Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-9692

January 6, 1958

COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
BATANGAS TRANSPORTATION COMPANY and LAGUNA-TAYABAS BUS COMPANY, respondents.
Office of the Solicitor General Ambrosio Padilla, Solicitor Conrado T. Limcaoco and Zoilo R. Zandoval for petitioner.
Ozaeta, Lichauco and Picazo for respondents.
MONTEMAYOR, J.:
This is an appeal from the decision of the Court of Tax Appeals (C.T.A.), which reversed the assessment and decision of petitioner Collector of Internal Revenue, later referred to
as Collector, assessing and demanding from the respondents Batangas Transportation Company, later referred to as Batangas Transportation, and Laguna-Tayabas Bus Company,
later referred to as Laguna Bus, the amount of P54,143.54, supposed to represent the deficiency income tax and compromise for the years 1946 to 1949, inclusive, which amount,
pending appeal in the C.T.A., but before the Collector filed his answer in said court, was increased to P148,890.14.
The following facts are undisputed: Respondent companies are two distinct and separate corporations engaged in the business of land transportation by means of motor buses, and
operating distinct and separate lines. Batangas Transportation was organized in 1918, while Laguna Bus was organized in 1928. Each company now has a fully paid up capital of
Pl,000,000. Before the last war, each company maintained separate head offices, that of Batangas Transportation in Batangas, Batangas, while the Laguna Bus had its head office in
San Pablo Laguna. Each company also kept and maintained separate books, fleets of buses, management, personnel, maintenance and repair shops, and other facilities. Joseph
Benedict managed the Batangas Transportation, while Martin Olson was the manager of the Laguna Bus. To show the connection and close relation between the two companies, it
should be stated that Max Blouse was the President of both corporations and owned about 30 per cent of the stock in each company. During the war, the American officials of these
two corporations were interned in Santo Tomas, and said companies ceased operations. They also lost their respective properties and equipment. After Liberation, sometime in
April, 1945, the two companies were able to acquire 56 auto buses from the United States Army, and the two companies diveded said equipment equally between
themselves,registering the same separately in their respective names. In March, 1947, after the resignation of Martin Olson as Manager of the Laguna Bus, Joseph Benedict, who
was then managing the Batangas Transportation, was appointed Manager of both companies by their respective Board of Directors. The head office of the Laguna Bus in San Pablo
City was made the main office of both corporations. The placing of the two companies under one sole mangement was made by Max Blouse, President of both companies, by
virtue of the authority granted him by resolution of the Board of Directors of the Laguna Bus on August 10, 1945, and ratified by the Boards of the two companies in their
respective resolutions of October 27, 1947.
According to the testimony of joint Manager Joseph Benedict, the purpose of the joint management, which was called, "Joint Emergency Operation", was to economize in
overhead expenses; that by means of said joint operation, both companies had been able to save the salaries of one manager, one assistant manager, fifteen inspectors, special
agents, and one set of office of clerical force, the savings in one year amounting to about P200,000 or about P100,000 for each company. At the end of each calendar year, all gross
receipts and expenses of both companies were determined and the net profits were divided fifty-fifty, and transferred to the book of accounts of each company, and each company
"then prepared its own income tax return from this fifty per centum of the gross receipts and expenditures, assets and liabilities thus transferred to it from the `Joint Emergency
Operation' and paid the corresponding income taxes thereon separately".
Under the theory that the two companies had pooled their resources in the establishment of the Joint Emergency Operation, thereby forming a joint venture, the Collector wrote the
bus companies that there was due from them the amount of P422,210.89 as deficiency income tax and compromise for the years 1946 to 1949, inclusive. Since the Collector
caused to be restrained, seized, and advertized for sale all the rolling stock of the two corporations, respondent companies had to file a surety bond in the same amount of
P422,210.89 to guarantee the payment of the income tax assessed by him.
After some exchange of communications between the parties, the Collector, on January 8, 1955, informed the respondents "that after crediting the overpayment made by them of
their alleged income tax liabilities for the aforesaid years, pursuant to the doctrine of equitable recoupment, the income tax due from the `Joint Emergency Operation' for the years
1946 to 1949, inclusive, is in the total amount of P54,143.54." The respondent companies appealed from said assessment of P54,143.54 to the Court of Tax Appeals, but before
filing his answer, the Collector set aside his original assessment of P54,143.54 and reassessed the alleged income tax liability of respondents of P148,890.14, claiming that he had

later discovered that said companies had been "erroneously credited in the last assessment with 100 per cent of their income taxes paid when they should in fact have been credited
with only 75 per cent thereof, since under Section 24 of the Tax Code dividends received by them from the Joint Operation as a domestic corporation are returnable to the extent of
25 per cent". That corrected and increased reassessment was embodied in the answer filed by the Collector with the Court of Tax Appeals.
The theory of the Collector is the Joint Emergency Operation was a corporation distinct from the two respondent companies, as defined in section 84 (b), and so liable to income
tax under section 24, both of the National Internal Revenue Code. After hearing, the C.T.A. found and held, citing authorities, that the Joint Emergency Operation or joint
management of the two companies "is not a corporation within the contemplation of section 84 (b) of the National Internal Revenue Code much less a partnership, association or
insurance company", and therefore was not subject to the income tax under the provisions of section 24 of the same Code, separately and independently of respondent companies;
so, it reversed the decision of the Collector assessing and demanding from the two companies the payment of the amount of P54,143.54 and/or the amount of P148,890.14. The Tax
Court did not pass upon the question of whether or not in the appeal taken to it by respondent companies, the Collector could change his original assessment by increasing the same
from P54,143.14 to P148,890.14, to correct an error committed by him in having credited the Joint Emergency Operation, totally or 100 per cent of the income taxes paid by the
respondent companies for the years 1946 to 1949, inclusive, by reason of the principle of equitable recoupment, instead of only 75 per cent.
The two main and most important questions involved in the present appeal are: (1) whether the two transportation companies herein involved are liable to the payment of income
tax as a corporation on the theory that the Joint Emergency Operation organized and operated by them is a corporation within the meaning of Section 84 of the Revised Internal
Revenue Code, and (2) whether the Collector of Internal Revenue, after the appeal from his decision has been perfected, and after the Court of Tax Appeals has acquired
jurisdiction over the same, but before said Collector has filed his answer with that court, may still modify his assessment subject of the appeal by increasing the same, on the
ground that he had committed error in good faith in making said appealed assessment.
The first question has already been passed upon and determined by this Tribunal in the case of Eufemia Evangelista et al., vs. Collector of Internal Revenue et al.,* G.R. No. L9996, promulgated on October 15, 1957. Considering the views and rulings embodied in our decision in that case penned by Mr. Justice Roberto Concepcion, we deem it
unnecessary to extensively discuss the point. Briefly, the facts in that case are as follows: The three Evangelista sisters borrowed from their father about P59,000 and adding thereto
their own personal funds, bought real properties, such as a lot with improvements for the sum of P100,000 in 1943, parcels of land with a total area of almost P4,000 square meters
with improvements thereon for P18,000 in 1944, another lot for P108,000 in the same year, and still another lot for P237,000 in the same year. The relatively large amounts
invested may be explained by the fact that purchases were made during the Japanese occupation, apparently in Japanese military notes. In 1945, the sisters appointed their brother
to manage their properties, with full power to lease, to collect and receive rents, on default of such payment, to bring suits against the defaulting tenants, to sign all letters and
contracts, etc. The properties therein involved were rented to various tenants, and the sisters, through their brother as manager, realized a net rental income of P5,948 in 1945,
P7,498 in 1946, and P12,615 in 1948.
In 1954, the Collector of Internal Revenue demanded of them among other things, payment of income tax on corporations from the year 1945 to 1949, in the total amount of
P6,157, including surcharge and compromise. Dissatisfied with the said assessment, the three sisters appealed to the Court of Tax Appeals, which court decided in favor of the
Collector of Internal Revenue. On appeal to us, we affirmed the decision of the Tax Court. We found and held that considering all the facts and circumstances sorrounding the case,
the three sisters had the purpose to engage in real estate transactions for monetary gain and then divide the same among themselves; that they contributed to a common fund which
they invested in a series of transactions; that the properties bought with this common fund had been under the management of one person with full power to lease, to collect rents,
issue receipts, bring suits, sign letters and contracts, etc., in such a manner that the affairs relative to said properties have been handled as if the same belonged to a corporation or
business enterprise operated for profit; and that the said sisters had the intention to constitute a partnership within the meaning of the tax law. Said sisters in their appeal insisted
that they were mere co-owners, not co-partners, for the reason that their acts did not create a personality independent of them, and that some of the characteristics of partnerships
were absent, but we held that when the Tax Code includes "partnerships" among the entities subject to the tax on corporations, it must refer to organizations which are not
necessarily partnerships in the technical sense of the term, and that furthermore, said law defined the term "corporation" as including partnerships no matter how created or
organized, thereby indicating that "a joint venture need not be undertaken in any of the standard forms, or in conformity with the usual requirements of the law on partnerships, in
order that one could be deemed constituted for purposes of the tax on corporations"; that besides, said section 84 (b) provides that the term "corporation" includes "joint accounts"
(cuentas en participacion) and "associations", none of which has a legal personality independent of that of its members. The decision cites 7A Merten's Law of Federal Income
Taxation.
In the present case, the two companies contributed money to a common fund to pay the sole general manager, the accounts and office personnel attached to the office of said
manager, as well as for the maintenance and operation of a common maintenance and repair shop. Said common fund was also used to buy spare parts, and equipment for both
companies, including tires. Said common fund was also used to pay all the salaries of the personnel of both companies, such as drivers, conductors, helpers and mechanics, and at
the end of each year, the gross income or receipts of both companies were merged, and after deducting therefrom the gross expenses of the two companies, also merged, the net

income was determined and divided equally between them, wholly and utterly disregarding the expenses incurred in the maintenance and operation of each company and of the
individual income of said companies.
From the standpoint of the income tax law, this procedure and practice of determining the net income of each company was arbitrary and unwarranted, disregarding as it did the
real facts in the case. There can be no question that the receipts and gross expenses of two, distinct and separate companies operating different lines and in some cases, different
territories, and different equipment and personnel at least in value and in the amount of salaries, can at the end of each year be equal or even approach equality. Those familiar with
the operation of the business of land transportation can readily see that there are many factors that enter into said operation. Much depends upon the number of lines operated and
the length of each line, including the number of trips made each day. Some lines are profitable, others break above even, while still others are operated at a loss, at least for a time,
depending, of course, upon the volume of traffic, both passenger and freight. In some lines, the operator may enjoy a more or less exclusive exclusive operation, while in others,
the competition is intense, sometimes even what they call "cutthroat competition". Sometimes, the operator is involved in litigation, not only as the result of money claims based on
physical injuries ar deaths occassioned by accidents or collisions, but litigations before the Public Service Commission, initiated by the operator itself to acquire new lines or
additional service and equipment on the lines already existing, or litigations forced upon said operator by its competitors. Said litigation causes expense to the operator. At other
times, operator is denounced by competitors before the Public Service Commission for violation of its franchise or franchises, for making unauthorized trips, for temporary
abandonement of said lines or of scheduled trips, etc. In view of this, and considering that the Batangas Transportation and the Laguna Bus operated different lines, sometimes in
different provinces or territories, under different franchises, with different equipment and personnel, it cannot possibly be true and correct to say that the end of each year, the gross
receipts and income in the gross expenses of two companies are exactly the same for purposes of the payment of income tax. What was actually done in this case was that, although
no legal personality may have been created by the Joint Emergency Operation, nevertheless, said Joint Emergency Operation joint venture, or joint management operated the
business affairs of the two companies as though they constituted a single entity, company or partnership, thereby obtaining substantial economy and profits in the operation.
For the foregoing reasons, and in the light of our ruling in the Evangelista vs. Collector of Internal Revenue case,supra, we believe and hold that the Joint Emergency Operation or
sole management or joint venture in this case falls under the provisions of section 84 (b) of the Internal Revenue Code, and consequently, it is liable to income tax provided for in
section 24 of the same code.
The second important question to determine is whether or not the Collector of Internal Revenue, after appeal from his decision to the Court of Tax Appeals has been perfected, and
after the Tax Court Appeals has acquired jurisdiction over the appeal, but before the Collector has filed his answer with the court, may still modify his assessment, subject of the
appeal, by increasing the same. This legal point, interesting and vital to the interests of both the Government and the taxpayer, provoked considerable discussion among the
members of this Tribunal, a minority of which the writer of this opinion forms part, maintaining that for the information and guidance of the taxpayer, there should be a definite
and final assessment on which he can base his decision whether or not to appeal; that when the assessment is appealed by the taxpayer to the Court of Tax Appeals, the collector
loses control and jurisdiction over the same, the jurisdiction being transferred automatically to the Tax Court, which has exclusive appellate jurisdiction over the same; that the
jurisdiction of the Tax Court is not revisory but only appellate, and therefore, it can act only upon the amount of assessment subject of the appeal to determine whether it is valid
and correct from the standpoint of the taxpayer-appellant; that the Tax Court may only correct errors committed by the Collector against the taxpayer, but not those committed in
his favor, unless the Government itself is also an appellant; and that unless this be the rule, the Collector of Internal Revenue and his agents may not exercise due care, prudence
and pay too much attention in making tax assessments, knowing that they can at any time correct any error committed by them even when due to negligence, carelessness or gross
mistake in the interpretation or application of the tax law, by increasing the assessment, naturally to the prejudice of the taxpayer who would not know when his tax liability has
been completely and definitely met and complied with, this knowledge being necessary for the wise and proper conduct and operation of his business; and that lastly, while in the
United States of America, on appeal from the decision of the Commissioner of Internal Revenue to the Board or Court of Tax Appeals, the Commissioner may still amend or
modify his assessment, even increasing the same the law in that jurisdiction expressly authorizes the Board or Court of Tax Appeals toredetermine and revise the assessment
appealed to it.
The majority, however, holds, not without valid arguments and reasons, that the Government is not bound by the errors committed by its agents and tax collectors in making tax
assessments, specially when due to a misinterpretation or application of the tax laws, more so when done in good faith; that the tax laws provide for a prescriptive period within
which the tax collectors may make assessments and reassessments in order to collect all the taxes due to the Government, and that if the Collector of Internal Revenue is not
allowed to amend his assessment before the Court of Tax Appeals, and since he may make a subsequent reassessment to collect additional sums within the same subject of his
original assessment, provided it is done within the prescriptive period, that would lead to multiplicity of suits which the law does not encourage; that since the Collector of Internal
Revenue, in modifying his assessment, may not only increase the same, but may also reduce it, if he finds that he has committed an error against the taxpayer, and may even make
refunds of amounts erroneously and illegally collected, the taxpayer is not prejudiced; that the hearing before the Court of Tax Appeals partakes of a trial de novo and the Tax Court
is authorized to receive evidence, summon witnesses, and give both parties, the Government and the taxpayer, opportunity to present and argue their sides, so that the true and
correct amount of the tax to be collected, may be determined and decided, whether resulting in the increase or reduction of the assessment appealed to it. The result is that the

ruling and doctrine now being laid by this Court is, that pending appeal before the Court of Tax Appeals, the Collector of Internal Revenue may still amend his appealed
assessment, as he has done in the present case.
There is a third question raised in the appeal before the Tax Court and before this Tribunal, namely, the liability of the two respondent transportation companies for 25 per cent
surcharge due to their failure to file an income tax return for the Joint Emergency Operation, which we hold to be a corporation within the meaning of the Tax Code. We understand
that said 25 per cent surcharge is included in the assessment of P148,890.14. The surcharge is being imposed by the Collector under the provisions of Section 72 of the Tax Code,
which read as follows:
The Collector of Internal Revenue shall assess all income taxes. In case of willful neglect to file the return or list within the time prescribed by law, or in case a false or
fraudulent return or list is willfully made the collector of internal revenue shall add to the tax or to the deficiency tax, in case any payment has been made on the basis of
such return before the discovery of the falsity or fraud, a surcharge of fifty per centum of the amount of such tax or deficiency tax. In case of any failure to make and file a
return list within the time prescribed by law or by the Collector or other internal revenue officer, not due to willful neglect, the Collector, shall add to the tax twenty-five
per centum of its amount, except that, when the return is voluntarily and without notice from the Collector or other officer filed after such time, it is shown that the failure
was due to a reasonable cause, no such addition shall be made to the tax. The amount so added to any tax shall be collected at the same time in the same manner and as
part of the tax unless the tax has been paid before the discovery of the neglect, falsity, or fraud, in which case the amount so added shall be collected in the same manner
as the tax.
We are satisfied that the failure to file an income tax return for the Joint Emergency Operation was due to a reasonable cause, the honest belief of respondent companies that there
was no such corporation within the meaning of the Tax Code, and that their separate income tax return was sufficient compliance with the law. That this belief was not entirely
without foundation and that it was entertained in good faith, is shown by the fact that the Court of Tax Appeals itself subscribed to the idea that the Joint Emergency Operation was
not a corporation, and so sustained the contention of respondents. Furthermore, there are authorities to the effect that belief in good faith, on advice of reputable tax accountants
and attorneys, that a corporation was not a personal holding company taxable as such constitutes "reasonable cause" for failure to file holding company surtax returns, and that in
such a case, the imposition of penalties for failure to file holding company surtax returns, and that in such a case, the imposition of penalties for failure to file return is not
warranted1
In view of the foregoing, and with the reversal of the appealed decision of the Court of Tax Appeals, judgment is hereby rendered, holding that the Joint Emergency Operation
involved in the present is a corporation within the meaning of section 84 (b) of the Internal Revenue Code, and so is liable to incom tax under section 24 of the code; that pending
appeal in the Court of Tax Appeals of an assessment made by the Collector of Internal Revenue, the Collector, pending hearing before said court, may amend his appealed
assessment and include the amendment in his answer before the court, and the latter may on the basis of the evidence presented before it, redetermine the assessment; that where
the failure to file an income tax return for and in behalf of an entity which is later found to be a corporation within the meaning of section 84 (b) of the Tax Code was due to a
reasonable cause, such as an honest belief based on the advice of its attorneys and accountants, a penalty in the form of a surcharge should not be imposed and collected. The
respondents are therefore ordered to pay the amount of the reassessment made by the Collector of Internal Revenue before the Tax Court, minus the amount of 25 per cent
surcharge. No costs.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-9996

October 15, 1957

EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and FRANCISCA EVANGELISTA, petitioners,

vs.
THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.
Santiago F. Alidio and Angel S. Dakila, Jr., for petitioner.
Office of the Solicitor General Ambrosio Padilla, Assistant Solicitor General Esmeraldo Umali and Solicitor Felicisimo R. Rosete for Respondents.
CONCEPCION, J.:
This is a petition filed by Eufemia Evangelista, Manuela Evangelista and Francisca Evangelista, for review of a decision of the Court of Tax Appeals, the dispositive part of which
reads:
FOR ALL THE FOREGOING, we hold that the petitioners are liable for the income tax, real estate dealer's tax and the residence tax for the years 1945 to 1949, inclusive,
in accordance with the respondent's assessment for the same in the total amount of P6,878.34, which is hereby affirmed and the petition for review filed by petitioner is
hereby dismissed with costs against petitioners.
It appears from the stipulation submitted by the parties:
1. That the petitioners borrowed from their father the sum of P59,1400.00 which amount together with their personal monies was used by them for the purpose of buying
real properties,.
2. That on February 2, 1943, they bought from Mrs. Josefina Florentino a lot with an area of 3,713.40 sq. m. including improvements thereon from the sum of
P100,000.00; this property has an assessed value of P57,517.00 as of 1948;
3. That on April 3, 1944 they purchased from Mrs. Josefa Oppus 21 parcels of land with an aggregate area of 3,718.40 sq. m. including improvements thereon for
P130,000.00; this property has an assessed value of P82,255.00 as of 1948;
4. That on April 28, 1944 they purchased from the Insular Investments Inc., a lot of 4,353 sq. m. including improvements thereon for P108,825.00. This property has an
assessed value of P4,983.00 as of 1948;
5. That on April 28, 1944 they bought form Mrs. Valentina Afable a lot of 8,371 sq. m. including improvements thereon for P237,234.34. This property has an assessed
value of P59,140.00 as of 1948;

6. That in a document dated August 16, 1945, they appointed their brother Simeon Evangelista to 'manage their properties with full power to lease; to collect and receive
rents; to issue receipts therefor; in default of such payment, to bring suits against the defaulting tenants; to sign all letters, contracts, etc., for and in their behalf, and to
endorse and deposit all notes and checks for them;
7. That after having bought the above-mentioned real properties the petitioners had the same rented or leases to various tenants;
8. That from the month of March, 1945 up to an including December, 1945, the total amount collected as rents on their real properties was P9,599.00 while the expenses
amounted to P3,650.00 thereby leaving them a net rental income of P5,948.33;
9. That on 1946, they realized a gross rental income of in the sum of P24,786.30, out of which amount was deducted in the sum of P16,288.27 for expenses thereby
leaving them a net rental income of P7,498.13;
10. That in 1948, they realized a gross rental income of P17,453.00 out of the which amount was deducted the sum of P4,837.65 as expenses, thereby leaving them a net
rental income of P12,615.35.
It further appears that on September 24, 1954 respondent Collector of Internal Revenue demanded the payment of income tax on corporations, real estate dealer's fixed tax and
corporation residence tax for the years 1945-1949, computed, according to assessment made by said officer, as follows:
INCOME TAXES
1945

14.84

1946

1,144.71

1947

10.34

1948

1,912.30

1949

1,575.90

Total including surcharge and

compromise

P6,157.09

REAL ESTATE DEALER'S FIXED TAX

1946

P37.50

1947

150.00

1948

150.00

1949

150.00

Total including penalty

P527.00

RESIDENCE TAXES OF CORPORATION

1945

P38.75

1946

38.75

1947

38.75

1948

38.75

1949

38.75

Total including surcharge

P193.75

TOTAL TAXES DUE

P6,878.34
.

Said letter of demand and corresponding assessments were delivered to petitioners on December 3, 1954, whereupon they instituted the present case in the Court of Tax Appeals,
with a prayer that "the decision of the respondent contained in his letter of demand dated September 24, 1954" be reversed, and that they be absolved from the payment of the taxes
in question, with costs against the respondent.
After appropriate proceedings, the Court of Tax Appeals the above-mentioned decision for the respondent, and a petition for reconsideration and new trial having been
subsequently denied, the case is now before Us for review at the instance of the petitioners.
The issue in this case whether petitioners are subject to the tax on corporations provided for in section 24 of Commonwealth Act. No. 466, otherwise known as the National
Internal Revenue Code, as well as to the residence tax for corporations and the real estate dealers fixed tax. With respect to the tax on corporations, the issue hinges on the meaning
of the terms "corporation" and "partnership," as used in section 24 and 84 of said Code, the pertinent parts of which read:
SEC. 24. Rate of tax on corporations.There shall be levied, assessed, collected, and paid annually upon the total net income received in the preceding 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-partnerships (compaias colectivas), a tax upon such income equal to the sum of the following: . . .
SEC. 84 (b). The term 'corporation' includes partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion),
associations or insurance companies, but does not include duly registered general copartnerships. (compaias colectivas).
Article 1767 of the Civil Code of the Philippines provides:
By the contract of partnership two or more persons bind themselves to contribute money, properly, or industry to a common fund, with the intention of dividing the profits
among themselves.
Pursuant to the article, the essential elements of a partnership are two, namely: (a) an agreement to contribute money, property or industry to a common fund; and (b) intent to
divide the profits among the contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly, petitioners have agreed to, and did, contribute money
and property to a common fund. Hence, the issue narrows down to their intent in acting as they did. Upon consideration of all the facts and circumstances surrounding the case, we
are fully satisfied that their purpose was to engage in real estate transactions for monetary gain and then divide the same among themselves, because:
1. Said common fund was not something they found already in existence. It was not property inherited by them pro indiviso. They created it purposely. What is more
they jointly borrowed a substantial portion thereof in order to establish said common fund.
2. They invested the same, not merely not merely in one transaction, but in a series of transactions. On February 2, 1943, they bought a lot for P100,000.00. On April 3,
1944, they purchased 21 lots for P18,000.00. This was soon followed on April 23, 1944, by the acquisition of another real estate for P108,825.00. Five (5) days later
(April 28, 1944), they got a fourth lot for P237,234.14. The number of lots (24) acquired and transactions undertaken, as well as the brief interregnum between each,
particularly the last three purchases, is strongly indicative of a pattern or common design that was not limited to the conservation and preservation of the aforementioned

common fund or even of the property acquired by the petitioners in February, 1943. In other words, one cannot but perceive a character of habitually peculiar to business
transactions engaged in the purpose of gain.
3. The aforesaid lots were not devoted to residential purposes, or to other personal uses, of petitioners herein. The properties were leased separately to several persons,
who, from 1945 to 1948 inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for petitioners do not even suggest that
there has been any change in the utilization thereof.
4. Since August, 1945, the properties have been under the management of one person, namely Simeon Evangelista, with full power to lease, to collect rents, to issue
receipts, to bring suits, to sign letters and contracts, and to indorse and deposit notes and checks. Thus, the affairs relative to said properties have been handled as if the
same belonged to a corporation or business and enterprise operated for profit.
5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen (15) years, since the first property was acquired, and over twelve (12)
years, since Simeon Evangelista became the manager.
6. Petitioners have not testified or introduced any evidence, either on their purpose in creating the set up already adverted to, or on the causes for its continued existence.
They did not even try to offer an explanation therefor.
Although, taken singly, they might not suffice to establish the intent necessary to constitute a partnership, the collective effect of these circumstances is such as to leave no room
for doubt on the existence of said intent in petitioners herein. Only one or two of the aforementioned circumstances were present in the cases cited by petitioners herein, and,
hence, those cases are not in point.
Petitioners insist, however, that they are mere co-owners, not copartners, for, in consequence of the acts performed by them, a legal entity, with a personality independent of that of
its members, did not come into existence, and some of the characteristics of partnerships are lacking in the case at bar. This pretense was correctly rejected by the Court of Tax
Appeals.
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 conformity with the usual requirements of
the law on partnerships, in order that one could be deemed constituted for purposes of the tax on corporations. Again, pursuant to said section 84(b), the term "corporation"
includes, among other, joint accounts, (cuentas en participation)" 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 copartnerships" 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" It may not be amiss to add that petitioners' allegation to the effect that their liability in connection with the leasing of the lots above referred to, under the
management of one person even if true, on which we express no opinion tends to increase the similarity between the nature of their venture and that corporations, and is,
therefore, an additional argument in favor of the imposition of said tax on corporations.
Under the Internal Revenue Laws of the United States, "corporations" are taxed differently from "partnerships". By specific provisions of said laws, such "corporations" include
"associations, joint-stock companies and insurance companies." However, the term "association" is not used in the aforementioned laws.
. . . in any narrow or technical sense. It includes any organization, created for the transaction of designed affairs, or the attainment of some object, which like a
corporation, continues notwithstanding that its members or participants change, and the affairs of which, like corporate affairs, are conducted by a single individual, a
committee, a board, or some other group, acting in a representative capacity. It is immaterial whether such organization is created by an agreement, a declaration of trust, a
statute, or otherwise. It includes a voluntary association, a joint-stock corporation or company, a 'business' trusts a 'Massachusetts' trust, a 'common law' trust, and
'investment' trust (whether of the fixed or the management type), an interinsuarance exchange operating through an attorney in fact, a partnership association, and any
other type of organization (by whatever name known) which is not, within the meaning of the Code, a trust or an estate, or a partnership. (7A Mertens Law of Federal
Income Taxation, p. 788; emphasis supplied.).
Similarly, the American Law.

. . . provides its own concept of a partnership, under the term 'partnership 'it includes not only a partnership as known at common law but, as well, a syndicate, group,
pool, joint venture or other unincorporated organizations 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 supplied.)
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 supplied.) .
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.
As regards the residence of tax for corporations, section 2 of Commonwealth Act No. 465 provides in part:
Entities liable to residence tax.-Every corporation, no matter how created or organized, whether domestic or resident foreign, engaged in or doing business in the
Philippines shall pay an annual residence tax of five pesos and an annual additional tax which in no case, shall exceed one thousand pesos, in accordance with the
following schedule: . . .
The term 'corporation' as used in this Act includes joint-stock company, partnership, joint account (cuentas en participacion), association or insurance company, no
matter how created or organized. (emphasis supplied.)
Considering that the pertinent part of this provision is analogous to that of section 24 and 84 (b) of our National Internal Revenue Code (commonwealth Act No. 466), and that the
latter was approved on June 15, 1939, the day immediately after the approval of said Commonwealth Act No. 465 (June 14, 1939), it is apparent that the terms "corporation" and
"partnership" are used in both statutes with substantially the same meaning. Consequently, petitioners are subject, also, to the residence tax for corporations.
Lastly, the records show that petitioners have habitually engaged in leasing the properties above mentioned for a period of over twelve years, and that the yearly gross rentals of
said properties from June 1945 to 1948 ranged from P9,599 to P17,453. Thus, they are subject to the tax provided in section 193 (q) of our National Internal Revenue Code, for
"real estate dealers," inasmuch as, pursuant to section 194 (s) thereof:
'Real estate dealer' includes any person engaged in the business of buying, selling, exchanging, leasing, or renting property or his own account as principal and holding
himself out as a full or part time dealer in real estate or as an owner of rental property or properties rented or offered to rent for an aggregate amount of three thousand
pesos or more a year. . . (emphasis supplied.)
Wherefore, the appealed decision of the Court of Tax appeals is hereby affirmed with costs against the petitioners herein. It is so ordered.
Bengzon, Paras, C.J., Padilla, Reyes, A., Reyes, J.B.L., Endencia and Felix, JJ., concur.

BAUTISTA ANGELO, J., concurring:

I agree with the opinion that petitioners have actually contributed money to a common fund with express purpose of engaging in real estate business for profit. The series of
transactions which they had undertaken attest to this. This appears in the following portion of the decision:
2. They invested the same, not merely in one transaction, but in a series of transactions. On February 2, 1943, they bought a lot for P100,000. On April 3, 1944, they
purchase 21 lots for P18,000. This was soon followed on April 23, 1944, by the acquisition of another real state for P108,825. Five (5) days later (April 28, 1944), they got
a fourth lot for P237,234.14. The number of lots (24) acquired and transactions undertaken, as well as the brief interregnum between each, particularly the last three
purchases, is strongly indicative of a pattern or common design that was not limited to the conservation and preservation of the aforementioned common fund or even of
the property acquired by the petitioner in February, 1943, In other words, we cannot but perceive a character of habitually peculiar to business transactions engaged in for
purposes of gain.
I wish however to make to make the following observation:
Article 1769 of the new Civil Code lays down the rule for determining when a transaction should be deemed a partnership or a co-ownership. Said article paragraphs 2 and 3,
provides:

(2) Co-ownership or co-possession does not of itself establish a partnership, whether such co-owners or co-possessors do or do not share any profits made by the use of
the property;
(3) The sharing of gross returns does not of itself establish partnership, whether or not the person sharing them have a joint or common right or interest in any property
from which the returns are derived;
From the above it appears that the fact that those who agree to form a co-ownership shared or do not share any profits made by the use of property held in common does not
convert their venture into a partnership. Or the sharing of the gross returns does not of itself establish a partnership whether or not the persons sharing therein have a joint or
common right or interest in the property. This only means that, aside from the circumstance of profit, the presence of other elements constituting partnership is necessary, such as
the clear intent to form a partnership, the existence of a judicial personality different from that of the individual partners, and the freedom to transfer or assign any interest in the
property by one with the consent of the others (Padilla, Civil Code of the Philippines Annotated, Vol. I, 1953 ed., pp. 635- 636).
It is evident that an isolated transaction whereby two or more persons contribute funds to buy certain real estate for profit in the absence of other circumstances showing a contrary
intention cannot be considered a partnership.
Persons who contribute property or funds for a common enterprise and agree to share the gross returns of that enterprise in proportion to their contribution, but who
severally retain the title to their respective contribution, are not thereby rendered partners. They have no common stock or capital, and no community of interest as
principal proprietors in the business itself which the proceeds derived. (Elements of the law of Partnership by Floyd R. Mechem, 2n Ed., section 83, p. 74.)
A joint venture purchase of land, by two, does not constitute a copartnership in respect thereto; nor does not agreement to share the profits and loses on the sale of land
create a partnership; the parties are only tenants in common. (Clark vs. Sideway, 142 U.S. 682, 12 S Ct. 327, 35 L. Ed., 1157.)
Where plaintiff, his brother, and another agreed to become owners of a single tract of reality, holding as tenants in common, and to divide the profits of disposing of it, the
brother and the other not being entitled to share in plaintiff's commissions, no partnership existed as between the parties, whatever relation may have been as to third
parties. (Magee vs. Magee, 123 N. E. 6763, 233 Mass. 341.)
In order to constitute a partnership inter sese there must be: (a) An intent to form the same; (b) generally a participating in both profits and losses; (c) and such a
community of interest, as far as third persons are concerned as enables each party to make contract, manage the business, and dispose of the whole property. (Municipal
Paving Co. vs Herring, 150 P. 1067, 50 Ill. 470.)
The common ownership of property does not itself create a partnership between the owners, though they may use it for purpose of making gains; and they may, without
becoming partners, agree among themselves as to the management and use of such property and the application of the proceeds therefrom. (Spurlock vs. Wilson, 142 S.
W. 363, 160 No. App. 14.)
This is impliedly recognized in the following portion of the decision: "Although, taken singly, they might not suffice to establish the intent necessary to constitute a partnership, the
collective effect of these circumstances (referring to the series of transactions) such as to leave no room for doubt on the existence of said intent in petitioners herein."

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-65773-74 April 30, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX APPEALS, respondents.
Quasha, Asperilla, Ancheta, Pea, Valmonte & Marcos for respondent British Airways.
MELENCIO-HERRERA, J.:
Petitioner Commissioner of Internal Revenue (CIR) seeks a review on certiorari of the joint Decision of the Court of Tax Appeals (CTA) in CTA Cases Nos. 2373 and 2561, dated
26 January 1983, which set aside petitioner's assessment of deficiency income taxes against respondent British Overseas Airways Corporation (BOAC) for the fiscal years 1959 to
1967, 1968-69 to 1970-71, respectively, as well as its Resolution of 18 November, 1983 denying reconsideration.
BOAC is a 100% British Government-owned corporation organized and existing under the laws of the United Kingdom It is engaged in the international airline business and is a
member-signatory of the Interline Air Transport Association (IATA). As such it operates air transportation service and sells transportation tickets over the routes of the other airline
members. During the periods covered by the disputed assessments, it is admitted that BOAC had no landing rights for traffic purposes in the Philippines, and was not granted a
Certificate of public convenience and necessity to operate in the Philippines by the Civil Aeronautics Board (CAB), except for a nine-month period, partly in 1961 and partly in
1962, when it was granted a temporary landing permit by the CAB. Consequently, it did not carry passengers and/or cargo to or from the Philippines, although during the period
covered by the assessments, it maintained a general sales agent in the Philippines Wamer Barnes and Company, Ltd., and later Qantas Airways which was responsible for
selling BOAC tickets covering passengers and cargoes. 1
G.R. No. 65773 (CTA Case No. 2373, the First Case)
On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity) assessed BOAC the aggregate amount of P2,498,358.56 for deficiency income taxes covering the
years 1959 to 1963. This was protested by BOAC. Subsequent investigation resulted in the issuance of a new assessment, dated 16 January 1970 for the years 1959 to 1967 in the
amount of P858,307.79. BOAC paid this new assessment under protest.
On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79, which claim was denied by the CIR on 16 February 1972. But before said denial, BOAC had
already filed a petition for review with the Tax Court on 27 January 1972, assailing the assessment and praying for the refund of the amount paid.
G.R. No. 65774 (CTA Case No. 2561, the Second Case)
On 17 November 1971, BOAC was assessed deficiency income taxes, interests, and penalty for the fiscal years 1968-1969 to 1970-1971 in the aggregate amount of P549,327.43,
and the additional amounts of P1,000.00 and P1,800.00 as compromise penalties for violation of Section 46 (requiring the filing of corporation returns) penalized under Section 74
of the National Internal Revenue Code (NIRC).
On 25 November 1971, BOAC requested that the assessment be countermanded and set aside. In a letter, dated 16 February 1972, however, the CIR not only denied the BOAC
request for refund in the First Case but also re-issued in the Second Case the deficiency income tax assessment for P534,132.08 for the years 1969 to 1970-71 plus P1,000.00 as
compromise penalty under Section 74 of the Tax Code. BOAC's request for reconsideration was denied by the CIR on 24 August 1973. This prompted BOAC to file the Second
Case before the Tax Court praying that it be absolved of liability for deficiency income tax for the years 1969 to 1971.
This case was subsequently tried jointly with the First Case.

On 26 January 1983, the Tax Court rendered the assailed joint Decision reversing the CIR. The Tax Court held that the proceeds of sales of BOAC passage tickets in the
Philippines by Warner Barnes and Company, Ltd., and later by Qantas Airways, during the period in question, do not constitute BOAC income from Philippine sources "since no
service of carriage of passengers or freight was performed by BOAC within the Philippines" and, therefore, said income is not subject to Philippine income tax. The CTA position
was that income from transportation is income from services so that the place where services are rendered determines the source. Thus, in the dispositive portion of its Decision,
the Tax Court ordered petitioner to credit BOAC with the sum of P858,307.79, and to cancel the deficiency income tax assessments against BOAC in the amount of P534,132.08
for the fiscal years 1968-69 to 1970-71.
Hence, this Petition for Review on certiorari of the Decision of the Tax Court.
The Solicitor General, in representation of the CIR, has aptly defined the issues, thus:
1. Whether or not the revenue derived by private respondent British Overseas Airways Corporation (BOAC) from sales of tickets in the Philippines for air
transportation, while having no landing rights here, constitute income of BOAC from Philippine sources, and, accordingly, taxable.
2. Whether or not during the fiscal years in question BOAC s a resident foreign corporation doing business in the Philippines or has an office or place of business
in the Philippines.
3. In the alternative that private respondent may not be considered a resident foreign corporation but a non-resident foreign corporation, then it is liable to
Philippine income tax at the rate of thirty-five per cent (35%) of its gross income received from all sources within the Philippines.
Under Section 20 of the 1977 Tax Code:
(h) the term resident foreign corporation engaged in trade or business within the Philippines or having an office or place of business therein.
(i) The term "non-resident foreign corporation" applies to a foreign corporation not engaged in trade or business within the Philippines and not having any office
or place of business therein
It is our considered opinion that BOAC is a resident foreign corporation. There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business.
Each case must be judged in the light of its peculiar environmental circumstances. The term implies a continuity of commercial dealings and arrangements, and contemplates, to
that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of commercial gain or for the purpose
and object of the business organization. 2 "In order that a foreign corporation may be regarded as doing business within a State, there must be continuity of conduct and intention to
establish a continuous business, such as the appointment of a local agent, and not one of a temporary character. 3
BOAC, during the periods covered by the subject - assessments, maintained a general sales agent in the Philippines, That general sales agent, from 1959 to 1971, "was engaged in
(1) selling and issuing tickets; (2) breaking down the whole trip into series of trips each trip in the series corresponding to a different airline company; (3) receiving the fare
from the whole trip; and (4) consequently allocating to the various airline companies on the basis of their participation in the services rendered through the mode of interline
settlement as prescribed by Article VI of the Resolution No. 850 of the IATA Agreement." 4 Those activities were in exercise of the functions which are normally incident to, and
are in progressive pursuit of, the purpose and object of its organization as an international air carrier. In fact, the regular sale of tickets, its main activity, is the very lifeblood of the
airline business, the generation of sales being the paramount objective. There should be no doubt then that BOAC was "engaged in" business in the Philippines through a local
agent during the period covered by the assessments. Accordingly, it is a resident foreign corporation subject to tax upon its total net income received in the preceding taxable year
from all sources within the Philippines. 5
Sec. 24. Rates of tax on corporations. ...
(b) Tax on foreign corporations. ...
(2) Resident corporations. A corporation organized, authorized, or existing under the laws of any foreign country, except a foreign fife insurance company,
engaged in trade or business within the Philippines, shall be taxable as provided in subsection (a) of this section upon the total net income received in the
preceding taxable year from all sources within the Philippines. (Emphasis supplied)
Next, we address ourselves to the issue of whether or not the revenue from sales of tickets by BOAC in the Philippines constitutes income from Philippine sources and,
accordingly, taxable under our income tax laws.
The Tax Code defines "gross income" thus:

"Gross income" includes gains, profits, and income derived from salaries, wages or compensation for personal service of whatever kind and in whatever form
paid, or from profession, vocations, trades,business, commerce, sales, or dealings in property, whether real or personal, growing out of the ownership or use of or
interest in such property; also from interests, rents, dividends, securities, or the transactions of any business carried on for gain or profile, or gains, profits,
and income derived from any source whatever (Sec. 29[3]; Emphasis supplied)
The definition is broad and comprehensive to include proceeds from sales of transport documents. "The words 'income from any source whatever' disclose a legislative policy to
include all income not expressly exempted within the class of taxable income under our laws." Income means "cash received or its equivalent"; it is the amount of money coming
to a person within a specific time ...; it means something distinct from principal or capital. For, while capital is a fund, income is a flow. As used in our income tax law, "income"
refers to the flow of wealth. 6
The records show that the Philippine gross income of BOAC for the fiscal years 1968-69 to 1970-71 amounted to P10,428,368 .00. 7
Did such "flow of wealth" come from "sources within the Philippines",
The source of an income is the property, activity or service that produced the income. 8 For the source of income to be considered as coming from the Philippines, it is sufficient
that the income is derived from activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that produces the income. The tickets exchanged
hands here and payments for fares were also made here in Philippine currency. The site of the source of payments is the Philippines. The flow of wealth proceeded from, and
occurred within, Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth should share the
burden of supporting the government.
A transportation ticket is not a mere piece of paper. When issued by a common carrier, it constitutes the contract between the ticket-holder and the carrier. It gives rise to the
obligation of the purchaser of the ticket to pay the fare and the corresponding obligation of the carrier to transport the passenger upon the terms and conditions set forth thereon.
The ordinary ticket issued to members of the traveling public in general embraces within its terms all the elements to constitute it a valid contract, binding upon the parties entering
into the relationship. 9
True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources within the Philippines, namely: (1) interest, (21) dividends, (3) service, (4) rentals and
royalties, (5) sale of real property, and (6) sale of personal property, does not mention income from the sale of tickets for international transportation. However, that does not render
it less an income from sources within the Philippines. Section 37, by its language, does not intend the enumeration to be exclusive. It merely directs that the types of income listed
therein be treated as income from sources within the Philippines. A cursory reading of the section will show that it does not state that it is an all-inclusive enumeration, and that no
other kind of income may be so considered. " 10
BOAC, however, would impress upon this Court that income derived from transportation is income for services, with the result that the place where the services are rendered
determines the source; and since BOAC's service of transportation is performed outside the Philippines, the income derived is from sources without the Philippines and, therefore,
not taxable under our income tax laws. The Tax Court upholds that stand in the joint Decision under review.
The absence of flight operations to and from the Philippines is not determinative of the source of income or the site of income taxation. Admittedly, BOAC was an off-line
international airline at the time pertinent to this case. The test of taxability is the "source"; and the source of an income is that activity ... which produced the
income. 11Unquestionably, the passage documentations in these cases were sold in the Philippines and the revenue therefrom was derived from a activity regularly pursued within
the Philippines. business a And even if the BOAC tickets sold covered the "transport of passengers and cargo to and from foreign cities", 12it cannot alter the fact that income from
the sale of tickets was derived from the Philippines. The word "source" conveys one essential idea, that of origin, and the origin of the income herein is the Philippines. 13
It should be pointed out, however, that the assessments upheld herein apply only to the fiscal years covered by the questioned deficiency income tax assessments in these cases, or,
from 1959 to 1967, 1968-69 to 1970-71. For, pursuant to Presidential Decree No. 69, promulgated on 24 November, 1972, international carriers are now taxed as follows:
... Provided, however, That international carriers shall pay a tax of 2- per cent on their cross Philippine billings. (Sec. 24[b] [21, Tax Code).
Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory definition of the term "gross Philippine billings," thus:
... "Gross Philippine billings" includes gross revenue realized from uplifts anywhere in the world by any international carrier doing business in the Philippines of
passage documents sold therein, whether for passenger, excess baggage or mail provided the cargo or mail originates from the Philippines. ...
The foregoing provision ensures that international airlines are taxed on their income from Philippine sources. The 2- % tax on gross Philippine billings is an income tax. If it had
been intended as an excise or percentage tax it would have been place under Title V of the Tax Code covering Taxes on Business.

Lastly, we find as untenable the BOAC argument that the dismissal for lack of merit by this Court of the appeal inJAL vs. Commissioner of Internal Revenue (G.R. No. L-30041)
on February 3, 1969, is res judicata to the present case. The ruling by the Tax Court in that case was to the effect that the mere sale of tickets, unaccompanied by the physical act of
carriage of transportation, does not render the taxpayer therein subject to the common carrier's tax. As elucidated by the Tax Court, however, the common carrier's tax is an excise
tax, being a tax on the activity of transporting, conveying or removing passengers and cargo from one place to another. It purports to tax the business of transportation. 14 Being an
excise tax, the same can be levied by the State only when the acts, privileges or businesses are done or performed within the jurisdiction of the Philippines. The subject matter of
the case under consideration is income tax, a direct tax on the income of persons and other entities "of whatever kind and in whatever form derived from any source." Since the two
cases treat of a different subject matter, the decision in one cannot be res judicata to the other.
WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby SET ASIDE. Private respondent, the British Overseas Airways Corporation (BOAC), is hereby
ordered to pay the amount of P534,132.08 as deficiency income tax for the fiscal years 1968-69 to 1970-71 plus 5% surcharge, and 1% monthly interest from April 16, 1972 for a
period not to exceed three (3) years in accordance with the Tax Code. The BOAC claim for refund in the amount of P858,307.79 is hereby denied. Without costs.
SO ORDERED.