SPOUSES CRISTINO and BRIGIDA CUSTODIO and SPOUSES LITO

and MARIA CRISTINA SANTOS, petitioners, vs. COURT OF

APPEALS, HEIRS OF PACIFICO C. MABASA and REGIONAL
TRIAL COURT OF PASIG, METRO MANILA, BRANCH
181, respondents.
DECISION
REGALADO, J.:
This petition for review on certiorari assails the decision of respondent
Court of Appeals in CA-G.R. CV No. 29115, promulgated on November 10,
1993, which affirmed with modification the decision of the trial court, as
well as its resolution dated July 8, 1994 denying petitioners motion for
reconsideration.[1]
On August 26, 1982, Civil Case No. 47466 for the grant of an
easement of right of way was filed by Pacifico Mabasa against Cristino
Custodio, Brigida R. Custodio, Rosalina R. Morato, Lito Santos and Maria
Cristina C. Santos before the Regional Trial Court of Pasig and assigned to
Branch 22 thereof.[2]
The generative facts of the case, as synthesized by the trial court and
adopted by the Court of Appeals, are as follows:
Perusing the record, this Court finds that the original plaintiff Pacifico
Mabasa died during the pendency of this case and was substituted by
Ofelia Mabasa, his surviving spouse [and children].
The plaintiff owns a parcel of land with a two-door apartment erected
thereon situated at Interior P. Burgos St., Palingon, Tipas, Taguig, Metro
Manila. The plaintiff was able to acquire said property through a contract
of sale with spouses Mamerto Rayos and Teodora Quintero as vendors last
September 1981. Said property may be described to be surrounded by
other immovables pertaining to defendants herein. Taking P. Burgos
Street as the point of reference, on the left side, going to plaintiffs
property, the row of houses will be as follows: That of defendants Cristino
and Brigido Custodio, then that of Lito and Maria Cristina Santos and then
that of Ofelia Mabasa. On the right side (is) that of defendant Rosalina
Morato and then a Septic Tank (Exhibit D). As an access to P. Burgos
Street from plaintiffs property, there are two possible passageways. The
first passageway is approximately one meter wide and is about 20 meters
distan(t) from Mabasas residence to P. Burgos Street. Such path is passing
in between the previously mentioned row of houses. The second

passageway is about 3 meters in width and length from plaintiff Mabasas

residence to P. Burgos Street; it is about 26 meters. In passing thru said
passageway, a less than a meter wide path through the septic tank and
with 5-6 meters in length has to be traversed.
When said property was purchased by Mabasa, there were tenants
occupying the premises and who were acknowledged by plaintiff Mabasa
as tenants. However, sometime in February, 1982. one of said tenants
vacated the apartment and when plaintiff Mabasa went to see the
premises, he saw that there had been built an adobe fence in the first
passageway making it narrower in width. Said adobe fence was first
constructed by defendants Santoses along their property which is also
along the first passageway. Defendant Morato constructed her adobe fence
and even extended said fence in such a way that the entire passageway
was enclosed (Exhibit 1-Santoses and Custodios, Exh. D for plaintiff,
Exhs. 1-C, 1-D and I -E) And it was then that the remaining tenants of
said apartment vacated the area. Defendant Ma. Cristina Santos testified
that she constructed said fence because there was an incident when her
daughter was dragged by a bicycle pedalled by a son of one of the tenants
in said apartment along the first passageway. She also mentioned some
other inconveniences of having (at) the front of her house a pathway such
as when some of the tenants were drunk and would bang their doors and
windows. Some of their footwear were even lost. x x x[3] (Italics in original
text; corrections in parentheses supplied)
On February 27, 1990, a decision was rendered by the trial court, with
this dispositive part:
Accordingly, judgment is hereby rendered as follows:
1) Ordering defendants Custodios and Santoses to give plaintiff permanent
access - ingress and egress, to the public street;
2) Ordering the plaintiff to pay defendants Custodios and Santoses the sum
of Eight Thousand Pesos (P8,000) as indemnity for the permanent use of
the passageway.
The parties to shoulder their respective litigation expenses. [4]
Not satisfied therewith, therein plaintiff represented by his heirs,
herein private respondents, went to the Court of Appeals raising the sole
issue of whether or not the lower court erred in not awarding damages in
their favor. On November 10, 1993, as earlier stated, the Court of Appeals

rendered its decision affirming the judgment of the trial court with
modification, the decretal portion of which disposes as follows:

Mabasa, incurred losses in the form of unrealized rentals when the tenants
vacated the leased premises by reason of the closure of the passageway.

WHEREFORE, the appealed decision of the lower court is hereby AFFIRMED

WITH MODIFICATION only insofar as the herein grant of damages to
plaintiffs-appellants. The Court hereby orders defendants-appellees to pay
plaintiffs-appellants the sum of Sixty Five Thousand (P65,000) Pesos as
Actual Damages, Thirty Thousand (P30,000) Pesos as Moral Damages, and
Ten Thousand (P10,000) Pesos as Exemplary Damages. The rest of the
appealed decision is affirmed to all respects.[5]

However, the mere fact that the plaintiff suffered losses does not give
rise to a right to recover damages. To warrant the recovery of damages,
there must be both a right of action for a legal wrong inflicted by the
defendant, and damage resulting to the plaintiff therefrom. Wrong without
damage, or damage without wrong, does not constitute a cause of action,
since damages are merely part of the remedy allowed for the injury caused
by a breach or wrong.[8]

On July 8, 1994, the Court of Appeals denied petitioners motion for

reconsideration.[6] Petitioners then took the present recourse to us, raising
two issues, namely, whether or not the grant of right of way to herein
private respondents is proper, and whether or not the award of damages is
in order.

There is a material distinction between damages and injury. Injury is

the illegal invasion of a legal right; damage is the loss, hurt, or harm which
results from the injury; and damages are the recompense or compensation
awarded for the damage suffered. Thus, there can be damage without
injury in those instances in which the loss or harm was not the result of a
violation of a legal duty. These situations are often called damnum absque
injuria.[9] in order that a plaintiff may maintain an action for the injuries of
which he complains, he must establish that such injuries resulted from a
breach of duty which the defendant owed to the plaintiff - a concurrence of
injury to the plaintiff and legal responsibility by the person causing it.
[10]
The underlying basis for the award of tort damages is the premise that
an individual was injured in contemplation of law. Thus, there must first be
the breach of some duty and the imposition of liability for that breach
before damages may be awarded; it is not sufficient to state that there
should be tort liability merely because the plaintiff suffered some pain and
suffering)[11]

With respect to the first issue, herein petitioners are already barred
from raising the same. Petitioners did not appeal from the decision of the
court a quo granting private respondents the right of way, hence they are
presumed to be satisfied with the adjudication therein. With the finality of
the judgment of the trial court as to petitioners, the issue of propriety of
the grant of right of way has already been laid to rest.
For failure to appeal the decision of the trial court to the Court of
Appeals, petitioners cannot obtain any affirmative relief other than those
granted in the decision of the trial court. That decision of the court below
has become final as against them and can no longer be reviewed, much
less reversed, by this Court. The rule in this jurisdiction is that whenever
an appeal is taken in a civil case, an appellee who has not himself
appealed may not obtain from the appellate court any affirmative relief
other than what was granted in the decision of the lower court. The
appellee can only advance any argument that he may deem necessary to
defeat the appellants claim or to uphold the decision that is being
disputed, and he can assign errors in his brief if such is required to
strengthen the views expressed by the court a quo. These assigned errors,
in turn, may be considered by the appellate court solely to maintain the
appealed decision on other grounds, but not for the purpose of reversing or
modifying the judgment in the appellees favor and giving him other
affirmative reliefs.[7]
However, with respect to the second issue, we agree with petitioners
that the Court of Appeals erred in awarding damages in favor of private
respondents. The award of damages has no substantial legal basis. A
reading of the decision of the Court of Appeals will show that the award of
damages was based solely on the fact that the original plaintiff, Pacifico

Many accidents occur and many injuries are inflicted by acts or

omissions which cause damage or loss to another but which violate no
legal duty to such other person, and consequently create no cause of
action in his favor. In such cases, the consequences must be borne by the
injured person alone. The law affords no remedy for damages resulting
from an act which does not amount to a legal injury or wrong. [12]
In other words, in order that the law will give redress for an act
causing damage, that act must be not only hurtful, but wrongful. There
must be damnum et injuria.[13] If, as may happen in many cases, a person
sustains actual damage, that is, harm or loss to his person or property,
without sustaining any legal injury, that is, an act or omission which the
law does not deem an injury, the damage is regarded as damnum absque
injuria.[14]
In the case at bar, although there was damage, there was no legal
injury. Contrary to the claim of private respondents, petitioners could not
be said to have violated the principle of abuse of right. In order that the

principle of abuse of right provided in Article 21 of the Civil Code can be

applied, it is essential that the following requisites concur: (1) The
defendant should have acted in a manner that is contrary to morals, good
customs or public policy; (2) The acts should be willful; and (3) There was
damage or injury to the plaintiff.[15]
The act of petitioners in constructing a fence within their lot is a valid
exercise of their right as owners, hence not contrary to morals, good
customs or public policy. The law recognizes in the owner the right to
enjoy and dispose of a thing, without other limitations than those
established by law.[16] It is within the right of petitioners, as owners, to
enclose and fence their property. Article 430 of the Civil Code provides that
(e)very owner may enclose or fence his land or tenements by means of
walls, ditches, live or dead hedges, or by any other means without
detriment to servitudes constituted thereon.

The proper exercise of a lawful right cannot constitute a legal wrong

for which an action will lie, [20] although the act may result in damage to
another, for no legal right has been invaded[21] One may use any lawful
means to accomplish a lawful purpose and though the means adopted may
cause damage to another, no cause of action arises in the latters
favor. Any injury or damage occasioned thereby is damnum absque
injuria. The courts can give no redress for hardship to an individual
resulting from action reasonably calculated to achieve a lawful end by
lawful means.[22]
WHEREFORE, under the compulsion of the foregoing premises, the
appealed decision of respondent Court of Appeals is hereby REVERSED and
SET ASIDE and the judgment of the trial court is correspondingly
REINSTATED.
SO ORDERED.

At the time of the construction of the fence, the lot was not subject to
any servitudes. There was no easement of way existing in favor of private
respondents, either by law or by contract. The fact that private
respondents had no existing right over the said passageway is confirmed
by the very decision of the trial court granting a compulsory right of way in
their favor after payment of just compensation. It was only that decision
which gave private respondents the right to use the said passageway after
payment of the compensation and imposed a corresponding duty on
petitioners not to interfere in the exercise of said right.

Romero and Puno, JJ., concur.

Mendoza, J., took no part.

Hence, prior to said decision, petitioners had an absolute right over

their property and their act of fencing and enclosing the same was an act
which they may lawfully perform in the employment and exercise of said
right. To repeat, whatever injury or damage may have been sustained by
private respondents by reason of the rightful use of the said land by
petitioners isdamnum absque injuria.[17]

HEIRS OF SIMEON BORLADO, namely, ADELAIDA BORLADO, LORETO

BORLADO, REYNALDO BORLADO, RICARDO BORLADO,
FRANCISCO BORLADO and ALADINO DORADO, petitioners,
vs. COURT OF APPEALS, and SALVACION VDA. DE BULAN,
BIENVENIDO BULAN, JR., NORMA B. CLARITO and THE
PROVINCIAL SHERIFF OF CAPIZ, respondents.

A person has a right to the natural use and enjoyment of his own
property, according to his pleasure, for all the purposes to which such
property is usually applied. As a general rule, therefore, there is no cause
of action for acts done by one person upon his own property in a lawful and
proper manner, although such acts incidentally cause damage or an
unavoidable loss to another, as such damage or loss is damnum absque
injuria.[18] When the owner of property makes use thereof in the general
and ordinary manner in which the property is used, such as fencing or
enclosing the same as in this case, nobody can complain of having been
injured, because the inconvenience arising from said use can be
considered as a mere consequence of community life.[19]

DECISION
PARDO, J.:
The case is an appeal via certiorari from a decision[1] of the Court of
Appeals affirming the decision of the trial court, the dispositive portion of
which reads:
WHEREFORE, judgment is rendered dismissing plaintiffs complaint for
lack of cause of action and ordering as vacated the restraining order and
writ of preliminary injunction issued in this case; and

1. Plaintiffs to be jointly and solidarily liable to defendants the quantity of

one hundred (100) cavans of palay every year from 1972 until plaintiffs
vacate the premises of the land in question;
2. Declaring defendants as owner of the land and entitled to possession;
3. Ordering plaintiffs to pay defendants the sum of P5,000.00 as
attorneys fees and the sum of P5,000.00 as litigation expenses; and
4. To pay the costs of the suit.
SO ORDERED.
Roxas City, Philippines, March 18, 1988.

(Sgd.) JONAS A. ABELLAR

J u d g e[2]
The Facts
The facts, as found by the Court of Appeals, are as follows:
The records show that plaintiffs-appellants[3] (petitioners) are the heirs of
Simeon Borlado whose parents were Serapio Borlado and Balbina
Bulan. The original owner of the lot in question, Lot No. 2097 of the
Pontevedra Cadastre, Maayon, Capiz, was Serapio Borlado, grandfather of
petitioners.
On 15 April 1942, Serapio sold the lot to Francisco Bacero (Exh. C, p.
247, MTC Record) for Three Hundred Pesos (P300.00). After the death of
Francsico on 26 February 1948, his widow Amparo Dionisio Vda. de Bacero,
in her capacity as legal guardian of her minor children, namely: Nicolas,
Valentin and Luzviminda, all surnamed Bacero and forced heirs of Francisco
Bacero sold it (the lot) to the Spouses Bienvenido Bulan and Salvacion
Borbon, through a Deed of Absolute Sale dated 27 August 1954 (Exh. 65,
pp. 243-245, id.).
Upon the execution of the Deed of Sale and even prior thereto, actual
possession of Lot No. 2057 was with the vendees-spouses Bulans in view of
a loan obtained by Francisco Bacero from them in December 1947 (Exh.
65, supra). Exercising their right of ownership under the Deed of Sale,

Salvacion Borbon Vda. de Bulan declared the lot in her name in 1900 for
taxation purposes under Tax Declaration No. 2232 (Exh. F, p. 254, Record
[MTC]). She paid the corresponding taxes as evidenced by the Tax
Receipts marked as Exhibits K, J, I, G, F and H (pp. 248-253,
Record, id.). Salvacion and her co-defendants-appellees[4] possession of
the lot was continuous, peaceful, uninterrupted, adverse and exclusive
until November 4, 1972, when petitioners forcibly entered and wrested
physical possession thereof from them.
On 23 November 1972, respondents filed with the Municipal Court of
Maayon, Capiz a complaint for ejectment docketed as Civil Case No. A-1,
against petitioners (p. 1, id.). The ejectment case was decided in favor of
the respondents whereby the petitioners, their agents, tenants, privies and
members of their families were ordered to vacate Lot No. 2079 and deliver
possession to the respondents together with all improvements and
standing crops; to pay said respondents One Hundred (100) cavans of
palay annually from 1972 to the present or in the total amount of One
Thousand One Hundred (1,100) cavans of palay; and to pay the sum of Five
Thousand (P5,000.00) Pesos as reimbursement for the amount
respondents had paid their lawyer to protect their rights; and, the costs of
suit (Exh. 57, pp. 256-261, id.). Instead of appealing the adverse decision
to the Court of First Instance (now RTC), on 8 November 1983, petitioners
filed the present case with the Regional Trial Court, Branch 18, Roxas City,
docketed as Civil Case No. V-4887. This case was dismissed for lack of
cause of action in a decision, the decretal portion of which was quoted
earlier.[5]
On 24 November 1993, the Court of Appeals promulgated its
decision affirming in toto the appealed decision.[6]
Hence, this appeal.[7]
The Issue
The issue raised is whether the Court of Appeals erred in ruling that
respondents were the owners of the lot in question.
The Courts Ruling
We deny the petition. The issue is factual. In an appeal via certiorari,
we may not review the findings of fact of the Court of Appeals. [8] When
supported by substantial evidence, the findings of fact of the Court of
Appeals are conclusive and binding on the parties and are not reviewable
by this Court,[9] unless the case falls under any of the exceptions to the
rule.[10]

Petitioner failed to prove that the case falls within the exceptions.
The Supreme Court is not a trier of facts. [12] It is not our function to
review, examine and evaluate or weigh the probative value of the evidence
presented.[13] A question of fact would arise in such event. [14] Questions of
fact cannot be raised in an appeal via certiorari before the Supreme Court
and are not proper for its consideration.[15]
[11]

Nevertheless, as a matter of law, the trial court and the Court of

Appeals erred in holding petitioners liable to pay respondents one hundred
(100) cavans of palay every year from 1972 until they vacate the premises
of the land in question.
The one hundred cavans of palay was awarded as a form of
damages. We cannot sustain the award. Palay is not legal tender
currency in the Philippines.

LUCIO ALGARRA, plaintiff-appellant,

On the trial the plaintiff testified that he had done no work since the
accident, which occurred on July 9, 1912, and that he was not yet entirely
recovered. Plaintiff testified that his earning capacity was P50 per month. It
is not clear at what time plaintiff became entirely well again, but as to the
doctor to whom he described himself as being well stated that this was
about the last of July, and the trial took place September 19, two months'
pay would seem sufficient for the actual time lost from his work. Plaintiff
further testified that he paid the doctor P8 and expended P2 for medicines.
This expenses, amounting in all to P110 should also be allowed.

Plaintiff sold the products of a distillery on a 10 per cent commission and

made an average of P50 per month. He had about twenty regular
customers who, it seems, purchased in small quantities, necessitating
regular and frequent deliveries. Since the accident his wife had done
something in a small way to keep up this business but the total orders
taken by her would not net them over P15. He lost all his regular customers
but four, other agents filing their orders since his accident. It took him
about four years to build up the business he had at the time of the
accident, and he could not say how long it would take him to get back the
business he had lost.

vs.
SIXTO SANDEJAS, defendant-appellee.

Southworth, Hargis & Springer for appellant.

Rohde & Wright for appellee.

TRENT, J.:

This is a civil action for personal injuries received from a collision with the
defendant's automobile due to the negligence of the defendant, who was
driving the car. The negligence of the defendant is not questioned and this
case involves only the amount of damages which should be allowed.

As a result of the injuries received, plaintiff was obliged to spend ten days
in the hospital, during the first four or five of which he could not leave his
bed. After being discharged from the hospital, he received medical
attention from a private practitioner for several days. The latter testified
that after the last treatment the plaintiff described himself as being well.

Under this state of facts, the lower court, while recognizing the justness of
he claim, refused to allow him anything for injury to his business due to his
enforced absence therefrom, on the ground that the doctrine of Marcelo vs.
Velasco (11 Phil., Rep., 277) is opposed t such allowance. The trial court's
opinion appears to be based upon the following quotation from Viada (vol.
1 p. 539), quoted in that decision: ". . . with regard to the offense of
lesiones, for example, the civil liability is almost always limited to
indemnity for damage to the party aggrieved for the time during which he
was incapacitated for work; . . ."

This statement, however, derives its force, not from any provision of the
law applicable to lesiones, but is a mere deduction from the operation of
the law upon the cases arising under it. That the interpretation placed
upon this statement of Viada by the lower court is either not correct, or
that it does not apply to actions for personal injuries under article 1902 of
the Civil Code, is apparent from the decisions of the supreme court of
Spain of January 8, 1906, January 15, 1902, and October 19, 1909, to which
a more extended reference will be made further on in this opinion. There is
nothing said in the decision in question prohibiting the allowance of
compensatory damages, nor does there seem to be anything contained
therein opposed to the allowance of such damages occurring subsequent
to the institution of the action. In fact, it appears from the following

quotation that the court would have been disposed to consider favorably
the plaintiff's claim for injury to her business had the evidence presented
it.

No evidence was then offered by the plaintiff to show that this slight
lameness in any way interfered with the conduct of her business or that
she could make any less amount therein than she could make if she did not
suffer from this direct. The court, therefore, did not err in allowing her no
further damages on this account, because there was no evidence that she
had suffered any.

The alleged damages which the court refused to entertain in that case and
under the discussion of which appears the above quotation from Viada,
were for pain and suffering the plaintiff may have experienced. The court
said: "For the profits which the plaintiff failed to obtain, spoken of in the
latter part of this article, the plaintiff was allowed to recover, and the
question is, whether the value of the loss which she suffered can be
extended to pain which she experienced by reason of the accident."

Actions for damages such as the case at bar are based upon article 1902 of
the Civil Code, which reads as follows: "A person who, by act or omission,
causes damage to another where there is fault or negligence shall be
obliged to repair the damage so done."

Of this article, the supreme court of Spain, in its decision of February 7,

1900, in considering the indemnity imposed by it, said: "It is undisputed
that said reparation, to be efficacious and substantial, must rationally
include the generic idea of complete indemnity, such as is defined and
explained in article 1106 of the said (Civil) Code."

Articles 1106 and 1107 of the Civil Code read as follows:

1106. Indemnity for losses and damages includes not only the amount of
the loss which may have been suffered, but also that of the profit which
the creditor may have failed to realize, reserving the provisions contained
in the following articles.

1107. The losses and damages for which a debtor in good faith is liable,
are those foreseen or which may have been foreseen, at the time of
constituting the obligation, and which may be a necessary consequence of
its nonfulfillment.

In case of fraud, the debtor shall be liable for all those which clearly may
originate from the nonfulfillment of the obligation.

Fraud is not an element of the present case, and we are not therefore
concerned with it. The liability of the present defendant includes only those
damages which were "foreseen or may have been foreseen" at the time of
the accident, and which are the necessary and immediate consequences of
his fault. In discussing the question of damages under the civil law,
Gutierrez (vol. 4, pp. 64, 65) says:

In the impossibility of laying down a surer rule, the Code understands

known damages to be those which in the prudent discernment of the judge
merit such a qualification, although their consequences may not be direct,
immediate inevitable.

If it is a question of losses occasioned through other causes, except fraud,

and the contracting parties have not covenanted any indemnity for the
case of nonfulfillment, then the reparation of the losses or damages shall
only comprise those that fault. This rule may not be very clear, but is the
only one possible in a matter more of the domain of prudence than of law.

In its decision of April 18, 1901, the supreme court of Spain said: "Neither
were the errors incurred that are mentioned in the third assignment, since
the indemnity for damages is understood to apply to those caused the
complainant directly, and not to those which, indirectly and through more
or less logical deductions, may affect the interests of the Ayuntamiento de
Viana, as occurs in the present case where the increase of wealth concerns
not only the Ayuntamiento but also the provide and the state, yet, not on
this account does any action lie in their behalf as derived from the
contracts with Urioste."

This doctrine is also affirmed in the more recent decision of March 18,
1909, in the following words: "For the calculation of the damages claimed,
it is necessary, pursuant to the provisions of article 924 of the Law of Civil

Procedure, to give due regard to the nature of the obligation that was
unfulfilled and to the reasonable consequences of its nonfulfillment,
because the conviction sought can be imposed only when there exists a
natural and true relation between such nonfulfillment and damages,
whatever, reason there may be to demand them on another account."

In the case of Garcia Gamo vs. Compania Madrilena de Alumbrado, etc.

(101 Juris, p., 662), it appeared that an employee of the defendant
company whose duty it was to clean and light the street lamps left as
stepladder leaning against a tree which stood in a public promenade. The
seven-year old son of the plaintiff climbed the tree by means of the ladder,
and while endeavoring to cut some branches fell to the ground, sustaining
severe injuries which eventually caused his death. The plaintiff lost in the
lower courts and on appeal to the supreme court the decision of those
lower courts was affirmed with the following statement;

That in this sense aside from the fitness of the judgment appealed from,
inasmuch as the acquittal of the defendant party resolves all the issues
argued at the trial, if no counterclaim was made the assignments of
error in the appeal cannot be sustained, because, while the act of placing
the stepladder against the tree in the manner and for the purposes
aforestated, was not permissible it was regularly allowed by the local
authorities, and that fact did not precisely determine the injury, which was
due first to the abandonment of the child by his parents and secondly to
his own imprudence, according to the findings of the trial court, not legally
objected to in the appeal; so it is beyond peradventure that the
circumstances necessary for imposing the obligations arising from guilt or
negligence do not concur in the present case.

The court here simply held that the injury to the child could not be
considered as the probable consequence of an injury which could have
been foreseen from the act of the company's employee in leaving the
ladder leaning against the tree.

In De Alba vs. Sociedad Anonima de Tranvias (102 Juris, p., 928), a

passenger was standing on the platform of a street car while it was in
motion when, on rounding a curve, the plaintiff fell off and under the car,
thereby sustaining severe injuries which took several months to heal. He
was not allowed to recover in the lower courts and on appeal the supreme
court sustained the inferior tribunals saying:

Whereas, considering the circumstances of the accident that happened to

D. Antonio Morales de Alba, such as they were held by the trail court to
have been proved, the evidence does not disclose that any liability
whatever in the said accident, for acts or omissions, may be charged
against the employees of the street car, as being guilty through fault or
negligence, since it was shown that the car was not traveling at any
unusual speed nor was this increased on rounding the curve, but that the
accident was solely due to the fact that the car in turning made a
movement which caused the plaintiff to lose his balance; and whereas no
act whatever has been proved of any violation of the regulations, nor can it
be required of street-car employees, who have to attend to their respective
duties, that they should foresee and be on the alert to notify the possibility
of danger when not greater than that which is more or less inherent to this
mode of travel; therefore the appeal can not be upheld, and with all the
more reason since the passenger who takes the risk of travelling on the
platform, especially when there is an unoccupied seat in the car, should be
on his guard against a contingency so natural as that of losing his balance
to a greater or less extent when the car rounds a curve.

In Crespo vs. Garcia (112 Jurisp., 796), the plaintiff, a servant woman, 72
years old, was injured in the performance of her duties by the sudden and
unexpected failure of the upper floor of a house in which she was working.
The owner and the architect of the building were made defendants and
after due trial it was held that no responsibility attached to them for the
failure of the floor, consequently the plaintiff was not allowed to recover.
On her appeal to the supreme court that tribunal said:

Whereas the trial court held, in view of all the evidence adduced, including
the expert and other testimony, that the act which occasioned the injury
suffered by Doa Maria Alonso Crespo, was accidental, without fault of
anybody, and consequently fortuitous, and that, in so considering it to
absolve the defendants, he did not incur the second error assigned on the
appeal, because, without overlooking the import and legal value of the
affidavit adduced at the trial, he held that the defendants in their conduct
were not liable for any omission that might constitute such fault or
negligence as would oblige them to indemnify the plaintiff; and to support
the error assigned no legal provision whatever was cited such as would
require a different finding, nor was any other authentic document produced
than the aforesaid affidavit which contained an account of the ocular
inspection and the expert's report, which, as well as the testimony of the
witnesses, the trial court was able to pass upon in accordance with its
exclusive power-all points of proof which do not reveal any mistake on the
part of the judge, whose opinion the appellant would substitute with his
own by a different interpretation.

These authorities are sufficient to show that liability for acts ex delicto
under the Civil Code is precisely that embraced within the "proximate
cause" of the Anglo-Saxon law of torts.

The general rule, as frequently stated, is that in order that an act omission
may be the proximate cause of an injury, the injury must be the natural
and probable consequence of the act or omission and such as might have
been foreseen by an ordinarily responsible and prudent man, in the light of
the attendant circumstances, as likely to result therefrom . . .

According to the latter authorities foreseeableness, as an element of

proximate cause, does not depend upon whether an ordinarily reasonable
and prudent man would or ought in advance to have anticipated the result
which happened, but whether, if such result and the chain of events
connecting it with the act complained of had occurred to his mind, the
same would have seemed natural and probable and according to the
ordinary course of nature. Thus, as said in one case, "A person guilty of
negligence, or an unlawful act, should be held responsible for all the
consequences which a prudent and experienced man, fully acquainted with
all the circumstances which in fact existed, would at the time of the
negligent or unlawful act have thought reasonable to follow, if they had
occurred to his mind." (Wabash R. etc. Co. vs. Coker, 81 Ill. App. 660, 664;
Cooley on Torts, sec. 15.)

The view which I shall endeavor to justify is that, for the purpose of civil
liability, those consequences, and those only, are deemed "immediate,"
"proximate," or, to anticipate a little, "natural and probable," which a
person of average competence and knowledge, being in the like case with
the person whose conduct is complained of, and having the like
opportunities of observation, might be expected to foresees as likely to
follow upon such conduct. This is only where the particular consequence is
not known to have been intended or foreseen by the actor. If proof of that
be forthcoming, whether the consequence was "immediate" or not does
not matter. That which a man actually foresees is to him, at all events,
natural and probable. (Webb's Pollock on Torts, p. 32.)

There is another line of definitions which have for their basis "the natural
and probable consequences" or "the direct and immediate consequences"
of the defendant's act. (Joyce on Damages, sec. 82.)

It will be observed that the supreme court of Spain, in the above decisions,
has rather inclined to this line of definitions of what results a defendant is
liable for as a consequence of his wrongful acts, while the Civil Code uses
the phraseology, "those foreseen or which may have been foreseen." From
either viewpoint the method of arriving at the liability of the wrongdoer
under the Civil Code and under the Anglo Saxon law is the same. Such was
the holding of this court in Taylor vs. M. E. R. and L. Co. (16 Phil. Rep., 8,
15):

We agree with counsel for appellant that under the Civil Code, as under the
generally accepted doctrine in the United States, the plaintiff in an action
such as that under consideration, in order to establish his right to a
recovery, must establish by competent evidence:

(1)

Damages to the plaintiff.

(2)
Negligence by act or omission of which defendant personally, or
some person for whose acts it must respond, was guilty.

(3)
The connection of cause and effect between the negligence and
the damages.

These propositions are, of course, elementary, and do not admit of

discussion, the real difficulty arising in the application of these principles to
the particular facts developed in the case under consideration.

Parenthetically it may be said that we are not now dealing with the
doctrine of comparative (contributory) negligence which was established
by Rakes vs. A. G. and P. Co. (7 Phil. Rep., 359), and Eades vs. A. G. and P.
Co. (19 Phil., Rep., 561.)

The rules for the measure of damages, once that liability is determined,
are, however, somewhat different. The Civil Code requires that the
defendant repair the damage caused by his fault or negligence. No
distinction is made therein between damage caused maliciously and
intentionally and damages caused through mere negligence in so far as the

civil liability of the wrongdoer in concerned. Nor is the defendant required

to do more than repair the damage done, or, in other words, to put the
plaintiff in the same position, so far as pecuniary compensation can do so,
that he would have been in had the damage not been inflicted. In this
respect there is a notable difference between the two systems. Under the
Anglo-SAxon law, when malicious or willful intention to cause the damage
is an element of the defendant's act, it is quite generally regarded as an
aggravating circumstance for which the plaintiff is entitled to more than
mere compensation for the injury inflicted. These are called exemplary or
punitive damages, and no provision is made for them in article 1902 of the
Civil Code.

Again it is quite common under the English system to award what is called
nominal damages where there is only a technical violation of the plaintiff's
rights resulting in no substantial injury to him. This branch of damages is
also unknown under the Civil Code. If no damages have actually occurred
there can be none to repair and the doctrine of nominal damages is not
applicable. Thus it has been often held by the supreme court of Spain that
a mere noncompliance with the obligations of a contract is not sufficient to
sustain a judgment for damages. It must be shown that damages actually
existed. (Decision of February 10, 1904.) Again, in its decision of January 9,
1897, that high tribunal said that as a logical consequence of the
requirements of articles 1101, 1718, and 1902 that he who causes
damages must repair them, their existence must be proved.

In at least one case decided by this court we held in effect that nominal
damages could not be allowed. (Mercado vs. Abangan, 10 Phil., Rep., 676.)

The purpose of the law in awarding actual damages is to repair the wrong
that has been done, to compensate for the injury inflicted, and not to
impose a penalty. Actual damages are not dependent on nor graded by the
intent with which the wrongful act is done." (Field vs. Munster, 11 Tex. Civ.,
Appl., 341, 32 S. W., 417.) "The words "actual damages" shall be construed
to include all damages that the plaintiff may he has suffered in respect to
his property, business, trade, profession, or occupation, and no other
damages whatever." (Gen Stat. Minn. 1894, sec., 5418.) "Actual damages
are compensatory only." (Lord, Owen and Co. vs. Wood, 120 Iowa, 303, 94
N. W., 842.) " `Compensatory damages' as indicated by the word employed
to characterize them, simply make good or replace the loss caused by the
wrong. They proceed from a sense of natural justice, and are designed to
repair that of which one has been deprived by the wrong of another." (Reid
vs. Terwilliger, 116 N. Y., 530; 22 N. E., 1091.) "Compensatory damages'
are such as awarded to compensate the injured party for caused by the

wrong, and must be only such as make just and fair compensation, and are
due when the wrong is established, whether it was committed maliciously
that is, with evil intention or not. (Wimer vs. Allbaugh, 78 Iowa, 79; 42
N. W., 587; 16 Am. St. Rep., 422.)

Finally, this court has itself held that actual damages are the extent of the
recovery allowed to the plaintiff. In Marker vs. Garcia (5 Phil., Rep., 557),
which was an action for damages for breach of contract, this court said:
"Except in those cases where the law authorizes the imposition of punitive
or exemplary damages, the party claiming damages must establish by
competent evidence the amount of such damages, and courts can not give
judgment for a greater amount than those actually proven."

We are of the opinion that the requirements of article 1902, that the
defendant repair the damage done can only mean what is set forth in the
above definitions, Anything short of that would not repair the damages and
anything beyond that would be excessive. Actual compensatory damages
are those allowed for tortious wrongs under the Civil Code; nothing more,
nothing less.

According to the text of article 1106 of the Civil Code, which, according to
the decision of February 7, 1990 (referred to above), is the generic
conception of what article 1902 embraces, actual damages include not
only loss already suffered, but loss of profits which may not have been
realized. The allowance of loss of prospective profits could hardly be more
explicitly provided for. But it may not be amiss to refer to the decisions of
the supreme court of Spain for its interpretation of this article. The
decisions are numerous upon this point. The decisions are as epitomized
by Sanchez Roman (vol. 1, 0. 281), interprets article 1106 as follows:

Pursuant to articles 1106 and 1107 of the same Code, which govern in
general the matter of indemnity due for the nonfulfillment of obligations,
the indemnity comprises, not only the value of loss suffered, but also that
of the prospective profit that was not realized, and the obligation of the
debtor in good faith is limited to such losses and damages as were
foreseen or might have been foreseen at the time the obligation was
incurred and which are a necessary consequence of his failure of
fulfillment. Losses and damages under such limitations and frustrated
profits must, therefore, be proved directly by means of the evidence the
law authorizes.

The decisions of January 8, 1906 (published in 14 Jurisp. del Codigo Civil,

516) had to do with the following case: The plaintiff, a painter by
occupation, was engaged to paint the poles from which were suspended
the trolley wires of a traction company. While at work on February 8, 1901,
the electric current was negligently turned on by the company, whereby
plaintiff received a severe shock, causing him to fall to the ground. Plaintiff
sustained injuries which took several months to heal and his right arm was
permanently disabled by the accident. The age of the plaintiff is not stated.
His daily wage was four pesetas. He was awarded 25,000 pesetas by the
trial court and this judgment was affirmed on appeal to the supreme court.
This was equivalent to approximately twenty year's salary.

In its decision of January 15, 1902 (published in 10 Jurisp. del Codigo Civil.,
260), the supreme court had the following case under consideration:
Plaintiff's son was a travelling salesman 48 years of age, who received an
annual salary of 2,500 pesetas and expenses. While travelling on
defendant's train an accident occurred which caused his death. The
accident was held to be due to the failure of the defendant company to
keep its track and roadbed in good repair. Plaintiff was allowed 35,000
pesetas for the death of her son. this would be equivalent to about
fourteen years' salary.

in the case dated October 19, 1909 (published in 116 Jurisp. del Codigo
Civil, 120), plaintiff as suing for the death of his son caused from injuries
inflicted by the defendant's bull while plaintiff and his son were travelling
along a public road. The age of the son is not given. Plaintiff was awarded
3,000 pesetas damages.

In each of the above-mentioned cases the supreme court refused to pass

on the amount of damages which had been awarded. It appears to be the
unvarying rule of the supreme court of Spain to accept the amount of
damages awarded by trial courts, its only inquiry being as to whether
damages have actually occurred as the result of the defendant's fault or
negligence. (Decision of July 5, 1909.) The reason why the supreme court
of Spain refuses to consider the amount of damages awarded is to be
found in the great importance attached by it to the provision of the Ley de
Enjuiciamiento Civil, articles 659 and 1692, No. 7. In its auto of March 16,
1900 (published in 8 Jurisp. del Codigo Civil, 503), the following comment is
made on these articles:

As this supreme court has repeatedly held, the weight given by the trial
judge to the testimony, with good discernment or otherwise, can not be a

matter for reversal, not even with the support of No. 7 of article 1692 of
the Ley de Enjuiciamiento Civil, as it is exclusively submitted to him,
pursuant to the provisions of article 659 of the said law and article 1248 of
the Code.

The practice of this court, under our Code of Civil Procedure, does not
permit of our going to such lengths in sustaining the findings of fact in trial
courts. We have repeatedly held that due weight will be given in this court
to the findings of fact by trial courts by reason of their opportunities to see
and hear the witnesses testify, note their demeanor and bearing upon the
stand, etc., but when the decision of the trial court, after permitting due
allowance for its superior advantages in weighing the evidence of the case,
appears to us to be against the fair preponderance of that evidence, it is
our duty to reverse or set aside the findings of fact made by the trial court
and render such judgment as the facts of the same deem to us to warrant.
(Code of Civ., Proc., sec. 496.) We need go to no other branch of law than
that of damages to support this statement. In the following case the
damages awarded by the lower court were reduced after a consideration of
the evidence; Sparrevohn vs. Fisher (2 Phil. Rep., 676); Campbell and GoTauco vs. Behn, Meyer and Co. (3 Phil., Rep., 590); Causin vs. Jakosalem 95
Phil., Rep., 155); Marker vs. Garcia (5 Phil., Rep., 557); Uy Piaoco vs.
Osmea (9 Phil., Rep., 299); Macleod vs. Phil. Pub. Co. (12 Phil., Rep., 427);
Orense vs. Jaucian (18 Phil. Rep., 553). In Rodriguez vs. Findlay and Co. (14
Phil. Rep., 294); and Cordoba y Conde vs. Castle Bros. (18 Phil. Rep., 317),
the damages awarded by the lower court were increased on appeal after a
consideration of the evidence. In Brodek vs. Larson (18 Phil., Rep., 425), it
was held that the damages awarded by the lower court were base on too
uncertain evidence, and the case was remanded for a new trial as to the
amount of damages sustained. Also in Saldivar vs. Municipality of Talisay
(18 Phil., Rep., 362), where the lower court exonerated the defendant from
liability, this court, after a consideration of the evidence, held that the
defendant was liable and remanded the case for the purpose of a new trial
in order to ascertain the amount of damages sustained.

In this respect the law of damages under article 1902, as laid down by the
decisions of the supreme court of Spain, has been indirectly modified by
the present Code of Civil Procedure so that the finding of the lower court as
to the amount of damages is not conclusive on appeal.

Actual damages, under the American system, include pecuniary

recompense for pain and suffering, injured feelings, and the like. Article
1902, as interpreted by this court in Marcelo vs. Velasco (11 Phil., Rep.,
287), does not extend to such incidents. Aside from this exception, actual

damages, in this jurisdiction, in the sense that they mean just

compensation for the loss suffered, are practically synonymous with actual
damages under the American system.

This court has already gone some distance in incorporating into our
jurisprudence those principles of the American law of actual damages
which are of a general and abstract nature. In Baer Senior and Co.'s
Successors vs. Compaia Maritima (6 Phil. Rep., 215), the American
principle of admiralty law that the liability of the ship for a tow is not so
great as that for her cargo was applied in determining the responsibility of
a ship, under the Code of Commerce, for her tow. In Rodriguez, vs. Findlay
and Co. (14 Phil., Rep., 294), which was an action for breach of contract of
warranty, the following principle, supported entirely by American authority,
was used in computing the amount of damages due the plaintiff:

The damages recoverable of a manufacturer or dealer for the breach of

warranty of machinery, which he contracts to furnish, or place in operation
for a known purpose are not confined to the difference in value of the
machinery as warranted and as it proves to be, but includes such
consequential damages as are the direct, immediate, and probable result
of the breach.

In Aldaz vs. Gay (7 Phil., Rep., 268), it was held that the earnings or
possible earnings of a workman wrongfully discharged should be
considered in mitigation of his damages for the breach of contract by his
employer, with the remark that nothing had been brought to our attention
to the contrary under Spanish jurisprudence.

In Fernandez vs. M. E. R. and L. Co. (14 Phil., Rep., 274), a release or

compromise for personal injury sustained by negligence attributed to the
defendant company was held a bar to an action for the recovery of further
damages, on the strength of American precedents.

In Taylor vs. M. E. R. and L. Co., supra, in the course of an extended

reference to American case law, the doctrine of the so-called "Turntable"
and "Torpedo" cases was adopted by this court as a factor in determining
the question of liability for damages in such cases as the one the court the
then had under consideration.

In Martinez vs. Van Buskirk (18 Phil., 79), this court, after remarking that
the rules under the Spanish law by which the fact of negligence is
determined are, generally speaking, the same as they are in Anglo-Saxon
countries, approved the following well-known rule of the Anglo-Saxon law
of negligence, relying exclusively upon American authorities: ". . . acts, the
performance of which has not proven destructive or injurious and which
have been generally acquiesced in by society for so long a time as to have
ripened into a custom, cannot be held to be unreasonable or imprudent
and that, under the circumstances, the driver was not guilty of negligence
in so leaving his team while assisting in unloading his wagon.

This court does not, as a rule, content itself in the determination of cases
brought before it, with a mere reference to or quotation of the articles of
the codes or laws applicable to the questions involved, for the reason that
it is committed to the practice of citing precedents for its rulings wherever
practicable. (See Ocampo vs. Cabangis, 15 Phil Rep., 626.) No better
example of the necessity of amplifying the treatment of a subject given in
the code is afforded than article 1902 of the Civil Code. That article
requires that the defendant repair the damage done. There is, however, a
world of difficulty in carrying out the legislative will in this particular. The
measure of damages is an ultimate fact, to be determined from the
evidence submitted to the court. The question is sometimes a nice one to
determine, whether the offered evidence in such as sought to be
considered by the court in fixing the quantum of damages; and while the
complexity of human affairs is such that two cases are seldom exactly
alike, a thorough discussion of each case may permit of their more or less
definite classification, and develop leading principles which will be of great
assistance to a court in determining the question, not only of damages, but
of the prior one of negligence. We are of the opinion that as the Code is so
indefinite (even though from necessity) on the subject of damages arising
from fault or negligence, the bench and bar should have access to and
avail themselves of those great, underlying principles which have been
gradually and conservatively developed and thoroughly tested in AngloSaxon courts. A careful and intelligent application of these principles
should have a tendency to prevent mistakes in the rulings of the court on
the evidence offered, and should assist in determining damages, generally,
with some degree of uniformity.

The law of damages has not, for some reason, proved as favorite a theme
with the civil-law writers as with those of the common-law school. The
decisions of the supreme court of Spain, though numerous on damages
arising from contractual obligations, are exceedingly few upon damages for
personal injuries arising ex delicto. The reasons for this are not important
to the present discussion. It is sufficient to say that the law of damages has
not received the elaborate treatment that it has at the hands of the Anglo-

Saxon jurists. If we in this jurisdiction desire to base our conclusions in

damage cases upon controlling principles, we may develop those principles
and incorporate them into our jurisprudence by that difficult and tedious
process which constitutes the centuries-old history of Anglo-Saxon
jurisprudence; or we may avail ourselves of these principles in their
present state of development without further effort than it costs to refer to
the works and writings of many eminent text-writers and jurists. We shall
not attempt to say that all these principles will be applicable in this
jurisdiction. It must be constantly borne in mind that the law of damages in
this jurisdiction was conceived in the womb of the civil law and under an
entirely different form of government. These influences have had their
effect upon the customs and institutions of the country. Nor are the
industrial and social conditions the same. An Act which might constitute
negligence or damage here, and vice versa. As stated in Story on
Bailments, section 12, "It will thence follow that, in different times and in
different countries, the standard (of diligence) is necessary variable with
respect to the facts, although it may be uniform with respect to the
principle. So that it may happen that the same acts which in one country or
in one age may be deemed negligent acts, may at another time or in
another country be justly deemed an exercise of ordinary diligence."

The abstract rules for determining negligence and the measure of

damages are, however, rules of natural justice rather than man-made law,
and are applicable under any enlightened system of jurisprudence. There is
all the more reason for our adopting the abstract principles of the AngloSaxon law of damages, when we consider that there are at least two
important laws o n our statute books of American origin, in the application
of which we must necessarily be guided by American authorities: they are
the Libel Law (which, by the way, allows damages for injured feelings and
reputation, as well as punitive damages, in a proper case), and the
Employer's Liability Act.

The case at bar involves actual incapacity of the plaintiff for two months,
and loss of the greater portion of his business. As to the damages resulting
from the actual incapacity of the plaintiff to attend to his business there is
no question. They are, of course, to be allowed on the basis of his earning
capacity, which in this case, is P50 per month. the difficult question in the
present case is to determine the damage which has results to his business
through his enforced absence. In Sanz vs. Lavin Bros. (6 Phil. Rep., 299),
this court, citing numerous decisions of the supreme court of Spain, held
that evidence of damages "must rest upon satisfactory proof of the
existence in reality of the damages alleged to have been suffered." But,
while certainty is an essential element of an award of damages, it need not
be a mathematical certainty. That this is true is adduced not only from the
personal injury cases from the supreme court of Spain which we have

discussed above, but by many cases decided by this court, reference to

which has already been made. As stated in Joyce on Damages, section 75,
"But to deny the injured party the right to recover any actual damages in
cases f torts because they are of such a nature a cannot be thus certainly
measured, would be to enable parties to profit by and speculate upon their
own wrongs; such is not the law."

As to the elements to be considered in estimating the damage done to

plaintiff's business by reason of his accident, this same author, citing
numerous authorities, has the following to say: It is proper to consider the
business the plaintiff is engaged in, the nature and extent of such
business, the importance of his personal oversight and superintendence in
conducting it, and the consequent loss arising from his inability to
prosecure it.

The business of the present plaintiff required his immediate supervision. All
the profits derived therefrom were wholly due to his own exertions. Nor are
his damages confined to the actual time during which he was physically
incapacitated for work, as is the case of a person working for a stipulated
daily or monthly or yearly salary. As to persons whose labor is thus
compensated and who completely recover from their injuries, the rule may
be said to be that their damages are confined to the duration of their
enforced absence from their occupation. But the present plaintiff could not
resume his work at the same profit he was making when the accident
occurred. He had built up an establishing business which included some
twenty regular customers. These customers represented to him a regular
income. In addition to this he made sales to other people who were not so
regular in their purchases. But he could figure on making at least some
sales each month to others besides his regular customers. Taken as a
whole his average monthly income from his business was about P50. As a
result of the accident, he lost all but four of his regular customers and his
receipts dwindled down to practically nothing. Other agents had invaded
his territory, and upon becoming physically able to attend to his business,
he found that would be necessary to start with practically no regular trade,
and either win back his old customers from his competitors or else secure
others. During this process of reestablishing his patronage his income
would necessarily be less than he was making at the time of the accident
and would continue to be so for some time. Of course, if it could be
mathematically determined how much less he will earn during this
rebuilding process than he would have earned if the accident had not
occurred, that would be the amount he would be entitled to in this action.
But manifestly this ideal compensation cannot be ascertained. The
question therefore resolves itself into whether this damage to his business
can be so nearly ascertained as to justify a court in awarding any amount
whatever.

When it is shown that a plaintiff's business is a going concern with a fairly

steady average profit on the investment, it may be assumed that had the
interruption to the business through defendant's wrongful act not occurred,
it would have continued producing this average income "so long as is usual
with things of that nature." When in addition to the previous average
income of the business it is further shown what the reduced receipts of the
business are immediately after the cause of the interruption has been
removed, there can be no manner of doubt that a loss of profits has
resulted from the wrongful act of the defendant. In the present case, we
not only have the value of plaintiff's business to him just prior to the
accident, but we also have its value to him after the accident. At the trial,
he testified that his wife had earned about fifteen pesos during the two
months that he was disabled. That this almost total destruction of his
business was directly chargeable to defendant's wrongful act, there can be
no manner of doubt; and the mere fact that the loss can not be ascertained
with absolute accuracy, is no reason for denying plaintiff's claim altogether.
As stated in one case, it would be a reproach to the law if he could not
recover damages at all. (Baldwin vs. Marquez, 91 Ga., 404)

Profits are not excluded from recovery because they are profits; but when
excluded, it is on the ground that there are no criteria by which to estimate
the amount with the certainty on which the adjudications of courts, and the
findings of juries, should be based. (Brigham vs. Carlisle (Ala.), 56 Am.
Rep., 28, as quoted in Wilson vs. Wernwag, 217 Pa., 82.)

The leading English case on the subject is Phillips vs. London and
Southwestern Ry. Co. (5 Q. B. D., 788; 41 L.T., 121; 8 Eng. Rul. Cases, 447).
The plaintiff was a physician with a very lucrative practice. In one case he
had received a fee of 5,000 guineas; but it appeared that his average
income was between 6,000 and 7,000 pounds sterling per year. The report
does not state definitely how serious plaintiff's injuries were, but
apparently he was permanently disabled. The following instruction to the
jury was approved, and we think should be set out in this opinion as
applicable to the present case:

You cannot put the plaintiff back again into his original position, but you
must bring your reasonable common sense to bear, and you must always
recollect that this is the only occasion on which compensation can be
given. Dr. Philips can never sue again for it. You have, therefore, not to give
him compensation a wrong at the hands of the defendants, and you must
take care o give him full, fair compensation. for that which he has suffered.

The jury's award was seven thousand pounds. Upon a new trial, on the
ground of the insufficiency of the damages awarded, plaintiff received
16,000 pounds. On the second appeal, Bramwell, L. J., put the case of a
laborer earning 25 shillings a week, who, on account of injury, was totally
incapacitated for work for twenty-six weeks, and then for ten weeks could
not earn more than ten shillings a week, and was not likely to get into full
work for another twenty weeks. The proper measure of damages would be
in that case 25 shillings a week twenty-six weeks, plus 15 shillings a week
for the ten and twenty weeks, and damages for bodily suffering and
medical expenses. Damages for bodily suffering, of course, are not, for
reasons stated above, applicable to this jurisdiction; otherwise we believe
this example to be the ideal compensation for loss of profits which courts
should strike to reach, in cases like the present.

In Joslin vs. Grand Rapids Ice and Coal Co. (53 Mich., 322), the court said:
"The plaintiff, in making proof of his damages, offered testimony to the
effect that he was an attorney at law of ability and in good standing, and
the extent and value of his practice, and that, in substance, the injury had
rendered him incapable of pursuing his profession. This was objected to as
irrelevant, immaterial and incompetent. We think this was competent. It
was within the declaration that his standing in his profession was such as
to command respect, and was proper to be shown, and his ability to earn,
and the extent of his practice, were a portion of the loss he had sustained
by the injury complained of. There was no error in permitting this proof,
and we further think it was competent, upon the question of damages
under the evidence in this case, for the plaintiff to show, by Judge Hoyt, as
was done, that an interruption in his legal business and practice for eight
months was a damage to him. It seems to have been a part of the
legitimate consequences of the plaintiff's injury."

In Luck vs. City of Ripon (52 Wis., 196), plaintiff was allowed to prevent
that she was a midwife and show the extent of her earnings prior to the
accident in order to establish the damage done to her business.

The pioneer case of Gobel vs. Hough (26 Minn., 252) contains perhaps one
of the clearest statements of the rule and is generally considered as one of
the leading cases on this subject. In that case the court said:

When a regular and established business, the value of which may be

ascertained, has been wrongfully interrupted, the true general rule for

compensating the party injured is to ascertain how much less valuable the
business was by reason of the interruption, and allow that as damages.
This gives him only what the wrongful act deprived him of. The value of
such a business depends mainly on the ordinary profits derived from it.
Such value cannot be ascertained without showing what the usual profits
are; nor are the ordinary profits incident to such a business contingent or
speculative, in the sense that excludes profits from consideration as an
element of damages. What they would have been, in the ordinary course of
the business, for a period during which it was interrupted, may be shown
with reasonable certainty. What effect extraordinary circumstances would
have had upon the business might be contingent and conjectural, and any
profits anticipated from such cause would be obnoxious to the objection
that they are merely speculative; but a history of the business, for a
reasonable time prior to a period of interruption, would enable the jury to
determine how much would be done under ordinary circumstances, and in
the usual course, during the given period; and the usual rate of profit being
shown, of course the aggregate becomes only a matter of calculation.

In the very recent case of Wellington vs. Spencer (Okla., 132 S. W., 675),
plaintiff had rented a building from the defendant and used it as a hotel.
Defendant sued out a wrongful writ of attachment upon the equipment of
the plaintiff, which caused him to abandon his hotel business. After
remarking that the earlier cases held that no recovery could be had for
prospective profits, but that the later authorities have held that such
damages may be allowed when the amount is capable of proof, the court
had the following to say:

Where the plaintiff has just made his arrangements to begin business, and
he is prevented from beginning either by tort or a breach of contract, or
where the injury is to a particular subject matter, profits of which are
uncertain, evidence as to expected profits must be excluded from the jury
because of the uncertainty. There is as much reason to believe that there
will be no profits as to believe that there will be no profits, but no such
argument can be made against proving a usual profit of an established
business. In this case the plaintiff, according to his testimony, had an
established business, and was earning a profit in the business, and had
been doing that for a sufficient length of time that evidence as to
prospective profits was not entirely speculative. Men who have been
engaged in business calculate with a reasonable certainty the income from
their business, make their plans to live accordingly, and the value of such
business is not a matter of speculation as to exclude evidence from the
jury.

A good example of a business not established for which loss of profits will
be allowed may be found in the States vs. Durkin (65 Kan., 101). Plaintiffs
formed a partnership, and entered the plumbing business in the city of
Topeka in April. In July of the same year, they brought an action against a
plumbers' association on the ground that the latter had formed an unlawful
combination in restraint of trade and prevented them from securing
supplies for their business within a reasonable time. The court said:

In the present case the plaintiffs had only been in business a short time
not so long that it can be said that they had an established business. they
had contracted three jobs of plumbing, had finished two, and lost money
on both; not, however, because of any misconduct or wrongful acts on the
part of the defendants or either of them. They carried no stock in trade,
and their manner of doing business was to secure a contract and then
purchase the material necessary for its completion. It is not shown that
they had any means or capital invested in the business other than their
tools. Neither of them had prior thereto managed or carried on a similar
business. Nor was it shown that they were capable of so managing this
business as to make it earn a profit. There was little of that class of
business being done at the time, and little, if any, profit derived therefrom.
The plaintiffs' business lacked duration, permanency, and recognition. It
was an adventure, as distinguished from an established business. Its
profits were speculative and remote, existing only in anticipation. The law,
with all its vigor and energy in its effort to right or wrongs and damages for
injuries sustained, may not enter into a domain of speculation or
conjecture. In view of the character and condition of the plaintiffs'
business, the jury had not sufficient evidence from which to ascertain
profits.

Other cases which hold that the profits of an established business may be
considered in calculating the measure of damages for an interruption of it
are: Wilkinson vs. Dunbar (149 N. C., 20); Kinney vs. Crocker (18 Wis., 80);
Sachra vs. Manila (120 la., 562); Kramer vs. City of Los Angeles (147 Cal.,
668); Mugge vs. Erkman (161 Ill. App., 180); Fredonia Gas Co. vs. Bailey
977 Kan., 296); Morrow vs. Mo. Pac. R. Co. (140 Mo. App., 200); City of
Indianapolis vs. Gaston (58 Ind., 24); National Fibre Board vs. Auburn
Electric Light Co. (95 Me., 318); Sutherland on Damages, sec. 70.

We have now outlined the principles which should govern the measure of
damages in this case. We are of the opinion that the lower court had before
it sufficient evidence of the damage to plaintiff's business in the way of
prospective loss of profits to justify it in calculating his damages as to his
item. That evidence has been properly elevated to this court of review.

Under section 496 of the Code of Civil Procedure, we are authorized to

enter final judgment or direct a new trial, as may best subserve the ends of
justice. We are of the opinion that the evidence presented as to the
damage done to plaintiff's business is credible and that it is sufficient and
clear enough upon which to base a judgment for damages. Plaintiff having
had four years' experience in selling goods on commission, it must be
presumed that he will be able to rebuild his business to its former
proportions; so that at some time in the future his commissions will equal
those he was receiving when the accident occurred. Aided by his
experience, he should be able to rebuild this business to its former
proportions in much less time than it took to establish it as it stood just
prior to the accident. One year should be sufficient time in which to do this.
The profits which plaintiff will receive from the business in the course of its
reconstruction will gradually increase. The injury to plaintiff's business
begins where these profits leave off, and, as a corollary, there is where
defendant's liability begins. Upon this basis, we fix the damages to
plaintiff's business at P250.

THE HON. COURT OF APPEALS, THE COMMISSIONER OF INTERNAL REVENUE

and TIRSO SAVELLANO, Respondents.

The judgment of the lower court is set aside, and the plaintiff is awarded
the following damages; ten pesos for medical expenses; one hundred
pesos for the two months of his enforced absence from his business; and
two hundred and fifty pesos for the damage done to his business in the
way of loss of profits, or a total of three hundred and sixty pesos. No costs
will be allowed in this instance.

DECISION

Arellano, C.J. and Araullo, J., concur.

Carson, J., concurs in the result.

x--------------------x

G.R. No. 112800

April 26, 2005

PHILIPPINE NATIONAL BANK, Petitioner,

vs.
THE HON. COURT OF APPEALS, COURT OF TAX APPEALS, TIRSO B.
SAVELLANO and COMMISSIONER OF INTERNAL REVENUE, Respondents.

CHICO-NAZARIO, J.:

This is a consolidation of two Petitions for Review on Certiorari filed by the

Philippine National Oil Company (PNOC)1 and the Philippine National Bank
(PNB),<2 assailing the decisions of the Court of Appeals in CA-G.R. SP No.
295833 and CA-G.R. SP No. 29526,4 respectively, which both affirmed the
decision of the Court of Tax Appeals (CTA) in CTA Case No. 4249.5

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. 109976

April 26, 2005

PHILIPPINE NATIONAL OIL COMPANY, Petitioner,

vs.

The Petitions before this Court originated from a sworn statement

submitted by private respondent Tirso B. Savellano (Savellano) to the
Bureau of Internal Revenue (BIR) on 24 June 1986. Through his sworn
statement, private respondent Savellano informed the BIR that PNB had
failed to withhold the 15% final tax on interest earnings and/or yields from
the money placements of PNOC with the said bank, in violation of
Presidential Decree (P.D.) No. 1931. P.D. No. 1931, which took effect on 11
June 1984, withdrew all tax exemptions of government-owned and
controlled corporations.

In a letter, dated 08 August 1986, the BIR requested PNOC to settle its
liability for taxes on the interests earned by its money placements with
PNB and which PNB did not withhold.6 PNOC wrote the BIR on 25

September 1986, and made an offer to compromise its tax liability, which it
estimated to be in the sum of P304,419,396.83, excluding interest and
surcharges, as of 31 July 1986. PNOC proposed to set-off its tax liability
against a claim for tax refund/credit of the National Power Corporation
(NAPOCOR), then pending with the BIR, in the amount of P335,259,450.21.
The amount of the claim for tax refund/credit was supposedly a receivable
account of PNOC from NAPOCOR.7

Add: Payment made by PNOC pursuant to the compromise agreement of

June 22, 1987

91,003,129.89

Total tax payment

On 08 October 1986, the BIR sent a demand letter to PNB, as withholding
agent, for the payment of the final tax on the interest earnings and/or
yields from PNOC's money placements with the bank, from 15 October
1984 to 15 October 1986, in the total amount of P376,301,133.33.8 On
the same date, the BIR also mailed a letter to PNOC informing it of the
demand letter sent to PNB.9

PNOC, in another letter, dated 14 October 1986, reiterated its proposal to

settle its tax liability through the set-off of the said tax liability against
NAPOCOR'S pending claim for tax refund/credit.10 The BIR replied on 11
November 1986 that the proposal for set-off was premature since
NAPOCOR's claim was still under process. Once more, BIR requested PNOC
to settle its tax liability in the total amount of P385,961,580.82, consisting
of P303,343,765.32 final tax, plus P82,617,815.50 interest computed until
15 November 1986.11

93,955,479.1213

Private respondent Savellano, through four installments, was paid the

informer's reward in the total amount of P14,093,321.89, representing 15%
of the P93,955,479.12 tax collected by the BIR from PNOC and PNB. He
received the last installment on 01 December 1987.14

On 07 January 1988, private respondent Savellano, through his legal

counsel, wrote the BIR to demand payment of the balance of his informer's
reward, computed as follows:

BIR tax assessment

On 09 June 1987, PNOC made another offer to the BIR to settle its tax
liability. This time, however, PNOC proposed a compromise by paying
P91,003,129.89, representing 30% of the P303,343,766.29 basic tax, in
accordance with the provisions of Executive Order (E.O.) No. 44.12

385,961,580.82

Final tax rate

Then BIR Commissioner Bienvenido A. Tan, in a letter, dated 22 June 1987,
accepted the compromise. The BIR received a total tax payment on the
interest earnings and/or yields from PNOC's money placements with PNB in
the amount of P93,955,479.12, broken down as follows:

Previous payment made by PNB

2,952,349.23

0.15

Informer's reward due (BIR deficiency tax assessment x Final tax rate)

57,894,237.12

Less: Payment received by private respondent Savellano

14,093,321.89

In his Answer filed with the CTA, BIR Commissioner Tan asserted that the
Petition stated no cause of action against him, and that private respondent
Savellano was already paid the informer's reward due him. Alleging that
the Petition was baseless and malicious, BIR Commissioner Tan filed a
counterclaim for exemplary damages against private respondent
Savellano.20

Outstanding balance

P 43,800,915.2515

BIR Commissioner Tan replied through a letter, dated 08 March 1988, that
private respondent Savellano was already fully paid the informer's reward
equivalent to 15% of the amount of tax actually collected by the BIR
pursuant to its compromise agreement with PNOC. BIR Commissioner Tan
further explained that the compromise was in accordance with the
provisions of E.O. No. 44, Revenue Memorandum Order (RMO) No. 39-86,
and RMO No. 4-87.16

Private respondent Savellano submitted another letter, dated 24 March

1988, to BIR Commissioner Tan, seeking reconsideration of his decision to
compromise the tax liability of PNOC. In the same letter, private
respondent Savellano questioned the legality of the compromise
agreement entered into by the BIR and PNOC and claimed that the tax
liability should have been collected in full.17

On 08 April 1988, while the aforesaid Motion for Reconsideration was still
pending with the BIR, private respondent Savellano filed a Petition for
Review ad cautelam with the CTA, docketed as CTA Case No. 4249. He
claimed therein that BIR Commissioner Tan acted "with grave abuse of
discretion and/or whimsical exercise of jurisdiction" in entering into a
compromise agreement that resulted in "a gross and unconscionable
diminution" of his reward. Private respondent Savellano prayed for the
enforcement and collection of the total tax assessment against taxpayer
PNOC and/or withholding agent PNB; and the payment to him by the BIR
Commissioner of the 15% informer's reward on the total tax collected.18
He would later amend his Petition to implead PNOC and PNB as necessary
and indispensable parties since they were parties to the compromise
agreement.19

PNOC and PNB filed separate Motions to Dismiss, both arguing that the CTA
lacked jurisdiction to decide the case.21 In its Resolution, dated 28
November 1988, the CTA denied the Motions to Dismiss since the question
of lack of jurisdiction and/or cause of action do not appear to be
indubitable.22

After their Motions to Dismiss were denied by the CTA, PNOC and PNB filed
their respective Answers to the amended Petition. PNOC averred, among
other things, that (1) it had no privity with private respondent Savellano;
(2) the BIR Commissioner's discretionary act in entering into the
compromise agreement had legal basis under E.O. No. 44 and RMO No. 3986 and RMO No. 4-87; and (3) the CTA had no jurisdiction to resolve the
case against it.23 On the other hand, PNB asserted that (1) the CTA lacked
jurisdiction over the case; and (2) the BIR Commissioner's decision to
accept the compromise was discretionary on his part and, therefore,
cannot be reviewed or interfered with by the courts.24 PNOC and PNB later
filed their amended Answer invoking an opinion of the Commission on
Audit (COA) disallowing the payment by the BIR of informer's reward to
private respondent Savellano.25

The CTA, thereafter, ordered the parties to submit their evidence,26 to be

followed by their respective Memoranda.27

On 23 November 1990, private respondent Savellano, filed a Manifestation

with Motion for Suspension of Proceedings, claiming that his pending
Motion for Reconsideration with the BIR Commissioner may soon be
resolved.28 Both PNOC and PNB opposed the said Motion.29

Subsequently, the new BIR Commissioner, Jose U. Ong, in a letter to PNB,

dated 16 January 1991, demanded that PNB pay deficiency withholding tax
on the interest earnings and/or yields from PNOC's money placements, in
the amount of P294,958,450.73, computed as follows:

Withholding tax, plus interest under the letter of demand dated November
11, 1986

385,961,580.82

Less: Amount paid under E.O. No. 44

91,003,129.89

Amount still due and collectible

On 11 June 1991, PNB appealed to the Department of Justice (DOJ) the BIR
assessment, dated 16 January 1991, for deficiency withholding tax in the
sum of P294,958,450.73. PNB alleged that its appeal to the DOJ was
sanctioned under P.D. No. 242, which provided for the administrative
settlement of disputes between government offices, agencies, and
instrumentalities, including government-owned and controlled
corporations.37

Three days later, on 14 June 1991, PNB filed a Motion to Suspend

Proceedings before the CTA since it had a pending appeal before the
DOJ.38 On 04 July 1991, PNB filed with the CTA a Motion for
Reconsideration of its Order, dated 03 June 1991, submitting the case for
decision as of 04 June 1991, and prayed that the CTA hold its resolution of
the case in view of PNB's appeal pending before the DOJ.39

294,958,450.7330

This BIR letter was received by PNB on 06 February 1991,31 and was
protested by it through a letter, dated 11 April 1991.32 The BIR denied
PNB's protest on the ground that it was filed out of time and, thus, the
assessment had already become final.33

Private respondent Savellano, on 22 February 1991, filed an Omnibus

Motion moving to withdraw his previous Motion for Suspension of
Proceeding since BIR Commissioner Ong had finally resolved his Motion for
Reconsideration, and submitting by way of supplemental offer of evidence
(1) the letter of BIR Commissioner Ong, dated 13 February 1991, informing
private respondent Savellano of the action on his Motion for
Reconsideration; and (2) the demand-letter of BIR Commissioner Ong to
PNB, dated 16 January 1991.34

Despite the oppositions of PNOC and PNB, the CTA, in a Resolution, dated
02 May 1991, resolved to allow private respondent Savellano to withdraw
his previous Motion for Suspension of Proceeding and to admit the
supplementary evidence being offered by the same party.35

In its Order, dated 03 June 1991, the CTA considered the case submitted
for decision as of the following day, 04 June 1991.36

On 17 July 1991, PNB filed a Motion to Suspend the Collection of Tax by the
BIR. It alleged that despite its request for reconsideration of the deficiency
withholding tax assessment, dated 16 January 1991, BIR Commissioner
Ong sent another letter, dated 23 April 1991, demanding payment of the
P294,958,450.73 deficiency withholding tax on the interest earnings and/or
yields from PNOC's money placements. The same letter informed PNB that
this was the BIR Commissioner's final decision on the matter and that the
BIR Commissioner was set to issue a warrant of distraint and/or levy
against PNB's deposits with the Central Bank of the Philippines. PNB
further alleged that the levy and distraint of PNB's deposits, unless
restrained by the CTA, would cause great and irreparable prejudice not only
to PNB, a government-owned and controlled corporation, but also to the
Government itself.40

Pursuant to the Order of the CTA, during the hearing on 19 July 1991,41 the
parties submitted their respective Memoranda on PNB's Motion to Suspend
Proceedings.42

On 20 September 1991, private respondent Savellano filed another

Omnibus Motion calling the attention of the CTA to the fact that the BIR
already issued, on 12 August 1991, a warrant of garnishment addressed to
the Central Bank Governor and against PNB. In compliance with the said
warrant, the Central Bank issued, on 23 August 1991, a debit advice
against the demand deposit account of PNB with the Central Bank for the
amount of P294,958,450.73, with a corresponding transfer of the same

amount to the demand deposit-in-trust of BIR with the Central Bank. Since
the assessment had already been enforced, PNB's Motion to Suspend
Proceedings became moot and academic. Private respondent Savellano,
thus, moved for the denial of PNB's Motion to Suspend Proceedings and for
an order requiring BIR to deposit with the CTA the amount of
P44,243,767.00 as his informer's reward, representing 15% of the
deficiency withholding tax collected.43

Both PNOC and PNB opposed private respondent Savellano's Omnibus

Motion, dated 20 September 1991, arguing that the DOJ already ordered
the suspension of the collection of the tax deficiency. There was therefore
no basis for private respondent Savellano's Motion as the same was
premised on the erroneous assumption that the tax deficiency had been
collected. When the DOJ denied the BIR Commissioner's Motion to Dismiss
and required him to file his answer, the DOJ assumed jurisdiction over
PNB's appeal, and the CTA should first suspend its proceedings to give the
DOJ the opportunity to decide the validity and propriety of the tax
assessment against PNB.44

The CTA, on 28 May 1992, rendered its decision, wherein it upheld its
jurisdiction and disposed of the case as follows:

WHEREFORE, judgment is rendered declaring the COMPROMISE

AGREEMENT between the Bureau of Internal Revenue, on the one hand,
and the Philippine National Oil Company and Philippine National Bank, on
the other, as WITHOUT FORCE AND EFFECT;

The Commissioner of Internal Revenue is hereby ordered to ENFORCE the

ASSESSMENT of January 16, 1991 against Philippine National Bank which
has become final and unappealable by collecting from Philippine National
Bank the deficiency withholding tax, plus interest totalling (sic)
P294,958,450.73;

Petitioner may be paid, upon collection of the deficiency withholding tax,

the balance of his entitlement to informer's reward based on fifteen
percent (15%) of the deficiency withholding total tax collected in this case
or P44,243.767.00 subject to existing rules and regulations governing
payment of reward to informers.45

In a Resolution, dated 16 November 1992, the CTA denied the Motions for
Reconsideration filed by PNOC and PNB since they substantially raised the
same issues in their previous pleadings and which had already been
passed upon and resolved adversely against them.46

PNOC and PNB filed separate appeals with the Court of Appeals seeking
the reversal of the CTA decision in CTA Case No. 4249, dated 28 May 1992,
and the CTA Resolution in the same case, dated 16 November 1992.
PNOC's appeal was docketed as CA-G.R. SP No. 29583, while PNB's appeal
was CA-G.R. SP No. 29526. In both cases, the Court of Appeals affirmed
the decision of the CTA.

In the meantime, the Central Bank again issued on 02 September 1992 a

debit advice against the demand deposit account of PNB with the Central
Bank for the amount of P294,958,450.73,47 and on 15 September 1992,
credited the same amount to the demand deposit account of the Treasurer
of the Republic of the Philippines.48 On 04 November 1992, the Treasurer
of the Republic issued a journal voucher transferring P294,958,450.73 to
the account of the BIR.49 PNB, in turn, debited P294,958,450.73 from the
deposit account of PNOC with PNB.50

PNOC and PNB then filed separate Petitions for Review on Certiorari with
this Court, praying that the decisions of the Court of Appeals in CA-G.R. SP
No. 29583 and CA-G.R. SP No. 29526, respectively, both affirming the
decision of the CTA in CTA Case No. 4249, be reversed and set aside.
These two Petitions were consolidated since they involved identical parties
and factual background, and the resolution of related, if not exactly, the
same issues.

In its Petition for Review, PNOC alleged the following errors committed by
the Court of Appeals in CA-G.R. SP No. 29583:

1. The Court of Appeals erred in holding that the deficiency taxes of PNOC
could not be the subject of a compromise under Executive Order No. 44;
and

2. The Court of Appeals erred in holding that Savellano is entitled to

additional informer's reward.51

PNB, in its own Petition for Review, assailed the decision of the Court of
Appeals in CA-G.R. SP No. 29526, assigning the following errors:

1. Respondent Court erred in not finding that the Court of Tax Appeals
lacks jurisdiction on the controversy involving BIR and PNB (both
government instrumentalities) regarding the new assessment of BIR
against PNB;

2. The respondent Court erred in not finding that the Court of Tax Appeals
has no jurisdiction to question the compromise agreement entered into by
the Commissioner of Internal Revenue; and

3. The respondent Court erred in not ruling that the Commissioner of

Internal Revenue cannot unilaterally annul tax compromises validly
entered into by his predecessor.52

The decisions of the Court of Appeals in CA-GR SP No. 29583 and CA-G.R.
SP No. 29526, affirmed the decision of the CTA in CTA Case No. 4249. The
resolution, therefore, of the assigned errors in the Court of Appeals'
decisions essentially requires a review of the CTA decision itself.

In consolidating the present Petitions, this Court finds that PNOC and PNB
are basically questioning the (1) Jurisdiction of the CTA in CTA Case No.
4249; (2) Declaration by the CTA that the compromise agreement was
without force and effect; (3) Finding of the CTA that the deficiency
withholding tax assessment against PNB had already become final and
unappealable and, thus, enforceable; and (4) Order of the CTA directing
payment of additional informer's reward to private respondent Savellano.

A. The demand letter, dated 16 January 1991 did not constitute a new
assessment against PNB.

The main argument of PNB in assailing the jurisdiction of the CTA in CTA
Case No. 4249 is that the BIR demand letter, dated 16 January 1991,53
should be considered as a new assessment against PNB. As a new
assessment, it gave rise to a new dispute and controversy solely between
the BIR and PNB that should be administratively settled or adjudicated, as
provided in P.D. No. 242.

This argument is without merit. The issuance by the BIR of the demand
letter, dated 16 January 1991, was merely a development in the continuing
effort of the BIR to collect the tax assessed against PNOC and PNB way
back in 1986.

BIR's first letter, dated 08 August 1986, was addressed to PNOC,

requesting it to settle its tax liability. The BIR subsequently sent another
letter, dated 08 October 1986, to PNB, as withholding agent, demanding
payment of the tax it had failed to withhold on the interest earnings and/or
yields from PNOC's money placements. PNOC wrote the BIR three
succeeding letters offering to compromise its tax liability; PNB, on the
other hand, did not act on the demand letter it received, dated 08 October
1986. The BIR and PNOC eventually reached a compromise agreement on
22 June 1987. Private respondent Savellano questioned the validity of the
compromise agreement because the reduced amount of tax collected from
PNOC, by virtue of the compromise agreement, also proportionately
reduced his informer's reward. Private respondent Savellano then
requested the BIR Commissioner to review and reconsider the compromise
agreement. Acting on the request of private respondent Savellano, the
new BIR Commissioner declared the compromise agreement to be without
basis and issued the demand letter, dated 16 January 1991, against PNB,
as the withholding agent for PNOC.

It is clear from the foregoing that the BIR demand letter, dated 16 January
1991, could not stand alone as a new assessment. It should always be
considered in the factual context summarized above.

Jurisdiction of the CTA

In fact, the demand letter, dated 16 January 1991, actually referred to the
withholding tax assessment first issued in 1986 and its eventual
settlement through a compromise agreement. In addition, the

computation of the deficiency withholding tax was based on the figures

from the 1986 assessments against PNOC and PNB, and BIR no longer
conducted a new audit or investigation of either PNOC and PNB before it
issued the demand letter on 16 January 1991.

These constant references to past events and circumstances demonstrate

that the demand letter, dated 16 January 1991, was not a new assessment,
but rather, the latest action taken by the BIR to collect on the tax
assessments issued against PNOC and PNB in 1986.

PNB argues that the demand letter, dated 16 January 1991, introduced a
new controversy. We see it differently as the said demand letter presented
the resolution by BIR Commissioner Ong of the previous controversy
involving the compromise of the 1986 tax assessments. BIR Commissioner
Ong explicitly declared therein that the compromise agreement was
without legal basis, and requested PNB, as the withholding agent, to pay
the amount of withholding tax still due.

B. The CTA correctly retained jurisdiction over CTA Case No. 4249 by virtue
of Republic Act No. 1125.

Having established that the BIR demand letter, dated 16 January 1991, did
not constitute a new assessment, then, there could be no basis for PNB's
claim that any dispute arising from the new assessment should only be
between BIR and PNB.

Still proceeding from the argument that there was a new dispute between
PNB and BIR, PNB sought the suspension of the proceedings in CTA Case
No. 4249, after it contested the deficiency withholding tax assessment
against it and the demand for payment thereof before the DOJ, pursuant to
P.D. No. 242. The CTA, however, correctly sustained its jurisdiction and
continued the proceedings in CTA Case No. 4249; and, in effect, rejected
DOJ's claim of jurisdiction to administratively settle or adjudicate BIR's
assessment against PNB.

The CTA assumed jurisdiction over the Petition for Review filed by private
respondent Savellano based on the following provision of Rep. Act No.
1125, the Act creating the Court of Tax Appeals:

SECTION 7. Jurisdiction. The Court of Tax Appeals shall exercise exclusive

appellate jurisdiction to review by appeal, as herein provided -

(1) Decisions of the Collector of Internal Revenue in cases involving

disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or other matters arising
under the National Internal Revenue Code or other law or part of law
administered by the Bureau of Internal Revenue; . . . (Underscoring ours.)

In his Petition before the CTA, private respondent Savellano requested a

review of the decisions of then BIR Commissioner Tan to enter into a
compromise agreement with PNOC and to reject his claim for additional
informer's reward. He submitted before the CTA questions of law involving
the interpretation and application of (1) E.O. No. 44, and its implementing
rules and regulations, which authorized the BIR Commissioner to
compromise delinquent accounts and disputed assessments pending as of
31 December 1985; and (2) Section 316(1) of the National Internal
Revenue Code of 1977 (NIRC of 1977), as amended, which granted to the
informer a reward equivalent to 15% of the actual amount recovered or
collected by the BIR.54 These should undoubtedly be considered as
matters arising from the NIRC and other laws being administered by the
BIR, thus, appealable to the CTA under Section 7(1) of Rep. Act No. 1125.

PNB, however, insists on the jurisdiction of the DOJ over its appeal of the
deficiency withholding tax assessment by virtue of P.D. No. 242. Provisions
on jurisdiction of P.D. No. 242 read:

SECTION 1. Provisions of law to the contrary notwithstanding, all disputes,

claims and controversies solely between or among the departments,
bureaus, offices, agencies, and instrumentalities of the National
Government, including government-owned or controlled corporations, but
excluding constitutional offices or agencies, arising from the interpretation
and application of statutes, contracts or agreements, shall henceforth be
administratively settled or adjudicated as provided hereinafter; Provided,
That this shall not apply to cases already pending in court at the time of
the effectivity of this decree.

SECTION 2. In all cases involving only questions of law, the same shall be
submitted to and settled or adjudicated by the Secretary of Justice, as

Attorney General and ex officio legal adviser of all government-owned or

controlled corporations and entities, in consonance with Section 83 of the
Revised Administrative Code. His ruling or determination of the question in
each case shall be conclusive and binding upon all the parties concerned.

SECTION 3. Cases involving mixed questions of law and of fact or only

factual issues shall be submitted to and settled or adjudicated by:

(a) The Solicitor General, with respect to disputes or claims controversies

between or among the departments, bureaus, offices and other agencies of
the National Government;

(b) The Government Corporate Counsel, with respect to disputes or claims

or controversies between or among government-owned or controlled
corporations or entities being served by the Office of the Government
Corporate Counsel; and

(c) The Secretary of Justice, with respect to all other disputes or claims or
controversies which do not fall under the categories mentioned in
paragraphs (a) and (b).

The PNB and DOJ are of the same position that P.D. No. 242, the more
recent law, repealed Section 7(1) of Rep. Act No. 1125,55 based on the
pronouncement of this Court in Development Bank of the Philippines v.
Court of Appeals, et al., 56] quoted below:

The Court expresses its entire agreement with the conclusion of the
Court of Appeals and the basic premises thereof that there is an
"irreconcilable repugnancybetween Section 7(2) of R.A. No. 1125 and P.D.
No. 242," and hence, that the later enactment (P.D. No. 242), being the
latest expression of the legislative will, should prevail over the earlier.

In the said case, it was expressly declared that P.D. No. 242 repealed
Section 7(2) of Rep. Act No. 1125, which provides for the exclusive
appellate jurisdiction of the CTA over decisions of the Commissioner of
Customs. PNB contends that P.D. No. 242 should be deemed to have
likewise repealed Section 7(1) of Rep. Act No. 1125, which provide for the

exclusive appellate jurisdiction of the CTA over decisions of the BIR

Commissioner.57

After re-examining the provisions on jurisdiction of Rep. Act No. 1125 and
P.D. No. 242, this Court finds itself in disagreement with the
pronouncement made in Development Bank of the Philippines v. Court of
Appeals, et al.,58 and refers to the earlier case of Lichauco & Company,
Inc. v. Apostol, et al.,59 for the guidelines in determining the relation
between the two statutes in question, to wit:

The cases relating to the subject of repeal by implication all proceed on the
assumption that if the act of later date clearly reveals an intention on the
part of the law making power to abrogate the prior law, this intention must
be given effect; but there must always be a sufficient revelation of this
intention, and it has become an unbending rule of statutory construction
that the intention to repeal a former law will not be imputed to the
Legislature when it appears that the two statutes, or provisions, with
reference to which the question arises bear to each other the relation of
general to special. (Underscoring ours.)

When there appears to be an inconsistency or conflict between two

statutes and one of the statutes is a general law, while the other is a
special law, then repeal by implication is not the primary rule applicable.
The following rule should principally govern instead:

Specific legislation upon a particular subject is not affected by a general

law upon the same subject unless it clearly appears that the provisions of
the two laws are so repugnant that the legislators must have intended by
the later to modify or repeal the earlier legislation. The special act and the
general law must stand together, the one as the law of the particular
subject and the other as the general law of the land. (Ex Parte United
States, 226 U. S., 420; 57 L. ed., 281; Ex Parte Crow Dog, 109 U. S., 556;
27 L. ed., 1030; Partee vs. St. Louis & S. F. R. Co., 204 Fed. Rep., 970.)

Where there are two acts or provisions, one of which is special and
particular, and certainly includes the matter in question, and the other
general, which, if standing alone, would include the same matter and thus
conflict with the special act or provision, the special must be taken as
intended to constitute an exception to the general act or provision,
especially when such general and special acts or provisions are

contemporaneous, as the Legislature is not to be presumed to have

intended a conflict. (Crane v. Reeder and Reeder, 22 Mich., 322, 334;
University of Utah vs. Richards, 77 Am. St. Rep., 928.)60

It has, thus, become an established rule of statutory construction that

between a general law and a special law, the special law prevails
Generalia specialibus non derogant.61

Sustained herein is the contention of private respondent Savellano that

P.D. No. 242 is a general law that deals with administrative settlement or
adjudication of disputes, claims and controversies between or among
government offices, agencies and instrumentalities, including governmentowned or controlled corporations. Its coverage is broad and sweeping,
encompassing all disputes, claims and controversies. It has been
incorporated as Chapter 14, Book IV of E.O. No. 292, otherwise known as
the Revised Administrative Code of the Philippines.62 On the other hand,
Rep. Act No. 1125 is a special law63 dealing with a specific subject matter
the creation of the CTA, which shall exercise exclusive appellate
jurisdiction over the tax disputes and controversies enumerated therein.

Following the rule on statutory construction involving a general and a

special law previously discussed, then P.D. No. 242 should not affect Rep.
Act No. 1125. Rep. Act No. 1125, specifically Section 7 thereof on the
jurisdiction of the CTA, constitutes an exception to P.D. No. 242. Disputes,
claims and controversies, falling under Section 7 of Rep. Act No. 1125,
even though solely among government offices, agencies, and
instrumentalities, including government-owned and controlled
corporations, remain in the exclusive appellate jurisdiction of the CTA.
Such a construction resolves the alleged inconsistency or conflict between
the two statutes, and the fact that P.D. No. 242 is the more recent law is no
longer significant.

Even if, for the sake of argument, that P.D. No. 242 should prevail over Rep.
Act No. 1125, the present dispute would still not be covered by P.D. No.
242. Section 1 of P.D. No. 242 explicitly provides that only disputes, claims
and controversies solely between or among departments, bureaus, offices,
agencies, and instrumentalities of the National Government, including
constitutional offices or agencies, as well as government-owned and
controlled corporations, shall be administratively settled or adjudicated.
While the BIR is obviously a government bureau, and both PNOC and PNB
are government-owned and controlled corporations, respondent Savellano
is a private citizen. His standing in the controversy could not be lightly

brushed aside. It was private respondent Savellano who gave the BIR the
information that resulted in the investigation of PNOC and PNB; who
requested the BIR Commissioner to reconsider the compromise agreement
in question; and who initiated CTA Case No. 4249 by filing a Petition for
Review.

In Bay View Hotel, Inc. v. Manila Hotel Workers' Union-PTGWO, et al.,64]

this Court upheld the jurisdiction of the Court of Industrial Relations over
the ordinary courts and justified its decision in the following manner:

We are unprepared to break away from the teaching in the cases just
adverted to. To draw a tenuous jurisdictional line is to undermine stability
in labor litigations. A piecemeal resort to one court and another gives rise
to multiplicity of suits. To force the employees to shuttle from one court to
another to secure full redress is a situation gravely prejudicial. The time to
be lost, effort wasted, anxiety augmented, additional expense incurred
these are considerations which weigh heavily against split jurisdiction.
Indeed, it is more in keeping with orderly administration of justice that all
the causes of action here "be cognizable and heard by only one court: the
Court of Industrial Relations."

The same justification is used in the present case to reject DOJ's

jurisdiction over the BIR and PNB, to the exclusion of the other parties. The
rights of all four parties in CTA Case No. 4249, namely the BIR, as the tax
collector; PNOC, the taxpayer; PNB, the withholding agent; and private
respondent Savellano, the informer claiming his reward; arose from the
same factual background and were so closely interrelated, that a
pronouncement as to one would definitely have repercussions on the
others. The ends of justice were best served when the CTA continued to
exercise its jurisdiction over CTA Case No. 4249. The CTA, which had
assumed jurisdiction over all the parties to the controversy, could render a
comprehensive resolution of the issues raised and grant complete relief to
the parties.

II

Validity of the Compromise Agreement

A. PNOC could not apply for a compromise under E.O. No. 44 because its
tax liability was not a delinquent account or a disputed assessment as of
31 December 1985.

PNOC and PNB, on different grounds, dispute the decision of the CTA in CTA
Case No. 4249 declaring the compromise agreement between BIR and
PNOC without force and effect.

PNOC asserts that the compromise agreement was in accordance with E.O.
No. 44, and its implementing rules and regulations, and should be binding
upon the parties thereto.

E.O. No. 44 granted the BIR Commissioner or his duly authorized

representatives the power to compromise any disputed assessment or
delinquent account pending as of 31 December 1985, upon the payment of
an amount equal to 30% of the basic tax assessed; in which case, the
corresponding interests and penalties shall be condoned. E.O. No. 44 took
effect on 04 September 1986 and remained effective until 31 March 1987.

The disputed assessments or delinquent accounts that the BIR

Commissioner could compromise under E.O. No. 44 are defined under
Revenue Regulation (RR) No. 17-86, as follows:

a) Delinquent account Refers to the amount of tax due on or before

December 31, 1985 from a taxpayer who failed to pay the same within the
time prescribed for its payment arising from (1) a self assessed tax,
whether or not a tax return was filed, or (2) a deficiency assessment issued
by the BIR which has become final and executory.

Where no return was filed, the taxpayer shall be considered delinquent as

of the time the tax on such return was due, and in availing of the
compromise, a tax return shall be filed as a basis for computing the
amount of compromise to be paid.

b) Disputed assessment refers to a tax assessment disputed or protested

on or before December 31, 1985 under any of the following categories:

1)
if the same is administratively protested within thirty (30) days from
the date the taxpayer received the assessment, or

2.)
if the decision of the BIR on the taxpayer's administrative protest is
appealed by the taxpayer before an appropriate court.

PNOC's tax liability could not be considered a delinquent account since (1)
it was not self-assessed, because the BIR conducted an investigation and
assessment of PNOC and PNB after obtaining information regarding the
non-withholding of tax from private respondent Savellano; and (2) the
demand letter, issued against it on 08 August 1986, could not have been a
deficiency assessment that became final and executory by 31 December
1985.

The dissenting opinion contends, however, that the tax liability of PNOC
constitutes a self-assessed tax, and is, therefore, a delinquent account as
of 31 December 1985, qualifying for a compromise under E.O. No. 44. It
anchors its argument on the declaration made by this Court in Tupaz v.
Ulep,65 that internal revenue taxes are self-assessing.

It is not denied herein that the self-assessing system governs Philippine

internal revenue taxes. The dissenting opinion itself defines self-assessed
tax as, "a tax that the taxpayer himself assesses or computes and pays to
the taxing authority." Clearly, such a system imposes upon the taxpayer
the obligation to conduct an assessment of himself so he could determine
and declare the amount to be used as tax basis, any deductions therefrom,
and finally, the tax due.

E.O. No. 44 covers self-assessed tax, whether or not a tax return was filed.
The phrase "whether or not a tax return was filed" only refers to the
compliance by the taxpayer with the obligation to file a return on the dates
specified by law, but it does not do away with the requisite that the tax
must be self-assessed in order for the taxpayer to avail of the compromise.
The second paragraph of Section 2(a) of RR No. 17-86 expressly
commands, and still imposes upon the taxpayer, who is availing of the
compromise under E.O. No. 44, and who has not previously filed any
return, the duty to conduct self-assessment by filing a tax return that
would be used as the basis for computing the amount of compromise to be
paid.

Section 2(a)(1) of RR No. 17-86 thus involves a situation wherein a

taxpayer, after conducting a self-assessment, discovers or becomes aware
that he had failed to pay a tax due on or before 31 December 1985,
regardless of whether he had previously filed a return to reflect such tax;
voluntarily comes forward and admits to the BIR his tax liability; and
applies for a compromise thereof. In case the taxpayer has not previously
filed any return, he must fill out such a return reflecting therein his own
declaration of the taxable amount and computation of the tax due. The
compromise payment shall be computed based on the amount reflected in
the tax return submitted by the taxpayer himself.

Neither PNOC nor PNB, the taxpayer and the withholding agent,
respectively, conducted self-assessment in this case. There is no showing
that in the absence of the tax assessment issued by the BIR against them,
that PNOC and/or PNB would have voluntarily admitted their tax liabilities,
already amounting to P385,961,580.82, as of 15 November 1986, and
would have offered to compromise the same. In fact, both PNOC and PNB
were conspicuously silent about their tax liabilities until they were
assessed thereon.

Any attempt by PNOC and PNB to assess and declare by themselves their
tax liabilities had already been overtaken by the BIR's conduct of its audit
and investigation and subsequent issuance of the assessments, dated 08
August 1986 and 08 October 1986, against PNOC and PNB, respectively.
The said tax assessments, uncontested and undisputed, presented the
results of the BIR audit and investigation and the computation of the total
amount of tax liabilities of PNOC and PNB. They should be controlling in
this case, and should not be so easily and conveniently ignored and set
aside. It would be a contradiction to claim that the tax liabilities of PNOC
and PNB are self-assessed and, at the same time, BIR-assessed; when it is
clear and simple that it had been the BIR that conducted the assessment
and determined the tax liabilities of PNOC and PNB.

That the BIR-assessed tax liability should be differentiated from a selfassessed one, is supported by the provisions of RR No. 17-86 on the basis
for computing the amount of compromise payment. Note that where tax
liabilities are self-assessed, the compromise payment shall be computed
based on the tax return filed by the taxpayer.66 On the other hand, where
the BIR already issued an assessment, the compromise payment shall be
computed based on the tax due on the assessment notice.67

For instances where the BIR had already issued an assessment against the
taxpayer, the tax liability could still be compromised under E.O. No. 44 only
if: (1) the assessment had been final and executory on or before 31
December 1985 and, therefore, considered a delinquent account as of said
date;68 or (2) the assessment had been disputed or protested on or before
31 December 1985.69

RMO No. 39-86, which provides the guidelines for the implementation of
E.O. No. 44, does mention different types of assessments that may be
compromised under said statute (i.e., jeopardy assessments, arbitrary
assessments, and tax assessments of doubtful validity). RMO No. 39-86
may not have expressly stated any qualification for these particular types
of assessments; nonetheless, E.O. No. 44 specifically refers only to
assessments that were delinquent or disputed as of 31 December 1985.

E.O. No. 44 and all BIR issuances to implement said statute should be
interpreted so that they are harmonized and consistent with each other.
Accordingly, this Court finds that the different types of assessments
mentioned in RMO No. 39-86 would still have to qualify as delinquent
accounts or disputed assessments as of 31 Dcember 1985, so that they
could be compromised under E.O. No. 44.

The BIR had first written to PNOC on 08 August 1986, demanding payment
of the income tax on the interest earnings and/or yields from PNOC's
money placements with PNB from 15 October 1984 to 15 October 1986.
This demand letter could be regarded as the first assessment notice
against PNOC.

Such an assessment, issued only on 08 August 1986, could not have been
final and executory as of 31 December 1985 so as to constitute a
delinquent account. Neither was the assessment against PNOC an
assessment that could have been disputed or protested on or before 31
December 1985, having been issued on a later date.

Given that PNOC's tax liability did not constitute a delinquent account or a
disputed assessment as of 31 December 1985, then it could not be
compromised under E.O. No. 44.

The assessment against PNOC, instead, was more appropriately covered by

Revenue Memorandum Circular (RMC) No. 31-86. RMC No. 31-86 clarifies
the scope of availment of the tax amnesty under E.O. No. 4170 and
compromise payments on delinquent accounts and disputed assessments
under E.O. No. 44. The third paragraph of RMC No. 31-86 reads:

[T]axpayers against whom assessments had been issued from January 1 to

August 21, 1986 may settle their tax liabilities by way of compromise
under Section 246 of the Tax Code as amended by paying 30% of the basic
assessment excluding surcharge, interest, penalties and other increments
thereto.

The above-quoted paragraph supports the position that only assessments

that were disputed or that were final and executory by 31 December 1985
could be the subject of a compromise under E.O. No. 44. Assessments
issued between 01 January to 21 August 1986 could still be compromised
by payment of 30% of the basic tax assessed, not anymore pursuant to
E.O. No. 44, but pursuant to Section 246 of the NIRC of 1977, as amended.

Section 246 of the NIRC of 1977, as amended, granted the BIR

Commissioner the authority to compromise the payment of any internal
revenue tax under the following circumstances: (1) there exists a
reasonable doubt as to the validity of the claim against the taxpayer; or (2)
the financial position of the taxpayer demonstrates a clear inability to pay
the assessed tax.71

There are substantial differences in circumstances under which

compromises may be granted under Section 246 of the NIRC of 1977, as
amended, and E.O. No. 44. Although PNOC and PNB have extensively
argued their entitlement to compromise under E.O. No. 44, neither of them
has alleged, much less, has presented any evidence to prove that it may
compromise its tax liability under Section 246 of the NIRC of 1977, as
amended.

B. The tax liability of PNB as withholding agent also did not qualify for
compromise under E.O. No. 44.

Before proceeding any further, this Court reconsiders the conclusion made
by BIR Commissioner Ong in his demand letter, dated 16 January 1991,

that the compromise settlement executed between the BIR and PNOC was
without legal basis because withholding taxes were not actually taxes that
could be compromised, but a penalty for PNB's failure to withhold and for
which it was made personally liable.

E.O. No. 44 covers disputed or delinquency cases where the person

assessed was himself the taxpayer rather than a mere agent.72 RMO No.
39-86 expressly allows a withholding agent, who failed to withhold the
required tax because of neglect, ignorance of the law, or his belief that he
was not required by law to withhold tax, to apply for a compromise
settlement of his withholding tax liability under E.O. No. 44. A withholding
agent, in such a situation, may compromise the withholding tax
assessment against him precisely because he is being held directly
accountable for the tax.73

RMO No. 39-86 distinguishes between the withholding agent in the

foregoing situation from the withholding agent who withheld the tax but
failed to remit the amount to the Government. A withholding agent in the
latter situation is the one disqualified from applying for a compromise
settlement because he is being made accountable as an agent, who held
funds in trust for the Government.74

Both situations, however, involve withholding agents. The right to

compromise under these provisions should have been claimed by PNB, the
withholding agent for PNOC. The BIR held PNB personally accountable for
its failure to withhold the tax on the interest earnings and/or yields from
PNOC's money placements with PNB. The BIR sent a demand letter, dated
08 October 1986, addressed directly to PNB, for payment of the
withholding tax assessed against it, but PNB failed to take any action on
the said demand letter. Yet, all the offers to compromise the withholding
tax assessment came from PNOC and PNOC did not claim that it made the
offers to compromise on behalf of PNB.

Moreover, the general requirement of E.O. No. 44 still applies to

withholding agents that the withholding tax liability must either be a
delinquent account or a disputed assessment as of 31 December 1985 to
qualify for compromise settlement. The demand letter against PNB, which
also served as its assessment notice, had been issued on 08 October 1986
or two months later than PNOC's. PNB's withholding tax liability could not
be considered a delinquent account or a disputed assessment, as defined
under RR No. 17-86, for the same reasons that PNOC's tax liability did not

constitute as such. The tax liability of PNB, therefore, was also not eligible
for compromise settlement under E.O. No. 44.

C. Even assuming arguendo that PNOC and/or PNB qualified under E.O. No.
44, their application for compromise was filed beyond the deadline.

Despite already ruling that the tax liabilities of PNOC and PNB could not be
compromised under E.O. No. 44, this Court still deems it necessary to
discuss the finding of the CTA that the compromise agreement had been
filed beyond the effectivity of E.O. No. 44, since the CTA made a
declaration in relation thereto that paragraph 2 of RMO No. 39-86 was null
and void for unduly extending the effectivity of E.O. No. 44.

Paragraph 2 of RMO No. 39-86 provides that:

2. Period for availment. Filing of application for compromise settlement

under the said law shall be effective only until March 31, 1987.
Applications filed on or before this date shall be valid even if the payment
or payments of the compromise amount shall be made after the said date,
subject, however, to the provisions of Executive Order No. 44 and its
implementing Revenue Regulations No. 17-86.

It is well-settled in this jurisdiction that administrative authorities are

vested with the power to make rules and regulations because it is
impracticable for the lawmakers to provide general regulations for various
and varying details of management. The interpretation given to a rule or
regulation by those charged with its execution is entitled to the greatest
weight by the court construing such rule or regulation, and such
interpretation will be followed unless it appears to be clearly unreasonable
or arbitrary.75

RMO No. 39-86, particularly paragraph 2 thereof, does not appear to be

unreasonable or arbitrary. It does not unduly expand the coverage of E.O.
No. 44 by merely providing that applications for compromise filed until 31
March 1987 are still valid, even if payment of the compromised amount is
made on a later date.

It cannot be expected that the compromise allowed under E.O. No. 44 can
be automatically granted upon mere filing of the application by the
taxpayer. Irrefutably, the applications would still have to be processed by
the BIR to determine compliance with the requirements of E.O. No. 44. As
it is uncontested that a taxpayer could still file an application for
compromise on 31 March 1987, the very last day of effectivity of E.O. No.
44, it would be unreasonable to expect the BIR to process and approve the
taxpayer's application within the same date considering the volume of
applications filed and pending approval, plus the other matters the BIR
personnel would also have to attend to. Thus, RMO No. 39-86 merely
assures the taxpayers that their applications would still be processed and
could be approved on a later date. Payment, of course, shall be made by
the taxpayer only after his application had been approved and the
compromised amount had been determined.

Given that paragraph 2 of RMO No. 39-86 is valid, the next question that
needs to be addressed is whether PNOC had been able to submit an
application for compromise on or before 31 March 1987 in compliance
thereof. Although the compromise agreement was executed only on 22
June 1987, PNOC is claiming that it had already written a letter to the BIR,
as early as 25 September 1986, offering to compromise its tax liability, and
that the said letter should be considered as PNOC's application for
compromise settlement.

A perusal of PNOC's letter, dated 25 September 1986, would reveal,

however, that the terms of its proposed compromise did not conform to
those authorized by E.O. No. 44. PNOC did not offer to pay outright 30%
of the basic tax assessed against it as required by E.O. No. 44; and instead,
made the following offer:

(2) That PNOC be permitted to set-off its foregoing mentioned tax liability
of P304,419,396.83 against the tax refund/credit claims of the National
Power Corporation (NPC) for specific taxes on fuel oil sold to NPC totaling
P335,259,450.21, which tax refunds/credits are actually receivable
accounts of our Company from NPC.76

PNOC reiterated the offer in its letter to the BIR, dated 14 October 1986.77
The BIR, in its letters to PNOC, dated 8 October 198678 and 11 November
1986,79 consistently denied PNOC's offer because the claim for tax
refund/credit of NAPOCOR was still under process, so that the offer to setoff such claim against PNOC's tax liability was premature.

Furthermore, E.O. No. 44 does not contemplate compromise payment by

set-off of a tax liability against a claim for tax refund/credit. Compromise
under E.O. No. 44 may be availed of only in the following circumstances:

SEC. 3. Who may avail. Any person, natural or juridical, may settle thru a
compromise any delinquent account or disputed assessment which has
been due as of December 31, 1985, by paying an amount equal to thirty
percent (30%) of the basic tax assessed.

SEC. 6. Mode of Payment. Upon acceptance of the proposed

compromise, the amount offered as compromise in complete settlement of
the delinquent account shall be paid immediately in cash or manager's
certified check.

Deferred or staggered payments of compromise amounts over P50,000

may be considered on a case to case basis in accordance with the extant
regulations of the Bureau upon approval of the Commissioner of Internal
Revenue, his Deputy or Assistant as delineated in their respective
jurisdictions.

If the Compromise amount is not paid as required herein, the compromise

agreement is automatically nullified and the delinquent account reverted
to the original amount plus the statutory increments, which shall be
collected thru the summary and/or judicial processes provided by law.

E.O. No. 44 is not for the benefit of the taxpayer alone, who can extinguish
his tax liability by paying the compromise amount equivalent to 30% of the
basic tax. It also benefits the Government by making collection of
delinquent accounts and disputed assessments simpler, easier, and faster.
Payment of the compromise amount must be made immediately, in cash or
in manager's check. Although deferred or staggered payments may be
allowed on a case-to-case basis, the mode of payment remains unchanged,
and must still be made either in cash or in manager's check.

PNOC's offer to set-off was obviously made to avoid actual cash-out by the
company. The offer defeated the purpose of E.O. No. 44 because it would
not only delay collection, but more importantly, it would not guarantee
collection. First of all, BIR's collection was contingent on whether the claim
for tax refund/credit of NAPOCOR would be subsequently granted. Second,
collection could not be made immediately and would have to wait until the
resolution of the claim for tax refund/credit of NAPOCOR. Third, there is no
proof, other than the bare allegation of PNOC, that NAPOCOR's claim for
tax refund/credit is an account receivable of PNOC. A possible dispute
between NAPOCOR and PNOC as to the proceeds of the tax refund/credit
would only delay collection by the BIR even further.

It was only in its letter, dated 09 June 1987, that PNOC actually offered to
compromise its tax liability in accordance with the terms and
circumstances prescribed by E.O. No. 44 and its implementing rules and
regulations, by stating that:

Consequently, we reiterate our previous request for compromise under E.O.

No. 44, and convey our preparedness to settle the subject tax assessment
liability by payment of the compromise amount of P91,003,129.89,
representing thirty percent (30%) of the basic tax assessment of
P303,343,766.29, in accordance with E.O. No. 44 and its implementing BIR
Revenue Memorandum Order No. 39-86.80

PNOC claimed in the same letter that it had previously requested for a
compromise under the terms of E.O. No. 44, but this Court could not find
evidence of such previous request. There are stark and substantial
differences in the terms of PNOC's offer to compromise in its earlier letters,
dated 25 September 1986 and 14 October 1986 (set-off of the entire
amount of its tax liability against the claim for tax refund/credit of
NAPOCOR), to those in its letter, dated 09 June 1987 (payment of the
compromise amount representing 30% of the basic tax assessed against
it), making it difficult for this Court to accept that the letter of 09 June 1987
merely reiterated PNOC's offer to compromise in its earlier letters.

This Court likewise cannot give credence to PNOC's allegation that

beginning 25 September 1986, the date of its first letter to the BIR, there
were continuing negotiations between PNOC and BIR that culminated in
the compromise agreement on 22 June 1987. Aside from the exchange of
letters recounted in the preceding paragraphs, both PNOC and PNB failed
to present any other proof of the supposed negotiations.

After the BIR denied the second offer of PNOC to set-off its tax liability
against the claim for tax refund/credit of NAPOCOR in a letter, dated 11
November 1986, there is no other evidence of subsequent communication
between PNOC and the BIR. It was only after almost seven months, or on
09 June 1987, that PNOC again wrote a letter to the BIR, this time offering
to pay the compromise amount of 30% of the basic tax assessed against.
This letter was already filed beyond 31 March 1987, after the lapse of the
effectivity of E.O. No. 44 and the deadline for filing applications for
compromise under the said statute.

Evidence of meetings between PNOC and the BIR, or any other form of
communication, wherein the parties presented their offer and counter-offer
to the other, would have been very valuable in explaining and supporting
BIR Commissioner Tan's decision to accept PNOC's third offer to
compromise after denying the previous two. The absence of such evidence
herein negates PNOC's claim of actual negotiations with the BIR.

Therefore, even assuming arguendo that the tax liabilities of PNOC and
PNB qualify as delinquent accounts or disputed assessments as of 31
December 1985, the application for compromise filed by PNOC on 09 June
1987, and accepted by then BIR Commissioner Tan on 22 June 1987, was
still filed way beyond 31 March 1987, the expiration date of the effectivity
of E.O. No. 44 and the deadline for filing of applications for compromise
under RMO No. 39-86.

D. The BIR Commissioner's discretionary authority to enter into a

compromise agreement is not absolute and the CTA may inquire into
allegations of abuse thereof.

The foregoing discussion supports the CTA's conclusion that the

compromise agreement between PNOC and the BIR was indeed without
legal basis. Despite this lack of legal support for the execution of the said
compromise agreement, PNB argues that the CTA still had no jurisdiction to
review and set aside the compromise agreement. It contends that the
authority to compromise is purely discretionary on the BIR Commissioner
and the courts cannot interfere with his exercise thereof.

It is generally true that purely administrative and discretionary functions

may not be interfered with by the courts; but when the exercise of such

functions by the administrative officer is tainted by a failure to abide by the

command of the law, then it is incumbent on the courts to set matters
right, with this Court having the last say on the matter.81

The manner by which BIR Commissioner Tan exercised his discretionary

power to enter into a compromise was brought under the scrutiny of the
CTA amidst allegations of "grave abuse of discretion and/or whimsical
exercise of jurisdiction."82 The discretionary power of the BIR
Commissioner to enter into compromises cannot be superior over the
power of judicial review by the courts.

The discretionary authority to compromise granted to the BIR

Commissioner is never meant to be absolute, uncontrolled and
unrestrained. No such unlimited power may be validly granted to any
officer of the government, except perhaps in cases of national
emergency.83 In this case, the BIR Commissioner's authority to
compromise, whether under E.O. No. 44 or Section 246 of the NIRC of
1977, as amended, can only be exercised under certain circumstances
specifically identified in said statutes. The BIR Commissioner would have
to exercise his discretion within the parameters set by the law, and in case
he abuses his discretion, the CTA may correct such abuse if the matter is
appealed to them.84

Petitioners PNOC and PNB both contend that BIR Commissioner Tan merely
exercised his authority to enter into a compromise specially granted by
E.O. No. 44. Since this Court has already made a determination that the
compromise agreement did not qualify under E.O. No. 44, BIR
Commissioner Tan's decision to agree to the compromise should have been
reviewed in the light of the general authority granted to the BIR
Commissioner to compromise taxes under Section 246 of the NIRC of 1977,
as amended. Then again, petitioners PNOC and PNB failed to allege, much
less present evidence, that BIR Commissioner Tan acted in accordance with
Section 246 of the NIRC of 1977, as amended, when he entered into the
compromise agreement with PNOC.

E. The CTA may set aside a compromise agreement that is contrary to law
and public policy.

PNB also asserts that the CTA had no jurisdiction to set aside a compromise
agreement entered into in good faith. It relies on the decision of this Court

in Republic v. Sandiganbayan85 that a compromise agreement cannot be

set aside merely because it is too one-sided. A compromise agreement
should be respected by the courts as the res judicata between the parties
thereto.

This Court, though, finds that there are substantial differences in the
factual background of Republic v. Sandiganbayan and the present case.

The compromise agreement executed between the Presidential

Commission on Good Government (PCGG) and Roberto S. Benedicto in
Republic v. Sandiganbayan was judicially approved by the Sandiganbayan.
The Sandiganbayan had ample opportunity to examine the validity of the
compromise agreement since two years elapsed from the time the
agreement was executed up to the time it was judicially approved. This
Court even stated in the said case that, "We are not dealing with the usual
compromise agreement perfunctorily submitted to a court and approved as
a matter of course. The PCGG-Benedicto agreement was thoroughly and, at
times, disputatiously discussed before the respondent court. There could
be no deception or misrepresentation foisted on either the PCGG or the
Sandiganbayan."86

In addition, the new PCGG Chairman originally prayed for the renegotiation of the compromise agreement so that it could be more just,
fair, and equitable, an action considered by this Court as an implied
admission that the agreement was not contrary to law, public policy or
morals nor was there any circumstance which had vitiated consent.87

The above-mentioned circumstances strongly supported the validity of the

compromise agreement in Republic v. Sandiganbayan, which was why this
Court refused to set it aside. Unfortunately for the petitioners in the
present case, the same cannot be said herein.

The Court of Appeals, in upholding the jurisdiction of the CTA to set aside
the compromise agreement, ruled that:

We are unable to accept petitioner's submissions. Its formulation of the

issues on CIR and CTA's lack of jurisdiction to disturb a compromise
agreement presupposes a compromise agreement validly entered into by
the CIR and not, when as in this case, it was indubitably shown that the

supposed compromise agreement is without legal support. In case of

arbitrary or capricious exercise by the Commissioner or if the proceedings
were fatally defective, the compromise can be attacked and reversed
through the judicial process (Meralco Securities Corporation v. Savellano,
117 SCRA 805, 812 [1982]; Sarah E. Ramsay, et. al. v. U.S. 21 Ct. C1 443,
aff'd 120 U.S. 214, 30 L. Ed. 582; Tyson v. U.S., 39 F. Supp. 135 cited in
page 18 of decision) .88

Although the general rule is that compromises are to be favored, and that
compromises entered into in good faith cannot be set aside,89 this rule is
not without qualification. A court may still reject a compromise or
settlement when it is repugnant to law, morals, good customs, public
order, or public policy.90

The compromise agreement between the BIR and PNOC was contrary to
law having been entered into by BIR Commissioner Tan in excess or in
abuse of the authority granted to him by legislation. E.O. No. 44 and the
NIRC of 1977, as amended, had identified the situations wherein the BIR
Commissioner may compromise tax liabilities, and none of these situations
existed in this case.

The compromise, moreover, was contrary to public policy. The primary

duty of the BIR is to collect taxes, since taxes are the lifeblood of the
Government and their prompt and certain availability are imperious
needs.91 In the present case, however, BIR Commissioner Tan, by entering
into the compromise agreement that was bereft of any legal basis, would
have caused the Government to lose almost P300 million in tax revenues
and would have deprived the Government of much needed monetary
resources.

Allegations of good faith and previous execution of the terms of the

compromise agreement on the part of PNOC would not be enough for this
Court to disregard the demands of law and public policy. Compromise may
be the favored method to settle disputes, but when it involves taxes, it
may be subject to closer scrutiny by the courts. A compromise agreement
involving taxes would affect not just the taxpayer and the BIR, but also the
whole nation, the ultimate beneficiary of the tax revenues collected.

F. The Government cannot be estopped from collecting taxes by the

mistake, negligence, or omission of its agents.

The new BIR Commissioner, Commissioner Ong, had acted well within his
powers when he set aside the compromise agreement, dated 22 June
1987, after finding that the said compromise agreement was without legal
basis. When he took over from his predecessor, there was still a pending
motion for reconsideration of the said compromise agreement, filed by
private respondent Savellano on 24 March 1988. To resolve the said
motion, he reviewed the compromise agreement and, thereafter, came
upon the conclusion that it did not comply with E.O. No. 44 and its
implementing rules and regulations.

It had been declared by this Court in Hilado v. Collector of Internal

Revenue, et al.,92 that an administrative officer, such as the BIR
Commissioner, may revoke, repeal or abrogate the acts or previous rulings
of his predecessor in office. The construction of a statute by those
administering it is not binding on their successors if, thereafter, the latter
becomes satisfied that a different construction should be given.

It is evident in this case that the new BIR Commissioner, Commissioner

Ong, construed E.O. No. 44 and its implementing rules and regulations
differently from that of his predecessor, former Commissioner Tan, which
led to Commissioner Ong's revocation of the BIR approval of the
compromise agreement, dated 22 June 1987. Such a revocation was only
proper considering that the former BIR Commissioner's decision to approve
the said compromise agreement was based on the erroneous construction
of the law (i.e., E.O. No. 44 and its implementing rules and regulations) and
should not give rise to any vested right on PNOC.93

Furthermore, approval of the compromise agreement and acceptance of

the compromise payment by his predecessor cannot estop BIR
Commissioner Ong from setting aside the compromise agreement, dated
22 June 1987, for lack of legal basis; and from demanding payment of the
deficiency withholding tax from PNB. As a general rule, the Government
cannot be estopped from collecting taxes by the mistake, negligence, or
omission of its agents94 because:

. . . Upon taxation depends the Government ability to serve the people for
whose benefit taxes are collected. To safeguard such interest, neglect or
omission of government officials entrusted with the collection of taxes
should not be allowed to bring harm or detriment to the people, in the
same manner as private persons may be made to suffer individually on

account of his own negligence, the presumption being that they take good
care of their personal affairs. This should not hold true to government
officials with respect to matters not of their own personal concern. This is
the philosophy behind the government's exception, as a general rule, from
the operation of the principle of estoppel. (Republic vs. Caballero, L-27437,
September 30, 1977, 79 SCRA 177; Manila Lodge No. 761, Benevolent and
Protective Order of the Elks, Inc. vs. Court of Appeals, L-41001, September
30, 1976, 73 SCRA 162; Sy vs. Central Bank of the Philippines, L-41480,
April 30, 1976, 70 SCRA 571; Balmaceda vs. Corominas & Co., Inc., 66
SCRA 553; Auyong Hian vs. Court of Tax Appeals, 59 SCRA 110; Republic
vs. Philippine Rabbit Bus Lines, Inc., 66 SCRA 553; Republic vs. Philippine
Long Distance Telephone Company, L-18841, January 27, 1969, 26 SCRA
620; Zamora vs. Court of Tax Appeals, L-23272, November 26, 1970, 36
SCRA 77; E. Rodriguez, Inc. vs. Collector of Internal Revenue, L-23041, July
31, 1969, 28 SCRA 119).95

III

Finality of the Tax Assessment

A. The issue on whether the BIR complied with the notice requirements
under RR No. 12-85 is raised for the first time on appeal and should not be
given due course.

PNB, in another effort to block the collection of the deficiency withholding

tax, this time raises doubts as to the validity of the deficiency withholding
tax assessment issued against it on 16 January 1991. It submits that the
BIR failed to comply with the notice requirements set forth in RR No. 1285.96

Whether or not the BIR complied with the notice requirements of RR No.
12-85 is a new issue raised by PNB only before this Court. Such a question
has not been ventilated before the lower courts. For an appellate tribunal
to consider a legal question, it should have been raised in the court
below.97 If raised earlier, the matter would have been seriously delved into
by the CTA and the Court of Appeals.98

B. The assessment against PNB had become final and unappealable, and
therefore, enforceable.

The CTA and the Court of Appeals declared as final and unappealable, and
thus, enforceable, the assessment against PNB, dated 16 January 1991,
since PNB failed to protest said assessment within the 30-day prescribed
period. This Court, though, finds that the significant BIR assessment, as far
as this case is concerned, should be the one issued by the BIR against PNB
on 08 October 1986.

The BIR issued on 08 October 1986 an assessment against PNB for its
withholding tax liability on the interest earnings and/or yields from PNOC's
money placements with the bank. It had 30 days from receipt to protest
the BIR's assessment.99 PNB, however, did not take any action as to the
said assessment so that upon the lapse of the period to protest, the
withholding tax assessment against it, dated 8 October 1986, became final
and unappealable, and could no longer be disputed.100 The courts may
therefore order the enforcement of this assessment.

It is the enforcement of this BIR assessment against PNB, dated 08 October

1986, that is in issue in the instant case. If the compromise agreement is
valid, it would effectively bar the BIR from enforcing the assessment and
collecting the assessed tax; on the other hand, if the compromise
agreement is void, then the courts can order the BIR to enforce the
assessment and collect the assessed tax.

As has been previously discussed by this Court, the BIR demand letter,
dated 16 January 1991, is not a new assessment against PNB. It only
demanded from PNB the payment of the balance of the withholding tax
assessed against it on 08 October 1986. The same demand letter also has
no substantial effect or impact on the resolution of the present case. It is
already unnecessary and superfluous, having been issued by the BIR when
CTA Case No. 4249 was already pending before the CTA. At best, the
demand letter, dated 16 January 1991, constitute a useful reference for the
courts in computing the balance of PNB's tax liability, after applying as
partial payment thereon the amount previously received by the BIR from
PNOC pursuant to the compromise agreement.

IV

Prescription

A. The defense of prescription was never raised by petitioners PNOC and

PNB, and should be considered waived.

The dissenting opinion takes the position that the right of the BIR to assess
and collect income tax on the interest earnings and/or yields from PNOC's
money placements with PNB, particularly for taxable year 1985, had
already prescribed, based on Section 268 of the NIRC of 1977, as
amended.

Section 268 of the NIRC of 1977, as amended, provides a three-year period

of limitation for the assessment and collection of internal revenue taxes,
which begins to run after the last day prescribed for filing of the return.101

The dissenting opinion points out that more than four years have elapsed
from 25 January 1986 (the last day prescribed by law for PNB to file its
withholding tax return for the fourth quarter of 1985) to 16 January 1991
(the date when the alleged final assessment of PNB's tax liability was
issued).

The issue of prescription, however, was brought up only in the dissenting

opinion and was never raised by PNOC and PNB in the proceedings before
the BIR nor in any of their pleadings submitted to the CTA and the Court of
Appeals.

Section 1, Rule 9 of the Rules of Civil Procedure lays down the rule on
defenses and objections not pleaded, and reads:

SECTION 1. Defenses and objections not pleaded. Defenses and

objections not pleaded either in a motion to dismiss or in the answer are
deemed waived. However, when it appears from the pleadings or the
evidence on record that the court has no jurisdiction over the subject
matter, that there is another action pending between the parties for the
same cause, or that the action is barred by prior judgment or by the
statute of limitations, the court shall dismiss the claim.

The general rule enunciated in the above-quoted provision governs the

present case, that is, the defense of prescription, not pleaded in a motion
to dismiss or in the answer, is deemed waived. The exception in same
provision cannot be applied herein because the pleadings and the evidence
on record do not sufficiently show that the action is barred by prescription.

It has been consistently held in earlier tax cases that the defense of
prescription of the period for the assessment and collection of tax liabilities
shall be deemed waived when such defense was not properly pleaded and
the facts alleged and evidences submitted by the parties were not
sufficient to support a finding by this Court on the matter.102 In Querol v.
Collector of Internal Revenue,103 this Court pronounced that prescription,
being a matter of defense, imposes the burden on the taxpayer to prove
that the full period of the limitation has expired; and this requires him to
positively establish the date when the period started running and when the
same was fully accomplished.

In making its conclusion that the assessment and collection in this case
had prescribed, the dissenting opinion took liberties to assume the
following facts even in the absence of allegations and evidences to the
effect that: (1) PNB filed returns for its withholding tax obligations for
taxable year 1985; (2) PNB reported in the said returns the interest
earnings of PNOC's money placements with the bank; and (3) that the
returns were filed on or before the prescribed date, which was 25 January
1986.

It is not safe to adopt the first and second assumptions in this case
considering that Section 269 of the NIRC of 1977, as amended, provides for
a different period of limitation for assessment and collection of taxes in
case of false or fraudulent return or for failure to file a return. In such
cases, the BIR is given 10 years after discovery of the falsity, fraud, or
omission within which to make an assessment.104

It is also not safe to accept the third assumption since there can be a
possibility that PNB filed the withholding tax return later than the
prescribed date, in which case, following the dictates of Section 268 of the
NIRC of 1977, as amended, the three-year prescriptive period shall be
counted from the date the return was actually filed.105

PNB's withholding tax returns for taxable year 1985, duly received by the
BIR, would have been the best evidence to prove actual filing, the date of
filing and the contents thereof. These facts are relevant in determining
which prescriptive period should apply, and when such prescriptive period
should begin to run and when it had lapsed. Yet, the pleadings did not
refer to any return, and no return was made part of the records of the
present case.

This Court could not make a proper ruling on the matter of prescription on
the mere basis of assumptions; such an issue should have been properly
raised, argued, and supported by evidences submitted by the parties
themselves before the BIR and the courts below.

B. Granting that this Court can take cognizance of the defense of

prescription, this Court finds that the assessment of the withholding tax
liability against PNOC and collection of the tax assessed were done within
the prescriptive period.

Assuming, for the sake of argument, that this Court can give due course to
the defense of prescription, it finds that the assessment against PNB for its
withholding tax liability for taxable year 1985 and the collection of the tax
assessed therein were accomplished within the prescribed periods for
assessment and collection under the NIRC of 1977, as amended.

If this Court adopts the assumption made by the dissenting opinion that
PNB filed its withholding tax return for the last quarter of 1985 on 25
January 1986, then the BIR had until 24 January 1989 to assess PNB. The
original assessment against PNB was issued as early as 08 October 1986,
well-within the three-year prescriptive period for making the assessment as
prescribed by the following provisions of the NIRC of 1977, as amended:

SEC. 268. Period of limitation upon assessment and collection. Except as

provided in the succeeding section, internal revenue taxes shall be
assessed within three years after the last day prescribed by law for the
filing of the return, and no proceeding in court without assessment for the
collection of such taxes shall be begun after the expiration of such period

SEC. 269. Exceptions as to period of limitation of assessment and

collection of taxes.

WHEREFORE, in view of the foregoing, petitioner respectfully prays that the

compromise agreement of June 22, 1987 be reviewed and declared null
and void, and that this Court directs:

(c) Any internal revenue tax which has been assessed within the period of
limitation above-prescribed may be collected by distraint or levy or by a
proceeding in court within three years following the assessment of the tax.

a) respondent Commissioner to enforce and collect and respondents PNB

and/or PNOC to pay in a joint and several capacity, the total tax liability of
P387,987,785.73, plus interests from 31 October 1986; and

Sections 268 and 269(c) of the NIRC of 1977, as amended, should be read
in conjunction with one another. Section 268 requires that assessment be
made within three years from the last day prescribed by law for the filing of
the return. Section 269(c), on the other hand, provides that when an
assessment is issued within the prescribed period provided in Section 268,
the BIR has three years, counted from the date of the assessment, to
collect the tax assessed either by distraint, levy or court action. Therefore,
when an assessment is timely issued in accordance with Section 268, the
BIR is given another three-year period, under Section 269(c), within which
to collect the tax assessed, reckoned from the date of the assessment.

b) respondent Commissioner to pay unto petitioner, as informer's reward,

15% of the tax liability collected under clause (a) hereof.

In the case of PNB, an assessment was issued against it by the BIR on 08

October 1986, so that the BIR had until 07 October 1989 to enforce it and
to collect the tax assessed. The filing, however, by private respondent
Savellano of his Amended Petition for Review before the CTA on 02 July
1988 already constituted a judicial action for collection of the tax assessed
which stops the running of the three-year prescriptive period for collection
thereof.

A judicial action for the collection of a tax may be initiated by the filing of a
complaint with the proper regular trial court; or where the assessment is
appealed to the CTA, by filing an answer to the taxpayer's petition for
review wherein payment of the tax is prayed for.106

The present case is unique, however, because the Petition for Review was
filed by private respondent Savellano, the informer, against the BIR, PNOC,
and PNB. The BIR, the collecting government agency; PNOC, the taxpayer;
and PNB, the withholding agent, initially found themselves on the same
side. The prayer in the Amended Petition for Review of private respondent
Savellano reads:

Other equitable reliefs under the premises are likewise prayed for.107
(Underscoring ours.)

Private respondent Savellano, in his Amended Petition for Review in CTA

Case No. 4249, prayed for (1) the CTA to direct the BIR Commissioner to
enforce and collect the tax, and (2) PNB and/or PNOC to pay the tax
making CTA Case No. 4249 a collection case. That the Amended Petition
for Review was filed by the informer and not the taxpayer; and that the
prayer for the enforcement of the tax assessment and payment of the tax
was also made by the informer, not the BIR, should not affect the nature of
the case as a judicial action for collection. In case the CTA grants the
Petition and the prayer therein, as what has happened in the present case,
the ultimate result would be the collection of the tax assessed.
Consequently, upon the filing of the Amended Petition for Review by
private respondent Savellano, judicial action for collection of the tax had
been initiated and the running of the prescriptive period for collection of
the said tax was terminated.

Supposing that CTA Case No. 4249 is not a collection case which stops the
running of the prescriptive period for the collection of the tax, CTA Case
No. 4249, at the very least, suspends the running of the said prescriptive
period. Under Section 271 of the NIRC of 1977, as amended, the running
of the prescriptive period to collect deficiency taxes shall be suspended for
the period during which the BIR Commissioner is prohibited from beginning
a distraint or levy or instituting a proceeding in court, and for 60 days
thereafter.108 Just as in the cases of Republic v. Ker & Co., Ltd.109 and
Protector's Services, Inc. v. Court of Appeals,110 this Court declares herein
that the pendency of the present case before the CTA, the Court of Appeals
and this Court, legally prevents the BIR Commissioner from instituting an

action for collection of the same tax liabilities assessed against PNOC and
PNB in the CTA or the regular trial courts. To rule otherwise would be to
violate the judicial policy of avoiding multiplicity of suits and the rule on lis
pendens.

PNOC insists that private respondent Savellano is not entitled to additional

informer's reward because there was no voluntary payment of the
withholding tax liability. PNOC, however, fails to state any legal basis for
its argument.

Once again, that CTA Case No. 4249 was initiated by private respondent
Savellano, the informer, instead of PNOC, the taxpayer, or PNB, the
withholding agent, would not prevent the suspension of the running of the
prescriptive period for collection of the tax. What is controlling herein is
the fact that the BIR Commissioner cannot file a judicial action in any other
court for the collection of the tax because such a case would necessarily
involve the same parties and involve the same issues already being
litigated before the CTA in CTA Case No. 4249. The three-year prescriptive
period for collection of the tax shall commence to run only after the
promulgation of the decision of this Court in which the issues of the
present case are resolved with finality.

Section 316(1) of the NIRC of 1977, as amended, granted a reward to an

informer equivalent to 15% of the revenues, surcharges, or fees recovered,
plus, any fine or penalty imposed and collected.111 The provision was
clear and uncomplicated an informer was entitled to a reward of 15% of
the total amount actually recovered or collected by the BIR based on his
information. The provision did not make any distinction as to the manner
the tax liability was collected whether it was through voluntary payment
by the taxpayer or through garnishment of the taxpayer's property.
Applicable herein is another well-known maxim in statutory construction
Ubi lex non distinguit nec nos distinguere debemos when the law does
not distinguish, we should not distinguish.112

Whether the filing of the Amended Petition for Review by private

respondent Savellano entirely stops or merely suspends the running of the
prescriptive period for collection of the tax, it had been premature for the
BIR Commissioner to issue a writ of garnishment against PNB on 12 August
1991 and for the Central Bank of the Philippines to debit the account of
PNB on 02 September 1992 pursuant to the said writ, because the case
was by then, pending review by the Court of Appeals. However, since this
Court already finds that the compromise agreement is without force and
effect and hereby orders the enforcement of the assessment against PNB,
then, any issue or controversy arising from the premature garnishment of
PNB's account and collection of the tax by the BIR has become moot and
academic at this point.

Pursuant to the writ of garnishment issued by the BIR, the Central Bank
issued a debit advice against the demand deposit account of PNB with the
Central Bank for the amount of P294,958,450.73, and credited the same
amount to the demand deposit account of the Treasurer of the Republic of
the Philippines. The Treasurer of the Republic, in turn, already issued a
journal voucher transferring P294,958,450.73 to the account of the BIR.

Since the BIR had already collected P294,958,450.73 from PNB through the
execution of the writ of garnishment over PNB's deposit with the Central
Bank, then private respondent Savellano should be awarded 15% thereof
as reward since the said collection could still be traced to the information
he had given.

Additional Informer's Reward

Private respondent Savellano is entitled to additional informer's reward

since the BIR had already collected the full amount of the tax assessment
against PNB.

WHEREFORE, in view of the foregoing, the Petitions of PNOC and PNB in

G.R. No. 109976 and G.R. No. 112800, respectively, are hereby DENIED.
This Court AFFIRMS the assailed Decisions of the Court of Appeals in CAG.R. SP No. 29583 and CA-G.R. SP No. 29526, which affirmed the decision
of the CTA in CTA Case No. 4249, with modifications, to wit:

(1) The compromise agreement between PNOC and the BIR, dated 22
June 1987, is declared void for being contrary to law and public policy, and
is without force and effect;

(2)Paragraph 2 of RMO No. 39-86 remains a valid provision of the

regulation;

(3)The withholding tax assessment against PNB, dated 08 October 1986,

had become final and unappealable. The BIR Commissioner is ordered to
enforce the said assessment and collect the amount of P294,958,450.73,
the balance of tax assessed after crediting the previous payment made by
PNOC pursuant to the compromise agreement, dated 22 June 1987; and

(4) Private respondent Savellano shall be paid the remainder of his

informer's reward, equivalent to 15% of the deficiency withholding tax
ordered collected herein, or P 44,243,767.61.

DECISION
DAVIDE, JR., J.:

These two consolidated cases stemmed from a complaint[1] filed against

the Development Bank of the Philippines (hereafter DBP) and Agripina
Caperal filed by Lydia Cuba (hereafter CUBA) on 21 May 1985 with the
Regional Trial Court of Pangasinan, Branch 54. The said complaint sought
(1) the declaration of nullity of DBPs appropriation of CUBAs rights, title,
and interests over a 44-hectare fishpond located in Bolinao, Pangasinan,
for being violative of Article 2088 of the Civil Code; (2) the annulment of
the Deed of Conditional Sale executed in her favor by DBP; (3) the
annulment of DBPs sale of the subject fishpond to Caperal; (4) the
restoration of her rights, title, and interests over the fishpond; and (5) the
recovery of damages, attorneys fees, and expenses of litigation.

SO ORDERED.

Quisumbing, Sandoval-Gutierrez, Austria-Martinez, Callejo, Sr., and Garcia,

JJ., concur.
Davide, Jr., C.J., Corona, and Carpio-Morales, joins J. Carpio in his dissenting
opinion.
Puno, and Panganiban, J., concurs with the majority and the separate
opinion of J. Tinga.
Ynares-Santiago, J., no part.
Carpio, J., see dissenting opinion.
Azcuna, J., no partwas PNB Chairman in 1991.

After the joinder of issues following the filing by the parties of their
respective pleadings, the trial court conducted a pre-trial where CUBA and
DBP agreed on the following facts, which were embodied in the pre-trial
order:[2]

1. Plaintiff Lydia P. Cuba is a grantee of a Fishpond Lease Agreement No.

2083 (new) dated May 13, 1974 from the Government;

2. Plaintiff Lydia P. Cuba obtained loans from the Development Bank of the
Philippines in the amounts of P109,000.00; P109,000.00; and P98,700.00
under the terms stated in the Promissory Notes dated September 6, 1974;
August 11, 1975; and April 4, 1977;

Tinga, J., see separate concurring opinion.

3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of
Assignment of her Leasehold Rights;
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. COURT OF
APPEALS and LYDIA CUBA, respondents.
[G.R. No. 118367. January 5, 1998]

LYDIA P. CUBA, petitioner, vs. COURT OF APPEALS, DEVELOPMENT BANK OF

THE PHILIPPINES and AGRIPINA P. CAPERAL, respondents.

4. Plaintiff failed to pay her loan on the scheduled dates thereof in

accordance with the terms of the Promissory Notes;

5. Without foreclosure proceedings, whether judicial or extra-judicial,

defendant DBP appropriated the Leasehold Rights of plaintiff Lydia Cuba
over the fishpond in question;

6. After defendant DBP has appropriated the Leasehold Rights of plaintiff

Lydia Cuba over the fishpond in question, defendant DBP, in turn, executed
a Deed of Conditional Sale of the Leasehold Rights in favor of plaintiff Lydia
Cuba over the same fishpond in question;

7. In the negotiation for repurchase, plaintiff Lydia Cuba addressed two

letters to the Manager DBP, Dagupan City dated November 6, 1979 and
December 20, 1979. DBP thereafter accepted the offer to repurchase in a
letter addressed to plaintiff dated February 1, 1982;

14. That the DBP thereafter executed a Deed of Conditional Sale in favor
of defendant Agripina Caperal on August 16, 1984;

15. Thereafter, defendant Caperal was awarded Fishpond Lease Agreement

No. 2083-A on December 28, 1984 by the Ministry of Agriculture and Food.

Defendant Caperal admitted only the facts stated in paragraphs 14 and 15

of the pre-trial order. [3]

Trial was thereafter had on other matters.

8. After the Deed of Conditional Sale was executed in favor of plaintiff
Lydia Cuba, a new Fishpond Lease Agreement No. 2083-A dated March 24,
1980 was issued by the Ministry of Agriculture and Food in favor of plaintiff
Lydia Cuba only, excluding her husband;

9. Plaintiff Lydia Cuba failed to pay the amortizations stipulated in the

Deed of Conditional Sale;

10. After plaintiff Lydia Cuba failed to pay the amortization as stated in
Deed of Conditional Sale, she entered with the DBP a temporary
arrangement whereby in consideration for the deferment of the Notarial
Rescission of Deed of Conditional Sale, plaintiff Lydia Cuba promised to
make certain payments as stated in temporary Arrangement dated
February 23, 1982;

11. Defendant DBP thereafter sent a Notice of Rescission thru Notarial Act
dated March 13, 1984, and which was received by plaintiff Lydia Cuba;

12. After the Notice of Rescission, defendant DBP took possession of the
Leasehold Rights of the fishpond in question;

13. That after defendant DBP took possession of the Leasehold Rights over
the fishpond in question, DBP advertised in the SUNDAY PUNCH the public
bidding dated June 24, 1984, to dispose of the property;

The principal issue presented was whether the act of DBP in appropriating
to itself CUBAs leasehold rights over the fishpond in question without
foreclosure proceedings was contrary to Article 2088 of the Civil Code and,
therefore, invalid. CUBA insisted on an affirmative resolution. DBP
stressed that it merely exercised its contractual right under the
Assignments of Leasehold Rights, which was not a contract of mortgage.
Defendant Caperal sided with DBP.

The trial court resolved the issue in favor of CUBA by declaring that DBPs
taking possession and ownership of the property without foreclosure was
plainly violative of Article 2088 of the Civil Code which provides as follows:

ART. 2088. The creditor cannot appropriate the things given by way of
pledge or mortgage, or dispose of them. Any stipulation to the contrary is
null and void.

It disagreed with DBPs stand that the Assignments of Leasehold Rights

were not contracts of mortgage because (1) they were given as security
for loans, (2) although the fishpond land in question is still a public land,
CUBAs leasehold rights and interest thereon are alienable rights which can
be the proper subject of a mortgage; and (3) the intention of the
contracting parties to treat the Assignment of Leasehold Rights as a
mortgage was obvious and unmistakable; hence, upon CUBAs default,
DBPs only right was to foreclose the Assignment in accordance with law.

The trial court also declared invalid condition no. 12 of the Assignment of
Leasehold Rights for being a clear case of pactum commissorium expressly
prohibited and declared null and void by Article 2088 of the Civil Code. It
then concluded that since DBP never acquired lawful ownership of CUBAs
leasehold rights, all acts of ownership and possession by the said bank
were void. Accordingly, the Deed of Conditional Sale in favor of CUBA, the
notarial rescission of such sale, and the Deed of Conditional Sale in favor
of defendant Caperal, as well as the Assignment of Leasehold Rights
executed by Caperal in favor of DBP, were also void and ineffective.

As to damages, the trial court found ample evidence on record that in

1984 the representatives of DBP ejected CUBA and her caretakers not only
from the fishpond area but also from the adjoining big house; and that
when CUBAs son and caretaker went there on 15 September 1985, they
found the said house unoccupied and destroyed and CUBAs personal
belongings, machineries, equipment, tools, and other articles used in
fishpond operation which were kept in the house were missing. The
missing items were valued at about P550,000. It further found that when
CUBA and her men were ejected by DBP for the first time in 1979, CUBA
had stocked the fishpond with 250,000 pieces of bangus fish (milkfish), all
of which died because the DBP representatives prevented CUBAs men
from feeding the fish. At the conservative price of P3.00 per fish, the gross
value would have been P690,000, and after deducting 25% of said value as
reasonable allowance for the cost of feeds, CUBA suffered a loss of
P517,500. It then set the aggregate of the actual damages sustained by
CUBA at P1,067,500.

The trial court further found that DBP was guilty of gross bad faith in falsely
representing to the Bureau of Fisheries that it had foreclosed its mortgage
on CUBAs leasehold rights. Such representation induced the said Bureau
to terminate CUBAs leasehold rights and to approve the Deed of
Conditional Sale in favor of CUBA. And considering that by reason of her
unlawful ejectment by DBP, CUBA suffered moral shock, degradation,
social humiliation, and serious anxieties for which she became sick and
had to be hospitalized the trial court found her entitled to moral and
exemplary damages. The trial court also held that CUBA was entitled to
P100,000 attorneys fees in view of the considerable expenses she incurred
for lawyers fees and in view of the finding that she was entitled to
exemplary damages.

In its decision of 31 January 1990, [4] the trial court disposed as follows:

WHEREFORE, judgment is hereby rendered in favor of plaintiff:

1. DECLARING null and void and without any legal effect the act of
defendant Development Bank of the Philippines in appropriating for its own
interest, without any judicial or extra-judicial foreclosure, plaintiffs
leasehold rights and interest over the fishpond land in question under her
Fishpond Lease Agreement No. 2083 (new);

2. DECLARING the Deed of Conditional Sale dated February 21, 1980 by

and between the defendant Development Bank of the Philippines and
plaintiff (Exh. E and Exh. 1) and the acts of notarial rescission of the
Development Bank of the Philippines relative to said sale (Exhs. 16 and
26) as void and ineffective;

3. DECLARING the Deed of Conditional Sale dated August 16, 1984 by and
between the Development Bank of the Philippines and defendant Agripina
Caperal (Exh. F and Exh. 21), the Fishpond Lease Agreement No. 2083-A
dated December 28, 1984 of defendant Agripina Caperal (Exh. 23) and the
Assignment of Leasehold Rights dated February 12, 1985 executed by
defendant Agripina Caperal in favor of the defendant Development Bank of
the Philippines (Exh. 24) as void ab initio;

4. ORDERING defendant Development Bank of the Philippines and

defendant Agripina Caperal, jointly and severally, to restore to plaintiff the
latters leasehold rights and interests and right of possession over the
fishpond land in question, without prejudice to the right of defendant
Development Bank of the Philippines to foreclose the securities given by
plaintiff;

5. ORDERING defendant Development Bank of the Philippines to pay to

plaintiff the following amounts:

a) The sum of ONE MILLION SIXTY-SEVEN THOUSAND FIVE HUNDRED

PESOS (P1,067,500.00), as and for actual damages;

b) The sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS as moral

damages;

c) The sum of FIFTY THOUSAND (P50,000.00) PESOS, as and for exemplary

damages;

d) And the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS, as and

for attorneys fees;

Cuba in favor of DBP; (3) the deed of conditional sale between CUBA and
DBP; and (4) the deed of conditional sale between DBP and Caperal, the
Fishpond Lease Agreement in favor of Caperal, and the assignment of
leasehold rights executed by Caperal in favor of DBP. It then ordered DBP
to turn over possession of the property to Caperal as lawful holder of the
leasehold rights and to pay CUBA the following amounts: (a) P1,067,500 as
actual damages; P50,000 as moral damages; and P50,000 as attorneys
fees.

6. And ORDERING defendant Development Bank of the Philippines to

reimburse and pay to defendant Agripina Caperal the sum of ONE MILLION
FIVE HUNDRED THIRTY-TWO THOUSAND SIX HUNDRED TEN PESOS AND
SEVENTY-FIVE CENTAVOS (P1,532,610.75) representing the amounts paid
by defendant Agripina Caperal to defendant Development Bank of the
Philippines under their Deed of Conditional Sale.

Since their motions for reconsideration were denied,[6] DBP and CUBA filed
separate petitions for review.

CUBA and DBP interposed separate appeals from the decision to the Court
of Appeals. The former sought an increase in the amount of damages,
while the latter questioned the findings of fact and law of the lower court.

Upon the other hand, in her petition (G.R. No. 118367), CUBA contends
that the Court of Appeals erred (1) in not holding that the questioned deed
of assignment was a pactum commissorium contrary to Article 2088 of the
Civil Code; (b) in holding that the deed of assignment effected a novation
of the promissory notes; (c) in holding that CUBA was estopped from
questioning the validity of the deed of assignment when she agreed to
repurchase her leasehold rights under a deed of conditional sale; and (d)
in reducing the amounts of moral damages and attorneys fees, in deleting
the award of exemplary damages, and in not increasing the amount of
damages.

In its decision [5] of 25 May 1994, the Court of Appeals ruled that (1) the
trial court erred in declaring that the deed of assignment was null and void
and that defendant Caperal could not validly acquire the leasehold rights
from DBP; (2) contrary to the claim of DBP, the assignment was not a
cession under Article 1255 of the Civil Code because DBP appeared to be
the sole creditor to CUBA - cession presupposes plurality of debts and
creditors; (3) the deeds of assignment represented the voluntary act of
CUBA in assigning her property rights in payment of her debts, which
amounted to a novation of the promissory notes executed by CUBA in favor
of DBP; (4) CUBA was estopped from questioning the assignment of the
leasehold rights, since she agreed to repurchase the said rights under a
deed of conditional sale; and (5) condition no. 12 of the deed of
assignment was an express authority from CUBA for DBP to sell whatever
right she had over the fishpond. It also ruled that CUBA was not entitled to
loss of profits for lack of evidence, but agreed with the trial court as to the
actual damages of P1,067,500. It, however, deleted the amount of
exemplary damages and reduced the award of moral damages from
P100,000 to P50,000 and attorneys fees, from P100,000 to P50,000.

The Court of Appeals thus declared as valid the following: (1) the act of
DBP in appropriating Cubas leasehold rights and interest under Fishpond
Lease Agreement No. 2083; (2) the deeds of assignment executed by

In its petition (G.R. No. 118342), DBP assails the award of actual and moral
damages and attorneys fees in favor of CUBA.

We agree with CUBA that the assignment of leasehold rights was a

mortgage contract.

It is undisputed that CUBA obtained from DBP three separate loans

totalling P335,000, each of which was covered by a promissory note. In all
of these notes, there was a provision that: In the event of foreclosure of
the mortgage securing this notes, I/We further bind myself/ourselves,
jointly and severally, to pay the deficiency, if any. [7]

Simultaneous with the execution of the notes was the execution of

Assignments of Leasehold Rights [8] where CUBA assigned her leasehold
rights and interest on a 44-hectare fishpond, together with the
improvements thereon. As pointed out by CUBA, the deeds of assignment

constantly referred to the assignor (CUBA) as borrower; the assigned

rights, as mortgaged properties; and the instrument itself, as mortgage
contract. Moreover, under condition no. 22 of the deed, it was provided
that failure to comply with the terms and condition of any of the loans
shall cause all other loans to become due and demandable and all
mortgages shall be foreclosed. And, condition no. 33 provided that if
foreclosure is actually accomplished, the usual 10% attorneys fees and
10% liquidated damages of the total obligation shall be imposed. There
is, therefore, no shred of doubt that a mortgage was intended.

Nor did the assignment constitute dation in payment under Article 1245 of
the civil Code, which reads: Dation in payment, whereby property is
alienated to the creditor in satisfaction of a debt in money, shall be
governed by the law on sales. It bears stressing that the assignment,
being in its essence a mortgage, was but a security and not a satisfaction
of indebtedness.[10]

We do not, however, buy CUBAs argument that condition no. 12 of the

deed of assignment constituted pactum commissorium. Said condition
reads:

Besides, in their stipulation of facts the parties admitted that the

assignment was by way of security for the payment of the loans; thus:

3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of
Assignment of her Leasehold Rights.

In Peoples Bank & Trust Co. vs. Odom,[9] this Court had the occasion to
rule that an assignment to guarantee an obligation is in effect a mortgage.

We find no merit in DBPs contention that the assignment novated the

promissory notes in that the obligation to pay a sum of money the loans
(under the promissory notes) was substituted by the assignment of the
rights over the fishpond (under the deed of assignment). As correctly
pointed out by CUBA, the said assignment merely complemented or
supplemented the notes; both could stand together. The former was only
an accessory to the latter. Contrary to DBPs submission, the obligation to
pay a sum of money remained, and the assignment merely served as
security for the loans covered by the promissory notes. Significantly, both
the deeds of assignment and the promissory notes were executed on the
same dates the loans were granted. Also, the last paragraph of the
assignment stated: The assignor further reiterates and states all terms,
covenants, and conditions stipulated in the promissory note or notes
covering the proceeds of this loan, making said promissory note or notes,
to all intent and purposes, an integral part hereof.

Neither did the assignment amount to payment by cession under Article

1255 of the Civil Code for the plain and simple reason that there was only
one creditor, the DBP. Article 1255 contemplates the existence of two or
more creditors and involves the assignment of all the debtors property.

12. That effective upon the breach of any condition of this assignment, the
Assignor hereby appoints the Assignee his Attorney-in-fact with full power
and authority to take actual possession of the property above-described,
together with all improvements thereon, subject to the approval of the
Secretary of Agriculture and Natural Resources, to lease the same or any
portion thereof and collect rentals, to make repairs or improvements
thereon and pay the same, to sell or otherwise dispose of whatever rights
the Assignor has or might have over said property and/or its improvements
and perform any other act which the Assignee may deem convenient to
protect its interest. All expenses advanced by the Assignee in connection
with purpose above indicated which shall bear the same rate of interest
aforementioned are also guaranteed by this Assignment. Any amount
received from rents, administration, sale or disposal of said property may
be supplied by the Assignee to the payment of repairs, improvements,
taxes, assessments and other incidental expenses and obligations and the
balance, if any, to the payment of interest and then on the capital of the
indebtedness secured hereby. If after disposal or sale of said property and
upon application of total amounts received there shall remain a deficiency,
said Assignor hereby binds himself to pay the same to the Assignee upon
demand, together with all interest thereon until fully paid. The power
herein granted shall not be revoked as long as the Assignor is indebted to
the Assignee and all acts that may be executed by the Assignee by virtue
of said power are hereby ratified.

The elements of pactum commissorium are as follows: (1) there should be

a property mortgaged by way of security for the payment of the principal
obligation, and (2) there should be a stipulation for automatic
appropriation by the creditor of the thing mortgaged in case of nonpayment of the principal obligation within the stipulated period.[11]

Condition no. 12 did not provide that the ownership over the leasehold
rights would automatically pass to DBP upon CUBAs failure to pay the loan
on time. It merely provided for the appointment of DBP as attorney-in-fact
with authority, among other things, to sell or otherwise dispose of the said
real rights, in case of default by CUBA, and to apply the proceeds to the
payment of the loan. This provision is a standard condition in mortgage
contracts and is in conformity with Article 2087 of the Civil Code, which
authorizes the mortgagee to foreclose the mortgage and alienate the
mortgaged property for the payment of the principal obligation.

DBP, however, exceeded the authority vested by condition no. 12 of the

deed of assignment. As admitted by it during the pre-trial, it had
[w]ithout foreclosure proceedings, whether judicial or extrajudicial,
appropriated the [l]easehold [r]ights of plaintiff Lydia Cuba over the
fishpond in question. Its contention that it limited itself to mere
administration by posting caretakers is further belied by the deed of
conditional sale it executed in favor of CUBA. The deed stated:

WHEREAS, the Vendor [DBP] by virtue of a deed of assignment executed in

its favor by the herein vendees [Cuba spouses] the former acquired all the
rights and interest of the latter over the above-described property;

The title to the real estate property [sic] and all improvements thereon
shall remain in the name of the Vendor until after the purchase price,
advances and interest shall have been fully paid. (Emphasis supplied).

It is obvious from the above-quoted paragraphs that DBP had appropriated

and taken ownership of CUBAs leasehold rights merely on the strength of
the deed of assignment.

DBP cannot take refuge in condition no. 12 of the deed of assignment to

justify its act of appropriating the leasehold rights. As stated earlier,
condition no. 12 did not provide that CUBAs default would operate to vest
in DBP ownership of the said rights. Besides, an assignment to guarantee
an obligation, as in the present case, is virtually a mortgage and not an
absolute conveyance of title which confers ownership on the assignee.[12]

At any rate, DBPs act of appropriating CUBAs leasehold rights was

violative of Article 2088 of the Civil Code, which forbids a creditor from
appropriating, or disposing of, the thing given as security for the payment
of a debt.

The fact that CUBA offered and agreed to repurchase her leasehold rights
from DBP did not estop her from questioning DBPs act of appropriation.
Estoppel is unavailing in this case. As held by this Court in some cases,
[13] estoppel cannot give validity to an act that is prohibited by law or
against public policy. Hence, the appropriation of the leasehold rights,
being contrary to Article 2088 of the Civil Code and to public policy, cannot
be deemed validated by estoppel.

Instead of taking ownership of the questioned real rights upon default by

CUBA, DBP should have foreclosed the mortgage, as has been stipulated in
condition no. 22 of the deed of assignment. But, as admitted by DBP,
there was no such foreclosure. Yet, in its letter dated 26 October 1979,
addressed to the Minister of Agriculture and Natural Resources and coursed
through the Director of the Bureau of Fisheries and Aquatic Resources, DBP
declared that it had foreclosed the mortgage and enforced the
assignment of leasehold rights on March 21, 1979 for failure of said
spouses [Cuba spouces] to pay their loan amortizations.[14] This only
goes to show that DBP was aware of the necessity of foreclosure
proceedings.

In view of the false representation of DBP that it had already foreclosed the
mortgage, the Bureau of Fisheries cancelled CUBAs original lease permit,
approved the deed of conditional sale, and issued a new permit in favor of
CUBA. Said acts which were predicated on such false representation, as
well as the subsequent acts emanating from DBPs appropriation of the
leasehold rights, should therefore be set aside. To validate these acts
would open the floodgates to circumvention of Article 2088 of the Civil
Code.

Even in cases where foreclosure proceedings were had, this Court had not
hesitated to nullify the consequent auction sale for failure to comply with
the requirements laid down by law, such as Act No. 3135, as amended.[15]
With more reason that the sale of property given as security for the
payment of a debt be set aside if there was no prior foreclosure
proceeding.

Hence, DBP should render an accounting of the income derived from the
operation of the fishpond in question and apply the said income in
accordance with condition no. 12 of the deed of assignment which
provided: Any amount received from rents, administration, may be
applied to the payment of repairs, improvements, taxes, assessment, and
other incidental expenses and obligations and the balance, if any, to the
payment of interest and then on the capital of the indebtedness.

We shall now take up the issue of damages.

inventory of the alleged lost items before the loss which is normal in a
project which sometimes, if not most often, is left to the care of other
persons. Neither was a single receipt or record of acquisition presented.

Curiously, in her complaint dated 17 May 1985, CUBA included losses of

property as among the damages resulting from DBPs take-over of the
fishpond. Yet, it was only in September 1985 when her son and a caretaker
went to the fishpond and the adjoining house that she came to know of the
alleged loss of several articles. Such claim for losses of property, having
been made before knowledge of the alleged actual loss, was therefore
speculative. The alleged loss could have been a mere afterthought or
subterfuge to justify her claim for actual damages.

Article 2199 provides:

Except as provided by law or by stipulation, one is entitled to an adequate

compensation only for such pecuniary loss suffered by him as he has duly
proved. Such compensation is referred to as actual or compensatory
damages.

Actual or compensatory damages cannot be presumed, but must be

proved with reasonable degree of certainty.[16] A court cannot rely on
speculations, conjectures, or guesswork as to the fact and amount of
damages, but must depend upon competent proof that they have been
suffered by the injured party and on the best obtainable evidence of the
actual amount thereof.[17] It must point out specific facts which could
afford a basis for measuring whatever compensatory or actual damages
are borne.[18]

In the present case, the trial court awarded in favor of CUBA P1,067,500 as
actual damages consisting of P550,000 which represented the value of the
alleged lost articles of CUBA and P517,500 which represented the value of
the 230,000 pieces of bangus allegedly stocked in 1979 when DBP first
ejected CUBA from the fishpond and the adjoining house. This award was
affirmed by the Court of Appeals.

We find that the alleged loss of personal belongings and equipment was
not proved by clear evidence. Other than the testimony of CUBA and her
caretaker, there was no proof as to the existence of those items before DBP
took over the fishpond in question. As pointed out by DBP, there was not

With regard to the award of P517,000 representing the value of the alleged
230,000 pieces of bangus which died when DBP took possession of the
fishpond in March 1979, the same was not called for. Such loss was not
duly proved; besides, the claim therefor was delayed unreasonably. From
1979 until after the filing of her complaint in court in May 1985, CUBA did
not bring to the attention of DBP the alleged loss. In fact, in her letter
dated 24 October 1979,[19] she declared:

1. That from February to May 1978, I was then seriously ill in Manila and
within the same period I neglected the management and supervision of the
cultivation and harvest of the produce of the aforesaid fishpond thereby
resulting to the irreparable loss in the produce of the same in the amount
of about P500,000.00 to my great damage and prejudice due to fraudulent
acts of some of my fishpond workers.

Nowhere in the said letter, which was written seven months after DBP took
possession of the fishpond, did CUBA intimate that upon DBPs take-over
there was a total of 230,000 pieces of bangus, but all of which died
because of DBPs representatives prevented her men from feeding the fish.

The award of actual damages should, therefore, be struck down for lack of
sufficient basis.

In view, however, of DBPs act of appropriating CUBAs leasehold rights

which was contrary to law and public policy, as well as its false
representation to the then Ministry of Agriculture and Natural Resources

that it had foreclosed the mortgage, an award of moral damages in the

amount of P50,000 is in order conformably with Article 2219(10), in
relation to Article 21, of the Civil Code. Exemplary or corrective damages
in the amount of P25,000 should likewise be awarded by way of example or
correction for the public good.[20] There being an award of exemplary
damages, attorneys fees are also recoverable.[21]

WHEREFORE, the 25 May 1994 Decision of the Court of Appeals in CA-G.R.

CV No. 26535 is hereby REVERSED, except as to the award of P50,000 as
moral damages, which is hereby sustained. The 31 January 1990 Decision
of the Regional Trial Court of Pangasinan, Branch 54, in Civil Case No. A1574 is MODIFIED setting aside the finding that condition no. 12 of the
deed of assignment constituted pactum commissorium and the award of
actual damages; and by reducing the amounts of moral damages from
P100,000 to P50,000; the exemplary damages, from P50,000 to P25,000;

and the attorneys fees, from P100,000 to P20,000. The Development

Bank of the Philippines is hereby ordered to render an accounting of the
income derived from the operation of the fishpond in question.

Let this case be REMANDED to the trial court for the reception of the
income statement of DBP, as well as the statement of the account of Lydia
P. Cuba, and for the determination of each partys financial obligation to
one another.

SO ORDERED.

Bellosillo, Vitug, and Kapunan, JJ., concur.