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CLASSIFICATION OF INCOME TAXPAYERS

G.R. No. L-22611 May 27, 1968


COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
VISAYAN ELECTRIC COMPANY and THE COURT OF TAX APPEALS,
respondents.
Office of the Solicitor General for petitioner.
Jesus P. Garcia for respondents.
SANCHEZ, J.:
The problems cast in legal setting in this petition for review 1 of the judgment
of the Court of Tax Appeals are:
Is Visayan Electric Company liable for deficiency income tax on dividends
from the stock investment of its employees' reserve fund for pensions?
Is it also liable for 25% surcharge on alleged late payment of franchise tax?
Respondent company is the holder of a legislative franchise, Act 3499 of the
Philippine Legislature, to operate and maintain an electric light, heat, and
power system in the City of Cebu, certain municipalities in the Province of
Cebu, and other surrounding places.
In a board of directors' meeting held on March 14, 1949, respondent
company established a pension fund, known as the "Employees' Reserve for
Pensions." Said fund is for the benefit of its "present and future" employees,
in the event of retirement, accident or disability. Every month thereafter an
amount has been set aside for this purpose. It is taken from the gross
operating receipts of the company. This reserve fund was later invested by
the company in stocks of San Miguel Brewery, Inc., for which dividends have
been regularly received. But these dividends were not declared for tax
purposes.
It was in a letter dated August 9, 1957 that the Auditor General gave notice
that as the company has retained full control of the fund, therefore, the
dividends are not tax exempt; but that such dividends may be excluded from
gross receipts for franchise tax purposes, provided the same are declared for
income tax purposes.
In pursuance of the above letter, the Provincial Auditor of Cebu allowed the
company the option to declare the dividends either as part of the company's
income for income tax purposes or as part of its income for franchise tax
purposes. The company elected the latter.2
The Revenue Examiner of Cebu, however, conducted a separate
investigation for the Bureau of Internal Revenue. His report dated September
17, 1959 likewise revealed that the "company itself is the custodian or has the
complete control of the fund." That report disagreed with the action of the
Provincial Auditor, instead considered the dividends as subject to corporate
income tax under Section 24 of the National Internal Revenue Code.
Said report further disclosed that: (a) during the years 1957, 1958 and 1959,
some payments of the franchise tax were made after fifteen days although
within twenty days of the month following the end of each calendar quarter,
allegedly contrary to Section 259 of the Tax Code, which imposes a 25%
surcharge if the franchise faxes "remain unpaid for fifteen days from and after
the date on which they must be paid"; and (b) from 1954 to 1959, the
company had not paid additional residence tax imposed by Section 2 of Act
465.
With the foregoing report as basis, the Commissioner of Internal Revenue, in
two letters of demand dated September 7 and 15, 1960, assessed the
following amounts against the company: (a) P2,443.30 representing
deficiency income tax for the years 1953 to 1958, plus interest and 50%
surcharge; (b) P3,850.00 as additional residence tax from 1954 to 1959; and
(c) P35,419.05 as 25% surcharge for late payment of franchise taxes for the
years 1957, 1958 and 1959. Reconsideration having been denied, the
company went to the Court of Tax Appeals on petition for review.
On January 31, 1964, the Court of Tax Appeals sustained the correctness of
the additional residence tax assessments3 but freed the company from liability
for deficiency income tax and the 25% surcharge for late payment of
franchise taxes.
It is now the turn of the Commissioner of Internal Revenue to appeal to this
Court.
1. Admittedly, the investment of the fund in shares of stocks of the San Miguel
Brewery, Inc. is not a part of respondent company's business. Neither is it
necessary or incidental to its operation under its franchise. And yet those
dividends were assessed by petitioner as part of the income of respondent
company. The tax court joins petitioner in this, but applied the following
provision in Section 8, Act 3499 the company's legislative franchise in
holding that the dividends are not subject to income tax, viz.:
SEC. 8. The grantee shall pay the same taxes as are now or may hereafter
be required by law from other persons, on its real estate, buildings, plant,
machinery, and other personal property, except property declared exempt in
this section. In consideration of the franchise and rights hereby granted, the
grantee shall pay into the municipal treasury of each municipality in which it is
supplying electricity to the public under this franchise, a tax equal to two per
centum of the gross earnings for electric current sold under this franchise in
each of the respective municipalities. Said percentage shall be due and
payable quarterly and shall be in lieu of all taxes of any kind levied,
established or collected by any authority whatsoever, now or in the future, on
its poles, wires, insulators, switches, transformers and other structures,
installations, conductors and accessories, placed in and over the public
streets, avenues, roads, thoroughfares, squares, bridges, and other places
and on its franchises, rights, privileges, receipts, revenues and profits, from
which taxes the grantee is hereby expressly exempted.4
We perceive incorrectness of this approach by the Tax Court. What is
envisioned in the statute granting exemption, so far as is pertinent to this
case, is the last underscored portion thereof which speaks of its receipts,
revenues and profits, "from which taxes the grantee is hereby expressly
exempted." The heavy accent is on the word its. Plain import of this word,
taken in context, is that the receipts, revenues and profits, which could be tax-
exempt under the statute, must be the company's not somebody else's. No
doubt this provision should not be broadened so as to include situations
which by fail intendment are excluded therefrom. To do so is to take too loose
a view of the statute.
The disputed income are not receipts, revenues or profits of the company.
They do not go to the general fund of the company. They are dividends from
the San Miguel Brewery, Inc. investment which form part of and are added to
the reserve pension fund which is solely for the benefit of the employees, 5 "to
be distributed among the employees." 6
Not escaping notice is that by the resolution of respondent company's board
and the setting aside of monthly amounts from its gross operating receipts for
that fund, said company was merely acting, with respect to such fund, as
trustee for its employees. For, indeed, the intention to establish a trust in favor
of the employees is clear. A valid express trust has thus been created. 7 And,
for tax purposes, the employees' reserve fund is a separate taxable entity.8
Respondent company then, while retaining legal title and custody 9 over the
property, holds it in trust for the beneficiaries mentioned in the resolution
creating the trust, in the absence of any condition therein which would, in
effect, destroy the intention to create a trust. 10
Given the fact that the dividends are returns of the trust estate and not of the
grantor company, we must say that petitioner misconceived the import of the
law when he assessed said dividends as part of the income of the company.
Similarly, the tax court should not have considered them at all as the
company's "receipts, revenues and profits" which are exempt from income
tax.
2. As we look back at the resolution creating the employees' reserve fund and
having in mind the company's admission that it is "solely for the benefit of the
employees" and that the company is holding said fund "merely as trustee of
its employees,"11 we reach the conclusion that the fund may not be diverted
for other purposes, and that the trust so created is irrevocable. For, really
nothing in respondent company's acts suggests that it reserved the power to
revoke that fund or for that matter appropriate it for itself. The trust binds the
company to its employees. The trust created is not therefore a revocable trust
a provided in Section 59 of the Tax Code. 12 Nor is it a trust contemplated in
Section 60, the income from which is for the benefit of the grantor.13
This state of facts calls for inquiry into the applicability of Section 56 of the
Tax Code, which in part reads:
SEC. 56. Imposition of tax (a) Application of tax. The taxes imposed by
this Title upon individuals shall apply to the income of estate or of any kind of
property held in trust, including
(1) Income accumulated in trust for the benefit of unborn or unascertained
person or persons with contingent interests and income accumulated or held
for future distribution under the terms of the will or trust;
xxx xxx xxx
(c) Computation and payment
(1) In general. The tax shall be computed upon the net income of the
estate or trust and shall be paid by the fiduciary, except as provided in
Section fifty-nine (relating to revocable trust) and section sixty (relating to
income for the benefit of the grantor);
xxx xxx x x x14
Of interest here is that an amendment to Section 56 Republic Act 1983, 15
approved on June 22, 1957 singles out employees' trust for tax exemption
in the following language:
(b) Exception. The tax imposed by this Title shall not apply to employees'
trust which forms part of a pension, stock bonus or profit-sharing plan of an
employer for the benefit of some or all of his employees (1) if contributions
are made to the trust by such employer, or employees, or both for the
purpose of distributing to such employees the earnings and principal of the
fund accumulated by the trust in accordance with such plan, and (2) if under
the trust instrument it is impossible, at any time prior to the satisfaction of all
liabilities with respect to employees under the trust, for any part of the corpus
or income to be (within the taxable year or thereafter) used for, or diverted to,
purposes other then for the exclusive benefit of his employees: Provided,
That any amount actually distributed to any employee or distributee shall be
taxable to him in the year in which so distributed to the extent that it exceeds
the amount contributed by such employee or distributee. 16
A dig into the legislative history unearths the fact that this exemption in
Republic Act 1983 was conceived in order to encourage the formation of
pension trust systems for the benefit of laborers and employees outside the
Social Security Act.17
Understandably, the second requirement in paragraph (b) of Section 56 of the
Tax Code as it was inserted by Republic Act 1983 non-diversion of fund
was written into the statute the better to insure that the trust fund and its
income will be used "for the exclusive benefit" of the employees.
Of importance is the employment of the word plan as it is applied to pension
set forth in the first part of paragraph (b) aforesaid. Worth mentioning is that a
sizeable portion of our Tax Code has been lifted from the United States
Internal Revenue Code. To be sure, Republic Act 1983 which amends Section
56 of our Tax Code is substantially similar in terms to Section 165 of the
United States Internal Revenue Code of 1939. 18 It is thus permissible for this
Court to look into the interpretations of the American counterpart in an effort
to determine the congressional scheme in exempting employees' trust from
taxation.
In the American jurisdiction, the word plan is emphasized. To qualify for
exemption, the employees' trust must refer to a definite program, scheme or
plan. It must be set up in good faith. It must be acturially sound. Under such
plan, employees generally are to be extended retirement and pension
benefits. But why? The fund is not thereafter to be controlled or used for the
benefit of the company in any way.19 A trust device used to disguise added
compensation to the shareholders and officers of a company and thereby
avoid present payment of income tax thereon instead of providing for
future security of the employees in general will not qualify under the
exemption.20 Hubbell vs. Commissioner of Internal Revenue, 150 F. 2d 516,
161 A.L.R. 764, 773, which was decided under the 1939 version, confirms
this view. There, the United States Circuit Court of Appeals took into account
the direction of the amendments in construing congressional purpose, and
held that the 1942 amendment which added the requirement of non-
discrimination in favor of shareholders, officials, or highly-compensated
employees presents no apparent change in congressional purpose: "to insure
that ... pension ... plans are operated for the welfare of employees in general,
and to prevent the trust device from being used for the benefit of
shareholders, officials, or highly paid employees...."
This is not to say, of course, that the employees' trust fund established by
private respondent is a device calculated to unserve its purpose and serve
tax evasion. Unquestionably, the trust fund was created in good faith. It is
meant as it was intended to mean for the employees' welfare.
But wanting are sufficient data which would justify this Court to make a
conclusive statement that the trust qualifies under Section 56 (b) as it was
inserted into the Tax Code by Republic Act 1963. The only written evidence of
record of the creation of the pension trust is the minutes of the board of
directors' meeting of March 14, 1949, the pertinent portion of which reads:
3. Upon motion duly seconded, the following resolution was unanimously
passed:
RESOLVED, that the sum of FOUR HUNDRED FIFTEEN THOUSAND
PESOS (P415,000.00) be appropriated from the surplus of the company
arising from prewar operations in order to cover the payments of backpay and
payment of reasonable compensations to those persons who have materially
aided the Company in its Organization and Rehabilitation and in the
preparation and prosecution of the Company's claims. This appropriation
shall cover a reserve fund for pensions for all the present and future
employees of the firm in the amount of SIXTY THOUSAND PESOS
(P60,000.00), Reserve Fund for Employees' Welfare to the amount of FIFTY
THOUSAND PESOS (P50,000.00). Reserve Funds for Medical
Hospitalization, etc. to the amount of THIRTY THOUSAND PESOS
(P30,000.00). Reserve Fund for Insurance and Accident to the amount of
TWENTY FOUR THOUSAND PESOS (P24,000.00) and a Reserve Fund for
Bonuses Payable to the amount of FIFTY THOUSAND PESOS (P50,000.00).
4. Upon motion by Mr. Jesus Moraza, duly seconded by Mr. Juan Coromina, it
was resolved further that the committee consisting of Dr. Mamerto Escano, as
Chairman and Messrs. Gil Garcia and Salvador E. Sala as members be
constituted, as it is hereby constituted, to study the details of all the above
resolutions and give effect thereto. The said committee is hereby empowered
to immediately put into effect the above resolutions.
We have the admitted fact also that every month thereafter an amount has
been set aside for the fund and the investment thereof in stocks of San
Miguel Brewery, Inc.
And yet, something is amiss. For one, there is the admission made on page 3
of respondents' brief that:
... It is, of course, admitted by the respondent Company that the strict
requirements of Section 56 (b) of the Tax Code on the formation of
employees' trust funds for pension had not been strictly complied with,
although said funds and their returns are exclusively for the benefit of
respondent Company's employees.
And then, nothing extant in the record will show a pension plan actuarially
sound. Correctly did the Court of Tax Appeals find that "[i]t does not appear,
however, that said pension trust was created in accordance with the provision
of Section 56 (b) of the Revenue Code." 21
The absence of such plan prevents us from taking a view which fits the
purpose of the statute. Coming into play then is the specific provision in
paragraph (a), Section 56, heretofore transcribed, which directs that the
"taxes imposed by this Title upon individuals shall apply to the income ... of
any kind of property held in trust." For which reason, the income received by
the employees' trust fund from January 1, 1957 is subject to the income tax
prescribed for individuals under Section 21 of the Tax Code.
To follow a different construction would run "smack against the familiar rules
that exemption from taxation is not favored,22 and that exemptions in tax
statutes are never presumed,"23 and these "are but statements in adherence
to the ancient rule that exemptions from taxation are construed in strictissimi
juris against the taxpayer and liberally in favor of the taxing authority." 24
3. Having reached the conclusion that the assessment made by petitioner
and the ruling of the Court of Tax Appeals on lack of income tax liability were
on a mistaken premise, but that the trust established by respondent should
pay the taxes imposed upon individuals, we are now faced with the
mechanics of tax collection.
The problem of prescription comes in. By Section 331 of the Tax Code,
internal revenue taxes shall be assessed within five years after the return is
filed. Here, no return was filed upon a belief in good faith that no tax liability
attaches. Add to this the fact that the Commissioner of Internal Revenue
made an assessment of income tax but upon the mistaken assumption that
the tax payable was upon the basis of a corporate tax and not individual tax,
and the picture is complete. Good faith in one, and honest mistake in the
other. Both petitioner and respondent company are on the same footing. It is
because of this that we rule that Section 332 (a) of the Tax Code finds
application. It reads:
SEC. 332. Exceptions as to period of limitation of assessment and collection
of taxes. (a) In the case of a false or fraudulent return with intent to evade
tax or of a failure to file a return, the tax may be assessed, or a proceeding in
court for the collection of such tax may be begun without assessment, at any
time within ten years after the discovery of the falsity, fraud, or omission.
Assessment should have as starting point the known figures. From 1953 to
1958, the following amounts were dividends received on the San Miguel
Brewery, Inc. investment:
1953 ...................................
P4,430.00
1954 ...................................
4,384.00
1955 ...................................
6,240.00
1956 ...................................
8,000.00
1957 ...................................
8,009.60
1958 ...................................
7,999.20
As far as we could read from the record, on the 1953 to 1956 dividends,
payments under protest were made as follows:
1. Deficiency franchise tax ..................................
P468.14
2. 25% surcharge ..................................................
117.04
3. Compromise penalty ........................................
50.00
Total ............................................

P635.18
On the 1957 dividends, the following were paid under protest:
1. Deficiency franchise tax ..................................
P166.85
2. 25% surcharge ..................................................
41.71
3. Compromise ......................................................
10.00
Total ............................................

P218.56
The 1958 dividends were included in the franchise tax return for the first
quarter of 1959, the tax for which was paid on April 16, 1959.
In the determination of the taxes due, the 50% surcharge sought by petitioner
should not be included. To subject a taxpayer to the payment of 50%
surcharge provided for in Section 72 of the National Internal Revenue Code,
the State must show either that there was a wilful neglect to file a return or
that a case of a false or fraudulent return wilfully made exists. There is total
absence of proof, and petitioner does not allege, that respondent company
wilfully neglected to file a return or that it made a false or fraudulent return. In
fact, this Court's pronouncement was necessary to determine whether such
dividends are taxable at all, and if so, under what law. In Yutivo Sons
Hardware Company vs. Commissioner,25 our ruling is that where a man
"honestly believes" that the method employed by him in computing his tax
liability is correct, he does not incur any fraud; in which case, no fraud penalty
attaches under Section 72 of the Tax Code, which in part reads:
SEC. 72. Surcharges for failure to render return and for rendering false and
fraudulent returns.
... In case of wilful neglect to file the return or list within the time prescribed by
law, or in case a false or fraudulent return or list is wilfully made, the
Commissioner 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....
Absent the specifics exacted in Section 72, no 50% surcharge is collectible.
4. Was respondent company late in the payment of its franchise taxes?
We first go to the controlling statutes. Section 259, paragraph (2) of the
National Internal Revenue Code reads:
SEC. 259. Tax on corporate franchises. ....
The taxes, charges, and percentages on corporate franchises, shall be due
and payable as specified in the particular franchise, or in case no time limit is
specified therein, the provisions of section one hundred and eighty-three shall
apply; and if such taxes, charges, and percentages remain unpaid for fifteen
days from and after the date on which they must be paid, twenty-five per
centum shall be added to the amount of such taxes, charges, and
percentages, which increase shall form part of the tax. 26
Section 183 (a) mentioned in Section 259 of the same Code in turn partly
reads:
SEC. 183. Payment of percentage taxes. (a) In general. It shall be the
duty of every person conducting a business on which a percentage tax is
imposed under this Title, to make a true and complete return of the amount of
his, her or its gross monthly sales, receipts or earnings, or gross value of
output actually removed from the factory or mill warehouses and within twenty
days after the end of each month, pay the tax due thereon:....
Upon the other hand, the company's franchise provides:
... Said percentage shall be due and payable quarterly.
The quintessence of petitioner's argument is that the phrase "due and
payable quarterly" in the franchise of the company means that the tax is
immediately demandable at the end of each calendar quarter; and that since
the franchise itself sets the time limit for the payment of the franchise tax,
Section 183 just quoted finds no application. In which case, so petitioner
avers, the 25% surcharge would be collectible if the percentage taxes remain
unpaid after fifteen days from the end of each calendar quarter.
Decisive of the question is the meaning of the term "due and payable
quarterly." Resort to the following definitions may help in clearing up the
issue:
(1) The word "due" is only equivalent to or synonymous with "payable." 27
(2) The word "due" with reference to taxes, implies that such taxes are then
"owing, collectible or matured."28
(3) "The word 'due' in one sense means that the debt or obligation to which it
is applied has by contract of operation of law become immediately payable,
but in another sense it denotes the existence of a simple indebtedness,
without reference to the time of payment, in which it is synonymous with
'owing' and includes all debts whether payable in praesenti or in futuro."29
(4) "Unless context clearly indicates a contrary meaning, the phrase 'due and
payable' on a specified date means the debt or obligation to which it is
applicable is then immediately payable." 30
In line with the foregoing definitions, the term "due and payable on the first
day of each month" was interpreted to mean that payment on any day during
the month other than the first day would constitute non-compliance. 31
In our opinion, the term "due and payable quarterly" in this case merely
indicates the frequency of payment of the franchise tax, viz., very three
months. It does not refer to the time limit or, in the precise language of
Section 259, "the date on which they (the taxes) must be paid."
Under Section 183(a) in relation to Section 259, second paragraph, the law
has opted to collect the tax within twenty days after it becomes due and
payable, namely, the last day of each quarter. The time limit or the date on
which the percentage tax must be paid by the company is the twentieth day
after the last day of each quarter. Section 259 grants another grace period of
fifteen days from the termination of this time limit before imposing the 25%
surcharge.
To say that Section 183(a) is not applicable simply because, as amended, it
provides for monthly payment while the company's charter speaks of
quarterly payment, is to hang so heavy a meaning on too slender a frame.
Prior to its amendment by R.A. 1612 on August 24, 1956, said Section 183(a)
prescribed quarterly payment of percentage taxes. 32 Accurately read, the
amendment merely changed the manner or frequency of payment of the tax,
whereas Section 259 makes reference to Section 183(a) with respect to the
time limit for payment of percentage taxes. The amendment does not nullify
the applicability of Section 183(a) to franchises which do not set any time limit
for payment although providing for a different manner or frequency of
payment. Common sense dictates that it be so. For, if the law has chosen to
allow a fifteen-day grace period to taxpayers paying every month, no cogent
reason exists why the same period if not longer should be denied
taxpayers paying every three months. The latter require more time for
preparation their return covers a longer period. The tax court is correct. 33
Really, the tax cannot be immediately demandable at the end of each
calendar quarter. Reason for this is that transactions on the last day of the
quarter must have to be included in the computation of the taxpayer's return
for each particular quarter. It is well-nigh impossible for the taxpayer to add up
his income, write down the deductions, and compute the net amount taxable
as of the last working hour of the last day of the quarter, and at the same time
go to the nearest revenue office, submit the quarterly return and pay the tax.
This accounts for the fact that Section 183(a) of the National Internal
Revenue Code gives the taxpayer a leeway of twenty days after the end of
each quarter to do all of these. And by Section 259, it is only upon failure to
pay for fifteen days "from and after the date on which they must be paid" that
the twenty-five per centum shall be added to the amount of "taxes, charges,
and percentages," on corporate franchises. Statutes are not to be so narrowly
read as to beget unreasonableness.
We accordingly rule that the franchise tax "must be paid" within "twenty days
after the end" of each quarter and that if such tax remains unpaid for 15 days
"from and after the date on which they must be paid," then twenty-five per
centum shall be added to the amount due. No surcharge for late payment of
respondent company's franchise taxes accrues.
For the reasons given
The judgment under review is hereby AFFIRMED insofar as it reverses
petitioner's assessment of surcharge for late payment of respondent
company's franchise tax;34 and
Said judgment is hereby REVERSED insofar as it exempts respondent
company from the payment of deficiency income tax, in the sense that
respondent company, in its capacity as fiduciary of its employees' reserve
fund, is hereby declared liable for the payment of individual income tax set
forth in Section 56(a) in connection with Section 21 of the National Internal
Revenue Code; and
Conformably to the opinion expressed herein, let the record of this case be
returned to the Court of Tax Appeals with instructions to hear and determine
the tax liability of the trust known as "Employees' Reserve for Pensions"
and/or tax refund, if any, to respondent Visayan Electric Company, upon the
dividends received during the years 1953 to 1958 on the investment of its
employees' reserve fund for pensions, and tax payments made by reason
thereof, said tax to be computed in accordance with Section 56(a) and (c) of
the National Internal Revenue Code in relation to Section 21 of the same
Code.
No costs. So ordered.

G.R. No. 95022 March 23, 1992


COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
THE HON. COURT OF APPEALS, THE COURT OF TAX APPEALS, GCL
RETIREMENT PLAN, represented by its Trustee-Director, respondents.

MELENCIO-HERRERA, J.:
This case is said to be precedent setting. While the amount involved is
insignificant, the Solicitor General avers that there are about 85 claims of the
same nature pending in the Court of Tax Appeals and Bureau of Internal
Revenue totalling approximately P120M.
Petitioner, the Commissioner of Internal Revenue, seeks a reversal of the
Decision of respondent Court of Appeals, dated August 27, 1990, in CA-G.R.
SP No. 20426, entitled "Commissioner of Internal Revenue vs. GCL
Retirement Plan, represented by its Trustee-Director and the Court of Tax
Appeals," which affirmed the Decision of the latter Court, dated 15 December
1986, in Case No. 3888, ordering a refund, in the sum of P11,302.19, to the
GCL Retirement Plan representing the withholding tax on income from money
market placements and purchase of treasury bills, imposed pursuant to
Presidential Decree No. 1959.
There is no dispute with respect to the facts. Private Respondent, GCL
Retirement Plan (GCL, for brevity) is an employees' trust maintained by the
employer, GCL Inc., to provide retirement, pension, disability and death
benefits to its employees. The Plan as submitted was approved and qualified
as exempt from income tax by Petitioner Commissioner of Internal Revenue
in accordance with Rep. Act No. 4917. 1
In 1984, Respondent GCL made investsments and earned therefrom interest
income from which was witheld the fifteen per centum (15%) final witholding
tax imposed by Pres. Decree No. 1959, 2 which took effect on 15 October 1984,
to wit:
Date Kind of Investment Principal Income Earned 15% Tax
ACIC
12/05/84 Market Placement P236,515.32 P8,751.96 P1,312.66
10/22/84 234,632.75 9,815.89 1,472.38
11/19/84 225,886.51 10,629.22 1,594.38
11/23/84 344,448.64 17,313.33 2,597.00
12/05/84 324,633.81 15,077.44 2,261.52
COMBANK Treasury Bills 2,064.15

P11,302.19
On 15 January 1985, Respondent GCL filed with Petitioner a claim for refund
in the amounts of P1,312.66 withheld by Anscor Capital and Investment
Corp., and P2,064.15 by Commercial Bank of Manila. On 12 February 1985,
it filed a second claim for refund of the amount of P7,925.00 withheld by
Anscor, stating in both letters that it disagreed with the collection of the 15%
final withholding tax from the interest income as it is an entity fully exempt
from income tax as provided under Rep. Act No. 4917 in relation to Section
56 (b) 3 of the Tax Code.
The refund requested having been denied, Respondent GCL elevated the
matter to respondent Court of Tax Appeals (CTA). The latter ruled in favor of
GCL, holding that employees' trusts are exempt from the 15% final
withholding tax on interest income and ordering a refund of the tax withheld.
Upon appeal, originally to this Court, but referred to respondent Court of
Appeals, the latter upheld the CTA Decision. Before us now, Petitioner assails
that disposition.
It appears that under Rep. Act No. 1983, which took effect on 22 June 1957,
amending Sec. 56 (b) of the National Internal Revenue Code (Tax Code, for
brevity), employees' trusts were exempt from income tax. That law provided:
Sec. 56 Imposition of tax. (a) Application of tax. The taxes imposed by
this Title upon individuals shall apply to the income of estates or of any kind of
property held in trust, including
xxx xxx xxx
(b) Exception. The tax imposed by this Title shall not apply to employees'
trust which forms a part of a pension, stock bonus or profit-sharing plan of an
employer for the benefit of some or all of his employees (1) if contributions
are made to trust by such employer, or employees, or both, for the purpose of
distributing to such employees the earnings and principal of the fund
accumulated by the trust in accordance with such
plan, . . .
On 3 June 1977, Pres. Decree No. 1156 provided, for the first time, for the
withholding from the interest on bank deposits at the source of a tax of fifteen
per cent (15%) of said interest. However, it also allowed a specific exemption
in its Section 53, as follows:
Sec. 53. Withholding of tax at source.
xxx xxx xxx
(c) Withholding tax on interest on bank deposits. (1) Rate of withholding
tax. Every bank or banking institution shall deduct and withhold from the
interest on bank deposits (except interest paid or credited to non-resident
alien individuals and foreign corporations), a tax equal to fifteen per cent of
the said interest: Provided, however, That no withholding of tax shall be made
if the aggregate amount of the interest on all deposit accounts maintained by
a depositor alone or together with another in any one bank at any time during
the taxable period does not exceed three hundred fifty pesos a year or eighty-
seven pesos and fifty centavos per quarter. For this purpose, interest on a
deposit account maintained by two persons shall be deemed to be equally
owned by them.
(2) Treatment of bank deposit interest. The interest income shall be
included in the gross income in computing the depositor's income tax liability
in according with existing law.
(3) Depositors enjoying tax exemption privileges or preferential tax treatment.
In all cases where the depositor is tax-exempt or is enjoying preferential
income tax treatment under existing laws, the withholding tax imposed in this
paragraph shall be refunded or credited as the case may be upon submission
to the Commissioner of Internal Revenue of proof that the said depositor is a
tax-exempt entity or enjoys a preferential income tax treatment.
xxx xxx xxx
This exemption and preferential tax treatment were carried over in Pres.
Decree No. 1739, effective on 17 September 1980, which law also subjected
interest from bank deposits and yield from deposit substitutes to a final tax of
twenty per cent (20%). The pertinent provisions read:
Sec. 2. Section 21 of the same Code is hereby amended by adding a new
paragraph to read as follows:
Sec. 21. Rates of tax on citizens or residents.
xxx xxx xxx
Interest from Philippine Currency bank deposits and yield from deposit
substitutes whether received by citizens of the Philippines or by resident alien
individuals, shall be subject to the final tax as follows: (a) 15% of the interest
on savings deposits, and (b) 20% of the interest on time deposits and yield
from deposit substitutes, which shall be collected and paid as provided in
Sections 53 and 54 of this Code. Provided, That no tax shall be imposed if
the aggregate amount of the interest on all Philippine Currency deposit
accounts maintained by a depositor alone or together with another in any one
bank at any time during the taxable period does not exceed Eight Hundred
Pesos (P800.00) a year or Two Hundred Pesos (P200.00) per quarter.
Provided, further, That if the recipient of such interest is exempt from income
taxation, no tax shall be imposed and that, if the recipient is enjoying
preferential income tax treatment, then the preferential tax rates so provided
shall be imposed (Emphasis supplied).
Sec. 3. Section 24 of the same Code is hereby amended by adding a new
subsection (cc) between subsections (c) and (d) to read as follows:
(cc) Rates of tax on interest from deposits and yield from deposit substitutes.
Interest on Philippine Currency bank deposits and yield from deposit
substitutes received by domestic or resident foreign corporations shall be
subject to a final tax on the total amount thereof as follows: (a) 15% of the
interest on savings deposits; and (b) 20% of the interest on time deposits and
yield from deposit substitutes which shall be collected and paid as provided in
Sections 53 and 54 of this Code. Provided, That if the recipient of such
interest is exempt from income taxation, no tax shall be imposed and that, if
the recipient is enjoying preferential income tax treatment, then the
preferential tax rates so provided shall be imposed (Emphasis supplied).
Sec. 9. Section 53(e) of the same Code is hereby amended to read as
follows:
Se. 53(e) Withholding of final tax on interest on bank deposits and yield from
deposit substitutes.
(1) Withholding of final tax. Every bank or non-bank financial intermediary
shall deduct and withhold from the interest on bank deposits or yield from
deposit substitutes a final tax equal to fifteen (15%) per cent of the interest on
savings deposits and twenty (20%) per cent of the interest on time deposits or
yield from deposit substitutes: Provided, however, That no withholding tax
shall be made if the aggregate amount of the interest on all deposit accounts
maintained by a depositor alone or together with another in any one bank at
any time during the taxable period does not exceed Eight Hundred Pesos a
year or Two Hundred Pesos per quarter. For this purpose, interest on a
deposit account maintained by two persons shall be deemed to be equally
owned by them.
(2) Depositors or placers/investors enjoying tax exemption privileges or
preferential tax treatment. In all cases where the depositor or
placer/investor is tax exempt or is enjoying preferential income tax treatment
under existing laws, the withholding tax imposed in this paragraph shall be
refunded or credited as the case may be upon submission to the
Commissioner of Internal Revenue of proof that the said depositor, or
placer/investor is a tax exempt entity or enjoys a preferential income tax
treatment.
Subsequently, however, on 15 October 1984, Pres. Decree No. 1959 was
issued, amending the aforestated provisions to read:
Sec. 2. Section 21(d) of this Code, as amended, is hereby further amended to
read as follows:
(d) On interest from bank deposits and yield or any other monetary benefit
from deposit substitutes and from trust fund and similar arrangements.
Interest from Philippine Currency Bank deposits and yield or any other
monetary benefit from deposit substitutes and from trust fund and similar
arrangements whether received by citizens of the Philippines, or by resident
alien individuals, shall be subject to a 15% final tax to be collected and paid
as provided in Sections 53 and 54 of this Code.
Sec. 3. Section 24(cc) of this Code, as amended, is hereby further amended
to read as follows:
(cc) Rates of tax on interest from deposits and yield or any other monetary
benefit from deposit substitutes and from trust fund and similar
arrangements. Interest on Philippine Currency Bank deposits and yield or
any other monetary benefit from deposit substitutes and from trust fund and
similar arrangements received by domestic or resident foreign corporations
shall be subject to a 15% final tax to be collected and paid as provided in
Section 53 and 54 of this Code.
Sec. 4. Section 53 (d) (1) of this code is hereby amended to read as follows:
Sec. 53 (d) (1). Withholding of Final Tax. Every bank or non-bank financial
intermediary or commercial. industrial, finance companies, and other non-
financial companies authorized by the Securities and Exchange Commission
to issue deposit substitutes shall deduct and withhold from the interest on
bank deposits or yield or any other monetary benefit from deposit substitutes
a final tax equal to fifteen per centum (15%) of the interest on deposits or
yield or any other monetary benefit from deposit substitutes and from trust
fund and similar arrangements.
It is to be noted that the exemption from withholding tax on interest on bank
deposits previously extended by Pres. Decree No. 1739 if the recipient
(individual or corporation) of the interest income is exempt from income
taxation, and the imposition of the preferential tax rates if the recipient of the
income is enjoying preferential income tax treatment, were both abolished by
Pres. Decree No. 1959. Petitioner thus submits that the deletion of the
exempting and preferential tax treatment provisions under the old law is a
clear manifestation that the single 15% (now 20%) rate is impossible on all
interest incomes from deposits, deposit substitutes, trust funds and similar
arrangements, regardless of the tax status or character of the recipients
thereof. In short, petitioner's position is that from 15 October 1984 when Pres.
Decree No. 1959 was promulgated, employees' trusts ceased to be exempt
and thereafter became subject to the final withholding tax.
Upon the other hand, GCL contends that the tax exempt status of the
employees' trusts applies to all kinds of taxes, including the final withholding
tax on interest income. That exemption, according to GCL, is derived from
Section 56(b) and not from Section 21 (d) or 24 (cc) of the Tax Code, as
argued by Petitioner.
The sole issue for determination is whether or not the GCL Plan is exempt
from the final withholding tax on interest income from money placements and
purchase of treasury bills required by Pres. Decree No. 1959.
We uphold the exemption.
To begin with, it is significant to note that the GCL Plan was qualified as
exempt from income tax by the Commissioner of Internal Revenue in
accordance with Rep. Act No. 4917 approved on 17 June 1967. This law
specifically provided:
Sec. 1. Any provision of law to the contrary notwithstanding, the retirement
benefits received by officials and employees of private firms, whether
individual or corporate, in accordance with a reasonable private benefit plan
maintained by the employer shall be exempt from all taxes and shall not be
liable to attachment, levy or seizure by or under any legal or equitable
process whatsoever except to pay a debt of the official or employee
concerned to the private benefit plan or that arising from liability imposed in a
criminal action; . . . (emphasis ours).
In so far as employees' trusts are concerned, the foregoing provision should
be taken in relation to then Section 56(b) (now 53[b]) of the Tax Code, as
amended by Rep. Act No. 1983, supra, which took effect on 22 June 1957.
This provision specifically exempted employee's trusts from income tax and is
repeated hereunder for emphasis:
Sec. 56. Imposition of Tax. (a) Application of tax. The taxes imposed by
this Title upon individuals shall apply to the income of estates or of any kind of
property held in trust.
xxx xxx xxx
(b) Exception. The tax imposed by this Title shall not apply to employee's
trust which forms part of a pension, stock bonus or profit-sharing plan of an
employer for the benefit of some or all of his
employees . . .
The tax-exemption privilege of employees' trusts, as distinguished from any
other kind of property held in trust, springs from the foregoing provision. It is
unambiguous. Manifest therefrom is that the tax law has singled out
employees' trusts for tax exemption.
And rightly so, by virtue of the raison de'etre behind the creation of
employees' trusts. Employees' trusts or benefit plans normally provide
economic assistance to employees upon the occurrence of certain
contingencies, particularly, old age retirement, death, sickness, or disability. It
provides security against certain hazards to which members of the Plan may
be exposed. It is an independent and additional source of protection for the
working group. What is more, it is established for their exclusive benefit and
for no other purpose.
The tax advantage in Rep. Act No. 1983, Section 56(b), was conceived in
order to encourage the formation and establishment of such private Plans for
the benefit of laborers and employees outside of the Social Security Act.
Enlightening is a portion of the explanatory note to H.B. No. 6503, now R.A.
1983, reading:
Considering that under Section 17 of the social Security Act, all contributions
collected and payments of sickness, unemployment, retirement, disability and
death benefits made thereunder together with the income of the pension trust
are exempt from any tax, assessment, fee, or charge, it is proposed that a
similar system providing for retirement, etc. benefits for employees outside
the Social Security Act be exempted from income taxes. (Congressional
Record, House of Representatives, Vol. IV, Part. 2, No. 57, p. 1859, May 3,
1957; cited in Commissioner of Internal Revenue v. Visayan Electric Co., et
al., G.R. No. L-22611, 27 May 1968, 23 SCRA 715); emphasis supplied.
It is evident that tax-exemption is likewise to be enjoyed by the income of the
pension trust. Otherwise, taxation of those earnings would result in a
diminution accumulated income and reduce whatever the trust beneficiaries
would receive out of the trust fund. This would run afoul of the very
intendment of the law.
The deletion in Pres. Decree No. 1959 of the provisos regarding tax
exemption and preferential tax rates under the old law, therefore, can not be
deemed to extent to employees' trusts. Said Decree, being a general law, can
not repeal by implication a specific provision, Section 56(b) now 53 [b]) in
relation to Rep. Act No. 4917 granting exemption from income tax to
employees' trusts. Rep. Act 1983, which excepted employees' trusts in its
Section 56 (b) was effective on 22 June 1957 while Rep. Act No. 4917 was
enacted on 17 June 1967, long before the issuance of Pres. Decree No. 1959
on 15 October 1984. A subsequent statute, general in character as to its
terms and application, is not to be construed as repealing a special or specific
enactment, unless the legislative purpose to do so is manifested. This is so
even if the provisions of the latter are sufficiently comprehensive to include
what was set forth in the special act (Villegas v. Subido, G.R. No. L-31711, 30
September 1971, 41 SCRA 190).
Notably, too, all the tax provisions herein treated of come under Title II of the
Tax Code on "Income Tax." Section 21 (d), as amended by Rep. Act No.
1959, refers to the final tax on individuals and falls under Chapter II; Section
24 (cc) to the final tax on corporations under Chapter III; Section 53 on
withholding of final tax to Returns and Payment of Tax under Chapter VI; and
Section 56 (b) to tax on Estates and Trusts covered by Chapter VII, Section
56 (b), taken in conjunction with Section 56 (a), supra, explicitly excepts
employees' trusts from "the taxes imposed by this Title." Since the final tax
and the withholding thereof are embraced within the title on "Income Tax," it
follows that said trust must be deemed exempt therefrom. Otherwise, the
exception becomes meaningless.
There can be no denying either that the final withholding tax is collected from
income in respect of which employees' trusts are declared exempt (Sec. 56
[b], now 53 [b], Tax Code). The application of the withholdings system to
interest on bank deposits or yield from deposit substitutes is essentially to
maximize and expedite the collection of income taxes by requiring its
payment at the source. If an employees' trust like the GCL enjoys a tax-
exempt status from income, we see no logic in withholding a certain
percentage of that income which it is not supposed to pay in the first place.
Petitioner also relies on Revenue Memorandum Circular 31-84, dated 30
October 1984, and Bureau of Internal Revenue Ruling No. 027-e-000-00-005-
85, dated 14 January 1985, as authorities for the argument that Pres. Decree
No. 1959 withdrew the exemption of employees' trusts from the withholding of
the final tax on interest income. Said Circular and Ruling pronounced that the
deletion of the exempting and preferential tax treatment provisions by Pres.
Decree No. 1959 is a clear manifestation that the single 15% tax rate is
imposable on all interest income regardless of the tax status or character of
the recipient thereof. But since we herein rule that Pres. Decree No. 1959 did
not have the effect of revoking the tax exemption enjoyed by employees'
trusts, reliance on those authorities is now misplaced.
WHEREFORE, the Writ of Certiorari prayed for is DENIED. The judgment of
respondent Court of Appeals, affirming that of the Court of Tax Appeals is
UPHELD. No costs.
SO ORDERED.

[G.R. No. 103635. February 1, 1996]


CATALINA BUAN VDA. DE ESCONDE, CONSTANCIA
ESCONDE VDA. DE PERALTA, ELENITA ESCONDE
and BENJAMIN E SCONDE, petitioners, vs.
HONORABLE COURT OF APPEALS and PEDRO
ESCONDE, respondents.
DECISION
ROMERO, J.:
This petition for review on certiorari seeks the reversal of the
January 22, 1992 decision in CA G.R. CV No. 26795 of
[if !supportFootnotes][1][endif]

the Court of Appeals affirming the Decision of the Regional Trial


Court of Bataan, Branch 2. The lower court declared that
[if !supportFootnotes][2][endif]

petitioners action for reconveyance of real property based on an


implied trust has been barred by prescription and laches.
Petitioners Constancia, Benjamin and Elenita, and private
respondent Pedro, are the children of the late Eulogio Esconde and
petitioner Catalina Buan. Eulogio Esconde was one of the children [if !

and heirs of Andres Esconde. Andres is the brother of


supportFootnotes][3][endif]

Estanislao Esconde, the original owner of the disputed lot who died
without issue on April 1942. Survived by his only brother, Andres,
Estanislao left an estate consisting of four (4) parcels of land in
Samal, Bataan, namely: (a) Lot No. 1865 with 22,712 square
meters; (b) Lot No. 1902 with 54,735 square meters; (c) Lot No.
1208 with 20,285 square meters; and (d) Lot No. 1700 with 547
square meters.
Eulogio died in April, 1944 survived by petitioners and private
respondent. At that time, Lazara and Ciriaca, Eulogios sisters, had
already died without having partitioned the estate of the late
Estanislao Esconde.
On December 5, 1946, the heirs of Lazara, Ciriaca and Eulogio
executed a deed of extrajudicial partition, with the heirs
[if !supportFootnotes][4][endif]

of Lazara identified therein as the Party of the First Part, that of


Ciriaca, the Party of the Second Part and that of Eulogio, the Party
of the Third Part. Since the children of Eulogio, with the exception of
Constancia, were then all minors, they were represented by their
mother and judicial guardian, petitioner Catalina Buan vda. de
Esconde who renounced and waived her usufructuary rights over
the parcels of land in favor of her children in the same deed. Salient
provisions of the deed state as follows:
1.TOARTURODOMINGUEZ,minor,PartyoftheFirstPartis
adjudicated:
(a)LotNo.1865ofSamalCadastre;
(b)PortionofLotNo.1208,SamalCadastre,whichportionhasanareaof
FIVE(5)Luang;
2.TOJOVITABUAN,RICARDOBUAN,andMELODYand
LEOPOLDOOCONER,areadjudicatedLotNo.1902SamalCadastre,
andtode(sic)dividedasfollows:
(a)JovitaBuanUndividedonethird(1/3)share;
(b)RicardoBuanUndividedonethird(1/3)share;
(c)MelodyOconerUndividedonesixth(1/6)share;
(d)LeopoldoOconerUndividedonesixth(1/6)share;
3.TOCONSTANCIA,PEDRO,BENJAMINandELENITA,all
SurnamedESCONDE,areadjudicated,inundividedequalshareseach,the
following:
(a)LotNo.1208SamalCadastre,subjecttotheencumbranceoftheright
ofownershipofArturoDominguezontheFIVELUANG;
4.TOPEDROESCONDEisadjudicatedexclusivelyLotNo.1700ofthe
CadastralSurveyofSamal;(Italicssupplied.)
The deed bears the thumbmark of Catalina Buan and the signature
of Constancia Esconde, as well as the approval and signature of
Judge Basilio Bautista. [if !supportFootnotes][5][endif]

Pursuant to the same deed, transfer certificates of title were issued


to the new owners of the properties. Transfer Certificate [if !supportFootnotes][6][endif]

of Title No. 394 for Lot No. 1700 was issued on February 11, 1947
in the name of private respondent but Catalina kept it in her
possession until she delivered it to him in 1949 when private
respondent got married.
Meanwhile, Benjamin constructed the family home on Lot No. 1698-
B which is adjacent to Lot No. 1700. A portion of the
[if !supportFootnotes][7][endif]

house occupied an area of twenty (20) square meters, more or less,


of Lot No. 1700. Benjamin also built a concrete fence and a
common gate enclosing the two (2) lots, as well as an artesian well
within Lot No. 1700.
Sometime in December, 1982, Benjamin discovered that Lot No.
1700 was registered in the name of his brother, private respondent.
Believing that the lot was co-owned by all the children of Eulogio
Esconde, Benjamin demanded his share of the lot from private
respondent. However, private respondent asserted
[if !supportFootnotes][8][endif]

exclusive ownership thereof pursuant to the deed of extrajudicial


partition and, in 1985 constructed a buho fence to segregate Lot
No. 1700 from Lot No. 1698-B.
Hence, on June 29, 1987, petitioners herein filed a complaint before
the Regional Trial Court of Bataan against private respondent for
the annulment of TCT No. 394. They further prayed that private
respondent be directed to enter into a partition agreement with
them, and for damages (Civil Case No. 5552).
In its decision of July 31, 1989, the lower court dismissed the
complaint and the counterclaims. It found that the deed of
extrajudicial partition was an unenforceable contract as far as Lot
No. 1700 was concerned because petitioner Catalina Buan vda. de
Esconde, as mother and judicial guardian of her children, exceeded
her authority as such in donating the lot to private respondent or
waiving the rights thereto of Benjamin and Elenita in favor of private
respondent. Because of the unenforceability of the deed, a trust
relationship was created with private respondent as trustee and
Benjamin and Elenita as beneficiaries. The court said:
Althoughthepartiestothepartitiondidnoteithercontemplateorexpress
itinsaiddocument,theresultingtrustaroseorwascreatedbyoperationof
Article1456ofthenewCivilCode,whichreads:Ifpropertyisacquired
throughmistakeorfraud,thepersonobtainingitis,byforceoflaw,
consideredatrusteeofanimpliedtrustforthebenefitofthepersonfrom
whomthepropertycomes.Thepersonsfromwhomthetwothirdsportion
ofLot1700cameareplaintiffsBenjaminandElenitaEscondeandthe
trusteewasdefendantPedroEsconde,whoacquiredsuchportionthrough
mistakebyvirtueofthesubjectpartition.Themistakewastheallotmentor
assignmentofsuchportiontoPedroEscondealthoughithadrightfully
belongedtosaidtwoplaintiffsmorethantwo(2)yearsbefore. [if!supportFootnotes][9][endif]

However, the lower court ruled that the action had been barred by
both prescription and laches. Lot No. 1700 having been registered
in the name of private respondent on February 11, 1947, the action
to annul such title prescribed within ten (10) years on February 11,
1957 or more than thirty (30) years before the action was filed on
June 29, 1987. Thus, even if Art. 1963 of the old Civil Code
providing for a 30-year prescriptive period for real actions over
immovable properties were to be applied, still, the action would
have prescribed on February 11, 1977.
Hence, petitioners elevated the case to the Court of Appeals which
affirmed the lower courts decision. The appellate court held that the
deed of extrajudicial partition established an implied trust arising
from the mistake of the judicial guardian in favoring one heir by
giving him a bigger share in the hereditary property. It stressed that
an action for reconveyance based on implied or constructive trust
prescribes in ten (10) years counted from the registration of the
property in the sole name of the co-heir. [if !supportFootnotes][10][endif]

Petitioners are now before this Court charging the Court of Appeals
with having erred in: (a) denying their appeal by reason of
prescription and laches, and (b) not reversing the decision of the
lower court insofar as awarding them damages is concerned.
Trust is the legal relationship between one person having an
equitable ownership in property and another person owning the
legal title to such property, the equitable ownership of the former
entitling him to the performance of certain duties and the exercise of
certain powers by the latter. Trusts are either express or
[if !supportFootnotes][11][endif]

implied. An express trust is created by the direct and positive acts of


the parties, by some writing or deed or will or by words evidencing
an intention to create a trust. No particular words are
[if !supportFootnotes][12][endif]

required for the creation of an express trust, it being sufficient that a


trust is clearly intended. [if !supportFootnotes][13][endif]

On the other hand, implied trusts are those which, without being
expressed, are deducible from the nature of the transaction as
matters of intent or which are superinduced on the transaction by
operation of law as matters of equity, independently of the particular
intention of the parties. In turn, implied trusts are either
[if !supportFootnotes][14][endif]

resulting or constructive trusts. These two are differentiated from


each other as follows:
Resultingtrustsarebasedontheequitabledoctrinethatvaluable
considerationandnotlegaltitledeterminestheequitabletitleorinterest
andarepresumedalwaystohavebeencontemplatedbytheparties.They
arisefromthenatureorcircumstancesoftheconsiderationinvolvedina
transactionwherebyonepersontherebybecomesinvestedwithlegaltitle
butisobligatedinequitytoholdhislegaltitleforthebenefitofanother.
Ontheotherhand,constructivetrustsarecreatedbytheconstructionof
equityinordertosatisfythedemandsofjusticeandpreventunjust
enrichment.Theyarisecontrarytointentionagainstonewho,byfraud,
duressorabuseofconfidence,obtainsorholdsthelegalrighttoproperty
whichheoughtnot,inequityandgoodconscience,tohold. [if!supportFootnotes][15][endif]

While the deed of extrajudicial partition and the registration of Lot


No. 1700 occurred in 1947 when the Code of Civil Procedure or Act
No. 190 was yet in force, we hold that the trial court correctly
applied Article 1456. In Diaz, et al. v. Gorricho and Aguado, [if !supportFootnotes]

the Court categorically held that while it is not a retroactive


[16][endif]

provision of the new Civil Code, Article 1456 merely expresses a


rule already recognized by our courts prior to the Codes
promulgation. This article provides:
Art.1456.Ifpropertyisacquiredthroughmistakeorfraud,theperson
obtainingitis,byforceoflaw,consideredatrusteeofanimpliedtrustfor
thebenefitofthepersonfromwhomthepropertycomes.
Construing this provision of the Civil Code, in Philippine National
Bank v. Court of Appeals, the Court stated:
AdeeperanalysisofArticle1456revealsthatitisnotatrustinthe
technicalsenseforinatypicaltrust,confidenceisreposedinoneperson
whoisnamedatrusteeforthebenefitofanotherwhoiscalledthecestui
quetrust,respectingpropertywhichisheldbythetrusteeforthebenefitof
thecestuiquetrust.Aconstructivetrust,unlikeanexpresstrust,doesnot
emanatefrom,orgenerateafiduciaryrelation.Whileinanexpresstrust,a
beneficiaryandatrusteearelinkedbyconfidentialorfiduciaryrelations,
inaconstructivetrust,thereisneitherapromisenoranyfiduciaryrelation
tospeakofandthesocalledtrusteeneitheracceptsanytrustnorintends
holdingthepropertyforthebeneficiary. [if!supportFootnotes][17][endif]

In the case at bench, petitioner Catalina Buan vda. de Esconde, as


mother and legal guardian of her children, appears to have favored
her elder son, private respondent, in allowing that he be given Lot
No. 1700 in its entirety in the extrajudicial partition of the Esconde
estate to the prejudice of her other children. Although it does not
appear on record whether Catalina intentionally granted private
respondent that privileged bestowal, the fact is that, said lot was
registered in private respondents name. After TCT No. 394 was
handed to him by his mother, private respondent exercised
exclusive rights of ownership therein to the extent of even
mortgaging the lot when he needed money.
If, as petitioners insist, a mistake was committed in allotting Lot No.
1700 to private respondent, then a trust relationship was created
between them and private respondent. However, private respondent
never considered himself a trustee. If he allowed his brother
Benjamin to construct or make improvements thereon, it appears to
have been out of tolerance to a brother. Consequently, if indeed, by
mistake, private respondent was given the entirety of
[if !supportFootnotes][18][endif]

Lot No. 1700, the trust relationship between him and petitioners
was a constructive, not resulting, implied trust. Petitioners,
therefore, correctly questioned private respondents exercise of
absolute ownership over the property. Unfortunately, however,
petitioners assailed it long after their right to do so had prescribed.
The rule that a trustee cannot acquire by prescription ownership
over property entrusted to him until and unless he repudiates the
trust, applies to express trusts and resulting implied [if !supportFootnotes][19][endif]

trusts. However, in constructive implied trusts,


[if !supportFootnotes][20][endif]

prescription may supervene even if the trustee does not [if !supportFootnotes][21][endif]

repudiate the relationship. Necessarily, repudiation of the said trust


is not a condition precedent to the running of the prescriptive
period.
Since the action for the annulment of private respondents title to Lot
No. 1700 accrued during the effectivity of Act No. 190, Section 40 of
Chapter III thereof applies. It provides:
Sec.40.Periodofprescriptionastorealestate.Anactionforrecoveryof
titleto,orpossessionof,realproperty,oraninteresttherein,canonlybe
broughtwithintenyearsafterthecauseofsuchactionaccrues.
Thus, in Heirs of Jose Olviga v. Court of Appeals, the [if !supportFootnotes][22][endif]

Court ruled that the ten-year prescriptive period for an action for
reconveyance of real property based on implied or constructive trust
which is counted from the date of registration of the property,
applies when the plaintiff is not in possession of the contested
property. In this case, private respondent, not petitioners who
instituted the action, is in actual possession of Lot No. 1700. Having
filed their action only on June 29, 1987, petitioners action has been
barred by prescription.
Not only that. Laches has also circumscribed the action for, whether
the implied trust is constructive or resulting, this doctrine applies. [if !

As regards constructive implied trusts, the Court held in


supportFootnotes][23][endif]

Diaz, et al. v. Gorricho and Aguado that: [if !supportFootnotes][24][endif]

xxxinconstructivetrusts(thatareimposedbylaw),thereisneither
promisenorfiduciaryrelation;thesocalledtrusteedoesnotrecognizeany
trustandhasnointenttoholdforthebeneficiary;therefore,thelatteris
notjustifiedindelayingactiontorecoverhisproperty.Itishisfaultifhe
delays;hence,hemaybeestoppedbyhisownlaches.
It is tragic that a land dispute has once again driven a wedge
between brothers. However, credit must be given to petitioner
Benjamin Esconde for resorting to all means possible in
[if !supportFootnotes][25][endif]
arriving at a settlement between him and his brother in accordance
with Article 222 of the Civil Code. Verbally and in two
[if !supportFootnotes][26][endif]

letters, he demanded that private respondent give him


[if !supportFootnotes][27][endif]

and his sisters their share in Lot No. 1700. He even reported the
matter to the barangay authorities for which three conferences were
held. Unfortunately, his efforts proved fruitless. Even the
[if !supportFootnotes][28][endif]

action he brought before the court was filed too late.


On the other hand, private respondent should not be unjustly
enriched by the improvements introduced by his brother on Lot No.
1700 which he himself had tolerated. He is obliged by law to
indemnify his brother, petitioner Benjamin Esconde, for whatever
expenses the latter had incurred.
WHEREFORE, the instant petition for review on certiorari is
hereby DENIED and the questioned decision AFFIRMED subject to
the modification that private respondent shall indemnify petitioner
Benjamin Esconde the expenses the latter had incurred for the
improvements on Lot No. 1700. No costs.
SO ORDERED.

GILBERT G. GUY, Petitioner,

- versus -

THE COURT OF APPEALS (8TH DIVISION), NORTHERN


ISLANDS CO., INCORPORATED, SIMNY G. GUY,
GERALDINE G. GUY, GLADYS G. YAO, and EMILIA
TABUGADIR,
Respondents.
x--------------------------x
IGNACIO AND IGNACIO LAW OFFICES,
Petitioner,
- versus -

THE COURT OF APPEALS (7TH DIVISION), NORTHERN


ISLANDS CO., INCORPORATED, SIMNY G. GUY,
GERALDINE G. GUY, GLADYS G. YAO, and EMILIA A.
TABUGADIR,
Respondents.
x--------------------------x
SMARTNET PHILIPPINES, Petitioner,

- versus -

THE COURT OF APPEALS (7TH DIVISION), NORTHERN


ISLANDS CO., INCORPORATED, SIMNY G. GUY,
GERALDINE G. GUY, GLADYS

G. YAO, and EMILIA A. TABUGADIR,


Respondents.
x--------------------------x
LINCOLN CONTINENTAL DEVELOPMENT CO., INC.,
Petitioner,

- versus -

NORTHERN ISLANDS CO., INCORPORATED, SIMNY G. GUY,


GERALDINE G. GUY, GRACE G. CHEU, GLADYS G. YAO, and
EMILIA A. TABUGADIR,
Respondents.
x--------------------------x
LINCOLN CONTINENTAL DEVELOPMENT COMPANY, INC.,
Petitioner,
- versus -

NORTHERN ISLANDS CO., INCORPORATED, SIMNY G. GUY,


GERALDINE G. GUY, GRACE G. CHEU, GLADYS G. YAO, and
EMILIA A. TABUGADIR,
Respondents.

DECISION

SANDOVAL-GUTIERREZ, J.:

Before us are five (5) consolidated cases which stemmed


from Civil Case No. 04-109444 filed with the Regional Trial
Court (RTC), Branch 24, Manila, subsequently re-raffled to
Branch 46[if !supportFootnotes][1][endif] and eventually to Branch 25.[if !
supportFootnotes][2][endif]

The instant controversies arose from a family dispute. Gilbert


Guy is the son of Francisco and Simny Guy. Geraldine, Gladys
and Grace are his sisters. The family feud involves the
ownership and control of 20,160 shares of stock of Northern
Islands Co., Inc. (Northern Islands) engaged in the manufacture,
distribution, and sales of various home appliances bearing the 3-
D trademark.
Simny and her daughters Geraldine, Gladys and Grace, as well
as Northern Islands and Emilia Tabugadir, have been impleaded
as respondents in the above-entitled cases. Northern Islands is a
family-owned corporation organized in 1957 by spouses
Francisco and respondent Simny Guy. In November 1986, they
incorporated Lincoln Continental Development Corporation,
Inc. (Lincoln Continental) as a holding company of the 50%
shares of stock of Northern Islands in trust for their three (3)
daughters, respondents Geraldine, Gladys and Grace. Sometime
in December 1986, upon instruction of spouses Guy, Atty.
Andres Gatmaitan, president of Lincoln Continental, indorsed in
blank Stock Certificate No. 132 (covering 8,400 shares) and
Stock Certificate No. 133 (covering 11,760 shares) and delivered
them to Simny.
In 1984, spouses Guy found that their son Gilbert has been
disposing of the assets of their corporations without authority. In
order to protect the assets of Northern Islands, Simny
surrendered Stock Certificate Nos. 132 and 133 to Emilia
Tabugadir, an officer of Northern Islands. The 20,160 shares
covered by the two Stock Certificates were then registered in the
names of respondent sisters, thus enabling them to assume an
active role in the management of Northern Islands.
On January 27, 2004, during a special meeting of the
stockholders of Northern Islands, Simny was elected President;
Grace as Vice-President for Finance; Geraldine as Corporate
Treasurer; and Gladys as Corporate Secretary. Gilbert retained
his position as Executive Vice President. This development
started the warfare between Gilbert and his sisters.
On March 18, 2004, Lincoln Continental filed with the RTC,
Branch 24, Manila a Complaint for Annulment of the Transfer of
Shares of Stock against respondents, docketed as Civil Case No.
04-109444. The complaint basically alleges that Lincoln
Continental owns 20,160 shares of stock of Northern Islands;
and that respondents, in order to oust Gilbert from the
management of Northern Islands, falsely transferred the said
shares of stock in respondent sisters names. Lincoln Continental
then prayed for an award of damages and that the management
of Northern Islands be restored to Gilbert. Lincoln also prayed
for the issuance of a temporary restraining order (TRO) and a
writ of preliminary mandatory injunction to prohibit respondents
from exercising any right of ownership over the shares.
On June 16, 2004, Lincoln Continental filed a Motion to Inhibit
the Presiding Judge of Branch 24, RTC, Manila on the ground of
partiality. In an Order dated June 22, 2004, the presiding judge
granted the motion and inhibited himself from further hearing
Civil Case No. 04-109444. It was then re-raffled to Branch 46 of
the same court.
On July 12, 2004, Branch 46 set the continuation of the hearing
on Lincoln Continentals application for a TRO.
On July 13, 2004, respondents filed with the Court of Appeals a
Petition for Certiorari and Mandamus, docketed as CA-G.R. SP
No. 85069, raffled off to the Tenth Division. Respondents
alleged that the presiding judge of Branch 24, in issuing the
Order dated June 22, 2004 inhibiting himself from further
hearing Civil Case No. 04-109444, and the presiding judge of
Branch 46, in issuing the Order dated July 12, 2004 setting the
continuation of hearing on Lincoln Continentals application for a
TRO, acted with grave abuse of discretion tantamount to lack or
excess of jurisdiction.
Meanwhile, on July 15, 2004, the trial court issued the TRO
prayed for by Lincoln Continental directing respondents to
restore to Gilbert the shares of stock under controversy. In the
same Order, the trial court set the hearing of Lincoln
Continentals application for a writ of preliminary injunction on
July 19, 20, and 22, 2004.
On July 16, 2004, the Court of Appeals (Tenth Division) issued a
TRO enjoining Branch 46, RTC, Manila from enforcing,
maintaining, or giving effect to its Order of July 12, 2004 setting
the hearing of Lincoln Continentals application for a TRO.
Despite the TRO, the trial court proceeded to hear Lincoln
Continentals application for a writ of preliminary injunction.
This prompted respondents to file in the same CA-G.R. SP No.
85069 a Supplemental Petition for Certiorari, Prohibition, and
Mandamus seeking to set aside the Orders of the trial court
setting the hearing and actually hearing Lincoln Continentals
application for a writ of preliminary injunction. They prayed for
a TRO and a writ of preliminary injunction to enjoin the trial
court (Branch 46) from further hearing Civil Case No. 04-
109444.
On September 17, 2004, the TRO issued by the Court of Appeals
(Tenth Division) in CA-G.R. SP No. 85069 expired.
On September 20, 2004, Gilbert filed a Motion for Leave to
Intervene and Motion to Admit Complaint-in-Intervention in
Civil Case No. 04-109444. In its Order dated October 4, 2004,
the trial court granted the motions.
Meantime, on October 13, 2004, the trial court issued the writ of
preliminary mandatory injunction prayed for by Lincoln
Continental in Civil Case No. 04-109444.
On October 20, 2004, the Court of Appeals (Tenth Division)
denied respondents application for injunctive relief since the trial
court had already issued a writ of preliminary injunction in favor
of Lincoln Continental. Consequently, on October 22, 2004,
respondents filed with the Tenth Division a Motion to Withdraw
Petition and Supplemental Petition in CA-G.R. SP No. 85069.
On October 26, 2004, respondents filed a new Petition for
Certiorari with the Court of Appeals, docketed as CA-G.R. SP
No. 87104, raffled off to the Eighth Division. They prayed that
the TRO and writ of preliminary injunction issued by the RTC,
Branch 46, Manila be nullified and that an injunctive relief be
issued restoring to them the management of Northern Islands.
They alleged that Gilbert has been dissipating the assets of the
corporation for his personal gain.
On October 28, 2004, the Court of Appeals Eighth Division
issued a TRO enjoining the implementation of the writ of
preliminary injunction dated October 13, 2004 issued by the trial
court in Civil Case No. 04-109444; and directing Lincoln
Continental to turn over the assets and records of Northern
Islands to respondents.
On November 2, 2004, respondents filed with the appellate court
(Eighth Division) an Urgent Omnibus Motion praying for the
issuance of a break-open Order to implement its TRO.
On November 4, 2004, the Eighth Division issued a Resolution
granting respondents motion. Pursuant to this Resolution,
respondents entered the Northern Islands premises at No. 3
Mercury Avenue, Libis, Quezon City.
On November 18, 2004, Gilbert filed with this Court a petition
for certiorari, docketed as G.R. No. 165849, alleging that the
Court of Appeals (Eighth Division), in granting an injunctive
relief in favor of respondents, committed grave abuse of
discretion tantamount to lack or in excess of jurisdiction. The
petition also alleges that respondents resorted to forum
shopping.
Meanwhile, on December 16, 2004, Smartnet Philippines, Inc.
(Smartnet) filed with the Metropolitan Trial Court (MeTC),
Branch 35, Quezon City a complaint for forcible entry against
respondents, docketed as Civil Case No. 35-33937. The
complaint alleges that in entering the Northern Islands premises,
respondents took possession of the area being occupied by
Smartnet and barred its officers and employees from occupying
the same.
Likewise on December 16, 2004, Ignacio and Ignacio Law
Offices also filed with Branch 37, same court, a complaint for
forcible entry against respondents, docketed as Civil Case No.
34106. It alleges that respondents forcibly occupied its office
space when they took over the premises of Northern Islands.
On December 22, 2004, the Eighth Division issued the writ of
preliminary injunction prayed for by respondents in CA-G.R. SP
No. 87104.
Subsequently, the presiding judge of the RTC, Branch 46,
Manila retired. Civil Case No. 04-109444 was then re-raffled to
Branch 25.
On January 20, 2005, respondents filed with the Eighth Division
of the appellate court a Supplemental Petition for Certiorari
with Urgent Motion for a Writ of Preliminary Injunction to
Include Supervening Events. Named as additional respondents
were 3-D Industries, Judge Celso D. Lavia, Presiding Judge,
RTC, Branch 71, Pasig City and Sheriff Cresencio Rabello, Jr.
This supplemental petition alleges that Gilbert, in an attempt to
circumvent the injunctive writ issued by the Eighth Division of
the appellate court, filed with the RTC, Branch 71, Pasig City a
complaint for replevin on behalf of 3-D Industries, to enable it to
take possession of the assets and records of Northern Islands.
The complaint was docketed as Civil Case No. 70220. On
January 18, 2005, the RTC issued the writ of replevin in favor of
3-D Industries.
On April 15, 2005, respondents filed with the Eighth Division a
Second Supplemental Petition for Certiorari and Prohibition
with Urgent Motion for the Issuance of an Expanded Writ of
Preliminary Injunction. Impleaded therein as additional
respondents were Ignacio and Ignacio Law Offices, Smartnet,
Judge Maria Theresa De Guzman, Presiding Judge, MeTC,
Branch 35, Quezon City, Judge Augustus C. Diaz, Presiding
Judge, MeTC, Branch 37, Quezon City, Sun Fire Trading
Incorporated, Zolt Corporation, Cellprime Distribution
Corporation, Goodgold Realty and Development Corporation,
John Does and John Doe Corporations. Respondents alleged in
the main that the new corporations impleaded are alter egos of
Gilbert; and that the filing of the forcible entry cases with the
MeTC was intended to thwart the execution of the writ of
preliminary injunction dated December 22, 2004 issued by the
Court of Appeals (Eighth Division) in CA-G.R. SP No. 87104.
On April 26, 2005, the Eighth Division issued a Resolution
admitting respondents new pleading. On August 19, 2005, the
Eighth Division (now Seventh Division) rendered its Decision in
CA-G.R. SP No. 87104, the dispositive portion of which reads:
WHEREFORE, premises considered, the petition is hereby GRANTED
and the October 13, 2004 Order and the October 13, 2004 Writ of
Preliminary Mandatory Injunction issued by Branch 46 of the Regional
Trial Court of Manila are hereby REVERSED and SET ASIDE. The
December 17, 2004 Order and Writ of Preliminary Injunction issued by
this Court of Appeals are hereby MADE PERMANENT against all
respondents herein.
SO ORDERED.

Meanwhile, in a Decision[if !supportFootnotes][3][endif] dated September


19, 2005, the RTC, Branch 25, Manila dismissed the complaint
filed by Lincoln Continental and the complaint-in-intervention
of Gilbert in Civil Case No. 04-109444, thus:
WHEREFORE, in view of the foregoing, the Complaint and the
Complaint-in-Intervention are hereby DISMISSED. Plaintiff and plaintiff-
intervenor are hereby ordered to jointly and severally pay defendants the
following:

[if !supportLists](a) [endif]Moral damages in the amount


of Php2,000,000.00 each for defendants Simny Guy,
Geraldine Guy, Grace Guy-Cheu and Gladys Yao;

[if !supportLists](b) [endif]Moral damages in the amount


of Php200,000.00 for defendant Emilia Tabugadir;
[if !supportLists](c) [endif]Exemplary damages in the
amount of Php2,000,000.00 each for defendants
Simny Guy, Geraldine Guy, Grace Guy-Cheu, and
Gladys Yao;

[if !supportLists](d) [endif]Exemplary damages in the


amount of Php200,000.00 for defendant Emilia
Tabugadir;

[if !supportLists](e) [endif]Attorneys fees in the amount of


Php2,000.000.00; and

[if !supportLists](f) [endif]Costs of suit.

SO ORDERED.

The trial court held that Civil Case No. 04-109444 is a


baseless and an unwarranted suit among family members; that
based on the evidence, Gilbert was only entrusted to hold the
disputed shares of stock in his name for the benefit of the other
family members; and that it was only when Gilbert started to
dispose of the assets of the familys corporations without their
knowledge that respondent sisters caused the registration of the
shares in their respective names.
Both Lincoln Continental and Gilbert timely appealed the
RTC Decision to the Court of Appeals, docketed therein as CA-
G.R. CV No. 85937.
On September 15, 2005, 3-D Industries, Inc. filed a
petition for certiorari, prohibition, and mandamus with this
Court assailing the Decision of the Court of Appeals in CA-G.R.
SP No. 87104 setting aside the writ of preliminary injunction
issued by the RTC, Branch 46. The petition was docketed as
G.R. No. 169462 and raffled off to the Third Division of this
Court.
On October 3, 2005, the Third Division of this Court
issued a Resolution[if !supportFootnotes][4][endif] dismissing the petition of
3-D Industries in G.R. No. 169462. 3-D Industries timely filed
its motion for reconsideration but this was denied by this Court
in its Resolution[if !supportFootnotes][5][endif] dated December 14, 2005.
Meanwhile, on October 10, 2005, Gilbert, petitioner in
G.R. No. 165849 for certiorari, filed with this Court a
Supplemental Petition for Certiorari, Prohibition, and
Mandamus with Urgent Application for a Writ of Preliminary
Mandatory Injunction challenging the Decision of the Court of
Appeals (Seventh Division), dated August 19, 2005, in CA-G.R.
SP No. 87104. This Decision set aside the Order dated October
13, 2004 of the RTC, Branch 46 granting the writ of preliminary
injunction in favor of Lincoln Continental.
On November 8, 2005, Ignacio and Ignacio Law Offices
and Smartnet filed with this Court their petitions for certiorari,
docketed as G.R. Nos. 170185 and 170186, respectively.
On February 27, 2006, Lincoln Continental filed with this
Court a petition for review on certiorari challenging the
Decision of the Court of Appeals (Seventh Division) in CA-G.R.
CV No. 85937, docketed as G.R. No. 171066.
On March 20, 2006, we ordered the consolidation of G.R.
No. 171066 with G.R. Nos. 165849, 170185, and 170186.
In the meantime, in a Decision dated November 27, 2006
in CA-G.R. CV No. 85937, the Court of Appeals (Special
Second Division) affirmed the Decision in Civil Case No. 04-
109444 of the RTC (Branch 25) dismissing Lincoln Continentals
complaint and Gilberts complaint-in-intervention, thus:
WHEREFORE, the appeals are dismissed and the assailed decision
AFFIRMED with modifications that plaintiff and plaintiff-intervenor are
ordered to pay each of the defendants-appellees Simny Guy, Geraldine
Guy, Grace Guy-Cheu and Gladys Yao moral damages of P500,000.00,
exemplary damages of P100,000.00 and attorneys fees of P500,000.00.
SO ORDERED.

Lincoln Continental and Gilbert filed their respective


motions for reconsideration, but they were denied in a
Resolution promulgated on February 12, 2007.
Lincoln Continental then filed with this Court a petition
for review on certiorari assailing the Decision of the Court of
Appeals (Former Special Second Division) in CA-G.R. CV No.
85937. This petition was docketed as G.R. No. 176650 and
raffled off to the Third Division of this Court.
In our Resolution dated June 6, 2007, we ordered G.R.
No. 176650 consolidated with G.R. Nos. 165849, 170185,
170186, and 171066.
THE ISSUES
In G.R. Nos. 165849 and 171066, petitioners Gilbert and
Lincoln Continental raise the following issues: (1) whether
respondents are guilty of forum shopping; and (2) whether they
are entitled to the injunctive relief granted in CA-G.R. SP No.
87104.
In G.R. Nos. 170185 and 170186, the pivotal issue is
whether the Court of Appeals committed grave abuse of
discretion amounting to lack or excess of jurisdiction in ruling
that petitioners Ignacio and Ignacio Law Offices and Smartnet
are also covered by its Resolution granting the writ of
preliminary injunction in favor of respondents.
In G.R. No. 176650, the core issue is whether the Court
of Appeals (Special Second Division) erred in affirming the
Decision of the RTC, Branch 25, Manila dated September 19,
2005 dismissing the complaint of Lincoln Continental and the
complaint-in-intervention of Gilbert in Civil Case No. 04-
109444.
THE COURTS RULING
A. G.R. Nos. 165849 and 171066
On the question of forum shopping, petitioners Gilbert and
Lincoln Continental contend that the acts of respondents in filing
a petition for certiorari and mandamus in CA-G.R. SP No.
85069 and withdrawing the same and their subsequent filing of a
petition for certiorari in CA-G.R. SP No. 87104 constitute
forum shopping; that respondents withdrew their petition in CA-
G.R. SP No. 85069 after the Tenth Division issued a Resolution
dated October 20, 2004 denying their application for a writ of
preliminary injunction; that they then filed an identical petition
in CA-G.R. SP No. 87104 seeking the same relief alleged in
their petition in CA-G.R. SP No. 85069; and that by taking
cognizance of the petition in CA-G.R. SP No. 87104, instead of
dismissing it outright on the ground of forum shopping, the
Court of Appeals committed grave abuse of discretion
tantamount to lack or excess of jurisdiction.
A party is guilty of forum shopping when he repetitively avails
of several judicial remedies in different courts, simultaneously
or successively, all substantially founded on the same
transactions and the same essential facts and circumstances, and
all raising substantially the same issues either pending in, or
already resolved adversely by some other court. [if !supportFootnotes][6]
[endif]
It is prohibited by Section 5, Rule 7 of the 1997 Rules of
Civil Procedure, as amended, which provides:
SECTION 5. Certification against forum shopping. The plaintiff or
principal party shall certify under oath in the complaint or other initiatory
pleading asserting a claim for relief, or in a sworn certification annexed
thereto and simultaneously filed therewith: (a) that he has not theretofore
commenced any action or filed any other claim involving the same issues
in any court, tribunal, or quasi-judicial agency and, to the best of his
knowledge, no such other action or claim is pending therein; (b) if there is
such other pending action or claim, a complete statement of the present
status thereof; and (c) if he should thereafter learn that the same or similar
action has been filed or is pending, he shall report that fact within five (5)
days therefrom to the court wherein his aforesaid complaint or initiatory
pleading has been filed.
Failure to comply with the foregoing requirements shall not be curable by
mere amendment of the complaint or other initiatory pleading but shall be
cause for the dismissal of the case without prejudice, unless otherwise
provided, upon motion and hearing. The submission of a false certification
or non-compliance with any of the undertakings therein shall constitute
indirect contempt of court, without prejudice to the corresponding
administrative and criminal actions. If the acts of the party or his counsel
clearly constitute willful and deliberate forum shopping, the same shall be
ground for summary dismissal with prejudice and shall constitute direct
contempt, as well as a cause for administrative sanctions.

Forum shopping is condemned because it unnecessarily burdens


our courts with heavy caseloads, unduly taxes the manpower and
financial resources of the judiciary and trifles with and mocks
judicial processes, thereby affecting the efficient administration
of justice.[if !supportFootnotes][7][endif] The primary evil sought to be
proscribed by the prohibition against forum shopping is,
however, the possibility of conflicting decisions being rendered
by the different courts and/or administrative agencies upon the
same issues.[if !supportFootnotes][8][endif]
Forum shopping may only exist where the elements of litis
pendentia are present or where a final judgment in one case will
amount to res judicata in the other.[if !supportFootnotes][9][endif] Litis
pendentia as a ground for dismissing a civil action is that
situation wherein another action is pending between the same
parties for the same cause of action, such that the second action
is unnecessary and vexatious. The elements of litis pendentia are
as follows: (a) identity of parties, or at least such as representing
the same interest in both actions; (b) identity of rights asserted
and the relief prayed for, the relief being founded on the same
facts; and (c) the identity of the two cases such that judgment in
one, regardless of which party is successful, would amount to
res judicata in the other.[if !supportFootnotes][10][endif] From the foregoing,
it is clear that sans litis pendentia or res judicata, there can be no
forum shopping.
While the first element of litis pendentia identity of parties is
present in both CA-G.R. SP No. 85069 and CA-G.R. SP No.
87104, however, the second element, does not exist. The
petitioners in CA-G.R. SP No. 85069 prayed that the following
Orders be set aside:
[if !supportLists](1) [endif]the Order of inhibition dated June 22,
2004 issued by the presiding judge of the RTC of Manila,
Branch 24; and
[if !supportLists](2) [endif]the Order dated July 12, 2004 issued
by Branch 46 setting Gilberts application for preliminary
injunction for hearing.
In their petition in CA-G.R. SP No. 87104, respondents
prayed for the annulment of the writ of preliminary injunction
issued by the RTC, Branch 46 after the expiration of the TRO
issued by the Tenth Division of the Court of Appeals. Evidently,
this relief is not identical with the relief sought by respondents in
CA-G.R. SP No. 85069. Clearly, the second element of litis
pendentia the identity of reliefs sought - is lacking in the two
petitions filed by respondents with the appellate court. Thus, we
rule that no grave abuse of discretion amounting to lack or
excess of jurisdiction may be attributed to the Court of Appeals
(Eighth Division) for giving due course to respondents petition
in CA-G.R. SP No. 87104.
On the second issue, Section 3, Rule 58 of the 1997 Rules of
Civil Procedure, as amended provides:
SECTION 3. Grounds for issuance of preliminary injunction. A
preliminary injunction may be granted when it is established:
[if !supportLists](a) [endif]That the applicant is entitled to the relief
demanded, and the whole or part of such relief consists in restraining the
commission or continuance of the act or acts complained of, or in
requiring the performance of an act or acts, either for a limited period or
perpetually;
[if !supportLists](b) [endif]That the commission, continuance, or non-
performance of the act or acts complained of during the litigation would
probably work injustice to the applicant; or
[if !supportLists](c) [endif]That a party, court, agency, or a person is
doing, threatening, or is attempting to do, or is procuring or suffering to be
done, some act or acts probably in violation of the rights of the applicant
respecting the subject of the action or proceeding, and tending to render
the judgment ineffectual.

For a party to be entitled to an injunctive writ, he must


show that there exists a right to be protected and that the acts
against which the injunction is directed are violative of this
right.[if !supportFootnotes][11][endif] In granting the respondents application
for injunctive relief and making the injunction permanent, the
Court of Appeals (Seventh Division) found that they have shown
their clear and established right to the disputed 20,160 shares of
stock because: (1) they have physical possession of the two
stock certificates equivalent to the said number of shares; (2)
Lincoln Continental is a mere trustee of the Guy family; and (3)
respondents constitute a majority of the board of directors of
Northern Islands, and accordingly have management and control
of the company at the inception of Civil Case No. 94-109444.
The appellate court then ruled that the trial court committed
grave abuse of discretion in issuing a writ of preliminary
mandatory injunction in favor of Guy. The writ actually reduced
the membership of Northern Islands board to just one member -
Gilbert Guy. Moreover, he failed to establish by clear and
convincing evidence his ownership of the shares of stock in
question. The Court of Appeals then held there was an urgent
necessity to issue an injunctive writ in order to prevent serious
damage to the rights of respondents and Northern Islands.
We thus find no reason to depart from the findings of the
Court of Appeals. Indeed, we cannot discern any taint of grave
abuse of discretion on its part in issuing the assailed writ of
preliminary injunction and making the injunction permanent.
B. G.R. Nos. 170185 & 170186
Ignacio and Ignacio Law Offices and Smartnet,
petitioners, claim that the Court of Appeals never acquired
jurisdiction over their respective persons as they were not served
with summons, either by the MeTC or by the appellate court in
CA-G.R. SP No. 87104. Thus, they submit that the Court of
Appeals committed grave abuse of discretion amounting to lack
or excess of jurisdiction when it included them in the coverage
of its injunctive writ.
Jurisdiction is the power or capacity given by the law to a
court or tribunal to entertain, hear, and determine certain
controversies.[if !supportFootnotes][12][endif] Jurisdiction over the subject
matter of a case is conferred by law.
Section 9 (1) of Batas Pambansa Blg. 129, [if !supportFootnotes][13]
[endif]
as amended, provides:
SEC. 9. Jurisdiction. The Court of Appeals shall exercise:
(1) Original jurisdiction to issue writs of mandamus, prohibition,
certiorari, habeas corpus, and quo warranto, and auxiliary writs or
processes, whether or not in aid of its appellate jurisdiction.

Rule 46 of the 1997 Rules of Civil Procedure, as amended,


governs all cases originally filed with the Court of Appeals.
The following provisions of the Rule state:
SEC. 2. To what actions applicable. This Rule shall apply to original
actions for certiorari, prohibition, mandamus and quo warranto.
Except as otherwise provided, the actions for annulment of judgment shall
be governed by Rule 47, for certiorari, prohibition, and mandamus by
Rule 65, and for quo warranto by Rule 66.
xxx
SEC. 4. Jurisdiction over person of respondent, how acquired. The court
shall acquire jurisdiction over the person of the respondent by the service
on him of its order or resolution indicating its initial action on the petition
or by his voluntary submission to such jurisdiction.
SEC. 5. Action by the court. The court may dismiss the petition outright
with specific reasons for such dismissal or require the respondent to file a
comment on the same within ten (10) days from notice. Only pleadings
required by the court shall be allowed. All other pleadings and papers may
be filed only with leave of court.

It is thus clear that in cases covered by Rule 46, the Court


of Appeals acquires jurisdiction over the persons of the
respondents by the service upon them of its order or resolution
indicating its initial action on the petitions or by their voluntary
submission to such jurisdiction.[if !supportFootnotes][14][endif] The reason
for this is that, aside from the fact that no summons or other
coercive process is served on respondents, their response to the
petitions will depend on the initial action of the court thereon.
Under Section 5, the court may dismiss the petitions outright,
hence, no reaction is expected from respondents and under the
policy adopted by Rule 46, they are not deemed to have been
brought within the courts jurisdiction until after service on them
of the dismissal order or resolution.[if !supportFootnotes][15][endif]
Records show that on April 27, 2005, petitioners in these
two forcible entry cases, were served copies of the Resolution of
the Court of Appeals (Seventh Division) dated April 26, 2005 in
CA-G.R. SP No. 87104.[if !supportFootnotes][16][endif] The Resolution
states:
Private respondents SMARTNET PHILIPPINES, INC.,
IGNACIO & IGNACIO LAW OFFICE, SUNFIRE TRADING, INC.,
ZOLT CORPORATION, CELLPRIME DISTRIBUTION CORPO.,
GOODGOLD REALTY & DEVELOPMENT CORP., are hereby
DIRECTED to file CONSOLIDATED COMMENT on the original
Petition for Certiorari, the First Supplemental Petition for Certiorari, and
the Second Supplemental Petition for Certiorari (not a Motion to Dismiss)
within ten (10) days from receipt of a copy of the original, first and second
Petitions for Certiorari.[if !supportFootnotes][17][endif]

Pursuant to Rule 46, the Court of Appeals validly acquired


jurisdiction over the persons of Ignacio and Ignacio Law Offices
and Smartnet upon being served with the above Resolution.
But neither of the parties bothered to file the required
comment. Their allegation that they have been deprived of due
process is definitely without merit. We have consistently held
that when a party was afforded an opportunity to participate in
the proceedings but failed to do so, he cannot complain of
deprivation of due process for by such failure, he is deemed to
have waived or forfeited his right to be heard without violating
the constitutional guarantee.[if !supportFootnotes][18][endif]
On the question of whether the Court of Appeals could
amend its Resolution directing the issuance of a writ of
preliminary injunction so as to include petitioners, suffice to
state that having acquired jurisdiction over their persons, the
appellate court could do so pursuant to Section 5 (g), Rule 135
of the Revised Rules of Court, thus:
SEC. 5. Inherent powers of courts. Every court shall have power:
xxx
(g) To amend and control its process and orders so as to make them
conformable to law and justice.

In Villanueva v. CFI of Oriental Mindoro[if !supportFootnotes][19]


[endif]
and Eternal Gardens Memorial Parks Corp. v. Intermediate
Appellate Court,[if !supportFootnotes][20][endif] we held that under this Rule,
a court has inherent power to amend its judgment so as to make
it conformable to the law applicable, provided that said
judgment has not yet acquired finality, as in these cases.
C. G.R. No. 176650
The fundamental issue is who owns the disputed shares of
stock in Northern Islands.
We remind petitioner Lincoln Continental that what it
filed with this Court is a petition for review on certiorari under
Rule 45 of the 1997 Rules of Civil Procedure, as amended. It is a
rule in this jurisdiction that in petitions for review under Rule
45, only questions or errors of law may be raised. [if !supportFootnotes][21]
[endif]
There is a question of law when the doubt or controversy
concerns the correct application of law or jurisprudence to a
certain set of facts, or when the issue does not call for an
examination of the probative value of the evidence presented.
There is a question of fact when the doubt arises as to the truth
or falsehood of facts or when there is a need to calibrate the
whole evidence considering mainly the credibility of the
witnesses, the existence and relevancy of specific surrounding
circumstances, as well as their relation to each other and to the
whole, and the probability of the situation.[if !supportFootnotes][22][endif]
Obviously, the issue raised by the instant petition for review on
certiorari, involves a factual matter, hence, is outside the
domain of this Court. However, in the interest of justice and in
order to settle this controversy once and for all, a ruling from
this Court is imperative.
One thing is clear. It was established before the trial
court, affirmed by the Court of Appeals, that Lincoln
Continental held the disputed shares of stock of Northern
Islands merely in trust for the Guy sisters. In fact, the
evidence proffered by Lincoln Continental itself supports this
conclusion. It bears emphasis that this factual finding by the trial
court was affirmed by the Court of Appeals, being supported by
evidence, and is, therefore, final and conclusive upon this Court.
Article 1440 of the Civil Code provides that:
ART. 1440. A person who establishes a trust is called the trustor;
one in whom confidence is reposed as regards property for the benefit of
another person is known as the trustee; and the person for whose benefit
the trust has been created is referred to as the beneficiary.

In the early case of Gayondato v. Treasurer of the


Philippine Islands,[if !supportFootnotes][23][endif] this Court defines trust, in
its technical sense, as a right of property, real or personal, held
by one party for the benefit of another. Differently stated, a trust
is a fiduciary relationship with respect to property, subjecting the
person holding the same to the obligation of dealing with the
property for the benefit of another person.[if !supportFootnotes][24][endif]
Both Lincoln Continental and Gilbert claim that the latter
holds legal title to the shares in question. But record shows that
there is no evidence to support their claim. Rather, the
evidence on record clearly indicates that the stock certificates
representing the contested shares are in respondents possession.
Significantly, there is no proof to support his allegation that the
transfer of the shares of stock to respondent sisters is fraudulent.
As aptly held by the Court of Appeals, fraud is never presumed
but must be established by clear and convincing evidence.[if !
supportFootnotes][25][endif]
Gilbert failed to discharge this burden. We,
agree with the Court of Appeals that respondent sisters own the
shares of stocks, Gilbert being their mere trustee. Verily, we find
no reversible error in the challenged Decision of the Court of
Appeals (Special Second Division) in CA-G.R. CV No. 85937.
WHEREFORE, we DISMISS the petitions in G.R. Nos.
165849, 170185, 170186 and 176650; and DENY the petitions
in G.R. Nos. 171066 and 176650. The Resolutions of the Court
of Appeals (Eighth Division), dated October 28, 2004 and
November 4, 2004, as well as the Decision dated October 10,
2005 of the Court of Appeals (Seventh Division) in CA-G.R. SP
No. 87104 are AFFIRMED. We likewise AFFIRM IN TOTO
the Decision of the Court of Appeals (Special Second Division),
dated November 27, 2006 in CA-G.R. CV No. 85937. Costs
against petitioners.

G.R. No. 162175 June 28, 2010


MIGUEL J. OSSORIO PENSION FOUNDATION, INCORPORATED,
Petitioner,
vs.
COURT OF APPEALS and COMMISSIONER OF INTERNAL REVENUE,
Respondents.
DECISION
CARPIO, J.:
The Case
The Miguel J. Ossorio Pension Foundation, Incorporated (petitioner or
MJOPFI) filed this Petition for Certiorari1 with Prayer for the Issuance of a
Temporary Restraining Order and/or Writ of Preliminary Injunction to reverse
the Court of Appeals (CA) Decision2 dated 30 May 2003 in CA-G.R. SP No.
61829 as well as the Resolution3 dated 7 November 2003 denying the Motion
for Reconsideration. In the assailed decision, the CA affirmed the Court of Tax
Appeals (CTA) Decision4 dated 24 October 2000. The CTA denied petitioners
claim for refund of withheld creditable tax of P3,037,500 arising from the sale
of real property of which petitioner claims to be a co-owner as trustee of the
employees trust or retirement funds.
The Facts
Petitioner, a non-stock and non-profit corporation, was organized for the
purpose of holding title to and administering the employees trust or
retirement funds (Employees Trust Fund) established for the benefit of the
employees of Victorias Milling Company, Inc. (VMC). 5 Petitioner, as trustee,
claims that the income earned by the Employees Trust Fund is tax exempt
under Section 53(b) of the National Internal Revenue Code (Tax Code).
Petitioner alleges that on 25 March 1992, petitioner decided to invest part of
the Employees Trust Fund to purchase a lot6 in the Madrigal Business Park
(MBP lot) in Alabang, Muntinlupa. Petitioner bought the MBP lot through
VMC.7 Petitioner alleges that its investment in the MBP lot came about upon
the invitation of VMC, which also purchased two lots. Petitioner claims that its
share in the MBP lot is 49.59%. Petitioners investment manager, the Citytrust
Banking Corporation (Citytrust),8 in submitting its Portfolio Mix Analysis,
regularly reported the Employees Trust Funds share in the MBP lot.9 The
MBP lot is covered by Transfer Certificate of Title No. 183907 (TCT 183907)
with VMC as the registered owner.10
Petitioner claims that since it needed funds to pay the retirement and pension
benefits of VMC employees and to reimburse advances made by VMC,
petitioners Board of Trustees authorized the sale of its share in the MBP lot. 11
On 14 March 1997, VMC negotiated the sale of the MBP lot with Metropolitan
Bank and Trust Company, Inc. (Metrobank) for P81,675,000, but the
consummation of the sale was withheld. 12 On 26 March 1997, VMC eventually
sold the MBP lot to Metrobank. VMC, through its Vice President Rolando
Rodriguez and Assistant Vice President Teodorico Escober, signed the Deed
of Absolute Sale as the sole vendor.
Metrobank, as withholding agent, paid the Bureau of Internal Revenue (BIR)
P6,125,625 as withholding tax on the sale of real property.
Petitioner alleges that the parties who co-owned the MBP lot executed a
notarized Memorandum of Agreement as to the proceeds of the sale, the
pertinent provisions of which state:13
2. The said parcels of land are actually co-owned by the following:
Block 4, Lot 1 Covered by TCT No. 183907

%
SQ.M.
AMOUNT
MJOPFI
49.59%
450.00
P 5,504,748.25
VMC
32.23%
351.02
3,578,294.70
VFC
18.18%
197.98
2,018,207.30
3. Since Lot 1 has been sold for P81,675,000.00 (gross of 7.5% withholding
tax and 3% brokers commission, MJOPFIs share in the proceeds of the sale
is P40,500,000.00 (gross of 7.5% withholding tax and 3% brokers
commission. However, MJO Pension Fund is indebted to VMC representing
pension benefit advances paid to retirees amounting to P21,425,141.54,
thereby leaving a balance of P14,822,358.46 in favor of MJOPFI. Check for
said amount of P14,822,358.46 will therefore be issued to MJOPFI as its
share in the proceeds of the sale of Lot 1. The check corresponding to said
amount will be deposited with MJOPFIs account with BPI Asset Management
& Trust Group which will then be invested by it in the usual course of its
administration of MJOPFI funds.
Petitioner claims that it is a co-owner of the MBP lot as trustee of the
Employees Trust Fund, based on the notarized Memorandum of Agreement
presented before the appellate courts. Petitioner asserts that VMC has
confirmed that petitioner, as trustee of the Employees Trust Fund, is VMCs
co-owner of the MBP lot. Petitioner maintains that its ownership of the MBP
lot is supported by the excerpts of the minutes and the resolutions of
petitioners Board Meetings. Petitioner further contends that there is no
dispute that the Employees Trust Fund is exempt from income tax. Since
petitioner, as trustee, purchased 49.59% of the MBP lot using funds of the
Employees Trust Fund, petitioner asserts that the Employees Trust Fund's
49.59% share in the income tax paid (or P3,037,697.40 rounded off to
P3,037,500) should be refunded.14
Petitioner maintains that the tax exemption of the Employees Trust Fund
rendered the payment of P3,037,500 as illegal or erroneous. On 5 May 1997,
petitioner filed a claim for tax refund.15
On 14 August 1997, the BIR, through its Revenue District Officer, wrote
petitioner stating that under Section 26 of the Tax Code, petitioner is not
exempt from tax on its income from the sale of real property. The BIR asked
petitioner to submit documents to prove its co-ownership of the MBP lot and
its exemption from tax.16
On 2 September 1997, petitioner replied that the applicable provision granting
its claim for tax exemption is not Section 26 but Section 53(b) of the Tax
Code. Petitioner claims that its co-ownership of the MBP lot is evidenced by
Board Resolution Nos. 92-34 and 96-46 and the memoranda of agreement
among petitioner, VMC and its subsidiaries.17
Since the BIR failed to act on petitioners claim for refund, petitioner elevated
its claim to the Commissioner of Internal Revenue (CIR) on 26 October 1998.
The CIR did not act on petitioners claim for refund. Hence, petitioner filed a
petition for tax refund before the CTA. On 24 October 2000, the CTA rendered
a decision denying the petition.18
On 22 November 2000, petitioner filed its Petition for Review before the Court
of Appeals. On 20 May 2003, the CA rendered a decision denying the appeal.
The CA also denied petitioners Motion for Reconsideration.19
Aggrieved by the appellate courts Decision, petitioner elevated the case
before this Court.
The Ruling of the Court of Tax Appeals
The CTA held that under Section 53(b)20 [now Section 60(b)] of the Tax Code,
it is not petitioner that is entitled to exemption from income tax but the income
or earnings of the Employees Trust Fund. The CTA stated that petitioner is
not the pension trust itself but it is a separate and distinct entity whose
function is to administer the pension plan for some VMC employees. 21 The
CTA, after evaluating the evidence adduced by the parties, ruled that
petitioner is not a party in interest.
To prove its co-ownership over the MBP lot, petitioner presented the following
documents:
a. Secretarys Certificate showing how the purchase and eventual sale of the
MBP lot came about.
b. Memoranda of Agreement showing various details:
i. That the MBP lot was co-owned by VMC and petitioner on a 50/50 basis;
ii. That VMC held the property in trust for North Legaspi Land Development
Corporation, North Negros Marketing Co., Inc., Victorias Insurance Factors
Corporation, Victorias Science and Technical Foundation, Inc. and Canetown
Development Corporation.
iii. That the previous agreement (ii) was cancelled and it showed that the
MBP lot was co-owned by petitioner, VMC and Victorias Insurance Factors
Corporation (VFC).22
The CTA ruled that these pieces of evidence are self-serving and cannot by
themselves prove petitioners co-ownership of the MBP lot when the TCT, the
Deed of Absolute Sale, and the Monthly Remittance Return of Income Taxes
Withheld (Remittance Return) disclose otherwise. The CTA further ruled that
petitioner failed to present any evidence to prove that the money used to
purchase the MBP lot came from the Employees' Trust Fund. 23
The CTA concluded that petitioner is estopped from claiming a tax exemption.
The CTA pointed out that VMC has led the government to believe that it is the
sole owner of the MBP lot through its execution of the Deeds of Absolute Sale
both during the purchase and subsequent sale of the MBP lot and through the
registration of the MBP lot in VMCs name. Consequently, the tax was also
paid in VMCs name alone. The CTA stated that petitioner may not now claim
a refund of a portion of the tax paid by the mere expediency of presenting
Secretarys Certificates and memoranda of agreement in order to prove its
ownership. These documents are self-serving; hence, these documents merit
very little weight.24
The Ruling of the Court of Appeals
The CA declared that the findings of the CTA involved three types of
documentary evidence that petitioner presented to prove its contention that it
purchased 49.59% of the MBP lot with funds from the Employees Trust Fund:
(1) the memoranda of agreement executed by petitioner and other VMC
subsidiaries; (2) Secretarys Certificates containing excerpts of the minutes of
meetings conducted by the respective boards of directors or trustees of VMC
and petitioner; (3) Certified True Copies of the Portfolio Mix Analysis issued
by Citytrust regarding the investment of P5,504,748.25 in Madrigal Business
Park I for the years 1994 to 1997.25
The CA agreed with the CTA that these pieces of documentary evidence
submitted by petitioner are largely self-serving and can be contrived easily.
The CA ruled that these documents failed to show that the funds used to
purchase the MBP lot came from the Employees Trust Fund. The CA
explained, thus:
We are constrained to echo the findings of the Court of Tax Appeals in regard
to the failure of the petitioner to ensure that legal documents pertaining to its
investments, e.g. title to the subject property, were really in its name,
considering its awareness of the resulting tax benefit that such foresight or
providence would produce; hence, genuine efforts towards that end should
have been exerted, this notwithstanding the alleged difficulty of procuring a
title under the names of all the co-owners. Indeed, we are unable to
understand why petitioner would allow the title of the property to be placed
solely in the name of petitioner's alleged co-owner, i.e. the VMC, although it
allegedly owned a much bigger (nearly half), portion thereof. Withal, petitioner
failed to ensure a "fix" so to speak, on its investment, and we are not
impressed by the documents which the petitioner presented, as the same
apparently allowed "mobility" of the subject real estate assets between or
among the petitioner, the VMC and the latter's subsidiaries. Given the fact
that the subject parcel of land was registered and sold under the name solely
of VMC, even as payment of taxes was also made only under its name, we
cannot but concur with the finding of the Court of Tax Appeals that petitioner's
claim for refund of withheld creditable tax is bereft of solid juridical basis. 26
The Issues
The issues presented are:
1. Whether petitioner or the Employees Trust Fund is estopped from claiming
that the Employees Trust Fund is the beneficial owner of 49.59% of the MBP
lot and that VMC merely held 49.59% of the MBP lot in trust for the
Employees Trust Fund.
2. If petitioner or the Employees Trust Fund is not estopped, whether they
have sufficiently established that the Employees Trust Fund is the beneficial
owner of 49.59% of the MBP lot, and thus entitled to tax exemption for its
share in the proceeds from the sale of the MBP lot.
The Ruling of the Court
We grant the petition.
The law expressly allows a co-owner (first co-owner) of a parcel of land to
register his proportionate share in the name of his co-owner (second co-
owner) in whose name the entire land is registered. The second co-owner
serves as a legal trustee of the first co-owner insofar as the proportionate
share of the first co-owner is concerned. The first co-owner remains the
owner of his proportionate share and not the second co-owner in whose
name the entire land is registered. Article 1452 of the Civil Code provides:
Art. 1452. If two or more persons agree to purchase a property and by
common consent the legal title is taken in the name of one of them for the
benefit of all, a trust is created by force of law in favor of the others in
proportion to the interest of each. (Emphasis supplied)
For Article 1452 to apply, all that a co-owner needs to show is that there is
"common consent" among the purchasing co-owners to put the legal title to
the purchased property in the name of one co-owner for the benefit of all.
Once this "common consent" is shown, "a trust is created by force of law."
The BIR has no option but to recognize such legal trust as well as the
beneficial ownership of the real owners because the trust is created by force
of law. The fact that the title is registered solely in the name of one person is
not conclusive that he alone owns the property.
Thus, this case turns on whether petitioner can sufficiently establish that
petitioner, as trustee of the Employees Trust Fund, has a common
agreement with VMC and VFC that petitioner, VMC and VFC shall jointly
purchase the MBP lot and put the title to the MBP lot in the name of VMC for
the benefit petitioner, VMC and VFC.
We rule that petitioner, as trustee of the Employees Trust Fund, has more
than sufficiently established that it has an agreement with VMC and VFC to
purchase jointly the MBP lot and to register the MBP lot solely in the name of
VMC for the benefit of petitioner, VMC and VFC.
Factual findings of the CTA will be reviewed
when judgment is based on a misapprehension of facts.
Generally, the factual findings of the CTA, a special court exercising expertise
on the subject of tax, are regarded as final, binding and conclusive upon this
Court, especially if these are substantially similar to the findings of the CA
which is normally the final arbiter of questions of fact. 27 However, there are
recognized exceptions to this rule,28 such as when the judgment is based on a
misapprehension of facts.
Petitioner contends that the CA erred in evaluating the documents as self-
serving instead of considering them as truthful and genuine because they are
public documents duly notarized by a Notary Public and presumed to be
regular unless the contrary appears. Petitioner explains that the CA erred in
doubting the authenticity and genuineness of the three memoranda of
agreement presented as evidence. Petitioner submits that there is nothing
wrong in the execution of the three memoranda of agreement by the parties.
Petitioner points out that VMC authorized petitioner to administer its
Employees Trust Fund which is basically funded by donation from its founder,
Miguel J. Ossorio, with his shares of stocks and share in VMC's profits. 29
Petitioner argues that the Citytrust report reflecting petitioners investment in
the MBP lot is concrete proof that money of the Employees Trust Funds was
used to purchase the MBP lot. In fact, the CIR did not dispute the authenticity
and existence of this documentary evidence. Further, it would be unlikely for
Citytrust to issue a certified copy of the Portfolio Mix Analysis stating that
petitioner invested in the MBP lot if it were not true. 30
Petitioner claims that substantial evidence is all that is required to prove
petitioners co-ownership and all the pieces of evidence have overwhelmingly
proved that petitioner is a co-owner of the MBP lot to the extent of 49.59% of
the MBP lot. Petitioner explains:
Thus, how the parties became co-owners was shown by the excerpts of the
minutes and the resolutions of the Board of Trustees of the petitioner and
those of VMC. All these documents showed that as far as March 1992,
petitioner already expressed intention to be co-owner of the said property. It
then decided to invest the retirement funds to buy the said property and
culminated in it owning 49.59% thereof. When it was sold to Metrobank,
petitioner received its share in the proceeds from the sale thereof. The
excerpts and resolutions of the parties' respective Board of Directors were
certified under oath by their respective Corporate Secretaries at the time. The
corporate certifications are accorded verity by law and accepted as prima
facie evidence of what took place in the board meetings because the
corporate secretary is, for the time being, the board itself. 31
Petitioner, citing Article 1452 of the Civil Code, claims that even if VMC
registered the land solely in its name, it does not make VMC the absolute
owner of the whole property or deprive petitioner of its rights as a co-owner. 32
Petitioner argues that under the Torrens system, the issuance of a TCT does
not create or vest a title and it has never been recognized as a mode of
acquiring ownership.33
The issues of whether petitioner or the Employees Trust Fund is estopped
from claiming 49.59% ownership in the MBP lot, whether the documents
presented by petitioner are self-serving, and whether petitioner has proven its
exemption from tax, are all questions of fact which could only be resolved
after reviewing, examining and evaluating the probative value of the evidence
presented. The CTA ruled that the documents presented by petitioner cannot
prove its co-ownership over the MBP lot especially that the TCT, Deed of
Absolute Sale and the Remittance Return disclosed that VMC is the sole
owner and taxpayer.
However, the appellate courts failed to consider the genuineness and due
execution of the notarized Memorandum of Agreement acknowledging
petitioners ownership of the MBP lot which provides:
2. The said parcels of land are actually co-owned by the following:
Block 4, Lot 1 Covered by TCT No. 183907

%
SQ.M.
AMOUNT
MJOPFI
49.59%
450.00
P 5,504,748.25
VMC
32.23%
351.02
3,578,294.70
VFC
18.18%
197.98
2,018,207.30
Thus, there is a "common consent" or agreement among petitioner, VMC and
VFC to co-own the MBP lot in the proportion specified in the notarized
Memorandum of Agreement.
In Cuizon v. Remoto,34 we held:
Documents acknowledged before notaries public are public documents and
public documents are admissible in evidence without necessity of preliminary
proof as to their authenticity and due execution. They have in their favor the
presumption of regularity, and to contradict the same, there must be evidence
that is clear, convincing and more than merely preponderant.
The BIR failed to present any clear and convincing evidence to prove that the
notarized Memorandum of Agreement is fictitious or has no legal effect.
Likewise, VMC, the registered owner, did not repudiate petitioners share in
the MBP lot. Further, Citytrust, a reputable banking institution, has prepared a
Portfolio Mix Analysis for the years 1994 to 1997 showing that petitioner
invested P5,504,748.25 in the MBP lot. Absent any proof that the Citytrust
bank records have been tampered or falsified, and the BIR has presented
none, the Portfolio Mix Analysis should be given probative value.
The BIR argues that under the Torrens system, a third person dealing with
registered property need not go beyond the TCT and since the registered
owner is VMC, petitioner is estopped from claiming ownership of the MBP lot.
This argument is grossly erroneous. The trustor-beneficiary is not estopped
from proving its ownership over the property held in trust by the trustee when
the purpose is not to contest the disposition or encumbrance of the property
in favor of an innocent third-party purchaser for value. The BIR, not being a
buyer or claimant to any interest in the MBP lot, has not relied on the face of
the title of the MBP lot to acquire any interest in the lot. There is no basis for
the BIR to claim that petitioner is estopped from proving that it co-owns, as
trustee of the Employees Trust Fund, the MBP lot. Article 1452 of the Civil
Code recognizes the lawful ownership of the trustor-beneficiary over the
property registered in the name of the trustee. Certainly, the Torrens system
was not established to foreclose a trustor or beneficiary from proving its
ownership of a property titled in the name of another person when the rights
of an innocent purchaser or lien-holder are not involved. More so, when such
other person, as in the present case, admits its being a mere trustee of the
trustor or beneficiary.
The registration of a land under the Torrens system does not create or vest
title, because registration is not one of the modes of acquiring ownership. A
TCT is merely an evidence of ownership over a particular property and its
issuance in favor of a particular person does not foreclose the possibility that
the property may be co-owned by persons not named in the certificate, or that
it may be held in trust for another person by the registered owner.35
No particular words are required for the creation of a trust, it being sufficient
that a trust is clearly intended.36 It is immaterial whether or not the trustor and
the trustee know that the relationship which they intend to create is called a
trust, and whether or not the parties know the precise characteristic of the
relationship which is called a trust because what is important is whether the
parties manifested an intention to create the kind of relationship which in law
is known as a trust.37
The fact that the TCT, Deed of Absolute Sale and the Remittance Return
were in VMCs name does not forestall the possibility that the property is
owned by another entity because Article 1452 of the Civil Code expressly
authorizes a person to purchase a property with his own money and to
take conveyance in the name of another.
In Tigno v. Court of Appeals, the Court explained, thus:
An implied trust arises where a person purchases land with his own money
and takes conveyance thereof in the name of another. In such a case, the
property is held on resulting trust in favor of the one furnishing the
consideration for the transfer, unless a different intention or understanding
appears. The trust which results under such circumstances does not arise
from a contract or an agreement of the parties, but from the facts and
circumstances; that is to say, the trust results because of equity and it arises
by implication or operation of law. 38
In this case, the notarized Memorandum of Agreement and the certified true
copies of the Portfolio Mix Analysis prepared by Citytrust clearly prove that
petitioner invested P5,504,748.25, using funds of the Employees' Trust Fund,
to purchase the MBP lot. Since the MBP lot was registered in VMCs name
only, a resulting trust is created by operation of law. A resulting trust is
based on the equitable doctrine that valuable consideration and not legal title
determines the equitable interest and is presumed to have been
contemplated by the parties.39 Based on this resulting trust, the Employees
Trust Fund is considered the beneficial co-owner of the MBP lot.
Petitioner has sufficiently proven that it had a "common consent" or
agreement with VMC and VFC to jointly purchase the MBP lot. The absence
of petitioners name in the TCT does not prevent petitioner from claiming
before the BIR that the Employees Trust Fund is the beneficial owner of
49.59% of the MBP lot and that VMC merely holds 49.59% of the MBP lot in
trust, through petitioner, for the benefit of the Employees Trust Fund.
The BIR has acknowledged that the owner of a land can validly place the title
to the land in the name of another person. In BIR Ruling [DA-(I-012) 190-09]
dated 16 April 2009, a certain Amelia Segarra purchased a parcel of land and
registered it in the names of Armin Segarra and Amelito Segarra as trustees
on the condition that upon demand by Amelia Segarra, the trustees would
transfer the land in favor of their sister, Arleen May Segarra-Guevara. The
BIR ruled that an implied trust is deemed created by law and the transfer of
the land to the beneficiary is not subject to capital gains tax or creditable
withholding tax.
Income from Employees Trust Fund is Exempt from Income Tax
Petitioner claims that the Employees Trust Fund is exempt from the payment
of income tax. Petitioner further claims that as trustee, it acts for the
Employees Trust Fund, and can file the claim for refund. As trustee, petitioner
considers itself as the entity that is entitled to file a claim for refund of taxes
erroneously paid in the sale of the MBP lot.40
The Office of the Solicitor General argues that the cardinal rule in taxation is
that tax exemptions are highly disfavored and whoever claims a tax
exemption must justify his right by the clearest grant of law. Tax exemption
cannot arise by implication and any doubt whether the exemption exists is
strictly construed against the taxpayer.41 Further, the findings of the CTA,
which were affirmed by the CA, should be given respect and weight in the
absence of abuse or improvident exercise of authority.42 1avvphi1

Section 53(b) and now Section 60(b) of the Tax Code provides:
SEC. 60. Imposition of Tax. -
(A) Application of Tax. - x x x
(B) Exception. - The tax imposed by this Title shall not apply to employees
trust which forms part of a pension, stock bonus or profit-sharing plan of an
employer for the benefit of some or all of his employees (1) if contributions
are made to the trust by such employer, or employees, or both for the
purpose of distributing to such employees the earnings and principal of the
fund accumulated by the trust in accordance with such plan, and (2) if under
the trust instrument it is impossible, at any time prior to the satisfaction of all
liabilities with respect to employees under the trust, for any part of the corpus
or income to be (within the taxable year or thereafter) used for, or diverted to,
purposes other than for the exclusive benefit of his employees: Provided,
That any amount actually distributed to any employee or distributee shall be
taxable to him in the year in which so distributed to the extent that it exceeds
the amount contributed by such employee or distributee.
Petitioners Articles of Incorporation state the purpose for which the
corporation was formed:
Primary Purpose
To hold legal title to, control, invest and administer in the manner provided,
pursuant to applicable rules and conditions as established, and in the interest
and for the benefit of its beneficiaries and/or participants, the private
pension plan as established for certain employees of Victorias Milling
Company, Inc., and other pension plans of Victorias Milling Company
affiliates and/or subsidiaries, the pension funds and assets, as well as
accruals, additions and increments thereto, and such amounts as may be set
aside or accumulated for the benefit of the participants of said pension plans;
and in furtherance of the foregoing and as may be incidental thereto. 43
(Emphasis supplied)
Petitioner is a corporation that was formed to administer the Employees' Trust
Fund. Petitioner invested P5,504,748.25 of the funds of the Employees' Trust
Fund to purchase the MBP lot. When the MBP lot was sold, the gross income
of the Employees Trust Fund from the sale of the MBP lot was P40,500,000.
The 7.5% withholding tax of P3,037,500 and brokers commission were
deducted from the proceeds. In Commissioner of Internal Revenue v. Court
of Appeals,44 the Court explained the rationale for the tax-exemption privilege
of income derived from employees trusts:
It is evident that tax-exemption is likewise to be enjoyed by the income of the
pension trust. Otherwise, taxation of those earnings would result in a
diminution of accumulated income and reduce whatever the trust
beneficiaries would receive out of the trust fund. This would run afoul of the
very intendment of the law.
In Miguel J. Ossorio Pension Foundation, Inc. v. Commissioner of Internal
Revenue,45 the CTA held that petitioner is entitled to a refund of withholding
taxes paid on interest income from direct loans made by the Employees' Trust
Fund since such interest income is exempt from tax. The CTA, in recognizing
petitioners entitlement for tax exemption, explained:
In or about 1968, Victorias Milling Co., Inc. established a retirement or
pension plan for its employees and those of its subsidiary companies
pursuant to a 22-page plan. Pursuant to said pension plan, Victorias Milling
Co., Inc. makes a (sic) regular financial contributions to the employee trust for
the purpose of distributing or paying to said employees, the earnings and
principal of the funds accumulated by the trust in accordance with said plan.
Under the plan, it is imposable, at any time prior to the satisfaction of all
liabilities with respect to employees under the trust, for any part of the corpus
or income to be used for, or diverted to, purposes other than for the exclusive
benefit of said employees. Moreover, upon the termination of the plan, any
remaining assets will be applied for the benefit of all employees and their
beneficiaries entitled thereto in proportion to the amount allocated for their
respective benefits as provided in said plan.
The petitioner and Victorias Milling Co., Inc., on January 22, 1970, entered
into a Memorandum of Understanding, whereby they agreed that petitioner
would administer the pension plan funds and assets, as assigned and
transferred to it in trust, as well as all amounts that may from time to time be
set aside by Victorias Milling Co., Inc. "For the benefit of the Pension Plan,
said administration is to be strictly adhered to pursuant to the rules and
regulations of the Pension Plan and of the Articles of Incorporation and By
Laws" of petitioner.
The pension plan was thereafter submitted to the Bureau of Internal Revenue
for registration and for a ruling as to whether its income or earnings are
exempt from income tax pursuant to Rep. Act 4917, in relation to Sec. 56(b),
now Sec. 54(b), of the Tax Code.
In a letter dated January 18, 1974 addressed to Victorias Milling Co., Inc., the
Bureau of Internal Revenue ruled that "the income of the trust fund of your
retirement benefit plan is exempt from income tax, pursuant to Rep. Act
4917 in relation to Section 56(b) of the Tax Code."
In accordance with petitioners Articles of Incorporation (Annex A), petitioner
would "hold legal title to, control, invest and administer, in the manner
provided, pursuant to applicable rules and conditions as established,
and in the interest and for the benefit of its beneficiaries and/or
participants, the private pension plan as established for certain
employees of Victorias Milling Co., Inc. and other pension plans of
Victorias Milling Co. affiliates and/or subsidiaries, the pension funds
and assets, as well as the accruals, additions and increments thereto,
and such amounts as may be set aside or accumulated of said pension
plans. Moreover, pursuant to the same Articles of Incorporations,
petitioner is empowered to "settle, compromise or submit to arbitration,
any claims, debts or damages due or owing to or from pension funds
and assets and other funds and assets of the corporation, to commence
or defend suits or legal proceedings and to represent said funds and
assets in all suits or legal proceedings."
Petitioner, through its investment manager, the City Trust Banking
Corporation, has invested the funds of the employee trust in treasury
bills, Central Bank bills, direct lending, etc. so as to generate income or
earnings for the benefit of the employees-beneficiaries of the pension
plan. Prior to the effectivity of Presidential Decree No. 1959 on October 15,
1984, respondent did not subject said income or earning of the employee
trust to income tax because they were exempt from income tax pursuant to
Sec. 56(b), now Sec. 54(b) of the Tax Code and the BIR Ruling dated
January 18, 1984 (Annex D). (Boldfacing supplied; italicization in the original)
xxx
It asserted that the pension plan in question was previously submitted to the
Bureau of Internal Revenue for a ruling as to whether the income or earnings
of the retirement funds of said plan are exempt from income tax and in a letter
dated January 18,1984, the Bureau ruled that the earnings of the trust
funds of the pension plan are exempt from income tax under Sec. 56(b)
of the Tax Code. (Emphasis supplied)
"A close review of the provisions of the plan and trust instrument disclose that
in reality the corpus and income of the trust fund are not at no time used for,
or diverted to, any purpose other than for the exclusive benefit of the plan
beneficiaries. This fact was likewise confirmed after verification of the plan
operations by the Revenue District No. 63 of the Revenue Region No. 14,
Bacolod City. Section X also confirms this fact by providing that if any assets
remain after satisfaction of the requirements of all the above clauses, such
remaining assets will be applied for the benefits of all persons included in
such classes in proportion to the amounts allocated for their respective
benefits pursuant to the foregoing priorities.
"In view of all the foregoing, this Office is of the opinion, as it hereby holds,
that the income of the trust fund of your retirement benefit plan is exempt
from income tax pursuant to Republic Act 4917 in relation to Section 56(b) of
the Tax Code. (Annex "D" of Petition)
This CTA decision, which was affirmed by the CA in a decision dated 20
January 1993, became final and executory on 3 August 1993.
The tax-exempt character of petitioners Employees' Trust Fund is not at
issue in this case. The tax-exempt character of the Employees' Trust Fund
has long been settled. It is also settled that petitioner exists for the purpose of
holding title to, and administering, the tax-exempt Employees Trust Fund
established for the benefit of VMCs employees. As such, petitioner has the
personality to claim tax refunds due the Employees' Trust Fund.
In Citytrust Banking Corporation as Trustee and Investment Manager of
Various Retirement Funds v. Commissioner of Internal Revenue,46 the CTA
granted Citytrusts claim for refund on withholding taxes paid on the
investments made by Citytrust in behalf of the trust funds it manages,
including petitioner.47 Thus:
In resolving the second issue, we note that the same is not a case of first
impression. Indeed, the petitioner is correct in its adherence to the clear ruling
laid by the Supreme Court way back in 1992 in the case of Commissioner of
Internal Revenue vs. The Honorable Court of Appeals, The Court of Tax
Appeals and GCL Retirement Plan, 207 SCRA 487 at page 496, supra,
wherein it was succinctly held:
xxx
There can be no denying either that the final withholding tax is collected from
income in respect of which employees trusts are declared exempt (Sec.
56(b), now 53(b), Tax Code). The application of the withholdings system to
interest on bank deposits or yield from deposit substitutes is essentially to
maximize and expedite the collection of income taxes by requiring its
payment at the source. If an employees trust like the GCL enjoys a tax-
exempt status from income, we see no logic in withholding a certain
percentage of that income which it is not supposed to pay in the first place.
xxx
Similarly, the income of the trust funds involved herein is exempt from the
payment of final withholding taxes.
This CTA decision became final and executory when the CIR failed to file a
Petition for Review within the extension granted by the CA.
Similarly, in BIR Ruling [UN-450-95], Citytrust wrote the BIR to request for a
ruling exempting it from the payment of withholding tax on the sale of the land
by various BIR-approved trustees and tax-exempt private employees'
retirement benefit trust funds 48 represented by Citytrust. The BIR ruled that
the private employees benefit trust funds, which included petitioner, have
met the requirements of the law and the regulations and therefore qualify as
reasonable retirement benefit plans within the contemplation of Republic Act
No. 4917 (now Sec. 28(b)(7)(A), Tax Code). The income from the trust fund
investments is therefore exempt from the payment of income tax and
consequently from the payment of the creditable withholding tax on the sale
of their real property.49
Thus, the documents issued and certified by Citytrust showing that money
from the Employees Trust Fund was invested in the MBP lot cannot simply
be brushed aside by the BIR as self-serving, in the light of previous cases
holding that Citytrust was indeed handling the money of the Employees Trust
Fund. These documents, together with the notarized Memorandum of
Agreement, clearly establish that petitioner, on behalf of the Employees Trust
Fund, indeed invested in the purchase of the MBP lot. Thus, the Employees'
Trust Fund owns 49.59% of the MBP lot. 1avvphi1

Since petitioner has proven that the income from the sale of the MBP lot
came from an investment by the Employees' Trust Fund, petitioner, as trustee
of the Employees Trust Fund, is entitled to claim the tax refund of P3,037,500
which was erroneously paid in the sale of the MBP lot.
Wherefore, we GRANT the petition and SET ASIDE the Decision of 30 May
2003 of the Court of Appeals in CA-G.R. SP No. 61829. Respondent
Commissioner of Internal Revenue is directed to refund petitioner Miguel J.
Ossorio Pension Foundation, Incorporated, as trustee of the Employees
Trust Fund, the amount of P3,037,500, representing income tax erroneously
paid.

CORPORATIONS CASES:

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.:p
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.
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.).
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.).
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.).
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)
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).
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).
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 ............................................................... P17,361.25
(See Exhibit 13, page 50, BIR records)
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.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE
PETITIONERS FORMED AN UNREGISTERED PARTNERSHIP;
II.
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);
III.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS
WERE LIABLE FOR CORPORATE INCOME TAXES FOR 1955 AND 1956
AS AN UNREGISTERED PARTNERSHIP;
IV.
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?
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.
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.
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.
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.
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.
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." ....
xxx xxx xxx
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.)
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.
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.
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.
IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax
Appeals appealed from is affirm with costs against petitioners.
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.

G.R. No. 78133 October 18, 1988


MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX
APPEALS, respondents.
De la Cuesta, De las Alas and Callanta Law Offices for petitioners.
The Solicitor General for respondents

GANCAYCO, J.:
The distinction between co-ownership and an unregistered partnership or
joint venture for income tax purposes is the issue in this petition.
On June 22, 1965, petitioners bought two (2) parcels of land from Santiago
Bernardino, et al. and on May 28, 1966, they bought another three (3) parcels
of land from Juan Roque. The first two parcels of land were sold by
petitioners in 1968 toMarenir Development Corporation, while the three
parcels of land were sold by petitioners to Erlinda Reyes and Maria Samson
on March 19,1970. Petitioners realized a net profit in the sale made in 1968 in
the amount of P165,224.70, while they realized a net profit of P60,000.00 in
the sale made in 1970. The corresponding capital gains taxes were paid by
petitioners in 1973 and 1974 by availing of the tax amnesties granted in the
said years.
However, in a letter dated March 31, 1979 of then Acting BIR Commissioner
Efren I. Plana, petitioners were assessed and required to pay a total amount
of P107,101.70 as alleged deficiency corporate income taxes for the years
1968 and 1970.
Petitioners protested the said assessment in a letter of June 26, 1979
asserting that they had availed of tax amnesties way back in 1974.
In a reply of August 22, 1979, respondent Commissioner informed petitioners
that in the years 1968 and 1970, petitioners as co-owners in the real estate
transactions formed an unregistered partnership or joint venture taxable as a
corporation under Section 20(b) and its income was subject to the taxes
prescribed under Section 24, both of the National Internal Revenue Code 1
that the unregistered partnership was subject to corporate income tax as
distinguished from profits derived from the partnership by them which is subject to
individual income tax; and that the availment of tax amnesty under P.D. No. 23, as
amended, by petitioners relieved petitioners of their individual income tax liabilities
but did not relieve them from the tax liability of the unregistered partnership. Hence,
the petitioners were required to pay the deficiency income tax assessed.
Petitioners filed a petition for review with the respondent Court of Tax Appeals
docketed as CTA Case No. 3045. In due course, the respondent court by a
majority decision of March 30, 1987, 2 affirmed the decision and action taken by
respondent commissioner with costs against petitioners.
It ruled that on the basis of the principle enunciated in Evangelista 3 an
unregistered partnership was in fact formed by petitioners which like a corporation
was subject to corporate income tax distinct from that imposed on the partners.
In a separate dissenting opinion, Associate Judge Constante Roaquin stated
that considering the circumstances of this case, although there might in fact
be a co-ownership between the petitioners, there was no adequate basis for
the conclusion that they thereby formed an unregistered partnership which
made "hem liable for corporate income tax under the Tax Code.
Hence, this petition wherein petitioners invoke as basis thereof the following
alleged errors of the respondent court:
A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION
OF THE RESPONDENT COMMISSIONER, TO THE EFFECT THAT
PETITIONERS FORMED AN UNREGISTERED PARTNERSHIP SUBJECT
TO CORPORATE INCOME TAX, AND THAT THE BURDEN OF OFFERING
EVIDENCE IN OPPOSITION THERETO RESTS UPON THE PETITIONERS.
B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE
TRANSACTIONS, THAT AN UNREGISTERED PARTNERSHIP EXISTED
THUS IGNORING THE REQUIREMENTS LAID DOWN BY LAW THAT
WOULD WARRANT THE PRESUMPTION/CONCLUSION THAT A
PARTNERSHIP EXISTS.
C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE
EVANGELISTA CASE AND THEREFORE SHOULD BE DECIDED
ALONGSIDE THE EVANGELISTA CASE.
D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE
PETITIONERS FROM PAYMENT OF OTHER TAXES FOR THE PERIOD
COVERED BY SUCH AMNESTY. (pp. 12-13, Rollo.)
The petition is meritorious.
The basis of the subject decision of the respondent court is the ruling of this
Court in Evangelista. 4
In the said case, petitioners borrowed a sum of money from their father which
together with their own personal funds they used in buying several real
properties. They appointed their brother to manage their properties with full
power to lease, collect, rent, issue receipts, etc. They had the real properties
rented or leased to various tenants for several years and they gained net
profits from the rental income. Thus, the Collector of Internal Revenue
demanded the payment of income tax on a corporation, among others, from
them.
In resolving the issue, this Court held as follows:
The issue in this case is 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 sections 24 and 84 of said
Code, the pertinent parts of which read:
Sec. 24. Rate of the 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 (companies
collectives), 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
participation), associations or insurance companies, but does not include duly
registered general co-partnerships (companies 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, property, or industry to a common fund, with the intention of
dividing the profits among themselves.
Pursuant to this 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 a 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 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 transcations 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 petitioners in February, 1943. In other words, one
cannot but perceive a character of habituality peculiar to business
transactions engaged in for purposes 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 Evangelists, 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 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 Evangelists 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. 5
In the present case, there is no evidence that petitioners entered into an
agreement to contribute money, property or industry to a common fund, and
that they intended to divide the profits among themselves. Respondent
commissioner and/ or his representative just assumed these conditions to be
present on the basis of the fact that petitioners purchased certain parcels of
land and became co-owners thereof.
In Evangelists, there was a series of transactions where petitioners
purchased twenty-four (24) lots showing that the purpose was not limited to
the conservation or preservation of the common fund or even the properties
acquired by them. The character of habituality peculiar to business
transactions engaged in for the purpose of gain was present.
In the instant case, petitioners bought two (2) parcels of land in 1965. They
did not sell the same nor make any improvements thereon. In 1966, they
bought another three (3) parcels of land from one seller. It was only 1968
when they sold the two (2) parcels of land after which they did not make any
additional or new purchase. The remaining three (3) parcels were sold by
them in 1970. The transactions were isolated. The character of habituality
peculiar to business transactions for the purpose of gain was not present.
In Evangelista, the properties were leased out to tenants for several years.
The business was under the management of one of the partners. Such
condition existed for over fifteen (15) years. None of the circumstances are
present in the case at bar. The co-ownership started only in 1965 and ended
in 1970.
Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista
he said:
I wish however 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 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 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;
From the above it appears that the fact that those who agree to form a co-
ownership share or do not share any profits made by the use of the 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 juridical 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 Flord D. Mechem
2nd Ed., section 83, p. 74.)
A joint purchase of land, by two, does not constitute a co-partnership in
respect thereto; nor does an agreement to share the profits and losses on the
sale of land create a partnership; the parties are only tenants in common.
(Clark vs. Sideway, 142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)
Where plaintiff, his brother, and another agreed to become owners of a single
tract of realty, 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
plaintiffs commission, no partnership existed as between the three parties,
whatever their relation may have been as to third parties. (Magee vs. Magee
123 N.E. 673, 233 Mass. 341.)
In order to constitute a partnership inter sese there must be: (a) An intent to
form the same; (b) generally 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 III 470.)
The common ownership of property does not itself create a partnership
between the owners, though they may use it for the 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.) 6
The sharing of returns does not in itself establish a partnership whether or not
the persons sharing therein have a joint or common right or interest in the
property. There must be a clear intent to form a partnership, the existence of
a juridical personality different from the individual partners, and the freedom
of each party to transfer or assign the whole property.
In the present case, there is clear evidence of co-ownership between the
petitioners. There is no adequate basis to support the proposition that they
thereby formed an unregistered partnership. The two isolated transactions
whereby they purchased properties and sold the same a few years thereafter
did not thereby make them partners. They shared in the gross profits as co-
owners and paid their capital gains taxes on their net profits and availed of
the tax amnesty thereby. Under the circumstances, they cannot be
considered to have formed an unregistered partnership which is thereby liable
for corporate income tax, as the respondent commissioner proposes.
And even assuming for the sake of argument that such unregistered
partnership appears to have been formed, since there is no such existing
unregistered partnership with a distinct personality nor with assets that can be
held liable for said deficiency corporate income tax, then petitioners can be
held individually liable as partners for this unpaid obligation of the partnership
p. 7 However, as petitioners have availed of the benefits of tax amnesty as
individual taxpayers in these transactions, they are thereby relieved of any further
tax liability arising therefrom.
WHEREFROM, the petition is hereby GRANTED and the decision of the
respondent Court of Tax Appeals of March 30, 1987 is hereby REVERSED
and SET ASIDE and another decision is hereby rendered relieving petitioners
of the corporate income tax liability in this case, without pronouncement as to
costs.

[G.R. No. 112675. January 25, 1999]


AFISCO INSURANCE CORPORATION; CCC
INSURANCE CORPORATION; CHARTER INSURANCE
CO., INC.; CIBELES INSURANCE CORPORATION;
COMMONWEALTH INSURANCE COMPANY;
CONSOLIDATED INSURANCE CO., INC.;
DEVELOPMENT INSURANCE & SURETY
CORPORATION; DOMESTIC INSURANCE COMPANY
OF THE PHILIPPINES; EASTERN ASSURANCE
COMPANY & SURETY CORP.; EMPIRE INSURANCE
COMPANY; EQUITABLE INSURANCE CORPORATION;
FEDERAL INSURANCE CORPORATION INC.; FGU
INSURANCE CORPORATION; FIDELITY & SURETY
COMPANY OF THE PHILS., INC.; FILIPINO
MERCHANTS INSURANCE CO., INC.; GOVERNMENT
SERVICE INSURANCE SYSTEM; MALAYAN
INSURANCE CO., INC.; MALAYAN ZURICH
INSURANCE CO., INC.; MERCANTILE INSURANCE
CO., INC.; METROPOLITAN INSURANCE COMPANY;
METRO-TAISHO INSURANCE CORPORATION; NEW
ZEALAND INSURANCE CO., LTD.; PAN-MALAYAN
INSURANCE CORPORATION; PARAMOUNT
INSURANCE CORPORATION; PEOPLES TRANS-EAST
ASIA INSURANCE CORPORATION; PERLA COMPANIA
DE SEGUROS, INC.; PHILIPPINE BRITISH
ASSURANCE CO., INC.; PHILIPPINE FIRST
INSURANCE CO., INC.; PIONEER INSURANCE &
SURETY CORP.; PIONEER INTERCONTINENTAL
INSURANCE CORPORATION; PROVIDENT
INSURANCE COMPANY OF THE PHILIPPINES;
PYRAMID INSURANCE CO., INC.; RELIANCE SURETY
& INSURANCE COMPANY; RIZAL SURETY &
INSURANCE COMPANY; SANPIRO INSURANCE
CORPORATION; SEABOARD-EASTERN INSURANCE
CO., INC.; SOLID GUARANTY, INC.; SOUTH SEA
SURETY & INSURANCE CO., INC.; STATE BONDING &
INSURANCE CO., INC.; SUMMA INSURANCE
CORPORATION; TABACALERA INSURANCE CO.,
INC.all assessed as POOL OF MACHINERY INSURERS,
petitioners, vs. COURT OF APPEALS, COURT OF TAX
APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.
DECISION
PANGANIBAN, J.:
Pursuant to reinsurance treaties, a number of local insurance firms
formed themselves into a pool in order to facilitate the handling of
business contracted with a nonresident foreign reinsurance company. May
the clearing house or insurance pool so formed be deemed a partnership or
an association that is taxable as a corporation under the National Internal
Revenue Code (NIRC)? Should the pools remittances to the member
companies and to the said foreign firm be taxable as dividends? Under the
facts of this case, has the governments right to assess and collect said tax
prescribed?
The Case

These are the main questions raised in the Petition for Review on
Certiorari before us, assailing the October 11, 1993 Decision [if !supportFootnotes][1]
[endif]
of the Court of Appeals[if !supportFootnotes][2][endif]in CA-GR SP 29502, which
dismissed petitioners appeal of the October 19, 1992 Decision [if !supportFootnotes][3]
[endif]
of the Court of Tax Appeals[if !supportFootnotes][4][endif] (CTA) which had
previously sustained petitioners liability for deficiency income tax, interest
and withholding tax. The Court of Appeals ruled:
WHEREFORE,thepetitionisDISMISSED,withcostsagainstpetitioners.
[if!supportFootnotes][5][endif]

The petition also challenges the November 15, 1993 Court of Appeals
(CA) Resolution[if !supportFootnotes][6][endif] denying reconsideration.
The Facts

The antecedent facts,[if !supportFootnotes][7][endif] as found by the Court of


Appeals, are as follows:
Thepetitionersare41nonlifeinsurancecorporations,organizedand
existingunderthelawsofthePhilippines.Uponissuancebythemof
Erection,MachineryBreakdown,BoilerExplosionandContractorsAll
Riskinsurancepolicies,thepetitionersonAugust1,1965enteredintoa
QuotaShareReinsuranceTreatyandaSurplusReinsuranceTreatywith
theMunchenerRuckversicherungsGesselschaft(hereaftercalledMunich),
anonresidentforeigninsurancecorporation.Thereinsurancetreaties
requiredpetitionerstoforma[p]ool.Accordingly,apoolcomposedofthe
petitionerswasformedonthesameday.
OnApril14,1976,thepoolofmachineryinsurerssubmittedafinancial
statementandfiledanInformationReturnofOrganizationExemptfrom
IncomeTaxfortheyearendingin1975,onthebasisofwhichitwas
assessedbytheCommissionerofInternalRevenuedeficiencycorporate
taxesintheamountofP1,843,273.60,andwithholdingtaxesintheamount
ofP1,768,799.39andP89,438.68ondividendspaidtoMunichandtothe
petitioners,respectively.Theseassessmentswereprotestedbythe
petitionersthroughitsauditorsSycip,Gorres,VelayoandCo.
OnJanuary27,1986,theCommissionerofInternalRevenuedeniedthe
protestandorderedthepetitioners,assessedasPoolofMachineryInsurers,
topaydeficiencyincometax,interest,andwith[h]oldingtax,itemizedas
follows:
Netincomeperinformation
returnP3,737,370.00
===========
IncometaxduethereonP1,298,080.00
Add:14%Int.fr.4/15/76
to4/15/79545,193.60
TOTALAMOUNTDUE&P1,843,273.60
COLLECTIBLE===========
DividendpaidtoMunich
ReinsuranceCompanyP3,728,412.00
===========
35%withholdingtaxat
sourceduethereonP1,304,944.20
Add:25%surcharge326,236.05
14%interestfrom
1/25/76to1/25/79137,019.14
Compromisepenalty
nonfilingofreturn300.00
latepayment300.00
TOTALAMOUNTDUE&P1,768,799.39
COLLECTIBLE===========
DividendpaidtoPoolMembersP655,636.00
===========
10%withholdingtaxat
sourceduethereonP65,563.60
Add:25%surcharge16,390.90
14%interestfrom
1/25/76to1/25/796,884.18
Compromisepenalty
nonfilingofreturn300.00
latepayment300.00
TOTALAMOUNTDUE&P89,438.68
COLLECTIBLE===========[if!supportFootnotes][8][endif]

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.[if !supportFootnotes][9][endif]
The Issues

Before this Court, petitioners raise the following issues:


1.WhetherornottheClearingHouse,actingasamereagentand
performingstrictlyadministrativefunctions,andwhichdidnotinsureor
assumeanyriskinitsownname,wasapartnershiporassociationsubject
totaxasacorporation;
2.WhetherornottheremittancestopetitionersandMUNICHREoftheir
respectivesharesofreinsurancepremiums,pertainingtotheirindividual
andseparatecontractsofreinsurance,weredividendssubjecttotax;and
3.WhetherornottherespondentCommissionersrighttoassessthe
ClearingHousehadalreadyprescribed.[if!supportFootnotes][10][endif]
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.[if !supportFootnotes][11][endif] Hence, the pool did not act or earn income as a
reinsurer.[if !supportFootnotes][12][endif] 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.[if !supportFootnotes][13][endif]
Petitioners belie the existence of a partnership in this case, because (1)
they, the reinsurers, did not share the same risk or solidary liability; [if !
supportFootnotes][14][endif]
(2) there was no common fund;[if !supportFootnotes][15][endif] (3) the
executive board of the pool did not exercise control and management of its
funds, unlike the board of directors of a corporation; [if !supportFootnotes][16][endif] 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.[if !supportFootnotes][17][endif]
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,[if !supportFootnotes][18][endif] 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. [if !
supportFootnotes][19][endif]
Indeed,
[I]thasbeenthelongstandingpolicyandpracticeofthisCourttorespect
theconclusionsofquasijudicialagencies,suchastheCourtofTax
Appealswhich,bythenatureofitsfunctions,isdedicatedexclusivelyto
thestudyandconsiderationoftaxproblemsandhasnecessarilydeveloped
anexpertiseonthesubject,unlesstherehasbeenanabuseorimprovident
exerciseofitsauthority.[if!supportFootnotes][20][endif]
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.Rateoftaxoncorporations.(a)Taxondomesticcorporations.
Ataxisherebyimposeduponthetaxablenetincomereceivedduring
eachtaxableyearfromallsourcesbyeverycorporationorganizedin,or
existingunderthelawsofthePhilippines,nomatterhowcreatedor
organized,butnotincludingdulyregisteredgeneralcopartnership
(compaiascolectivas),generalprofessionalpartnerships,private
educationalinstitutions,andbuildingandloanassociationsxxx.
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,[if !supportFootnotes][21][endif] which amended the Tax Code.
Pertinent provisions of the new law read as follows:
SEC.27.RatesofIncomeTaxonDomesticCorporations.
(A)InGeneral.ExceptasotherwiseprovidedinthisCode,anincome
taxofthirtyfivepercent(35%)isherebyimposeduponthetaxable
incomederivedduringeachtaxableyearfromallsourceswithinand
withoutthePhilippinesbyeverycorporation,asdefinedinSection22(B)
ofthisCode,andtaxableunderthisTitleasacorporationxxx.
SEC.22.Definition.WhenusedinthisTitle:
xxx xxx xxx
(B)Thetermcorporationshallincludepartnerships,nomatterhow
createdororganized,jointstockcompanies,jointaccounts(cuentasen
participacion),associations,orinsurancecompanies,butdoesnotinclude
generalprofessionalpartnerships[or]ajointventureorconsortiumformed
forthepurposeofundertakingconstructionprojectsorengagingin
petroleum,coal,geothermalandotherenergyoperationspursuanttoan
operatingorconsortiumagreementunderaservicecontractwithoutthe
Government.Generalprofessionalpartnershipsarepartnershipsformed
bypersonsforthesolepurposeofexercisingtheircommonprofession,no
partoftheincomeofwhichisderivedfromengaginginanytradeor
business.
xxx xxx xxx."
Thus, the Court in Evangelista v. Collector of Internal Revenue[if !
supportFootnotes][22][endif]
held that Section 24 covered these unregistered partnerships
and even associations or joint accounts, which had no legal personalities
apart from their individual members.[if !supportFootnotes][23][endif] The Court of Appeals
astutely applied Evangelista:[if !supportFootnotes][24][endif]
xxxAccordingly,apoolofindividualrealpropertyownersdealinginreal
estatebusinesswasconsideredacorporationforpurposesofthetaxinsec.
24oftheTaxCodeinEvangelistav.CollectorofInternalRevenue,supra.
TheSupremeCourtsaid:
Thetermpartnershipincludesasyndicate,group,pool,jointventureor
otherunincorporatedorganization,throughorbymeansofwhichany
business,financialoperation,orventureiscarriedon.***(8Mertens
LawofFederalIncomeTaxation,p.562Note63)
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.[if !supportFootnotes][25][endif] Its requisites are:
(1) mutual contribution to a common stock, and (2) a joint interest in the
profits.[if !supportFootnotes][26][endif] 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. [if !
supportFootnotes][27][endif]
Meanwhile, an association implies associates who enter into
a joint enterprise x x x for the transaction of business.[if !supportFootnotes][28][endif]
In the case before us, the ceding companies entered into a Pool
Agreement[if !supportFootnotes][29][endif] or an association[if !supportFootnotes][30][endif] that would
handle all the insurance businesses covered under their quota-share
reinsurance treaty[if !supportFootnotes][31][endif] and surplus reinsurance treaty[if !supportFootnotes]
[32][endif]
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.[if !supportFootnotes][33][endif] This common fund pays for the
administration and operation expenses of the pool. [if !
supportFootnotes][34][endif]

(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.[if !supportFootnotes][35][endif]

(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. [if !supportFootnotes][36][endif] Profit
motive or business is, therefore, the primordial reason for
the pools formation. As aptly found by the CTA:

xxxThefactthatthepooldoesnotretainanyprofitorincome
doesnotobliterateanantecedentfact,thatofthepoolbeing
usedinthetransactionofbusinessforprofit.Itisapparent,
andpetitionersadmit,thattheirassociationorcoactionwas
indispensable[to]thetransactionofthebusiness.xxxIf
togethertheyhaveconductedbusiness,profitmusthave
beentheobjectas,indeed,profitwasearned.Thoughthe
profitwasapportionedamongthemembers,thisisonlya
matterofconsequence,asitimpliesthatprofitactually
resulted.[if!supportFootnotes][37][endif]

The petitioners reliance on Pascual v. Commissioner[if !supportFootnotes][38][endif]


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. [if !
supportFootnotes][39][endif]
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.[if !supportFootnotes][40][endif] 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. [if !supportFootnotes][41][endif] 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,[if !supportFootnotes][42][endif] as well as Article 7 of paragraph 1 [if !supportFootnotes][43][endif]
and Article 5 of paragraph 5[if !supportFootnotes][44][endif] of the RP-West German Tax
Treaty.[if !supportFootnotes][45][endif]
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. [if !
supportFootnotes][46][endif]
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. [if !supportFootnotes]
[47][endif]
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)[if !supportFootnotes][48][endif] 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
3[if !supportFootnotes][49][endif] and 10[if !supportFootnotes][50][endif] of the Quota Share Reinsurance
Treaty and Articles 3[if !supportFootnotes][51][endif] and 10[if !supportFootnotes][52][endif] 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.[if !supportFootnotes][53][endif]
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. [if !supportFootnotes][54][endif] 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.[if !supportFootnotes][55][endif]
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.[if !supportFootnotes][56][endif]
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,[if !supportFootnotes][57][endif] 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. [if !supportFootnotes][58][endif] 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.

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. L-9996, 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 to redetermine 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.

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

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.

G.R. Nos. L-24020-21 July 29, 1968


FLORENCIO REYES and ANGEL REYES, petitioners,
vs.
COMMISSIONER OF INTERNAL REVENUE and HON. COURT OF TAX
APPEALS, respondents.
Jose W. Diokno and Domingo Sandoval for petitioners.
Office of the Solicitor General for respondents.
FERNANDO, J.:
Petitioners in this case were assessed by respondent Commissioner of
Internal Revenue the sum of P46,647.00 as income tax, surcharge and
compromise for the years 1951 to 1954, an assessment subsequently
reduced to P37,528.00. This assessment sought to be reconsidered
unsuccessfully was the subject of an appeal to respondent Court of Tax
Appeals. Thereafter, another assessment was made against petitioners, this
time for back income taxes plus surcharge and compromise in the total sum
of P25,973.75, covering the years 1955 and 1956. There being a failure on
their part to have such assessments reconsidered, the matter was likewise
taken to the respondent Court of Tax Appeals. The two cases 1 involving as
they did identical issues and ultimately traceable to facts similar in character
were heard jointly with only one decision being rendered.
In that joint decision of respondent Court of Tax Appeals, the tax liability for
the years 1951 to 1954 was reduced to P37,128.00 and for the years 1955
and 1956, to P20,619.00 as income tax due "from the partnership formed" by
petitioners.2 The reduction was due to the elimination of surcharge, the failure
to file the income tax return being accepted as due to petitioners honest belief
that no such liability was incurred as well as the compromise penalties for
such failure to file.3 A reconsideration of the aforesaid decision was sought
and denied by respondent Court of Tax Appeals. Hence this petition for
review.
The facts as found by respondent Court of Tax Appeals, which being
supported by substantial evidence, must be respected 4 follow: "On October
31, 1950, petitioners, father and son, purchased a lot and building, known as
the Gibbs Building, situated at 671 Dasmarias Street, Manila, for
P835,000.00, of which they paid the sum of P375,000.00, leaving a balance
of P460,000.00, representing the mortgage obligation of the vendors with the
China Banking Corporation, which mortgage obligations were assumed by
the vendees. The initial payment of P375,000.00 was shared equally by
petitioners. At the time of the purchase, the building was leased to various
tenants, whose rights under the lease contracts with the original owners, the
purchasers, petitioners herein, agreed to respect. The administration of the
building was entrusted to an administrator who collected the rents; kept its
books and records and rendered statements of accounts to the owners;
negotiated leases; made necessary repairs and disbursed payments,
whenever necessary, after approval by the owners; and performed such other
functions necessary for the conservation and preservation of the building.
Petitioners divided equally the income of operation and maintenance. The
gross income from rentals of the building amounted to about P90,000.00
annually."5
From the above facts, the respondent Court of Tax Appeals applying the
appropriate provisions of the National Internal Revenue Code, the first of
which imposes an income tax on corporations "organized in, or existing under
the laws of the Philippines, no matter how created or organized but not
including duly registered general co-partnerships (companias colectivas), ...," 6
a term, which according to the second provision cited, includes partnerships
"no matter how created or organized, ...," 7 and applying the leading case of
Evangelista v. Collector of Internal Revenue,8 sustained the action of
respondent Commissioner of Internal Revenue, but reduced the tax liability of
petitioners, as previously noted.
Petitioners maintain the view that the Evangelista ruling does not apply; for
them, the situation is dissimilar. Consequently they allege that the reliance
1wph1.t

by respondent Court of Tax Appeals was unwarranted and the decision


should be set aside. If their interpretation of the authoritative doctrine therein
set forth commands assent, then clearly what respondent Court of Tax
Appeals did fails to find shelter in the law. That is the crux of the matter. A
perusal of the Evangelista decision is therefore unavoidable.
As noted in the opinion of the Court, penned by the present Chief Justice, the
issue was 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, ..."9 After referring to another section of the
National Internal Revenue Code, which explicitly provides that the term
corporation "includes partnerships" and then to Article 1767 of the Civil Code
of the Philippines, defining what a contract of partnership is, the opinion goes
on to state that "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, ..." 10
In support of the above conclusion, reference was made to the following
circumstances, namely, the common fund being created purposely not
something already found in existence, the investment of the same not merely
in one transaction but in a series of transactions; the lots thus acquired not
being devoted to residential purposes or to other personal uses of petitioners
in that case; such properties having been under the management of one
person with full power to lease, to collect rents, to issue receipts, to bring
suits, to sign letters and contracts and to endorse notes and checks; the
above conditions having existed for more than 10 years since the acquisition
of the above properties; and no testimony having been introduced as to the
purpose "in creating the set up already adverted to, or on the causes for its
continued existence."11 The conclusion that emerged had all the imprint of
inevitability. Thus: "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."12
It may be said that there could be a differentiation made between the
circumstances above detailed and those existing in the present case. It does
not suffice though to preclude the applicability of the Evangelista decision.
Petitioners could harp on these being only one transaction. They could stress
that an affidavit of one of them found in the Bureau of Internal Revenue
records would indicate that their intention was to house in the building
acquired by them the respective enterprises, coupled with a plan of effecting
a division in 10 years. It is a little surprising then that while the purchase was
made on October 31, 1950 and their brief as petitioners filed on October 20,
1965, almost 15 years later, there was no allegation that such division as
between them was in fact made. Moreover, the facts as found and as
submitted in the brief made clear that the building in question continued to be
leased by other parties with petitioners dividing "equally the income ... after
deducting the expenses of operation and maintenance ..." 13 Differences of
such slight significance do not call for a different ruling.
It is obvious that petitioners' effort to avoid the controlling force of the
Evangelista ruling cannot be deemed successful. Respondent Court of Tax
Appeals acted correctly. It yielded to the command of an authoritative
decision; it recognized its binding character. There is clearly no merit to the
second error assigned by petitioners, who would deny its applicability to their
situation.
The first alleged error committed by respondent Court of Tax Appeals in
holding that petitioners, in acquiring the Gibbs Building, established a
partnership subject to income tax as a corporation under the National Internal
Revenue Code is likewise untenable. In their discussion in their brief of this
alleged error, stress is laid on their being co-owners and not partners. Such
an allegation was likewise made in the Evangelista case.
This is the way it was disposed of in the opinion of the present Chief Justice:
"This pretense was correctly rejected by the Court of Tax Appeals." 14 Then
came the explanation why: "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 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 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"." 15 The opinion
went on to summarize the matter aptly: "For purposes of the tax on
corporations, our National Internal Revenue Code, include these partnerships
with the exception only of duly registered general co-partnerships 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." 16
In the light of the above, it cannot be said that the respondent Court of Tax
Appeals decided the matter incorrectly. There is no warrant for the assertion
that it failed to apply the settled law to uncontroverted facts. Its decision
cannot be successfully assailed. Moreover, an observation made in Alhambra
Cigar & Cigarette Manufacturing Co. v. Commissioner of Internal Revenue, 17
is well-worth recalling. Thus: "Nor as a matter of principle is it advisable for
this Court to set aside the conclusion reached by an agency such as the
Court of Tax Appeals which is, by the very nature of its functions, dedicated
exclusively to the study and consideration of tax problems and has
necessarily developed an expertise on the subject, unless, as did not happen
here, there has been an abuse or improvident exercise of its authority."
WHEREFORE, the decision of the respondent Court of Tax Appeals ordering
petitioners "to pay the sums of P37,128.00 as income tax due from the
partnership formed by herein petitioners for the years 1951 to 1954 and
P20,619.00 for the years 1955 and 1956 within thirty days from the date this
decision becomes final, plus the corresponding surcharge and interest in
case of delinquency," is affirmed. With costs against petitioners.

G.R. No. 148187 April 16, 2008


PHILEX MINING CORPORATION, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
YNARES-SANTIAGO, J.:
This is a petition for review on certiorari of the June 30, 2000 Decision 1 of the
Court of Appeals in CA-G.R. SP No. 49385, which affirmed the Decision 2 of
the Court of Tax Appeals in C.T.A. Case No. 5200. Also assailed is the April 3,
2001 Resolution3 denying the motion for reconsideration.
The facts of the case are as follows:
On April 16, 1971, petitioner Philex Mining Corporation (Philex Mining),
entered into an agreement4 with Baguio Gold Mining Company ("Baguio
Gold") for the former to manage and operate the latters mining claim, known
as the Sto. Nino mine, located in Atok and Tublay, Benguet Province. The
parties agreement was denominated as "Power of Attorney" and provided for
the following terms:
4. Within three (3) years from date thereof, the PRINCIPAL (Baguio Gold)
shall make available to the MANAGERS (Philex Mining) up to ELEVEN
MILLION PESOS (P11,000,000.00), in such amounts as from time to time
may be required by the MANAGERS within the said 3-year period, for use in
the MANAGEMENT of the STO. NINO MINE. The said ELEVEN MILLION
PESOS (P11,000,000.00) shall be deemed, for internal audit purposes, as the
owners account in the Sto. Nino PROJECT. Any part of any income of the
PRINCIPAL from the STO. NINO MINE, which is left with the Sto. Nino
PROJECT, shall be added to such owners account.
5. Whenever the MANAGERS shall deem it necessary and convenient in
connection with the MANAGEMENT of the STO. NINO MINE, they may
transfer their own funds or property to the Sto. Nino PROJECT, in accordance
with the following arrangements:
(a) The properties shall be appraised and, together with the cash, shall be
carried by the Sto. Nino PROJECT as a special fund to be known as the
MANAGERS account.
(b) The total of the MANAGERS account shall not exceed P11,000,000.00,
except with prior approval of the PRINCIPAL; provided, however, that if the
compensation of the MANAGERS as herein provided cannot be paid in cash
from the Sto. Nino PROJECT, the amount not so paid in cash shall be added
to the MANAGERS account.
(c) The cash and property shall not thereafter be withdrawn from the Sto.
Nino PROJECT until termination of this Agency.
(d) The MANAGERS account shall not accrue interest. Since it is the desire
of the PRINCIPAL to extend to the MANAGERS the benefit of subsequent
appreciation of property, upon a projected termination of this Agency, the ratio
which the MANAGERS account has to the owners account will be
determined, and the corresponding proportion of the entire assets of the STO.
NINO MINE, excluding the claims, shall be transferred to the MANAGERS,
except that such transferred assets shall not include mine development,
roads, buildings, and similar property which will be valueless, or of slight
value, to the MANAGERS. The MANAGERS can, on the other hand, require
at their option that property originally transferred by them to the Sto. Nino
PROJECT be re-transferred to them. Until such assets are transferred to the
MANAGERS, this Agency shall remain subsisting.
xxxx
12. The compensation of the MANAGER shall be fifty per cent (50%) of the
net profit of the Sto. Nino PROJECT before income tax. It is understood that
the MANAGERS shall pay income tax on their compensation, while the
PRINCIPAL shall pay income tax on the net profit of the Sto. Nino PROJECT
after deduction therefrom of the MANAGERS compensation.
xxxx
16. The PRINCIPAL has current pecuniary obligation in favor of the
MANAGERS and, in the future, may incur other obligations in favor of the
MANAGERS. This Power of Attorney has been executed as security for the
payment and satisfaction of all such obligations of the PRINCIPAL in favor of
the MANAGERS and as a means to fulfill the same. Therefore, this Agency
shall be irrevocable while any obligation of the PRINCIPAL in favor of the
MANAGERS is outstanding, inclusive of the MANAGERS account. After all
obligations of the PRINCIPAL in favor of the MANAGERS have been paid and
satisfied in full, this Agency shall be revocable by the PRINCIPAL upon 36-
month notice to the MANAGERS.
17. Notwithstanding any agreement or understanding between the
PRINCIPAL and the MANAGERS to the contrary, the MANAGERS may
withdraw from this Agency by giving 6-month notice to the PRINCIPAL. The
MANAGERS shall not in any manner be held liable to the PRINCIPAL by
reason alone of such withdrawal. Paragraph 5(d) hereof shall be operative in
case of the MANAGERS withdrawal.
x x x x5
In the course of managing and operating the project, Philex Mining made
advances of cash and property in accordance with paragraph 5 of the
agreement. However, the mine suffered continuing losses over the years
which resulted to petitioners withdrawal as manager of the mine on January
28, 1982 and in the eventual cessation of mine operations on February 20,
1982.6
Thereafter, on September 27, 1982, the parties executed a "Compromise with
Dation in Payment"7 wherein Baguio Gold admitted an indebtedness to
petitioner in the amount of P179,394,000.00 and agreed to pay the same in
three segments by first assigning Baguio Golds tangible assets to petitioner,
transferring to the latter Baguio Golds equitable title in its Philodrill assets
and finally settling the remaining liability through properties that Baguio Gold
may acquire in the future.
On December 31, 1982, the parties executed an "Amendment to
Compromise with Dation in Payment" 8 where the parties determined that
Baguio Golds indebtedness to petitioner actually amounted to
P259,137,245.00, which sum included liabilities of Baguio Gold to other
creditors that petitioner had assumed as guarantor. These liabilities pertained
to long-term loans amounting to US$11,000,000.00 contracted by Baguio
Gold from the Bank of America NT & SA and Citibank N.A. This time, Baguio
Gold undertook to pay petitioner in two segments by first assigning its
tangible assets for P127,838,051.00 and then transferring its equitable title in
its Philodrill assets for P16,302,426.00. The parties then ascertained that
Baguio Gold had a remaining outstanding indebtedness to petitioner in the
amount of P114,996,768.00.
Subsequently, petitioner wrote off in its 1982 books of account the remaining
outstanding indebtedness of Baguio Gold by charging P112,136,000.00 to
allowances and reserves that were set up in 1981 and P2,860,768.00 to the
1982 operations.
In its 1982 annual income tax return, petitioner deducted from its gross
income the amount of P112,136,000.00 as "loss on settlement of receivables
from Baguio Gold against reserves and allowances." 9 However, the Bureau of
Internal Revenue (BIR) disallowed the amount as deduction for bad debt and
assessed petitioner a deficiency income tax of P62,811,161.39.
Petitioner protested before the BIR arguing that the deduction must be
allowed since all requisites for a bad debt deduction were satisfied, to wit: (a)
there was a valid and existing debt; (b) the debt was ascertained to be
worthless; and (c) it was charged off within the taxable year when it was
determined to be worthless.
Petitioner emphasized that the debt arose out of a valid management contract
it entered into with Baguio Gold. The bad debt deduction represented
advances made by petitioner which, pursuant to the management contract,
formed part of Baguio Golds "pecuniary obligations" to petitioner. It also
included payments made by petitioner as guarantor of Baguio Golds long-
term loans which legally entitled petitioner to be subrogated to the rights of
the original creditor.
Petitioner also asserted that due to Baguio Golds irreversible losses, it
became evident that it would not be able to recover the advances and
payments it had made in behalf of Baguio Gold. For a debt to be considered
worthless, petitioner claimed that it was neither required to institute a judicial
action for collection against the debtor nor to sell or dispose of collateral
assets in satisfaction of the debt. It is enough that a taxpayer exerted diligent
efforts to enforce collection and exhausted all reasonable means to collect.
On October 28, 1994, the BIR denied petitioners protest for lack of legal and
factual basis. It held that the alleged debt was not ascertained to be worthless
since Baguio Gold remained existing and had not filed a petition for
bankruptcy; and that the deduction did not consist of a valid and subsisting
debt considering that, under the management contract, petitioner was to be
paid fifty percent (50%) of the projects net profit.10
Petitioner appealed before the Court of Tax Appeals (CTA) which rendered
judgment, as follows:
WHEREFORE, in view of the foregoing, the instant Petition for Review is
hereby DENIED for lack of merit. The assessment in question, viz: FAS-1-82-
88-003067 for deficiency income tax in the amount of P62,811,161.39 is
hereby AFFIRMED.
ACCORDINGLY, petitioner Philex Mining Corporation is hereby ORDERED to
PAY respondent Commissioner of Internal Revenue the amount of
P62,811,161.39, plus, 20% delinquency interest due computed from February
10, 1995, which is the date after the 20-day grace period given by the
respondent within which petitioner has to pay the deficiency amount x x x up
to actual date of payment.
SO ORDERED.11
The CTA rejected petitioners assertion that the advances it made for the Sto.
Nino mine were in the nature of a loan. It instead characterized the advances
as petitioners investment in a partnership with Baguio Gold for the
development and exploitation of the Sto. Nino mine. The CTA held that the
"Power of Attorney" executed by petitioner and Baguio Gold was actually a
partnership agreement. Since the advanced amount partook of the nature of
an investment, it could not be deducted as a bad debt from petitioners gross
income.
The CTA likewise held that the amount paid by petitioner for the long-term
loan obligations of Baguio Gold could not be allowed as a bad debt
deduction. At the time the payments were made, Baguio Gold was not in
default since its loans were not yet due and demandable. What petitioner did
was to pre-pay the loans as evidenced by the notice sent by Bank of America
showing that it was merely demanding payment of the installment and
interests due. Moreover, Citibank imposed and collected a "pre-termination
penalty" for the pre-payment.
The Court of Appeals affirmed the decision of the CTA. 12 Hence, upon denial
of its motion for reconsideration,13 petitioner took this recourse under Rule 45
of the Rules of Court, alleging that:
I.
The Court of Appeals erred in construing that the advances made by Philex in
the management of the Sto. Nino Mine pursuant to the Power of Attorney
partook of the nature of an investment rather than a loan.
II.
The Court of Appeals erred in ruling that the 50%-50% sharing in the net
profits of the Sto. Nino Mine indicates that Philex is a partner of Baguio Gold
in the development of the Sto. Nino Mine notwithstanding the clear absence
of any intent on the part of Philex and Baguio Gold to form a partnership.
III.
The Court of Appeals erred in relying only on the Power of Attorney and in
completely disregarding the Compromise Agreement and the Amended
Compromise Agreement when it construed the nature of the advances made
by Philex.
IV.
The Court of Appeals erred in refusing to delve upon the issue of the propriety
of the bad debts write-off.14
Petitioner insists that in determining the nature of its business relationship
with Baguio Gold, we should not only rely on the "Power of Attorney", but also
on the subsequent "Compromise with Dation in Payment" and "Amended
Compromise with Dation in Payment" that the parties executed in 1982.
These documents, allegedly evinced the parties intent to treat the advances
and payments as a loan and establish a creditor-debtor relationship between
them.
The petition lacks merit.
The lower courts correctly held that the "Power of Attorney" is the instrument
that is material in determining the true nature of the business relationship
between petitioner and Baguio Gold. Before resort may be had to the two
compromise agreements, the parties contractual intent must first be
discovered from the expressed language of the primary contract under which
the parties business relations were founded. It should be noted that the
compromise agreements were mere collateral documents executed by the
parties pursuant to the termination of their business relationship created
under the "Power of Attorney". On the other hand, it is the latter which
established the juridical relation of the parties and defined the parameters of
their dealings with one another.
The execution of the two compromise agreements can hardly be considered
as a subsequent or contemporaneous act that is reflective of the parties true
intent. The compromise agreements were executed eleven years after the
"Power of Attorney" and merely laid out a plan or procedure by which
petitioner could recover the advances and payments it made under the
"Power of Attorney". The parties entered into the compromise agreements as
a consequence of the dissolution of their business relationship. It did not
define that relationship or indicate its real character.
An examination of the "Power of Attorney" reveals that a partnership or joint
venture was indeed intended by the parties. Under a contract of partnership,
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.15 While a corporation, like petitioner, cannot generally enter into a
contract of partnership unless authorized by law or its charter, it has been
held that it may enter into a joint venture which is akin to a particular
partnership:
The legal concept of a joint venture is of common law origin. It has no precise
legal definition, but it has been generally understood to mean an organization
formed for some temporary purpose. x x x It is in fact hardly distinguishable
from the partnership, since their elements are similar community of interest
in the business, sharing of profits and losses, and a mutual right of control. x
x x The main distinction cited by most opinions in common law jurisdictions is
that the partnership contemplates a general business with some degree of
continuity, while the joint venture is formed for the execution of a single
transaction, and is thus of a temporary nature. x x x This observation is not
entirely accurate in this jurisdiction, since under the Civil Code, a partnership
may be particular or universal, and a particular partnership may have for its
object a specific undertaking. x x x It would seem therefore that under
Philippine law, a joint venture is a form of partnership and should be governed
by the law of partnerships. The Supreme Court has however recognized a
distinction between these two business forms, and has held that although a
corporation cannot enter into a partnership contract, it may however engage
in a joint venture with others. x x x (Citations omitted) 16
Perusal of the agreement denominated as the "Power of Attorney" indicates
that the parties had intended to create a partnership and establish a common
fund for the purpose. They also had a joint interest in the profits of the
business as shown by a 50-50 sharing in the income of the mine.
Under the "Power of Attorney", petitioner and Baguio Gold undertook to
contribute money, property and industry to the common fund known as the
Sto. Nio mine.17 In this regard, we note that there is a substantive
equivalence in the respective contributions of the parties to the development
and operation of the mine. Pursuant to paragraphs 4 and 5 of the agreement,
petitioner and Baguio Gold were to contribute equally to the joint venture
assets under their respective accounts. Baguio Gold would contribute P11M
under its owners account plus any of its income that is left in the project, in
addition to its actual mining claim. Meanwhile, petitioners contribution
would consist of its expertise in the management and operation of mines, as
well as the managers account which is comprised of P11M in funds and
property and petitioners "compensation" as manager that cannot be paid in
cash.
However, petitioner asserts that it could not have entered into a partnership
agreement with Baguio Gold because it did not "bind" itself to contribute
money or property to the project; that under paragraph 5 of the agreement, it
was only optional for petitioner to transfer funds or property to the Sto. Nio
project "(w)henever the MANAGERS shall deem it necessary and convenient
in connection with the MANAGEMENT of the STO. NIO MINE."18
The wording of the parties agreement as to petitioners contribution to the
common fund does not detract from the fact that petitioner transferred its
funds and property to the project as specified in paragraph 5, thus rendering
effective the other stipulations of the contract, particularly paragraph 5(c)
which prohibits petitioner from withdrawing the advances until termination of
the parties business relations. As can be seen, petitioner became bound by
its contributions once the transfers were made. The contributions acquired an
obligatory nature as soon as petitioner had chosen to exercise its option
under paragraph 5.
There is no merit to petitioners claim that the prohibition in paragraph 5(c)
against withdrawal of advances should not be taken as an indication that it
had entered into a partnership with Baguio Gold; that the stipulation only
showed that what the parties entered into was actually a contract of agency
coupled with an interest which is not revocable at will and not a partnership.
In an agency coupled with interest, it is the agency that cannot be revoked or
withdrawn by the principal due to an interest of a third party that depends
upon it, or the mutual interest of both principal and agent. 19 In this case, the
non-revocation or non-withdrawal under paragraph 5(c) applies to the
advances made by petitioner who is supposedly the agent and not the
principal under the contract. Thus, it cannot be inferred from the stipulation
that the parties relation under the agreement is one of agency coupled with
an interest and not a partnership.
Neither can paragraph 16 of the agreement be taken as an indication that the
relationship of the parties was one of agency and not a partnership. Although
the said provision states that "this Agency shall be irrevocable while any
obligation of the PRINCIPAL in favor of the MANAGERS is outstanding,
inclusive of the MANAGERS account," it does not necessarily follow that the
parties entered into an agency contract coupled with an interest that cannot
be withdrawn by Baguio Gold.
It should be stressed that the main object of the "Power of Attorney" was not
to confer a power in favor of petitioner to contract with third persons on behalf
of Baguio Gold but to create a business relationship between petitioner and
Baguio Gold, in which the former was to manage and operate the latters
mine through the parties mutual contribution of material resources and
industry. The essence of an agency, even one that is coupled with interest, is
the agents ability to represent his principal and bring about business relations
between the latter and third persons.20 Where representation for and in behalf
of the principal is merely incidental or necessary for the proper discharge of
ones paramount undertaking under a contract, the latter may not necessarily
be a contract of agency, but some other agreement depending on the ultimate
undertaking of the parties.21
In this case, the totality of the circumstances and the stipulations in the
parties agreement indubitably lead to the conclusion that a partnership was
formed between petitioner and Baguio Gold.
First, it does not appear that Baguio Gold was unconditionally obligated to
return the advances made by petitioner under the agreement. Paragraph 5
(d) thereof provides that upon termination of the parties business relations,
"the ratio which the MANAGERS account has to the owners account will be
determined, and the corresponding proportion of the entire assets of the STO.
NINO MINE, excluding the claims" shall be transferred to petitioner.22 As
pointed out by the Court of Tax Appeals, petitioner was merely entitled to a
proportionate return of the mines assets upon dissolution of the parties
business relations. There was nothing in the agreement that would require
Baguio Gold to make payments of the advances to petitioner as would be
recognized as an item of obligation or "accounts payable" for Baguio Gold.
Thus, the tax court correctly concluded that the agreement provided for a
distribution of assets of the Sto. Nio mine upon termination, a provision that
is more consistent with a partnership than a creditor-debtor relationship. It
should be pointed out that in a contract of loan, a person who receives a loan
or money or any fungible thing acquires ownership thereof and is bound to
pay the creditor an equal amount of the same kind and quality.23 In this case,
however, there was no stipulation for Baguio Gold to actually repay petitioner
the cash and property that it had advanced, but only the return of an amount
pegged at a ratio which the managers account had to the owners account.
In this connection, we find no contractual basis for the execution of the two
compromise agreements in which Baguio Gold recognized a debt in favor of
petitioner, which supposedly arose from the termination of their business
relations over the Sto. Nino mine. The "Power of Attorney" clearly provides
that petitioner would only be entitled to the return of a proportionate share of
the mine assets to be computed at a ratio that the managers account had to
the owners account. Except to provide a basis for claiming the advances as a
bad debt deduction, there is no reason for Baguio Gold to hold itself liable to
petitioner under the compromise agreements, for any amount over and above
the proportion agreed upon in the "Power of Attorney".
Next, the tax court correctly observed that it was unlikely for a business
corporation to lend hundreds of millions of pesos to another corporation with
neither security, or collateral, nor a specific deed evidencing the terms and
conditions of such loans. The parties also did not provide a specific maturity
date for the advances to become due and demandable, and the manner of
payment was unclear. All these point to the inevitable conclusion that the
advances were not loans but capital contributions to a partnership.
The strongest indication that petitioner was a partner in the Sto Nio mine is
the fact that it would receive 50% of the net profits as "compensation" under
paragraph 12 of the agreement. The entirety of the parties contractual
stipulations simply leads to no other conclusion than that petitioners
"compensation" is actually its share in the income of the joint venture.
Article 1769 (4) of the Civil Code explicitly provides that the "receipt by a
person of a share in the profits of a business is prima facie evidence that he
is a partner in the business." Petitioner asserts, however, that no such
inference can be drawn against it since its share in the profits of the Sto Nio
project was in the nature of compensation or "wages of an employee", under
the exception provided in Article 1769 (4) (b). 24
On this score, the tax court correctly noted that petitioner was not an
employee of Baguio Gold who will be paid "wages" pursuant to an employer-
employee relationship. To begin with, petitioner was the manager of the
project and had put substantial sums into the venture in order to ensure its
viability and profitability. By pegging its compensation to profits, petitioner
also stood not to be remunerated in case the mine had no income. It is hard
to believe that petitioner would take the risk of not being paid at all for its
services, if it were truly just an ordinary employee.
Consequently, we find that petitioners "compensation" under paragraph 12 of
the agreement actually constitutes its share in the net profits of the
partnership. Indeed, petitioner would not be entitled to an equal share in the
income of the mine if it were just an employee of Baguio Gold. 25 It is not
surprising that petitioner was to receive a 50% share in the net profits,
considering that the "Power of Attorney" also provided for an almost equal
contribution of the parties to the St. Nino mine. The "compensation" agreed
upon only serves to reinforce the notion that the parties relations were indeed
of partners and not employer-employee.
All told, the lower courts did not err in treating petitioners advances as
investments in a partnership known as the Sto. Nino mine. The advances
were not "debts" of Baguio Gold to petitioner inasmuch as the latter was
under no unconditional obligation to return the same to the former under the
"Power of Attorney". As for the amounts that petitioner paid as guarantor to
Baguio Golds creditors, we find no reason to depart from the tax courts
factual finding that Baguio Golds debts were not yet due and demandable at
the time that petitioner paid the same. Verily, petitioner pre-paid Baguio
Golds outstanding loans to its bank creditors and this conclusion is supported
by the evidence on record.26
In sum, petitioner cannot claim the advances as a bad debt deduction from its
gross income. Deductions for income tax purposes partake of the nature of
tax exemptions and are strictly construed against the taxpayer, who must
prove by convincing evidence that he is entitled to the deduction claimed. 27 In
this case, petitioner failed to substantiate its assertion that the advances were
subsisting debts of Baguio Gold that could be deducted from its gross
income. Consequently, it could not claim the advances as a valid bad debt
deduction.
WHEREFORE, the petition is DENIED. The decision of the Court of Appeals
in CA-G.R. SP No. 49385 dated June 30, 2000, which affirmed the decision
of the Court of Tax Appeals in C.T.A. Case No. 5200 is AFFIRMED. Petitioner
Philex Mining Corporation is ORDERED to PAY the deficiency tax on its 1982
income in the amount of P62,811,161.31, with 20% delinquency interest
computed from February 10, 1995, which is the due date given for the
payment of the deficiency income tax, up to the actual date of payment.

G.R. No. 169507


AIR CANADA, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
LEONEN, J.:
An offline international air carrier selling passage tickets in the Philippines,
through a general sales agent, is a resident foreign corporation doing
business in the Philippines. As such, it is taxable under Section 28(A)(l), and
not Section 28(A)(3) of the 1997 National Internal Revenue Code, subject to
any applicable tax treaty to which the Philippines is a signatory. Pursuant to
Article 8 of the Republic of the Philippines-Canada Tax Treaty, Air Canada
may only be imposed a maximum tax of 1 % of its gross revenues earned
from the sale of its tickets in the Philippines.
This is a Petition for Review appealing the August 26, 2005 Decision of the
1 2

Court of Tax Appeals En Banc, which in turn affirmed the December 22, 2004
Decision and April 8, 2005 Resolution of the Court of Tax Appeals First
3 4

Division denying Air Canadas claim for refund.


Air Canada is a "foreign corporation organized and existing under the laws of
Canada[.]" On April 24, 2000, it was granted an authority to operate as an
5

offline carrier by the Civil Aeronautics Board, subject to certain conditions,


which authority would expire on April 24, 2005. "As an off-line carrier, [Air
6

Canada] does not have flights originating from or coming to the Philippines
[and does not] operate any airplane [in] the Philippines[.]"
7

On July 1, 1999, Air Canada engaged the services of Aerotel Ltd., Corp.
(Aerotel) as its general sales agent in the Philippines. Aerotel "sells [Air
8

Canadas] passage documents in the Philippines." 9

For the period ranging from the third quarter of 2000 to the second quarter of
2002, Air Canada, through Aerotel, filed quarterly and annual income tax
returns and paid the income tax on Gross Philippine Billings in the total
amount of 5,185,676.77, detailed as follows:
1wphi1
10

Applicable Quarter[/]Year
Date Filed/Paid
Amount of Tax
3rd Qtr 2000
November 29, 2000
P 395,165.00
Annual ITR
2000 April 16, 2001
381,893.59
1st Qtr 2001
May 30, 2001
522,465.39
2nd Qtr 2001
August 29, 2001
1,033,423.34
3rd Qtr 2001
November 29, 2001
765,021.28
Annual ITR 2001
April 15, 2002
328,193.93
1st Qtr 2002
May 30, 2002
594,850.13
2nd Qtr 2002
August 29, 2002
1,164,664.11
TOTAL

P 5,185,676.77
11
On November 28, 2002, Air Canada filed a written claim for refund of alleged
erroneously paid income taxes amounting to 5,185,676.77 before the
Bureau of Internal Revenue, Revenue District Office No. 47-East Makati. It
12 13

found basis from the revised definition of Gross Philippine Billings under
14

Section 28(A)(3)(a) of the 1997 National Internal Revenue Code:


SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
....
(3) International Carrier. - An international carrier doing business in the
Philippines shall pay a tax of two and onehalf percent (2 1/2%) on its Gross
Philippine Billings as defined hereunder:
(a) International Air Carrier. - Gross Philippine Billings refers to the amount of
gross revenue derived from carriage of persons, excess baggage, cargo
and mail originating from the Philippines in a continuous and
uninterrupted flight, irrespective of the place of sale or issue and the
place of payment of the ticket or passage document: Provided, That
tickets revalidated, exchanged and/or indorsed to another international airline
form part of the Gross Philippine Billings if the passenger boards a plane in a
port or point in the Philippines: Provided, further, That for a flight which
originates from the Philippines, but transshipment of passenger takes place at
any port outside the Philippines on another airline, only the aliquot portion of
the cost of the ticket corresponding to the leg flown from the Philippines to the
point of transshipment shall form part of Gross Philippine Billings. (Emphasis
supplied)
To prevent the running of the prescriptive period, Air Canada filed a Petition
for Review before the Court of Tax Appeals on November 29, 2002. The 15

case was docketed as C.T.A. Case No. 6572. 16

On December 22, 2004, the Court of Tax Appeals First Division rendered its
Decision denying the Petition for Review and, hence, the claim for refund. It 17

found that Air Canada was engaged in business in the Philippines through a
local agent that sells airline tickets on its behalf. As such, it should be taxed
as a resident foreign corporation at the regular rate of 32%. Further, 18

according to the Court of Tax Appeals First Division, Air Canada was deemed
to have established a "permanent establishment" in the Philippines under
19

Article V(2)(i) of the Republic of the Philippines-Canada Tax Treaty by the 20

appointment of the local sales agent, "in which [the] petitioner uses its
premises as an outlet where sales of [airline] tickets are made[.]" 21

Air Canada seasonably filed a Motion for Reconsideration, but the Motion
was denied in the Court of Tax Appeals First Divisions Resolution dated April
8, 2005 for lack of merit. The First Division held that while Air Canada was
22

not liable for tax on its Gross Philippine Billings under Section 28(A)(3), it was
nevertheless liable to pay the 32% corporate income tax on income derived
from the sale of airline tickets within the Philippines pursuant to Section 28(A)
(1).
23

On May 9, 2005, Air Canada appealed to the Court of Tax Appeals En Banc. 24

The appeal was docketed as CTA EB No. 86. 25

In the Decision dated August 26, 2005, the Court of Tax Appeals En Banc
affirmed the findings of the First Division. The En Banc ruled that Air Canada
26

is subject to tax as a resident foreign corporation doing business in the


Philippines since it sold airline tickets in the Philippines. The Court of Tax
27

Appeals En Banc disposed thus:


WHEREFORE, premises considered, the instant petition is hereby DENIED
DUE COURSE, and accordingly, DISMISSED for lack of merit. 28

Hence, this Petition for Review was filed.


29

The issues for our consideration are:


First, whether petitioner Air Canada, as an offline international carrier selling
passage documents through a general sales agent in the Philippines, is a
resident foreign corporation within the meaning of Section 28(A)(1) of the
1997 National Internal Revenue Code;
Second, whether petitioner Air Canada is subject to the 2% tax on Gross
Philippine Billings pursuant to Section 28(A)(3). If not, whether an offline
international carrier selling passage documents through a general sales agent
can be subject to the regular corporate income tax of 32% on taxable 30

income pursuant to Section 28(A)(1);


Third, whether the Republic of the Philippines-Canada Tax Treaty applies,
specifically:
a. Whether the Republic of the Philippines-Canada Tax Treaty is enforceable;
b. Whether the appointment of a local general sales agent in the Philippines
falls under the definition of "permanent establishment" under Article V(2)(i) of
the Republic of the Philippines-Canada Tax Treaty; and
Lastly, whether petitioner Air Canada is entitled to the refund of
5,185,676.77 pertaining allegedly to erroneously paid tax on Gross
Philippine Billings from the third quarter of 2000 to the second quarter of
2002.
Petitioner claims that the general provision imposing the regular corporate
income tax on resident foreign corporations provided under Section 28(A)(1)
of the 1997 National Internal Revenue Code does not apply to "international
carriers," which are especially classified and taxed under Section 28(A)(3).
31 32

It adds that the fact that it is no longer subject to Gross Philippine Billings tax
as ruled in the assailed Court of Tax Appeals Decision "does not render it
ipso facto subject to 32% income tax on taxable income as a resident foreign
corporation." Petitioner argues that to impose the 32% regular corporate
33

income tax on its income would violate the Philippine governments covenant
under Article VIII of the Republic of the Philippines-Canada Tax Treaty not to
impose a tax higher than 1% of the carriers gross revenue derived from
sources within the Philippines. It would also allegedly result in "inequitable
34

tax treatment of on-line and off-line international air carriers[.]"


35

Also, petitioner states that the income it derived from the sale of airline tickets
in the Philippines was income from services and not income from sales of
personal property. Petitioner cites the deliberations of the Bicameral
36

Conference Committee on House Bill No. 9077 (which eventually became the
1997 National Internal Revenue Code), particularly Senator Juan Ponce
Enriles statement, to reveal the "legislative intent to treat the revenue
37

derived from air carriage as income from services, and that the carriage of
passenger or cargo as the activity that generates the income." Accordingly,
38

applying the principle on the situs of taxation in taxation of services, petitioner


claims that its income derived "from services rendered outside the Philippines
[was] not subject to Philippine income taxation." 39

Petitioner further contends that by the appointment of Aerotel as its general


sales agent, petitioner cannot be considered to have a "permanent
establishment" in the Philippines pursuant to Article V(6) of the Republic of
40

the Philippines-Canada Tax Treaty. It points out that Aerotel is an


41

"independent general sales agent that acts as such for . . . other international
airline companies in the ordinary course of its business." Aerotel sells
42

passage tickets on behalf of petitioner and receives a commission for its


services. Petitioner states that even the Bureau of Internal Revenue
43

through VAT Ruling No. 003-04 dated February 14, 2004has conceded that
an offline international air carrier, having no flight operations to and from the
Philippines, is not deemed engaged in business in the Philippines by merely
appointing a general sales agent. Finally, petitioner maintains that its "claim
44

for refund of erroneously paid Gross Philippine Billings cannot be denied on


the ground that [it] is subject to income tax under Section 28 (A) (1)" since it
45

has not been assessed at all by the Bureau of Internal Revenue for any
income tax liability.
46

On the other hand, respondent maintains that petitioner is subject to the 32%
corporate income tax as a resident foreign corporation doing business in the
Philippines. Petitioners total payment of 5,185,676.77 allegedly shows that
petitioner was earning a sizable income from the sale of its plane tickets
within the Philippines during the relevant period. Respondent further points
47

out that this court in Commissioner of Internal Revenue v. American Airlines,


Inc., which in turn cited the cases involving the British Overseas Airways
48

Corporation and Air India, had already settled that "foreign airline companies
which sold tickets in the Philippines through their local agents . . . [are]
considered resident foreign corporations engaged in trade or business in the
country." It also cites Revenue Regulations No. 6-78 dated April 25, 1978,
49

which defined the phrase "doing business in the Philippines" as including


"regular sale of tickets in the Philippines by offline international airlines either
by themselves or through their agents." 50
Respondent further contends that petitioner is not entitled to its claim for
refund because the amount of 5,185,676.77 it paid as tax from the third
quarter of 2000 to the second quarter of 2001 was still short of the 32%
income tax due for the period. Petitioner cannot allegedly claim good faith in
51

its failure to pay the right amount of tax since the National Internal Revenue
Code became operative on January 1, 1998 and by 2000, petitioner should
have already been aware of the implications of Section 28(A)(3) and the
decided cases of this courts ruling on the taxability of offline international
carriers selling passage tickets in the Philippines. 52

I
At the outset, we affirm the Court of Tax Appeals ruling that petitioner, as an
offline international carrier with no landing rights in the Philippines, is not
liable to tax on Gross Philippine Billings under Section 28(A)(3) of the 1997
National Internal Revenue Code:
SEC. 28. Rates of Income Tax on Foreign Corporations.
(A) Tax on Resident Foreign Corporations. -
....
(3) International Carrier. - An international carrier doing business in the
Philippines shall pay a tax of two and one-half percent (2 1/2%) on its Gross
Philippine Billings as defined hereunder:
(a) International Air Carrier. - 'Gross Philippine Billings' refers to the amount
of gross revenue derived from carriage of persons, excess baggage, cargo
and mail originating from the Philippines in a continuous and uninterrupted
flight, irrespective of the place of sale or issue and the place of payment of
the ticket or passage document: Provided, That tickets revalidated,
exchanged and/or indorsed to another international airline form part of the
Gross Philippine Billings if the passenger boards a plane in a port or point in
the Philippines: Provided, further, That for a flight which originates from the
Philippines, but transshipment of passenger takes place at any port outside
the Philippines on another airline, only the aliquot portion of the cost of the
ticket corresponding to the leg flown from the Philippines to the point of
transshipment shall form part of Gross Philippine Billings. (Emphasis
supplied)
Under the foregoing provision, the tax attaches only when the carriage of
persons, excess baggage, cargo, and mail originated from the Philippines in a
continuous and uninterrupted flight, regardless of where the passage
documents were sold.
Not having flights to and from the Philippines, petitioner is clearly not liable for
the Gross Philippine Billings tax.
II
Petitioner, an offline carrier, is a resident foreign corporation for income tax
purposes. Petitioner falls within the definition of resident foreign corporation
under Section 28(A)(1) of the 1997 National Internal Revenue Code, thus, it
may be subject to 32% tax on its taxable income:
53

SEC. 28. Rates of Income Tax on Foreign Corporations. -


(A) Tax on Resident Foreign Corporations. -
(1) In General. - Except as otherwise provided in this Code, a corporation
organized, authorized, or existing under the laws of any foreign country,
engaged in trade or business within the Philippines, shall be subject to
an income tax equivalent to thirty-five percent (35%) of the taxable
income derived in the preceding taxable year from all sources within
the Philippines: Provided, That effective January 1, 1998, the rate of income
tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall
be thirty-three percent (33%); and effective January 1, 2000 and thereafter,
the rate shall be thirty-two percent (32% ). (Emphasis supplied)
54

The definition of "resident foreign corporation" has not substantially changed


throughout the amendments of the National Internal Revenue Code. All
versions refer to "a foreign corporation engaged in trade or business within
the Philippines."
Commonwealth Act No. 466, known as the National Internal Revenue Code
and approved on June 15, 1939, defined "resident foreign corporation" as
applying to "a foreign corporation engaged in trade or business within the
Philippines or having an office or place of business therein."55

Section 24(b)(2) of the National Internal Revenue Code, as amended by


Republic Act No. 6110, approved on August 4, 1969, reads:
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 life 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)
56

Presidential Decree No. 1158-A took effect on June 3, 1977 amending certain
sections of the 1939 National Internal Revenue Code. Section 24(b)(2) on
foreign resident corporations was amended, but it still provides that "[a]
corporation organized, authorized, or existing under the laws of any foreign
country, 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[.]" 57

As early as 1987, this court in Commissioner of Internal Revenue v. British


Overseas Airways Corporation 58
declared British Overseas Airways
Corporation, an international air carrier with no landing rights in the
Philippines, as a resident foreign corporation engaged in business in the
Philippines through its local sales agent that sold and issued tickets for the
airline company. This court discussed that:
59

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. "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.["]
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."
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. (Emphasis
60

supplied, citations omitted)


Republic Act No. 7042 or the Foreign Investments Act of 1991 also provides
guidance with its definition of "doing business" with regard to foreign
corporations. Section 3(d) of the law enumerates the activities that constitute
doing business:
d. the phrase "doing business" shall include soliciting orders, service
contracts, opening offices, whether called "liaison" offices or branches;
appointing representatives or distributors domiciled in the Philippines or who
in any calendar year stay in the country for a period or periods totalling one
hundred eighty (180) days or more; participating in the management,
supervision or control of any domestic business, firm, entity or corporation in
the Philippines; and any other act or acts that imply a continuity of
commercial dealings or arrangements, and contemplate 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 of the purpose and object of the business
organization: Provided, however, That the phrase "doing business" shall not
be deemed to include mere investment as a shareholder by a foreign entity in
domestic corporations duly registered to do business, and/or the exercise of
rights as such investor; nor having a nominee director or officer to represent
its interests in such corporation; nor appointing a representative or distributor
domiciled in the Philippines which transacts business in its own name and for
its own account[.] (Emphasis supplied)
61

While Section 3(d) above states that "appointing a representative or


distributor domiciled in the Philippines which transacts business in its own
name and for its own account" is not considered as "doing business," the
Implementing Rules and Regulations of Republic Act No. 7042 clarifies that
"doing business" includes "appointing representatives or distributors,
operating under full control of the foreign corporation, domiciled in the
Philippines or who in any calendar year stay in the country for a period or
periods totaling one hundred eighty (180) days or more[.]" 62

An offline carrier is "any foreign air carrier not certificated by the [Civil
Aeronautics] Board, but who maintains office or who has designated or
appointed agents or employees in the Philippines, who sells or offers for sale
any air transportation in behalf of said foreign air carrier and/or others, or
negotiate for, or holds itself out by solicitation, advertisement, or otherwise
sells, provides, furnishes, contracts, or arranges for such transportation."
63

"Anyone desiring to engage in the activities of an off-line carrier [must] apply


to the [Civil Aeronautics] Board for such authority." Each offline carrier must
64

file with the Civil Aeronautics Board a monthly report containing information
on the tickets sold, such as the origin and destination of the passengers,
carriers involved, and commissions received. 65

Petitioner is undoubtedly "doing business" or "engaged in trade or business"


in the Philippines.
Aerotel performs acts or works or exercises functions that are incidental and
beneficial to the purpose of petitioners business. The activities of Aerotel
bring direct receipts or profits to petitioner. There is nothing on record to
66

show that Aerotel solicited orders alone and for its own account and without
interference from, let alone direction of, petitioner. On the contrary, Aerotel
cannot "enter into any contract on behalf of [petitioner Air Canada] without the
express written consent of [the latter,]" and it must perform its functions
67

according to the standards required by petitioner. Through Aerotel, petitioner


68

is able to engage in an economic activity in the Philippines.


Further, petitioner was issued by the Civil Aeronautics Board an authority to
operate as an offline carrier in the Philippines for a period of five years, or
from April 24, 2000 until April 24, 2005.
69
Petitioner is, therefore, a resident foreign corporation that is taxable on its
income derived from sources within the Philippines. Petitioners income from
sale of airline tickets, through Aerotel, is income realized from the pursuit of
its business activities in the Philippines.
III
However, the application of the regular 32% tax rate under Section 28(A)(1)
of the 1997 National Internal Revenue Code must consider the existence of
an effective tax treaty between the Philippines and the home country of the
foreign air carrier.
In the earlier case of South African Airways v. Commissioner of Internal
Revenue, this court held that Section 28(A)(3)(a) does not categorically
70

exempt all international air carriers from the coverage of Section 28(A)(1).
Thus, if Section 28(A)(3)(a) is applicable to a taxpayer, then the general rule
under Section 28(A)(1) does not apply. If, however, Section 28(A)(3)(a) does
not apply, an international air carrier would be liable for the tax under Section
28(A)(1).71

This court in South African Airways declared that the correct interpretation of
these provisions is that: "international air carrier[s] maintain[ing] flights to and
from the Philippines . . . shall be taxed at the rate of 2% of its Gross
Philippine Billings[;] while international air carriers that do not have flights to
and from the Philippines but nonetheless earn income from other activities in
the country [like sale of airline tickets] will be taxed at the rate of 32% of such
[taxable] income." 72

In this case, there is a tax treaty that must be taken into consideration to
determine the proper tax rate.
A tax treaty is an agreement entered into between sovereign states "for
purposes of eliminating double taxation on income and capital, preventing
fiscal evasion, promoting mutual trade and investment, and according fair and
equitable tax treatment to foreign residents or nationals." Commissioner of
73

Internal Revenue v. S.C. Johnson and Son, Inc. explained the purpose of a
74

tax treaty:
The purpose of these international agreements is to reconcile the national
fiscal legislations of the contracting parties in order to help the taxpayer avoid
simultaneous taxation in two different jurisdictions. More precisely, the tax
conventions are drafted with a view towards the elimination of international
juridical double taxation, which is defined as the imposition of comparable
taxes in two or more states on the same taxpayer in respect of the same
subject matter and for identical periods.
The apparent rationale for doing away with double taxation is to encourage
the free flow of goods and services and the movement of capital, technology
and persons between countries, conditions deemed vital in creating robust
and dynamic economies. Foreign investments will only thrive in a fairly
predictable and reasonable international investment climate and the
protection against double taxation is crucial in creating such a climate. 75

(Emphasis in the original, citations omitted)


Observance of any treaty obligation binding upon the government of the
Philippines is anchored on the constitutional provision that the Philippines
"adopts the generally accepted principles of international law as part of the
law of the land[.]" Pacta sunt servanda is a fundamental international law
76

principle that requires agreeing parties to comply with their treaty obligations
in good faith.
77

Hence, the application of the provisions of the National Internal Revenue


Code must be subject to the provisions of tax treaties entered into by the
Philippines with foreign countries.
In Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue, 78

this court stressed the binding effects of tax treaties. It dealt with the issue of
"whether the failure to strictly comply with [Revenue Memorandum Order]
RMO No. 1-2000 will deprive persons or corporations of the benefit of a tax
79

treaty." Upholding the tax treaty over the administrative issuance, this court
80

reasoned thus:
Our Constitution provides for adherence to the general principles of
international law as part of the law of the land. The time-honored
international principle of pacta sunt servanda demands the performance in
good faith of treaty obligations on the part of the states that enter into the
agreement. Every treaty in force is binding upon the parties, and obligations
under the treaty must be performed by them in good faith. More importantly,
treaties have the force and effect of law in this jurisdiction.
Tax treaties are entered into "to reconcile the national fiscal legislations of the
contracting parties and, in turn, help the taxpayer avoid simultaneous
taxations in two different jurisdictions." CIR v. S.C. Johnson and Son, Inc.
further clarifies that "tax conventions are drafted with a view towards the
elimination of international juridical double taxation, which is defined as the
imposition of comparable taxes in two or more states on the same taxpayer in
respect of the same subject matter and for identical periods. The apparent
rationale for doing away with double taxation is to encourage the free flow of
goods and services and the movement of capital, technology and persons
between countries, conditions deemed vital in creating robust and dynamic
economies. Foreign investments will only thrive in a fairly predictable and
reasonable international investment climate and the protection against double
taxation is crucial in creating such a climate." Simply put, tax treaties are
entered into to minimize, if not eliminate the harshness of international
juridical double taxation, which is why they are also known as double tax
treaty or double tax agreements.
"A state that has contracted valid international obligations is bound to make in
its legislations those modifications that may be necessary to ensure the
fulfillment of the obligations undertaken." Thus, laws and issuances must
ensure that the reliefs granted under tax treaties are accorded to the parties
entitled thereto. The BIR must not impose additional requirements that would
negate the availment of the reliefs provided for under international
agreements. More so, when the RPGermany Tax Treaty does not provide for
any pre-requisite for the availment of the benefits under said agreement.
....
Bearing in mind the rationale of tax treaties, the period of application for the
availment of tax treaty relief as required by RMO No. 1-2000 should not
operate to divest entitlement to the relief as it would constitute a violation of
the duty required by good faith in complying with a tax treaty. The denial of
the availment of tax relief for the failure of a taxpayer to apply within the
prescribed period under the administrative issuance would impair the value of
the tax treaty. At most, the application for a tax treaty relief from the BIR
should merely operate to confirm the entitlement of the taxpayer to the relief.
The obligation to comply with a tax treaty must take precedence over the
objective of RMO No. 1-2000. Logically, noncompliance with tax treaties has
negative implications on international relations, and unduly discourages
foreign investors. While the consequences sought to be prevented by RMO
No. 1-2000 involve an administrative procedure, these may be remedied
through other system management processes, e.g., the imposition of a fine or
penalty. But we cannot totally deprive those who are entitled to the benefit of
a treaty for failure to strictly comply with an administrative issuance requiring
prior application for tax treaty relief. (Emphasis supplied, citations omitted)
81

On March 11, 1976, the representatives for the government of the Republic
82

of the Philippines and for the government of Canada signed the Convention
between the Philippines and Canada for the Avoidance of Double Taxation
and the Prevention of Fiscal Evasion with Respect to Taxes on Income
(Republic of the Philippines-Canada Tax Treaty). This treaty entered into force
on December 21, 1977.
Article V of the Republic of the Philippines-Canada Tax Treaty defines
83

"permanent establishment" as a "fixed place of business in which the


business of the enterprise is wholly or partly carried on."
84

Even though there is no fixed place of business, an enterprise of a


Contracting State is deemed to have a permanent establishment in the other
Contracting State if under certain conditions there is a person acting for it.
Specifically, Article V(4) of the Republic of the Philippines-Canada Tax Treaty
states that "[a] person acting in a Contracting State on behalf of an enterprise
of the other Contracting State (other than an agent of independent status to
whom paragraph 6 applies) shall be deemed to be a permanent
establishment in the first-mentioned State if . . . he has and habitually
exercises in that State an authority to conclude contracts on behalf of the
enterprise, unless his activities are limited to the purchase of goods or
merchandise for that enterprise[.]" The provision seems to refer to one who
would be considered an agent under Article 1868 of the Civil Code of the
85

Philippines.
On the other hand, Article V(6) provides that "[a]n enterprise of a Contracting
State shall not be deemed to have a permanent establishment in the other
Contracting State merely because it carries on business in that other State
through a broker, general commission agent or any other agent of an
independent status, where such persons are acting in the ordinary course of
their business."
Considering Article XV of the same Treaty, which covers dependent personal
86

services, the term "dependent" would imply a relationship between the


principal and the agent that is akin to an employer-employee relationship.
Thus, an agent may be considered to be dependent on the principal where
the latter exercises comprehensive control and detailed instructions over the
means and results of the activities of the agent.87

Section 3 of Republic Act No. 776, as amended, also known as The Civil
Aeronautics Act of the Philippines, defines a general sales agent as "a
person, not a bonafide employee of an air carrier, who pursuant to an
authority from an airline, by itself or through an agent, sells or offers for sale
any air transportation, or negotiates for, or holds himself out by solicitation,
advertisement or otherwise as one who sells, provides, furnishes, contracts or
arranges for, such air transportation." General sales agents and their
88

property, property rights, equipment, facilities, and franchise are subject to the
regulation and control of the Civil Aeronautics Board. A permit or
89

authorization issued by the Civil Aeronautics Board is required before a


general sales agent may engage in such an activity. 90

Through the appointment of Aerotel as its local sales agent, petitioner is


deemed to have created a "permanent establishment" in the Philippines as
defined under the Republic of the Philippines-Canada Tax Treaty.
Petitioner appointed Aerotel as its passenger general sales agent to perform
the sale of transportation on petitioner and handle reservations, appointment,
and supervision of International Air Transport Associationapproved and
petitioner-approved sales agents, including the following services:
ARTICLE 7
GSA SERVICES
The GSA [Aerotel Ltd., Corp.] shall perform on behalf of AC [Air Canada] the
following services:
a) Be the fiduciary of AC and in such capacity act solely and entirely for the
benefit of AC in every matter relating to this Agreement;
....
c) Promotion of passenger transportation on AC;
....
e) Without the need for endorsement by AC, arrange for the reissuance, in
the Territory of the GSA [Philippines], of traffic documents issued by AC
outside the said territory of the GSA [Philippines], as required by the
passenger(s);
....
h) Distribution among passenger sales agents and display of timetables, fare
sheets, tariffs and publicity material provided by AC in accordance with the
reasonable requirements of AC;
....
j) Distribution of official press releases provided by AC to media and
reference of any press or public relations inquiries to AC;
....
o) Submission for ACs approval, of an annual written sales plan on or before
a date to be determined by AC and in a form acceptable to AC;
....
q) Submission of proposals for ACs approval of passenger sales agent
incentive plans at a reasonable time in advance of proposed implementation.
r) Provision of assistance on request, in its relations with Governmental and
other authorities, offices and agencies in the Territory [Philippines].
....
u) Follow AC guidelines for the handling of baggage claims and customer
complaints and, unless otherwise stated in the guidelines, refer all such
claims and complaints to AC. 91

Under the terms of the Passenger General Sales Agency Agreement, Aerotel
will "provide at its own expense and acceptable to [petitioner Air Canada],
adequate and suitable premises, qualified staff, equipment, documentation,
facilities and supervision and in consideration of the remuneration and
expenses payable[,] [will] defray all costs and expenses of and incidental to
the Agency." "[I]t is the sole employer of its employees and . . . is responsible
92

for [their] actions . . . or those of any subcontractor." In remuneration for its


93

services, Aerotel would be paid by petitioner a commission on sales of


transportation plus override commission on flown revenues. Aerotel would
94

also be reimbursed "for all authorized expenses supported by original supplier


invoices."95

Aerotel is required to keep "separate books and records of account, including


supporting documents, regarding all transactions at, through or in any way
connected with [petitioner Air Canada] business." 96

"If representing more than one carrier, [Aerotel must] represent all carriers in
an unbiased way." Aerotel cannot "accept additional appointments as
97

General Sales Agent of any other carrier without the prior written consent of
[petitioner Air Canada]."98

The Passenger General Sales Agency Agreement "may be terminated by


either party without cause upon [no] less than 60 days prior notice in
writing[.]" In case of breach of any provisions of the Agreement, petitioner
99
may require Aerotel "to cure the breach in 30 days failing which [petitioner Air
Canada] may terminate [the] Agreement[.]" 100

The following terms are indicative of Aerotels dependent status:


First, Aerotel must give petitioner written notice "within 7 days of the date [it]
acquires or takes control of another entity or merges with or is acquired or
controlled by another person or entity[.]" Except with the written consent of
101

petitioner, Aerotel must not acquire a substantial interest in the ownership,


management, or profits of a passenger sales agent affiliated with the
International Air Transport Association or a non-affiliated passenger sales
agent nor shall an affiliated passenger sales agent acquire a substantial
interest in Aerotel as to influence its commercial policy and/or management
decisions. Aerotel must also provide petitioner "with a report on any
102

interests held by [it], its owners, directors, officers, employees and their
immediate families in companies and other entities in the aviation industry or .
. . industries related to it[.]" Petitioner may require that any interest be
103

divested within a set period of time. 104

Second, in carrying out the services, Aerotel cannot enter into any contract on
behalf of petitioner without the express written consent of the latter; it must
105

act according to the standards required by petitioner; "follow the terms and
106

provisions of the [petitioner Air Canada] GSA Manual [and all] written
instructions of [petitioner Air Canada;]" and "[i]n the absence of an
107

applicable provision in the Manual or instructions, [Aerotel must] carry out its
functions in accordance with [its own] standard practices and procedures[.]" 108

Third, Aerotel must only "issue traffic documents approved by [petitioner Air
Canada] for all transportation over [its] services[.]" All use of petitioners
109

name, logo, and marks must be with the written consent of petitioner and
according to petitioners corporate standards and guidelines set out in the
Manual. 110

Fourth, all claims, liabilities, fines, and expenses arising from or in connection
with the transportation sold by Aerotel are for the account of petitioner, except
in the case of negligence of Aerotel. 111

Aerotel is a dependent agent of petitioner pursuant to the terms of the


Passenger General Sales Agency Agreement executed between the parties.
It has the authority or power to conclude contracts or bind petitioner to
contracts entered into in the Philippines. A third-party liability on contracts of
Aerotel is to petitioner as the principal, and not to Aerotel, and liability to such
third party is enforceable against petitioner. While Aerotel maintains a certain
independence and its activities may not be devoted wholly to petitioner,
nonetheless, when representing petitioner pursuant to the Agreement, it must
carry out its functions solely for the benefit of petitioner and according to the
latters Manual and written instructions. Aerotel is required to submit its
annual sales plan for petitioners approval.
In essence, Aerotel extends to the Philippines the transportation business of
petitioner. It is a conduit or outlet through which petitioners airline tickets are
sold.112

Under Article VII (Business Profits) of the Republic of the Philippines-Canada


Tax Treaty, the "business profits" of an enterprise of a Contracting State is
"taxable only in that State[,] unless the enterprise carries on business in the
other Contracting State through a permanent establishment[.]" Thus, income
113

attributable to Aerotel or from business activities effected by petitioner


through Aerotel may be taxed in the Philippines. However, pursuant to the last
paragraph of Article VII in relation to Article VIII (Shipping and Air
114 115

Transport) of the same Treaty, the tax imposed on income derived from the
operation of ships or aircraft in international traffic should not exceed 1% of
gross revenues derived from Philippine sources.
IV
While petitioner is taxable as a resident foreign corporation under Section
28(A)(1) of the 1997 National Internal Revenue Code on its taxable income 116

from sale of airline tickets in the Philippines, it could only be taxed at a


maximum of 1% of gross revenues, pursuant to Article VIII of the Republic
of the Philippines-Canada Tax Treaty that applies to petitioner as a "foreign
corporation organized and existing under the laws of Canada[.]" 117

Tax treaties form part of the law of the land, and jurisprudence has applied
118

the statutory construction principle that specific laws prevail over general
ones. 119

The Republic of the Philippines-Canada Tax Treaty was ratified on December


21, 1977 and became valid and effective on that date. On the other hand, the
applicable provisions relating to the taxability of resident foreign
120

corporations and the rate of such tax found in the National Internal Revenue
Code became effective on January 1, 1998. Ordinarily, the later provision
121

governs over the earlier one. In this case, however, the provisions of the
122

Republic of the Philippines-Canada Tax Treaty are more specific than the
provisions found in the National Internal Revenue Code.
These rules of interpretation apply even though one of the sources is a treaty
and not simply a statute.
Article VII, Section 21 of the Constitution provides:
SECTION 21. No treaty or international agreement shall be valid and effective
unless concurred in by at least two-thirds of all the Members of the Senate.
This provision states the second of two ways through which international
obligations become binding. Article II, Section 2 of the Constitution deals with
international obligations that are incorporated, while Article VII, Section 21
deals with international obligations that become binding through ratification.
"Valid and effective" means that treaty provisions that define rights and duties
as well as definite prestations have effects equivalent to a statute. Thus,
these specific treaty provisions may amend statutory provisions. Statutory
provisions may also amend these types of treaty obligations.
We only deal here with bilateral treaty state obligations that are not
international obligations erga omnes. We are also not required to rule in this
case on the effect of international customary norms especially those with jus
cogens character.
The second paragraph of Article VIII states that "profits from sources within a
Contracting State derived by an enterprise of the other Contracting State from
the operation of ships or aircraft in international traffic may be taxed in the
first-mentioned State but the tax so charged shall not exceed the lesser of a)
one and one-half per cent of the gross revenues derived from sources in that
State; and b) the lowest rate of Philippine tax imposed on such profits derived
by an enterprise of a third State."
The Agreement between the government of the Republic of the Philippines
and the government of Canada on Air Transport, entered into on January 14,
1997, reiterates the effectivity of Article VIII of the Republic of the Philippines-
Canada Tax Treaty:
ARTICLE XVI
(Taxation)
The Contracting Parties shall act in accordance with the provisions of Article
VIII of the Convention between the Philippines and Canada for the Avoidance
of Double Taxation and the Prevention of Fiscal Evasion with Respect to
Taxes on Income, signed at Manila on March 31, 1976 and entered into force
on December 21, 1977, and any amendments thereto, in respect of the
operation of aircraft in international traffic.
123

Petitioners income from sale of ticket for international carriage of passenger


is income derived from international operation of aircraft. The sale of tickets is
closely related to the international operation of aircraft that it is considered
incidental thereto.
"[B]y reason of our bilateral negotiations with [Canada], we have agreed to
have our right to tax limited to a certain extent[.]" Thus, we are bound to
124

extend to a Canadian air carrier doing business in the Philippines through a


local sales agent the benefit of a lower tax equivalent to 1% on business
profits derived from sale of international air transportation.
V
Finally, we reject petitioners contention that the Court of Tax Appeals erred in
denying its claim for refund of erroneously paid Gross Philippine Billings tax
on the ground that it is subject to income tax under Section 28(A)(1) of the
National Internal Revenue Code because (a) it has not been assessed at all
by the Bureau of Internal Revenue for any income tax liability; and (b)
125

internal revenue taxes cannot be the subject of set-off or compensation, 126

citing Republic v. Mambulao Lumber Co., et al. and Francia v. Intermediate


127

Appellate Court. 128


In SMI-ED Philippines Technology, Inc. v. Commissioner of Internal
Revenue, we have ruled that "[i]n an action for the refund of taxes allegedly
129

erroneously paid, the Court of Tax Appeals may determine whether there are
taxes that should have been paid in lieu of the taxes paid." The
130

determination of the proper category of tax that should have been paid is
incidental and necessary to resolve the issue of whether a refund should be
granted. Thus:
131

Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject it
to 6% capital gains tax or other taxes at the first instance. The Court of Tax
Appeals has no power to make an assessment.
As earlier established, the Court of Tax Appeals has no assessment powers.
In stating that petitioners transactions are subject to capital gains tax,
however, the Court of Tax Appeals was not making an assessment. It was
merely determining the proper category of tax that petitioner should have
paid, in view of its claim that it erroneously imposed upon itself and paid the
5% final tax imposed upon PEZA-registered enterprises.
The determination of the proper category of tax that petitioner should have
paid is an incidental matter necessary for the resolution of the principal issue,
which is whether petitioner was entitled to a refund.
The issue of petitioners claim for tax refund is intertwined with the issue of
the proper taxes that are due from petitioner. A claim for tax refund carries the
assumption that the tax returns filed were correct. If the tax return filed was
not proper, the correctness of the amount paid and, therefore, the claim for
refund become questionable. In that case, the court must determine if a
taxpayer claiming refund of erroneously paid taxes is more properly liable for
taxes other than that paid.
In South African Airways v. Commissioner of Internal Revenue, South African
Airways claimed for refund of its erroneously paid 2% taxes on its gross
Philippine billings. This court did not immediately grant South Africans claim
for refund. This is because although this court found that South African
Airways was not subject to the 2% tax on its gross Philippine billings, this
court also found that it was subject to 32% tax on its taxable income.
In this case, petitioners claim that it erroneously paid the 5% final tax is an
admission that the quarterly tax return it filed in 2000 was improper. Hence, to
determine if petitioner was entitled to the refund being claimed, the Court of
Tax Appeals has the duty to determine if petitioner was indeed not liable for
the 5% final tax and, instead, liable for taxes other than the 5% final tax. As in
South African Airways, petitioners request for refund can neither be granted
nor denied outright without such determination.
If the taxpayer is found liable for taxes other than the erroneously paid 5%
final tax, the amount of the taxpayers liability should be computed and
deducted from the refundable amount.
Any liability in excess of the refundable amount, however, may not be
collected in a case involving solely the issue of the taxpayers entitlement to
refund. The question of tax deficiency is distinct and unrelated to the question
of petitioners entitlement to refund. Tax deficiencies should be subject to
assessment procedures and the rules of prescription. The court cannot be
expected to perform the BIRs duties whenever it fails to do so either through
neglect or oversight. Neither can court processes be used as a tool to
circumvent laws protecting the rights of taxpayers. 132

Hence, the Court of Tax Appeals properly denied petitioners claim for refund
of allegedly erroneously paid tax on its Gross Philippine Billings, on the
ground that it was liable instead for the regular 32% tax on its taxable income
received from sources within the Philippines. Its determination of petitioners
liability for the 32% regular income tax was made merely for the purpose of
ascertaining petitioners entitlement to a tax refund and not for imposing any
deficiency tax.
In this regard, the matter of set-off raised by petitioner is not an issue.
Besides, the cases cited are based on different circumstances. In both cited
cases, the taxpayer claimed that his (its) tax liability was off-set by his (its)
133

claim against the government.


Specifically, in Republic v. Mambulao Lumber Co., et al., Mambulao Lumber
contended that the amounts it paid to the government as reforestation
charges from 1947 to 1956, not having been used in the reforestation of the
area covered by its license, may be set off or applied to the payment of forest
charges still due and owing from it. Rejecting Mambulaos claim of legal
134

compensation, this court ruled:


[A]ppellant and appellee are not mutually creditors and debtors of each other.
Consequently, the law on compensation is inapplicable. On this point, the trial
court correctly observed:
Under Article 1278, NCC, compensation should take place when two persons
in their own right are creditors and debtors of each other. With respect to the
forest charges which the defendant Mambulao Lumber Company has paid to
the government, they are in the coffers of the government as taxes collected,
and the government does not owe anything to defendant Mambulao Lumber
Company. So, it is crystal clear that the Republic of the Philippines and the
Mambulao Lumber Company are not creditors and debtors of each other,
because compensation refers to mutual debts. * * *.
And the weight of authority is to the effect that internal revenue taxes, such as
the forest charges in question, can not be the subject of set-off or
compensation.
A claim for taxes is not such a debt, demand, contract or judgment as is
allowed to be set-off under the statutes of set-off, which are construed
uniformly, in the light of public policy, to exclude the remedy in an action or
any indebtedness of the state or municipality to one who is liable to the state
or municipality for taxes. Neither are they a proper subject of recoupment
since they do not arise out of the contract or transaction sued on. * * *. (80
C.J.S. 7374.)
The general rule, based on grounds of public policy is well-settled that no set-
off is admissible against demands for taxes levied for general or local
governmental purposes. The reason on which the general rule is based, is
that taxes are not in the nature of contracts between the party and party but
grow out of a duty to, and are the positive acts of the government, to the
making and enforcing of which, the personal consent of individual taxpayers
is not required. * * * If the taxpayer can properly refuse to pay his tax when
called upon by the Collector, because he has a claim against the
governmental body which is not included in the tax levy, it is plain that some
legitimate and necessary expenditure must be curtailed. If the taxpayers
claim is disputed, the collection of the tax must await and abide the result of a
lawsuit, and meanwhile the financial affairs of the government will be thrown
into great confusion. (47 Am. Jur. 766767.) (Emphasis supplied)
135

In Francia, this court did not allow legal compensation since not all requisites
of legal compensation provided under Article 1279 were present. In that
136

case, a portion of Francias property in Pasay was expropriated by the


national government, which did not immediately pay Francia. In the
137

meantime, he failed to pay the real property tax due on his remaining property
to the local government of Pasay, which later on would auction the property
on account of such delinquency. He then moved to set aside the auction
138

sale and argued, among others, that his real property tax delinquency was
extinguished by legal compensation on account of his unpaid claim against
the national government. This court ruled against Francia:
139

There is no legal basis for the contention. By legal compensation, obligations


of persons, who in their own right are reciprocally debtors and creditors of
each other, are extinguished (Art. 1278, Civil Code). The circumstances of the
case do not satisfy the requirements provided by Article 1279, to wit:
(1) that each one of the obligors be bound principally and that he be at the
same time a principal creditor of the other;
xxx xxx xxx
(3) that the two debts be due.
xxx xxx xxx
This principal contention of the petitioner has no merit. We have consistently
ruled that there can be no off-setting of taxes against the claims that the
taxpayer may have against the government. A person cannot refuse to pay a
tax on the ground that the government owes him an amount equal to or
greater than the tax being collected. The collection of a tax cannot await the
results of a lawsuit against the government.
....
There are other factors which compel us to rule against the petitioner. The tax
was due to the city government while the expropriation was effected by the
national government. Moreover, the amount of 4,116.00 paid by the national
government for the 125 square meter portion of his lot was deposited with the
Philippine National Bank long before the sale at public auction of his
remaining property. Notice of the deposit dated September 28, 1977 was
received by the petitioner on September 30, 1977. The petitioner admitted in
his testimony that he knew about the 4,116.00 deposited with the bank but
he did not withdraw it. It would have been an easy matter to withdraw
2,400.00 from the deposit so that he could pay the tax obligation thus
aborting the sale at public auction. 140

The ruling in Francia was applied to the subsequent cases of Caltex


Philippines, Inc. v. Commission on Audit and Philex Mining Corporation v.
141

Commissioner of Internal Revenue. In Caltex, this court reiterated:


142

[A] taxpayer may not offset taxes due from the claims that he may have
against the government. Taxes cannot be the subject of compensation
because the government and taxpayer are not mutually creditors and debtors
of each other and a claim for taxes is not such a debt, demand, contract or
judgment as is allowed to be set-off. (Citations omitted)
143

Philex Mining ruled that "[t]here is a material distinction between a tax and
debt. Debts are due to the Government in its corporate capacity, while taxes
are due to the Government in its sovereign capacity." Rejecting Philex
144

Minings assertion that the imposition of surcharge and interest was


unjustified because it had no obligation to pay the excise tax liabilities within
the prescribed period since, after all, it still had pending claims for VAT input
credit/refund with the Bureau of Internal Revenue, this court explained:
To be sure, we cannot allow Philex to refuse the payment of its tax liabilities
on the ground that it has a pending tax claim for refund or credit against the
government which has not yet been granted. It must be noted that a
distinguishing feature of a tax is that it is compulsory rather than a matter of
bargain. Hence, a tax does not depend upon the consent of the taxpayer. If
any tax payer can defer the payment of taxes by raising the defense that it
still has a pending claim for refund or credit, this would adversely affect the
government revenue system. A taxpayer cannot refuse to pay his taxes when
they fall due simply because he has a claim against the government or that
the collection of the tax is contingent on the result of the lawsuit it filed against
the government. Moreover, Philexs theory that would automatically apply its
VAT input credit/refund against its tax liabilities can easily give rise to
confusion and abuse, depriving the government of authority over the manner
by which taxpayers credit and offset their tax liabilities. (Citations omitted)
145

In sum, the rulings in those cases were to the effect that the taxpayer cannot
simply refuse to pay tax on the ground that the tax liabilities were off-set
against any alleged claim the taxpayer may have against the government.
Such would merely be in keeping with the basic policy on prompt collection of
taxes as the lifeblood of the government. 1wphi1

Here, what is involved is a denial of a taxpayers refund claim on account of


the Court of Tax Appeals finding of its liability for another tax in lieu of the
Gross Philippine Billings tax that was allegedly erroneously paid.
Squarely applicable is South African Airways where this court rejected similar
arguments on the denial of claim for tax refund:
Commissioner of Internal Revenue v. Court of Tax Appeals, however, granted
the offsetting of a tax refund with a tax deficiency in this wise:
Further, it is also worth noting that the Court of Tax Appeals erred in denying
petitioners supplemental motion for reconsideration alleging bringing to said
courts attention the existence of the deficiency income and business tax
assessment against Citytrust. The fact of such deficiency assessment is
intimately related to and inextricably intertwined with the right of respondent
bank to claim for a tax refund for the same year. To award such refund
despite the existence of that deficiency assessment is an absurdity and a
polarity in conceptual effects. Herein private respondent cannot be entitled to
refund and at the same time be liable for a tax deficiency assessment for the
same year.
The grant of a refund is founded on the assumption that the tax return is
valid, that is, the facts stated therein are true and correct. The deficiency
assessment, although not yet final, created a doubt as to and constitutes a
challenge against the truth and accuracy of the facts stated in said return
which, by itself and without unquestionable evidence, cannot be the basis for
the grant of the refund.
Section 82, Chapter IX of the National Internal Revenue Code of 1977, which
was the applicable law when the claim of Citytrust was filed, provides that
"(w)hen an assessment is made in case of any list, statement, or return,
which in the opinion of the Commissioner of Internal Revenue was false or
fraudulent or contained any understatement or undervaluation, no tax
collected under such assessment shall be recovered by any suits unless it is
proved that the said list, statement, or return was not false nor fraudulent and
did not contain any understatement or undervaluation; but this provision shall
not apply to statements or returns made or to be made in good faith regarding
annual depreciation of oil or gas wells and mines."
Moreover, to grant the refund without determination of the proper assessment
and the tax due would inevitably result in multiplicity of proceedings or suits. If
the deficiency assessment should subsequently be upheld, the Government
will be forced to institute anew a proceeding for the recovery of erroneously
refunded taxes which recourse must be filed within the prescriptive period of
ten years after discovery of the falsity, fraud or omission in the false or
fraudulent return involved. This would necessarily require and entail
additional efforts and expenses on the part of the Government, impose a
burden on and a drain of government funds, and impede or delay the
collection of much-needed revenue for governmental operations.
Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it
is both logically necessary and legally appropriate that the issue of the
deficiency tax assessment against Citytrust be resolved jointly with its claim
for tax refund, to determine once and for all in a single proceeding the true
and correct amount of tax due or refundable.
In fact, as the Court of Tax Appeals itself has heretofore conceded, it would
be only just and fair that the taxpayer and the Government alike be given
equal opportunities to avail of remedies under the law to defeat each other s
claim and to determine all matters of dispute between them in one single
case. It is important to note that in determining whether or not petitioner is
entitled to the refund of the amount paid, it would [be] necessary to determine
how much the Government is entitled to collect as taxes. This would
necessarily include the determination of the correct liability of the taxpayer
and, certainly, a determination of this case would constitute res judicata on
both parties as to all the matters subject thereof or necessarily involved
therein.
Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the
1997 NIRC. The above pronouncements are, therefore, still applicable today.
Here, petitioner's similar tax refund claim assumes that the tax return that it
filed was correct. Given, however, the finding of the CTA that petitioner,
although not liable under Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under
Sec. 28(A)(l), the correctness of the return filed by petitioner is now put in
doubt. As such, we cannot grant the prayer for a refund. (Emphasis146

supplied, citation omitted)


In the subsequent case of United Airlines, Inc. v. Commissioner of Internal
Revenue, this court upheld the denial of the claim for refund based on the
147

Court of Tax Appeals' finding that the taxpayer had, through erroneous
deductions on its gross income, underpaid its Gross Philippine Billing tax on
cargo revenues for 1999, and the amount of underpayment was even greater
than the refund sought for erroneously paid Gross Philippine Billings tax on
passenger revenues for the same taxable period. 148

In this case, the P5,185,676.77 Gross Philippine Billings tax paid by petitioner
was computed at the rate of 1 % of its gross revenues amounting to
P345,711,806.08 from the third quarter of 2000 to the second quarter of
149

2002. It is quite apparent that the tax imposable under Section 28(A)(l) of the
1997 National Internal Revenue Code [32% of t.axable income, that is, gross
income less deductions] will exceed the maximum ceiling of 1 % of gross
revenues as decreed in Article VIII of the Republic of the Philippines-Canada
Tax Treaty. Hence, no refund is forthcoming.
WHEREFORE, the Petition is DENIED. The Decision dated August 26, 2005
and Resolution dated April 8, 2005 of the Court of Tax Appeals En Banc are
AFFIRMED.