Francia vs IAC GR no.

67649 June 28, 1988

Engracio Francia is the registered owner of a residential lot and a two-story house
built upon it situated at Pasay City, Metro Manila. The lot, with an area of about
328 square meters, is described and covered by TCT No. 4739 (37795) of the
Registry of Deeds of Pasay City. On October 15, 1977, a 125 square meter portion
of Francia's property was expropriated by the Republic of the Philippines for the
sum of P4,116.00 representing the estimated amount equivalent to the assessed
value of the aforesaid portion. Since 1963 up to 1977 inclusive, Francia failed to
pay his real estate taxes. Thus, on December 5, 1977, his property was sold at public
auction by the City Treasurer of Pasay City pursuant to Section 73 of Presidential
Decree No. 464 known as the Real Property Tax Code in order to satisfy a tax
delinquency of P2,400.00. Ho Fernandez was the highest bidder for the property.

Francia was not present during the auction sale since he was in Iligan City at that
time helping his uncle ship bananas. On March 3, 1979, Francia received a notice
of hearing of LRC Case No. 1593-P "In re: Petition for Entry of New Certificate of
Title" filed by Ho Fernandez, seeking the cancellation of TCT No. 4739 (37795)
and the issuance in his name of a new certificate of title. Upon verification through
his lawyer, Francia discovered that a Final Bill of Sale had been issued in favor of
Ho Fernandez by the City Treasurer on December 11, 1978. The auction sale and
the final bill of sale were both annotated at the back of TCT No. 4739 (37795) by
the Register of Deeds. On March 20, 1979, Francia filed a complaint to annul the
auction sale.

The lower court dismissed Francia’s complaint.

The Intermediate Appellate Court affirmed the decision of the lower court.
Hence, the petition for review before the Supreme Court.

ISSUE:
WON the auction sale should be annulled.
(Sub-issue) WON Francia’s P2,400 tax delinquency was legally compensated by
the P4,116 paid to him for the expropriation.

RULING:
No, the auction sale should not be annulled. SC said: Francia contends that his tax
delinquency of P2,400.00 has been extinguished by legal compensation. He claims
that the government owed him P4,116.00 when a portion of his land was
expropriated on October 15, 1977. Hence, his tax obligation had been set-off by
operation of law as of October 15, 1977. But there is no legal basis for Francia’s
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;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the debtor.

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. In the case of Republic v. Mambulao Lumber
Co. (4 SCRA 622), this Court ruled that Internal Revenue Taxes can not be the
subject of set-off or compensation. We stated that:
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 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. ..."

This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we
stated that: "... internal revenue taxes cannot be the subject of compensation:
Reason: government and taxpayer are not mutually creditors and debtors of each
other' under Article 1278 of the Civil Code and a "claim for taxes is not such a debt,
demand, contract or judgment as is allowed to be set-off."
Mario Espina vs CA GR no. 116805 June 22, 2000

Mario S. Espina is the registered owner of a Condominium Unit in Antipolo, Rizal.

Such ownership is evidenced by a Condominium Certificate of Title. On November
29, 1991, Mario S. Espina, as seller, and Rene G. Diaz, as buyer, executed a
Provisional Deed of Sale, whereby the former sold to the latter the aforesaid
condominium unit for the amount of P100,000.00 to be paid upon the execution of
the contract and the balance to be paid through PCI Bank postdated checks. During
this time, Diaz was a lessee of the said unit.

On January 25, 1992, Diaz through Ms. Socorro Diaz, his wife, paid private Mario
Espina P200,000.00, which was acknowledged by him as partial payment for the
condominium unit subject of this controversy. On July 26, 1992, Espina sent Diaz
a "Notice of Cancellation" of the Provisional Deed of Sale. However, despite the
Notice of Cancellation from Espina, the latter accepted payment from Diaz per
Metrobank Check which was encashed on October 28, 1992 in the amount of
P100,000.00 (there was no express indication whether this would be applied to the
purchase of the property or the unpaid rentals).

On February 24, 1993, Espina filed a complaint for Unlawful Detainer (Rentals have
not been paid for a while) against Diaz before the MTC of Antipolo, Branch 1. On
November 12, 1993, the trial court rendered its decision, ordering Diaz to vacate the
condominium unit. On appeal to RTC, the decision of the MTC was affirmed. On
petition for review, the CA reversed the appealed decision and dismissed the
complaint for unlawful detainer. MR was denied. Hence, the appeal via petition for
review on certiorari before the SC.

ISSUE:
The basic issue raised is whether the Court of Appeals erred in ruling that the
provisional deed of sale novated the existing contract of lease and that petitioner
had no cause of action for ejectment against respondent Diaz.

RULING:
We resolve the issue in favor of petitioner (Espina). According to respondent Diaz,
the provisional deed of sale that was subsequently executed by the parties novated
the original existing contract of lease. The contention cannot be sustained.
Respondent originally occupied the condominium unit in question in 1987 as a
lessee. While he occupied the premises as lessee, petitioner agreed to sell the
condominium unit to respondent by installments. The agreement to sell was
provisional as the consideration was payable in installments.

The question is, did the provisional deed of sale novate the existing lease contract?
The answer is no. The novation must be clearly proved since its existence is not
presumed. "In this light, novation is never presumed; it must be proven as a fact
either by express stipulation of the parties or by implication derived from an
irreconcilable incompatibility between old and new obligations or contracts."
Novation takes place only if the parties expressly so provide, otherwise, the original
contract remains in force. In other words, the parties to a contract must expressly
agree that they are abrogating their old contract in favor of a new one. Where there
is no clear agreement to create a new contract in place of the existing one, novation
cannot be presumed to take place, unless the terms of the new contract are fully
incompatible with the former agreement on every point. Thus, a deed of cession of
the right to repurchase a piece of land does not supersede a contract of lease over
the same property. In the provisional deed of sale in this case, after the initial down
payment, respondent's checks in payment of six installments all bounced and were
dishonored upon presentment for the reason that the bank account was closed.
Consequently, on July 26, 1992, petitioner terminated the provisional deed of sale
by a notarial notice of cancellation. Nonetheless, respondent Diaz continued to
occupy the premises, as lessee, but failed to pay the rentals due. On October 28,
1992, respondent made a payment of P100,000.00 that may be applied either to the
back rentals or for the purchase of the condominium unit. On February 13, 1993,
petitioner gave respondent a notice to vacate the premises and to pay his back
rentals. Failing to do so, respondent's possession became unlawful and his eviction
was proper. Hence, on February 24, 1993, petitioner filed with the Municipal Trial
Court, Antipolo, Rizal, Branch 01 an action for unlawful detainer against respondent
Diaz.

Now respondent contends that the petitioner's subsequent acceptance of such

payment effectively withdrew the cancellation of the provisional sale. We do not
agree. Unless the application of payment is expressly indicated, the payment shall
be applied to the obligation most onerous to the debtor. In this case, the unpaid
rentals constituted the more onerous obligation of the respondent to petitioner. As
the payment did not fully settle the unpaid rentals, petitioner's cause of action for
ejectment survives. Thus, the Court of Appeals erred in ruling that the payment was
"additional payment" for the purchase of the property.