Munich. The
following unmistakably indicates a partnership or an association covered by Section 24 of the
NIRC:
(1) The pool has a common fund, consisting of money and other valuables that are deposited in
the name and credit of the pool.xxxiii[33] This common fund pays for the administration and
operation expenses of the pool.xxxiv[34]
(2) The pool functions through an executive board, which resembles the board of directors of a
corporation, composed of one representative for each of the ceding companies.xxxv[35]
(3) True, the pool itself is not a reinsurer and does not issue any insurance policy; however, its
work is indispensable, beneficial and economically useful to the business of the ceding
companies and Munich, because without it they would not have received their premiums. The
ceding companies share in the business ceded to the pool and in the expenses according to a
Rules of Distribution annexed to the Pool Agreement.xxxvi[36] Profit motive or business is,
therefore, the primordial reason for the pools formation. As aptly found by the CTA:
xxx The fact that the pool does not retain any profit or income does not obliterate an
antecedent fact, that of the pool being used in the transaction of business for profit. It is
apparent, and petitioners admit, that their association or coaction was indispensable [to]
the transaction of the business. x x x If together they have conducted business, profit
must have been the object as, indeed, profit was earned. Though the profit was
apportioned among the members, this is only a matter of consequence, as it implies that
profit actually resulted.xxxvii[37]
The petitioners reliance on Pascual v. Commissionerxxxviii[38] is misplaced, because the facts
obtaining therein are not on all fours with the present case. In Pascual, there was no
unregistered partnership, but merely a co-ownership which took up only two isolated
transactions.xxxix[39] The Court of Appeals did not err in applying Evangelista, which
involved a partnership that engaged in a series of transactions spanning more than ten years, as in
the case before us.
Second Issue:

Pools Remittances Are Taxable

Petitioners further contend that the remittances of the pool to the ceding companies and Munich
are not dividends subject to tax. They insist that taxing such remittances contravene Sections 24
(b) (I) and 263 of the 1977 NIRC and would be tantamount to an illegal double taxation, as it
would result in taxing the same premium income twice in the hands of the same taxpayer.xl[40]
Moreover, petitioners argue that since Munich was not a signatory to the Pool Agreement, the
remittances it received from the pool cannot be deemed dividends.xli[41] They add that even if
such remittances were treated as dividends, they would have been exempt under the previously
mentioned sections of the 1977 NIRC,xlii[42] as well as Article 7 of paragraph 1xliii[43] and
Article 5 of paragraph 5xliv[44] of the RP-West German Tax Treaty.xlv[45]
Petitioners are clutching at straws. Double taxation means taxing the same property twice when
it should be taxed only once. That is, xxx taxing the same person twice by the same jurisdiction
for the same thing.xlvi[46] In the instant case, the pool is a taxable entity distinct from the
individual corporate entities of the ceding companies. The tax on its income is obviously
different from the tax on the dividends received by the said companies. Clearly, there is no
double taxation here.
The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto
remains unproven and unsubstantiated. It is axiomatic in the law of taxation that taxes are the
lifeblood of the nation. Hence, exemptions therefrom are highly disfavored in law and he who
claims tax exemption must be able to justify his claim or right.xlvii[47] Petitioners have failed
to discharge this burden of proof. The sections of the 1977 NIRC which they cite are
inapplicable, because these were not yet in effect when the income was earned and when the
subject information return for the year ending 1975 was filed.
Referring to the 1975 version of the counterpart sections of the NIRC, the Court still cannot
justify the exemptions claimed. Section 255 provides that no tax shall xxx be paid upon
reinsurance by any company that has already paid the tax xxx. This cannot be applied to the
present case because, as previously discussed, the pool is a taxable entity distinct from the ceding
companies; therefore, the latter cannot individually claim the income tax paid by the former as
their own.
On the other hand, Section 24 (b) (1)xlviii[48] pertains to tax on foreign corporations; hence, it
cannot be claimed by the ceding companies which are domestic corporations. Nor can Munich, a
foreign corporation, be granted exemption based solely on this provision of the Tax Code,
because the same subsection specifically taxes dividends, the type of remittances forwarded to it
by the pool. Although not a signatory to the Pool Agreement, Munich is patently an associate of
the ceding companies in the entity formed, pursuant to their reinsurance treaties which required
the creation of said pool.
Under its pool arrangement with the ceding companies, Munich shared in their income and loss.
This is manifest from a reading of Articles 3xlix[49] and 10l[50] of the Quota Share Reinsurance
Treaty and Articles 3li[51] and 10lii[52] of the Surplus Reinsurance Treaty. The foregoing
interpretation of Section 24 (b) (1) is in line with the doctrine that a tax exemption must be
construed strictissimi juris, and the statutory exemption claimed must be expressed in a language
too plain to be mistaken.liii[53]
Finally, the petitioners claim that Munich is tax-exempt based on the RP-West German Tax
Treaty is likewise unpersuasive, because the internal revenue commissioner assessed the pool for
corporate taxes on the basis of the information return it had submitted for the year ending 1975, a
taxable year when said treaty was not yet in effect.liv[54] Although petitioners omitted in their
pleadings the date of effectivity of the treaty, the Court takes judicial notice that it took effect
only later, on December 14, 1984.lv[55]
Third Issue: Prescription

Petitioners also argue that the governments right to assess and collect the subject tax had
prescribed. They claim that the subject information return was filed by the pool on April 14,
1976. On the basis of this return, the BIR telephoned petitioners on November 11, 1981, to give
them notice of its letter of assessment dated March 27, 1981. Thus, the petitioners contend that
the five-year statute of limitations then provided in the NIRC had already lapsed, and that the
internal revenue commissioner was already barred by prescription from making an
assessment.lvi[56]
We cannot sustain the petitioners. The CA and the CTA categorically found that the prescriptive
period was tolled under then Section 333 of the NIRC,lvii[57] because the taxpayer cannot be
located at the address given in the information return filed and for which reason there was delay
in sending the assessment.lviii[58] Indeed, whether the governments right to collect and assess
the tax has prescribed involves facts which have been ruled upon by the lower courts. It is
axiomatic that in the absence of a clear showing of palpable error or grave abuse of discretion, as
in this case, this Court must not overturn the factual findings of the CA and the CTA.
Furthermore, petitioners admitted in their Motion for Reconsideration before the Court of
Appeals that the pool changed its address, for they stated that the pools information return filed
in 1980 indicated therein its present address. The Court finds that this falls short of the
requirement of Section 333 of the NIRC for the suspension of the prescriptive period. The law
clearly states that the said period will be suspended only if the taxpayer informs the
Commissioner of Internal Revenue of any change in the address.
WHEREFORE, the petition is DENIED. The Resolutions of the Court of Appeals dated
October 11, 1993 and November 15, 1993 are hereby AFFIRMED. Costs against petitioners.
SO ORDERED






















PhilippineLaw.info Jurisprudence 1903 February
PhilippineLaw.info Jurisprudence Phil. Rep. Vol. 1





G.R. No. 413, Fernandez v. De La Rosa, 1 Phil. 671
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
February 2, 1903
G.R. No. 413
JOSE FERNANDEZ, plaintiff-appellant,
vs.
FRANCISCO DE LA ROSA, defendant-appellee.
Vicente Miranda, for appellant.
Simplicio del Rosario, for appellee.
LADD, J .:
The object of this action is to obtain from the court a declaration that a partnership exists
between the parties, that the plaintiff has a consequent interested in certain cascoes which are
alleged to be partnership property, and that the defendant is bound to render an account of his
administration of the cascoes and the business carried on with them.
Judgment was rendered for the defendant in the court below and the plaintiff appealed.
The respective claims of the parties as to the facts, so far as it is necessary to state them in order
to indicate the point in dispute, may be briefly summarized. The plaintiff alleges that in January,
1900, he entered into a verbal agreement with the defendant to form a partnership for the
purchase of cascoes and the carrying on of the business of letting the same for hire in Manila, the
defendant to buy the cascoes and each partner to furnish for that purpose such amount of money
as he could, the profits to be divided proportionately; that in the same January the plaintiff
furnished the defendant 300 pesos to purchase a casco designated as No. 1515, which the
defendant did purchase for 500 pesos of Doa Isabel Vales, taking the title in his own name; that
the plaintiff furnished further sums aggregating about 300 pesos for repairs on this casco; that on

the fifth of the following March he furnished the defendant 825 pesos to purchase another casco
designated as No. 2089, which the defendant did purchase for 1,000 pesos of Luis R. Yangco,
taking the title to this casco also in his own name; that in April the parties undertook to draw up
articles of partnership for the purpose of embodying the same in an authentic document, but that
the defendant having proposed a draft of such articles which differed materially from the terms
of the earlier verbal agreement, and being unwillingly to include casco No. 2089 in the
partnership, they were unable to come to any understanding and no written agreement was
executed; that the defendant having in the meantime had the control and management of the two
cascoes, the plaintiff made a demand for an accounting upon him, which the defendant refused to
render, denying the existence of the partnership altogether.
The defendant admits that the project of forming a partnership in the casco business in which he
was already engaged to some extent individually was discussed between himself and the plaintiff
in January, 1900, and earlier, one Marcos Angulo, who was a partner of the plaintiff in a bakery
business, being also a party to the negotiations, but he denies that any agreement was ever
consummated. He denies that the plaintiff furnished any money in January, 1900, for the
purchase of casco No. 1515, or for repairs on the same, but claims that he borrowed 300 pesos on
his individual account in January from the bakery firm, consisting of the plaintiff, Marcos
Angulo, and Antonio Angulo. The 825 pesos, which he admits he received from the plaintiff
March 5, he claims was for the purchase of casco No. 1515, which he alleged was bought March
12, and he alleges that he never received anything from the defendant toward the purchase of
casco No. 2089. He claims to have paid, exclusive of repairs, 1,200 pesos for the first casco and
2,000 pesos for the second one.
The case comes to this court under the old procedure, and it is therefore necessary for us the
review the evidence and pass upon the facts. Our general conclusions may be stated as follows:
(1) Doa Isabel Vales, from whom the defendant bought casco No. 1515, testifies that the sale
was made and the casco delivered in January, although the public document of sale was not
executed till some time afterwards. This witness is apparently disinterested, and we think it is
safe to rely upon the truth of her testimony, especially as the defendant, while asserting that the
sale was in March, admits that he had the casco taken to the ways for repairs in January.
It is true that the public document of sale was executed March 10, and that the vendor declares
therein that she is the owner of the casco, but such declaration does not exclude proof as to the
actual date of the sale, at least as against the plaintiff, who was not a party to the instrument.
(Civil Code, sec. 1218.) It often happens, of course, in such cases, that the actual sale precedes
by a considerable time the execution of the formal instrument of transfer, and this is what we
think occurred here.
(2) The plaintiff presented in evidence the following receipt: "I have this day received from D.
Jose Fernandez eight hundred and twenty-five pesos for the cost of a casco which we are to
purchase in company. Manila, March 5, 1900. Francisco de la Rosa." The authenticity of this
receipt is admitted by the defendant. If casco No. 1515 was bought, as we think it was, in
January, the casco referred to in the receipt which the parties "are to purchase in company" must
be casco No. 2089, which was bought March 22. We find this to be the fact, and that the plaintiff

furnished and the defendant received 825 pesos toward the purchase of this casco, with the
understanding that it was to be purchased on joint account.
(3) Antonio Fernandez testifies that in the early part of January, 1900, he saw Antonio Angulo
give the defendant, in the name of the plaintiff, a sum of money, the amount of which he is
unable to state, for the purchase of a casco to be used in the plaintiff's and defendant's business.
Antonio Angulo also testifies, but the defendant claims that the fact that Angulo was a partner of
the plaintiff rendered him incompetent as a witness under the provisions of article 643 of the then
Code of Civil Procedure, and without deciding whether this point is well taken, we have
discarded his testimony altogether in considering the case. The defendant admits the receipt of
300 pesos from Antonio Angulo in January, claiming, as has been stated, that it was a loan from
the firm. Yet he sets up the claim that the 825 pesos which he received from the plaintiff in
March were furnished toward the purchase of casco No. 1515, thereby virtually admitting that
casco was purchased in company with the plaintiff. We discover nothing in the evidence to
support the claim that the 300 pesos received in January was a loan, unless it may be the fact that
the defendant had on previous occasions borrowed money from the bakery firm. We think all the
probabilities of the case point to the truth of the evidence of Antonio Fernandez as to this
transaction, and we find the fact to be that the sum in question was furnished by the plaintiff
toward the purchase for joint ownership of casco No. 1515, and that the defendant received it
with the understanding that it was to be used for this purposed. We also find that the plaintiff
furnished some further sums of money for the repair of casco.
(4) The balance of the purchase price of each of the two cascoes over and above the amount
contributed by the plaintiff was furnished by the defendant.
(5) We are unable to find upon the evidence before us that there was any specific verbal
agreement of partnership, except such as may be implied from the fact as to the purchase of the
casco.
(6) Although the evidence is somewhat unsatisfactory upon this point, we think it more probable
than otherwise that no attempt was made to agree upon articles of partnership till about the
middle of the April following the purchase of the cascoes.
(7) At some time subsequently to the failure of the attempt to agree upon partnership articles and
after the defendant had been operating the cascoes for some time, the defendant returned to the
plaintiff 1,125 pesos, in two different sums, one of 300 and one of 825 pesos. The only evidence
in the record as to the circumstances under which the plaintiff received these sums is contained
in his answer to the interrogatories proposed to him by the defendant, and the whole of his
statement on this point may properly be considered in determining the fact as being in the nature
of an indivisible admission. He states that both sums were received with an express reservation
on his part of all his rights as a partner. We find this to be the fact.
Two questions of law are raised by the foregoing facts: (1) Did a partnership exist between the
parties? (2) If such partnership existed, was it terminated as a result of the act of the defendant in
receiving back the 1,125 pesos?

(1) "Partnership is a contract by which two or more persons bind themselves to contribute
money, property, or industry to a common fund, with the intention of dividing the profits among
themselves." (Civil Code, art. 1665.)
The essential points upon which the minds of the parties must meet in a contract of partnership
are, therefore, (1) mutual contribution to a common stock, and (2) a joint interest in the profits. If
the contract contains these two elements the partnership relation results, and the law itself fixes
the incidents of this relation if the parties fail to do so. (Civil Code, secs. 1689, 1695.)
We have found as a fact that money was furnished by the plaintiff and received by the defendant
with the understanding that it was to be used for the purchase of the cascoes in question. This
establishes the first element of the contract, namely, mutual contribution to a common stock. The
second element, namely, the intention to share profits, appears to be an unavoidable deduction
from the fact of the purchase of the cascoes in common, in the absence of any other explanation
of the object of the parties in making the purchase in that form, and, it may be added, in view of
the admitted fact that prior to the purchase of the first casco the formation of a partnership had
been a subject of negotiation between them.
Under other circumstances the relation of joint ownership, a relation distinct though perhaps not
essentially different in its practical consequence from that of partnership, might have been the
result of the joint purchase. If, for instance, it were shown that the object of the parties in
purchasing in company had been to make a more favorable bargain for the two cascoes that they
could have done by purchasing them separately, and that they had no ulterior object except to
effect a division of the common property when once they had acquired it, the affectio
societatis would be lacking and the parties would have become joint tenants only; but, as nothing
of this sort appears in the case, we must assume that the object of the purchase was active use
and profit and not mere passive ownership in common.
It is thus apparent that a complete and perfect contract of partnership was entered into by the
parties. This contract, it is true, might have been subject to a suspensive condition, postponing its
operation until an agreement was reached as to the respective participation of the partners in the
profits, the character of the partnership as collective or en comandita, and other details, but
although it is asserted by counsel for the defendant that such was the case, there is little or
nothing in the record to support this claim, and that fact that the defendant did actually go on and
purchase the boat, as it would seem, before any attempt had been made to formulate partnership
articles, strongly discountenances the theory.
The execution of a written agreement was not necessary in order to give efficacy to the verbal
contract of partnership as a civil contract, the contributions of the partners not having been in the
form of immovables or rights in immovables. (Civil Code, art. 1667.) The special provision
cited, requiring the execution of a public writing in the single case mentioned and dispensing
with all formal requirements in other cases, renders inapplicable to this species of contract the
general provisions of article 1280 of the Civil Code.
(2) The remaining question is as to the legal effect of the acceptance by the plaintiff of the
money returned to him by the defendant after the definitive failure of the attempt to agree upon
partnership articles. The amount returned fell short, in our view of the facts, of that which the

plaintiff had contributed to the capital of the partnership, since it did not include the sum which
he had furnished for the repairs of casco No. 1515. Moreover, it is quite possible, as claimed by
the plaintiff, that a profit may have been realized from the business during the period in which
the defendant have been administering it prior to the return of the money, and if so he still
retained that sum in his hands. For these reasons the acceptance of the money by the plaintiff did
not have the effect of terminating the legal existence of the partnership by converting it into
a societas leonina, as claimed by counsel for the defendant.
Did the defendant waive his right to such interest as remained to him in the partnership property
by receiving the money? Did he by so doing waive his right to an accounting of the profits
already realized, if any, and a participation in them in proportion to the amount he had originally
contributed to the common fund? Was the partnership dissolved by the "will or withdrawal of
one of the partners" under article 1705 of the Civil Code? We think these questions must be
answered in the negative.
There was no intention on the part of the plaintiff in accepting the money to relinquish his rights
as a partner, nor is there any evidence that by anything that he said or by anything that he omitted
to say he gave the defendant any ground whatever to believe that he intended to relinquish them.
On the contrary he notified the defendant that he waived none of his rights in the partnership.
Nor was the acceptance of the money an act which was in itself inconsistent with the continuance
of the partnership relation, as would have been the case had the plaintiff withdrawn his entire
interest in the partnership. There is, therefore, nothing upon which a waiver, either express or
implied, can be predicated. The defendant might have himself terminated the partnership relation
at any time, if he had chosen to do so, by recognizing the plaintiff's right in the partnership
property and in the profits. Having failed to do this he can not be permitted to force a dissolution
upon his co-partner upon terms which the latter is unwilling to accept. We see nothing in the case
which can give the transaction in question any other aspect than that of the withdrawal by one
partner with the consent of the other of a portion of the common capital.
The result is that we hold and declare that a partnership was formed between the parties in
January, 1900, the existence of which the defendant is bound to recognize; that cascoes No. 1515
and 2089 constitute partnership property, and that the plaintiff is entitled to an accounting of the
defendant's administration of such property, and of the profits derived therefrom. This
declaration does not involve an adjudication as to any disputed items of the partnership account.
The judgment of the court below will be reversed without costs, and the record returned for the
execution of the judgment now rendered. So ordered.
Arellano, C.J., Torres, Cooper, and Mapa, JJ., concur.
Willard, J., dissenting.
ON MOTION FOR A REHEARING.
MAPA, J .:
This case has been decided on appeal in favor of the plaintiff, and the defendant has moved for a
rehearing upon the following grounds:

1. Because that part of the decision which refers to the existence of the partnership which is the
object of the complaint is not based upon clear and decisive legal grounds; and
2. Because, upon the supposition of the existence of the partnership, the decision does not clearly
determine whether the juridical relation between the partners suffered any modification in
consequence of the withdrawal by the plaintiff of the sum of 1,125 pesos from the funds of the
partnership, or if it continued as before, the parties being thereby deprived, he alleges, of one of
the principal bases for determining with exactness the amount due to each.
With respect to the first point, the appellant cites the fifth conclusion of the decision, which is as
follows: "We are unable to find from the evidence before us that there was any specific verbal
agreement of partnership, except such as may be implied from the facts as to the purchase of the
cascoes."
Discussing this part of the decision, the defendant says that, in the judgment of the court, if on
the one hand there is no direct evidence of a contract, on the other its existence can only be
inferred from certain facts, and the defendant adds that the possibility of an inference is not
sufficient ground upon which to consider as existing what may be inferred to exist, and still less
as sufficient ground for declaring its efficacy to produce legal effects.
This reasoning rests upon a false basis. We have not taken into consideration the mere possibility
of an inference, as the appellant gratuitously stated, for the purpose of arriving at a conclusion
that a contract of partnership was entered into between him and the plaintiff, but have considered
the proof which is derived from the facts connected with the purchase of the cascoes. It is stated
in the decision that with the exception of this evidence we find no other which shows the making
of the contract. But this does not mean (for it says exactly the contrary) that this fact is not
absolutely proven, as the defendant erroneously appears to think. From this data we infer a fact
which to our mind is certain and positive, and not a mere possibility; we infer not that it is
possible that the contract may have existed, but that it actually did exist. The proofs constituted
by the facts referred to, although it is the only evidence, and in spite of the fact that it is not
direct, we consider, however, sufficient to produce such a conviction, which may certainly be
founded upon any of the various classes of evidence which the law admits. There is all the more
reason for its being so in this case, because a civil partnership may be constituted in any form,
according to article 1667 of the Civil Code, unless real property or real rights are contributed to it
the only case of exception in which it is necessary that the agreement be recorded in a public
instrument.
It is of no importance that the parties have failed to reach an agreement with respect to the minor
details of contract. These details pertain to the accidental and not to the essential part of the
contract. We have already stated in the opinion what are the essential requisites of a contract of
partnership, according to the definition of article 1665. Considering as a whole the probatory
facts which appears from the record, we have reached the conclusion that the plaintiff and the
defendant agreed to the essential parts of that contract, and did in fact constitute a partnership,
with the funds of which were purchased the cascoes with which this litigation deals, although it
is true that they did not take the precaution to precisely establish and determine from the
beginning the conditions with respect to the participation of each partner in the profits or losses
of the partnership. The disagreements subsequently arising between them, when endeavoring to

fix these conditions, should not and can not produce the effect of destroying that which has been
done, to the prejudice of one of the partners, nor could it divest his rights under the partnership
which had accrued by the actual contribution of capital which followed the agreement to enter
into a partnership, together with the transactions effected with partnership funds. The law has
foreseen the possibility of the constitution of a partnership without an express stipulation by the
partners upon those conditions, and has established rules which may serve as a basis for the
distribution of profits and losses among the partners. (Art. 1689 of the Civil Code. ) We consider
that the partnership entered into by the plaintiff and the defendant falls within the provisions of
this article.
With respect to the second point, it is obvious that upon declaring the existence of a partnership
and the right of the plaintiff to demand from the defendant an itemized accounting of his
management thereof, it was impossible at the same time to determine the effects which might
have been produced with respect to the interest of the partnership by the withdrawal by the
plaintiff of the sum of 1,125 pesos. This could only be determined after a liquidation of the
partnership. Then, and only then, can it be known if this sum is to be charged to the capital
contributed by the plaintiff, or to his share of the profits, or to both. It might well be that the
partnership has earned profits, and that the plaintiff's participation therein is equivalent to or
exceeds the sum mentioned. In this case it is evident that, notwithstanding that payment, his
interest in the partnership would still continue. This is one case. It would be easy to imagine
many others, as the possible results of a liquidation are innumerable. The liquidation will finally
determine the condition of the legal relations of the partners inter se at the time of the withdrawal
of the sum mentioned. It was not, nor is it possible to determine this status a priori without
prejudging the result, as yet unknown, of the litigation. Therefore it is that in the decision no
direct statement has been made upon this point. It is for the same reason that it was expressly
stated in the decision that it "does not involve an adjudication as to any disputed item of the
partnership account."
The contentions advanced by the moving party are so evidently unfounded that we can not see
the necessity or convenience of granting the rehearing prayed for, and the motion is therefore
denied.
Arellano, C.J., Torres, Cooper, and Ladd, JJ., concur.
Willard and McDonough, JJ., did not sit in this case.































































Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-68118 October 29, 1985
JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P.
OBILLOS, brothers and sisters, petitioners
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
Demosthenes B. Gadioma for petitioners.

AQUINO, J .:
This case is about the income tax liability of four brothers and sisters who sold two parcels of land
which they had acquired from their father.
On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots with areas
of 1,124 and 963 square meters located at Greenhills, San Juan, Rizal. The next day he transferred
his rights to his four children, the petitioners, to enable them to build their residences. The company
sold the two lots to petitioners for P178,708.12 on March 13 (Exh. A and B, p. 44, Rollo).
Presumably, the Torrens titles issued to them would show that they were co-owners of the two lots.
In 1974, or after having held the two lots for more than a year, the petitioners resold them to the
Walled City Securities Corporation and Olga Cruz Canda for the total sum of P313,050 (Exh. C and
D). They derived from the sale a total profit of P134,341.88 or P33,584 for each of them. They
treated the profit as a capital gain and paid an income tax on one-half thereof or of P16,792.
In April, 1980, or one day before the expiration of the five-year prescriptive period, the Commissioner
of Internal Revenue required the four petitioners to pay corporate income tax on the total profit of
P134,336 in addition to individual income tax on their shares thereof He assessed P37,018 as
corporate income tax, P18,509 as 50% fraud surcharge and P15,547.56 as 42% accumulated
interest, or a total of P71,074.56.
Not only that. He considered the share of the profits of each petitioner in the sum of P33,584 as a "
taxable in full (not a mere capital gain of which is taxable) and required them to pay deficiency
income taxes aggregating P56,707.20 including the 50% fraud surcharge and the accumulated
interest.
Thus, the petitioners are being held liable for deficiency income taxes and penalties totalling
P127,781.76 on their profit of P134,336, in addition to the tax on capital gains already paid by them.

The Commissioner acted on the theory that the four petitioners had formed an unregistered
partnership or joint venture within the meaning of sections 24(a) and 84(b) of the Tax Code
(Collector of Internal Revenue vs. Batangas Trans. Co., 102 Phil. 822).
The petitioners contested the assessments. Two Judges of the Tax Court sustained the same.
Judge Roaquin dissented. Hence, the instant appeal.
We hold that it is error to consider the petitioners as having formed a partnership under article 1767
of the Civil Code simply because they allegedly contributed P178,708.12 to buy the two lots, resold
the same and divided the profit among themselves.
To regard the petitioners as having formed a taxable unregistered partnership would result in
oppressive taxation and confirm the dictum that the power to tax involves the power to destroy. That
eventuality should be obviated.
As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple.
To consider them as partners would obliterate the distinction between a co-ownership and a
partnership. The petitioners were not engaged in any joint venture by reason of that isolated
transaction.
Their original purpose was to divide the lots for residential purposes. If later on they found it not
feasible to build their residences on the lots because of the high cost of construction, then they had
no choice but to resell the same to dissolve the co-ownership. The division of the profit was merely
incidental to the dissolution of the co-ownership which was in the nature of things a temporary state.
It had to be terminated sooner or later. Castan Tobeas says:
Como establecer el deslinde entre la comunidad ordinaria o copropiedad y la
sociedad?
El criterio diferencial-segun la doctrina mas generalizada-esta: por razon del
origen, en que la sociedad presupone necesariamente la convencion,
mentras que la comunidad puede existir y existe ordinariamente sin ela; y
por razon del fin objecto, en que el objeto de la sociedad es obtener lucro,
mientras que el de la indivision es solo mantener en su integridad la cosa
comun y favorecer su conservacion.
Reflejo de este criterio es la sentencia de 15 de Octubre de 1940, en la que
se dice que si en nuestro Derecho positive se ofrecen a veces dificultades al
tratar de fijar la linea divisoria entre comunidad de bienes y contrato de
sociedad, la moderna orientacion de la doctrina cientifica seala como nota
fundamental de diferenciacion aparte del origen de fuente de que surgen, no
siempre uniforme, la finalidad perseguida por los interesados: lucro comun
partible en la sociedad, y mera conservacion y aprovechamiento en la
comunidad. (Derecho Civil Espanol, Vol. 2, Part 1, 10 Ed., 1971, 328- 329).
Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself
establish a partnership, whether or not the persons sharing them have a joint or common right or
interest in any property from which the returns are derived". There must be an unmistakable
intention to form a partnership or joint venture.*
Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67 Phil. 666, where 15
persons contributed small amounts to purchase a two-peso sweepstakes ticket with the agreement

that they would divide the prize The ticket won the third prize of P50,000. The 15 persons were held
liable for income tax as an unregistered partnership.
The instant case is distinguishable from the cases where the parties engaged in joint ventures for
profit. Thus, in Oa vs.
** This view is supported by the following rulings of respondent Commissioner:
Co-owership distinguished from partnership.We find that the case at bar is
fundamentally similar to the De Leon case. Thus, like the De Leon heirs, the
Longa heirs inherited the 'hacienda' in question pro-indiviso from their
deceased parents; they did not contribute or invest additional ' capital to
increase or expand the inherited properties; they merely continued dedicating
the property to the use to which it had been put by their forebears; they
individually reported in their tax returns their corresponding shares in the
income and expenses of the 'hacienda', and they continued for many years
the status of co-ownership in order, as conceded by respondent, 'to preserve
its (the 'hacienda') value and to continue the existing contractual relations
with the Central Azucarera de Bais for milling purposes. Longa vs. Aranas,
CTA Case No. 653, July 31, 1963).
All co-ownerships are not deemed unregistered pratnership.Co-Ownership
who own properties which produce income should not automatically be
considered partners of an unregistered partnership, or a corporation, within
the purview of the income tax law. To hold otherwise, would be to subject the
income of all
co-ownerships of inherited properties to the tax on corporations, inasmuch as
if a property does not produce an income at all, it is not subject to any kind of
income tax, whether the income tax on individuals or the income tax on
corporation. (De Leon vs. CI R, CTA Case No. 738, September 11, 1961,
cited in Araas, 1977 Tax Code Annotated, Vol. 1, 1979 Ed., pp. 77-78).
Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after an
extrajudicial settlement the co-heirs used the inheritance or the incomes derived therefrom as a
common fund to produce profits for themselves, it was held that they were taxable as an
unregistered partnership.
It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, where
father and son purchased a lot and building, entrusted the administration of the building to an
administrator and divided equally the net income, and from Evangelista vs. Collector of Internal
Revenue, 102 Phil. 140, where the three Evangelista sisters bought four pieces of real property
which they leased to various tenants and derived rentals therefrom. Clearly, the petitioners in these
two cases had formed an unregistered partnership.
In the instant case, what the Commissioner should have investigated was whether the father
donated the two lots to the petitioners and whether he paid the donor's tax (See Art. 1448, Civil
Code). We are not prejudging this matter. It might have already prescribed.
WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are
cancelled. No costs.
SO ORDERED.

















Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-45425 April 29, 1939
JOSE GATCHALIAN, ET AL., plaintiffs-appellants,
vs.
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee.
Guillermo B. Reyes for appellants.
Office of the Solicitor-General Tuason for appellee.
IMPERIAL, J .:
The plaintiff brought this action to recover from the defendant Collector of Internal Revenue the sum
of P1,863.44, with legal interest thereon, which they paid under protest by way of income tax. They
appealed from the decision rendered in the case on October 23, 1936 by the Court of First Instance
of the City of Manila, which dismissed the action with the costs against them.
The case was submitted for decision upon the following stipulation of facts:
Come now the parties to the above-mentioned case, through their respective
undersigned attorneys, and hereby agree to respectfully submit to this Honorable
Court the case upon the following statement of facts:
1. That plaintiff are all residents of the municipality of Pulilan, Bulacan, and that
defendant is the Collector of Internal Revenue of the Philippines;

2. That prior to December 15, 1934 plaintiffs, in order to enable them to purchase
one sweepstakes ticket valued at two pesos (P2), subscribed and paid therefor the
amounts as follows:
1. Jose Gatchalian .................................................................................................... P0.18
2. Gregoria Cristobal ............................................................................................... .18
3. Saturnina Silva .................................................................................................... .08
4. Guillermo Tapia ................................................................................................... .13
5. Jesus Legaspi ...................................................................................................... .15
6. Jose Silva ............................................................................................................. .07
7. Tomasa Mercado ................................................................................................ .08
8. Julio Gatchalian ................................................................................................... .13
9. Emiliana Santiago ................................................................................................ .13
10. Maria C. Legaspi ............................................................................................... .16
11. Francisco Cabral ............................................................................................... .13
12. Gonzalo Javier .................................................................................................... .14
13. Maria Santiago ................................................................................................... .17
14. Buenaventura Guzman ...................................................................................... .13
15. Mariano Santos ................................................................................................. .14
Total ........................................................................................................

2.00
3. That immediately thereafter but prior to December 15, 1934, plaintiffs purchased,
in the ordinary course of business, from one of the duly authorized agents of the
National Charity Sweepstakes Office one ticket bearing No. 178637 for the sum of
two pesos (P2) and that the said ticket was registered in the name of Jose
Gatchalian and Company;
4. That as a result of the drawing of the sweepstakes on December 15, 1934, the
above-mentioned ticket bearing No. 178637 won one of the third prizes in the
amount of P50,000 and that the corresponding check covering the above-mentioned
prize of P50,000 was drawn by the National Charity Sweepstakes Office in favor of
Jose Gatchalian & Company against the Philippine National Bank, which check was
cashed during the latter part of December, 1934 by Jose Gatchalian & Company;
5. That on December 29, 1934, Jose Gatchalian was required by income tax
examiner Alfredo David to file the corresponding income tax return covering the prize
won by Jose Gatchalian & Company and that on December 29, 1934, the said return
was signed by Jose Gatchalian, a copy of which return is enclosed as Exhibit A and
made a part hereof;

6. That on January 8, 1935, the defendant made an assessment against Jose
Gatchalian & Company requesting the payment of the sum of P1,499.94 to the
deputy provincial treasurer of Pulilan, Bulacan, giving to said Jose Gatchalian &
Company until January 20, 1935 within which to pay the said amount of P1,499.94, a
copy of which letter marked Exhibit B is enclosed and made a part hereof;
7. That on January 20, 1935, the plaintiffs, through their attorney, sent to defendant a
reply, a copy of which marked Exhibit C is attached and made a part hereof,
requesting exemption from payment of the income tax to which reply there were
enclosed fifteen (15) separate individual income tax returns filed separately by each
one of the plaintiffs, copies of which returns are attached and marked Exhibit D-1 to
D-15, respectively, in order of their names listed in the caption of this case and made
parts hereof; a statement of sale signed by Jose Gatchalian showing the amount put
up by each of the plaintiffs to cover up the attached and marked as Exhibit E and
made a part hereof; and a copy of the affidavit signed by Jose Gatchalian dated
December 29, 1934 is attached and marked Exhibit F and made part thereof;
8. That the defendant in his letter dated January 28, 1935, a copy of which marked
Exhibit G is enclosed, denied plaintiffs' request of January 20, 1935, for exemption
from the payment of tax and reiterated his demand for the payment of the sum of
P1,499.94 as income tax and gave plaintiffs until February 10, 1935 within which to
pay the said tax;
9. That in view of the failure of the plaintiffs to pay the amount of tax demanded by
the defendant, notwithstanding subsequent demand made by defendant upon the
plaintiffs through their attorney on March 23, 1935, a copy of which marked Exhibit H
is enclosed, defendant on May 13, 1935 issued a warrant of distraint and levy
against the property of the plaintiffs, a copy of which warrant marked Exhibit I is
enclosed and made a part hereof;
10. That to avoid embarrassment arising from the embargo of the property of the
plaintiffs, the said plaintiffs on June 15, 1935, through Gregoria Cristobal, Maria C.
Legaspi and Jesus Legaspi, paid under protest the sum of P601.51 as part of the tax
and penalties to the municipal treasurer of Pulilan, Bulacan, as evidenced by official
receipt No. 7454879 which is attached and marked Exhibit J and made a part hereof,
and requested defendant that plaintiffs be allowed to pay under protest the balance
of the tax and penalties by monthly installments;
11. That plaintiff's request to pay the balance of the tax and penalties was granted by
defendant subject to the condition that plaintiffs file the usual bond secured by two
solvent persons to guarantee prompt payment of each installments as it becomes
due;
12. That on July 16, 1935, plaintiff filed a bond, a copy of which marked Exhibit K is
enclosed and made a part hereof, to guarantee the payment of the balance of the
alleged tax liability by monthly installments at the rate of P118.70 a month, the first
payment under protest to be effected on or before July 31, 1935;
13. That on July 16, 1935 the said plaintiffs formally protested against the payment of
the sum of P602.51, a copy of which protest is attached and marked Exhibit L, but
that defendant in his letter dated August 1, 1935 overruled the protest and denied the
request for refund of the plaintiffs;

14. That, in view of the failure of the plaintiffs to pay the monthly installments in
accordance with the terms and conditions of bond filed by them, the defendant in his
letter dated July 23, 1935, copy of which is attached and marked Exhibit M, ordered
the municipal treasurer of Pulilan, Bulacan to execute within five days the warrant of
distraint and levy issued against the plaintiffs on May 13, 1935;
15. That in order to avoid annoyance and embarrassment arising from the levy of
their property, the plaintiffs on August 28, 1936, through Jose Gatchalian, Guillermo
Tapia, Maria Santiago and Emiliano Santiago, paid under protest to the municipal
treasurer of Pulilan, Bulacan the sum of P1,260.93 representing the unpaid balance
of the income tax and penalties demanded by defendant as evidenced by income tax
receipt No. 35811 which is attached and marked Exhibit N and made a part hereof;
and that on September 3, 1936, the plaintiffs formally protested to the defendant
against the payment of said amount and requested the refund thereof, copy of which
is attached and marked Exhibit O and made part hereof; but that on September 4,
1936, the defendant overruled the protest and denied the refund thereof; copy of
which is attached and marked Exhibit P and made a part hereof; and
16. That plaintiffs demanded upon defendant the refund of the total sum of one
thousand eight hundred and sixty three pesos and forty-four centavos (P1,863.44)
paid under protest by them but that defendant refused and still refuses to refund the
said amount notwithstanding the plaintiffs' demands.
17. The parties hereto reserve the right to present other and additional evidence if
necessary.
Exhibit E referred to in the stipulation is of the following tenor:
To whom it may concern:
I, Jose Gatchalian, a resident of Pulilan, Bulacan, married, of age, hereby certify, that
on the 11th day of August, 1934, I sold parts of my shares on ticket No. 178637 to
the persons and for the amount indicated below and the part of may share remaining
is also shown to wit:
Purchaser Amount Address
1. Mariano Santos ........................................... P0.14 Pulilan, Bulacan.
2. Buenaventura Guzman ............................... .13 - Do -
3. Maria Santiago ............................................ .17 - Do -
4. Gonzalo Javier .............................................. .14 - Do -
5. Francisco Cabral .......................................... .13 - Do -
6. Maria C. Legaspi .......................................... .16 - Do -
7. Emiliana Santiago ......................................... .13 - Do -
8. Julio Gatchalian ............................................ .13 - Do -
9. Jose Silva ...................................................... .07 - Do -

10. Tomasa Mercado ....................................... .08 - Do -
11. Jesus Legaspi ............................................. .15 - Do -
12. Guillermo Tapia ........................................... .13 - Do -
13. Saturnina Silva ............................................ .08 - Do -
14. Gregoria Cristobal ....................................... .18 - Do -
15. Jose Gatchalian ............................................ .18 - Do -


2.00 Total cost of said
ticket; and that, therefore, the persons named above are entitled to the parts of
whatever prize that might be won by said ticket.
Pulilan, Bulacan, P.I.
(Sgd.) JOSE GATCHALIAN
And a summary of Exhibits D-1 to D-15 is inserted in the bill of exceptions as follows:
RECAPITULATIONS OF 15 INDIVIDUAL INCOME TAX RETURNS FOR 1934 ALL
DATED JANUARY 19, 1935 SUBMITTED TO THE COLLECTOR OF INTERNAL
REVENUE.
Name
Exhibit
No.
Purchase
Price
Price
Won
Expenses
Net
prize
1. Jose Gatchalian
..........................................
D-1 P0.18 P4,425 P 480 3,945
2. Gregoria Cristobal
......................................
D-2 .18 4,575 2,000 2,575
3. Saturnina Silva
.............................................
D-3 .08 1,875 360 1,515
4. Guillermo Tapia
..........................................
D-4 .13 3,325 360 2,965
5. Jesus Legaspi by Maria Cristobal
.........
D-5 .15 3,825 720 3,105
6. Jose Silva
....................................................
D-6 .08 1,875 360 1,515
7. Tomasa Mercado
.......................................
D-7 .07 1,875 360 1,515
8. Julio Gatchalian by Beatriz
Guzman .......
D-8 .13 3,150 240 2,910

9. Emiliana Santiago
......................................
D-9 .13 3,325 360 2,965
10. Maria C. Legaspi
......................................
D-10 .16 4,100 960 3,140
11. Francisco Cabral
......................................
D-11 .13 3,325 360 2,965
12. Gonzalo Javier
..........................................
D-12 .14 3,325 360 2,965
13. Maria Santiago
..........................................
D-13 .17 4,350 360 3,990
14. Buenaventura Guzman
...........................
D-14 .13 3,325 360 2,965
15. Mariano Santos
........................................
D-15 .14 3,325 360 2,965


2.00

50,000
<
COSPAN="2">
The legal questions raised in plaintiffs-appellants' five assigned errors may properly be reduced to
the two following: (1) Whether the plaintiffs formed a partnership, or merely a community of property
without a personality of its own; in the first case it is admitted that the partnership thus formed is
liable for the payment of income tax, whereas if there was merely a community of property, they are
exempt from such payment; and (2) whether they should pay the tax collectively or whether the latter
should be prorated among them and paid individually.
The Collector of Internal Revenue collected the tax under section 10 of Act No. 2833, as last
amended by section 2 of Act No. 3761, reading as follows:
SEC. 10. (a) There shall be levied, assessed, collected, and paid annually upon the
total net income received in the preceding calendar year from all sources by every
corporation, joint-stock company, partnership, joint account (cuenta en participacion),
association or insurance company, organized in the Philippine Islands, no matter
how created or organized, but not including duly registered general copartnership
(compaias colectivas), a tax of three per centum upon such income; and a like tax
shall be levied, assessed, collected, and paid annually upon the total net income
received in the preceding calendar year from all sources within the Philippine Islands
by every corporation, joint-stock company, partnership, joint account (cuenta en
participacion), association, or insurance company organized, authorized, or existing
under the laws of any foreign country, including interest on bonds, notes, or other
interest-bearing obligations of residents, corporate or otherwise: Provided, however,
That nothing in this section shall be construed as permitting the taxation of the
income derived from dividends or net profits on which the normal tax has been paid.
The gain derived or loss sustained from the sale or other disposition by a
corporation, joint-stock company, partnership, joint account (cuenta en participacion),
association, or insurance company, or property, real, personal, or mixed, shall be
ascertained in accordance with subsections (c) and (d) of section two of Act

Numbered Two thousand eight hundred and thirty-three, as amended by Act
Numbered Twenty-nine hundred and twenty-six.
The foregoing tax rate shall apply to the net income received by every taxable
corporation, joint-stock company, partnership, joint account (cuenta en participacion),
association, or insurance company in the calendar year nineteen hundred and twenty
and in each year thereafter.
There is no doubt that if the plaintiffs merely formed a community of property the latter is exempt
from the payment of income tax under the law. But according to the stipulation facts the plaintiffs
organized a partnership of a civil nature because each of them put up money to buy a sweepstakes
ticket for the sole purpose of dividing equally the prize which they may win, as they did in fact in the
amount of P50,000 (article 1665, Civil Code). The partnership was not only formed, but upon the
organization thereof and the winning of the prize, Jose Gatchalian personally appeared in the office
of the Philippines Charity Sweepstakes, in his capacity as co-partner, as such collection the prize,
the office issued the check for P50,000 in favor of Jose Gatchalian and company, and the said
partner, in the same capacity, collected the said check. All these circumstances repel the idea that
the plaintiffs organized and formed a community of property only.
Having organized and constituted a partnership of a civil nature, the said entity is the one bound to
pay the income tax which the defendant collected under the aforesaid section 10 (a) of Act No. 2833,
as amended by section 2 of Act No. 3761. There is no merit in plaintiff's contention that the tax
should be prorated among them and paid individually, resulting in their exemption from the tax.
In view of the foregoing, the appealed decision is affirmed, with the costs of this instance to the
plaintiffs appellants. So ordered.
Avancea, C.J., Villa-Real, Diaz, Laurel, Concepcion and Moran, JJ., concur.











EN BANC
G.R. No. L-2484 April 11, 1906

JOHN FORTIS,Plaintiff-Appellee, vs. GUTIERREZ HERMANOS,Defendants-
Appellants.
Hartigan, Rohde and Gutierrez, for appellants.
W. A. Kincaid, for appellee.
WILLARD, J.:
Plaintiff, an employee of defendants during the years 1900, 1901, and 1902,
brought this action to recover a balance due him as salary for the year 1902.
He alleged that he was entitled, as salary, to 5 per cent of the net profits of
the business of the defendants for said year. The complaint also contained a
cause of action for the sum of 600 pesos, money expended by plaintiff for
the defendants during the year 1903. The court below, in its judgment,
found that the contract had been made as claimed by the plaintiff; that 5 per
cent of the net profits of the business for the year 1902 amounted to
26,378.68 pesos, Mexican currency; that the plaintiff had received on
account of such salary 12,811.75 pesos, Mexican currency, and ordered
judgment against the defendants for the sum 13,566.93 pesos, Mexican
currency, with interest thereon from December 31, 1904. The court also
ordered judgment against the defendants for the 600 pesos mentioned in
the complaint, and intereat thereon. The total judgment rendered against
the defendants in favor of the plaintiff, reduced to Philippine currency,
amounted to P13,025.40. The defendants moved for a new trial, which was
denied, and they have brought the case here by bill of exceptions.chanroblesvi rtualawlibrary chanrobles virtual law l ibrary
(1) The evidence is sufifcient to support the finding of the court below to the
effect that the plaintiff worked for the defendants during the year 1902
under a contract by which he was to receive as compensation 5 per cent of
the net profits of the business. The contract was made on the part of the
defendants by Miguel Alonzo Gutierrez. By the provisions of the articles of
partnership he was made one of the managers of the company, with full
power to transact all of the business thereof. As such manager he had
authority to make a contract of employment with the plaintiff.chanroblesvirtualawli brary chanrobles vi rtual law library
(2) Before answering in the court below, the defendants presented a motion
that the complaint be made more definite and certain. This motion was
denied. To the order denying it the defendants excepted, and they have
assigned as error such ruling of the court below. There is nothing in the
record to show that the defendants were in any way prejudiced by this ruling
of the court below. If it were error it was error without prejudice, and not
ground for reversal. (Sec. 503, Code of Civil Procedure.)chanrobles vi rtual law library

(3) It is claimed by the appellants that the contract alleged in the complaint
made the plaintiff a copartner of the defendants in the business which they
were carrying on. This contention can not bo sustained. It was a mere
contract of employnent. The plaintiff had no voice nor vote in the
management of the affairs of the company. The fact that the compensation
received by him was to be determined with reference to the profits made by
the defendants in their business did not in any sense make by a partner
therein. The articles of partnership between the defendants provided that
the profits should be divided among the partners named in a certain
proportion. The contract made between the plaintiff and the then manager of
the defendant partnership did not in any way vary or modify this provision of
the articles of partnership. The profits of the business could not be
determined until all of the expenses had been paid. A part of the expenses
to be paid for the year 1902 was the salary of the plaintiff. That salary had
to be deducted before the net profits of the business, which were to be
divided among the partners, could be ascertained. It was undoubtedly
necessary in order to determine what the salary of the plaintiff was, to
determine what the profits of the business were, after paying all of the
expenses except his, but that determination was not the final determination
of the net profits of the business. It was made for the purpose of fixing the
basis upon which his compensation should be determined.chanroblesvirtualawlibrary chanrobles virtual law li brary
(4) It was no necessary that the contract between the plaintiff and the
defendants should be made in writing. (Thunga Chui vs. Que Bentec,
1
1 Off.
Gaz., 818, October 8, 1903.)chanrobles virtual law l ibrary
(5) It appearred that Miguel Alonzo Gutierrez, with whom the plaintiff had
made the contract, had died prior to the trial of the action, and the
defendants claim that by reasons of the provisions of section 383, paragraph
7, of the Code of Civil Procedure, plaintiff could not be a witness at the trial.
That paragraph provides that parties to an action against an executor or
aministrator upon a claim or demand against the estate of a deceased
person can not testify as to any matter of fact occurring before the death of
such deceased person. This action was not brought against the administrator
of Miguel Alonzo, nor was it brought upon a claim against his estate. It was
brought against a partnership which was in existence at the time of the trial
of the action, and which was juridical person. The fact that Miguel Alonzo
had been a partner in this company, and that his interest therein might be
affected by the result of this suit, is not sufficient to bring the case within
the provisions of the section above cited.chanroblesvi rtualawlibrary chanrobles virtual law library
(6) The plaintiff was allowed to testify against the objection and exception of
the defendants, that he had been paid as salary for the year 1900 a part of
the profits of the business. This evidence was competent for the purpose of

corroborating the testimony of the plaintiff as to the existence of the
contract set out in the complaint.chanroblesvirtualawl ibrary chanrobles virtual law l ibrary
(7) The plaintiff was allowed to testify as to the contents of a certain letter
written by Miguel Glutierrez, one of the partners in the defendant company,
to Miguel Alonzo Gutierrez, another partner, which letter was read to plaintiff
by Miguel Alonzo. It is not necessary to inquire whether the court committed
an error in admitting this evidence. The case already made by the plaintiff
was in itself sufficient to prove the contract without reference to this letter.
The error, if any there were, was not prejudicial, and is not ground for
revesal. (Sec. 503, Code of Civil Procedure.)chanrobles virtual law l ibrary
(8) For the purpose of proving what the profits of the defendants were for
the year 1902, the plaintiff presented in evidence the ledger of defendants,
which contained an entry made on the 31st of December, 1902, as follows:
Perdidas y Ganancias ...................................... a Varios Ps. 527,573.66
Utilidades liquidas obtenidas durante el ano y que abonamos conforme a la
proporcion que hemos establecido segun el convenio de sociedad.
The defendant presented as a witness on, the subject of profits Miguel
Gutierrez, one of the defendants, who testiffied, among other things, that
there were no profits during the year 1902, but, on the contrary, that the
company suffered considerable loss during that year. We do not think the
evidence of this witnees sufficiently definite and certain to overcome the
positive evidence furnished by the books of the defendants themselves.chanroblesvi rtualawlibrary chanrobles vi rtual law library
(9) In reference to the cause of action relating to the 600 pesos, it appears
that the plaintiff left the employ of the defendants on the 19th of Macrh,
1903; that at their request he went to Hongkong, and was there for about
two months looking after the business of the defendants in the matter of the
repair of a certain steamship. The appellants in their brief say that the
plaintiff is entitled to no compensation for his services thus rendered,
because by the provisions of article 1711 of the Civil Code, in the absence of
an agreement to the contrary, the contract of agency is supposed to be
gratuitous. That article i not applicable to this case, because the amount of
600 pesos not claimed as compensation for services but as a reimbursment
for money expended by the plaintiff in the business of the defendants. The
article of the code that is applicable is article 1728.chanroblesvi rtualawlibrary chanrobles virtual law l ibrary
The judgment of the court below is affirmed, with the costs, of this instance
against the appellants. After the expiration of twenty days from the date of
this decision let final judgment be entered herein, and ten days thereafter
let the case be remanded to the lower court for execution. So ordered.chanroblesvirtualawl ibrary chanrobles virtual law l ibrary

Arellano, C.J., Torres, Mapa, Johnson and Carson, JJ., concur.




EN BANC
G.R. No. L-21906 December 24, 1968
INOCENCIA DELUAO and FELIPE DELUAO Plaintiffs-Appellees, v.
NICANOR CASTEEL and JUAN DEPRA, defendants,
NICANOR CASTEEL, Defendant-Appellant.
Aportadera and Palabrica and Pelaez, Jalandoni and Jamir plaintiffs-
appellees.
Ruiz Law Offices for defendant-appellant.
CASTRO, J.:
This is an appeal from the order of May 2, 1956, the decision of May 4, 1956
and the order of May 21, 1956, all of the Court of First Instance of Davao, in
civil case 629. The basic action is for specific performance, and damages
resulting from an alleged breach of contract.chanroblesvi rtualawlibrarychanrobles virtual law l ibrary
In 1940 Nicanor Casteel filed a fishpond application for a big tract of swampy
land in the then Sitio of Malalag (now the Municipality of Malalag),
Municipality of Padada, Davao. No action was taken thereon by the
authorities concerned. During the Japanese occupation, he filed another
fishpond application for the same area, but because of the conditions then
prevailing, it was not acted upon either. On December 12, 1945 he filed a
third fishpond application for the same area, which, after a survey, was
found to contain 178.76 hectares. Upon investigation conducted by a
representative of the Bureau of Forestry, it was discovered that the area
applied for was still needed for firewood production. Hence on May 13, 1946
this third application was disapproved.chanroblesvirtualawlibrarychanrobles virtual law l ibrary
Despite the said rejection, Casteel did not lose interest. He filed a motion for
reconsideration. While this motion was pending resolution, he was advised
by the district forester of Davao City that no further action would be taken
on his motion, unless he filed a new application for the area concerned. So
he filed on May 27, 1947 his fishpond application 1717.chanroblesvirtualawl ibrarychanrobles vi rtual law li brary

Meanwhile, several applications were submitted by other persons for
portions of the area covered by Casteel's application.chanroblesvirtualawl ibrarychanrobles vi rtual law library
On May 20, 1946 Leoncio Aradillos filed his fishpond application 1202
covering 10 hectares of land found inside the area applied for by Casteel; he
was later granted fishpond permit F-289-C covering 9.3 hectares certified as
available for fishpond purposes by the Bureau of Forestry.chanroblesvirtualawl ibrarychanrobles vi rtual law library
Victor D. Carpio filed on August 8, 1946 his fishpond application 762 over a
portion of the land applied for by Casteel. Alejandro Cacam's fishpond
application 1276, filed on December 26, 1946, was given due course on
December 9, 1947 with the issuance to him of fishpond permit F-539-C to
develop 30 hectares of land comprising a portion of the area applied for by
Casteel, upon certification of the Bureau of Forestry that the area was
likewise available for fishpond purposes. On November 17, 1948 Felipe
Deluao filed his own fishpond application for the area covered by Casteel's
application.chanroblesvi rtualawlibrarychanrobles vi rtual law library
Because of the threat poised upon his position by the above applicants who
entered upon and spread themselves within the area, Casteel realized the
urgent necessity of expanding his occupation thereof by constructing dikes
and cultivating marketable fishes, in order to prevent old and new squatters
from usurping the land. But lacking financial resources at that time, he
sought financial aid from his uncle Felipe Deluao who then extended loans
totalling more or less P27,000 with which to finance the needed
improvements on the fishpond. Hence, a wide productive fishpond was
built.chanroblesvirtualawl ibrarychanrobles vi rtual law library
Moreover, upon learning that portions of the area applied for by him were
already occupied by rival applicants, Casteel immediately filed the
corresponding protests. Consequently, two administrative cases ensued
involving the area in question, to wit: DANR Case 353, entitled "Fp. Ap. No.
661 (now Fp. A. No. 1717), Nicanor Casteel, applicant-appellant versus Fp.
A. No. 763, Victorio D. Carpio, applicant-appellant"; and DANR Case 353-B,
entitled "Fp. A. No. 661 (now Fp. A. No. 1717), Nicanor Casteel, applicant-
protestant versus Fp. Permit No. 289-C, Leoncio Aradillos, Fp. Permit No.
539-C, Alejandro Cacam, Permittees-Respondents."chanrobles virtual law l ibrary
However, despite the finding made in the investigation of the above
administrative cases that Casteel had already introduced improvements on
portions of the area applied for by him in the form of dikes, fishpond gates,
clearings, etc., the Director of Fisheries nevertheless rejected Casteel's
application on October 25, 1949, required him to remove all the
improvements which he had introduced on the land, and ordered that the

land be leased through public auction. Failing to secure a favorable
resolution of his motion for reconsideration of the Director's order, Casteel
appealed to the Secretary of Agriculture and Natural Resources.chanroblesvirtualawli brarychanrobles vi rtual law library
In the interregnum, some more incidents occurred. To avoid repetition, they
will be taken up in our discussion of the appellant's third assignment of
error.chanroblesvi rtualawlibrarychanrobles virtual law l ibrary
On November 25, 1949 Inocencia Deluao (wife of Felipe Deluao) as party of
the first part, and Nicanor Casteel as party of the second part, executed a
contract - denominated a "contract of service" - the salient provisions of
which are as follows:
That the Party of the First Part in consideration of the mutual covenants and
agreements made herein to the Party of the Second Part, hereby enter into a
contract of service, whereby the Party of the First Part hires and employs the
Party of the Second Part on the following terms and conditions, to wit:chanrobles vi rtual law li brary
That the Party of the First Part will finance as she has hereby financed the
sum of TWENTY SEVEN THOUSAND PESOS (P27,000.00), Philippine
Currency, to the Party of the Second Part who renders only his services for
the construction and improvements of a fishpond at Barrio Malalag,
Municipality of Padada, Province of Davao, Philippines;chanrobles vi rtual law library
That the Party of the Second Part will be the Manager and sole buyer of all
the produce of the fish that will be produced from said fishpond;chanrobles vi rtual law library
That the Party of the First Part will be the administrator of the same she
having financed the construction and improvement of said fishpond;chanrobles virtual law l ibrary
That this contract was the result of a verbal agreement entered into between
the Parties sometime in the month of November, 1947, with all the above-
mentioned conditions enumerated; ...
On the same date the above contract was entered into, Inocencia Deluao
executed a special power of attorney in favor of Jesus Donesa, extending to
the latter the authority "To represent me in the administration of the
fishpond at Malalag, Municipality of Padada, Province of Davao, Philippines,
which has been applied for fishpond permit by Nicanor Casteel, but rejected
by the Bureau of Fisheries, and to supervise, demand, receive, and collect
the value of the fish that is being periodically realized from it...."chanrobles vi rtual law library
On November 29, 1949 the Director of Fisheries rejected the application filed
by Felipe Deluao on November 17, 1948. Unfazed by this rejection, Deluao
reiterated his claim over the same area in the two administrative cases

(DANR Cases 353 and 353-B) and asked for reinvestigation of the
application of Nicanor Casteel over the subject fishpond. However, by letter
dated March 15, 1950 sent to the Secretary of Commerce and Agriculture
and Natural Resources (now Secretary of Agriculture and Natural
Resources), Deluao withdrew his petition for reinvestigation.chanroblesvirtualawl ibrarychanrobles vi rtual law li brary
On September 15, 1950 the Secretary of Agriculture and Natural Resources
issued a decision in DANR Case 353, the dispositive portion of which reads
as follows:
In view of all the foregoing considerations, Fp. A. No. 661 (now Fp. A. No.
1717) of Nicanor Casteel should be, as hereby it is, reinstated and given due
course for the area indicated in the sketch drawn at the back of the last
page hereof; and Fp. A. No. 762 of Victorio D. Carpio shall remain rejected.
On the same date, the same official issued a decision in DANR Case 353-B,
the dispositive portion stating as follows:
WHEREFORE, Fishpond Permit No. F-289-C of Leoncio Aradillos and Fishpond
Permit No. F-539-C of Alejandro Cacam, should be, as they are hereby
cancelled and revoked; Nicanor Casteel is required to pay the improvements
introduced thereon by said permittees in accordance with the terms and
dispositions contained elsewhere in this decision....
Sometime in January 1951 Nicanor Casteel forbade Inocencia Deluao from
further administering the fishpond, and ejected the latter's representative
(encargado), Jesus Donesa, from the premises.chanroblesvi rtualawl ibrarychanrobles vi rtual law li brary
Alleging violation of the contract of service (exhibit A) entered into between
Inocencia Deluao and Nicanor Casteel, Felipe Deluao and Inocencia Deluao
on April 3, 1951 filed an action in the Court of First Instance of Davao for
specific performance and damages against Nicanor Casteel and Juan Depra
(who, they alleged, instigated Casteel to violate his contract), praying inter
alia, (a) that Casteel be ordered to respect and abide by the terms and
conditions of said contract and that Inocencia Deluao be allowed to continue
administering the said fishpond and collecting the proceeds from the sale of
the fishes caught from time to time; and (b) that the defendants be ordered
to pay jointly and severally to plaintiffs the sum of P20,000 in damages.chanroblesvi rtualawlibrarychanrobles virtual law l ibrary
On April 18, 1951 the plaintiffs filed an ex parte motion for the issuance of a
preliminary injunction, praying among other things, that during the
pendency of the case and upon their filling the requisite bond as may be
fixed by the court, a preliminary injunction be issued to restrain Casteel from
doing the acts complained of, and that after trial the said injunction be made
permanent. The lower court on April 26, 1951 granted the motion, and, two

days later, it issued a preliminary mandatory injunction addressed to
Casteel, the dispositive portion of which reads as follows:
POR EL PRESENTE, queda usted ordenado que, hasta nueva orden, usted, el
demandado y todos usu abogados, agentes, mandatarios y demas personas
que obren en su ayuda, desista de impedir a la demandante Inocencia R.
Deluao que continue administrando personalmente la pesqueria objeto de
esta causa y que la misma continue recibiendo los productos de la venta de
los pescados provenientes de dicha pesqueria, y que, asimismo, se prohibe a
dicho demandado Nicanor Casteel a desahuciar mediante fuerza al
encargado de los demandantes llamado Jesus Donesa de la pesqueria objeto
de la demanda de autos.
On May 10, 1951 Casteel filed a motion to dissolve the injunction, alleging
among others, that he was the owner, lawful applicant and occupant of the
fishpond in question. This motion, opposed by the plaintiffs on June 15,
1951, was denied by the lower court in its order of June 26, 1961.chanroblesvi rtualawlibrarychanrobles virtual law library
The defendants on May 14, 1951 filed their answer with counterclaim,
amended on January 8, 1952, denying the material averments of the
plaintiffs' complaint. A reply to the defendants' amended answer was filed by
the plaintiffs on January 31, 1952.chanroblesvi rtualawlibrarychanrobles virtual law l ibrary
The defendant Juan Depra moved on May 22, 1951 to dismiss the complaint
as to him. On June 4, 1951 the plaintiffs opposed his motion.chanroblesvi rtualawlibrary chanrobles virtual law l ibrary
The defendants filed on October 3, 1951 a joint motion to dismiss on the
ground that the plaintiffs' complaint failed to state a claim upon which relief
may be granted. The motion, opposed by the plaintiffs on October 12, 1951,
was denied for lack of merit by the lower court in its order of October 22,
1951. The defendants' motion for reconsideration filed on October 31, 1951
suffered the same fate when it was likewise denied by the lower court in its
order of November 12, 1951.chanroblesvirtualawl ibrarychanrobles vi rtual law li brary
After the issues were joined, the case was set for trial. Then came a series of
postponements. The lower court (Branch I, presided by Judge Enrique A.
Fernandez) finally issued on March 21, 1956 an order in open court, reading
as follows: .
Upon petition of plaintiffs, without any objection on the part of defendants,
the hearing of this case is hereby transferred to May 2 and 3, 1956 at 8:30
o'clock in the morning.chanroblesvi rtualawlibrarychanrobles vi rtual law library
This case was filed on April 3, 1951 and under any circumstance this Court
will not entertain any other transfer of hearing of this case and if the parties

will not be ready on that day set for hearing, the court will take the
necessary steps for the final determination of this case. (emphasis supplied)
On April 25, 1956 the defendants' counsel received a notice of hearing dated
April 21, 1956, issued by the office of the Clerk of Court (thru the special
deputy Clerk of Court) of the Court of First Instance of Davao, setting the
hearing of the case for May 2 and 3, 1956 before Judge Amador Gomez of
Branch II. The defendants, thru counsel, on April 26, 1956 filed a motion for
postponement. Acting on this motion, the lower court (Branch II, presided
by Judge Gomez) issued an order dated April 27, 1956, quoted as follows:
This is a motion for postponement of the hearing of this case set for May 2
and 3, 1956. The motion is filed by the counsel for the defendants and has
the conformity of the counsel for the plaintiffs.chanroblesvi rtualawl ibrarychanrobles vi rtual law li brary
An examination of the records of this case shows that this case was initiated
as early as April 1951 and that the same has been under advisement of the
Honorable Enrique A. Fernandez, Presiding Judge of Branch No. I, since
September 24, 1953, and that various incidents have already been
considered and resolved by Judge Fernandez on various occasions. The last
order issued by Judge Fernandez on this case was issued on March 21, 1956,
wherein he definitely states that the Court will not entertain any further
postponement of the hearing of this case.chanroblesvi rtualawlibrarychanrobles vi rtual law library
CONSIDERING ALL THE FOREGOING, the Court believes that the
consideration and termination of any incident referring to this case should be
referred back to Branch I, so that the same may be disposed of therein.
(emphasis supplied)
A copy of the abovequoted order was served on the defendants' counsel on
May 4, 1956.chanroblesvi rtualawlibrarychanrobles virtual law li brary
On the scheduled date of hearing, that is, on May 2, 1956, the lower court
(Branch I, with Judge Fernandez presiding), when informed about the
defendants' motion for postponement filed on April 26, 1956, issued an
order reiterating its previous order handed down in open court on March 21,
1956 and directing the plaintiffs to introduce their evidence ex parte, there
being no appearance on the part of the defendants or their counsel. On the
basis of the plaintiffs' evidence, a decision was rendered on May 4, 1956 the
dispositive portion of which reads as follows:
EN SU VIRTUD, el Juzgado dicta de decision a favor de los demandantes y
en contra del demandado Nicanor Casteel:chanrobles vi rtual law li brary

(a) Declara permanente el interdicto prohibitorio expedido contra el
demandado;chanrobles virtual law l ibrary
(b) Ordena al demandado entregue la demandante la posesion y
administracion de la mitad () del "fishpond" en cuestion con todas las
mejoras existentes dentro de la misma;chanrobles vi rtual law li brary
(c) Condena al demandado a pagar a la demandante la suma de P200.00
mensualmente en concepto de danos a contar de la fecha de la expiracion de
los 30 dias de la promulgacion de esta decision hasta que entregue la
posesion y administracion de la porcion del "fishpond" en conflicto;chanrobles vi rtual law library
(d) Condena al demandado a pagar a la demandante la suma de P2,000.00
valor de los pescado beneficiados, mas los intereses legales de la fecha de la
incoacion de la demanda de autos hasta el completo pago de la obligacion
principal;chanrobles virtual law library
(e) Condena al demandado a pagar a la demandante la suma de P2,000.00,
por gastos incurridos por aquella durante la pendencia de esta causa;chanrobles vi rtual law library
(f) Condena al demandado a pagar a la demandante, en concepto de
honorarios, la suma de P2,000.00;chanrobles virtual law l ibrary
(g) Ordena el sobreseimiento de esta demanda, por insuficiencia de pruebas,
en tanto en cuanto se refiere al demandado Juan Depra;chanrobles vi rtual law library
(h) Ordena el sobreseimiento de la reconvencion de los demandados por
falta de pruebas;chanrobles virtual law li brary
(i) Con las costas contra del demandado, Casteel.
The defendant Casteel filed a petition for relief from the foregoing decision,
alleging, inter alia, lack of knowledge of the order of the court a quo setting
the case for trial. The petition, however, was denied by the lower court in its
order of May 21, 1956, the pertinent portion of which reads as follows:
The duty of Atty. Ruiz, was not to inquire from the Clerk of Court whether
the trial of this case has been transferred or not, but to inquire from the
presiding Judge, particularly because his motion asking the transfer of this
case was not set for hearing and was not also acted upon.chanroblesvi rtualawlibrarychanrobles vi rtual law library
Atty. Ruiz knows the nature of the order of this Court dated March 21, 1956,
which reads as follows:

Upon petition of the plaintiff without any objection on the part of the
defendants, the hearing of this case is hereby transferred to May 2 and 3,
1956, at 8:30 o'clock in the morning.chanroblesvirtualawli brarychanrobles virtual law li brary
This case was filed on April 3, 1951, and under any circumstance this Court
will not entertain any other transfer of the hearing of this case, and if the
parties will not be ready on the day set for hearing, the Court will take
necessary steps for the final disposition of this case.
In view of the order above-quoted, the Court will not accede to any transfer
of this case and the duty of Atty. Ruiz is no other than to be present in the
Sala of this Court and to call the attention of the same to the existence of
his motion for transfer.chanroblesvi rtualawlibrarychanrobles virtual law l ibrary
Petition for relief from judgment filed by Atty. Ruiz in behalf of the
defendant, not well taken, the same is hereby denied.
Dissatisfied with the said ruling, Casteel appealed to the Court of Appeals
which certified the case to us for final determination on the ground that it
involves only questions of law.chanroblesvirtualawli brarychanrobles vi rtual law library
Casteel raises the following issues:
(1) Whether the lower court committed gross abuse of discretion when it
ordered reception of the appellees' evidence in the absence of the appellant
at the trial on May 2, 1956, thus depriving the appellant of his day in court
and of his property without due process of law;chanrobles vi rtual law li brary
(2) Whether the lower court committed grave abuse of discretion when it
denied the verified petition for relief from judgment filed by the appellant on
May 11, 1956 in accordance with Rule 38, Rules of Court; andchanrobles vi rtual law library
(3) Whether the lower court erred in ordering the issuance ex parte of a writ
of preliminary injunction against defendant-appellant, and in not dismissing
appellees' complaint.
1. The first and second issues must be resolved against the appellant.chanroblesvi rtualawl ibrarychanrobles vi rtual law li brary
The record indisputably shows that in the order given in open court on March
21, 1956, the lower court set the case for hearing on May 2 and 3, 1956 at
8:30 o'clock in the morning and empathically stated that, since the case had
been pending since April 3, 1951, it would not entertain any further motion
for transfer of the scheduled hearing.chanroblesvirtualawli brarychanrobles virtual law l ibrary

An order given in open court is presumed received by the parties on the very
date and time of promulgation,
1
and amounts to a legal notification for all
legal purposes.
2
The order of March 21, 1956, given in open court, was a
valid notice to the parties, and the notice of hearing dated April 21, 1956 or
one month thereafter, was a superfluity. Moreover, as between the order of
March 21, 1956, duly promulgated by the lower court, thru Judge
Fernandez, and the notice of hearing signed by a "special deputy clerk of
court" setting the hearing in another branch of the same court, the former's
order was the one legally binding. This is because the incidents of
postponements and adjournments are controlled by the court and not by the
clerk of court, pursuant to section 4, Rule 31 (now sec. 3, Rule 22) of the
Rules of Court.chanroblesvirtualawl ibrarychanrobles vi rtual law li brary
Much less had the clerk of court the authority to interfere with the order of
the court or to transfer the cage from one sala to another without authority
or order from the court where the case originated and was being tried. He
had neither the duty nor prerogative to re-assign the trial of the case to a
different branch of the same court. His duty as such clerk of court, in so far
as the incident in question was concerned, was simply to prepare the trial
calendar. And this duty devolved upon the clerk of court and not upon the
"special deputy clerk of court" who purportedly signed the notice of
hearing.chanroblesvirtualawli brarychanrobles vi rtual law library
It is of no moment that the motion for postponement had the conformity of
the appellees' counsel. The postponement of hearings does not depend upon
agreement of the parties, but upon the court's discretion.
3
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The record further discloses that Casteel was represented by a total of 12
lawyers, none of whom had ever withdrawn as counsel. Notice to Atty. Ruiz
of the order dated March 21, 1956 intransferably setting the case for hearing
for May 2 and 3, 1956, was sufficient notice to all the appellant's eleven
other counsel of record. This is a well-settled rule in our jurisdiction.
4
chanrobles vi rtual law li brary
It was the duty of Atty. Ruiz, or of the other lawyers of record, not excluding
the appellant himself, to appear before Judge Fernandez on the scheduled
dates of hearing Parties and their lawyers have no right to presume that
their motions for postponement will be granted.
5
For indeed, the appellant
and his 12 lawyers cannot pretend ignorance of the recorded fact that since
September 24, 1953 until the trial held on May 2, 1956, the case was under
the advisement of Judge Fernandez who presided over Branch I. There was,
therefore, no necessity to "re-assign" the same to Branch II because Judge
Fernandez had exclusive control of said case, unless he was legally inhibited
to try the case - and he was not.chanroblesvirtualawl ibrarychanrobles vi rtual law li brary

There is truth in the appellant's contention that it is the duty of the clerk of
court - not of the Court - to prepare the trial calendar. But the assignment or
reassignment of cases already pending in one sala to another sala, and the
setting of the date of trial after the trial calendar has been prepared, fall
within the exclusive control of the presiding judge.chanroblesvi rtualawlibrarychanrobles virtual law l ibrary
The appellant does not deny the appellees' claim that on May 2 and 3, 1956,
the office of the clerk of court of the Court of First Instance of Davao was
located directly below Branch I. If the appellant and his counsel had
exercised due diligence, there was no impediment to their going upstairs to
the second storey of the Court of First Instance building in Davao on May 2,
1956 and checking if the case was scheduled for hearing in the said sala.
The appellant after all admits that on May 2, 1956 his counsel went to the
office of the clerk of court.chanroblesvi rtualawlibrarychanrobles virtual law l ibrary
The appellant's statement that parties as a matter of right are entitled to
notice of trial, is correct. But he was properly accorded this right. He was
notified in open court on March 21, 1956 that the case was definitely and
intransferably set for hearing on May 2 and 3, 1956 before Branch I. He
cannot argue that, pursuant to the doctrine in Siochi vs. Tirona,
6
his counsel
was entitled to a timely notice of the denial of his motion for postponement.
In the cited case the motion for postponement was the first one filed by the
defendant; in the case at bar, there had already been a series of
postponements. Unlike the case at bar, the Siochi case was not
intransferably set for hearing. Finally, whereas the cited case did not spend
for a long time, the case at bar was only finally and intransferably set for
hearing on March 21, 1956 - after almost five years had elapsed from the
filing of the complaint on April 3, 1951.chanrobl esvirtualawli brarychanrobles vi rtual law library
The pretension of the appellant and his 12 counsel of record that they lacked
ample time to prepare for trial is unacceptable because between March 21,
1956 and May 2, 1956, they had one month and ten days to do so. In effect,
the appellant had waived his right to appear at the trial and therefore he
cannot be heard to complain that he has been deprived of his property
without due process of law.
7
Verily, the constitutional requirements of due
process have been fulfilled in this case: the lower court is a competent
court; it lawfully acquired jurisdiction over the person of the defendant
(appellant) and the subject matter of the action; the defendant (appellant)
was given an opportunity to be heard; and judgment was rendered upon
lawful hearing.
8
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2. Finally, the appellant contends that the lower court incurred an error in
ordering the issuance ex parte of a writ of preliminary injunction against

him, and in not dismissing the appellee's complaint. We find this contention
meritorious.chanroblesvi rtualawlibrarychanrobles virtual law l ibrary
Apparently, the court a quo relied on exhibit A - the so-called "contract of
service" - and the appellees' contention that it created a contract of co-
ownership and partnership between Inocencia Deluao and the appellant over
the fishpond in question.chanroblesvirtualawl ibrarychanrobles vi rtual law library
Too well-settled to require any citation of authority is the rule that everyone
is conclusively presumed to know the law. It must be assumed, conformably
to such rule, that the parties entered into the so-called "contract of service"
cognizant of the mandatory and prohibitory laws governing the filing of
applications for fishpond permits. And since they were aware of the said
laws, it must likewise be assumed - in fairness to the parties - that they did
not intend to violate them. This view must perforce negate the appellees'
allegation that exhibit A created a contract of co-ownership between the
parties over the disputed fishpond. Were we to admit the establishment of a
co-ownership violative of the prohibitory laws which will hereafter be
discussed, we shall be compelled to declare altogether the nullity of the
contract. This would certainly not serve the cause of equity and justice,
considering that rights and obligations have already arisen between the
parties. We shall therefore construe the contract as one of partnership,
divided into two parts - namely, a contract of partnership to exploit the
fishpond pending its award to either Felipe Deluao or Nicanor Casteel, and a
contract of partnership to divide the fishpond between them after such
award. The first is valid, the second illegal.chanroblesvirtualawl ibrarychanrobles vi rtual law library
It is well to note that when the appellee Inocencia Deluao and the appellant
entered into the so-called "contract of service" on November 25, 1949, there
were two pending applications over the fishpond. One was Casteel's which
was appealed by him to the Secretary of Agriculture and Natural Resources
after it was disallowed by the Director of Fisheries on October 25, 1949. The
other was Felipe Deluao's application over the same area which was likewise
rejected by the Director of Fisheries on November 29, 1949, refiled by
Deluao and later on withdrawn by him by letter dated March 15, 1950 to the
Secretary of Agriculture and Natural Resources. Clearly, although the
fishpond was then in the possession of Casteel, neither he nor, Felipe Deluao
was the holder of a fishpond permit over the area. But be that as it may,
they were not however precluded from exploiting the fishpond pending
resolution of Casteel's appeal or the approval of Deluao's application over
the same area - whichever event happened first. No law, rule or regulation
prohibited them from doing so. Thus, rather than let the fishpond remain
idle they cultivated it.chanroblesvi rtualawlibrarychanrobles virtual law l ibrary

The evidence preponderates in favor of the view that the initial intention of
the parties was not to form a co-ownership but to establish a partnership -
Inocencia Deluao as capitalist partner and Casteel as industrial partner - the
ultimate undertaking of which was to divide into two equal parts such
portion of the fishpond as might have been developed by the amount
extended by the plaintiffs-appellees, with the further provision that Casteel
should reimburse the expenses incurred by the appellees over one-half of
the fishpond that would pertain to him. This can be gleaned, among others,
from the letter of Casteel to Felipe Deluao on November 15, 1949, which
states, inter alia:
... [W]ith respect to your allowing me to use your money, same will redound
to your benefit because you are the ones interested in half of the work we
have done so far, besides I did not insist on our being partners in my
fishpond permit, but it was you "Tatay" Eping the one who wanted that we
be partners and it so happened that we became partners because I am poor,
but in the midst of my poverty it never occurred to me to be unfair to you.
Therefore so that each of us may be secured, let us have a document
prepared to the effect that we are partners in the fishpond that we caused to
be made here in Balasinon, but it does not mean that you will treat me as
one of your "Bantay" (caretaker) on wage basis but not earning wages at all,
while the truth is that we are partners. In the event that you are not
amenable to my proposition and consider me as "Bantay" (caretaker)
instead, do not blame me if I withdraw all my cases and be left without even
a little and you likewise.
(emphasis supplied)
9

Pursuant to the foregoing suggestion of the appellant that a document be
drawn evidencing their partnership, the appellee Inocencia Deluao and the
appellant executed exhibit A which, although denominated a "contract of
service," was actually the memorandum of their partnership agreement.
That it was not a contract of the services of the appellant, was admitted by
the appellees themselves in their letter
10
to Casteel dated December 19,
1949 wherein they stated that they did not employ him in his (Casteel's)
claim but because he used their money in developing and improving the
fishpond, his right must be divided between them. Of course, although
exhibit A did not specify any wage or share appertaining to the appellant as
industrial partner, he was so entitled - this being one of the conditions he
specified for the execution of the document of partnership.
11
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Further exchanges of letters between the parties reveal the continuing intent
to divide the fishpond. In a letter,
12
dated March 24, 1950, the appellant
suggested that they divide the fishpond and the remaining capital, and
offered to pay the Deluaos a yearly installment of P3,000 - presumably as

reimbursement for the expenses of the appellees for the development and
improvement of the one-half that would pertain to the appellant. Two days
later, the appellee Felipe Deluao replied,
13
expressing his concurrence in the
appellant's suggestion and advising the latter to ask for a reconsideration of
the order of the Director of Fisheries disapproving his (appellant's)
application, so that if a favorable decision was secured, then they would
divide the area.chanroblesvi rtualawlibrarychanrobles virtual law l ibrary
Apparently relying on the partnership agreement, the appellee Felipe Deluao
saw no further need to maintain his petition for the reinvestigation of
Casteel's application. Thus by letter
14
dated March 15, 1950 addressed to
the Secretary of Agriculture and Natural Resources, he withdrew his petition
on the alleged ground that he was no longer interested in the area, but
stated however that he wanted his interest to be protected and his capital to
be reimbursed by the highest bidder.chanroblesvirtualawl ibrarychanrobles vi rtual law library
The arrangement under the so-called "contract of service" continued until
the decisions both dated September 15, 1950 were issued by the Secretary
of Agriculture and Natural Resources in DANR Cases 353 and 353-B. This
development, by itself, brought about the dissolution of the partnership.
Moreover, subsequent events likewise reveal the intent of both parties to
terminate the partnership because each refused to share the fishpond with
the other.chanroblesvi rtualawl ibrarychanrobles vi rtual law li brary
Art. 1830(3) of the Civil Code enumerates, as one of the causes for the
dissolution of a partnership, "... any event which makes it unlawful for the
business of the partnership to be carried on or for the members to carry it
on in partnership." The approval of the appellant's fishpond application by
the decisions in DANR Cases 353 and 353-B brought to the fore several
provisions of law which made the continuation of the partnership unlawful
and therefore caused its ipso facto dissolution.chanroblesvi rtualawlibrarychanrobles virtual law l ibrary
Act 4003, known as the Fisheries Act, prohibits the holder of a fishpond
permit (the permittee) from transferring or subletting the fishpond granted
to him, without the previous consent or approval of the Secretary of
Agriculture and Natural Resources.
15
To the same effect is Condition No. 3 of
the fishpond permit which states that "The permittee shall not transfer or
sublet all or any area herein granted or any rights acquired therein without
the previous consent and approval of this Office." Parenthetically, we must
observe that in DANR Case 353-B, the permit granted to one of the parties
therein, Leoncio Aradillos, was cancelled not solely for the reason that his
permit covered a portion of the area included in the appellant's prior
fishpond application, but also because, upon investigation, it was ascertained
thru the admission of Aradillos himself that due to lack of capital, he allowed

one Lino Estepa to develop with the latter's capital the area covered by his
fishpond permit F-289-C with the understanding that he (Aradillos) would be
given a share in the produce thereof.
16
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Sec. 40 of Commonwealth Act 141, otherwise known as the Public Land Act,
likewise provides that
The lessee shall not assign, encumber, or sublet his rights without the
consent of the Secretary of Agriculture and Commerce, and the violation of
this condition shall avoid the contract; Provided, That assignment,
encumbrance, or subletting for purposes of speculation shall not be
permitted in any case: Provided, further, That nothing contained in this
section shall be understood or construed to permit the assignment,
encumbrance, or subletting of lands leased under this Act, or under any
previous Act, to persons, corporations, or associations which under this Act,
are not authorized to lease public lands.
Finally, section 37 of Administrative Order No. 14 of the Secretary of
Agriculture and Natural Resources issued in August 1937, prohibits a
transfer or sublease unless first approved by the Director of Lands and under
such terms and conditions as he may prescribe. Thus, it states:
When a transfer or sub-lease of area and improvement may be allowed. - If
the permittee or lessee had, unless otherwise specifically provided, held the
permit or lease and actually operated and made improvements on the area
for at least one year, he/she may request permission to sub-lease or
transfer the area and improvements under certain conditions.chanroblesvi rtualawlibrary chanrobles virtual law l ibrary
(a) Transfer subject to approval. - A sub-lease or transfer shall only be valid
when first approved by the Director under such terms and conditions as may
be prescribed, otherwise it shall be null and void. A transfer not previously
approved or reported shall be considered sufficient cause for the cancellation
of the permit or lease and forfeiture of the bond and for granting the area to
a qualified applicant or bidder, as provided in subsection (r) of Sec. 33 of
this Order.
Since the partnership had for its object the division into two equal parts of
the fishpond between the appellees and the appellant after it shall have been
awarded to the latter, and therefore it envisaged the unauthorized transfer
of one-half thereof to parties other than the applicant Casteel, it was
dissolved by the approval of his application and the award to him of the
fishpond. The approval was an event which made it unlawful for the business
of the partnership to be carried on or for the members to carry it on in
partnership.chanroblesvi rtualawlibrarychanrobles virtual law li brary

The appellees, however, argue that in approving the appellant's application,
the Secretary of Agriculture and Natural Resources likewise recognized
and/or confirmed their property right to one-half of the fishpond by virtue of
the contract of service, exhibit A. But the untenability of this argument
would readily surface if one were to consider that the Secretary of
Agriculture and Natural Resources did not do so for the simple reason that
he does not possess the authority to violate the aforementioned prohibitory
laws nor to exempt anyone from their operation.chanroblesvi rtualawlibrarychanrobles virtual law library
However, assuming in gratia argumenti that the approval of Casteel's
application, coupled with the foregoing prohibitory laws, was not enough to
cause the dissolution ipso facto of their partnership, succeeding events
reveal the intent of both parties to terminate the partnership by refusing to
share the fishpond with the other.chanroblesvi rtualawlibrarychanrobles virtual law l ibrary
On December 27, 1950 Casteel wrote
17
the appellee Inocencia Deluao,
expressing his desire to divide the fishpond so that he could administer his
own share, such division to be subject to the approval of the Secretary of
Agriculture and Natural Resources. By letter dated December 29, 1950,
18

the appellee Felipe Deluao demurred to Casteel's proposition because there
were allegedly no appropriate grounds to support the same and, moreover,
the conflict over the fishpond had not been finally resolved.chanroblesvirtualawl ibrarychanrobles vi rtual law li brary
The appellant wrote on January 4, 1951 a last letter
19
to the appellee Felipe
Deluao wherein the former expressed his determination to administer the
fishpond himself because the decision of the Government was in his favor
and the only reason why administration had been granted to the Deluaos
was because he was indebted to them. In the same letter, the appellant
forbade Felipe Deluao from sending the couple's encargado, Jesus Donesa,
to the fishpond. In reply thereto, Felipe Deluao wrote a letter
20
dated
January 5, 1951 in which he reiterated his refusal to grant the
administration of the fishpond to the appellant, stating as a ground his belief
"that only the competent agencies of the government are in a better position
to render any equitable arrangement relative to the present case; hence,
any action we may privately take may not meet the procedure of legal
order."chanrobles virtual law l ibrary
Inasmuch as the erstwhile partners articulated in the aforecited letters their
respective resolutions not to share the fishpond with each other - in direct
violation of the undertaking for which they have established their
partnership - each must be deemed to have expressly withdrawn from the
partnership, thereby causing its dissolution pursuant to art. 1830(2) of the
Civil Code which provides, inter alia, that dissolution is caused "by the
express will of any partner at any time."chanrobles vi rtual law library

In this jurisdiction, the Secretary of Agriculture and Natural Resources
possesses executive and administrative powers with regard to the survey,
classification, lease, sale or any other form of concession or disposition and
management of the lands of the public domain, and, more specifically, with
regard to the grant or withholding of licenses, permits, leases and contracts
over portions of the public domain to be utilized as fishponds.
21
, Thus, we
held in Pajo, et al. vs. Ago, et al. (L-15414, June 30, 1960), and reiterated
in Ganitano vs. Secretary of Agriculture and Natural Resources, et al.
(L-21167, March 31, 1966), that
... [T]he powers granted to the Secretary of Agriculture and Commerce
(Natural Resources) by law regarding the disposition of public lands such as
granting of licenses, permits, leases, and contracts, or approving, rejecting,
reinstating, or cancelling applications, or deciding conflicting applications,
are all executive and administrative in nature. It is a well-recognized
principle that purely administrative and discretionary functions may not be
interfered with by the courts (Coloso v. Board of Accountancy, G.R. No. L-
5750, April 20, 1953). In general, courts have no supervising power over the
proceedings and action of the administrative departments of the
government. This is generally true with respect to acts involving the exercise
of judgment or discretion, and findings of fact. (54 Am. Jur. 558-559)
Findings of fact by an administrative board or official, following a hearing,
are binding upon the courts and will not be disturbed except where the
board or official has gone beyond his statutory authority, exercised
unconstitutional powers or clearly acted arbitrarily and without regard to his
duty or with grave abuse of discretion... (emphasis supplied)
In the case at bar, the Secretary of Agriculture and Natural Resources gave
due course to the appellant's fishpond application 1717 and awarded to him
the possession of the area in question. In view of the finality of the
Secretary's decision in DANR Cases 353 and 353-B, and considering the
absence of any proof that the said official exceeded his statutory authority,
exercised unconstitutional powers, or acted with arbitrariness and in
disregard of his duty, or with grave abuse of discretion, we can do no less
than respect and maintain unfettered his official acts in the premises. It is a
salutary rule that the judicial department should not dictate to the executive
department what to do with regard to the administration and disposition of
the public domain which the law has entrusted to its care and
administration. Indeed, courts cannot superimpose their discretion on that of
the land department and compel the latter to do an act which involves the
exercise of judgment and discretion.
22
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Therefore, with the view that we take of this case, and even assuming that
the injunction was properly issued because present all the requisite grounds

for its issuance, its continuation, and, worse, its declaration as permanent,
was improper in the face of the knowledge later acquired by the lower court
that it was the appellant's application over the fishpond which was given due
course. After the Secretary of Agriculture and Natural Resources approved
the appellant's application, he became to all intents and purposes the legal
permittee of the area with the corresponding right to possess, occupy and
enjoy the same. Consequently, the lower court erred in issuing the
preliminary mandatory injunction. We cannot overemphasize that an
injunction should not be granted to take property out of the possession and
control of one party and place it in the hands of another whose title has not
been clearly established by law.
23
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However, pursuant to our holding that there was a partnership between the
parties for the exploitation of the fishpond before it was awarded to Casteel,
this case should be remanded to the lower court for the reception of
evidence relative to an accounting from November 25, 1949 to September
15, 1950, in order for the court to determine (a) the profits realized by the
partnership, (b) the share (in the profits) of Casteel as industrial partner, (e)
the share (in the profits) of Deluao as capitalist partner, and (d) whether the
amounts totalling about P27,000 advanced by Deluao to Casteel for the
development and improvement of the fishpond have already been liquidated.
Besides, since the appellee Inocencia Deluao continued in possession and
enjoyment of the fishpond even after it was awarded to Casteel, she did so
no longer in the concept of a capitalist partner but merely as creditor of the
appellant, and therefore, she must likewise submit in the lower court an
accounting of the proceeds of the sales of all the fishes harvested from the
fishpond from September 16, 1950 until Casteel shall have been finally given
the possession and enjoyment of the same. In the event that the appellee
Deluao has received more than her lawful credit of P27,000 (or whatever
amounts have been advanced to Casteel), plus 6% interest thereon per
annum, then she should reimburse the excess to the appellant.chanroblesvirtualawli brarychanrobles vi rtual law library
ACCORDINGLY, the judgment of the lower court is set aside. Another
judgment is hereby rendered: (1) dissolving the injunction issued against
the appellant, (2) placing the latter back in possession of the fishpond in
litigation, and (3) remanding this case to the court of origin for the reception
of evidence relative to the accounting that the parties must perforce render
in the premises, at the termination of which the court shall render judgment
accordingly. The appellant's counterclaim is dismissed. No pronouncement
as to costs.chanroblesvirtualawl ibrarychanrobles vi rtual law li brary
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez,
Fernando and Capistrano, JJ., concur.


Endnotes:















EN BANC
G.R. No. L-1256 October 23, 1903
VICENTE W. PASTOR,Plaintiff-Appellant, vs. MANUEL GASPAR, ET AL.,Defendants-Appellees.
Alfredo Chicote for appellant.
F. Ortigas and Hartigan, Marple and Solignac for appellees.
WILLARD, J.:
There was no motion for a new trial in this case.chanrobles vi rtual law library
From the facts admitted by the pleadings and those found by the court, it appears that in November,
1900, there existed in Manila a partnership composed of Macario Nicasio and the defendant Gaspar
under the name "Nicasio and Gaspar." It owned the steam launch Luisa, and its only business was the
relating to this launch.chanrobles vi rtual law library
Desiring to increase this business, on the 24th day of November, 1900, a contract was made between
the firm of Nicasio and Gaspar on the one side, and on the other side the plaintiff, the defendants
Eguia, Iboleon, and Monserrat, and one Hermoso. This contract recites that Nicasio and Gaspar, by
writing of the same date, have enlarged the business of their partnership; have bought six lorchas,
which are named, and that, needing money with which to pay for the lorchas and the necessary
repairs thereon, the parties of the second part have furnished them 28,000 pesos as loan, the amount
furnished by each being named. The firm of Nicasio and Gaspar then acknowledges the receipt of
these amounts. The fifth clause of the contract is as follows:

Fifth. The partnership of Nicasio and Gaspar undertakes to return to the said Eguia, Monserrat,
Iboleon, Pastor, and Hermoso the said total sum of 28,000 pesos within the period of ten years from
the date of the instrument, and to guarantee the fulfillment of said payment they pledge to said
parties the said lorchas Pepay, Lola, Consuelo, India, Niceta, and Castellana, in the sums respectively
which said parties have furnished for the purchase and repair of said vessels, as before stated, ceding
and assigning to said parties, in like proportions the profits and gains which may be realized from the
exploitation of said vessels; the said vessels to be the property of said Eguia, Monserrat, Iboleon,
Pastor, and Hermoso, and of the parties of the first part, proportionate with the sums which the said
parties have invested in said vessels; the management of said vessels during the time in which said
debt remains unpaid to remain with the partnership of Nicasio and Gaspar, with the understanding
that whatever may be the result of the business of said vessels, neither the said partnership nor the
parties of the first part shall become responsible for the payment of said debt, except in so far as the
said vessels shall respond therefor, and in no event shall they respond therefor with any other
property; injuries to and all losses of said lorchas to be shared by all the parties hereto, as well as
crews' expenses and other outlays necessary for the preservation of said vessels, in the proportion
which corresponds to each party hereto according to his investment; the parties of the first part
binding themselves not to encumber or pledge said vessels while said debt remains unsatisfied to the
parties of the second part.
It was provided in the seventh clause that the launch Luisa was not included in this contract.chanrobles vi rtual law li brary
It is alleged in the complaint, and not denied by the answer, that the contract thus entered into on
November 24, 1900, was in July, 1901, dissolved and terminated, and the lorchas sold by mutual
consent.chanrobles virtual law l ibrary
The cause of action set forth in the complaint is that there was actually a partnership between the
parties to the contract of November 24, and that the consent of the agent of the plaintiff to its
dissolution and the sale of the lorchas was obtained by fraud of the defendants. The prayer of the
complaint is that the dissolution of the partnership and the sale of the lorchas be declared null, and
that the plaintiff be restored to his rights therein, and if this can not be done that he recover of the
defendants damages in the sum of 42,500 pesos.chanrobles vi rtual law library
1. The plaintiff, who was defeated in the court below and who has appealed, claims that the contract
of November 24, 1900, created a partnership between the parties to it.chanrobles vi rtual law library
While all the court are of the opinion that the judgment should be affirmed, we are not agreed as to
the proper construction to be put upon this document. The opinion of the writer is that held by the
court below, viz, that upon the face of the contract the plaintiff was a creditor and not a partner. The
contract is not clearly drawn, but the following seem to indicate that the transaction was rather a loan
than a contract of partnership: (1) In the beginning it is twice stated positively that Nicasio and
Gaspar are the only partners and the only persons interested in the partnership of Nicasio and Gaspar.
These statements the plaintiff assented to when he signed the document. (2) In the second
paragraph, and again in the fourth, it is stated, also, distinctly and positively, that the money has
been furnished as a loan. (3) In the fifth paragraph, hereinbefore quoted, Nicasio and Gaspar bind
themselves to repay the amount, something that they would not be bound to do were the contract one
of partnership. (4) In the same paragraph Nicasio and Gaspar create in favor of the plaintiff and his
associates a right of pledge over the lorchas, a thing inconsistent with the idea of partnership. this
paragraph should not be construed as transferring the ownership of the lorchas themselves to the
second parties. Although the words "las cuales" would grammatically refer to the preceding word
"embarcaciones," yet such a construction would be inconsistent with what has been before stated in
the same paragraph as to the pledge. (5) By the same paragraph Nicasio and Gaspar are to be
considered consignees only as long as they do not pay the debt. This indicates that they had a right to
pay it. (6) By the last clause of this paragraph they bind themselves not to alienate the lorchas until
they had paid the debt, indicating clearly that by paying the debt they could do so, a thing consistent
with the idea of a partnership. (7) By the seventh paragraph of this contract it is stated that the
launch Luisa is not included in the contract.chanrobles virtual law l ibrary

The claim of the plaintiff that by this document he became a partner in the firm of Nicasio and Gaspar
can not in any event be sustained. That firm was engaged in business with the launch Luisa. With this
the plaintiff and his associates had nothing to do.chanrobles virtual law library
It appears, also, from this contract that when Nicasio and Gaspar enlarged their business they could
devote themselves not only to the launch Luisa and the six lorchas in question but also to other craft.
With such other business the plaintiff would have nothing to do. The most that he can claim is not that
he was a partner in the firm of Nicasio and Gaspar, but that he and his associates, in connection with
that firm, had formed another partnership to manage these lorchas. The fact that the plaintiff was to
share in the profits and losses of the business and that Nicasio and Gaspar should answer for the
payment of the debt only with the lorchas, and not with their own property, indicates that the plaintiff
was a partner. But these provisions are not conclusive. This is a suit between the parties to the
contract. The rights of third persons are not concerned. Whether the plaintiff would be a partner as to
such third persons is not to be determined. As between themselves the parties could make any
contract that pleased them, provided that it was not illegal (art. 1255, Civil Code). They could, in
making this contract, if they chose, take some provision from the law of partnership and others from
the law of loans. Loans with a right to receive a part of the profits in lieu of interest are not
uncommon. As between the parties, such contract is not one of partnership.chanrobles vi rtual law library
The question on this branch of the case is whether the contract on its face creates a partnership or
not. The court finds that the plaintiff believed that he could not be a partner because he was a Spanish
subject. There can therefore be no doubt as to his intention in signing this contract. He did not believe
that on its face it made him a partner. If he had so believed, he would not have signed it. If he was
willing to sign a contract which on its face made him a partner, he and his associates would have
joined with Nicasio and Gaspar in the amended articles of partnership which they signed on this very
day, and this second document would have been entirely unnecessary. The inference from these facts
is so strong that it can not be overcome by the fact that in subsequent dealings the parties called
themselves partners. The plaintiff undoubtedly wished to secure, as far as he could, the rights of a
partner without making himself one.chanrobles vi rtual law li brary
The contract, in the opinion of the writer, was that Nicasio and Gaspar should take the money of the
other parties to the contract, manage the business as they saw fit, pay the investors their share of the
profits as long as the business continued, and not to sell the lorchas until they had been so repaid.
Anything more than this would have made the investors partners according to the instrument itself,
the one thing which they were seeking to avoid. It may be added that, in a similar contract which the
plaintiff made with Nicasio in April, 1900, he in 1902 considered himself a creditor and made a
demand on Nicasio for the payment of the debt.chanrobles vi rtual law library
It is claimed by the plaintiff that even if the transaction was a loan, it could not be terminated without
his consent until the expiration of the period of ten years. Article 1127 of the Civil Code does not say
that the period allowed for the performance of an obligation is for the benefit of the creditor as well as
the debtor. It says that it shall be so presumed unless the contrary appears. In this case the contrary
does appear in two clauses hereinbefore cited under (5) and (6). Upon paying the loan at the end of
ten years, they would have had the undoubted right to mortgage or sell the lorchas, and then by the
mere act of payment would have ceased to be consignees thereof. No declaration of that kind in the
contract was at all necessary. These rights would result as a matter of law. The insertion of these
clauses can only be explained on the theory that the period was for the benefit of the debtors alone,
and that they would be at liberty at any time, even before the expiration of ten years, to sell the
property, provided they repaid the loan.chanrobles virtual law library
2. It is further claimed by the plaintiff that, even if the contract itself did not make them partners,
there was a verbal agreement that they should be partners. The court refused to allow him to answer
certain questions relating to this matter. His exception is stated as follows in the bill of exceptions:
"The plaintiff in his first testimony attempted to set forth the verbal agreements by virtue of which he
was in reality a partner in the firm of Nicasio and Gaspar. The court ruled this evidence out for the
reason that the name of the plaintiff does not appear in the articles of partnership of Nicasio and
Gaspar. The plaintiff excepted to the ruling."chanrobles virtual law library

There are several reasons why the court was correct in its ruling.chanrobles virtual law l ibrary
(1) Although the offer was to show that he was a partner in the firm of Nicasio and Gaspar -
something not claimed in the complaint - it is probable that the purpose was to show a contract of
partnership between Nicasio and Gaspar on the one hand and the plaintiff and his associates on the
other. The statements at the trial indicates this. The bill of exceptions does not show what verbal
agreements the plaintiff, would have testified to if he had been allowed to do so. But in his brief in this
court he says:
( b) That the firm was organized verbally on said date for a period of ten years; ( c) that the rights
and obligations of the partners were set forth in document No. 945 of the said date, although it may
be stated in said document that the contract in reference was a contract of pledge.
If, as thus appears, all the rights and obligations which were verbally agreed to were afterwards
embodied in a written instrument which was offered in evidence, the plaintiff has not been prejudiced
by not being allowed to testify that these agreements were first made verbally. All of them having
been included in the written document, he could testify to nothing more. If all the agreements as to
the rights and obligations of the parties were embodied in the written contract, the additional verbal
agreement that they should be partners would be but their opinion as to the nature of the said written
contract and would add nothing to it.chanrobles vi rtual law li brary
(2) The parties made a verbal agreement which they afterwards reduced to writing. Section 285 of the
Code of Civil Procedure prohibits any parol evidence as to other terms not contained in the writing.
Under this section, even if there had been agreements other than those contained in the instrument
and inconsistent therewith, the plaintiff could not testify to them. The plaintiff claims that this section
does not prohibit evidence as to the surrounding circumstances. This is true, and the plaintiff was the
trial allowed to testify that he brought the lorchas himself in Iloilo; that he was paid $500 for so doing;
that $20,000 was borrowed from the Banco Espaol -- Filipino for the purpose of paying for them; and
as to other details. There was no intrinsic ambiguity in the contract which required explanation. When
a written contract is vague and indefinite, it can be explained by showing what the surrounding
circumstances were (sec. 289), but not by showing by parol what the prior agreement in fact was.chanrobles vi rtual law li brary
3. The court refused to receive in evidence a letter written by Hermoso to the plaintiff, and the latter
excepted. there was no error in this ruling. The plaintiff could not prove the facts stated in this letter
in this way. He should have called Hermoso or other persons as witnesses to do so, and given the
defendants the right to cross-examine them. (Sec. 381, Code of Civil Procedure.)chanrobles vi rtual law li brary
4. The following exception appears in the record:
During the examination of Lino Eguia, he was asked by the plaintiff to state, either by means of the
document or the answer to the complaint, who was intrusted with the purchase of the lorchas. The
court ruled out the question and the plaintiff excepted.
This ruling was correct for two reasons: (1) The documents themselves showed the facts. (2) The
plaintiff had already testified without objection that he brought the lorchas in Iloilo by direction of
Nicasio and Gaspar. The refusal to allow this witness to testify, on a matter as to which there was no
dispute, could not have prejudiced the plaintiff.chanrobles vi rtual law library
5. Nicasio was asked if the capital in Nicasio and Gaspar which stood in his name was all his own. This
question was ruled out and the plaintiff excepted. If the question referred to the original contract of
partnership, and the plaintiff desired to show that he had contributed money thereto, he could not
have been prejudiced by the ruling because the witness had already testified that it was contributed in
fact by the plaintiff. This fact also appeared during the trial from the document No. 325 of April 26,
1900, between the witness and the plaintiff. If he wished to show that a part of the capital standing in
the name of Nicasio, in the amended articles of partnership, was furnished by the plaintiff and others,
he was not prejudiced by the ruling, for this all appeared from the contract of November 24, 1900, so
many times referred to. If he desired to show that Nicasio had borrowed a part of his capital from

some person not connected with this suit, the question was immaterial and was properly excluded. In
such a case it would be no concern of the plaintiff whose money this was.chanrobles vi rtual law library
6. The following exception appears in the record:
During the examination of the witness Joaquin Salvador, he was asked on cross-examination by
plaintiff to state if he, as attorney in fact of the partner Hermoso in the meetings of the partners
preliminary to the sale of the lorchas, would have consented to the dissolution of the partnership had
he known that the partnership would be immediately reorganized with the same lorchas and the same
partners with the exception of Nicasio, Hermoso, and Pastor. The court ruled the question out and the
plaintiff excepted.
This ruling was correct. What Salvador would have done was of no importance. The plaintiff's agent
was allowed to testify that he would not have given the plaintiff's consent if he had known that the
defendants intended to continue the business.chanrobles virtual law li brary
7. The assignment of error as to the bills of Warner, Barnes and Co. is not sustained by the bill of
exceptions. It is stated therein (fol. 25) that these documents were admitted.chanrobles vi rtual law library
8. The question as to whether the power of attorney given by the plaintiff to Nicasio was sufficient to
authorize the latter to consent for the plaintiff to the cancellation of the contract was not raised by any
exception at the trial and is not the subject of any assignment of error in this court.chanrobles vi rtual law library
9. The claim of the plaintiff, as has been said before, was (1) that he was a partner, and (2) that the
cancellation of the agreement of partnership had been procured by fraud. The judge made a finding
upon the first claim, but not upon the second; although the finding that he made was sufficient to
determine the case before him, yet he should have found upon all the issues presented by the
pleadings. But this omission does not require a reversal of the judgment. If the court below was right
in the construction of the document, it of course does not, for the decision would then contain facts
sufficient to justify the judgment. But even if it were not, the same thing would result. It is a fact
clearly admitted by the pleadings, and therefore not required to be stated in the decision, that this
contract of November 24, 1900, was canceled and the arrangement, whatever it was, dissolved. To
this dissolution the plaintiff through his agent consented. This is alleged in the complaint, although it
is there stated that such consent was obtained by fraud. The facts admitted in the pleadings and
stated in the decision showing, therefore, that the plaintiff had surrendered his rights, and there being
no finding that such surrender was obtained by fraud, the defendants are, on such admissions and
findings, entitled to judgment. We reach this conclusion the more willingly because a majority of the
court is of the opinion that the evidence in the case was not sufficient to show any fraud on the part of
the defendants. c.j.chanrobles vi rtual law li brary
The judgment is affirmed, with the costs of this instance against the appellant. Judgment will be
entered accordingly twenty days after the filing of this decision.chanrobles vi rtual law li brary
Arellano, C.J., Torres, Mapa, and McDonough, JJ., concur.
























EN BANC
G.R. No. L-19342 May 25, 1972
LORENZO T. OA and HEIRS OF JULIA BUALES, namely: RODOLFO
B. OA, MARIANO B. OA, LUZ B. OA, VIRGINIA B. OA and
LORENZO B. OA, JR., Petitioners, vs. THE COMMISSIONER OF
INTERNAL REVENUE, Respondent.
Orlando Velasco for petitioners.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General
Felicisimo R. Rosete, and Special Attorney Purificacion Ureta for respondent.
BARREDO, J.:
Petition for review of the decision of the Court of Tax Appeals in CTA Case
No. 617, similarly entitled as above, holding that petitioners have
constituted an unregistered partnership and are, therefore, subject to the
payment of the deficiency corporate income taxes assessed against them by
respondent Commissioner of Internal Revenue for the years 1955 and 1956
in the total sum of P21,891.00, plus 5% surcharge and 1% monthly interest
from December 15, 1958, subject to the provisions of Section 51 (e) (2) of
the Internal Revenue Code, as amended by Section 8 of Republic Act No.
2343 and the costs of the suit,
1
as well as the resolution of said court
denying petitioners' motion for reconsideration of said decision.chanroblesvi rtualawlibrarychanrobles virtual law l ibrary

The facts are stated in the decision of the Tax Court as follows:
Julia Buales died on March 23, 1944, leaving as heirs her surviving spouse,
Lorenzo T. Oa and her five children. In 1948, Civil Case No. 4519 was
instituted in the Court of First Instance of Manila for the settlement of her
estate. Later, Lorenzo T. Oa the surviving spouse was appointed
administrator of the estate of said deceased (Exhibit 3, pp. 34-41, BIR rec.).
On April 14, 1949, the administrator submitted the project of partition,
which was approved by the Court on May 16, 1949 (See Exhibit K). Because
three of the heirs, namely Luz, Virginia and Lorenzo, Jr., all surnamed Oa,
were still minors when the project of partition was approved, Lorenzo T.
Oa, their father and administrator of the estate, filed a petition in Civil Case
No. 9637 of the Court of First Instance of Manila for appointment as
guardian of said minors. On November 14, 1949, the Court appointed him
guardian of the persons and property of the aforenamed minors (See p. 3,
BIR rec.).chanroblesvi rtualawlibrarychanrobles virtual law library
The project of partition (Exhibit K; see also pp. 77-70, BIR rec.) shows that
the heirs have undivided one-half (1/2) interest in ten parcels of land with a
total assessed value of P87,860.00, six houses with a total assessed value of
P17,590.00 and an undetermined amount to be collected from the War
Damage Commission. Later, they received from said Commission the
amount of P50,000.00, more or less. This amount was not divided among
them but was used in the rehabilitation of properties owned by them in
common (t.s.n., p. 46). Of the ten parcels of land aforementioned, two were
acquired after the death of the decedent with money borrowed from the
Philippine Trust Company in the amount of P72,173.00 (t.s.n., p. 24; Exhibit
3, pp. 31-34 BIR rec.).chanroblesvirtualawl ibrarychanrobles vi rtual law library
The project of partition also shows that the estate shares equally with
Lorenzo T. Oa, the administrator thereof, in the obligation of P94,973.00,
consisting of loans contracted by the latter with the approval of the Court
(see p. 3 of Exhibit K; or see p. 74, BIR rec.).chanroblesvi rtualawlibrarychanrobles virtual law l ibrary
Although the project of partition was approved by the Court on May 16,
1949, no attempt was made to divide the properties therein listed. Instead,
the properties remained under the management of Lorenzo T. Oa who used
said properties in business by leasing or selling them and investing the
income derived therefrom and the proceeds from the sales thereof in real
properties and securities. As a result, petitioners' properties and investments
gradually increased from P105,450.00 in 1949 to P480,005.20 in 1956 as
can be gleaned from the following year-end balances:
Year Investment Land Building


Account Account Account
1949 - P87,860.00 P17,590.00
1950 P24,657.65 128,566.72 96,076.26
1951 51,301.31 120,349.28 110,605.11
1952 67,927.52 87,065.28 152,674.39
1953 61,258.27 84,925.68 161,463.83
1954 63,623.37 99,001.20 167,962.04
1955 100,786.00 120,249.78 169,262.52
1956 175,028.68 135,714.68 169,262.52
(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)chanrobles virtual law l ibrary
From said investments and properties petitioners derived such incomes as
profits from installment sales of subdivided lots, profits from sales of stocks,
dividends, rentals and interests (see p. 3 of Exhibit 3; p. 32, BIR rec.; t.s.n.,
pp. 37-38). The said incomes are recorded in the books of account kept by
Lorenzo T. Oa where the corresponding shares of the petitioners in the net
income for the year are also known. Every year, petitioners returned for
income tax purposes their shares in the net income derived from said
properties and securities and/or from transactions involving them (Exhibit 3,
supra; t.s.n., pp. 25-26). However, petitioners did not actually receive their
shares in the yearly income. (t.s.n., pp. 25-26, 40, 98, 100). The income
was always left in the hands of Lorenzo T. Oa who, as heretofore pointed
out, invested them in real properties and securities. (See Exhibit 3, t.s.n.,
pp. 50, 102-104).chanroblesvi rtualawlibrarychanrobles vi rtual law library
On the basis of the foregoing facts, respondent (Commissioner of Internal
Revenue) decided that petitioners formed an unregistered partnership and
therefore, subject to the corporate income tax, pursuant to Section 24, in
relation to Section 84(b), of the Tax Code. Accordingly, he assessed against
the petitioners the amounts of P8,092.00 and P13,899.00 as corporate
income taxes for 1955 and 1956, respectively. (See Exhibit 5, amended by
Exhibit 17, pp. 50 and 86, BIR rec.). Petitioners protested against the
assessment and asked for reconsideration of the ruling of respondent that
they have formed an unregistered partnership. Finding no merit in
petitioners' request, respondent denied it (See Exhibit 17, p. 86, BIR rec.).
(See pp. 1-4, Memorandum for Respondent, June 12, 1961).chanroblesvi rtualawlibrarychanrobles virtual law l ibrary

The original assessment was as follows:
1955
Net income as per investigation ................ P40,209.89

Income tax due thereon ............................... 8,042.00
25% surcharge .............................................. 2,010.50
Compromise for non-filing .......................... 50.00
Total ............................................................... P10,102.50
1956
Net income as per investigation ................ P69,245.23
Income tax due thereon ............................... 13,849.00
25% surcharge .............................................. 3,462.25
Compromise for non-filing .......................... 50.00
Total ............................................................... P17,361.25chanrobles vi rtual law library
(See Exhibit 13, page 50, BIR records)chanrobles virtual law l ibrary
Upon further consideration of the case, the 25% surcharge was eliminated in
line with the ruling of the Supreme Court in Collector v. Batangas
Transportation Co., G.R. No. L-9692, Jan. 6, 1958, so that the questioned
assessment refers solely to the income tax proper for the years 1955 and
1956 and the "Compromise for non-filing," the latter item obviously referring
to the compromise in lieu of the criminal liability for failure of petitioners to
file the corporate income tax returns for said years. (See Exh. 17, page 86,
BIR records). (Pp. 1-3, Annex C to Petition)
Petitioners have assigned the following as alleged errors of the Tax Court:
I.chanroblesvi rtualawlibrarychanrobles vi rtual law li brary
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONERS
FORMED AN UNREGISTERED PARTNERSHIP;chanrobles vi rtual law li brary
II.chanroblesvi rtualawlibrarychanrobles virtual law l ibrary
THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE
PETITIONERS WERE CO-OWNERS OF THE PROPERTIES INHERITED AND
(THE) PROFITS DERIVED FROM TRANSACTIONS THEREFROM (sic);chanrobles virtual law l ibrary
III.chanroblesvi rtualawlibrarychanrobles virtual law l ibrary

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS WERE
LIABLE FOR CORPORATE INCOME TAXES FOR 1955 AND 1956 AS AN
UNREGISTERED PARTNERSHIP;chanrobles virtual law li brary
IV.chanroblesvi rtualawlibrarychanrobles virtual law library
ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN
UNREGISTERED PARTNERSHIP, THE COURT OF TAX APPEALS ERRED IN NOT
HOLDING THAT THE PETITIONERS WERE AN UNREGISTERED PARTNERSHIP
TO THE EXTENT ONLY THAT THEY INVESTED THE PROFITS FROM THE
PROPERTIES OWNED IN COMMON AND THE LOANS RECEIVED USING THE
INHERITED PROPERTIES AS COLLATERALS;
V .
ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED PARTNERSHIP,
THE COURT OF TAX APPEALS ERRED IN NOT DEDUCTING THE VARIOUS
AMOUNTS PAID BY THE PETITIONERS AS INDIVIDUAL INCOME TAX ON
THEIR RESPECTIVE SHARES OF THE PROFITS ACCRUING FROM THE
PROPERTIES OWNED IN COMMON, FROM THE DEFICIENCY TAX OF THE
UNREGISTERED PARTNERSHIP.
In other words, petitioners pose for our resolution the following questions:
(1) Under the facts found by the Court of Tax Appeals, should petitioners be
considered as co-owners of the properties inherited by them from the
deceased Julia Buales and the profits derived from transactions involving
the same, or, must they be deemed to have formed an unregistered
partnership subject to tax under Sections 24 and 84(b) of the National
Internal Revenue Code? (2) Assuming they have formed an unregistered
partnership, should this not be only in the sense that they invested as a
common fund the profits earned by the properties owned by them in
common and the loans granted to them upon the security of the said
properties, with the result that as far as their respective shares in the
inheritance are concerned, the total income thereof should be considered as
that of co-owners and not of the unregistered partnership? And (3)
assuming again that they are taxable as an unregistered partnership, should
not the various amounts already paid by them for the same years 1955 and
1956 as individual income taxes on their respective shares of the profits
accruing from the properties they owned in common be deducted from the
deficiency corporate taxes, herein involved, assessed against such
unregistered partnership by the respondent Commissioner?chanrobles vi rtual law library
Pondering on these questions, the first thing that has struck the Court is that
whereas petitioners' predecessor in interest died way back on March 23,

1944 and the project of partition of her estate was judicially approved as
early as May 16, 1949, and presumably petitioners have been holding their
respective shares in their inheritance since those dates admittedly under the
administration or management of the head of the family, the widower and
father Lorenzo T. Oa, the assessment in question refers to the later years
1955 and 1956. We believe this point to be important because, apparently,
at the start, or in the years 1944 to 1954, the respondent Commissioner of
Internal Revenue did treat petitioners as co-owners, not liable to corporate
tax, and it was only from 1955 that he considered them as having formed an
unregistered partnership. At least, there is nothing in the record indicating
that an earlier assessment had already been made. Such being the case,
and We see no reason how it could be otherwise, it is easily understandable
why petitioners' position that they are co-owners and not unregistered co-
partners, for the purposes of the impugned assessment, cannot be upheld.
Truth to tell, petitioners should find comfort in the fact that they were not
similarly assessed earlier by the Bureau of Internal Revenue.chanroblesvi rtualawlibrarychanrobles vi rtual law library
The Tax Court found that instead of actually distributing the estate of the
deceased among themselves pursuant to the project of partition approved in
1949, "the properties remained under the management of Lorenzo T. Oa
who used said properties in business by leasing or selling them and investing
the income derived therefrom and the proceed from the sales thereof in real
properties and securities," as a result of which said properties and
investments steadily increased yearly from P87,860.00 in "land account" and
P17,590.00 in "building account" in 1949 to P175,028.68 in "investment
account," P135.714.68 in "land account" and P169,262.52 in "building
account" in 1956. And all these became possible because, admittedly,
petitioners never actually received any share of the income or profits from
Lorenzo T. Oa and instead, they allowed him to continue using said shares
as part of the common fund for their ventures, even as they paid the
corresponding income taxes on the basis of their respective shares of the
profits of their common business as reported by the said Lorenzo T. Oa.chanroblesvirtualawl ibrarychanrobles vi rtual law
library
It is thus incontrovertible that petitioners did not, contrary to their
contention, merely limit themselves to holding the properties inherited by
them. Indeed, it is admitted that during the material years herein involved,
some of the said properties were sold at considerable profit, and that with
said profit, petitioners engaged, thru Lorenzo T. Oa, in the purchase and
sale of corporate securities. It is likewise admitted that all the profits from
these ventures were divided among petitioners proportionately in accordance
with their respective shares in the inheritance. In these circumstances, it is
Our considered view that from the moment petitioners allowed not only the
incomes from their respective shares of the inheritance but even the
inherited properties themselves to be used by Lorenzo T. Oa as a common

fund in undertaking several transactions or in business, with the intention of
deriving profit to be shared by them proportionally, such act was tantamonut
to actually contributing such incomes to a common fund and, in effect, they
thereby formed an unregistered partnership within the purview of the above-
mentioned provisions of the Tax Code.chanrobl esvirtualawli brarychanrobles vi rtual law library
It is but logical that in cases of inheritance, there should be a period when
the heirs can be considered as co-owners rather than unregistered co-
partners within the contemplation of our corporate tax laws aforementioned.
Before the partition and distribution of the estate of the deceased, all the
income thereof does belong commonly to all the heirs, obviously, without
them becoming thereby unregistered co-partners, but it does not necessarily
follow that such status as co-owners continues until the inheritance is
actually and physically distributed among the heirs, for it is easily
conceivable that after knowing their respective shares in the partition, they
might decide to continue holding said shares under the common
management of the administrator or executor or of anyone chosen by them
and engage in business on that basis. Withal, if this were to be allowed, it
would be the easiest thing for heirs in any inheritance to circumvent and
render meaningless Sections 24 and 84(b) of the National Internal Revenue
Code.chanroblesvi rtualawlibrarychanrobles virtual law l ibrary
It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated,
among the reasons for holding the appellants therein to be unregistered co-
partners for tax purposes, that their common fund "was not something they
found already in existence" and that "it was not a property inherited by them
pro indiviso," but it is certainly far fetched to argue therefrom, as petitioners
are doing here, that ergo, in all instances where an inheritance is not
actually divided, there can be no unregistered co-partnership. As already
indicated, for tax purposes, the co-ownership of inherited properties is
automatically converted into an unregistered partnership the moment the
said common properties and/or the incomes derived therefrom are used as a
common fund with intent to produce profits for the heirs in proportion to
their respective shares in the inheritance as determined in a project partition
either duly executed in an extrajudicial settlement or approved by the court
in the corresponding testate or intestate proceeding. The reason for this is
simple. From the moment of such partition, the heirs are entitled already to
their respective definite shares of the estate and the incomes thereof, for
each of them to manage and dispose of as exclusively his own without the
intervention of the other heirs, and, accordingly he becomes liable
individually for all taxes in connection therewith. If after such partition, he
allows his share to be held in common with his co-heirs under a single
management to be used with the intent of making profit thereby in
proportion to his share, there can be no doubt that, even if no document or

instrument were executed for the purpose, for tax purposes, at least, an
unregistered partnership is formed. This is exactly what happened to
petitioners in this case.chanroblesvirtualawli brarychanrobles vi rtual law library
In this connection, petitioners' reliance on Article 1769, paragraph (3), of
the Civil Code, providing that: "The sharing of gross returns does not of itself
establish a partnership, whether or not the persons sharing them have a
joint or common right or interest in any property from which the returns are
derived," and, for that matter, on any other provision of said code on
partnerships is unavailing. In Evangelista, supra, this Court clearly
differentiated the concept of partnerships under the Civil Code from that of
unregistered partnerships which are considered as "corporations" under
Sections 24 and 84(b) of the National Internal Revenue Code. Mr. Justice
Roberto Concepcion, now Chief Justice, elucidated on this point thus:
To begin with, the tax in question is one imposed upon "corporations",
which, strictly speaking, are distinct and different from "partnerships". When
our Internal Revenue Code includes "partnerships" among the entities
subject to the tax on "corporations", said Code must allude, therefore, to
organizations which are not necessarily "partnerships", in the technical sense
of the term. Thus, for instance, section 24 of said Code exempts from the
aforementioned tax "duly registered general partnerships," which constitute
precisely one of the most typical forms of partnerships in this jurisdiction.
Likewise, as defined in section 84(b) of said Code, "the term corporation
includes partnerships, no matter how created or organized." This qualifying
expression clearly indicates that a joint venture need not be undertaken in
any of the standard forms, or in confirmity with the usual requirements of
the law on partnerships, in order that one could be deemed constituted for
purposes of the tax on corporation. Again, pursuant to said section 84(b),the
term "corporation" includes, among others, "joint accounts,(cuentas en
participacion)" and "associations", none of which has a legal personality of
its own, independent of that of its members. Accordingly, the lawmaker
could not have regarded that personality as a condition essential to the
existence of the partnerships therein referred to. In fact, as above stated,
"duly registered general co-partnerships" - which are possessed of the
aforementioned personality - have been expressly excluded by law (sections
24 and 84[b]) from the connotation of the term "corporation." ....chanroblesvirtualawl ibrarychanrobles vi rtual law library
xxx xxx xxxchanrobles vi rtual law li brary
Similarly, the American Law
... provides its own concept of a partnership. Under the term "partnership" it
includes not only a partnership as known in common law but, as well, a

syndicate, group, pool, joint venture, or other unincorporated organization
which carries on any business, financial operation, or venture, and which is
not, within the meaning of the Code, a trust, estate, or a corporation. ... .
(7A Merten's Law of Federal Income Taxation, p. 789; emphasis ours.)chanrobles vi rtual law library
The term "partnership" includes a syndicate, group, pool, joint venture or
other unincorporated organization, through or by means of which any
business, financial operation, or venture is carried on. ... . (8 Merten's Law
of Federal Income Taxation, p. 562 Note 63; emphasis ours.)
For purposes of the tax on corporations, our National Internal Revenue Code
includes these partnerships - with the exception only of duly registered
general copartnerships - within the purview of the term "corporation." It is,
therefore, clear to our mind that petitioners herein constitute a partnership,
insofar as said Code is concerned, and are subject to the income tax for
corporations.
We reiterated this view, thru Mr. Justice Fernando, in Reyes vs.
Commissioner of Internal Revenue, G. R. Nos. L-24020-21, July 29, 1968,
24 SCRA 198, wherein the Court ruled against a theory of co-ownership
pursued by appellants therein.chanroblesvirtualawl ibrarychanrobles vi rtual law library
As regards the second question raised by petitioners about the segregation,
for the purposes of the corporate taxes in question, of their inherited
properties from those acquired by them subsequently, We consider as
justified the following ratiocination of the Tax Court in denying their motion
for reconsideration:
In connection with the second ground, it is alleged that, if there was an
unregistered partnership, the holding should be limited to the business
engaged in apart from the properties inherited by petitioners. In other
words, the taxable income of the partnership should be limited to the income
derived from the acquisition and sale of real properties and corporate
securities and should not include the income derived from the inherited
properties. It is admitted that the inherited properties and the income
derived therefrom were used in the business of buying and selling other real
properties and corporate securities. Accordingly, the partnership income
must include not only the income derived from the purchase and sale of
other properties but also the income of the inherited properties.
Besides, as already observed earlier, the income derived from inherited
properties may be considered as individual income of the respective heirs
only so long as the inheritance or estate is not distributed or, at least,
partitioned, but the moment their respective known shares are used as part

of the common assets of the heirs to be used in making profits, it is but
proper that the income of such shares should be considered as the part of
the taxable income of an unregistered partnership. This, We hold, is the
clear intent of the law.chanroblesvirtualawl ibrarychanrobles vi rtual law library
Likewise, the third question of petitioners appears to have been adequately
resolved by the Tax Court in the aforementioned resolution denying
petitioners' motion for reconsideration of the decision of said court.
Pertinently, the court ruled this wise:
In support of the third ground, counsel for petitioners alleges:
Even if we were to yield to the decision of this Honorable Court that the
herein petitioners have formed an unregistered partnership and, therefore,
have to be taxed as such, it might be recalled that the petitioners in their
individual income tax returns reported their shares of the profits of the
unregistered partnership. We think it only fair and equitable that the various
amounts paid by the individual petitioners as income tax on their respective
shares of the unregistered partnership should be deducted from the
deficiency income tax found by this Honorable Court against the
unregistered partnership. (page 7, Memorandum for the Petitioner in
Support of Their Motion for Reconsideration, Oct. 28, 1961.)
In other words, it is the position of petitioners that the taxable income of the
partnership must be reduced by the amounts of income tax paid by each
petitioner on his share of partnership profits. This is not correct; rather, it
should be the other way around. The partnership profits distributable to the
partners (petitioners herein) should be reduced by the amounts of income
tax assessed against the partnership. Consequently, each of the petitioners
in his individual capacity overpaid his income tax for the years in question,
but the income tax due from the partnership has been correctly assessed.
Since the individual income tax liabilities of petitioners are not in issue in
this proceeding, it is not proper for the Court to pass upon the same.
Petitioners insist that it was error for the Tax Court to so rule that whatever
excess they might have paid as individual income tax cannot be credited as
part payment of the taxes herein in question. It is argued that to sanction
the view of the Tax Court is to oblige petitioners to pay double income tax
on the same income, and, worse, considering the time that has lapsed since
they paid their individual income taxes, they may already be barred by
prescription from recovering their overpayments in a separate action. We do
not agree. As We see it, the case of petitioners as regards the point under
discussion is simply that of a taxpayer who has paid the wrong tax,
assuming that the failure to pay the corporate taxes in question was not

deliberate. Of course, such taxpayer has the right to be reimbursed what he
has erroneously paid, but the law is very clear that the claim and action for
such reimbursement are subject to the bar of prescription. And since the
period for the recovery of the excess income taxes in the case of herein
petitioners has already lapsed, it would not seem right to virtually disregard
prescription merely upon the ground that the reason for the delay is
precisely because the taxpayers failed to make the proper return and
payment of the corporate taxes legally due from them. In principle, it is but
proper not to allow any relaxation of the tax laws in favor of persons who
are not exactly above suspicion in their conduct vis-a-vis their tax obligation
to the State.chanroblesvi rtualawlibrarychanrobles virtual law library
IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax Appeals
appealed from is affirm with costs against petitioners.