A.
DEFINITION OF TAXATION Development Company had earlier appointed Algue as its agent, authorizing it to sell its land,
G.R. No. L-28896 February 17, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs. ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.
CRUZ, J.:
Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance. It is therefore necessary to reconcile the apparently conflicting interests of the
authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the
common good, may be achieved.
FACTS:
 Private respondent, a domestic corporation engaged in engineering, construction,
received a letter from the petitioner assessing it in the total amount of P83,183.85 as
delinquency income taxes for the years 1958 and 1959.
 Algue filed a letter of protest.
 A warrant of distraint and levy was presented to the private respondent, through its
counsel, Atty. Guevara, who refused to receive it on the ground of the pending
protest.
 Atty. Guevara was informed that the BIR was not taking any action on the protest
and it was only then that he accepted the warrant.
 Sixteen days later, Algue filed a petition for review of the decision of the
Commissioner of Internal Revenue with the CTA.
CTA: the protest filed by private respondent was not pro forma. The period started running
again only on April 7, 1965, when the private respondent was definitely informed of the
implied rejection of the said protest and the warrant was finally served on it. Hence, when the
appeal was filed on April 23, 1965, only 20 days of the reglementary period had been
consumed.
PETITIONER: contends that the claimed deduction of P75,000.00 was properly disallowed
because it was not an ordinary reasonable or necessary business expense.
CTA: Agreeing with Algue, it held that the said amount had been legitimately paid by the
private respondent for actual services rendered. The payment was in the form of promotional
fees. These were collected by the Payees for their work in the creation of the Vegetable Oil
Investment Corporation of the Philippines and its subsequent purchase of the properties of the
Philippine Sugar Estate Development Company. Parenthetically, it may be observed that the
petitioner had Originally claimed these promotional fees to be personal holding company
income but later conformed to the decision of the respondent court rejecting this assertion. In
fact, as the said court found, the amount was earned through the joint efforts of the persons
among whom it was distributed It has been established that the Philippine Sugar Estate
factories and oil manufacturing process. Pursuant to such authority, Alberto Guevara, et al,
worked for the formation of the Vegetable Oil Investment Corporation, inducing other persons
to invest in it.14 Ultimately, after its incorporation largely through the promotion of the said
persons, this new corporation purchased the PSEDC properties.15 For this sale, Algue received
as agent a commission of P126,000.00, and it was from this commission that the P75,000.00
promotional fees were paid to the aforenamed individuals.16
There is no dispute that the payees duly reported their respective shares of the fees in their
income tax returns and paid the corresponding taxes thereon. The Court of Tax Appeals also
found, after examining the evidence, that no distribution of dividends was involved.
The petitioner claims that these payments are fictitious because most of the payees are
members of the same family in control of Algue. It is argued that no indication was made as to
how such payments were made, whether by check or in cash, and there is not enough
substantiation of such payments. In short, the petitioner suggests a tax dodge, an attempt to
evade a legitimate assessment by involving an imaginary deduction.
RULING:
We find that these suspicions were adequately met by the private respondent when its
President, Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the
payments were not made in one lump sum but periodically and in different amounts as each
payee's need arose. 19 It should be remembered that this was a family corporation where strict
business procedures were not applied and immediate issuance of receipts was not required.
Even so, at the end of the year, when the books were to be closed, each payee made an
accounting of all of the fees received by him or her, to make up the total of
P75,000.00. 20 Admittedly, everything seemed to be informal. This arrangement was
understandable, however, in view of the close relationship among the persons in the family
corporation.
We agree with the respondent court that the amount of the promotional fees was not excessive.
The total commission paid by the Philippine Sugar Estate Development Co. to the private
respondent was P125,000.00. 21After deducting the said fees, Algue still had a balance of
P50,000.00 as clear profit from the transaction. The amount of P75,000.00 was 60% of the
total commission. This was a reasonable proportion, considering that it was the payees who
did practically everything, from the formation of the Vegetable Oil Investment Corporation to
the actual purchase by it of the Sugar Estate properties.
This finding of the respondent court is in accord with the following provision of the Tax Code:
SEC. 30. Deductions from gross income.--In computing net income there shall be allowed as
deductions — (a) Expenses: (1) In general.--All the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or business, including a reasonable
allowance for salaries or other compensation for personal services actually rendered;
and Revenue Regulations No. 2, Section 70 (1), reading as follows: SEC. 70. Compensation
for personal services.--Among the ordinary and necessary expenses paid or incurred in
1
carrying on any trade or business may be included a reasonable allowance for salaries or other
compensation for personal services actually rendered. The test of deductibility in the case of
compensation payments is whether they are reasonable and are, in fact, payments purely for
service. This test and deductibility in the case of compensation payments is whether they are
reasonable and are, in fact, payments purely for service. This test and its practical application
may be further stated and illustrated as follows:
Any amount paid in the form of compensation, but not in fact as the purchase price of
services, is not deductible. (a) An ostensible salary paid by a corporation may be a
distribution of a dividend on stock. This is likely to occur in the case of a corporation having
few stockholders, Practically all of whom draw salaries. If in such a case the salaries are in
excess of those ordinarily paid for similar services, and the excessive payment correspond or
bear a close relationship to the stockholdings of the officers of employees, it would seem
likely that the salaries are not paid wholly for services rendered, but the excessive payments
are a distribution of earnings upon the stock.
It is worth noting at this point that most of the payees were not in the regular employ of
Algue nor were they its controlling stockholders.
The Solicitor General is correct when he says that the burden is on the taxpayer to prove the
validity of the claimed deduction. In the present case, however, we find that the onus has been
discharged satisfactorily. The private respondent has proved that the payment of the fees was
necessary and reasonable in the light of the efforts exerted by the payees in inducing investors
and prominent businessmen to venture in an experimental enterprise and involve themselves in
a new business requiring millions of pesos. This was no mean feat and should be, as it was,
sufficiently recompensed.
It is said that taxes are what we pay for civilization society. Without taxes, the government
would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the
natural reluctance to surrender part of one's hard earned income to the taxing authorities, every
person who is able to must contribute his share in the running of the government. The
government for its part, is expected to respond in the form of tangible and intangible benefits
intended to improve the lives of the people and enhance their moral and material values. This
symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it
is an arbitrary method of exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of taxation, it is a requirement in
all democratic regimes that it be exercised reasonably and in accordance with the prescribed
procedure. If it is not, then the taxpayer has a right to complain and the courts will then come
to his succor. For all the awesome power of the tax collector, he may still be stopped in his
tracks if the taxpayer can demonstrate, as it has here, that the law has not been observed.
We hold that the appeal of the private respondent from the decision of the petitioner was filed
on time with the respondent court in accordance with RA 1125. And we also find that the
claimed deduction by the private respondent was permitted under the Internal Revenue Code
and should therefore not have been disallowed by the petitioner. The appealed decision of the
Court of Tax Appeals is AFFIRMED.
G.R. No. L-68252 May 26, 1995
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. TOKYO SHIPPING CO.
LTD., represented by SORIAMONT STEAMSHIP AGENCIES INC., and COURT OF
TAX APPEALS, respondents.
PUNO, J.:
FACTS:
 Private respondent is a foreign corporation represented in the Philippines by
Soriamont Steamship Agencies, Incorporated. It owns and operates tramper vessel
M/V Gardenia.
 NASUTRA2 chartered M/V Gardenia to load 16,500 metric tons of raw sugar in the
Philippines.3
 Mr. Edilberto Lising, the operations supervisor of Soriamont Agency, 4 paid the
required income and common carrier's taxes in the respective sums of (P59,523.75)
and (P47,619.00), or a total of (P107,142.75) based on the expected gross receipts
of the vessel.5
 Upon arriving, however, at Guimaras Port of Iloilo, the vessel found no sugar for
loading.
 NASUTRA and private respondent's agent mutually agreed to have the vessel sail
for Japan without any cargo.
 Claiming the pre-payment of income and common carrier's taxes as erroneous since
no receipt was realized from the charter agreement, private respondent instituted a
claim for tax credit or refund of the sum (P107,142.75) before petitioner
Commissioner.
 Petitioner failed to act promptly on the claim, hence, private respondent filed a
petition for review before CTA.
 Petitioner contested the petition. It alleged the following: that taxes are presumed to
have been collected in accordance with law; that in an action for refund, the burden
of proof is upon the taxpayer to show that taxes are erroneously or illegally
collected, and the taxpayer's failure to sustain said burden is fatal to the action for
refund; and that claims for refund are construed strictly against tax claimants.
CTA: decided in favor of the private respondent. It held: It has been shown in this case
that 1) the petitioner has complied with the mentioned statutory requirement by having
filed a written claim for refund within the two-year period from date of payment; 2) the
respondent has not issued any deficiency assessment nor disputed the correctness of the
tax returns and the corresponding amounts of prepaid income and percentage taxes; and
3) the chartered vessel sailed out of the Philippine port with absolutely no cargo laden on
board as cleared and certified by the Customs authorities; nonetheless 4) respondent's
apparent bit of reluctance in validating the legal merit of the claim, by and large, is tacked
upon the "examiner who is investigating petitioner's claim for refund which is the subject
matter of this case has not yet submitted his report.
2
An examination of the records satisfies us that the case presents no dispute as to relatively
simple material facts. The circumstances obtaining amply justify petitioner's righteous
indignation to a more expeditious action. Respondent has offered no reason nor made effort to
submit any controverting documents to bash that patina of legitimacy over the claim. But as
might well be, towards the end of some two and a half years of seeming impotent anguish over
the pendency, the respondent Commissioner of Internal Revenue would furnish the
satisfaction of ultimate solution by manifesting that "it is now his turn to present evidence,
however, the Appellate Division of the BIR has already recommended the approval of
petitioner's claim for refund subject matter of this petition. The examiner who examined this
case has also recommended the refund of petitioner's claim. Without prejudice to withdrawing
this case after the final approval of petitioner's claim, the Court ordered the resetting to
September 7, 1983." We need not fashion any further issue into an apparently settled legal
situation as far be it from a comedy of errors it would be too much of a stretch to hold and
deny the refund of the amount of prepaid income and common carrier's taxes for which
petitioner could no longer be made accountable.
RESPONDENT COURT: denied petitioner's motion for reconsideration, hence, this petition
for review on certiorari.
PETITIONER: now contends: (1) private respondent has the burden of proof to support its
claim of refund; (2) it failed to prove that it did not realize any receipt from its charter
agreement; and (3) it suppressed evidence when it did not present its charter agreement.
RULING: We find no merit in the petition.
There is no dispute about the applicable law. It is section 24 (b) (2) of the National Internal
Revenue Code which at that time provides as follows:
A corporation organized, authorized, or existing under the laws of any foreign country,
engaged in trade or business within the Philippines, shall be taxable as provided in
subsection (a) of this section upon the total net income derived in the preceding taxable year
from all sources within the Philippines: Provided, however, That international carriers shall
pay a tax of (2 1/2%) on their gross Philippine billings: "Gross Philippine Billings" include
gross revenue realized from uplifts anywhere in the world by any international carrier doing
business in the Philippines of passage documents sold therein, whether for passenger, excess
baggage or mail, provided the cargo or mail originates from the Philippines. The gross revenue
realized from the said cargo or mail include the gross freight charge up to final destination.
Gross revenue from chartered flights originating from the Philippines shall likewise form part
of "Gross Philippine Billings" regardless of the place or payment of the passage documents.
Pursuant to this provision, a resident foreign corporation engaged in the transport of cargo
is liable for taxes depending on the amount of income it derives from sources within the
Philippines. Thus, before such a tax liability can be enforced the taxpayer must be shown to
have earned income sourced from the Philippines.
We agree with petitioner that a claim for refund is in the nature of a claim for exemption 8 and
should be construed in strictissimi juris against the taxpayer.9 Likewise, there can be no
disagreement with petitioner's stance that private respondent has the burden of proof to
establish the factual basis of its claim for tax refund.
ISSUE: whether or not the private respondent was able to prove that it derived no receipts
from its charter agreement, and hence is entitled to a refund of the taxes it pre-paid to the
government.
The respondent court held that sufficient evidence has been adduced by the private respondent
proving that it derived no receipt from its charter agreement with NASUTRA. Exhibits
positively show that the vessel M/V "Gardenia" arrived in Iloilo but found no raw sugar to
load and returned to Japan without any cargo laden on board. The correctness of the contents
of these documents regularly issued by officials of the Bureau of Customs cannot be doubted
as indeed, they have not been contested by the petitioner. The records also reveal that in the
course of the proceedings in the court a quo, petitioner evaded when its turn came to present
evidence. At one point, its counsel manifested that the BIR examiner and the appellate
division of the BIR have both recommended the approval of private respondent's claim for
refund. The case dragged on but petitioner never withdrew its opposition to the petition even if
it did not present evidence at all. The insincerity of petitioner's stance drew the sharp lecture of
respondent court in its Decision and for good reason. Taxpayers owe honesty to government
just as government owes fairness to taxpayers.
PETITIONER: contends that private respondent suppressed evidence when it did not present
its charter agreement with NASUTRA. The contention cannot succeed. It presupposes without
any basis that the charter agreement is prejudicial evidence against the private
respondent. 10 Allegedly, it will show that private respondent earned a charter fee with or
without transporting its supposed cargo from Iloilo to Japan. The allegation simply remained
an allegation and no court of justice will regard it as truth. Moreover, the charter agreement
could have been presented by petitioner itself thru the proper use of a subpoena duces tecum
but it never did.
We cannot but regret the rigid stance taken by the government in refusing to refund the sum of
(P107,142.75) erroneously prepaid by private respondent. The tax was paid way back in 1980
and despite the clear showing that it was erroneously paid, the government succeeded in
delaying its refund for (15) years. After (15) long years and the expenses of litigation, the
money that will be finally refunded to the private respondent is just worth a damaged nickel.
This is not, however, the kind of success the government, especially the BIR, needs to increase
its collection of taxes. Fair deal is expected by our taxpayers from the BIR and the duty
demands that BIR should refund without any unreasonable delay what it has
erroneously collected.
Our ruling in Roxas v. Court of Tax Appeals: The power of taxation is sometimes called also
the power to destroy. Therefore it should be exercised with caution to minimize injury to the
proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax
collector kill the "hen that lays the golden egg." And, in order to maintain the general public's
trust and confidence in the Government this power must be used justly and not treacherously.
3
IN VIEW HEREOF, the assailed decision of respondent Court of Tax Appeals is CTA: dismissed petitioner's petition on the ground that petitioner failed to present as evidence
AFFIRMED in toto. No costs. its corporate Annual Income Tax Return for 1990 to establish the fact that petitioner had not
yet credited the amount of P297,492.00 (inclusive of the amount P112,491.00 which is the
G.R. No. 122480 April 12, 2000 subject of the present controversy) to its 1990 income tax liability.

BPI-FAMILY SAVINGS BANK, Inc., petitioner,  Petitioner filed a MR, however, the same was denied.
vs. COURT OF APPEALS, COURT OF TAX APPEALS and the COMMISSIONER OF
INTERNAL REVENUE,respondents. CA: affirmed the CTA. Hence, this Petition. It is incumbent upon the petitioner to show proof
that it has not credited to its 1990 Annual income Tax Return, the amount of P297,492.00
PANGANIBAN, J.: (including P112,491.00), so as to contest its previous declaration in the 1989 Income Tax
Return that the said amount will be applied as a tax credit in the succeeding year of 1990.
Having failed to submit such requirement, there is no basis to grant the claim for refund. Tax
If the State expects its taxpayers to observe fairness and honesty in paying their taxes, so must refunds are in the nature of tax exemptions. As such, they are regarded as in derogation of
it apply the same standard against itself in refunding excess payments. When it is undisputed sovereign authority and to be construed strictissimi juris against the person or entity claiming
that a taxpayer is entitled to a refund, the State should not invoke technicalities to keep money the exemption. In other words, the burden of proof rests upon the taxpayer to establish by
not belonging to it. No one, not even the State, should enrich oneself at the expense of sufficient and competent evidence its entitlement to the claim for refund.
another.
ISSUE: Whether or not petitioner is entitled to the refund of P112,491.90, representing excess
The Facts creditable withholding tax paid for the taxable year 1989.

 This case involves a claim for tax refund in the amount of P112,491.00 representing The Court's Ruling: The Petition is meritorious.
petitioner's tax withheld for the year 1989.
 In its Corporate Annual Income Tax Return for the year 1989, the following items
are reflected: Main Issue: Petitioner Entitled to Refund

Income P1,017,931,831.00 It is undisputed that petitioner had excess withholding taxes for the year 1989 and was thus
Deductions P1,026,218,791.00 entitled to a refund amounting to P112,491. Pursuant to Section 69 of the 1986 Tax Code
Net Income (Loss) (P8,286,960.00) which states that a corporation entitled to a refund may opt either (1) to obtain such refund or
Taxable Income (Loss) (P8,286,960.00) (2) to credit said amount for the succeeding taxable year, petitioner indicated in its 1989
Less: Income Tax Return that it would apply the said amount as a tax credit for the succeeding
1988 Tax Credit P185,001.00 taxable year, 1990. Subsequently, petitioner informed the BIR that it would claim the amount
1989 Tax Credit P112,491.00 as a tax refund, instead of applying it as a tax credit. When no action from the BIR was
TOTAL AMOUNT P297,492.00 forthcoming, petitioner filed its claim with the CTA.
REFUNDABLE
The CTA and the CA, however, denied the claim for tax refund. Since petitioner declared in
It appears from the foregoing 1989 Income Tax Return that petitioner had a total refundable its 1989 Income Tax Return that it would apply the excess withholding tax as a tax credit for
amount of P297,492 inclusive of the P112,491.00 being claimed as tax refund in the present the following year, the Tax Court held that petitioner was presumed to have done so. The CTA
case. However, petitioner declared in the same 1989 Income Tax Return that the said total and the CA ruled that petitioner failed to overcome this presumption because it did not present
refundable amount of P297,492.00 will be applied as tax credit to the succeeding taxable year. its 1990 Return, which would have shown that the amount in dispute was not applied as a tax
credit. Hence, the CA concluded that petitioner was not entitled to a tax refund.

 petitioner filed a written claim for refund in the amount of P112,491.00 with the
We disagree with the Court of Appeals. As a rule, the factual findings of the appellate court
respondent Commissioner of Internal Revenue alleging that it did not apply the 1989
are binding on this Court. This rule, however, does not apply where, inter alia, the judgment is
refundable amount of P297,492.00 (including P112,491.00) to its 1990 Annual
premised on a misapprehension of facts, or when the appellate court failed to notice certain
Income Tax Return or other tax liabilities due to the alleged business losses it
relevant facts which if considered would justify a different conclusion. This case is one such
incurred for the same year.
exception.
 petitioner filed a petition for review with respondent CTA, seeking the refund of the
amount of P112,491.00.
4
In the first place, petitioner presented evidence to prove its claim that it did not apply the
amount as a tax credit. During the trial before the CTA, Ms. Yolanda Esmundo, the manager
of petitioner's accounting department, testified to this fact. It likewise presented its claim for
refund and a certification issued by Mr. Gil Lopez, petitioner's vice-president, stating that the
amount of P112,491 "has not been and/or will not be automatically credited/offset against any
succeeding quarters' income tax liabilities for the rest of the calendar year ending December
31, 1990." Also presented were the quarterly returns for the first two quarters of 1990.
The BIR, for its part, failed to controvert petitioner's claim. In fact, it presented no evidence at
all. Because it ought to know the tax records of all taxpayers, the CIR could have easily
disproved petitioner's claim. To repeat, it did not do so.
More important, a copy of the Final Adjustment Return for 1990 was attached to petitioner's
MR filed before the CTA. 12 A final adjustment return shows whether a corporation incurred a
loss or gained a profit during the taxable year. In this case, that Return clearly showed that
petitioner incurred P52,480,173 as net loss in 1990. Clearly, it could not have applied the
amount in dispute as a tax credit.
In the present case, the Return attached to the MR clearly showed that petitioner suffered a net
loss in 1990. Contrary to the holding of the CA and the CTA, petitioner could not have applied
the amount as a tax credit. In failing to consider the said Return, as well as the other
documentary evidence presented during the trial, the appellate court committed a reversible
error.
It should be stressed that the rationale of the rules of procedure is to secure a just
determination of every action. They are tools designed to facilitate the attainment of
justice. 14 But there can be no just determination of the present action if we ignore, on grounds
of strict technicality, the Return submitted before the CTA and even before this
Court. Consequently, there is no reason for the BIR and this Court to withhold the tax refund
which rightfully belongs to the petitioner.
PUBLIC RESPONDENTS: maintain that what was attached to petitioner's MR was not the
final adjustment Return, but petitioner's first two quarterly returns for 1990. This allegation is
wrong. An examination of the records shows that the 1990 Final Adjustment Return was
attached to the MR. On the other hand, the two quarterly returns for 1990 mentioned by
respondent were in fact attached to the Petition for Review filed before the CTA.
CTA Case No. 4897
Section 2, Rule 129 provides that courts may take judicial notice of matters ought to be known
to judges because of their judicial functions. In this case, the Court notes that a copy of the
Decision in CTA Case No. 4897 was attached to the Petition for Review filed before this
Court. Significantly, respondents do not claim at all that the said Decision was fraudulent or
nonexistent. Indeed, they do not even dispute the contents of the said Decision, claiming
merely that the Court cannot take judicial notice thereof.
To our mind, respondents' reasoning underscores the weakness of their case. For if they had
really believed that petitioner is not entitled to a tax refund, they could have easily proved that
it did not suffer any loss in 1990. Indeed, it is noteworthy that respondents opted not to assail
the fact appearing therein — that petitioner suffered a net loss in 1990 — in the same way that
it refused to controvert the same fact established by petitioner's other documentary exhibits.
In any event, the Decision in CTA Case No. 4897 is not the sole basis of petitioner's case. It is
merely one more bit of information showing the stark truth: petitioner did not use its 1989
refund to pay its taxes for 1990.
Finally, respondents argue that tax refunds are in the nature of tax exemptions and are to be
construed strictissimi juris against the claimant. Under the facts of this case, we hold that
petitioner has established its claim. Petitioner may have failed to strictly comply with the rules
of procedure; it may have even been negligent. These circumstances, however, should not
compel the Court to disregard this cold, undisputed fact: that petitioner suffered a net loss in
1990, and that it could not have applied the amount claimed as tax credits.
Substantial justice, equity and fair play are on the side of petitioner. Technicalities and
legalisms, however exalted, should not be misused by the government to keep money not
belonging to it and thereby enrich itself at the expense of its law-abiding citizens. If the
State expects its taxpayers to observe fairness and honesty in paying their taxes, so must it
apply the same standard against itself in refunding excess payments of such taxes. Indeed, the
State must lead by its own example of honor, dignity and uprightness.
WHEREFORE, the Petition is hereby GRANTED and the assailed Decision and Resolution of
the Court of Appeals REVERSED and SET ASIDE. The Commissioner of Internal Revenue is
ordered to refund to petitioner the amount of P112,491 as excess creditable taxes paid in 1989.
No costs.
B. ATTRIBUTES, CHARACTERISTICS OF TAXES
1. IT IS A FORCE CHARGE, IMPOSITION OR CONTRIBUTION
G.R. No. L-10574 May 28, 1958
PANAY ELECTRIC CO., INC., petitioner, vs. THE COLLECTOR OF INTERNAL
REVENUE and THE COURT OF TAX APPEALS, respondents.
MONTEMAYOR, J.:
 Petitioner Panay is appealing the decision of the CTA, denying the refund to it the
amount of P85,355.72, balance of P135,872.67, representing overpayment of
franchise taxes from January 19, 1947 to January 18, 1952.
 Petitioner is a grantee of a legislative franchise under Act No. 2983, to operate, and
maintain an electric light, heat and power system in certain municipalities of Iloilo,
for a period of years from the approved of its franchise on January 22, 1921.
5
  Under the franchise, it was required to pay a franchise tax equal to 1 ½ Per cent of
its gross earnings, during the first twenty years, and 2 per cent during the remaining
thirty years.
 Upon the promulgation of Republic Act No. 39, amending Section 259 of the
National Internal Revenue Code, respondent Collector of Internal Revenue required
petitioner to pay a franchise tax of 5 per cent instead of 2 per cent of its gross
earnings.
 petitioner paid the franchise tax of 5 per cent, as provided for in Section 259 of the
Revenue Code as amended, beginning January 19, 1947 and up to January 18, 1952,
in the total sum of P135,872.67, at the same time protesting the imposition and
collection of the 5 per cent tax.
 The protest, however, was denied by respondent.
On March 25, 1952, the Supreme Court promulgated its decision in the case of Philippine
Railway vs. Collector of Internal Revenue, wherein it was held that the rate of tax provided in
Section 259 of the Revenue Code as amended by Republic Act No. 39, is not applicable to
holders of franchises which fix a specific rate of franchise tax.
 On the basis of this decision, petitioner, wrote a letter to the City Treasurer of Iloilo
City, demanding the refund of excess franchise taxes paid since October 1, 1946.
 This claim for refund was reiterated in a letter to respondent Collector, wherein
petitioner demanded the refund of excess franchise taxes from January 19, 1947 to
January 18, 1952, in the amount of P135,872.67.
 In the meantime, respondent Collector accepted the ruling laid down in the case
of Philippine Railway vs. Collector of Internal Revenue, supra, and thereafter,
collected from petitioner franchise taxes at the rate of only 2 per cent.
 The last payment made by petitioner at the rate of 5 per cent was on January 18,
1952.
 On July 22, 1952, respondent Collector wrote to petitioner, informing it of his stand
on the question of refund to the effect that the first claim for refund filed by it was
made only in its letter of April 16, 1952, and that refund may be effected only of the
over payment made two years prior to said demand, that is to say, from April 16,
1950.
 Petitioner filed a petition for review with the defunct Board of Tax Appeals seeking
the refund in the amount of P135,872.67.
 In his answer, respondent admitted that there had been overpayment, but contended
that it could allow a refund of overpayment made for a period of only two years
prior to April 16, 1952, when petitioner filed a formal demand for refund.
Respondent accordingly agreed to credit petitioner with P64,607.07, the amount of
the overpayment from April 19, 1950 to January 18, 1952, and estated that "steps
have been taken by the respondent to credit to the petitioner the amount of
P64,607.07, computed below, as overpayment."
BOARD OF TAX APPEALS: rendered its decision reversing that of respondent Collector
and ordering him to refund to petitioner not only the P64,607.07 as overpayment for the period
1950-51, and which respondent was willing and even offered to credit petitioner, but also
P70,272.49, covering the period of 1947-50. However, upon motion for reconsideration by
respondent, the Board of Tax Appeals on December 29, 1952, modified its decision in the
sense that the refund to petitioner should be only P64,607.07, corresponding to the period of
two years prior to the filing of the letter of demand for refund, dated April 18, 1952. Petitioner
appealed the decision as modified to the Supreme Court and this Tribunal in its resolution of
March 30, 1954, following its decision in the case of University of Santo Tomas vs. Board of
Tax Appeals.
Thereafter, petitioner filed the corresponding complaint against respondent in the Court of
First Instance, of Iloilo for the refund of the whole amount of P135,872.67. Upon the creation
of the Court of Tax Appeals under Republic Act No. 1125, the case was sent up to said court
for final disposition. After due hearing, the Tax Court decided on March 10, 1956 that "only
the excess payments made by plaintiffs from October 18, 1950 to January 18, 1952 in the
aggregate amount of P50,516.95 were made within two years prior to the institution of judicial
proceedings for recovery thereof. The excess payments made prior to October 18, 1950 (from
January 19, 1947 to July 18, 1950) in the amount of P85,355.72 cannot be recovered, the right
of action of plaintiff in regard thereto having prescribed." Consequently respondent was
ordered to refund to petitioner only the sum of P50,516.95. It is this decision which is now
before us on a petition for review by the petitioner, Panay Electric Co., Inc.
The pertinent provisions of law applicable to the present case are sections 306 and 309 of the
Revenue Code, which we reproduce for purposes of reference:
SEC. 306. Recovery of tax erroneously or illegally collected. — No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged
to have been erroneously or illegally assessed or collected, or of any penalty claimed to have
been collected without authority, or of any sum alleged to have been excessive or in any
manner wrongfully collected, until a claim for refund or credit has been duly filed with the
Collector of Internal Revenue; but such suit or proceeding may be maintained, whether or not
such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit or
proceeding shall be begun after the expiration of two years from the date of payment of the tax
or penalty.
SEC. 309. Authority of Collector to make compromises and to refund taxes. — The Collector
of Internal Revenue may compromise any civil or other case arising under this Code or other
law or part of law administered by the Bureau of Internal Revenue, may credit or refund taxes
erroneously or illegally received, or penalties imposed without authority, and may remit before
payment any tax that appears to be unjustly assessed or excessive.
He shall refund the value of internal-revenue stamps when the same are returned in good
condition by the purchaser, and may, in his discretion, redeem or exchange unused stamps that
have been rendered unfit for use, and may refund their value upon proof of destruction.
The authority of the Collector of Internal Revenue to credit or refund taxes or penalties under
this section can only be exercised if the claim for credit or refund is made in writing and filed
with him within two years after the payment of the tax or penalty.
Petitioner in its appeal, reiterates its contention before the Court of Tax Appeals that the
franchise tax stipulated and payable under its franchise is not an internal revenue tax and,
6
therefore, Section 306 of the Tax Code, providing for refund of overpayment for a period of
only two years, is not applicable to it; that the legislative franchise constitute a contract
between itself and the Government; that the late of franchise tax payable under it is part of said
contract and the collection of any amount in excess of said rate fixed in the contract is a
violation of the contract itself; and that under said view, petitioner may tract itself of the
regular ten year period of prescription within which to bring an action for redress.
We are satisfied that the franchise tax is an internal revenue tax within the meaning of the Tax
Code, and we agree with the Court of Tax Appeals on its view and ruling on this point, and
reproduce with favor the pertinent portion of its decision overruling the contention of the
petitioner, and holding that a franchise tax is an internal revenue tax, and consequently, refund
of any overpayment governed by Section 306 of the Tax Code:
"Defendant contends that plaintiff failed to comply with the requirements of Section 306 of the
Revenue Code relative to the filing of a written claim for refund and the institution of judicial
proceedings for recovery of taxes erroneously or illegally collected within two years from the
date of payment. On the other hand, plaintiff contends that Section 306 of the Revenue Code
does not apply, its franchise tax liability not being an internal revenue tax.
On the question whether or not the tax payable by plaintiff under its franchise is an internal
revenue tax, the former Board of Tax Appeals expressed the opinion that the same is an
internal revenue tax.
Petitioner draws a distinction between tax proper and franchise tax.
A tax is a forced charge, imposition or contribution; it operates in invitum, and is in no way
dependent upon the will or contractual assent, express or implied, of the person taxed.
Franchise tax is "in consideration of the granting of the franchise," and it operates because a
person taxed assents expressly or impliedly. It is, in one word, a contractual assent. As
correctly maintained by the respondent, Section 18 of the Tax Code enumerates what are
National Internal Revenue Taxes, and among others franchise taxes are clearly listed; Section
259, Tax on Corporate Franchises, deals with franchise taxes.
It is clear from a reading of Section 259 of the Revenue Code that the "franchise tax" provided
therein refers not only to the tax imposed in said section but also to the "taxes, charges, and
percentages" prescribed in the special charters under "which holders of franchises operate. In
fact, the collection of franchise taxes and the penalty for delinquency are governed by Section
259, in so far as the provisions thereof are not inconsistent with the special charters. And
Section 18 of the Revenue Code, as pointed out by the former Board of Tax Appeals, clearly
classifies franchise taxes as national internal revenue taxes. We might also add that Section
359 of the Revenue Code provides for the disposition of franchise taxes as other national
internal revenue taxes. We have, therefore, no doubt in our minds that the franchise taxes
prescribed in Act No. 2983, as amended by Act No. 3665, under which plaintiff operates, is a
national internal revenue tax, and the provisions of law governing refunds of national internal
revenue taxes are applicable to refunds of the franchise tax here in question.
Petitioner contends that its letters of May 7, 1948 and June 7, 1948 (Annexes A and B of the
Petition for Review) should be considered claims for refund. Whether they are demand for
refund or not does not really matter because a claim for refund not followed by a judicial
action avails the claimant nothing. Besides, the refund of any tax already paid or illegally
collected is limited to a period of two years, counted from the date of the suit in court, not
from the date of the claim for refund. The claim for refund is only a preliminary step to court
action. As a matter of fact, we believe that the letters of May 7, 1948 and June 7, 1948 are not
really claims for refund, but mere protests against the action of the Collector, is agent in
claiming and collecting 5 per cent instead of 2 per cent of the gross earnings, and may well be
regarded as requests that the Collector and his agent stop making the illegal collection, nothing
more. The real claim for refund was made only on April 16, 1952 in petitioner's letter to the
Iloilo Treasurer, acting as agent of the Collector.
Applying the doctrine laid down in the case of Philippine Railway vs. Collector of Internal
Revenue, supra, it is clear that under the franchise of the petitioner, it was liable to pay only a
franchise tax of 2 per cent of its gross earning and not 5 per cent, consequently, the, difference
between 5 per cent and 2 per cent should be considered as overpayment. From a reading of
Section 306 of the Tax Code above reproduced, it is also equally clear that aside from the
requirement that before a suit or proceeding could be maintained in any court for the recovery
of any tax said to have been erroneously or illegally assessed or collected, a claim for refund
of said overpayment or illegal collection should first be made, the taxpayer is entitled to
refund only if he brought the action within two years from the due of the payment. In other
words, all overpayment or illegal connection made beyond the said two year period may not
be refunded.
Under a strict interpretation and application of law, petitioner is entitled to a refund of this
overpayment or illegal collection for a period of only two years prior to the date of the suit or
proceedings before the Board of Tax Appeals on August 20, 1952, that is to say, all payments
and illegal collections from August 20, 1950 which amount to P50,516.95 as found and
adjudged by the Court of Tax Appeals. Legally speaking, the decision of the Tax Court is
therefore correct, being in accordance with law. However, one's conscience does not and
cannot rest easy on this strict application of the law, considering the special circumstances that
surround this case. Because of his erroneous interpretation of the law on franchise taxes, the
Collector, from the year 1947, had illegally collected from petitioner the respectable sum of
P135,872.65. From a moral standpoint, the Government would be enriching itself of this
amount at the expense of the taxpayer. True, the Tax Court ordered the Collector to refund to
it (petitioner) the sum of P50,516.95, which approximately, is only 371 % of the whole illegal
collection. Of course, petitioner is to blame in part for supposedly sleeping on its rights and in
not filing the claim for refund and the suit to enforce said refund earlier. It should be borne in
mind, however, that before the promulgation of our decision in the case of Philippine Railway
vs. Collector of Internal Revenue, there had been no court ruling or doctrine on the relation
between a franchise tax stipulated in a legislative franchise and the ordinary or regular internal
revenue tax fixed in the Tax Code, on the gross earnings of a corporation or a public utility.
The Collector played safe and collected the regular 5 per cent rate. The petitioner should have
also done the same by not merely protesting the illegal collection, but by claiming a refund of
the overpayment and filing a suit to enforce the same, and should have asked the courts to
decide the controversy. We do not advocate the refund of the entire overpayment of
P135,872.67, but on moral and equitable grounds, we believe that the petitioner is entitled to
7
the refund of P64,607.07, basing on the two year period, beginning from the day the claim for
refund was made on April 18, 1952.
It will be recalled that under Section 309 of the Tax Code, the Collector of Internal Revenue is
authorized to credit or refund taxes erroneously or illegally received, for a period of two years
from the date of the claim for refund. In other words, the Collector had authority to refund or
credit this overpayment of P64,607.07. He not only offered to do this, but in his answer to the
suit filed by petitioner with the Board of Tax Appeals, he also assured the Board that steps
were being taken to credit petitioner with this amount. One aspect of this question is that by
not only offering to credit but also taking steps to credit petitioner with overpayment for a
period of two years from the date of the claim for refund, he waived the prescriptive period of
two years from the date of the actual filing of the suit a time difference of about four months.
The claim was filed on April 18 and the suit was filed on August 20 of the same year. As, a
matter of fact, this was the final decision of the Board of Tax Appeals, ordering the Collector
to refund that amount of P64,607.07. There is also some evidence to the effect that if petitioner
did not file its suit for refund earlier than August 20, 1952, it was because of an agreement or
understanding with the agent of the Collector that they should await the result of the then
pending case in this Court of Philippine Railway vs. Collector of Internal Revenue, in order
that the parties may act correctly and in accordance with the law, as interpreted by this High
Tribunal. By modifying as we do, the decision of the Tax Court so as to increase the amount
of the refund from P50,516.95 to P64,607.07 for the reasons above-stated, and considering we
said, the peculiar circumstances involved in the case, we would be tempering the rigors of the
law with fair and equity.
In view of the foregoing, and with the modification above-indicated, the appealed decision is
hereby affirmed. No costs.
G.R. No. L-17725 February 28, 1962
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs. MAMBULAO LUMBER
COMPANY, ET AL., defendants-appellants.
BARRERA, J.:
FACTS:
(a) under the first cause of action, defendants admitted that they have a liability of P587.37,
which liability is covered by a bond executed by defendant General Insurance & Surety
Corporation for Mambulao Lumber Company, jointly and severally in character, on July 29,
1953, in favor of herein plaintiff;
(b) under the second cause of action, both defendants admitted a joint and several liability in
favor of plaintiff in the sum of P296.70, also covered by a bond dated November 27, 1953;
and
(c) under the third cause of action, both defendants admitted a joint and several liability in
favor of plaintiff for P3,928.30, also covered by a bond dated July 20, 1954. These three
liabilities aggregate to P4,802.37.
If the liability of defendants in favor of plaintiff in the amount already mentioned is admitted,
then what is the defense interposed by the defendants? The defense presented by the
defendants is quite unusual in more ways than one. It appears from Exh. 3 that from July 31,
1948 to December 29, 1956, defendant Mambulao Lumber Company paid to the Republic of
the Philippines P8,200.52 for 'reforestation charges' and for the period commencing from April
30, 1947 to June 24, 1948, said defendant paid P927.08 to the Republic of the Philippines for
'reforestation charges'. These reforestation were paid to the plaintiff in pursuance of Section 1
of Republic Act 115 which provides that there shall be collected, in addition to the regular
forest charges provided under Section 264 of Commonwealth Act 466 known as the National
Internal Revenue Code, the amount of P0.50 on each cubic meter of timber... cut out and
removed from any public forest for commercial purposes. The amount collected shall be
expended by the director of forestry, with the approval of the secretary of agriculture and
commerce, for reforestation and afforestation of watersheds, denuded areas ... and other public
forest lands, which upon investigation, are found needing reforestation or afforestation .... The
total amount of the reforestation charges paid by Mambulao Lumber Company is P9,127.50,
and it is the contention of the defendant Mambulao Lumber Company that since the Republic
of the Philippines has not made use of those reforestation charges collected from it for
reforesting the denuded area of the land covered by its license, the Republic of the Philippines
should refund said amount, or, if it cannot be refunded, at least it should be compensated with
what Mambulao Lumber Company owed the Republic of the Philippines for reforestation
charges. In line with this thought, defendant Mambulao Lumber Company wrote the director
of forestry, letter which said defendant requested "that our account with your bureau be
credited with all the reforestation charges that you have imposed on us from July 1, 1947 to
June 14, 1956, amounting to around P2,988.62 ...". This letter of defendant Mambulao Lumber
Company was answered by the director of forestry, in which the director of forestry quoted an
opinion of the secretary of justice, to the effect that he has no discretion to extend the time for
paying the reforestation charges and also explained why not all denuded areas are being
reforested.
The only issue to be resolved in this appeal is whether the sum of P9,127.50 paid by
defendant-appellant company to plaintiff-appellee as reforestation charges from 1947 to 1956
may be set off or applied to the payment of the sum of P4,802.37 as forest charges due and
owing from appellant to appellee. It is appellant's contention that said sum of P9,127.50, not
having been used in the reforestation of the area covered by its license, the same is refundable
to it or may be applied in compensation of said sum of P4,802.37 due from it as forest charges.
We find appellant's claim devoid of any merit. Section 1 of Republic Act No. 115, provides:
SECTION 1. There shall be collected, in addition to the regular forest charges provided for
under Section two hundred and sixty-four of Commonwealth Act Numbered Four Hundred
Sixty-six, known as the National Internal Revenue Code, the amount of fifty centavos on each
cubic meter of timber for the first and second groups and forty centavos for the third and
fourth groups cut out and removed from any public forest for commercial purposes. The
amount collected shall be expended by the Director of Forestry, with the approval of the
8
Secretary of Agriculture and Natural Resources (commerce), for reforestation and
afforestation of watersheds, denuded areas and cogon and open lands within forest reserves,
communal forest, national parks, timber lands, sand dunes, and other public forest lands,
which upon investigation, are found needing reforestation or afforestation, or needing to be
under forest cover for the growing of economic trees for timber, tanning, oils, gums, and other
minor forest products or medicinal plants, or for watersheds protection, or for prevention of
erosion and floods and preparation of necessary plans and estimate of costs and for
reconnaisance survey of public forest lands and for such other expenses as may be deemed
necessary for the proper carrying out of the purposes of this Act.
All revenues collected by virtue of, and pursuant to, the provisions of the preceding
paragraph and from the sale of barks, medical plants and other products derived
from plantations as herein provided shall constitute a fund to be known as
Reforestation Fund, to be expended exclusively in carrying out the purposes
provided for under this Act. All provincial or city treasurers and their deputies shall
act as agents of the Director of Forestry for the collection of the revenues or incomes
derived from the provisions of this Act. (Emphasis supplied.)
Under this provision, it seems quite clear that the amount collected as reforestation charges
from a timber licenses or concessionaire shall constitute a fund to be known as the
Reforestation Fund, and that the same shall be expended by the Director of Forestry, with the
approval of the Secretary of Agriculture and Natural Resources for the reforestation or
afforestation, among others, of denuded areas which, upon investigation, are found to be
needing reforestation or afforestation. Note that there is nothing in the law which requires that
the amount collected as reforestation charges should be used exclusively for the reforestation
of the area covered by the license of a licensee or concessionaire, and that if not so used, the
same should be refunded to him. Observe too, that the licensee's area may or may not be
reforested at all, depending on whether the investigation thereof by the Director of Forestry
shows that said area needs reforestation. The conclusion seems to be that the amount paid by a
licensee as reforestation charges is in the nature of a tax which forms a part of the
Reforestation Fund, payable by him irrespective of whether the area covered by his license is
reforested or not. Said fund, as the law expressly provides, shall be expended in carrying out
the purposes provided for thereunder, namely, the reforestation or afforestation, among others,
of denuded areas needing reforestation or afforestation.
Appellant maintains that the principle of a compensation in Article 1278 of the new Civil
Code2 is applicable, such that the sum of P9,127.50 paid by it as reforestation charges may
compensate its indebtedness to appellee in the sum of P4,802.37 as forest charges. But in the
view we take of this case, appellant and appellee are not mutually creditors and debtors of
each other. Consequently, the law on compensation is inapplicable. On this point, the trial
court correctly observed: .
Under Article 1278, NCC, compensation should take place when two persons in their own
right are creditors and debtors of each other. With respect to the forest charges which the
defendant Mambulao Lumber Company has paid to the government, they are in the coffers of
the government as taxes collected, and the government does not owe anything, crystal clear
that the Republic of the Philippines and the Mambulao Lumber Company are not creditors and
debtors of each other, because compensation refers to mutual debts. ..
And the weight of authority is to the effect that internal revenue taxes, such as the forest
charges in question, can be the subject of set-off or compensation.
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off
under the statutes of set-off, which are construed uniformly, in the light of public policy, to
exclude the remedy in an action or any indebtedness of the state or municipality to one who is
liable to the state or municipality for taxes. Neither are they a proper subject of recoupment
since they do not arise out of the contract or transaction sued on.
The general rule, based on grounds of public policy is well-settled that no set-off is admissible
against demands for taxes levied for general or local governmental purposes. The reason on
which the general rule is based, is that taxes are not in the nature of contracts between the
party and party but grow out of a duty to, and are the positive acts of the government, to the
making and enforcing of which, the personal consent of individual taxpayers is not required. ...
If the taxpayer can properly refuse to pay his tax when called upon by the Collector, because
he has a claim against the governmental body which is not included in the tax levy, it is plain
that some legitimate and necessary expenditure must be curtailed. If the taxpayer's claim is
disputed, the collection of the tax must await and abide the result of a lawsuit, and meanwhile
the financial affairs of the government will be thrown into great confusion. (47 Am. Jur. 766-
767.)
WHEREFORE, the judgment of the trial court appealed from is hereby affirmed in all
respects, with costs against the defendant-appellant. So ordered.
G.R. No. L-67649 June 28, 1988
ENGRACIO FRANCIA, petitioner, vs. INTERMEDIATE APPELLATE COURT and
HO FERNANDEZ, respondents.
GUTIERREZ, JR., J.:
FACTS:
 Engracio Francia is the registered owner of a residential lot and a two-story house
built upon it situated in Pasay City.
 The lot, with an area of about 328 square meters, is described and covered by
Transfer Certificate of Title.
 a 125 square meter portion of Francia's property was expropriated by the Republic
for the sum of P4,116.00 representing the estimated amount equivalent to the
assessed value of the aforesaid portion.
 Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on
December 5, 1977, his property was sold at public auction by the City Treasurer of
Pasay City pursuant to Section 73 of Presidential Decree No. 464 known as the Real
Property Tax Code in order to satisfy a tax delinquency of P2,400.00.
 Ho Fernandez was the highest bidder for the property.
9
  Francia was not present during the auction sale since he was in Iligan City at that
time helping his uncle ship bananas.
 Francia received a notice of hearing filed by Ho Fernandez, seeking the cancellation
of TCT No. 4739 and the issuance in his name of a new certificate of title.
 Upon verification through his lawyer, Francia discovered that a Final Bill of Sale
had been issued in favor of Ho Fernandez by the City Treasurer. The auction sale
and the final bill of sale were both annotated at the back of TCT by the Register of
Deeds.
 Francia filed a complaint to annul the auction sale.
LOWER COURT: dismissed the amended complaint and ordering: (a) The Register of Deeds
of Pasay City to issue a new TCT in favor of the defendant Ho Fernandez over the parcel of
land. (b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00 as attorney's fees.
IAC: affirmed the decision of the lower court in toto. Hence, this petition for review.
ISSUE: respondent intermediate appellate court committed a grave error of law in not holding
petitioner's obligation to pay p2,400.00 for supposed tax delinquency was set-off by the
amount of p4,116.00 which the government is indebted to the former.
We gave due course to the petition for a more thorough inquiry into the petitioner's allegations
that his property was sold at public auction without notice to him and that the price paid for
the property was shockingly inadequate, amounting to fraud and deprivation without due
process of law.
A careful review of the case, however, discloses that Mr. Francia brought the problems raised
in his petition upon himself. While we commiserate with him at the loss of his property, the
law and the facts militate against the grant of his petition. We are constrained to dismiss it.
Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal
compensation. He claims that the government owed him P4,116.00 when a portion of his land
was expropriated on October 15, 1977. Hence, his tax obligation had been set-off by operation
of law as of October 15, 1977.
There is no legal basis for the contention. By legal compensation, obligations of persons, who
in their own right are reciprocally debtors and creditors of each other, are extinguished (Art.
1278, Civil Code). The circumstances of the case do not satisfy the requirements provided by
Article 1279, to wit: (1) that each one of the obligors be bound principally and that he be at the
same time a principal creditor of the other; (3) that the two debts be due.
This principal contention of the petitioner has no merit. We have consistently ruled that there
can be no off-setting of taxes against the claims that the taxpayer may have against the
government. A person cannot refuse to pay a tax on the ground that the government owes him
an amount equal to or greater than the tax being collected. The collection of a tax cannot await
the results of a lawsuit against the government.
In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal
Revenue Taxes can not be the subject of set-off or compensation. We stated that: A claim for
taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the
statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the
remedy in an action or any indebtedness of the state or municipality to one who is liable to the
state or municipality for taxes. Neither are they a proper subject of recoupment since they do
not arise out of the contract or transaction sued on. ... (80 C.J.S., 7374). "The general rule
based on grounds of public policy is well-settled that no set-off admissible against demands
for taxes levied for general or local governmental purposes. The reason on which the general
rule is based, is that taxes are not in the nature of contracts between the party and party but
grow out of duty to, and are the positive acts of the government to the making and enforcing of
which, the personal consent of individual taxpayers is not required."
We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector
because he has a claim against the governmental body not included in the tax levy.
This rule was reiterated in the case of Corders v. Gonda where we stated that: "internal
revenue taxes can not be the subject of compensation: Reason: government and taxpayer are
not mutually creditors and debtors of each other' under Article 1278 of the Civil Code and a
"claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off."
There are other factors which compel us to rule against the petitioner. The tax was due to the
city government while the expropriation was effected by the national government. Moreover,
the amount of P4,116.00 paid by the national government for the 125 square meter portion of
his lot was deposited with the Philippine National Bank long before the sale at public auction
of his remaining property. Notice of the deposit dated September 28, 1977 was received by the
petitioner on September 30, 1977. The petitioner admitted in his testimony that he knew about
the P4,116.00 deposited with the bank but he did not withdraw it. It would have been an easy
matter to withdraw P2,400.00 from the deposit so that he could pay the tax obligation thus
aborting the sale at public auction.
Petitioner had one year within which to redeem his property although, as well be shown later,
he claimed that he pocketed the notice of the auction sale without reading it.
Petitioner contends that "the auction sale in question was made without complying with the
mandatory provisions of the statute governing tax sale. No evidence, oral or otherwise, was
presented that the procedure outlined by law on sales of property for tax delinquency was
followed. Since defendant Ho Fernandez has the affirmative of this issue, the burden of proof
therefore rests upon him to show that plaintiff was duly and properly notified. (emphasis
supplied)
We agree with the petitioner's claim that Ho Fernandez, the purchaser at the auction sale, has
the burden of proof to show that there was compliance with all the prescribed requisites for a
tax sale.
The case of Valencia v. Jimenez laid down the doctrine that: Due process of law to be
followed in tax proceedings must be established by proof and the general rule is that the
10
purchaser of a tax title is bound to take upon himself the burden of showing the regularity of
all proceedings leading up to the sale. (emphasis supplied)
There is no presumption of the regularity of any administrative action which results in
depriving a taxpayer of his property through a tax sale. (Camo v. Riosa Boyco); Denoga v.
Insular Government). This is actually an exception to the rule that administrative proceedings
are presumed to be regular.
But even if the burden of proof lies with the purchaser to show that all legal prerequisites have
been complied with, the petitioner cannot, however, deny that he did receive the notice for the
auction sale.
PLAINTIFF: claimed that it was illegal and irregular. He insisted that he was not properly
notified of the auction sale. Surprisingly, however, he admitted in his testimony that he
received the letter as shown by his signature thereof. He claimed further that he was not
present on the date of the auction sale because he went to Iligan City. As long as there was
substantial compliance with the requirements of the notice, the validity of the auction sale
cannot be assailed.
 Petitioner was notified about the auction sale. It was negligence on his part when he
ignored such notice. By his very own admission that he received the notice, his now
coming to court assailing the validity of the auction sale loses its force.
Petitioner's third assignment of grave error likewise lacks merit. As a general rule, gross
inadequacy of price is not material (De Leon v. Salvador; Ponce de Leon v. Rehabilitation
Finance Corporation; Tolentino v. Agcaoili). See also Barrozo Vda. de Gordon v. Court of
Appeals, we held that "alleged gross inadequacy of price is not material when the law gives
the owner the right to redeem as when a sale is made at public auction, upon the theory that
the lesser the price, the easier it is for the owner to effect redemption."
In Velasquez v. Coronel, this Court held: Respondent treasurer now claims that the prices for
which the lands were sold are unconscionable considering the wide divergence between their
assessed values and the amounts for which they had been actually sold. However, while in
ordinary sales for reasons of equity a transaction may be invalidated on the ground of
inadequacy of price, or when such inadequacy shocks one's conscience as to justify the courts
to interfere, such does not follow when the law gives to the owner the right to redeem, as when
a sale is made at public auction, upon the theory that the lesser the price the easier it is for the
owner to effect the redemption. And so it was aptly said: "When there is the right to redeem,
inadequacy of price should not be material, because the judgment debtor may reacquire the
property or also sell his right to redeem and thus recover the loss he claims to have suffered by
reason of the price obtained at the auction sale."
The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v. De Long,
et al. : If mere inadequacy of price is held to be a valid objection to a sale for taxes, the
collection of taxes in this manner would be greatly embarrassed, if not rendered altogether
impracticable. In Black on Tax Titles, the correct rule is stated as follows: "where land is sold
for taxes, the inadequacy of the price given is not a valid objection to the sale." This rule arises
from necessity, for, if a fair price for the land were essential to the sale, it would be useless to
offer the property. Indeed, it is notorious that the prices habitually paid by purchasers at tax
sales are grossly out of proportion to the value of the land. (Rothchild Bros. v. Rollinger).
In this case now before us, we can aptly use the language of McGuire, et al. v. Bean, et al.:
Like most cases of this character there is here a certain element of hardship from which we
would be glad to relieve, but do so would unsettle long-established rules and lead to
uncertainty and difficulty in the collection of taxes which are the life blood of the state. We are
convinced that the present rules are just, and that they bring hardship only to those who have
invited it by their own neglect.
We are inclined to believe the petitioner's claim that the value of the lot has greatly
appreciated in value. Precisely because of the widening of Buendia Avenue in Pasay City,
which necessitated the expropriation of adjoining areas, real estate values have gone up in the
area. However, the price quoted by the petitioner for a 203 square meter lot appears quite
exaggerated. At any rate, the foregoing reasons which answer the petitioner's claims lead us to
deny the petition.
And finally, even if we are inclined to give relief to the petitioner on equitable grounds, there
are no strong considerations of substantial justice in his favor. Mr. Francia failed to pay his
taxes for 14 years from 1963 up to the date of the auction sale. He claims to have pocketed the
notice of sale without reading it which, if true, is still an act of inexplicable negligence. He did
not withdraw from the expropriation payment deposited with the Philippine National Bank an
amount sufficient to pay for the back taxes. The petitioner did not pay attention to another
notice sent by the City Treasurer on November 3, 1978, during the period of redemption,
regarding his tax delinquency. There is furthermore no showing of bad faith or collusion in the
purchase of the property by Mr. Fernandez. The petitioner has no standing to invoke equity in
his attempt to regain the property by belatedly asking for the annulment of the sale.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is DISMISSED.
The decision of the respondent court is affirmed.
G.R. No. L-18994 June 29, 1963
MELECIO R. DOMINGO, as Commissioner of Internal Revenue, petitioner, vs. HON.
LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of
Leyte, and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the late
Walter Scott Price, respondents.
LABRADOR, J.:
 It appears that in Domingo vs. Hon. Judge Moscoso, this Court declared as final and
executory the order for the payment by the estate of the estate and inheritance taxes,
charges and penalties, amounting to P40,058.55, issued by the Court of First
Instance of Leyte in, special proceedings No. 14 entitled "In the matter of the
Intestate Estate of the Late Walter Scott Price."
11
  In order to enforce the claims against the estate the fiscal presented a petition to the
court below for the execution of the judgment.
 The petition was, however, denied by the court which held that the execution is not
justifiable as the Government is indebted to the estate under administration in the
amount of P262,200.
 The orders of the court below are as follows: Atty. Benedicto submitted a copy of
the contract between Mrs.. Price, Administratrix of the estate of her late husband
Walter Scott Price and Director Zoilo Castrillo of the Bureau of Lands and
acknowledged before Notary Public Esguerra, legal adviser in Malacañang to
Executive Secretary De Leon, the note of His Excellency, Pres. Carlos P. Garcia, to
Director Castrillo, directing the latter to pay to Mrs. Price the sum ofP368,140.00,
and an extract of page 765 of Republic Act No. 2700 appropriating the sum of
P262.200.00 for the payment to the Leyte Cadastral Survey, Inc., represented by the
administratrix Simeona Price, as directed in the above note of the President.
Considering these facts, the Court orders that the payment of inheritance taxes in the
sum of P40,058.55 due the Collector of Internal Revenue as ordered paid by this
Court in accordance with the order of the Supreme Court promulgated July 30, 1960
in G.R. No. L-14674, be deducted from the amount of P262,200.00 due and payable
to the Administratrix Simeona K. Price, in this estate, the balance to be paid by the
Government to her without further delay. (Order of August 20, 1960)
The Court has nothing further to add to its order dated August 20, 1960 and it orders that the
payment of the claim of the Collector of Internal Revenue be deferred until the Government
shall have paid its accounts to the administratrix herein amounting to P262,200.00. It may not
be amiss to repeat that it is only fair for the Government, as a debtor, to its accounts to its
citizens-creditors before it can insist in the prompt payment of the latter's account to it,
specially taking into consideration that the amount due to the Government draws interests
while the credit due to the present state does not accrue any interest. (Order of September 28,
1960)
The petition to set aside the above orders of the court below and for the execution of the claim
of the Government against the estate must be denied for lack of merit. The ordinary procedure
by which to settle claims of indebtedness against the estate of a deceased person, as an
inheritance tax, is for the claimant to present a claim before the probate court so that said court
may order the administrator to pay the amount thereof.
To such effect is the decision of this Court in Aldamiz vs. Judge of the Court of First Instance
of Mindoro, thus: a writ of execution is not the proper procedure allowed by the Rules of
Court for the payment of debts and expenses of administration. The proper procedure is for the
court to order the sale of personal estate or the sale or mortgage of real property of the
deceased and all debts or expenses of administrator and with the written notice to all the heirs
legatees and devisees residing in the Philippines, according to Rule 89, section 3, and Rule 90,
section 2. And when sale or mortgage of real estate is to be made, the regulations contained in
Rule 90, section 7, should be complied with.
Execution may issue only where the devisees, legatees or heirs have entered into possession of
their respective portions in the estate prior to settlement and payment of the debts and
expenses of administration and it is later ascertained that there are such debts and expenses to
be paid, in which case "the court having jurisdiction of the estate may, by order for that
purpose, after hearing, settle the amount of their several liabilities, and order how much and in
what manner each person shall contribute, and may issue execution if circumstances require"
(Rule 89, section 6; see also Rule 74, Section 4; Emphasis supplied.) And this is not the
instant case.
The legal basis for such a procedure is the fact that in the testate or intestate proceedings to
settle the estate of a deceased person, the properties belonging to the estate are under the
jurisdiction of the court and such jurisdiction continues until said properties have been
distributed among the heirs entitled thereto. During the pendency of the proceedings all the
estate is in custodia legis and the proper procedure is not to allow the sheriff, in case of the
court judgment, to seize the properties but to ask the court for an order to require the
administrator to pay the amount due from the estate and required to be paid.
Another ground for denying the petition of the provincial fiscal is the fact that the court having
jurisdiction of the estate had found that the claim of the estate against the Government has
been recognized and an amount of P262,200 has already been appropriated for the purpose by
a corresponding law (Rep. Act No. 2700). Under the above circumstances, both the claim of
the Government for inheritance taxes and the claim of the intestate for services rendered have
already become overdue and demandable is well as fully liquidated.
Compensation, therefore, takes place by operation of law, in accordance with the provisions of
Articles 1279 and 1290 of the Civil Code, and both debts are extinguished to the concurrent
amount, thus: ART. 1200. When all the requisites mentioned in article 1279 are present,
compensation takes effect by operation of law, and extinguished both debts to the concurrent
amount, eventhough the creditors and debtors are not aware of the compensation.
It is clear, therefore, that the petitioner has no clear right to execute the judgment for taxes
against the estate of the deceased Walter Scott Price. Furthermore, the petition
for certiorari and mandamus is not the proper remedy for the petitioner. Appeal is the remedy.
The petition is, therefore, dismissed, without costs.
G.R. No. 92585 May 8, 1992
CALTEX PHILIPPINES, INC., petitioner, vs. THE HONORABLE COMMISSION ON
AUDIT, HONORABLE COMMISSIONER BARTOLOME C. FERNANDEZ and
HONORABLE COMMISSIONER ALBERTO P. CRUZ, respondents.
DAVIDE, JR., J.:
This is a petition erroneously brought under Rule 44 of the Rules of Court 1 questioning the
authority of the Commission on Audit (COA) in disallowing petitioner's claims for
reimbursement from the Oil Price Stabilization Fund (OPSF) and seeking the reversal of said
Commission's decision denying its claims for recovery of financing charges from the Fund and
reimbursement of underrecovery arising from sales to the National Power Corporation, Atlas
12
Consolidated Mining and Development Corporation (ATLAS) and Marcopper Mining
Corporation (MAR-COPPER), preventing it from exercising the right to offset its remittances
against its reimbursement vis-a-vis the OPSF and disallowing its claims which are still
pending resolution before the Office of Energy Affairs (OEA) and the (DOF).
Pursuant to the 1987 Constitution, 2 any decision, order or ruling of the Constitutional
Commissions 3 may be brought to this Court on certiorari by the aggrieved party within thirty
(30) days from receipt of a copy thereof. The certiorari referred to is the special civil action
for certiorari under Rule 65 of the Rules of Court. 4
Considering, however, that the allegations that the COA acted with:
(a) total lack of jurisdiction in completely ignoring and showing absolutely no respect for the
findings and rulings of the administrator of the fund itself and in disallowing a claim which is
still pending resolution at the OEA level, and (b) "grave abuse of discretion and completely
without jurisdiction" 5 in declaring that petitioner cannot avail of the right to offset any amount
that it may be required under the law to remit to the OPSF against any amount that it may
receive by way of reimbursement therefrom are sufficient to bring this petition within Rule 65
of the Rules of Court, and, considering further the importance of the issues raised, the error in
the designation of the remedy pursued will, in this instance, be excused.
The issues raised revolve around the OPSF created under Section 8 of Presidential Decree
(P.D.) No. 1956, as amended by Executive Order (E.O.) No. 137. As amended, said Section 8
reads as follows: Sec. 8 . There is hereby created a Trust Account in the books of accounts of
the Ministry of Energy to be designated as Oil Price Stabilization Fund (OPSF) for the purpose
of minimizing frequent price changes brought about by exchange rate adjustments and/or
changes in world market prices of crude oil and imported petroleum products. The Oil Price
Stabilization Fund may be sourced from any of the following: a) Any increase in the tax
collection from ad valorem tax or customs duty imposed on petroleum products subject to tax
under this Decree arising from exchange rate adjustment, as may be determined by the
Minister of Finance in consultation with the Board of Energy; b) Any increase in the tax
collection as a result of the lifting of tax exemptions of government corporations, as may be
determined by the Minister of Finance in consultation with the Board of Energy; c) Any
additional amount to be imposed on petroleum products to augment the resources of the Fund
through an appropriate Order that may be issued by the Board of Energy requiring payment by
persons or companies engaged in the business of importing, manufacturing and/or marketing
petroleum products; d) Any resulting peso cost differentials in case the actual peso costs paid
by oil companies in the importation of crude oil and petroleum products is less than the peso
costs computed using the reference foreign exchange rate as fixed by the Board of Energy.
The Fund herein created shall be used for the following: 1) To reimburse the oil companies for
cost increases in crude oil and imported petroleum products resulting from exchange rate
adjustment and/or increase in world market prices of crude oil; 2) To reimburse the oil
companies for possible cost under-recovery incurred as a result of the reduction of domestic
prices of petroleum products. The magnitude of the underrecovery, if any, shall be determined
by the Ministry of Finance. "Cost underrecovery" shall include the following: i. Reduction in
oil company take as directed by the Board of Energy without the corresponding reduction in
the landed cost of oil inventories in the possession of the oil companies at the time of the price
change; ii. Reduction in internal ad valorem taxes as a result of foregoing government
mandated price reductions; iii. Other factors as may be determined by the Ministry of Finance
to result in cost underrecovery.
The Oil Price Stabilization Fund (OPSF) shall be administered by the Ministry of Energy.
The material operative facts of this case, as gathered from the pleadings of the parties, are not
disputed.
COA: sent a letter to Caltex Philippines, Inc. (CPI), hereinafter referred to as Petitioner,
directing the latter to remit to the OPSF its collection, excluding that unremitted for the years
1986 and 1988, of the additional tax on petroleum products authorized under the aforesaid
Section 8 of P.D. No. 1956 which, as of 31 December 1987, amounted to P335,037,649.00 and
informing it that, pending such remittance, all of its claims for reimbursement from the OPSF
shall be held in abeyance. 6
COA: sent another letter to petitioner informing it that partial verification with the OEA
showed that the grand total of its unremitted collections of the above tax is P1,287,668,820.00,
broken down as follows:
1986 — P233,190,916.00
1987 — 335,065,650.00
1988 — 719,412,254.00;
directing it to remit the same, with interest and surcharges thereon, within sixty (60) days from
receipt of the letter; advising it that the COA will hold in abeyance the audit of all its claims
for reimbursement from the OPSF; and directing it to desist from further offsetting the taxes
collected against outstanding claims in 1989 and subsequent periods. 7
 petitioner requested the COA for an early release of its reimbursement certificates
from the OPSF covering claims with the Office of Energy Affairs since June 1987
up to March 1989, invoking in support thereof COA Circular No. 89-299 on the
lifting of pre-audit of government transactions of national government agencies and
government-owned or controlled corporations.
COA: denied petitioner's request for the early release of the reimbursement certificates from
the OPSF and repeated its earlier directive to petitioner to forward payment of the latter's
unremitted collections to the OPSF to facilitate COA's audit action on the reimbursement
claims.
 By way of a reply, petitioner submitted to the COA a proposal for the payment of
the collections and the recovery of claims, since the outright payment of the sum of
P1.287 billion to the OEA as a prerequisite for the processing of said claims against
the OPSF will cause a very serious impairment of its cash position. The proposal
reads:
13
We, therefore, very respectfully propose the following: (1) Any procedural arrangement
acceptable to COA to facilitate monitoring of payments and reimbursements will be
administered by the ERB/Finance Dept./OEA, as agencies designated by law to
administer/regulate OPSF. (2) For the retroactive period, Caltex will deliver to OEA, P1.287
billion as payment to OPSF, similarly OEA will deliver to Caltex the same amount in cash
reimbursement from OPSF. (3) The COA audit will commence immediately and will be
conducted expeditiously. (4) The review of current claims (1989) will be conducted
expeditiously to preclude further accumulation of reimbursement from OPSF.
COA: with the Chairman taking no part, handed down Decision No. 921 accepting the above-
stated proposal but prohibiting petitioner from further offsetting remittances and
reimbursements for the current and ensuing years. Decision No. 921 reads: This pertains to the
within separate requests of Mr. Manuel A. Estrella, President, Petron Corporation, and Mr.
Francis Ablan, President and Managing Director, Caltex (Philippines) Inc., for reconsideration
of this Commission's adverse action embodied in its letters dated February 2, 1989 and March
9, 1989, the former directing immediate remittance to the Oil Price Stabilization Fund of
collections made by the firms pursuant to P.D. 1956, as amended by E.O. No. 137, S. 1987,
and the latter reiterating the same directive but further advising the firms to desist from
offsetting collections against their claims with the notice that "this Commission will hold in
abeyance the audit of all . . . claims for reimbursement from the OPSF."
It appears that under letters of authority issued by the Chairman, Energy Regulatory Board, the
aforenamed oil companies were allowed to offset the amounts due to the Oil Price
Stabilization Fund against their outstanding claims from the said Fund for the calendar years
1987 and 1988, pending with the then Ministry of Energy, the government entity charged with
administering the OPSF. This Commission, however, expressing serious doubts as to the
propriety of the offsetting of all types of reimbursements from the OPSF against all categories
of remittances, advised these oil companies that such offsetting was bereft of legal basis.
Aggrieved thereby, these companies now seek reconsideration and in support thereof clearly
manifest their intent to make arrangements for the remittance to the Office of Energy Affairs
of the amount of collections equivalent to what has been previously offset, provided that this
Commission authorizes the Office of Energy Affairs to prepare the corresponding checks
representing reimbursement from the OPSF. It is alleged that the implementation of such an
arrangement, whereby the remittance of collections due to the OPSF and the reimbursement of
claims from the Fund shall be made within a period of not more than one week from each
other, will benefit the Fund and not unduly jeopardize the continuing daily cash requirements
of these firms.
Upon a circumspect evaluation of the circumstances herein obtaining, this Commission
perceives no further objectionable feature in the proposed arrangement, provided that 15% of
whatever amount is due from the Fund is retained by the Office of Energy Affairs, the same to
be answerable for suspensions or disallowances, errors or discrepancies which may be noted in
the course of audit and surcharges for late remittances without prejudice to similar future
retentions to answer for any deficiency in such surcharges, and provided further that no
offsetting of remittances and reimbursements for the current and ensuing years shall be
allowed.
Pursuant to this decision, the COA sent the following letter to Executive Director Wenceslao
R. De la Paz of the Office of Energy Affairs:
Dear Atty. dela Paz: Pursuant to the Commission on Audit Decision No. 921 dated June 7,
1989, and based on our initial verification of documents submitted to us by your Office in
support of Caltex (Philippines), Inc. offsets for the year 1986 to May 31, 1989, as well as its
outstanding claims against the Oil Price Stabilization Fund (OPSF) as of May 31, 1989, we are
pleased to inform your Office that Caltex (Philippines), Inc. shall be required to remit to OPSF
an amount of P1,505,668,906, representing remittances to the OPSF which were offset against
its claims reimbursements (net of unsubmitted claims). In addition, the Commission hereby
authorize the Office of Energy Affairs (OEA) to cause payment of P1,959,182,612 to Caltex,
representing claims initially allowed in audit, the details of which are presented hereunder:
As presented in the foregoing computation the disallowances totalled P387,683,535, which
included P130,420,235 representing those claims disallowed by OEA, details of which is
shown in Schedule 1 as summarized as follows:
Disallowance of COA Particulars Amount
Recovery of financing charges P162,728,475 /a
Product sales 48,402,398 /b
Inventory losses
Borrow loan arrangement 14,034,786 /c
Sales to Atlas/Marcopper 32,097,083 /d
Sales to NPC 558
——————
P257,263,300
Disallowances of OEA 130,420,235
————————— ——————
Total P387,683,535
The reasons for the disallowances are discussed hereunder:
a. Recovery of Financing Charges
Review of the provisions of P.D. 1596 as amended by E.O. 137 seems to indicate that
recovery of financing charges by oil companies is not among the items for which the OPSF
may be utilized. Therefore, it is our view that recovery of financing charges has no legal basis.
The mechanism for such claims is provided in DOF Circular 1-87.
b. Product Sales –– Sales to International Vessels/Airlines
BOE Resolution No. 87-01 dated February 7, 1987 as implemented by OEA Order No. 87-03-
095 indicating that (sic) February 7, 1987 as the effectivity date that (sic) oil companies should
pay OPSF impost on export sales of petroleum products. Effective February 7, 1987 sales to
14
international vessels/airlines should not be included as part of its domestic sales. Changing the
effectivity date of the resolution from February 7, 1987 to October 20, 1987 as covered by
subsequent ERB Resolution No. 88-12 dated November 18, 1988 has allowed Caltex to
include in their domestic sales volumes to international vessels/airlines and claim the
corresponding reimbursements from OPSF during the period. It is our opinion that the
effectivity of the said resolution should be February 7, 1987.
c. Inventory losses –– Settlement of Ad Valorem
We reviewed the system of handling Borrow and Loan (BLA) transactions including the
related BLA agreement, as they affect the claims for reimbursements of ad valorem taxes. We
observed that oil companies immediately settle ad valorem taxes for BLA transaction (sic).
Loan balances therefore are not tax paid inventories of Caltex subject to reimbursements but
those of the borrower. Hence, we recommend reduction of the claim for July, August, and
November, 1987 amounting to P14,034,786.
d. Sales to Atlas/Marcopper
LOI No. 1416 dated July 17, 1984 provides that "I hereby order and direct the suspension of
payment of all taxes, duties, fees, imposts and other charges whether direct or indirect due and
payable by the copper mining companies in distress to the national and local governments." It
is our opinion that LOI 1416 which implements the exemption from payment of OPSF imposts
as effected by OEA has no legal basis.
Furthermore, we wish to emphasize that payment to Caltex (Phil.) Inc., of the amount as
herein authorized shall be subject to availability of funds of OPSF as of May 31, 1989 and
applicable auditing rules and regulations. With regard to the disallowances, it is further
informed that the aggrieved party has 30 days within which to appeal the decision of the
Commission in accordance with law.
 petitioner filed an Omnibus Request for the Reconsideration of the decision based
on the following grounds: 13
A) COA-DISALLOWED CLAIMS ARE AUTHORIZED UNDER EXISTING RULES,
ORDERS, RESOLUTIONS, CIRCULARS ISSUED BY THE DEPARTMENT OF
FINANCE AND THE ENERGY REGULATORY BOARD PURSUANT TO EXECUTIVE
ORDER NO. 137.
B) ADMINISTRATIVE INTERPRETATIONS IN THE COURSE OF EXERCISE OF
EXECUTIVE POWER BY DEPARTMENT OF FINANCE AND ENERGY REGULATORY
BOARD ARE LEGAL AND SHOULD BE RESPECTED AND APPLIED UNLESS
DECLARED NULL AND VOID BY COURTS OR REPEALED BY LEGISLATION.
C) LEGAL BASIS FOR RETENTION OF OFFSET ARRANGEMENT, AS AUTHORIZED
BY THE EXECUTIVE BRANCH OF GOVERNMENT, REMAINS VALID.
 Petitioner filed with the COA a Supplemental Omnibus Request for
Reconsideration. 14
COA: affirming the disallowance for recovery of financing charges, inventory losses, and
sales to MARCOPPER and ATLAS, while allowing the recovery of product sales or those
arising from export sales. Decision No. 1171 reads as follows: Anent the recovery
of financing charges you contend that Caltex Phil. Inc. has the .authority to recover financing
charges from the OPSF on the basis of Department of Finance (DOF) Circular 1-87, dated
February 18, 1987, which allowed oil companies to "recover cost of financing working capital
associated with crude oil shipments," and provided a schedule of reimbursement in terms of
peso per barrel. It appears that on November 6, 1989, the DOF issued a memorandum to the
President of the Philippines explaining the nature of these financing charges and justifying
their reimbursement as follows: As part of your program to promote economic recovery, oil
companies (were authorized) to refinance their imports of crude oil and petroleum products
from the normal trade credit of 30 days up to 360 days from date of loading. Conformably, the
oil companies deferred their foreign exchange remittances for purchases by refinancing their
import bills from the normal 30-day payment term up to the desired 360 days. This refinancing
of importations carried additional costs (financing charges) which then became, due to
government mandate, an inherent part of the cost of the purchases of our country's oil
requirement.
We beg to disagree with such contention. The justification that financing charges increased oil
costs and the schedule of reimbursement rate in peso per barrel (Exhibit 1) used to support
alleged increase (sic) were not validated in our independent inquiry. As manifested in Exhibit
2, using the same formula which the DOF used in arriving at the reimbursement rate but using
comparable percentages instead of pesos, the ineluctable conclusion is that the oil companies
are actually gaining rather than losing from the extension of credit because such extension
enables them to invest the collections in marketable securities which have much higher rates
than those they incur due to the extension. The Data we used were obtained from CPI
(CALTEX) Management and can easily be verified from our records.
With respect to product sales or those arising from sales to international vessels or airlines, it
is believed that export sales (product sales) are entitled to claim refund from the OPSF.
As regard your claim for underrecovery arising from inventory losses, It is the considered
view of this Commission that the OPSF is not liable to refund such surtax on inventory losses
because these are paid to BIR and not OPSF, in view of which CPI (CALTEX) should seek
refund from BIR.
Finally, as regards the sales to Atlas and Marcopper, it is represented that you are entitled to
claim recovery from the OPSF pursuant to LOI 1416 issued on July 17, 1984, since these
copper mining companies did not pay CPI (CALTEX) and OPSF imposts which were added to
the selling price.
Upon a circumspect evaluation, this Commission believes and so holds that the CPI
(CALTEX) has no authority to claim reimbursement for this uncollected OPSF impost
because LOI 1416 dated July 17, 1984, which exempts distressed mining companies from "all
15
taxes, duties, import fees and other charges" was issued when OPSF was not yet in existence
and could not have contemplated OPSF imposts at the time of its formulation. Moreover, it is
evident that OPSF was not created to aid distressed mining companies but rather to help the
domestic oil industry by stabilizing oil prices.
Unsatisfied with the decision, petitioner filed on 28 March 1990 the present petition wherein it
imputes to the COA the commission of the following errors: 16
I RESPONDENT COMMISSION ERRED IN DISALLOWING RECOVERY OF
FINANCING CHARGES FROM THE OPSF.
II RESPONDENT COMMISSION ERRED IN DISALLOWING
CPI's 17 CLAIM FOR REIMBURSEMENT OF UNDERRECOVERY ARISING FROM
SALES TO NPC.
III RESPONDENT COMMISSION ERRED IN DENYING CPI's CLAIMS FOR
REIMBURSEMENT ON SALES TO ATLAS AND MARCOPPER.
IV RESPONDENT COMMISSION ERRED IN PREVENTING CPI FROM EXERCISING
ITS LEGAL RIGHT TO OFFSET ITS REMITTANCES AGAINST ITS
REIMBURSEMENT VIS-A-VIS THE OPSF.
V RESPONDENT COMMISSION ERRED IN DISALLOWING CPI's CLAIMS WHICH
ARE STILL PENDING RESOLUTION BY (SIC) THE OEA AND THE DOF.
In the Resolution of 5 April 1990, this Court required the respondents to comment on the
petition within ten (10) days from notice. 18
On 6 September 1990, respondents COA and Commissioners Fernandez and Cruz, assisted by
the Office of the Solicitor General, filed their Comment. 19
This Court resolved to give due course to this petition on 30 May 1991 and required the parties
to file their respective Memoranda within twenty (20) days from notice. 20
In a Manifestation dated 18 July 1991, the Office of the Solicitor General prays that the
Comment filed on 6 September 1990 be considered as the Memorandum for respondents. 21
Upon the other hand, petitioner filed its Memorandum on 14 August 1991.
I. Petitioner dwells lengthily on its first assigned error contending, in support thereof, that:
(1) In view of the expanded role of the OPSF pursuant to Executive Order No. 137, which
added a second purpose, to wit: 2) To reimburse the oil companies for possible cost
underrecovery incurred as a result of the reduction of domestic prices of petroleum products.
The magnitude of the underrecovery, if any, shall be determined by the Ministry of Finance.
"Cost underrecovery" shall include the following: i. Reduction in oil company take as directed
by the Board of Energy without the corresponding reduction in the landed cost of oil
inventories in the possession of the oil companies at the time of the price change; ii. Reduction
in internal ad valorem taxes as a result of foregoing government mandated price reductions;
iii. Other factors as may be determined by the Ministry of Finance to result in cost
underrecovery.
the "other factors" mentioned therein that may be determined by the Ministry (now
Department) of Finance may include financing charges for "in essence, financing charges
constitute unrecovered cost of acquisition of crude oil incurred by the oil companies," as
explained in the 6 November 1989 Memorandum to the President of the Department of
Finance; they "directly translate to cost underrecovery in cases where the money market
placement rates decline and at the same time the tax on interest income increases. The
relationship is such that the presence of underrecovery or overrecovery is directly dependent
on the amount and extent of financing charges."
(2) The claim for recovery of financing charges has clear legal and factual basis; it was filed
on the basis of Department of Finance Circular No.
1-87, dated 18 February 1987, which provides: To allow oil companies to recover the costs of
financing working capital associated with crude oil shipments, the following guidelines on the
utilization of the Oil Price Stabilization Fund pertaining to the payment of the foregoing (sic)
exchange risk premium and recovery of financing charges will be implemented:
1. The OPSF foreign exchange premium shall be reduced to a flat rate of one (1) percent for
the first (6) months and 1/32 of one percent per month thereafter up to a maximum period of
one year, to be applied on crude oil' shipments from January 1, 1987. Shipments with
outstanding financing as of January 1, 1987 shall be charged on the basis of the fee applicable
to the remaining period of financing. 2. In addition, for shipments loaded after January 1987,
oil companies shall be allowed to recover financing charges directly from the OPSF per barrel
of crude oil based on the following schedule:
Less than 180 days None
180 days to 239 days 1.90
241 (sic) days to 299 4.02
300 days to 369 (sic) days 6.16
360 days or more 8.28
The above rates shall be subject to review every sixty days.
Pursuant to this circular, the Department of Finance, in its letter of 18 February 1987, advised
the Office of Energy Affairs as follows:
HON. VICENTE T. PATERNO
Deputy Executive Secretary
For Energy Affairs
Office of the President
Makati, Metro Manila
16
Dear Sir: This refers to the letters of the Oil Industry dated December 4, 1986 and February 5,
1987 and subsequent discussions held by the Price Review committee on February 6, 1987.
On the basis of the representations made, the Department of Finance recognizes the necessity
to reduce the foreign exchange risk premium accruing to the Oil Price Stabilization Fund
(OPSF). Such a reduction would allow the industry to recover partly associated financing
charges on crude oil imports. Accordingly, the OPSF foreign exchange risk fee shall be
reduced to a flat charge of 1% for the first six (6) months plus 1/32% of 1% per month
thereafter up to a maximum period of one year, effective January 1, 1987. In addition, since
the prevailing company take would still leave unrecovered financing charges, reimbursement
may be secured from the OPSF in accordance with the provisions of the attached Department
of Finance circular. 23
Acting on this letter, the OEA issued on 4 May 1987 Order No. 87-05-096 which contains the
guidelines for the computation of the foreign exchange risk fee and the recovery of financing
charges from the OPSF, to wit:
B. FINANCE CHARGES
1. Oil companies shall be allowed to recover financing charges directly from the OPSF for
both crude and product shipments loaded after January 1, 1987 based on the following rates:
Less than 180 days None
180 days to 239 days 1.90
240 days to 229 (sic) days 4.02
300 days to 359 days 6.16
360 days to more 8.28
2. The above rates shall be subject to review every sixty days. 24
Then on 22 November 1988, the Department of Finance issued Circular No. 4-88 imposing
further guidelines on the recoverability of financing charges, to wit: Following are the
supplemental rules to Department of Finance Circular No. 1-87 dated February 18, 1987
which allowed the recovery of financing charges directly from the Oil Price Stabilization
Fund. (OPSF): 1. The Claim for reimbursement shall be on a per shipment basis. 2. The claim
shall be filed with the Office of Energy Affairs together with the claim on peso cost
differential for a particular shipment and duly certified supporting documents providedfor
under Ministry of Finance No. 11-85. 3. The reimbursement shall be on the form of
reimbursement certificate (Annex A) to be issued by the Office of Energy Affairs. The said
certificate may be used to offset against amounts payable to the OPSF. The oil companies may
also redeem said certificates in cash if not utilized, subject to availability of funds. 25
The OEA disseminated this Circular to all oil companies in its Memorandum Circular No. 88-
12-017. 26
The COA can neither ignore these issuances nor formulate its own interpretation of the laws in
the light of the determination of executive agencies. The determination by the Department of
Finance and the OEA that financing charges are recoverable from the OPSF is entitled to great
weight and consideration. 27 The function of the COA, particularly in the matter of allowing or
disallowing certain expenditures, is limited to the promulgation of accounting and auditing
rules for, among others, the disallowance of irregular, unnecessary, excessive, extravagant, or
unconscionable expenditures, or uses of government funds and properties. 28
(3) Denial of petitioner's claim for reimbursement would be inequitable. Additionally, COA's
claim that petitioner is gaining, instead of losing, from the extension of credit, is belatedly
raised and not supported by expert analysis.
In impeaching the validity of petitioner's assertions, the respondents argue that: 1. The
Constitution gives the COA discretionary power to disapprove irregular or unnecessary
government expenditures and as the monetary claims of petitioner are not allowed by law, the
COA acted within its jurisdiction in denying them; 2. P.D. No. 1956 and E.O. No. 137 do not
allow reimbursement of financing charges from the OPSF; 3. Under the principle of ejusdem
generis, the "other factors" mentioned in the second purpose of the OPSF pursuant to E.O. No.
137 can only include "factors which are of the same nature or analogous to those enumerated;"
4. In allowing reimbursement of financing charges from OPSF, Circular No. 1-87 of the
Department of Finance violates P.D. No. 1956 and E.O. No. 137; and 5. Department of
Finance rules and regulations implementing P.D. No. 1956 do not likewise allow
reimbursement of financing charges.
We find no merit in the first assigned error.
As to the power of the COA, which must first be resolved in view of its primacy, We find the
theory of petitioner –– that such does not extend to the disallowance of irregular, unnecessary,
excessive, extravagant, or unconscionable expenditures, or use of government funds and
properties, but only to the promulgation of accounting and auditing rules for, among others,
such disallowance –– to be untenable in the light of the provisions of the 1987 Constitution
and related laws.
Section 2, Subdivision D, Article IX of the 1987 Constitution expressly provides: Sec. 2(l).
The Commission on Audit shall have the power, authority, and duty to examine, audit, and
settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of funds
and property, owned or held in trust by, or pertaining to, the Government, or any of its
subdivisions, agencies, or instrumentalities, including government-owned and controlled
corporations with original charters, and on a post-audit basis: (a) constitutional bodies,
commissions and offices that have been granted fiscal autonomy under this Constitution; (b)
autonomous state colleges and universities; (c) other government-owned or controlled
corporations and their subsidiaries; and (d) such non-governmental entities receiving subsidy
or equity, directly or indirectly, from or through the government, which are required by law or
the granting institution to submit to such audit as a condition of subsidy or equity. However,
where the internal control system of the audited agencies is inadequate, the Commission may
adopt such measures, including temporary or special pre-audit, as are necessary and
appropriate to correct the deficiencies. It shall keep the general accounts, of the Government
and, for such period as may be provided by law, preserve the vouchers and other supporting
17
papers pertaining thereto. (2) The Commission shall have exclusive authority, subject to the
limitations in this Article, to define the scope of its audit and examination, establish the
techniques and methods required therefor, and promulgate accounting and auditing rules and
regulations, including those for the prevention and disallowance of irregular, unnecessary,
excessive, extravagant, or, unconscionable expenditures, or uses of government funds and
properties.
These present powers, consistent with the declared independence of the Commission, 30 are
broader and more extensive than that conferred by the 1973 Constitution. Under the latter, the
Commission was empowered to: Examine, audit, and settle, in accordance with law and
regulations, all accounts pertaining to the revenues, and receipts of, and expenditures or uses
of funds and property, owned or held in trust by, or pertaining to, the Government, or any of
its subdivisions, agencies, or instrumentalities including government-owned or controlled
corporations, keep the general accounts of the Government and, for such period as may
be provided by law, preserve the vouchers pertaining thereto; and promulgate accounting and
auditing rules and regulations including those for the prevention of irregular, unnecessary,
excessive, or extravagant expenditures or uses of funds and property. 31
Upon the other hand, under the 1935 Constitution, the power and authority of the COA's
precursor, the General Auditing Office, were, unfortunately, limited; its very role was
markedly passive. Section 2 of Article XI thereof provided: Sec. 2. The Auditor General shall
examine, audit, and settle all accounts pertaining to the revenues and receipts from whatever
source, including trust funds derived from bond issues; and audit, in accordance with law and
administrative regulations, all expenditures of funds or property pertaining to or held in trust
by the Government or the provinces or municipalities thereof. He shall keep the general
accounts of the Government and the preserve the vouchers pertaining thereto. It shall be the
duty of the Auditor General to bring to the attention of the proper administrative officer
expenditures of funds or property which, in his opinion, are irregular, unnecessary, excessive,
or extravagant. He shall also perform such other functions as may be prescribed by law.
As clearly shown above, in respect to irregular, unnecessary, excessive or extravagant
expenditures or uses of funds, the 1935 Constitution did not grant the Auditor General the
power to issue rules and regulations to prevent the same. His was merely to bring that matter
to the attention of the proper administrative officer.
The ruling on this particular point, quoted by petitioner from the cases of Guevarra
vs. Gimenez 32 and Ramos vs.Aquino, 33 are no longer controlling as the two (2) were decided
in the light of the 1935 Constitution.
There can be no doubt, however, that the audit power of the Auditor General under the 1935
Constitution and the Commission on Audit under the 1973 Constitution authorized them to
disallow illegal expenditures of funds or uses of funds and property. Our present Constitution
retains that same power and authority, further strengthened by the definition of the COA's
general jurisdiction in Section 26 of the Government Auditing Code of the Philippines 34 and
Administrative Code of 1987. 35 Pursuant to its power to promulgate accounting and auditing
rules and regulations for the prevention of irregular, unnecessary, excessive or extravagant
expenditures or uses of funds, 36 the COA promulgated on 29 March 1977 COA Circular No.
77-55. Since the COA is responsible for the enforcement of the rules and regulations, it goes
without saying that failure to comply with them is a ground for disapproving the payment of
the proposed expenditure. As observed by one of the Commissioners of the 1986
Constitutional Commission, Fr. Joaquin G. Bernas: 37
It should be noted, however, that whereas under Article XI, Section 2, of the 1935 Constitution
the Auditor General could not correct "irregular, unnecessary, excessive or extravagant"
expenditures of public funds but could only "bring [the matter] to the attention of the proper
administrative officer," under the 1987 Constitution, as also under the 1973 Constitution, the
Commission on Audit can "promulgate accounting and auditing rules and regulations
including those for the prevention and disallowance of irregular, unnecessary, excessive,
extravagant, or unconscionable expenditures or uses of government funds and properties."
Hence, since the Commission on Audit must ultimately be responsible for the enforcement of
these rules and regulations, the failure to comply with these regulations can be a ground for
disapproving the payment of a proposed expenditure.
Indeed, when the framers of the last two (2) Constitutions conferred upon the COA a more
active role and invested it with broader and more extensive powers, they did not intend merely
to make the COA a toothless tiger, but rather envisioned a dynamic, effective, efficient and
independent watchdog of the Government.
The issue of the financing charges boils down to the validity of Department of Finance
Circular No. 1-87, Department of Finance Circular No. 4-88 and the implementing circulars of
the OEA, issued pursuant to Section 8, P.D. No. 1956, as amended by E.O. No. 137,
authorizing it to determine "other factors" which may result in cost underrecovery and a
consequent reimbursement from the OPSF.
The Solicitor General maintains that, following the doctrine of ejusdem generis, financing
charges are not included in "cost underrecovery" and, therefore, cannot be considered as one
of the "other factors." Section 8 of P.D. No. 1956, as amended by E.O. No. 137, does not
explicitly define what "cost underrecovery" is. It merely states what it includes. Thus, "Cost
underrecovery" shall include the following: i. Reduction in oil company takes as directed by
the Board of Energy without the corresponding reduction in the landed cost of oil inventories
in the possession of the oil companies at the time of the price change; ii. Reduction in
internal ad valorem taxes as a result of foregoing government mandated price reductions; iii.
Other factors as may be determined by the Ministry of Finance to result in cost underrecovery.
These "other factors" can include only those which are of the same class or nature as the two
specifically enumerated in subparagraphs (i) and (ii). A common characteristic of both is that
they are in the nature of government mandated price reductions. Hence, any other factor which
seeks to be a part of the enumeration, or which could qualify as a cost underrecovery, must be
of the same class or nature as those specifically enumerated.
Petitioner, however, suggests that E.O. No. 137 intended to grant the Department of Finance
broad and unrestricted authority to determine or define "other factors."
Both views are unacceptable to this Court.
18
The rule of ejusdem generis states that "[w]here general words follow an enumeration of
persons or things, by words of a particular and specific meaning, such general words are not to
be construed in their widest extent, but are held to be as applying only to persons or things of
the same kind or class as those specifically mentioned. 38 A reading of subparagraphs (i) and
(ii) easily discloses that they do not have a common characteristic. The first relates to price
reduction as directed by the Board of Energy while the second refers to reduction in
internal ad valoremtaxes. Therefore, subparagraph (iii) cannot be limited by the enumeration
in these subparagraphs. What should be considered for purposes of determining the "other
factors" in subparagraph (iii) is the first sentence of paragraph (2) of the Section which
explicitly allows cost underrecovery only if such were incurred as a result of the reduction of
domestic prices of petroleum products.
Although petitioner's financing losses, if indeed incurred, may constitute cost underrecovery in
the sense that such were incurred as a result of the inability to fully offset financing expenses
from yields in money market placements, they do not, however, fall under the foregoing
provision of P.D. No. 1956, as amended, because the same did not result from the reduction of
the domestic price of petroleum products. Until paragraph (2), Section 8 of the decree, as
amended, is further amended by Congress, this Court can do nothing. The duty of this Court is
not to legislate, but to apply or interpret the law. Be that as it may, this Court wishes to
emphasize that as the facts in this case have shown, it was at the behest of the Government that
petitioner refinanced its oil import payments from the normal 30-day trade credit to a
maximum of 360 days. Petitioner could be correct in its assertion that owing to the extended
period for payment, the financial institution which refinanced said payments charged a higher
interest, thereby resulting in higher financing expenses for the petitioner. It would appear then
that equity considerations dictate that petitioner should somehow be allowed to recover its
financing losses, if any, which may have been sustained because it accommodated the request
of the Government. Although under Section 29 of the National Internal Revenue Code such
losses may be deducted from gross income, the effect of that loss would be merely to reduce
its taxable income, but not to actually wipe out such losses. The Government then may
consider some positive measures to help petitioner and others similarly situated to obtain
substantial relief. An amendment, as aforestated, may then be in order.
Upon the other hand, to accept petitioner's theory of "unrestricted authority" on the part of the
Department of Finance to determine or define "other factors" is to uphold an undue delegation
of legislative power, it clearly appearing that the subject provision does not provide any
standard for the exercise of the authority. It is a fundamental rule that delegation of legislative
power may be sustained only upon the ground that some standard for its exercise
is provided and that the legislature, in making the delegation, has prescribed the manner of the
exercise of the delegated authority. 39
Finally, whether petitioner gained or lost by reason of the extensive credit is rendered
irrelevant by reason of the foregoing disquisitions. It may nevertheless be stated that petitioner
failed to disprove COA's claim that it had in fact gained in the process. Otherwise stated,
petitioner failed to sufficiently show that it incurred a loss. Such being the case, how can
petitioner claim for reimbursement? It cannot have its cake and eat it too.
II. Anent the claims arising from sales to the National Power Corporation, We find for the
petitioner. The respondents themselves admit in their Comment that underrecovery arising
from sales to NPC are reimbursable because NPC was granted full exemption from the
payment of taxes; to prove this, respondents trace the laws providing for such
exemption. 40 The last law cited is the Fiscal Incentives Regulatory Board's Resolution No. 17-
87 of 24 June 1987 which provides, in part, "that the tax and duty exemption privileges of the
National Power Corporation, including those pertaining to its domestic purchases of petroleum
and petroleum products . . . are restored effective March 10, 1987." In a Memorandum issued
on 5 October 1987 by the Office of the President, NPC's tax exemption was confirmed and
approved.
Furthermore, as pointed out by respondents, the intention to exempt sales of petroleum
products to the NPC is evident in the recently passed Republic Act No. 6952 establishing the
Petroleum Price Standby Fund to support the OPSF. 41
The pertinent part of Section 2, Republic Act No. 6952 provides: Sec. 2. Application of the
Fund shall be subject to the following conditions: (1) That the Fund shall be used to reimburse
the oil companies for (a) cost increases of imported crude oil and finished petroleum products
resulting from foreign exchange rate adjustments and/or increases in world market prices of
crude oil; (b) cost underrecovery incurred as a result of fuel oil sales to the National Power
Corporation (NPC); and (c) other cost underrecoveries incurred as may be finally decided by
the Supreme Court; Hence, petitioner can recover its claim arising from sales of petroleum
products to the National Power Corporation.
III. With respect to its claim for reimbursement on sales to ATLAS and MARCOPPER,
petitioner relies on Letter of Instruction (LOI) 1416, dated 17 July 1984, which ordered the
suspension of payments of all taxes, duties, fees and other charges, whether direct or indirect,
due and payable by the copper mining companies in distress to the national government.
Pursuant to this LOI, then Minister of Energy, Hon. Geronimo Velasco, issued Memorandum
Circular No. 84-11-22 advising the oil companies that Atlas Consolidated Mining Corporation
and Marcopper Mining Corporation are among those declared to be in distress.
In denying the claims arising from sales to ATLAS and MARCOPPER, the COA, in its 18
August 1989 letter to Executive Director Wenceslao R. de la Paz, states that "it is our opinion
that LOI 1416 which implements the exemption from payment of OPSF imposts as effected by
OEA has no legal basis;" 42 in its Decision No. 1171, it ruled that "the CPI (CALTEX)
(Caltex) has no authority to claim reimbursement for this uncollected impost because LOI
1416 dated July 17, 1984, . . . was issued when OPSF was not yet in existence and could not
have contemplated OPSF imposts at the time of its formulation." 43 It is further stated that:
"Moreover, it is evident that OPSF was not created to aid distressed mining companies but
rather to help the domestic oil industry by stabilizing oil prices."
In sustaining COA's stand, respondents vigorously maintain that LOI 1416 could not have
intended to exempt said distressed mining companies from the payment of OPSF dues for the
following reasons: a. LOI 1416 granting the alleged exemption was issued on July 17, 1984.
P.D. 1956 creating the OPSF was promulgated on October 10, 1984, while E.O. 137,
amending P.D. 1956, was issued on February 25, 1987. b. LOI 1416 was issued in 1984 to
assist distressed copper mining companies in line with the government's effort to prevent the
collapse of the copper industry. P.D No. 1956, as amended, was issued for the purpose of
minimizing frequent price changes brought about by exchange rate adjustments and/or
19
changes in world market prices of crude oil and imported petroleum product's; and c. LOI
1416 caused the "suspension of all taxes, duties, fees, imposts and other charges, whether
direct or indirect, due and payable by the copper mining companies in distress to the Notional
and Local Governments . . ." On the other hand, OPSF dues are not payable by (sic) distressed
copper companies but by oil companies. It is to be noted that the copper mining companies do
not pay OPSF dues. Rather, such imposts are built in or already incorporated in the prices of
oil products. 44
Lastly, respondents allege that while LOI 1416 suspends the payment of taxes by distressed
mining companies, it does not accord petitioner the same privilege with respect to its
obligation to pay OPSF dues.
We concur with the disquisitions of the respondents. Aside from such reasons, however, it is
apparent that LOI 1416 was never published in the Official Gazette 45 as required by Article 2
of the Civil Code, which reads: Laws shall take effect after fifteen days following the
completion of their publication in the Official Gazette, unless it is otherwise provided.
In applying said provision, this Court ruled in the case of Tañada vs. Tuvera: 46
WHEREFORE, the Court hereby orders respondents to publish in the Official Gazette all
unpublished presidential issuances which are of general application, and unless so published
they shall have no binding force and effect.
Resolving the motion for reconsideration of said decision, this Court, in its Resolution
promulgated on 29 December 1986, 47 ruled: We hold therefore that all statutes, including
those of local application and private laws, shall be published as a condition for their
effectivity, which shall begin fifteen days after publication unless a different effectivity date is
fixed by the legislature.
Covered by this rule are presidential decrees and executive orders promulgated by the
President in the exercise of legislative powers whenever the same are validly delegated by the
legislature or, at present, directly conferred by the Constitution. Administrative rules and
regulations must also be published if their purpose is to enforce or implement existing laws
pursuant also to a valid delegation.
WHEREFORE, it is hereby declared that all laws as above defined shall immediately upon
their approval, or as soon thereafter as possible, be published in full in the Official Gazette, to
become effective only after fifteen days from their publication, or on another date specified by
the legislature, in accordance with Article 2 of the Civil Code.
LOI 1416 has, therefore, no binding force or effect as it was never published in the Official
Gazette after its issuance or at any time after the decision in the abovementioned cases.
Article 2 of the Civil Code was, however, later amended by Executive Order No. 200, issued
on 18 June 1987. As amended, the said provision now reads:
Laws shall take effect after fifteen days following the completion of their publication either in
the Official Gazette or in a newspaper of general circulation in the Philippines, unless it is
otherwise provided.
We are not aware of the publication of LOI 1416 in any newspaper of general circulation
pursuant to Executive Order No. 200.
Furthermore, even granting arguendo that LOI 1416 has force and effect, petitioner's claim
must still fail. Tax exemptions as a general rule are construed strictly against the grantee and
liberally in favor of the taxing authority. 48The burden of proof rests upon the party claiming
exemption to prove that it is in fact covered by the exemption so claimed. The party claiming
exemption must therefore be expressly mentioned in the exempting law or at least be within its
purview by clear legislative intent.
In the case at bar, petitioner failed to prove that it is entitled, as a consequence of its sales to
ATLAS and MARCOPPER, to claim reimbursement from the OPSF under LOI 1416. Though
LOI 1416 may suspend the payment of taxes by copper mining companies, it does not give
petitioner the same privilege with respect to the payment of OPSF dues.
IV. As to COA's disallowance of the amount of P130,420,235.00, petitioner maintains that the
Department of Finance has still to issue a final and definitive ruling thereon; accordingly, it
was premature for COA to disallow it. By doing so, the latter acted beyond its
jurisdiction. 49 Respondents, on the other hand, contend that said amount was already
disallowed by the OEA for failure to substantiate it. 50 In fact, when OEA submitted the claims
of petitioner for pre-audit, the abovementioned amount was already excluded.
An examination of the records of this case shows that petitioner failed to prove or substantiate
its contention that the amount of P130,420,235.00 is still pending before the OEA and the
DOF. Additionally, We find no reason to doubt the submission of respondents that said
amount has already been passed upon by the OEA. Hence, the ruling of respondent COA
disapproving said claim must be upheld.
V. The last issue to be resolved in this case is whether or not the amounts due to the OPSF
from petitioner may be offset against petitioner's outstanding claims from said fund. Petitioner
contends that it should be allowed to offset its claims from the OPSF against its contributions
to the fund as this has been allowed in the past, particularly in the years 1987 and 1988. 51
Furthermore, petitioner cites, as bases for offsetting, the provisions of the New Civil Code on
compensation and Section 21, Book V, Title I-B of the Revised Administrative Code which
provides for "Retention of Money for Satisfaction of Indebtedness to
Government." 52 Petitioner also mentions communications from the Board of Energy and the
Department of Finance that supposedly authorize compensation.
Respondents, on the other hand, citing Francia vs. IAC and Fernandez, 53 contend that there
can be no offsetting of taxes against the claims that a taxpayer may have against the
government, as taxes do not arise from contracts or depend upon the will of the taxpayer, but
are imposed by law. Respondents also allege that petitioner's reliance on Section 21, Book V,
20
Title I-B of the Revised Administrative Code, is misplaced because "while this provision
empowers the COA to withhold payment of a government indebtedness to a person who is
also indebted to the government and apply the government indebtedness to the satisfaction of
the obligation of the person to the government, like authority or right to make compensation is
not given to the private person." 54 The reason for this, as stated in Commissioner of Internal
Revenue vs. Algue, Inc., 55 is that money due the government, either in the form of taxes or
other dues, is its lifeblood and should be collected without hindrance. Thus, instead of giving
petitioner a reason for compensation or set-off, the Revised Administrative Code makes it the
respondents' duty to collect petitioner's indebtedness to the OPSF.
Refuting respondents' contention, petitioner claims that the amounts due from it do not arise as
a result of taxation because "P.D. 1956, amended, did not create a source of taxation; it instead
established a special fund . . .," 56 and that the OPSF contributions do not go to the general
fund of the state and are not used for public purpose, i.e., not for the support of the
government, the administration of law, or the payment of public expenses. This alleged lack of
a public purpose behind OPSF exactions distinguishes such from a tax. Hence, the ruling in
the Francia case is inapplicable.
Lastly, petitioner cites R.A. No. 6952 creating the Petroleum Price Standby Fund to support
the OPSF; the said law provides in part that: Sec. 2. Application of the fund shall be subject to
the following conditions: (3) That no amount of the Petroleum Price Standby Fund shall be
used to pay any oil company which has an outstanding obligation to the Government without
said obligation being offset first, subject to the requirements of compensation or offset under
the Civil Code.
We find no merit in petitioner's contention that the OPSF contributions are not for a public
purpose because they go to a special fund of the government. Taxation is no longer envisioned
as a measure merely to raise revenue to support the existence of the government; taxes may be
levied with a regulatory purpose to provide means for the rehabilitation and stabilization of a
threatened industry which is affected with public interest as to be within the police power of
the state. 57 There can be no doubt that the oil industry is greatly imbued with public interest as
it vitally affects the general welfare. Any unregulated increase in oil prices could hurt the lives
of a majority of the people and cause economic crisis of untold proportions. It would have a
chain reaction in terms of, among others, demands for wage increases and upward spiralling of
the cost of basic commodities. The stabilization then of oil prices is of prime concern which
the state, via its police power, may properly address.
Also, P.D. No. 1956, as amended by E.O. No. 137, explicitly provides that the source of OPSF
is taxation. No amount of semantical juggleries could dim this fact.
It is settled that a taxpayer may not offset taxes due from the claims that he may have against
the government. 58Taxes cannot be the subject of compensation because the government and
taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such
a debt, demand, contract or judgment as is allowed to be set-off. 59
We may even further state that technically, in respect to the taxes for the OPSF, the oil
companies merely act as agents for the Government in the latter's collection since the taxes
are, in reality, passed unto the end-users –– the consuming public. In that capacity, the
petitioner, as one of such companies, has the primary obligation to account for and remit the
taxes collected to the administrator of the OPSF. This duty stems from the fiduciary
relationship between the two; petitioner certainly cannot be considered merely as a debtor. In
respect, therefore, to its collection for the OPSF vis-a-vis its claims for reimbursement, no
compensation is likewise legally feasible. Firstly, the Government and the petitioner cannot be
said to be mutually debtors and creditors of each other. Secondly, there is no proof that
petitioner's claim is already due and liquidated. Under Article 1279 of the Civil Code, in order
that compensation may be proper, it is necessary that:
(1) each one of the obligors be bound principally, and that he be at the same time a principal
creditor of the other; (2) both debts consist in a sum of :money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the latter has been stated;
(3) the two (2) debts be due; (4) they be liquidated and demandable; (5) over neither of them
there be any retention or controversy, commenced by third persons and communicated in due
time to the debtor.
That compensation had been the practice in the past can set no valid precedent. Such a practice
has no legal basis. Lastly, R.A. No. 6952 does not authorize oil companies to offset their
claims against their OPSF contributions. Instead, it prohibits the government from paying any
amount from the Petroleum Price Standby Fund to oil companies which have outstanding
obligations with the government, without said obligation being offset first subject to the rules
on compensation in the Civil Code.
WHEREFORE, in view of the foregoing, judgment is hereby rendered AFFIRMING the
challenged decision of the Commission on Audit, except that portion thereof disallowing
petitioner's claim for reimbursement of underrecovery arising from sales to the National Power
Corporation, which is hereby allowed. With costs against petitioner. SO ORDERED.
2. ASSESSED ACCORDING TO A REASONABLE RULE OF APPORTIONMENT
3. PECUNIARY BURDEN PAYABLE IN MONEY
G.R. No. L-26862 March 30, 1970
REPUBLIC OF THE PHILIPPINES, plaintiff-appellant, vs. PHILIPPINE RABBIT BUS
LINES, INC., defendant-appellee.
FERNANDO, J.:
The right of a holder of a backpay certificate to use the same in the payment of his taxes has
been recognized by law.1 Necessarily, this Court, in Tirona v. Cudiamat,2 yielding obedience
to such statutory prescription, saw nothing objectionable in a taxpayer taking advantage of
such a provision. That much is clear; it is settled beyond doubt. What is involved in this appeal
from a lower court decision of November 24, 1965, dismissing a complaint by plaintiff-
appellant Republic of the Philippines, seeking the invalidation of the payment by defendant-
appellee Philippine Rabbit Bus Lines, Inc. for the registration fees3 of its motor vehicles in the
sum of P78,636.17, in the form of such negotiable backpay certificates of indebtedness, is the
21
applicability of such a provision to such a situation. The lower court held that it did. The
Republic of the Philippines appealed. While originally the matter was elevated to the Court of
Appeals, it was certified to us, the decisive issue being one of law. The statute having
restricted the privilege to the satisfaction of a tax, a liability for fees under the police power
being thus excluded from its benefits, we cannot uphold the decision appealed from. We
reverse.
The complaint of plaintiff-appellant Republic of the Philippines was filed on January 17, 1963
alleging that defendant-appellee, as the registered owner of two hundred thirty eight (238)
motor vehicles, paid to the Motor Vehicles Office in Baguio the amount of P78,636.17,
corresponding to the second installment of registration fees for 1959, not in cash but in the
form of negotiable certificate of indebtedness, the defendant being merely an assignee and not
the backpay holder itself. The complaint sought the payment of such amount with surcharges
plus the legal rate of interest from the filing thereof and a declaration of the nullity of the use
of such negotiable certificate of indebtedness to satisfy its obligation. The answer by
defendant-appellee, filed on February 18, 1963, alleged that what it did was in accordance
with law, both the Treasurer of the Philippines and the General Auditing Office having
signified their conformity to such a mode of payment. It sought the dismissal of the complaint.
After noting the respective theories of both parties in its pleadings, the lower court, in its
decision, stated that the issue before it "is whether or not the acceptance of the negotiable
certificates of indebtedness tendered by defendant bus firms to and accepted by the Motor
Vehicles Office of Baguio City and the corresponding issuance of official receipts therefor
acknowledging such payment by said office is valid and binding on plaintiff Republic." 4
In the decision now on appeal, the lower court, after referring to a documentary evidence
introduced by plaintiff-appellant continued: "From the evidence adduced by defendant bus
firm, it appears that as early as August 28, 1958, the National Treasurer upon whom devolves
the function of administering the Back Pay Law (Republic Act 304 as amended by Republic
Act Nos. 800 and 897), in his letter to the Chief of the Motor Vehicles Office who in turn
quoted and circularized same in his Circular No. 5 dated September 1, 1958, to draw the
attention thereto of all Motor Vehicle Supervisors, Registrars and employees ..., had approved
the acceptance of negotiable certificates of indebtedness in payment of registration fees of
motor vehicles with the view that such certificates 'should be accorded with the same
confidence by other governmental instrumentalities as other evidences of public debt, such as
bonds and treasury certificates'. Significantly, the Auditor General concurred in the said view
of the National Treasurer."5
The argument of plaintiff-appellant that only the holders of the backpay certificates
themselves could apply the same to the payment of motor vehicle registration fees did not find
favor with the lower court. Thus, "[Plaintiff] Republic urges that defendant bus firm being
merely an assignee of the negotiable certificates of indebtedness in question, it could not use
the same in payment of taxes. Such contention, this Court believes, runs counter to the recitals
appearing on the said certificates which states that 'the Republic of the Philippines hereby
acknowledges to (name) or assigns ...', legally allowing the assignment of backpay rights."6
It therefore, as above noted, rendered judgment in favor of defendant-appellee "upholding the
validity and efficacy" of such payment made and dismissing the complaint. Hence this appeal
which, on the decisive legal issue already set forth at the outset, we find meritorious.
1. If a registration fee were a tax, then what was done by defendant-appellee was strictly in
accordance with law and its nullity, as sought by plaintiff-appellant Republic of the
Philippines, cannot be decreed. But is it? The answer to that question is decisive of this
controversy. A tax refers to a financial obligation imposed by a state on persons, whether
natural or juridical, within its jurisdiction, for property owned, income earned, business or
profession engaged in, or any such activity analogous in character for raising the necessary
revenues to take care of the responsibilities of government. 7 An often-quoted definition is that
of Cooley: "Taxes are the enforced proportional contributions from persons and property
levied by the state by virtue of its sovereignty for the support of government and for all public
needs."8
As distinguished from other pecuniary burdens, the differentiating factor is that the purpose to
be subserved is the raising of revenue. A tax then is neither a penalty that must be satisfied or
a liability arising from contract.9 Much less can it be confused or identified with a license or a
fee as a manifestation of an exercise of the police power. It has been settled law in this
jurisdiction as far back as Cu Unjieng v. Potstone, decided in 1962, 10 that this broad and all-
encompassing governmental competence to restrict rights of liberty and property carries with
it the undeniable power to collect a regulatory fee. Unlike a tax, it has not for its object the
raising of revenue but looks rather to the enactment of specific measures that govern the
relations not only as between individuals but also as between private parties and the political
society. To quote from Cooley anew: "Legislation for these purposes it would seem proper to
look upon as being made in the exercise of that authority ... spoken of as the police power." 11
The registration fee which defendant-appellee had to pay was imposed by Section 8 of the
Revised Motor Vehicle Law. 12 Its heading speaks of "registration fees." The term is repeated
four times in the body thereof. Equally so, mention is made of the "fee for registration." 13 A
subsection starts with a categorical statement "No fees shall be charged." 14 The conclusion is
difficult to resist therefore that the Motor Vehicle Act requires the payment not of a tax but of
a registration fee under the police power. Hence the inapplicability of the section relied upon
by defendant-appellee under the Back Pay Law. It is not held liable for a tax but for a
registration fee. It therefore cannot make use of a backpay certificate to meet such an
obligation.
Any vestige of any doubt as to the correctness of the above conclusion should be dissipated by
Republic Act No. 5448. 15 A special science fund was thereby created and its title expressly
sets forth that a tax on privately-owned passenger automobiles, motorcycles and scooters was
imposed. The rates thereof were provided for in its Section 3 which clearly specifies that
"additional tax" was to be paid as distinguished from the registration fee under the Motor
Vehicle Act. There cannot be any clearer expression therefore of the legislative will, even on
the assumption that the earlier legislation could be stretching the point be susceptible of the
interpretation that a tax rather than a fee was levied. What is thus most apparent is that where
the legislative body relies on its authority to tax it expressly so states, and where it is enacting
a regulatory measure, it is equally explicit.
22
It may further be stated that a statute is meaningful not only by what it includes but also by
what it omits. What is left out is not devoid of significance. As observed by Frankfurter: "An
omission at the time of enactment, whether careless or calculated, cannot be judicially
supplied however much later wisdom may recommend the inclusion. 16 In the light of this
consideration, the reversal of the appealed judgment is unavoidable.
2. In the brief for plaintiff-appellant Republic of the Philippines, filed by the then Solicitor
General, now Justice Antonio P. Barredo, the principal error imputed to the trial court is its
failure to hold that the Back Pay Law prohibits an assignee, as is defendant-appellee, from
using certificates of indebtedness to pay their taxes. In view of the conclusion reached by us
that the liability of defendant-appellee under the Motor Vehicle Act does not arise under the
taxing power of the state, there is no need to pass upon this particular question.
3. The Republic of the Philippines, in its brief, likewise assigned as error the failure of the
lower court to hold that estoppel does not lie against the government for mistakes committed
by its agents. As could be discerned from an excerpt of the decision earlier referred to, the
lower court was impressed by the fact that the national treasurer to whom it correctly referred
as being vested with the function of administering the backpay law did in a communication to
the Motor Vehicles Office approve the acceptance of negotiable certificate of indebtedness in
payment of registration fees, a view with which the Auditor General was in concurrence. The
appealed decision likewise noted: "By the testimonies of Pedro Flores, the then Registrar of
the Motor Vehicles Office of Baguio City and Casiano Catbagan, the Cashier of the Bureau of
Public Highways in the same city, defendant bus firm has undisputedly shown that, after the
said certificates of indebtedness were properly indorsed in favor of the Motor Vehicles Office
of Baguio City and accepted by the Bureau of Public Highways on May 29, 1959, it was duly
and properly issued official receipts ... acknowledging full payment of its registration fees for
the second installment of 1959 of its 238 vehicles, and that the Bureau of Public Highways,
thru its collecting and disbursing officer, was validly and regularly authorized to receive such
payment." 17
Thus did the lower court, as pointed out by the then Solicitor General, conclude that the
government was bound by the mistaken interpretation arrived at by the national treasurer and
the auditor general. It would consider estoppel as applicable. That is not the law. Estoppel
does not lie. Such a principle dates back to Aguinaldo de Romero v. Director of Lands, 18 a
1919 decision. Insofar as the taxing power is concerned, Pineda v. Court of First Instance, a
1929 decision, speaks categorically: "The Government is never estopped by mistake or error
on the part of its agents. It follows that, in so far as this record shows, the petitioners have not
made it appear that the additional tax claimed by the Collector is not in fact due and
collectible. The assessment of the tax by the Collector creates, it must be remembered, a
charge that is at least prima facie valid." 19 That principle has since been subsequently
followed. 20 While the question here is one of the collection of a regulatory fee under the
police power, reliance on the above course of decisions is not inappropriate. There is nothing
to stand in the way, therefore, of the collection of the registration fees from defendant-
appellee.
WHEREFORE, the decision of November 24, 1965 is reversed and defendant-appellee
ordered to pay the sum of P78,636.17. With costs against defendant-appellee.
G.R. No. L- 41383 August 15, 1988
PHILIPPINE AIRLINES, INC., plaintiff-appellant, vs. ROMEO F. EDU in his capacity
as Land Transportation Commissioner, and UBALDO CARBONELL, in his capacity as
National Treasurer, defendants-appellants.
GUTIERREZ, JR., J.:
What is the nature of motor vehicle registration fees? Are they taxes or regulatory fees?
The disputed registration fees were imposed by the appellee, Commissioner Romeo F. Elevate
pursuant to Section 8, Republic Act No. 4136, otherwise known as the Land Transportation
and Traffic Code.
 The Philippine Airlines (PAL) is a corporation organized and existing under the
laws of the Philippines and engaged in the air transportation business under a
legislative franchise, Act No. 42739, as amended by Republic Act Nos. 25). and
269.1 Under its franchise, PAL is exempt from the payment of taxes. The pertinent
provision of the franchise provides as follows:
Section 13. In consideration of the franchise and rights hereby granted, the grantee shall pay to
the National Government during the life of this franchise a tax of two per cent of the gross
revenue or gross earning derived by the grantee from its operations under this franchise. Such
tax shall be due and payable quarterly and shall be in lieu of all taxes of any kind, nature or
description, levied, established or collected by any municipal, provincial or national
automobiles, Provided, that if, after the audit of the accounts of the grantee by the
Commissioner of Internal Revenue, a deficiency tax is shown to be due, the deficiency tax
shall be payable within the ten days from the receipt of the assessment. The grantee shall pay
the tax on its real property in conformity with existing law.
 On the strength of an opinion of the Secretary of Justice. PAL has, since 1956, not
been paying motor vehicle registration fees.
 Sometime in 1971, however, appellee Commissioner Romeo F. Elevate issued a
regulation requiring all tax exempt entities, among them PAL to pay motor vehicle
registration fees.
 Despite PAL's protestations, the appellee refused to register the appellant's motor
vehicles unless the amounts imposed under Republic Act 4136 were paid. The
appellant thus paid, under protest, the amount of P19,529.75 as registration fees of
its motor vehicles.
 After paying under protest, PAL through counsel, wrote a letter dated May 19,1971,
to Commissioner Edu demanding a refund of the amounts paid, invoking the ruling
in Calalang v. Lorenzo where it was held that motor vehicle registration fees are in
reality taxes from the payment of which PAL is exempt by virtue of its legislative
franchise.
 Appellee Edu denied the request for refund basing his action on the decision
in Republic v. Philippine Rabbit Bus Lines, Inc., to the effect that motor vehicle
registration fees are regulatory exceptional. and not revenue measures and, therefore,
23
 do not come within the exemption granted to PAL? under its franchise. Hence, PAL
filed the complaint against Land Transportation Commissioner Romeo F. Edu and
National Treasurer Ubaldo Carbonell with the Court of First Instance of Rizal.
 Appellee Romeo F. Elevate in his capacity as LTC Commissioner, and LOI
Carbonell in his capacity as National Treasurer, filed a motion to dismiss alleging
that the complaint states no cause of action. In support of the motion to dismiss,
defendants repatriation the ruling in Republic v. Philippine Rabbit Bus Lines, Inc.,
(supra) that registration fees of motor vehicles are not taxes, but regulatory fees
imposed as an incident of the exercise of the police power of the state. They
contended that while Act 4271 exempts PAL from the payment of any tax except
two per cent on its gross revenue or earnings, it does not exempt the plaintiff from
paying regulatory fees, such as motor vehicle registration fees. The resolution of the
motion to dismiss was deferred by the Court until after trial on the merits.
TRIAL COURT: rendered a decision dismissing the appellant's complaint "moved by the
later ruling laid down by the Supreme Court in the case or Republic v. Philippine Rabbit Bus
Lines, Inc., (supra)." From this judgment, PAL appealed to the Court of Appeals which
certified the case to us.
Resolving the issue in the Philippine Rabbit case, this Court held: "The registration fee which
defendant-appellee had to pay was imposed by Section 8 of the Revised Motor Vehicle Law
(Republic Act No. 587 [1950]). Its heading speaks of "registration fees." The term is repeated
four times in the body thereof. Equally so, mention is made of the "fee for registration." A
subsection starts with a categorical statement "No fees shall be charged." The conclusion is
difficult to resist therefore that the Motor Vehicle Act requires the payment not of a tax but of
a registration fee under the police power. Hence the incipient, of the section relied upon by
defendant-appellee under the Back Pay Law, It is not held liable for a tax but for a registration
fee. It therefore cannot make use of a backpay certificate to meet such an obligation.
Any vestige of any doubt as to the correctness of the above conclusion should be dissipated by
Republic Act No. 5448. ([1968]. Section 3 thereof as to the imposition of additional tax on
privately-owned passenger automobiles, motorcycles and scooters was amended by Republic
Act No. 5470 which is (sic) approved on May 30, 1969.) A special science fund was thereby
created and its title expressly sets forth that a tax on privately-owned passenger automobiles,
motorcycles and scooters was imposed. The rates thereof were provided for in its Section 3
which clearly specifies the" Philippine tax."(Cooley to be paid as distinguished from the
registration fee under the Motor Vehicle Act. There cannot be any clearer expression therefore
of the legislative will, even on the assumption that the earlier legislation could by subdivision
the point be susceptible of the interpretation that a tax rather than a fee was levied. What is
thus most apparent is that where the legislative body relies on its authority to tax it expressly
so states, and where it is enacting a regulatory measure, it is equally exploded (at p. 22,1969
In direct refutation is the ruling in Calalang v. Lorenzo (supra), where the Court, on the other
hand, held: The charges prescribed by the Revised Motor Vehicle Law for the registration of
motor vehicles are in section 8 of that law called "fees". But the appellation is no impediment
to their being considered taxes if taxes they really are. For not the name but the object of the
charge determines whether it is a tax or a fee. Geveia speaking, taxes are for revenue, whereas
fees are exceptional. for purposes of regulation and inspection and are for that reason limited
in amount to what is necessary to cover the cost of the services rendered in that connection.
Hence, a charge fixed by statute for the service to be person,-When by an officer, where the
charge has no relation to the value of the services performed and where the amount collected
eventually finds its way into the treasury of the branch of the government whose officer or
officers collected the chauffeur, is not a fee but a tax."
From the data submitted in the court below, it appears that the expenditures of the Motor
Vehicle Office are but a small portion—about 5 per centum—of the total collections from
motor vehicle registration fees. And as proof that the money collected is not intended for the
expenditures of that office, the law itself provides that all such money shall accrue to the funds
for the construction and maintenance of public roads, streets and bridges. It is thus obvious
that the fees are not collected for regulatory purposes, that is to say, as an incident to the
enforcement of regulations governing the operation of motor vehicles on public highways, for
their express object is to provide revenue with which the Government is to discharge one of its
principal functions—the construction and maintenance of public highways for everybody's
use. They are veritable taxes, not merely fees.
As a matter of fact, the Revised Motor Vehicle Law itself now regards those fees as taxes, for
it provides that "no other taxes or fees than those prescribed in this Act shall be imposed," thus
implying that the charges therein imposed—though called fees—are of the category of taxes.
The provision is contained in section 70, of subsection (b), of the law, as amended by section
17 of Republic Act 587, which reads: Sec. 70(b) No other taxes or fees than those prescribed
in this Act shall be imposed for the registration or operation or on the ownership of any motor
vehicle, or for the exercise of the profession of chauffeur, by any municipal corporation, the
provisions of any city charter to the contrary notwithstanding: Provided, however, That any
provincial board, city or municipal council or board, or other competent authority may exact
and collect such reasonable and equitable toll fees for the use of such bridges and ferries,
within their respective jurisdiction, as may be authorized and approved by the Secretary of
Public Works and Communications, and also for the use of such public roads, as may be
authorized by the President of the Philippines upon the recommendation of the Secretary of
Public Works and Communications, but in none of these cases, shall any toll fee." be charged
or collected until and unless the approved schedule of tolls shall have been posted levied, in a
conspicuous place at such toll station. (at pp. 213-214)
Motor vehicle registration fees were matters originally governed by the Revised Motor
Vehicle Law (Act 3992 [19511) as amended by Commonwealth Act 123 and Republic Acts
Nos. 587 and 1621.
Today, the matter is governed by Rep. Act 4136 [1968]), otherwise known as the Land
Transportation Code.
Section 73 of Commonwealth Act 123 states: Section 73. Disposal of moneys collected.—
Twenty per centum of the money collected under the provisions of this Act shall accrue to the
road and bridge funds of the different provinces and chartered cities in proportion to the
centum shall during the next previous year and the remaining eighty per centum shall be
deposited in the Philippine Treasury to create a special fund for the construction and
maintenance of national and provincial roads and bridges. as well as the streets and bridges in
the chartered cities to be alloted by the Secretary of Public Works and Communications for
24
projects recommended by the Director of Public Works in the different provinces and
chartered cities.
Presently, Sec. 61 of the Land Transportation and Traffic Code provides: Sec. 61. Disposal of
Mortgage. Collected—Monies collected under the provisions of this Act shall be deposited in
a special trust account in the National Treasury to constitute the Highway Special Fund, which
shall be apportioned and expended in accordance with the provisions of the" Philippine
Highway Act of 1935. "Provided, however, That the amount necessary to maintain and equip
the Land Transportation Commission but not to exceed twenty per cent of the total collection
during one year, shall be set aside for the purpose.
It appears clear from the above provisions that the legislative intent and purpose behind the
law requiring owners of vehicles to pay for their registration is mainly to raise funds for the
construction and maintenance of highways and to a much lesser degree, pay for the operating
expenses of the administering agency. On the other hand, the Philippine Rabbit case mentions
a presumption arising from the use of the term "fees," which appears to have been favored by
the legislature to distinguish fees from other taxes such as those mentioned in Section 13 of
Rep. Act 4136 which reads: Sec. 13. Payment of taxes upon registration.—No original
registration of motor vehicles subject to payment of taxes, customs s duties or other charges
shall be accepted unless proof of payment of the taxes due thereon has been presented to the
Commission.
referring to taxes other than those imposed on the registration, operation or ownership of a
motor vehicle (Sec. 59, b, Rep. Act 4136, as amended).
Fees may be properly regarded as taxes even though they also serve as an instrument of
regulation, As stated by a former presiding judge of the Court of Tax Appeals and writer on
various aspects of taxpayers
It is possible for an exaction to be both tax arose. regulation. License fees are changes. looked
to as a source of revenue as well as a means of regulation (Sonzinky v. U.S.) This is true, for
example, of automobile license fees. Isabela such case, the fees may properly be regarded as
taxes even though they also serve as an instrument of regulation. If the purpose is primarily
revenue, or if revenue is at least one of the real and substantial purposes, then the exaction is
properly called a tax. These exactions are sometimes called regulatory taxes.
Indeed, taxation may be made the implement of the state's police power (Lutz v. Araneta)
If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial
purposes, then the exaction is properly called a tax. Such is the case of motor vehicle
registration fees. The conclusions become inescapable in view of Section 70(b) of Rep. Act
587 quoted in the Calalang case. The same provision appears as Section 591-593). in the Land
Transportation code. It is patent therefrom that the legislators had in mind a regulatory tax as
the law refers to the imposition on the registration, operation or ownership of a motor vehicle
as a "tax or fee." Though nowhere in Rep. Act 4136 does the law specifically state that the
imposition is a tax, Section 591-593). speaks of "taxes." or fees ... for the registration or
operation or on the ownership of any motor vehicle, or for the exercise of the profession of
chauffeur ..." making the intent to impose a tax more apparent. Thus, even Rep. Act 5448 cited
by the respondents, speak of an "additional" tax," where the law could have referred to an
original tax and not one in addition to the tax already imposed on the registration, operation,
or ownership of a motor vehicle under Rep. Act 41383. Simply put, if the exaction under Rep.
Act 4136 were merely a regulatory fee, the imposition in Rep. Act 5448 need not be an
"additional" tax. Rep. Act 4136 also speaks of other "fees," such as the special permit fees for
certain types of motor vehicles (Sec. 10) and additional fees for change of registration (Sec.
11). These are not to be understood as taxes because such fees are very minimal to be revenue-
raising. Thus, they are not mentioned by Sec. 591-593). of the Code as taxes like the motor
vehicle registration fee and chauffers' license fee. Such fees are to go into the expenditures of
the Land Transportation Commission as provided for in the last proviso of see. 61,
aforequoted.
It is quite apparent that vehicle registration fees were originally simple exceptional. intended
only for rigidly purposes in the exercise of the State's police powers. Over the years, however,
as vehicular traffic exploded in number and motor vehicles became absolute necessities
without which modem life as we know it would stand still, Congress found the registration of
vehicles a very convenient way of raising much needed revenues. Without changing the earlier
deputy. of registration payments as "fees," their nature has become that of "taxes."
In view of the foregoing, we rule that motor vehicle registration fees as at present exacted
pursuant to the Land Transportation and Traffic Code are actually taxes intended for additional
revenues. of government even if one fifth or less of the amount collected is set aside for the
operating expenses of the agency administering the program.
May the respondent administrative agency be required to refund the amounts stated in the
complaint of PAL? The answer is NO.
The claim for refund is made for payments given in 1971. It is not clear from the records as to
what payments were made in succeeding years. We have ruled that Section 24 of Rep. Act No.
5448 dated June 27, 1968, repealed all earlier tax exemptions Of corporate taxpayers found in
legislative franchises similar to that invoked by PAL in this case.
In Radio Communications of the Philippines, Inc. v. Court of Tax Appeals, et al. this Court
ruled: Under its original franchise, Republic Act No. 21); enacted in 1957, petitioner Radio
Communications of the Philippines, Inc., was subject to both the franchise tax and income tax.
In 1964, however, petitioner's franchise was amended by Republic Act No. 41-42). to the
effect that its franchise tax of one and one-half percentum (1-1/2%) of all gross receipts was
provided as "in lieu of any and all taxes of any kind, nature, or description levied, established,
or collected by any authority whatsoever, municipal, provincial, or national from which taxes
the grantee is hereby expressly exempted." The issue raised to this Court now is the validity of
the respondent court's decision which ruled that the exemption under Republic Act No. 41-42).
was repealed by Section 24 of Republic Act No. 5448 dated June 27, 1968 which reads:
"(d) The provisions of existing special or general laws to the contrary notwithstanding, all
corporate taxpayers not specifically exempt under Sections 24 (c) (1) of this Code shall pay
the rates provided in this section. All corporations, agencies, or instrumentalities owned or
25
controlled by the government, including the Government Service Insurance System and the
Social Security System but excluding educational institutions, shall pay such rate of tax upon
their taxable net income as are imposed by this section upon associations or corporations
engaged in a similar business or industry. "
An examination of Section 24 of the Tax Code as amended shows clearly that the law intended
all corporate taxpayers to pay income tax as provided by the statute. There can be no doubt as
to the power of Congress to repeal the earlier exemption it granted. Article XIV, Section 8 of
the 1935 Constitution and Article XIV, Section 5 of the Constitution as amended in 1973
expressly provide that no franchise shall be granted to any individual, firm, or corporation
except under the condition that it shall be subject to amendment, alteration, or repeal by the
legislature when the public interest so requires. There is no question as to the public interest
involved. The country needs increased revenues. The repealing clause is clear and
unambiguous. There is a listing of entities entitled to tax exemption. The petitioner is not
covered by the provision. Considering the foregoing, the Court Resolved to DENY the petition
for lack of merit. The decision of the respondent court is affirmed.
Any registration fees collected between June 27, 1968 and April 9, 1979, were correctly
imposed because the tax exemption in the franchise of PAL was repealed during the period.
However, an amended franchise was given to PAL in 1979. Section 13 of Presidential Decree
No. 1590, now provides: In consideration of the franchise and rights hereby granted, the
grantee shall pay to the Philippine Government during the lifetime of this franchise whichever
of subsections (a) and (b) hereunder will result in a lower taxes.
(a) The basic corporate income tax based on the grantee's annual net taxable income computed
in accordance with the provisions of the Internal Revenue Code; or (b) A franchise tax of two
per cent (2%) of the gross revenues. derived by the grantees from all specific. without
distinction as to transport or nontransport corporations; provided that with respect to
international airtransport service, only the gross passengers, mail, and freight revenues. from
its outgoing flights shall be subject to this law.
The tax paid by the grantee under either of the above alternatives shall be in lieu of all other
taxes, duties, royalties, registration, license and other fees and charges of any kind, nature or
description imposed, levied, established, assessed, or collected by any municipal, city,
provincial, or national authority or government, agency, now or in the future, including but not
limited to the following: (5) All taxes, fees and other charges on the registration, license,
acquisition, and transfer of airtransport equipment, motor vehicles, and all other personal or
real property of the gravitates (Pres. Decree 1590).
PAL's current franchise is clear and specific. It has removed the ambiguity found in the earlier
law. PAL is now exempt from the payment of any tax, fee, or other charge on the registration
and licensing of motor vehicles. Such payments are already included in the basic tax or
franchise tax provided in Subsections (a) and (b) of Section 13, P.D. 1590, and may no longer
be exacted.
WHEREFORE, the petition is hereby partially GRANTED. The prayed for refund of
registration fees paid in 1971 is DENIED. The Land Transportation Franchising and
Regulatory Board (LTFRB) is enjoined functions-the collecting any tax, fee, or other charge
on the registration and licensing of the petitioner's motor vehicles from April 9, 1979 as
provided in Presidential Decree No. 1590.
4. LEVIED ON PERSONS, PROPERTY OR EXERCISES WITHIN ITS TERRITORY
5. LEVIED BY THE LEGISLATIVE DEPARTMENT
6. LEVIED FOR A PUBLIC PURPOSE
G.R. No. L-10405 December 29, 1960
WENCESLAO PASCUAL, in his official capacity as Provincial Governor of
Rizal, petitioner-appellant, vs. THE SECRETARY OF PUBLIC WORKS AND
COMMUNICATIONS, ET AL., respondents-appellees.
CONCEPCION, J.:
 petitioner, as Provincial Governor of Rizal, instituted this action for declaratory
relief, with injunction, upon the ground that Republic Act No. 920, entitled "An Act
Appropriating Funds for Public Works", approved "for the construction,
reconstruction, repair, extension and improvement" of Pasig feeder road terminals
(Gen. Roxas — Gen. Araneta — Gen. Lucban — Gen. Capinpin — Gen. Segundo
— Gen. Delgado — Gen. Malvar — Gen. Lim)";
 that, at the time of the passage and approval of said Act, the aforementioned feeder
roads were "nothing but projected and planned subdivision roads, not yet
constructed, within the Antonio Subdivision situated at Pasig, Rizal", which
projected feeder roads "do not connect any government property or any important
premises to the main highway";
 that the aforementioned Antonio Subdivision were private properties of respondent
Jose Zulueta, who, at the time of the passage and approval of said Act, was a
member of the Senate of the Philippines;
 that respondent Zulueta, addressed a letter to the Municipal Council of Pasig, Rizal,
offering to donate said projected feeder roads to the municipality of Pasig, Rizal;
 that the offer was accepted by the council, subject to the condition "that the donor
would submit a plan of the said roads and agree to change the names of two of
them";
 that no deed of donation in favor of the municipality of Pasig was, however,
executed;
 that respondent Zulueta wrote another letter to said council, calling attention to the
approval of Republic Act. No. 920, and the sum of P85,000.00 appropriated therein
for the construction of the projected feeder roads in question;
 that the municipal council of Pasig endorsed said letter of respondent Zulueta to the
District Engineer of Rizal, who, up to the present "has not made any endorsement
thereon" that inasmuch as the projected feeder roads in question were private
property at the time of the passage and approval of Republic Act No. 920, the
appropriation of P85,000.00 therein made, for the construction, reconstruction,
repair, extension and improvement of said projected feeder roads, was illegal and,
therefore, void ab initio";
26
  that said appropriation of P85,000.00 was made by Congress because its members
were made to believe that the projected feeder roads in question were "public roads
and not private streets of a private subdivision"';
 that, "in order to give a semblance of legality, when there is absolutely none, to the
aforementioned appropriation", respondents Zulueta executed, while he was a
member of the Senate of the Philippines, an alleged deed of donation — copy of
which is annexed to the petition — of the (4) parcels of land constituting said
projected feeder roads, in favor of the Republic;
 that said alleged deed of donation was, on the same date, accepted by the then
Executive Secretary;
 that being subject to an onerous condition, said donation partook of the nature of a
contract;
 that, such, said donation violated the provision of our fundamental law prohibiting
members of Congress from being directly or indirectly financially interested in any
contract with the Government, and, hence, is unconstitutional, as well as null and
void ab initio, for the construction of the projected feeder roads in question with
public funds would greatly enhance or increase the value of the aforementioned
subdivision of respondent Zulueta, "aside from relieving him from the burden of
constructing his subdivision streets or roads at his own expense";
 that the construction of said projected feeder roads was then being undertaken by the
Bureau of Public Highways; and that, unless restrained by the court, the respondents
would continue to execute, comply with, follow and implement the aforementioned
illegal provision of law, "to the irreparable damage, detriment and prejudice not only
to the petitioner but to the Filipino nation."
PETITIONER: prayed, therefore, that the contested item of Republic Act No. 920 be
declared null and void; that the alleged deed of donation of the feeder roads in question be
"declared unconstitutional and, therefor, illegal"; that a writ of injunction be issued enjoining
the Secretary of Public Works and Communications, the Director of the Bureau of Public
Works and Highways and Jose C. Zulueta from ordering or allowing the continuance of the
above-mentioned feeder roads project, and from making and securing any new and further
releases on the aforementioned item of Republic Act No. 920, and the disbursing officers of
the Department of Public Works and Highways from making any further payments out of said
funds provided for in Republic Act No. 920; and that pending final hearing on the merits, a
writ of preliminary injunction be issued enjoining the aforementioned parties respondent from
making and securing any new and further releases on the aforesaid item of Republic Act No.
920 and from making any further payments out of said illegally appropriated funds.
RESPONDENTS: moved to dismiss the petition upon the ground that petitioner had "no legal
capacity to sue", and that the petition did "not state a cause of action". In support to this
motion, respondent Zulueta alleged that the Provincial Fiscal of Rizal, not its provincial
governor, should represent the Province of Rizal, pursuant to section 1683 of the Revised
Administrative Code; that said respondent is " not aware of any law which makes illegal the
appropriation of public funds for the improvements of private property"; and that, the
constitutional provision invoked by petitioner is inapplicable to the donation in question, the
same being a pure act of liberality, not a contract. The other respondents, in turn, maintained
that petitioner could not assail the appropriation in question because "there is no actual bona
fide case in which the validity of Republic Act No. 920 is necessarily involved" and petitioner
"has not shown that he has a personal and substantial interest" in said Act "and that its
enforcement has caused or will cause him a direct injury."
LOWER COURT: rendered the aforementioned decision, dated October 29, 1953, holding
that, since public interest is involved in this case, the Provincial Governor of Rizal and the
provincial fiscal thereof who represents him therein, "have the requisite personalities" to
question the constitutionality of the disputed item of Republic Act No. 920; that "the
legislature is without power appropriate public revenues for anything but a public purpose",
that the instructions and improvement of the feeder roads in question, if such roads where
private property, would not be a public purpose; that, being subject to the following condition:
The within donation is hereby made upon the condition that the Government of the Republic of
the Philippines will use the parcels of land hereby donated for street purposes only and for no
other purposes whatsoever; it being expressly understood that should the Government of the
Republic of the Philippines violate the condition hereby imposed upon it, the title to the land
hereby donated shall, upon such violation, ipso facto revert to the DONOR, JOSE C.
ZULUETA. (Emphasis supplied.)
which is onerous, the donation in question is a contract; that said donation or contract is
"absolutely forbidden by the Constitution" and consequently "illegal", for Article 1409 of the
Civil Code of the Philippines, declares in existence and void from the very beginning contracts
"whose cause, objector purpose is contrary to law, morals . . . or public policy"; that the
legality of said donation may not be contested, however, by petitioner herein, because his
"interest are not directly affected" thereby; and that, accordingly, the appropriation in question
"should be upheld" and the case dismissed.
At the outset, it should be noted that we are concerned with a decision granting the
aforementioned motions to dismiss, which as much, are deemed to have admitted
hypothetically the allegations of fact made in the petition of appellant herein. According to
said petition, respondent Zulueta is the owner of several parcels of residential land situated in
Pasig, Rizal, and known as the Antonio Subdivision, certain portions of which had been
reserved for the projected feeder roads aforementioned, which, admittedly, were private
property of said respondent when Republic Act No. 920, appropriating P85,000.00 for the
"construction, reconstruction, repair, extension and improvement" of said roads, was passed by
Congress, as well as when it was approved by the President on June 20, 1953. The petition
further alleges that the construction of said roads, to be undertaken with the aforementioned
appropriation of P85,000.00, would have the effect of relieving respondent Zulueta of the
burden of constructing his subdivision streets or roads at his own expenses, 1and would
"greatly enhance or increase the value of the subdivision" of said respondent. The lower court
held that under these circumstances, the appropriation in question was "clearly for a private,
not a public purpose."
Respondents do not deny the accuracy of this conclusion, which is self-evident. However,
respondent Zulueta contended, in his motion to dismiss that: A law passed by Congress and
approved by the President can never be illegal because Congress is the source of all laws.
Aside from the fact that movant is not aware of any law which makes illegal the appropriation
of public funds for the improvement of what we, in the meantime, may assume as private
property.
27
The first proposition must be rejected most emphatically, it being inconsistent with the nature
of the Government established under the Constitution of the Republic of the Philippines and
the system of checks and balances underlying our political structure. Moreover, it is refuted by
the decisions of this Court invalidating legislative enactments deemed violative of the
Constitution or organic laws.
As regards the legal feasibility of appropriating public funds for a public purpose, the principle
according to Ruling Case Law, is this: It is a general rule that the legislature is without power
to appropriate public revenue for anything but a public purpose. It is the essential character of
the direct object of the expenditure which must determine its validity as justifying a tax, and
not the magnitude of the interest to be affected nor the degree to which the general advantage
of the community, and thus the public welfare, may be ultimately benefited by their
promotion. Incidental to the public or to the state, which results from the promotion of private
interest and the prosperity of private enterprises or business, does not justify their aid by the
use public money. (Emphasis supplied.)
The rule is set forth in Corpus Juris Secundum in the following language: In accordance with
the rule that the taxing power must be exercised for public purposes only, discussed suprasec.
money raised by taxation can be expended only for public purposes and not for the advantage
of private individuals. (emphasis supplied.)
Explaining the reason underlying said rule, Corpus Juris Secundum states: Generally, under
the express or implied provisions of the constitution, public funds may be used only for public
purpose. The right of the legislature to appropriate funds is correlative with its right to tax,
and, under constitutional provisions against taxation except for public purposes and
prohibiting the collection of a tax for one purpose and the devotion thereof to another
purpose, no appropriation of state funds can be made for other than for a public purpose.
The test of the constitutionality of a statute requiring the use of public funds is whether the
statute is designed to promote the public interest, as opposed to the furtherance of the
advantage of individuals, although each advantage to individuals might incidentally serve the
public. (emphasis supplied.)
Needless to say, this Court is fully in accord with the foregoing views which, apart from being
patently sound, are a necessary corollary to our democratic system of government, which, as
such, exists primarily for the promotion of the general welfare. Besides, reflecting as they do,
the established jurisprudence in the United States, after whose constitutional system ours has
been patterned, said views and jurisprudence are, likewise, part and parcel of our own
constitutional law.lawphil.net
This notwithstanding, the lower court felt constrained to uphold the appropriation in question,
upon the ground that petitioner may not contest the legality of the donation above referred to
because the same does not affect him directly. This conclusion is, presumably, based upon the
following premises, namely: (1) that, if valid, said donation cured the constitutional infirmity
of the aforementioned appropriation; (2) that the latter may not be annulled without a previous
declaration of unconstitutionality of the said donation; and (3) that the rule set forth in Article
1421 of the Civil Code is absolute, and admits of no exception. We do not agree with these
premises.
The validity of a statute depends upon the powers of Congress at the time of its passage or
approval, not upon events occurring, or acts performed, subsequently thereto, unless the latter
consists of an amendment of the organic law, removing, with retrospective operation, the
constitutional limitation infringed by said statute. Referring to the P85,000.00 appropriation
for the projected feeder roads in question, the legality thereof depended upon whether said
roads were public or private property when the bill, which, latter on, became Republic Act
920, was passed by Congress, or, when said bill was approved by the President and the
disbursement of said sum became effective, or on June 20, 1953. Inasmuch as the land on
which the projected feeder roads were to be constructed belonged then to respondent Zulueta,
the result is that said appropriation sought a private purpose, and hence, was null and void.
The donation to the Government, over (5) months after the approval and effectivity of said
Act, made, according to the petition, for the purpose of giving a "semblance of legality", or
legalizing, the appropriation in question, did not cure its aforementioned basic defect.
Consequently, a judicial nullification of said donation need not precede the declaration of
unconstitutionality of said appropriation.
Again, Article 1421 of our Civil Code, like many other statutory enactments, is subject to
exceptions. For instance, the creditors of a party to an illegal contract may, under the
conditions set forth in Article 1177 of said Code, exercise the rights and actions of the latter,
except only those which are inherent in his person, including therefore, his right to the
annulment of said contract, even though such creditors are not affected by the same, except
indirectly, in the manner indicated in said legal provision.
Again, it is well-stated that the validity of a statute may be contested only by one who will
sustain a direct injury in consequence of its enforcement. Yet, there are many decisions
nullifying, at the instance of taxpayers, laws providing for the disbursement of public
funds, 5upon the theory that "the expenditure of public funds by an officer of the State for the
purpose of administering an unconstitutional act constitutes a misapplication of such funds,"
which may be enjoined at the request of a taxpayer.
Although there are some decisions to the contrary, 7the prevailing view in the United States is
stated in the American Jurisprudence as follows: In the determination of the degree of interest
essential to give the requisite standing to attack the constitutionality of a statute, the general
rule is that not only persons individually affected, but also taxpayers, have sufficient interest in
preventing the illegal expenditure of moneys raised by taxation and may therefore question the
constitutionality of statutes requiring expenditure of public moneys. (emphasis supplied.)
However, this view was not favored by the Supreme Court of the U.S. in Frothingham vs.
Mellon (262 U.S. 447), insofar as federal laws are concerned, upon the ground that the
relationship of a taxpayer of the U.S. to its Federal Government is different from that of a
taxpayer of a municipal corporation to its government. Indeed, under the composite system of
government existing in the U.S., the states of the Union are integral part of the Federation
from an international viewpoint, but, each state enjoys internally a substantial measure of
sovereignty, subject to the limitations imposed by the Federal Constitution. In fact, the same
was made by representatives of each state of the Union, not of the people of the U.S., except
28
insofar as the former represented the people of the respective States, and the people of each
State has, independently of that of the others, ratified said Constitution. In other words, the
Federal Constitution and the Federal statutes have become binding upon the people of the U.S.
in consequence of an act of, and, in this sense, through the respective states of the Union of
which they are citizens. The peculiar nature of the relation between said people and the
Federal Government of the U.S. is reflected in the election of its President, who is chosen
directly, not by the people of the U.S., but by electors chosen by each State, in such manner as
the legislature thereof may direct (Article II, section 2, of the Federal
Constitution).lawphi1.net
The relation between the people of the Philippines and its taxpayers, on the other hand, and the
Republic of the Philippines, on the other, is not identical to that obtaining between the people
and taxpayers of the U.S. and its Federal Government. It is closer, from a domestic viewpoint,
to that existing between the people and taxpayers of each state and the government thereof,
except that the authority of the Republic of the Philippines over the people of the Philippines
is more fully direct than that of the states of the Union, insofar as the simple and unitary type
of our national government is not subject to limitations analogous to those imposed by the
Federal Constitution upon the states of the Union, and those imposed upon the Federal
Government in the interest of the Union. For this reason, the rule recognizing the right of
taxpayers to assail the constitutionality of a legislation appropriating local or state public funds
— which has been upheld by the Federal Supreme Court (Crampton vs. Zabriskie) — has
greater application in the Philippines than that adopted with respect to acts of Congress of the
United States appropriating federal funds.
Indeed, in the Province of Tayabas vs. Perez, involving the expropriation of a land by the
Province of Tayabas, (2) taxpayers thereof were allowed to intervene for the purpose of
contesting the price being paid to the owner thereof, as unduly exorbitant. It is true that in
Custodio vs. President of the Senate, a taxpayer and employee of the Government was not
permitted to question the constitutionality of an appropriation for backpay of members of
Congress. However, in Rodriguez vs. Treasurer of the Philippines and Barredo vs.Commission
on Elections, we entertained the action of taxpayers impugning the validity of certain
appropriations of public funds, and invalidated the same. Moreover, the reason that impelled
this Court to take such position in said (2) cases — the importance of the issues therein raised
— is present in the case at bar. Again, like the petitioners in the Rodriguez and Barredo cases,
petitioner herein is not merely a taxpayer. The Province of Rizal, which he represents
officially as its Provincial Governor, is our most populated political subdivision, 8and, the
taxpayers therein bear a substantial portion of the burden of taxation, in the Philippines.
Hence, it is our considered opinion that the circumstances surrounding this case sufficiently
justify petitioners action in contesting the appropriation and donation in question; that this
action should not have been dismissed by the lower court; and that the writ of preliminary
injunction should have been maintained.
Wherefore, the decision appealed from is hereby reversed, and the records are remanded to the
lower court for further proceedings not inconsistent with this decision, with the costs of this
instance against respondent Jose C. Zulueta. It is so ordered.
G.R. No. L-22356 July 21, 1967
REPUBLIC OF THE PHILIPPINES, plaintiff-appellant, vs. PEDRO B.
PATANAO, defendant-appellee.
ANGELES, J.:
This is an appeal from an order of the Court of First Instance of Agusan in civil case No. 925,
dismissing plaintiff's complaint so far as concerns the collection of deficiency income taxes for
the years 1951, 1953 and 1954 and additional residence taxes for 1951 and 1952, and requiring
the defendant to file his answer with respect to deficiency income tax for 1955 and residence
taxes for 1953-1955.
In the complaint filed by the Republic of the Philippines, through the Solicitor General,
against Pedro B. Patanao, it is alleged that defendant was the holder of an ordinary timber
license with concession at Esperanza, Agusan, and as such was engaged in the business of
producing logs and lumber for sale during the years 1951-1955; that defendant failed to file
income tax returns for 1953 and 1954, and although he filed income tax returns for 1951, 1952
and 1955, the same were false and fraudulent because he did not report substantial income
earned by him from his business; that in an examination conducted by the Bureau of Internal
Revenue on defendant's income and expenses for 1951-1955, it was ascertained that the sum
of P79,892.75, representing deficiency; income taxes and additional residence taxes for the
aforesaid years, is due from defendant; that on February 14, 1958, plaintiff, through the
Deputy Commissioner of Internal Revenue, sent a letter of demand with enclosed income tax
assessment to the defendant requiring him to pay the said amount; that notwithstanding
repeated demands the defendant refused, failed and neglected to pay said taxes; and that the
assessment for the payment of the taxes in question has become final, executory and
demandable, because it was not contested before the Court of Tax Appeals in accordance with
the provisions of section 11 of Republic Act No. 1125.
Defendant moved to dismiss the complaint on two grounds, namely: (1) that the action is
barred by prior judgment, defendant having been acquitted in criminal cases Nos. 2089 and
2090 of the same court, which were prosecutions for failure to file income tax returns and for
non-payment of income taxes; and (2) that the action has prescribed.
After considering the motion to dismiss, the opposition thereto and the rejoinder to the
opposition, the lower court entered the order appealed from, holding that the only cause of
action left to the plaintiff in its complaint is the collection of the income tax due for the taxable
year 1955 and the residence tax (Class B) for 1953, 1954 and 1955. A motion to reconsider
said order was denied, whereupon plaintiff interposed the instant appeal, which was brought
directly to this Court, the questions involved being purely legal.
The conclusion of the trial court, that the present action is barred by prior judgment, is
anchored on the following rationale: There is no question that the defendant herein has been
accused in Criminal Cases Nos. 2089 and 2090 of this Court for not filing his income tax
returns and for non-payment of income taxes for the years 1953 and 1954. In both cases, he
was acquitted. The rule in this jurisdiction is that the accused once acquitted is exempt from
both criminal and civil responsibility because when a criminal action is instituted, civil action
arising from the same offense is impliedly instituted unless the offended party expressly
29
waives the civil action or reserves the right to file it separately. In the criminal cases
abovementioned wherein the defendant was completely exonerated, there was no waiver or
reservation to file a separate civil case so that the failure to obtain conviction on a charge of
non-payment of income taxes is fatal to any civil action to collect the payment of said taxes.
Plaintiff-appellant assails the ruling as erroneous. Defendant-appellee on his part urges that it
should be maintained.
In applying the principle underlying the civil liability of an offender under the Penal Code to a
case involving the collection of taxes, the court a quo fell into error. The two cases are
circumscribed by factual premises which are diametrically opposed to each either, and are
founded on entirely different philosophies. Under the Penal Code the civil liability is incurred
by reason of the offender's criminal act. Stated differently, the criminal liability gives birth to
the civil obligation such that generally, if one is not criminally liable under the Penal Code, he
cannot become civilly liable thereunder. The situation under the income tax law is the exact
opposite. Civil liability to pay taxes arises from the fact, for instance, that one has engaged
himself in business, and not because of any criminal act committed by him. The criminal
liability arises upon failure of the debtor to satisfy his civil obligation. The incongruity of the
factual premises and foundation principles of the two cases is one of the reasons for not
imposing civil indemnity on the criminal infractor of the income tax law. Another reason, of
course, is found in the fact that while section 73 of the National Internal Revenue Code has
provided the imposition of the penalty of imprisonment or fine, or both, for refusal or neglect
to pay income tax or to make a return thereof, it failed to provide the collection of said tax in
criminal proceedings. The only civil remedies provided, for the collection of income tax are
distraint of goods, chattels, etc. or by judicial action, which remedies are generally exclusive
in the absence of a contrary intent from the legislator. Considering that the Government cannot
seek satisfaction of the taxpayer's civil liability in a criminal proceeding under the tax law or,
otherwise stated, since the said civil liability is not deemed included in the criminal action,
acquittal of the taxpayer in the criminal proceeding does not necessarily entail exoneration
from his liability to pay the taxes. It is error to hold, as the lower court has held, that the
judgment in the criminal cases Nos. 2089 and 2090 bars the action in the present case. The
acquittal in the said criminal cases cannot operate to discharge defendant appellee from the
duty of paying the taxes which the law requires to be paid, since that duty is imposed by
statute prior to and independently of any attempts by the taxpayer to evade payment. Said
obligation is not a consequence of the felonious acts charged in the criminal proceeding, nor is
it a mere civil liability arising from crime that could be wiped out by the judicial declaration of
non-existence of the criminal acts charged. (Castro vs. The Collector of Internal Revenue).
Regarding prescription of action, the lower court held that the cause of action on the
deficiency income tax and residence tax for 1951 is barred because appellee's income tax
return for 1951 was assessed by the Bureau of Internal Revenue only on February 14, 1958, or
beyond the five year period of limitation for assessment as provided in section 331 of the
National Internal Revenue Code. Appellant contends that the applicable law is section 332 (a)
of the same Code under which a proceeding in court for the collection of the tax may be
commenced without assessment at any time within 10 years from the discovery of the falsity,
fraud or omission.
The complaint alleges that the fraud in the appellee's income tax return for 1951, was
discovered on February 14, 1958. By filing a motion to dismiss, appellee hypothetically
admitted this allegation as all the other averments in the complaint were so admitted. Hence,
section 332 (a) and not section 331 of the National Internal Revenue Code should determine
whether or not the cause of action of deficiency income tax and residence tax for 1951 has
prescribed. Applying the provision of section 332 (a), the appellant's action instituted in court
on December 7, 1962 has not prescribed.
Wherefore, the order appealed from is hereby set aside. Let the records of this case be
remanded to the court of origin for further proceedings. No pronouncement as to costs.
7. PERSONAL TO THE TAXPAYER
G.R. No. L-57767 January 31, 1984
ALBERTO S. SUNIO and ILOCOS COMMERCIAL CORPORATION, petitioners, vs.
NATIONAL LABOR RELATIONS COMMISSION, NEMESIO VALENTON, SANTOS
DEL ROSARIO, VICENTE TAPUCOL, ANDRES SOLIS, CRESCENCIO SOLLER,
CECILIO LABUNI, SOTERO L. TUMANG, in his capacity as Asst. Regional Director
for Arbitration, Regional Office No. 1, Ministry of Labor & Employment, and
AMBROSIO B. SISON, in his capacity as Acting Regional Sheriff, Regional Office No. 1,
Ministry of Labor & Employment, respondents.
MELENCIO-HERRERA, J.:
 EM Ramos & Company, Inc. (EMRACO) and Cabugao Ice Plant, Inc. (CIPI), sister
corporations, sold an ice plant to Rizal Development and Finance Corporation
RDFC with a mortgage on the same properties constituted by the latter in favor of
the former to secure the payment of the balance of the purchase price.
 By virtue of that sale, EMRACO-CIPI terminated the services of all their employees
including private respondents herein, and paid them their separation pay. RDFC
hired its own own employees and operated the plant.
 RDFC sold the ice plant to petitioner Ilocos Commercial Corporation ICC headed by
its President and General Manager, petitioner Alberto Sunio. Petitioners also hired
their own employees as private respondents were no longer in the plant. The sale
was subject to the mortgage in favor of EMRACO-CIPI. Both RDFC-ICC failed to
pay the balance of the purchase price, as a consequence of which, EMRACO-CIPI
instituted extrajudicial foreclosure proceedings. The properties were sold at public
auction, the highest bidders being EMRACO CIPI. On the same date, said
companies obtained an ex-parte Writ of Possession from the Court of First Instance
of Ilocos Sur.
 On the same date, EMRACO-CIPI sold the ice plant to Nilo Villanueva, suspect to
the right of redemption of RDFC. Nilo Villanueva then re-hired private respondents.
 RDFC redeemed the ice plant. Because of the gate to Nilo Villanueva, EMRACO-
CIPI were unable to turn over possession to RDFC and/or petitioners, prompting the
latter to file a complaint for recovery of possession against EMRACO-CIPI with the
then Court of First Instance of Ilocos Sur. Nilo Villanueva intervened
30
Said Court ordered the issuance of a Writ of Preliminary Mandatory Injunction placing RDFC
in possession of the ice plant. EMPRACO-CIPI and Villanueva appealed to the Court of
Appeals. A Petition for certiorari with this Court assailing that Resolution was denied for lack
of merit.
 RDFC and petitioners finally obtains possession of the ice plant by virtue of the
Mandatory Injunction previously issued, which ordered defendant "particularly Nilo
Villanueva and his agents representatives, or any person found in the premises to
vacate and surrender the property in litigation." 2 Petitioners did not re-employ
private respondents.
 Private respondents filed complaints against petitioners for illegal dismissal with the
Regional Office, Ministry of Labor & Employment, San Fernando, La Union.
 the Assistant Regional Director rendered a decision the decretal portion of which
reads: respondents Cabugao Ice Plant, Inc., Ilocos Commercial Corporation and/or
Alberto Sunio, are hereby directed to reinstate the complainants to their former
positions without loss of seniority privileges and to pay their backwages from
February 1, 1978 to the date when they are actually reinstated
 Petitioners appealed to the NLRC, which affirmed the Regional Director's decision
and dismissed the appeal for lack of merit reasoning that when RDFC took
possession of the property and private respondents were terminated in 1973, the
latter already had a vested right to their security of tenure, and when they were
rehired those rights continued. 3
 Petitioners are now before us assailing the Asst. Regional Director's Decision, the
Resolution of the NLRC, as well as the Writ of Execution issued pursuant thereto,
for P156,720.80 representing backwages.
They raise as lone issue: That respondent National Labor Relations Commission and/or Asst.
Regional Director Sotero Tumang acted in excess of jurisdiction and/or with grave abuse of
discretion amounting to lack of jurisdiction in rendering the decision and the resolution in
NLRC Case No. RB-1-1228-78, and in ordering the execution of said decision
We issued a Temporary Restraining Order to maintain the status quo, resolved to give due
course to the Petition, and required the parties to submit their respective Briefs. Only
petitioners have complied.
Did public respondents' act with grave abuse of on amounting to lack of jurisdiction in
ordering the reinstatement of private respondents and the payment of their backwages?
Petitioners deny any employer-employee relationship with private respondents arguing that no
privity of contract exists between them, the latter being the employees of Nilo Villanueva who
re-hired them when he took over the operation of the ice plant from CIPI; that private
respondents should go after Nilo Villanueva for whatever rights they may be entitled to, or the
CIPI which is still existing, that no succession of rights and obligations took place between
Villanueva and petitioners as the transfer of possession was a consequence of the exercise of
the right of redemption; that the amount of backwages was determined without petitioners
being given a chance to be heard and that granting that respondents are entitled to the reliefs
adjudged, such award cannot be enforced against petitioner Sunio, who was impleaded in the
complaint as the General Manager of ICC.
Public respondent, in its Comment, countered that the sale of a business of 'a going concern
does not ipso factoterminate employer-employee relations when the successor-employer
continues the business operation of the predecessor-employer in an essentially unchanged
manner. Private respondents argue that the change of management or ownership of a business
entity is not one of the just causes for the termination of services of employees under Article
283 of the Labor Code, as amended. Both respondents additionally claim that petitioner Sunio,
as the General Manager of ICC and owner of (1/2) of its interest, is personally liable for his
malicious act of illegally dismissing private respondents, for no ground exists to justify their
termination.
We sustain petitioners.
It is true that the sale of a business of a going concern does not ipso facto terminate the
employer-employee relations insofar as the successor-employer is concerned, and that change
of ownership or management of an establishment or company is not one of the just causes
provided by law for termination of employment. The situation here, however, was not one of
simple change of ownership. Of note is the fact that when, on July 30, 1973, EMRACO-CIPI
sold the plant to RDFC, CIPI had terminated the services of its employees, including herein
private respondents, giving them their separation pay which they had accepted. When RDFC
took over ownership and management, therefore, it hired its own employees, not the private
respondents, who were no longer there. RDFC subsequently sold the property to petitioners on
November 28, 1973. But by reason of their failure to pay the balance of the purchase price,
EMRACO-CIPI foreclosed on the mortgage over the ice plant; the property was sold at public
auction to EMRACO-CIPI as the highest bidders, and they eventually re-possessed the plant
on August 30, 1974. During all the period that RDFC and petitioners were operating the plant
from July 30, 1973 to August 30, 1974, they had their own employees. CIPI-EMRACO then
sold the plant, also on August 30, 1974, to Nilo Villanueva, subject to RDFC's right of
redemption. Nilo Villanueva then rehired private respondents as employees of the plant, also
in 1974.
In 1975, RDFC redeemed the property and demanded possession but EMRACO-CIPI and Nilo
Villanueva resisted so that petitioners were compelled to sue for recovery of possession,
obtaining it, however, only in 1978.
Under those circumstances, it cannot be justifiably said that the plant together with its staff
and personnel moved from one ownership to another. No succession of employment rights and
obligations can be said to have taken place between EMRACO-CIPI-Nilo Villanueva, on the
one hand, and petitioners on the other. Petitioners eventually acquired possession by virtue of
the exercise of their right of redemption and of a Mandatory Injunction in their favor which
ordered Nilo Villanueva and "any person found in the premises" to vacate. What is more,
when EMRACO-CIPI sold the ice plant to RDFC in 1973, private respondents' employment
was terminated by EMRACO-CIPI and they were given their separation pay, which they
accepted. During the thirteen months, therefore, that RDFC and petitioners were in possession
and operating the plant up to August, 1974, they hired their own employees, not the private
respondents. In fact, it may even be said that private respondents had slept on their rights when
31
they failed to contest such termination at the time of sale, if they believed they had rights to
protect. Further, Nilo Villanueva rehired private respondents in August, 1974, subject to a
resolutory condition. That condition having arisen, the rights of private respondents who claim
under him mast be deemed to have also ceased.
Private respondents can neither successfully invoke security of tenure in their favor. Their
tenure should not be reckoned from 1967 because they were already terminated in 1973.
Private respondents were only rehired in 1974 by Nilo Villanueva. Petitioners took over by
judicial process in 1978 so that private respondents had actually only four years of rehired
employment with Nilo Villanueva, during all of which period, petitioners fought hard against
Nilo Villanueva to recover possession of the plant. Insofar as petitioners are concerned
therefore, there was no tenurial security to speak of that would entitle private respondents to
reinstatement and backwages. We come now to the personal liability of petitioner, Sunio, who
was made jointly and severally responsible with petitioner company and CIPI for the payment
of the backwages of private respondents. This is reversible error. The Assistant Regional
Director's Decision failed to disclose the reason why he was made personally liable.
Respondents, however, alleged as grounds thereof, his being the owner of (1/2) interest of said
corporation, and his alleged arbitrary dismissal of private respondents. Petitioner Sunio was
impleaded in the Complaint his capacity as General Manager of petitioner corporation. where
appears to be no evidence on record that he acted maliciously or in bad faith in terminating the
services of private respondents. His act, therefore, was within the scope of his authority and
was a corporate act.
It is basic that a corporation is invested by law with a personality separate and distinct from
those of the persons composing it as well as from that of any other legal entity to which it may
be related. 4 Mere ownership by a single stockholder or by another corporation of all or nearly
all of the capital stock of a corporation is not of itself sufficient ground for disregarding the
separate corporate personality. 5 Petitioner Sunio, therefore, should not have been made
personally answerable for the payment of private respondents' back salaries.
WHEREFORE, the assailed Decision and Resolution, and the consequent Writ of Execution
are hereby SET ASIDE and the Temporary Restraining Order heretofore issued by this Court
hereby made permanent. Public respondents are hereby ordered to return to petitioners the
latter's levied properties in their possession. No costs.
G.R. No. L-15778 April 23, 1962
TAN TIONG BIO, ET AL., petitioners, vs. COMMISSIONER OF INTERNAL
REVENUE, respondent.
BAUTISTA ANGELO, J.:
 Central Syndicate, a corporation organized under the laws of the Philippines, thru its
General Manager, David Sycip, sent a letter to the Collector of Internal Revenue
advising the latter that it purchased from Dee Hong Lue the entire stock of surplus
properties which the said Dee Hong Lue had bought from the Foreign Liquidation
Commission and that as it assumed Dee Hong Lue's obligation to pay the 3-1/2%
sales tax on said surplus goods, it was remitting the sum of P43,750.00 in his behalf
as deposit to answer for the payment of said sales tax with the understanding that it
would later be adjusted after the determination of the exact consideration of the sale.
 The syndicate again wrote the Collector requesting the refund of P1,103.28
representing alleged excess payment of sales tax due to the adjustment and reduction
of the purchase price in the amount of P31,522.18.
 Said letter was referred to an agent for verification and report.
 after a thorough investigation of the facts and circumstances surrounding the
transaction, the agent reported (1) that Dee Hong Lue purchased the surplus goods
as trustee for the Central Syndicate which was in the process of organization at the
time of the bidding; (2) that it was the representatives of the Central Syndicate that
removed the surplus goods from their base at Leyte; (3) that the syndicate must have
realized a gross profit of 18.8% from its sales thereof; and (4) that if the sales tax
were to be assessed on its gross sales it would still be liable for the amount of
P33,797.88 as deficiency sales tax and surcharge in addition to the amount of
P43,750.00 which the corporation had deposited in the name of Dee Hong Lue as
estimated sales tax due from the latter.
COLLECTOR: Based on the above findings of the agent in charge of the investigation,
decided that the Central Syndicate was the importer and original seller of the surplus goods in
question and, therefore, the one liable to pay the sales tax. Accordingly, the Collector assessed
against the syndicate the amount of P33,797.88 and P300.00 as deficiency sales tax, inclusive
of the 25% surcharge and compromise penalty, respectively, and on the same date, in a
separate letter, he denied the request of the syndicate for the refund of the sum of P1,103.28.
 Central Syndicate elevated the case to the Court of Tax Appeals questioning the
ruling of the Collector which denies its claim for refund as well as the assessment
made against it of the sum of P33,797.88, plus the sum of P300.00 as compromise
penalty, as stated above.
 The Collector filed his answer thereto wherein he reiterated his ruling and prayed
that the Central Syndicate be ordered to pay the deficiency sales tax and surcharge
as demanded in his letters.
 the syndicate filed a motion requesting that the issue of prescription it has raised
against the collection of the tax be first determined as a preliminary question, but
action thereon was deferred by the Court of Tax Appeals until after the trial of the
case on the merits.
 Collector filed a motion requiring the syndicate to file a bond to guarantee the
payment of the tax assessed against it which motion was denied by the Court of Tax
Appeals on the ground that cannot be legally done it appearing that the syndicate is
already a non-existing entity due to the expiration of its corporate existence.
 In view of this development, the Collector filed a motion to dismiss the appeal on
the ground of lack of personality on the part of the syndicate, which met an
opposition on the part of the latter, but the Court of Tax Appeals issued a resolution
dismissing the appeal primarily on the ground that the Central Syndicate has no
personality to maintain the action then pending before it.
 From this order the syndicate appealed to the Supreme Court wherein it intimated
that the appeal should not be dismissed because it could be substituted by its
successors-in-interest, to wit: Tan Tiong Bio, Yu Khe Thai, Alfonso Sycip, Dee
32
 Hong Lue, Lim Shui Ty, Sy Seng Tong, Sy En, Co Giap and David Sycip. And
taking cue from this suggestion, this Court ruled against the dismissal and held: "The
resolution appealed from is set aside and the respondent court is ordered to permit
the substitution of the officers and directors of the defunct Central Syndicate as
appellants, and to proceed with the hearing of the appeal upon its merits." In
permitting the substitution, this Court labored under the premise that said officers
and directors "may be held personally liable for the unpaid deficiency assessments
made by the Collector of Internal Revenue against the defunct syndicate."
COURT OF TAX APPEALS: the decision of the Collector of Internal Revenue appealed
from is hereby affirmed, except with regard to the imposition of the compromise penalty of
P300.00 the collection of which is unauthorized and illegal in the absence of a compromise
agreement between the parties..
 The petitioners Tan Tiong Bio, Yu Khe Thai, Lim Shui Ty, Alfonso Sycip, Sy En
alias Sy Seng Sui, Dee Hong Lue, and Sy Seng Tong, who appear in the Articles of
Incorporation of the Central Syndicate as incorporators and directors of the
corporation, the second named being in addition its President and the seventh its
Treasurer, are hereby ordered to pay jointly and severally, to the Collector of
Internal Revenue, the sum of P33,797.88 as deficiency sales tax and surcharge on
the surplus goods purchased by them from the Foreign Liquidation Commission on
July 5, 1946, from which they realized an estimated gross sales of P1,447,551.65,
with costs.
 Petitioners interposed the present appeal.
The important issues to be determined in this appeal are: (1) whether the importer of the
surplus goods in question the sale of which is subject to the present tax liability is Dee Hong
Lue or the Central Syndicate who has been substituted by the present petitioners; (2) whether
the deficiency sales tax which is now sought to be collected has already prescribed; and (3) the
Central Syndicate having already been dissolved because of the expiration of its corporate
existence, whether the sales tax in question can be enforced against its successors-in-interest
who are the present petitioners.
1. Petitioners contend that the Central Syndicate cannot be held liable for the deficiency sales
tax in question because it is not the importer of the surplus goods purchased from the Foreign
Liquidation Commission for the reason that said surplus goods were purchased by Dee Hong
Lue as shown by the contract executed between him and the Foreign Liquidation Commission
and the fact that the Central Syndicate only purchased the same from Dee Hong Lue and not
from the Foreign Liquidation Commission as shown by Exhibit 13.
This contention cannot be sustained. As correctly observed by the Court of Tax Appeals, the
overwhelming evidence presented by the Collector points to the conclusion that Dee Hong Lue
purchased the surplus goods in question not for himself but for the Central Syndicate which
was then in the process of incorporation such that the deed of sale Exhibit 13 which purports
to show that Dee Hong Lue sold said goods to the syndicate for a consideration of
P1,250,000.00 (the same amount paid by Dee Hong Lue to the Foreign Liquidation
Commission) "is but a ruse to evade payment of a greater amount of percentage tax." The
aforesaid conclusion of the lower court was arrived at after a thorough analysis of the evidence
on record, pertinent portion of which we quote hereunder with approval:
Exhibit "38-A" for the respondent shows that as early as July 23, 1946, or before the
organization and incorporation of Central Syndicate, Mr. David Sycip, who was subsequently
appointed General Manager of the corporation, together with Messrs. Sy En alias Sy Seng Sui
(one of the incorporators of Central Syndicate), Serge Gordeof and Chin Siu Bun (an
employee of the same corporation), for and in the name of Central Syndicate then in the
process of organization, went to Leyte to take over the surplus properties sold by the FLC to
Dee Hong Lue, which the latter held in trust for the corporation. Exhibit 38-A, which is a
certificate issued by no less than David Sycip himself who was subsequently appointed
General Manager of the corporation admits in express terms the following "... the surplus
property sold by the Foreign Liquidation Commission to Dee Hong Lue (and held in trust by
the latter for the Syndicate" (Emphasis ours.) We give full weight and credence to the adverse
admissions made by David Sycip against the petitioners as appearing in his certificate
considering that at the time he made them, he was a person jointly interested with the
petitioners in the transaction over which there was yet no controversy over any sales tax
liability.
Exhibit '39' for the respondent which is a letter of Mr. Yu Khe Thai President, Director and
biggest stockholder of Central Syndicate and addressed to the Commanding General
AFWESPAC, Manila, contains the following categorical admissions which corroborate the
admissions made by David Sycip; that the so-called Leyte 'Mystery Pile' surplus properties
were owned by Central Syndicate by virtue of a purchase from the FLC, effected in the name
of Dee Hong Lue on July 5, 1946, inasmuch as Central Syndicate was then still in the process
of organization; that Dee Hong Lue held the said surplus properties in trust until the mere
formal turnover to the corporation on August 20, 1946, when the corporation had already
been organized and incorporated under the laws of the Philippines; and that on July 23, 1946
viz., (22) days before the incorporation of Central Syndicate on August 15, 1946 'our General
Manager, Mr. David Sycip accompanied by one of our directors, Mr. Sy En, arrived in Leyte
to take over the properties.'
Before passing on to the rest of the evidence supporting the finding of respondent, we would
like to call attention to this significant detail. It is stated in the letter, of Mr. Yu Khe Thai that
our General Manager, Mr. David Sycip, accompanied by one of our directors, Mr. Sy En,
arrived in Leyte to take over the properties,' We ask: Why was there such a hurry on the part
of the promoters of Central Syndicate in taking over the surplus properties when the formal
agreement, purporting to be a contract of sale of the 'Mystery Pile' between Dee Hong Lue as
vendor, and the Central Syndicate, as vendee, for the amount of P1,250,000.00, was effected
(28) days later? Is this not another clear and unmistakable indication that from the very start,
as is the theory of the respondent, the real purchasers of the 'Mystery Pile' from the FLC and
as such the 'importers' of the goods, were the Central Syndicate and/or the group of big
financiers composing it before said corporation was incorporated; and, that Dee Hong Lue
acted merely as agent of these persons when he purchased the pile from the FLC? As a general
rule, one does not exercise all the acts of ownership over a property especially if it involves a
big amount until after the documents evidencing such ownership are fully accomplished.
33
Moreover, it appears that, Dee Hong Lue was investigated by Major Primitivo San Agustin,
Jr., G-2 of the Philippine Army, because of the discovery of some gun parts found in his
shipment of surplus material from Palo, Leyte.
In his sworn statement, before said officer, Dee Hong Lue admitted the following: That he
paid the FLC the amount of P1,250,000.00 "with the checks of Yu Khe Thai, maybe also
Alfonso Sycip and my checks with many others"; that "at the beginning I was trying to buy the
pile for myself without telling other people and other friends of mine." "Watkins came to me
and he bid for me for P600,000 or P700,000, but later on when the price went up to
P1,250,000, I talked to my friends who said I could get money." "So, I bought it with their
checks and mine"and, that after buying the "Mystery Pile", he (Dee Hong Lue) never
inspected the same personally.
In his affidavit, Dee Hong Lue admitted that of the amount of P1,250,000.00 which he paid in
two installments sometime in July, 1946, to the FLC, P1,181,250.00 (should be
P1,181,000.00) of the amount came from the following: Yu Khe Thai who advanced to him
P250,000.00; Sy Seng Tong — P375,000.00; Alfonso Z. Sycip - P375,000.00; Tan Tiong Bio
- P125,000.00; Robert Dee Se Wee — P25,000.00; and, Jose S. Lim — P31,000.00 that his
understanding with these persons was that should they eventually join him in Central
Syndicate, such advances would be adjusted to constitute their investments; and, that soon
after the "Mystery Pile" was purchased from the FLC, all the above-named persons with the
exception of Robert Dee Se Wee and Jose S. Lim, formed the Central Syndicate and a re-
allocation of shares was made corresponding to the amounts advanced by them.
Added to these, we have before us other documentary evidence for the respondent, all tending
to prove the same thing - that the Central Syndicate and/or the group of big financiers
composing it and not Dee Hong Lue was the real purchaser (importer) of the "Mystery Pile"
from the FLC; that in the contract of sale between Dee Hong Lue and the FLC the former
acted principally as agent (Article 1930, New Civil Code) of the petitioners Yu Khe Thai, Sy
Seng Tong, Alfonso Z. Sycip and Tan Tiong Bio who advanced the purchased price of
P1,125,000.00 out of the P1,250,000.00 paid to the FLC, Dee Hong Lue being the purchaser in
his own right only with respect to the amount of P69,000.00; and, that the deed, purporting to
show that Dee Hong Lue sold the "Mystery Pile" to the Central Syndicate for consideration of
P1,250.000.00 is but a ruse to evade payment of a greater amount of percentage tax.
To our mind, the deed of sale, as well as the circumstances surrounding the incorporation of
the Central Syndicate, are shrouded with as much mystery as the so-called "Mystery Pile"
subject of the transaction. But, as oil is to water, the truth and underlying motives behind these
transactions have to surface in the end. Petitioners would want us to believe that Dee Hong
Lue bought in his own right and for himself the surplus goods in question for P1,250,000.00
from the FLC and then, by virtue of a valid contract of sale, transferred and conveyed the
same to the Central Syndicate at cost. If this be so, what need was there for Dee Hong Lue to
agree in the immediate organization and incorporation of the Central Syndicate with six other
capitalists when he could very well have disposed of the surplus goods to the public in his
individual capacity and keep all the profits to himself without sharing 9/10th of it to the other
six incorporators and stockholders of the newly incorporated Syndicate.
It appears that Dee Hong Lue "sold" the pile to the Central Syndicate for exactly the same
price barely (46) days after acquiring it from FLC and exactly (5) days after the Syndicate was
registered with the Securities and Exchange Commission on August 19, 1946. This is indeed
most unusual for a businessman like Dee Hong Lue who, it is to be presumed, was out to make
a killing when he acquired the surplus goods from the FLC for the staggering amount of
P1,750,000.00 in cash.
Again, why did Dee Hong Lue waste all his time and effort not to say his good connections
with the FLC by acquiring the goods from that agency only to sell it for the same amount to
the Central Syndicate? This would have been understandable if Dee Hong Lue were the
biggest and controlling stockholder of the Syndicate. He could perhaps reason out to himself,
"the profits which I am sacrificing now in this sale to the Syndicate, I will get it anyway in the
form of dividends from it after it shall have disposed of all the "Mystery Pile" to the public.'
But then, how could this be possible when Dee Hong Lue was the smallest subscriber to the
capital stock of the Syndicate? It appears from the Articles of Incorporation that of the
authorized capital stock of the corporation in the amount of P500,000.00, Dee Hong Lue
subscribes to only P20,000.00 or 1/25th of the capital stock authorized and of this amount only
P5,000.00 was paid by him at the time of incorporation. So here is an experienced
businessman like Dee Hong Lue who, following the theory of petitioners' counsel, bought the
"'Mystery Pile" for himself for P1,250,000.00 in cash, and after a few days sold the same at
cost to a corporation wherein he owned only 1/25th of the authorized capital stock and
wherein he was not even an officer, thus doling out to the other six incorporators and
stockholders net profits in the sum conservatively estimated by the respondent to be
P206,116.45 out of a total of P229,073.83 which normally could all go to him. We take
judicial notice of the fact that as a result of our immense losses in property throughout the
archipelago the during the Japanese occupation, either through destruction or systematic
commandering by the enemy and our forces, surplus properties commanded a very good price
in the open market after the liberation and that quite a number of surplus dealers made
immense fortunes out of it. We believe the respondent was quite charitable if not more than
fair to the Central Syndicate in computing the profits realized by it in the resale of the
"Mystery Pile" to the public at only 18.8% of the acquisition price.
Now, from the side of the Central Syndicate. This corporation, as its articles of incorporation,
will show, was incorporated on August 15, 1946 with an authorized capital stock of
P500,000.00 of which P200,000.00 worth was subscribed by seven (7) persons and
P50,000.00 paid-up in cash at the time of incorporation. Five (5) days after its incorporation,
as the Deed of Sale, purports to show, the said corporation bought from Dee Hong Lue the
"Mystery Pile" for P1,250,000.00 in cash. This is indeed quite phenomenal and fantastic not to
say the utmost degree of finance considering that the corporation had a subscribed capital
stock of only P200,000.00 of which only P50,000.00 was paid-up at the time of incorporation
and with not the least proof showing that it never borrowed money in its own name from
outside source to raise the enormous amount allegedly paid to Dee Hong Lue nor evidence to
show that it had by then in so short a time is five (5) days accumulated a substantial reserve to
meet Dee Hong Lue's selling price.
Furthermore, at first blush it would seem quite difficult to understand why the (7)
incorporators and stockholders of the Central Syndicate formed a corporation with a
subscribed capital stock of only P200,000.00, and with cash on hand of only P50,000.00
34
knowing fully well that there was a transaction awaiting the newly registered corporation
involving an outlay of P1,250,000.00 in cash. We believe this was done after mature
deliberation and for some ulterior motive. As we see it, the only logical answer is that the
incorporator wanted to limit whatever civil liability that might arise in favor of third persons,
as the present tax liability has now arisen, up to the amount of their subscriptions, although the
surplus deal they transacted and which we believe was the only purpose in the incorporation of
the Central Syndicate, was very much over and above their authorized capital. Moreover, by
limiting its capital, the corporation was also able to save on incidental expenses, such as
attorney's fee and the filing fee paid to the Securities and Exchange Commission, which were
based on the amount of the authorized capital stock.
Another mystery worth unravelling is what happened to the P1,181,240.00 (should be
P1,181,000.00) which Dee Hong Lue in his affidavit claims to have received from Messrs. Uy
Khe Thai, Sy Seng Tong, Alfonso Z. Sycip, Tan Tiong Bio (all incorporators of the Syndicate)
and two others as 'advances' with which to pay the FLC. There is no evidence on record to
show that Dee Hong Lue ever returned this amount to those (6) persons after he supposedly
received P1,250,000.00 from the newly incorporated Syndicate by virtue of the Deed of Sale.
This is the explanation that Dee Hong Lue gave in this regard as appearing in his affidavit,
Exhibit 15: "That soon after the above-mentioned property was purchased, the above parties,
with the exception of Robert Dee Se Wee and Jose S. Lim decided to join the proposed
Central Syndicate and a re-allocation of shares was made for the reason that some of the above
parties in turn had to get advances from third parties." If this were true, why was it that
Messrs. Yu Khe Thai, Sy Seng Tong, Alfonso Z. Sycip and Tan Tiong Bio who advanced
P250,000.00; P375,000.00 and P125,000.00 to Dee Hong Lue were made to appear in the
Articles of incorporation of the Central Syndicate as having subscribed to shares worth only
P40,000.00; P30,000.00; P30,000.00 and P20,000.00 and of having paid only P10,000.00,
P7,500.00, P7,500.00, and P5,000.00 on their subscriptions, respectively? Would it not be
more in keeping with corporate practice, following the explanation of Dee Hong Lue, to just
credit those (4) persons in the corporation with shares worth the amount advanced by them to
Dee Hong Lue?
On the basis of the above figures, the re-allocation of shares in favor of the (4) incorporators
who advanced enormous sums for the Syndicate seems at first glance to be totally
disproportionate and unfair to them. However, in the final analysis it is not so as we will now
show. Immediately after the incorporation of the Syndicate, as the evidence shows, Dee Hong
Lue was made to execute a deed of transfer under the guise of a contract of sale, conveying
full and complete ownership of the "Mystery Pile" to the newly organized corporation. So we
have, on the face of the Articles of Incorporation and Exhibit 13, a corporation with assets
worth only P50,000.00 cash owning properties worth over a million pesos. Obviously, the
incorporators of the Syndicate, particularly those four who advanced enormous sums to Dee
Hong Lue, are not ordinary businessmen who could easily be taken for a ride. With the
precipitated execution of the "Deed of Sale" by Dee Hong Lue in favor of the Syndicate,
transferring and conveying ownership over the entire pile to the latter, the recoupment of their
advances from the newly acquired assets of the corporation was sufficiently secured, and at the
same time, by making the document appear to be a deed of sale instead of a deed of transfer as
it should be under Article 1891 of the New Civil Code, they have reduced (at least attempted
to) their sales tax liability with the argument that Dee Hong Lue was the original "purchaser"
or "importer" of the goods and therefore the taxable sale was that one made by him to the
Syndicate and not the sales made by the latter to the public. After going over the Articles of
Incorporation of the Central Syndicate and the other circumstances of this case, we draw the
conclusion that it was organized just for this particular transaction that its life span was
expressly limited to two (2) years from and after the date of incorporation just to give it time
to dispose of the "Mystery Pile" to the public and then liquidate all its assets among the seven
incorporators-stockholders as in fact it was done on August 15, 1948; that from the very start,
the seven (7) incorporators had intended it to be a closed corporation without the least
intention of ever selling to other persons the remaining authorized capital stock of
P300,000.00 still unsubscribed; and, that upon its liquidation, the seven (7) incorporators
composing it got much more than their investments including those who advanced
P1,181,000.00 to the FLC for the corporation.
Petitioners would dispute the finding that Dee Hong Lue merely acted as a trustee of the
Central Syndicate when he purchased the surplus goods in question from the Foreign
Liquidation Commission on July 5, 1946 considering that on that date the syndicate has not
yet been incorporated on the theory that no legal relation may exist between parties one of
whom has yet no legal existence. Technically this may be true, but the fact remains that it
cannot be denied that Dee Hong Lue purchased the goods on behalf of those who advanced the
money for the purchase thereof who later became the incorporators and only stockholders of
the syndicate with the understanding that the amounts they had respectively advanced would
be their investment and would represent their interest in the corporation. And this is further
evidenced by the fact that this purchase made by Dee Hong Lue was later approved and
adopted as the act of the Central Syndicate itself as can be gleaned from the certificate
executed by David Sycip, general manager of said syndicate, on September 16, 1946, wherein
he emphasized that the persons named therein (from whom Dee Hong Lue obtained the
money) merely acted on behalf of the syndicate and in fact were the ones who went to Leyte to
take over the aforesaid surplus goods. In any event, even if Dee Hong Lue may be deemed as
the purchaser of the surplus goods in his own right, nevertheless, the corporation still may be
regarded as the importer of the same goods for the reason that Dee Hong Lue transferred to it
all his rights and interests in the contract with the Foreign Liquidation Commission, and it was
said corporation that took delivery thereof from the place where they were stored in Leyte as
may be seen from the letter of Dee Hong Lue to the Foreign Liquidation Commission dated
September 2, 1946 and the letter of the Central Syndicate to the said Commission bearing the
same date. Under these facts, it is clear that the Central Syndicate is the importer of the surplus
goods as correctly observed by Judge Umali in his concurring opinion, from which we quote: .
It is now well settled that a person who bought surplus goods from the Foreign Liquidation
Commission and who removed the goods bought from the U.S. military bases in the
Philippines is considered an importer of such goods and is subject to the sales tax or
compensating tax, as the case may be. In this case it appearing that the Central Syndicate was
the owner of the 'Mystery Pile' before its removal from Base K and that it was the one which
actually took delivery thereof and removed the same from the U.S. military base, it is the
importer within the meaning of Section 186 of the Revenue Code, as it stood before the
enactment of Republic Act No. 594, and its sales of the surplus goods are the original sales
taxable under said section and not the sale to it by Dee Hong Lue.
2. Since the Central Syndicate, as we have already pointed out, was the importer of the surplus
goods in question, it was its duty under Section 183 of the Internal Revenue Code to file a
return of its gross sales within 20 days after the end of each quarter in order that the office of
35
the internal revenue may assess the sales tax that may be due thereon, but, as the record shows,
the Central Syndicate failed to file any return of its quarterly sales on the pretext that it was
Dee Hong Lue who imported the surplus goods and it merely purchased them from said
importer. This is in fact what the syndicate intended to impress upon the Collector when it
wrote to him its letter of October 19, 1946 informing him that it purchased from Dee Hong
Lue the entire stock of the surplus goods which the latter had bought from the Foreign
Liquidation Commission and was therefore depositing in his name the sum of P43,750.00 to
answer for his sales tax liability, but this letter certainly cannot be considered as a return that
may set in operation the application of the prescriptive period provided for in Section 331 of
the Tax Code, for, evidently, said letter if at all could only be considered as such in behalf of
Dee Hong Lue and not in behalf of the Central Syndicate because such is the only nature and
import of the letter. Besides, how can such letter be considered as a return of the sales of the
Central Syndicate when it was only on February 21, 1947 when it removed the surplus goods
in question from their base at Leyte? How can such return inure to the benefit of the syndicate
when the same surplus goods which were removed on said date could not have been sold by
the corporation earlier than the aforesaid date? It is obvious that the letter of October 19, 1946
cannot possibly be considered as a return filed by the syndicate and so cannot serve as basis
for the computation of the prescriptive period of five years prescribed by law.
Nor can the fact that the Collector did not include in the assessment a surcharge of 50% serve
as an argument that a return had already been filed, for such failure can only mean that an
oversight had been committed in the non-inclusion of said surcharge. The syndicate having
failed to file its quarterly returns as required by Section 183 of the Tax Code, the period that
has to be reckoned with is that embodied in Section 332 of the same Code which provides that
in case of failure to file the return the tax may be assessed within 10 years after discovery of
the falsity, fraud or omission of the payment of the proper tax. Since it appears that the
Collector discovered the failure of the syndicate to file the return only on September 12, 1951
he has therefore up to September 18, 1961 within which to assess or collect the deficiency tax
in question. Consequently the assessment made on January 4, 1952 was made within the
prescribed period.
3. Petitioners argue (1) that the Court of Tax Appeals acted in excess of its jurisdiction in
holding them liable as officers or directors of the defunct Central Syndicate for the tax liability
of the latter; (2) that petitioners cannot be held liable for said tax liability there being no
statutory provision in this jurisdiction authorizing the government to proceed against the
stockholders of a defunct corporation as transferees of the corporate assets upon liquidation;
(3) that assuming that the stockholders can be held so liable, they are only liable to the extent
of the benefits derived by them from the corporation and there is no evidence showing that
petitioners had been the beneficiaries of the defunct syndicate; (4) that considering that the
Collector instituted the present action on September 23, 1954 when he filed his answer to the
appeal of petitioners, said action was already barred by prescription pursuant to Sections 77
and 78 of the Corporation Law which allows corporations to continue as a body corporate only
for three years from its dissolution; and (5) that assuming that petitioners are liable to pay the
tax, their liability is not solidary, but only limited to the benefits derived by them from the
corporation.
It should be stated at the outset that it was petitioners themselves who caused their substitution
as parties in the present case, being the successors-in-interest of the defunct syndicate, when
they appealed this case to the Supreme Court for which reason the latter Court declared that
"the respondent Court of Tax Appeals should have allowed the substitution of its former
officers and directors is parties-appellants, since they are proper parties in interest insofar as
they may be (and in fact are) held personally liable for the unpaid deficiency assessments
made by the Collector of Internal Revenue against the defunct Syndicate." In fact, because of
this directive their substitution was effected. They cannot, therefore, be now heard to complain
if they are made responsible for the tax liability of the defunct syndicate whose representation
they assumed and whose assets were distributed among them.
In the second place, there is good authority to the effect that the creditor of a dissolved
corporation may follow its assets once they passed into the hands of the stockholders. Thus,
recognized are the following rules in American jurisprudence: The dissolution of a corporation
does not extinguish the debts due or owing to it (Bacon v. Robertson; Curron v. State). A
creditor of a dissolve corporation may follow its assets, as in the nature of a trust fund, into the
hands of its stockholders (MacWilliams v. Excelsier Coal Co.). An indebtedness of a
corporation to the federal government for income and excess profit taxes is not extinguished
by the dissolution of the corporation (Quinn v. McLeudon). And it has been stated, with
reference to the effect of dissolution upon taxes due from a corporation, "that the hands of the
government cannot, of course, collect taxes from a defunct corporation, it loses thereby none
of its rights to assess taxes which had been due from the corporation, and to collect them from
persons, who by reason of transactions with the corporation, hold property against which the
tax can be enforced and that the legal death of the corporation no more prevents such action
than would the physical death of an individual prevent the government from assessing taxes
against him and collecting them from his administrator, who holds the property which the
decedent had formerly possessed" (Wonder Bakeries Co. v. U.S.). Bearing in mind that our
corporation law is of American origin, the foregoing authorities have persuasive effect in
considering similar cases in this jurisdiction. This must have been taken into account when in
G.R. No. L-8800 this Court said that petitioners could be held personally liable for the taxes in
question as successors-in-interest of the defunct corporation.
Considering that the Central Syndicate realized from the sale of the surplus goods a net profit
of P229,073.83, and that the sale of said goods was the only transaction undertaken by said
syndicate, there being no evidence to the contrary, the conclusion is that said net profit
remained intact and was distributed among the stockholders when the corporation liquidated
and distributed its assets on August 15, 1948, immediately after the sale of the said surplus
goods. Petitioners are therefore the beneficiaries of the defunct corporation and as such should
be held liable to pay the taxes in question. However, there being no express provision
requiring the stockholders of the corporation to be solidarily liable for its debts which liability
must be express and cannot be presumed, petitioners should be held to be liable for the tax in
question only in proportion to their shares in the distribution of the assets of the defunct
corporation. The decision of the trial court should be modified accordingly.
WHEREFORE, with the above modification, we hereby affirm the decision appealed from,
with costs against petitioners.
C. THEORY & UNDERLYING BASIS
G.R. No. L-22074 April 30, 1965
36
THE PHILIPPINE GUARANTY CO., INC., petitioner, vs. THE COMMISSIONER OF
INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.
BENGZON, J.P., J.:
 The Philippine Guaranty Co., Inc., a domestic insurance company, entered into
reinsurance contracts, on various dates, with foreign insurance companies not doing
business in the Philippines namely: Imperio Compañia de Seguros, La Union y El
Fenix Español, Overseas Assurance Corp., Ltd., Socieded Anonima de Reaseguros
Alianza, Tokio Marino & Fire Insurance Co., Ltd., Union Assurance Society Ltd.,
Swiss Reinsurance Company and Tariff Reinsurance Limited. Philippine Guaranty
Co., Inc., thereby agreed to cede to the foreign reinsurers a portion of the premiums
on insurance it has originally underwritten in the Philippines, in consideration for the
assumption by the latter of liability on an equivalent portion of the risks insured.
Said reinsurrance contracts were signed by Philippine Guaranty Co., Inc. in Manila
and by the foreign reinsurers outside the Philippines, except the contract with Swiss
Reinsurance Company, which was signed by both parties in Switzerland.
 The reinsurance contracts made the commencement of the reinsurers' liability
simultaneous with that of Philippine Guaranty Co., Inc. under the original insurance.
Philippine Guaranty Co., Inc. was required to keep a register in Manila where the
risks ceded to the foreign reinsurers where entered, and entry therein was binding
upon the reinsurers. A proportionate amount of taxes on insurance premiums not
recovered from the original assured were to be paid for by the foreign reinsurers.
The foreign reinsurers further agreed, in consideration for managing or
administering their affairs in the Philippines, to compensate the Philippine Guaranty
Co., Inc., in an amount equal to 5% of the reinsurance premiums. Conflicts and/or
differences between the parties under the reinsurance contracts were to be arbitrated
in Manila. Philippine Guaranty Co., Inc. and Swiss Reinsurance Company stipulated
that their contract shall be construed by the laws of the Philippines.
Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty Co., Inc. ceded to the
foreign reinsurers the following premiums:
1953 . . . . . . . . . . . . . . . . . . . . . P842,466.71
1954 . . . . . . . . . . . . . . . . . . . . . 721,471.85
Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income when it
file its income tax returns for 1953 and 1954. Furthermore, it did not withhold or pay tax on
them. Consequently, per letter dated April 13, 1959, the Commissioner of Internal Revenue
assessed against Philippine Guaranty Co., Inc. withholding tax on the ceded reinsurance
premiums, thus:
1953
Gross premium per investigation . . . . . . . . . . P768,580.00
Withholding tax due thereon at 24% . . . . . . . . P184,459.00
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . 46,114.00
Compromise for non-filing of withholding
100.00
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL AMOUNT DUE & COLLECTIBLE . . . . P230,673.00
==========
1954
Gross premium per investigation . . . . . . . . . . P780.880.68
Withholding tax due thereon at 24% . . . . . . . . P184,411.00
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . P184,411.00
Compromise for non-filing of withholding
100.00
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL AMOUNT DUE & COLLECTIBLE . . . . P234,364.00
==========
 Philippine Guaranty Co., Inc., protested the assessment on the ground that
reinsurance premiums ceded to foreign reinsurers not doing business in the
Philippines are not subject to withholding tax. Its protest was denied and it appealed
to the Court of Tax Appeals.
CTA: petitioner Philippine Guaranty Co., Inc. is hereby ordered to pay to the Commissioner
of Internal Revenue the respective sums of P202,192.00 and P173,153.00 or the total sum of
P375,345.00 as withholding income taxes for the years 1953 and 1954, plus the statutory
delinquency penalties thereon. With costs against petitioner.
 Philippine Guaranty Co, Inc. has appealed, questioning the legality of the
Commissioner of Internal Revenue's assessment for withholding tax on the
reinsurance premiums ceded in 1953 and 1954 to the foreign reinsurers.
 Petitioner maintain that the reinsurance premiums in question did not constitute
income from sources within the Philippines because the foreign reinsurers did not
engage in business in the Philippines, nor did they have office here.
The reinsurance contracts, however, show that the transactions or activities that constituted the
undertaking to reinsure Philippine Guaranty Co., Inc. against loses arising from the original
insurances in the Philippines were performed in the Philippines. The liability of the foreign
reinsurers commenced simultaneously with the liability of Philippine Guaranty Co., Inc. under
the original insurances. Philippine Guaranty Co., Inc. kept in Manila a register of the risks
37
ceded to the foreign reinsurers. Entries made in such register bound the foreign resinsurers,
localizing in the Philippines the actual cession of the risks and premiums and assumption of
the reinsurance undertaking by the foreign reinsurers. Taxes on premiums imposed by Section
259 of the Tax Code for the privilege of doing insurance business in the Philippines were
payable by the foreign reinsurers when the same were not recoverable from the original
assured. The foreign reinsurers paid Philippine Guaranty Co., Inc. an amount equivalent to 5%
of the ceded premiums, in consideration for administration and management by the latter of
the affairs of the former in the Philippines in regard to their reinsurance activities here.
Disputes and differences between the parties were subject to arbitration in the City of Manila.
All the reinsurance contracts, except that with Swiss Reinsurance Company, were signed by
Philippine Guaranty Co., Inc. in the Philippines and later signed by the foreign reinsurers
abroad. Although the contract between Philippine Guaranty Co., Inc. and Swiss Reinsurance
Company was signed by both parties in Switzerland, the same specifically provided that its
provision shall be construed according to the laws of the Philippines, thereby manifesting a
clear intention of the parties to subject themselves to Philippine law.
Section 24 of the Tax Code subjects foreign corporations to tax on their income from sources
within the Philippines. The word "sources" has been interpreted as the activity, property or
service giving rise to the income. 1 The reinsurance premiums were income created from the
undertaking of the foreign reinsurance companies to reinsure Philippine Guaranty Co., Inc.,
against liability for loss under original insurances. Such undertaking, as explained above, took
place in the Philippines. These insurance premiums, therefore, came from sources within the
Philippines and, hence, are subject to corporate income tax.
The foreign insurers' place of business should not be confused with their place of
activity. Business should not be continuity and progression of transactions 2 while activity may
consist of only a single transaction. An activity may occur outside the place of business.
Section 24 of the Tax Code does not require a foreign corporation to engage in business in the
Philippines in subjecting its income to tax. It suffices that the activity creating the income is
performed or done in the Philippines. What is controlling, therefore, is not the place
of business but the place of activity that created an income.
Petitioner further contends that the reinsurance premiums are not income from sources within
the Philippines because they are not specifically mentioned in Section 37 of the Tax Code.
Section 37 is not an all-inclusive enumeration, for it merely directs that the kinds of income
mentioned therein should be treated as income from sources within the Philippines but it does
not require that other kinds of income should not be considered likewise.
The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It is a
necessary burden to preserve the State's sovereignty and a means to give the citizenry an army
to resist an aggression, a navy to defend its shores from invasion, a corps of civil servants to
serve, public improvement designed for the enjoyment of the citizenry and those which come
within the State's territory, and facilities and protection which a government is supposed to
provide. Considering that the reinsurance premiums in question were afforded protection by
the government and the recipient foreign reinsurers exercised rights and privileges guaranteed
by our laws, such reinsurance premiums and reinsurers should share the burden of maintaining
the state.
Petitioner would wish to stress that its reliance in good faith on the rulings of the
Commissioner of Internal Revenue requiring no withholding of the tax due on the reinsurance
premiums in question relieved it of the duty to pay the corresponding withholding tax thereon.
This defense of petitioner may free if from the payment of surcharges or penalties imposed for
failure to pay the corresponding withholding tax, but it certainly would not exculpate if from
liability to pay such withholding tax The Government is not estopped from collecting taxes by
the mistakes or errors of its agents.3
In respect to the question of whether or not reinsurance premiums ceded to foreign reinsurers
not doing business in the Philippines are subject to withholding tax under Section 53 and 54 of
the Tax Code, suffice it to state that this question has already been answered in the affirmative
in Alexander Howden & Co., Ltd. vs. Collector of Internal Revenue
Finally, petitioner contends that the withholding tax should be computed from the amount
actually remitted to the foreign reinsurers instead of from the total amount ceded. And since it
did not remit any amount to its foreign insurers in 1953 and 1954, no withholding tax was due.
The pertinent section of the Tax Code States: Sec. 54. Payment of corporation income tax at
source. — In the case of foreign corporations subject to taxation under this Title not engaged
in trade or business within the Philippines and not having any office or place of business
therein, there shall be deducted and withheld at the source in the same manner and upon the
same items as is provided in Section fifty-three a tax equal to twenty-four per centum thereof,
and such tax shall be returned and paid in the same manner and subject to the same conditions
as provided in that section.
The applicable portion of Section 53 provides: (b) Nonresident aliens. — All persons,
corporations and general copartnerships (compañias colectivas), in whatever capacity acting,
including lessees or mortgagors of real or personal property, trustees acting in any trust
capacity, executors, administrators, receivers, conservators, fiduciaries, employers, and all
officers and employees of the Government of the Philippines having the control, receipt,
custody, disposal, or payment of interest, dividends, rents, salaries, wages, premiums,
annuities, compensation, remunerations, emoluments, or other fixed or determinable annual or
periodical gains, profits, and income of any nonresident alien individual, not engaged in trade
or business within the Philippines and not having any office or place of business therein, shall
(except in the case provided for in subsection [a] of this section) deduct and withhold from
such annual or periodical gains, profits, and income a tax equal to twelve per
centum thereof: Provided That no deductions or withholding shall be required in the case of
dividends paid by a foreign corporation unless (1) such corporation is engaged in trade or
business within the Philippines or has an office or place of business therein, and (2) more than
eighty-five per centum of the gross income of such corporation for the three-year period
ending with the close of its taxable year preceding the declaration of such dividends (or for
such part of such period as the corporation has been in existence)was derived from sources
within the Philippines as determined under the provisions of section thirty-
seven: Provided, further, That the Collector of Internal Revenue may authorize such tax to be
deducted and withheld from the interest upon any securities the owners of which are not
known to the withholding agent.
38
The above-quoted provisions allow no deduction from the income therein enumerated in
5. Wack Wack Golf Club, Casino Español, etc. 6,940.92
determining the amount to be withheld. According, in computing the withholding tax due on
the reinsurance premium in question, no deduction shall be recognized.
TOTAL P30,138.88

WHEREFORE, in affirming the decision appealed from, the Philippine Guaranty Co., Inc. is
hereby ordered to pay to the Commissioner of Internal Revenue the sums of P202,192.00 and
P173,153.00, or a total amount of P375,345.00, as withholding tax for the years 1953 and
1954, respectively. If the amount of P375,345.00 is not paid within 30 days from the date this
judgement becomes final, there shall be collected a surcharged of 5% on the amount unpaid,
plus interest at the rate of 1% a month from the date of delinquency to the date of payment,
provided that the maximum amount that may be collected as interest shall not exceed the
amount corresponding to a period of three (3) years. With costs againsts petitioner.
G.R. No. L-22265 December 22, 1967
The claim for deduction thereof is based upon receipts issued, not by the entities in which the
alleged expenses had been incurred, but by the officers of Goodrich who allegedly paid them.
The claim must be rejected. If the expenses had really been incurred, receipts or chits would
have been issued by the entities to which the payments had been made, and it would have been
easy for Goodrich or its officers to produce such receipts.lawphil These issued by said officers
merely attest to their claim that they had incurred and paid said expenses. They do not
establish payment of said alleged expenses to the entities in which the same are said to have
been incurred. The Court of Tax Appeals erred, therefore, in allowing the deduction thereof.

COLLECTOR OF INTERNAL REVENUE, petitioner, The alleged bad debts are:

vs. GOODRICH INTERNATIONAL RUBBER CO., respondent.

1. Portillo's Auto Seat Cover P630.31

CONCEPCION, C.J.:
2. Visayan Rapid Transit 17,810.26
Appeal by the Government from a decision of the Court of Tax Appeals, setting aside the
assessments made by the Commissioner of Internal Revenue, in the sums of P14,128.00 and 3. Bataan Auto Seat Cover 373.13
P8,439.00, as deficiency income taxes allegedly due from respondent Goodrich International
Rubber Company — hereinafter referred to as Goodrich — for the years 1951 and 1952,
4. Tres Amigos Auto Supply 1,370.31
respectively.
5. P. C. Teodoro 650.00
These assessments were based on disallowed deductions, claimed by Goodrich, consisting of
several alleged bad debts, in the aggregate sum of P50,455.41, for the year 1951, and the sum 6. Ordnance Service, P.A. 386.42
of P30,138.88, as representation expenses allegedly incurred in the year 1952. Goodrich had
appealed from said assessments to the Court of Tax Appeals, which, after appropriate 7. Ordnance Service, P.C. 796.26
proceedings, rendered, on June 8, 1963, a decision allowing the deduction for bad debts, but
disallowing the alleged representation expenses. On motion for reconsideration and new trial, 8. National land Settlement Administration 3,020.76
filed by Goodrich, on November 19, 1963, the Court of Tax Appeals amended its
aforementioned decision and allowed said deductions for representation expenses. Hence, this
9. National Coconut Corporation 644.74
appeal by the Government.
10. Interior Caltex Service Station 1,505.87
The alleged representation expenses are:
11. San Juan Auto Supply 4,530.64
1. Expenses at Elks Club P10,959.21
12. P A C S A 45.36
2. Manila Polo Club 4,947.35
13. Philippine Naval Patrol 14.18
3. Army and Navy Club 2,812.95
14. Surplus Property Commission 277.68
4. Manila Golf Club 4,478.45
15. Alverez Auto Supply 285.62

39

16. Lion Shoe Store 1,686.93
17. Ruiz Highway Transit 2,350.00
18. Esquire Auto Seat Cover 3,536.94
TOTAL P50,455.41*
The issue, in connection with these debts is whether or not the same had been properly
deducted as bad debts for the year 1951. In this connection, we find:
Portillo's Auto Seat Cover (P730.00): This debt was incurred in 1950. In 1951, the debtor paid
P70.00, leaving a balance of P630.31. That same year, the account was written off as bad debt
(Exhibit 3-C-4). Counsel for Goodrich had merely sent two (2) letters of demand in 1951
(Exh. B-14). In 1952, the debtor paid the full balance (Exhibit A).
Visayan Rapid Transit (P17,810.26): This debt was, also, incurred in 1950. In 1951, it was
charged off as bad debt, after the debtor had paid P275.21. No other payment had been
made.lawphil Taxpayer's Accountant testified that, according to its branch manager in Cebu,
he had been unable to collect the balance. The debtor had merely promised and kept on
promising to pay. Taxpayer's counsel stated that the debtor had gone out of business and
became insolvent, but no proof to this effect. was introduced.
Bataan Auto Seat Cover (P373.13): This is the balance of a debt of P474.13 contracted in
1949. In 1951, the debtor paid P100.00. That same year, the balance of P373.13 was charged
off as bad debt. The next year, the debtor paid the additional sum of P50.00.
Tres Amigos Auto Supply (P1,370.31): This account had been outstanding since 1949. Counsel
for the taxpayer had merely sent demand letters (Exh. B-13) without success.
P. C. Teodoro (P650.00): In 1949, the account was P751.91. In 1951, the debtor paid P101.91,
thus leaving a balance of P650.00, which the taxpayer charged off as bad debt in the same
year. In 1952, the debtor made another payment of P150.00.
Ordinance Service, P.A. (P386.42): In 1949, the outstanding account of this government
agency was P817.55. Goodrich's counsel sent demand letters (Exh. B-8). In 1951, it paid
Goodrich P431.13. The balance of P386.42 was written off as bad debt that same year.
Ordinance Service, P.C. (P796.26): In 1950, the account was P796.26. It was referred to
counsel for collection. In 1951, the account was written off as a debt. In 1952, the debtor paid
it in full.
National Land Settlement Administration (P3,020.76): The outstanding account in 1949 was
P7,041.51. Collection letters were sent (Exh. B-7). In 1951, the debtor paid P4,020.75, leaving
a balance of P3,020.76, which was written off, that same year, as a bad debt. This office was
under liquidation, and its Board of Liquidators promised to pay when funds shall become
available.
National Coconut Corporation (P644.74): This account had been outstanding since 1949.
Collection letters were sent (Exh. B-12) without success. It was written off as bad debt in
1951, while the corporation was under a Board of Liquidators, which promised to pay upon
availability of funds. In 1961, the debt was fully paid.
Interior Caltex Service Station (P1,505.87): The original account was P2,705.87, when, in
1950, it was turned over for collection to counsel for Goodrich (p. 156, CTA Records).
Counsel began sending letters of collection in April 1950. Interior Caltex made partial
payments, so that as of December, 1951, the balance outstanding was
P1,505.87.lawphil.net The debtor paid P200, in 1952; P113.20, in 1954; P750.00, in 1961; and
P300.00.00 in 1962. The account had been written off as bad debt in 1951.
The claim for deduction of these ten (10) debts should be rejected. Goodrich has not
established either that the debts are actually worthless or that it had reasonable grounds to
believe them to be so in 1951. Our statute permits the deduction of debts "actually ascertained
to be worthless within the taxable year," obviously to prevent arbitrary action by the taxpayer,
to unduly avoid tax liability.
The requirement of ascertainment of worthlessness requires proof of two facts: (1) that the
taxpayer did in fact ascertain the debt to be worthlessness, in the year for which the deduction
is sought; and (2) that, in so doing, he acted in good faith.1
Good faith on the part of the taxpayer is not enough. He must show, also, that he had
reasonably investigated the relevant facts and had drawn a reasonable inference from the
information thus obtained by him.2 Respondent herein has not adequately made such showing.
The payments made, some in full, after some of the foregoing accounts had been characterized
as bad debts, merely stresses the undue haste with which the same had been written off. At any
rate, respondent has not proven that said debts were worthless. There is no evidence that the
debtors can not pay them.lawphil.net It should be noted also that, in violation of Revenue
Regulations No. 2, Section 102, respondent had not attached to its income tax returns a
statement showing the propriety of the deductions therein made for alleged bad debts.
Upon the other hand, we find that the following accounts were properly written off: San Juan
Auto Supply (P4,530.64): This account was contracted in 1950. Referred, for collection, to
respondent's counsel, the latter secured no payment. In November, 1950, the corresponding
suit for collection was filed (Exh. C). The debtor's counsel was allowed to withdraw, as such,
the debtor having failed to meet him. In fact, the debtor did not appear at the hearing of the
case.lawphil.net Judgment was rendered in 1951 for the creditor (Exh. C-2). The
corresponding writ of execution (Exh. C-3) was returned unsatisfied, for no properties could
be attached or levied upon.
PACSA (P45.36),
40
 QUISUMBING, J.:
Philippine Naval Patrol (P14.18),

Surplus Property Commission (P277.68), This petition for review assails the Resolution of the Court of Appeals affirming the
Decision2 and a Resolution of the Court Of Tax Appeals which denied the claims of the
Alvarez Auto Supply (P285.62): petitioner for tax refund and tax credits.

FACTS:
These four (4) accounts were 2 or 3 years old in 1951. After the collectors of the creditor had
failed to collect the same, its counsel wrote letters of demand (Exhs. B-10, B-11, B-6 and B-2)
to no avail. Considering the small amounts involved in these accounts, the taxpayer was
justified in feeling that the unsuccessful efforts therefore exerted to collect the same sufficed
to warrant their being written off.3
Lion Shoe Store (P11,686.93),
Ruiz Highway Transit (P2,350.00), and
Esquire Auto Seat Cover (P3,536.94):
These three (3) accounts were among those referred to counsel for Goodrich for collection. Up
to 1951, when they were written off, counsel had sent 17 Letters of demand to Lion Shoe Store
(Exh. B); 16 demand letters to Ruiz Highway Transit (Exh. B-1); and 6 letters of demand to
Esquire Auto Seat Cover (Exit. B-5) In 1951, Lion Shoe Store, Ruiz Highway Transit, and
Esquire Auto Seat Cover had made partial payments in the sums of P1,050.00, P400.00, and
P300.00 respectively. Subsequent to the write-off, additional small payments were made and
accounted for as income of Goodrich. Counsel interviewed the debtors, investigated their
ability to pay and threatened law suits. He found that the debtors were in strained financial
condition and had no attachable or leviable property. Moreover, Lion Shoe Store was burned
twice, in 1948 and 1949. Thereafter, it continued to do business on limited scale. Later; it went
out of business. Ruiz Highway Transit, had more debts than assets. Counsel, therefore, advised
respondent to write off these accounts as bad debts without going to court, for it would be
"foolish to spend good money after bad."
The deduction of these eight (8) accounts, aggregating P22,627.35, as bad debts should be
allowed.
 Petitioner, Philippine Bank of Communications (PBCom), a commercial banking
corporation duly organized under Philippine laws, filed its quarterly income tax
returns for the first and second quarters of 1985, reported profits, and paid the total
income tax of P5,016,954.00. The taxes due were settled by applying PBCom's tax
credit memos and accordingly, the BIR issued Tax Debit Memo Nos. 0746-85 and
0747-85 for P3,401,701.00 and P1,615,253.00, respectively.
 Subsequently, however, PBCom suffered losses so that when it filed its Annual
Income Tax Returns for the year-ended December 31, 1986, the petitioner likewise
reported a net loss of P14,129,602.00, and thus declared no tax payable for the year.
 But during these two years, PBCom earned rental income from leased properties.
The lessees withheld and remitted to the BIR withholding creditable taxes of
P282,795.50 in 1985 and P234,077.69 in 1986.
 petitioner requested the Commissioner of Internal Revenue, among others, for a tax
credit of P5,016,954.00 representing the overpayment of taxes in the first and second
quarters of 1985.
 Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes
withheld by their lessees from property rentals in 1985 for P282,795.50 and in 1986
for P234,077.69.
 Pending the investigation, petitioner instituted a Petition for Review on November
18, 1988 before the CTA.
 The losses petitioner incurred as per the summary of petitioner's claims for refund
and tax credit for 1985 and 1986, filed before the Court of Tax Appeals, are as
follows:
1985 1986
——— ———

WHEREFORE, the decision appealed from should be, as it is hereby, modified, in the sense Net Income (Loss) (P25,317,288.00) (P14,129,602.00)
that respondent's alleged representation expenses are totally disallowed, and its claim for bad
debts allowed up to the sum of P22,627.35 only. Without special pronouncement as to costs. It Tax Due NIL NIL
is so ordered.
Quarterly tax.
G.R. No. 112024 January 28, 1999
Payments Made 5,016,954.00 —
PHILIPPINE BANK OF COMMUNICATIONS, petitioner,
vs. COMMISSIONER OF INTERNAL REVENUE, COURT OF TAX APPEALS and Tax Withheld at Source 282,795.50 234,077.69
COURT OF APPEALS, respondent.
41
 ———————— ———————
Excess Tax Payments P5,299,749.50* P234,077.69
=============== =============
* CTA's decision reflects PBCom's 1985 tax claim as
P5,299,749.95. A forty five centavo difference was
noted.
CTA: rendered a decision which, as stated on the outset, denied the request of petitioner for a
tax refund or credit in the sum amount of P5,299,749.95, on the ground that it was filed
beyond the two-year reglementary period provided for by law. The petitioner's claim for
refund in 1986 amounting to P234,077.69 was likewise denied on the assumption that it was
automatically credited by PBCom against its tax payment in the succeeding year.
 petitioner filed a MR of the CTA's decision but the same was denied due course for
lack of merit.
 Thereafter, PBCom filed a petition for review of said decision and resolution of the
CTA with the Court of Appeals. However, the Court of Appeals affirmed in toto the
CTA's resolution. Hence this petition now before us.
ISSUE: Whether or not the Court of Appeals erred in denying the plea for tax refund or tax
credits on the ground of prescription, despite petitioner's reliance on RMC No. 7-85, changing
the prescriptive period of two years to ten years?
 Petitioner argues that its claims for refund and tax credits are not yet barred by
prescription relying on the applicability of Revenue Memorandum Circular No. 7-85
issued on April 1, 1985. The circular states that overpaid income taxes are not
covered by the two-year prescriptive period under the tax Code and that taxpayers
may claim refund or tax credits for the excess quarterly income tax with the BIR
within ten (10) years under Article 1144 of the Civil Code. The pertinent portions of
the circular reads:
REVENUE MEMORANDUM CIRCULAR NO. 7-85
SUBJECT: PROCESSING OF REFUND OR TAX CREDIT OF EXCESS CORPORATE
INCOME TAX RESULTING FROM THE FILING OF THE FINAL ADJUSTMENT
RETURN.
TO: All Internal Revenue Officers and Others Concerned.
Sec. 85 And 86 Of the National Internal Revenue Code provide: The foregoing provisions are
implemented by Section 7 of Revenue Regulations Nos. 10-77 which provide; It has been
observed, however, that because of the excess tax payments, corporations file claims for
recovery of overpaid income tax with the Court of Tax Appeals within the two-year period
from the date of payment, in accordance with sections 292 and 295 of the National Internal
Revenue Code. It is obvious that the filing of the case in court is to preserve the judicial right
of the corporation to claim the refund or tax credit.
It should he noted, however, that this is not a case of erroneously or illegally paid tax under
the provisions of Sections 292 and 295 of the Tax Code.
In the above provision of the Regulations the corporation may request for the refund of the
overpaid income tax or claim for automatic tax credit. To insure prompt action on corporate
annual income tax returns showing refundable amounts arising from overpaid quarterly
income taxes, this Office has promulgated Revenue Memorandum Order No. 32-76 dated June
11, 1976, containing the procedure in processing said returns. Under these procedures, the
returns are merely pre-audited which consist mainly of checking mathematical accuracy of the
figures of the return. After which, the refund or tax credit is granted, and, this procedure was
adopted to facilitate immediate action on cases like this.
In this regard, therefore, there is no need to file petitions for review in the Court of Tax
Appeals in order to preserve the right to claim refund or tax credit the two year period. As
already stated, actions hereon by the Bureau are immediate after only a cursory pre-audit of
the income tax returns. Moreover, a taxpayer may recover from the Bureau of Internal
Revenue excess income tax paid under the provisions of Section 86 of the Tax Code within 10
years from the date of payment considering that it is an obligation created by law (Article
1144 of the Civil Code).9 (Emphasis supplied.)
Petitioner argues that the government is barred from asserting a position contrary to its
declared circular if it would result to injustice to taxpayers. Citing ABS CBN Broadcasting
Corporation vs. Court of Tax Appeals 10 petitioner claims that rulings or circulars promulgated
by the Commissioner of Internal Revenue have no retroactive effect if it would be prejudicial
to taxpayers, In ABS-CBN case, the Court held that the government is precluded from
adopting a position inconsistent with one previously taken where injustice would result
therefrom or where there has been a misrepresentation to the taxpayer.
Petitioner contends that Sec. 246 of the National Internal Revenue Code explicitly provides for
this rules as follows: Sec. 246 Non-retroactivity of rulings— Any revocation, modification or
reversal of any of the rules and regulations promulgated in accordance with the preceding
section or any of the rulings or circulars promulgated by the Commissioner shall not be given
retroactive application if the revocation, modification or reversal will be prejudicial to the
taxpayers except in the following cases: a). where the taxpayer deliberately misstates or omits
material facts from his return or in any document required of him by the Bureau of Internal
Revenue; b). where the facts subsequently gathered by the Bureau of Internal Revenue are
materially different from the facts on which the ruling is based; c). where the taxpayer acted in
bad faith.
Respondent Commissioner of Internal Revenue, through Solicitor General, argues that the
two-year prescriptive period for filing tax cases in court concerning income tax payments of
Corporations is reckoned from the date of filing the Final Adjusted Income Tax Return, which
42
is generally done on April 15 following the close of the calendar year. As precedents,
respondent Commissioner cited cases which adhered to this principle, to wit ACCRA
Investments Corp. vs. Court of Appeals, et al., 11 and Commissioner of Internal
Revenue vs. TMX Sales, Inc., et al.. 12 Respondent Commissioner also states that since the
Final Adjusted Income Tax Return of the petitioner for the taxable year 1985 was supposed to
be filed on April 15, 1986, the latter had only until April 15, 1988 to seek relief from the court.
Further, respondent Commissioner stresses that when the petitioner filed the case before the
CTA on November 18, 1988, the same was filed beyond the time fixed by law, and such
failure is fatal to petitioner's cause of action.
After a careful study of the records and applicable jurisprudence on the matter, we find that,
contrary to the petitioner's contention, the relaxation of revenue regulations by RMC 7-85 is
not warranted as it disregards the two-year prescriptive period set by law.
Basic is the principle that "taxes are the lifeblood of the nation." The primary purpose is to
generate funds for the State to finance the needs of the citizenry and to advance the common
weal. 13 Due process of law under the Constitution does not require judicial proceedings in tax
cases. This must necessarily be so because it is upon taxation that the government chiefly
relies to obtain the means to carry on its operations and it is of utmost importance that the
modes adopted to enforce the collection of taxes levied should be summary and interfered with
as little as possible. 14
From the same perspective, claims for refund or tax credit should be exercised within the time
fixed by law because the BIR being an administrative body enforced to collect taxes, its
functions should not be unduly delayed or hampered by incidental matters.
Sec. 230 of the National Internal Revenue Code (NIRC) of 1977 (now Sec. 229, NIRC of
1997) provides for the prescriptive period for filing a court proceeding for the recovery of tax
erroneously or illegally collected, viz.: Sec. 230. Recovery of tax erroneously or illegally
collected. — No suit or proceeding shall be maintained in any court for the recovery of any
national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or
collected, or of any penalty claimed to have been collected without authority, or of any sum
alleged to have been excessive or in any manner wrongfully collected, until a claim for refund
or credit has been duly filed with the Commissioner; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.
In any case, no such suit or proceedings shall begun after the expiration of two years from the
date of payment of the tax or penalty regardless of any supervening cause that may arise after
payment; Provided however, That the Commissioner may, even without a written claim
therefor, refund or credit any tax, where on the face of the return upon which payment was
made, such payment appears clearly to have been erroneously paid. (Emphasis supplied)
The rule states that the taxpayer may file a claim for refund or credit with the Commissioner of
Internal Revenue, within (2) years after payment of tax, before any suit in CTA is commenced.
The two-year prescriptive period provided, should be computed from the time of filing the
Adjustment Return and final payment of the tax for the year.
In Commissioner of Internal Revenue vs. Philippine American Life Insurance Co., this Court
explained the application of Sec. 230 of 1977 NIRC, as follows: Clearly, the prescriptive
period of two years should commence to run only from the time that the refund is ascertained,
which can only be determined after a final adjustment return is accomplished. In the present
case, this date is April 16, 1984, and two years from this date would be April 16, 1986. As we
have earlier said in the TMX Sales case, Sections 68. 69, and 70 on Quarterly Corporate
Income Tax Payment and Section 321 should be considered in conjunction with it
When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the
prescriptive period of two years to ten years on claims of excess quarterly income tax
payments, such circular created a clear inconsistency with the provision of Sec. 230 of 1977
NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated guidelines
contrary to the statute passed by Congress.
It bears repeating that Revenue memorandum-circulars are considered administrative rulings
(in the sense of more specific and less general interpretations of tax laws) which are issued
from time to time by the Commissioner of Internal Revenue. It is widely accepted that the
interpretation placed upon a statute by the executive officers, whose duty is to enforce it, is
entitled to great respect by the courts. Nevertheless, such interpretation is not conclusive and
will be ignored if judicially found to be erroneous. 20 Thus, courts will not countenance
administrative issuances that override, instead of remaining consistent and in harmony with
the law they seek to apply and implement. 21
In the case of People vs. Lim, 22 it was held that rules and regulations issued by administrative
officials to implement a law cannot go beyond the terms and provisions of the latter.
Appellant contends that Section 2 of FAO No. 37-1 is void because it is not only inconsistent
with but is contrary to the provisions and spirit of Act. No 4003 as amended, because whereas
the prohibition prescribed in said Fisheries Act was for any single period of time not
exceeding five years duration, FAO No 37-1 fixed no period, that is to say, it establishes an
absolute ban for all time. This discrepancy between Act No. 4003 and FAO No. 37-1 was
probably due to an oversight on the part of Secretary of Agriculture and Natural Resources. Of
course, in case of discrepancy, the basic Act prevails, for the reason that the regulation or rule
issued to implement a law cannot go beyond the terms and provisions of the
latter. . . . In this connection, the attention of the technical men in the offices of Department
Heads who draft rules and regulation is called to the importance and necessity of closely
following the terms and provisions of the law which they intended to implement, this to avoid
any possible misunderstanding or confusion as in the present case.23
Further, fundamental is the rule that the State cannot be put in estoppel by the mistakes or
errors of its officials or agents. 24 As pointed out by the respondent courts, the nullification of
RMC No. 7-85 issued by the Acting Commissioner of Internal Revenue is an administrative
interpretation which is not in harmony with Sec. 230 of 1977 NIRC. for being contrary to the
express provision of a statute. Hence, his interpretation could not be given weight for to do so
would, in effect, amend the statute.
43
It is likewise argued that the Commissioner of Internal Revenue, after promulgating RMC No.
7-85, is estopped by the principle of non-retroactively of BIR rulings. Again We do not agree.
The Memorandum Circular, stating that a taxpayer may recover the excess income tax paid
within 10 years from date of payment because this is an obligation created by law, was issued
by the Acting Commissioner of Internal Revenue. On the other hand, the decision, stating that
the taxpayer should still file a claim for a refund or tax credit and corresponding petition fro
review within the two-year prescription period, and that the lengthening of the period of
limitation on refund from two to ten years would be adverse to public policy and run counter
to the positive mandate of Sec. 230, NIRC, - was the ruling and judicial interpretation of the
Court of Tax Appeals. Estoppel has no application in the case at bar because it was not the
Commissioner of Internal Revenue who denied petitioner's claim of refund or tax credit.
Rather, it was the Court of Tax Appeals who denied (albeit correctly) the claim and in effect,
ruled that the RMC No. 7-85 issued by the Commissioner of Internal Revenue is an
administrative interpretation which is out of harmony with or contrary to the express provision
of a statute (specifically Sec. 230, NIRC), hence, cannot be given weight for to do so would in
effect amend the statute.25
Art. 8 of the Civil Code 26 recognizes judicial decisions, applying or interpreting statutes as
part of the legal system of the country. But administrative decisions do not enjoy that level of
recognition. A memorandum-circular of a bureau head could not operate to vest a taxpayer
with shield against judicial action. For there are no vested rights to speak of respecting a
wrong construction of the law by the administrative officials and such wrong interpretation
could not place the Government in estoppel to correct or overrule the same. 27 Moreover, the
non-retroactivity of rulings by the Commissioner of Internal Revenue is not applicable in this
case because the nullity of RMC No. 7-85 was declared by respondent courts and not by the
Commissioner of Internal Revenue. Lastly, it must be noted that, as repeatedly held by this
Court, a claim for refund is in the nature of a claim for exemption and should be construed
in strictissimi juris against the taxpayer.28
On the second issue, the petitioner alleges that the Court of Appeals seriously erred in
affirming CTA's decision denying its claim for refund of P234,077.69 (tax overpaid in 1986),
based on mere speculation, without proof, that PBCom availed of the automatic tax credit in
1987.
Sec. 69 of the 1977 NIRC 29 (now Sec. 76 of the 1997 NIRC) provides that any excess of the
total quarterly payments over the actual income tax computed in the adjustment or final
corporate income tax return, shall either(a) be refunded to the corporation, or (b) may be
credited against the estimated quarterly income tax liabilities for the quarters of the succeeding
taxable year.
The corporation must signify in its annual corporate adjustment return (by marking the option
box provided in the BIR form) its intention, whether to request for a refund or claim for an
automatic tax credit for the succeeding taxable year. To ease the administration of tax
collection, these remedies are in the alternative, and the choice of one precludes the other.
As stated by respondent Court of Appeals: Finally, as to the claimed refund of income tax
over-paid in 1986 — the Court of Tax Appeals, after examining the adjusted final corporate
annual income tax return for taxable year 1986, found out that petitioner opted to apply for
automatic tax credit. This was the basis used (vis-avis the fact that the 1987 annual corporate
tax return was not offered by the petitioner as evidence) by the CTA in concluding that
petitioner had indeed availed of and applied the automatic tax credit to the succeeding year,
hence it can no longer ask for refund, as to [sic] the two remedies of refund and tax credit are
alternative. 30
That the petitioner opted for an automatic tax credit in accordance with Sec. 69 of the 1977
NIRC, as specified in its 1986 Final Adjusted Income Tax Return, is a finding of fact which
we must respect. Moreover, the 1987 annual corporate tax return of the petitioner was not
offered as evidence to contovert said fact. Thus, we are bound by the findings of fact by
respondent courts, there being no showing of gross error or abuse on their part to disturb our
reliance thereon. 31
WHEREFORE, the, petition is hereby DENIED, The decision of the Court of Appeals
appealed from is AFFIRMED, with COSTS against the petitioner.
G.R. No. 119286 October 13, 2004
PASEO REALTY & DEVELOPMENT CORPORATION, petitioner, vs. COURT OF
APPEALS, COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE,respondents.
TINGA, J.:
The changes in the reportorial requirements and payment schedules of corporate income taxes
from annual to quarterly have created problems, especially on the matter of tax refunds. 1 In
this case, the Court is called to resolve the question of whether alleged excess taxes paid by a
corporation during a taxable year should be refunded or credited against its tax liabilities for
the succeeding year.
Paseo Realty and Development Corporation, a domestic corporation engaged in the lease of
two (2) parcels of land at Paseo de Roxas in Makati City, seeks a review of the Decision2 of
the Court of Appeals dismissing its petition for review of the resolution 3 of the Court of Tax
Appeals (CTA) which, in turn, denied its claim for refund.
The factual antecedents4 are as follows:
 petitioner filed its Income Tax Return for the calendar year 1989 declaring a gross
income of ₱1,855,000.00, deductions of ₱1,775,991.00, net income of ₱79,009.00,
an income tax due thereon in the amount of ₱27,653.00, prior year’s excess credit of
₱146,026.00, and creditable taxes withheld in 1989 of ₱54,104.00 or a total tax
credit of ₱200,130.00 and credit balance of ₱172,477.00.
 petitioner filed with respondent a claim for "the refund of excess creditable
withholding and income taxes for the years 1989 and 1990 in the aggregate amount
of ₱147,036.15."
44
  alleging that the prescriptive period for refunds for 1989 would expire on December
30, 1991 and that it was necessary to interrupt the prescriptive period, petitioner
filed with the respondent Court of Tax Appeals a petition for review praying for the
refund of "₱54,104.00 representing creditable taxes withheld from income payments
of petitioner for the calendar year ending December 31, 1989.
 respondent Commissioner filed an Answer and by way of special and/or affirmative
defenses averred the following: a) the petition states no cause of action for failure to
allege the dates when the taxes sought to be refunded were paid; b) petitioner’s
claim for refund is still under investigation by respondent Commissioner; c) the
taxes claimed are deemed to have been paid and collected in accordance with law
and existing pertinent rules and regulations; d) petitioner failed to allege that it is
entitled to the refund or deductions claimed; e) petitioner’s contention that it has
available tax credit for the current and prior year is gratuitous and does not ipso
facto warrant the refund; f) petitioner failed to show that it has complied with the
provision of Section 230 in relation to Section 204 of the Tax Code.
RESPONDENT COURT: rendered a decision ordering respondent Commissioner "to refund
in favor of petitioner the amount of ₱54,104.00, representing excess creditable withholding
taxes paid for January to July1989."
 Respondent Commissioner moved for reconsideration of the decision, alleging that
the ₱54,104.00 ordered to be refunded "has already been included and is part and
parcel of the ₱172,477.00 which petitioner automatically applied as tax credit for the
succeeding taxable year 1990."
RESPONDENT COURT: reconsidered its decision of July 29, 1993 and dismissed the
petition for review, stating that it has "overlooked the fact that the petitioner’s 1989 Corporate
Income Tax Return (Exh. "A") indicated that the amount of ₱54,104.00 subject of petitioner’s
claim for refund has already been included as part and parcel of the ₱172,477.00 which the
petitioner automatically applied as tax credit for the succeeding taxable year 1990."
 Petitioner filed a MR which was denied by respondent Court
 Petitioner filed a Petition for Review6 with the Court of Appeals. Resolving the twin
issues of whether petitioner is entitled to a refund of ₱54,104.00 representing
creditable taxes withheld in 1989 and whether petitioner applied such creditable
taxes withheld to its 1990 income tax liability, the appellate court held that petitioner
is not entitled to a refund because it had already elected to apply the total amount of
₱172,447.00, which includes the ₱54,104.00 refund claimed, against its income tax
liability for 1990. The appellate court elucidated on the reason for its dismissal of
petitioner’s claim for refund, thus:
In the instant case, it appears that when petitioner filed its income tax return for the year 1989,
it filled up the box stating that the total amount of ₱172,477.00 shall be applied against its
income tax liabilities for the succeeding taxable year.
Petitioner did not specify in its return the amount to be refunded and the amount to be applied
as tax credit to the succeeding taxable year, but merely marked an "x" to the box indicating "to
be applied as tax credit to the succeeding taxable year." Unlike what petitioner had done when
it filed its income tax return for the year 1988, it specifically stated that out of the ₱146,026.00
the entire refundable amount, only ₱64,623.00 will be made available as tax credit, while the
amount of ₱81,403.00 will be refunded.
In its 1989 income tax return, petitioner filled up the box "to be applied as tax credit to
succeeding taxable year," which signified that instead of refund, petitioner will apply the total
amount of ₱172,447.00, which includes the amount of ₱54,104.00 sought to be refunded, as
tax credit for its tax liabilities in 1990. Thus, there is really nothing left to be refunded to
petitioner for the year 1989. To grant petitioner’s claim for refund is tantamount to granting
twice the refund herein sought to be refunded, to the prejudice of the Government.
CA: denied petitioner’s MR because the motion merely restated the grounds which have
already been considered and passed upon in its Decision.
 Petitioner thus filed the instant Petition for Review arguing that the evidence
presented before the lower courts conclusively shows that it did not apply the
₱54,104.00 to its 1990 income tax liability; that the Decision subject of the instant
petition is inconsistent with a final decision11 of the Sixteenth Division of the
appellate court in C.A.-G.R. Sp. No. 32890 involving the same parties and subject
matter; and that the affirmation of the questioned Decision would lead to absurd
results in the manner of claiming refunds or in the application of prior years’ excess
tax credits.
OSG: filed a Comment on behalf of respondents asserting that the claimed refund of
₱54,104.00 was, by petitioner’s election in its Corporate Annual Income Tax Return for 1989,
to be applied against its tax liability for 1990. Not having submitted its tax return for 1990 to
show whether the said amount was indeed applied against its tax liability for 1990, petitioner’s
election in its tax return stands. The OSG also contends that petitioner’s election to apply its
overpaid income tax as tax credit against its tax liabilities for the succeeding taxable year is
mandatory and irrevocable.
 petitioner filed a Reply insisting that the issue in this case is not whether the amount
of ₱54,104.00 was included as tax credit to be applied against its 1990 income tax
liability but whether the same amount was actually applied as tax credit for 1990.
Petitioner claims that there is no need to show that the amount of ₱54,104.00 had not
been automatically applied against its 1990 income tax liability because the
appellate court’s decision in C.A.-G.R. Sp. No. 32890 clearly held that petitioner
charged its 1990 income tax liability against its tax credit for 1988 and not 1989.
Petitioner also disputes the OSG’s assertion that the taxpayer’s election as to the
application of excess taxes is irrevocable averring that there is nothing in the law
that prohibits a taxpayer from changing its mind especially if subsequent events
leave the latter no choice but to change its election.
 The OSG filed a Rejoinder stating that petitioner’s 1988 tax return shows a prior
year’s excess credit of ₱81,403.00, creditable tax withheld of ₱92,750.00 and tax
due of ₱27,127.00. Petitioner indicated that the prior year’s excess credit of
₱81,403.00 was to be refunded, while the remaining amount of ₱64,623.00
(₱92,750.00 - ₱27,127.00) shall be considered as tax credit for 1989. However, in its
45
 1989 tax return, petitioner included the ₱81,403.00 which had already been
segregated for refund in the computation of its excess credit, and specified that the
full amount of ₱172,479.00* (₱81,403.00 + ₱64,623.00 + ₱54,104.00** -
₱27,653.00***) be considered as its tax credit for 1990. Considering that it had
obtained a favorable ruling for the refund of its excess credit for 1988 in CA-G.R.
SP. No. 32890, its remaining tax credit for 1989 should be the excess credit to be
applied against its 1990 tax liability. In fine, the OSG argues that by its own
election, petitioner can no longer ask for a refund of its creditable taxes withheld in
1989 as the same had been applied against its 1990 tax due.
COURT: gave due course to the petition and required the parties to simultaneously file their
respective memoranda within 30 days from notice. In compliance with this directive,
petitioner submitted its Memorandum16 dated September 18, 1997 in due time, while the OSG
filed its Memorandum17 dated April 27, 1998 only on April 29, 1998 after several extensions.
The petition must be denied.
As a matter of principle, it is not advisable for this Court to set aside the conclusion reached by
an agency such as the CTA which is, by the very nature of its functions, dedicated exclusively
to the study and consideration of tax problems and has necessarily developed an expertise on
the subject, unless there has been an abuse or improvident exercise of its authority.18
This interdiction finds particular application in this case since the CTA, after careful
consideration of the merits of the Commissioner of Internal Revenue’s motion for
reconsideration, reconsidered its earlier decision which ordered the latter to refund the amount
of ₱54,104.00 to petitioner. Its resolution cannot be successfully assailed based, as it is, on the
pertinent laws as applied to the facts.
Petitioner’s 1989 tax return indicates an aggregate creditable tax of ₱172,477.00, representing
its 1988 excess credit of ₱146,026.00 and 1989 creditable tax of ₱54,104.00 less tax due for
1989, which it elected to apply as tax credit for the succeeding taxable year. 19 According to
petitioner, it successively utilized this amount when it obtained refunds in CTA Case No. 4439
(C.A.-G.R. Sp. No. 32300) and CTA Case No. 4528 (C.A.-G.R. Sp. No. 32890), and applied
its 1990 tax liability, leaving a balance of ₱54,104.00, the amount subject of the instant claim
for refund.20Represented mathematically, petitioner accounts for its claim in this wise:
₱172,477.00 Amount indicated in petitioner’s 1989 tax return to be applied as tax credit for
the
succeeding taxable year
- 25,623.00 Claim for refund in CTA Case No. 4439 (C.A.-G.R. Sp. No. 32300)
₱146,854.00 Balance as of April 16, 1990
- 59,510.00 Claim for refund in CTA Case No. 4528 (C.A.-G.R. Sp. No. 32890)
₱87,344.00 Balance as of January 2, 1991
- 33,240.00 Income tax liability for calendar year 1990 applied as of April 15, 1991
₱54,104.00 Balance as of April 15, 1991 now subject of the instant claim for refund 21
Other than its own bare allegations, however, petitioner offers no proof to the effect that its
creditable tax of ₱172,477.00 was applied as claimed above. Instead, it anchors its assertion of
entitlement to refund on an alleged finding in C.A.-G.R. Sp. No. 3289022 involving the same
parties to the effect that petitioner charged its 1990 income tax liability to its tax credit for
1988 and not its 1989 tax credit. Hence, its excess creditable taxes withheld of ₱54,104.00 for
1989 was left untouched and may be refunded.
Note should be taken, however, that nowhere in the case referred to by petitioner did the Court
of Appeals make a categorical determination that petitioner’s tax liability for 1990 was applied
against its 1988 tax credit. The statement adverted to by petitioner was actually presented in
the appellate court’s decision in CA-G.R. Sp No. 32890 as part of petitioner’s own narration
of facts. The pertinent portion of the decision reads:
It would appear from petitioner’s submission as follows: since it has already applied to its
prior year’s excess credit of ₱81,403.00 (which petitioner wanted refunded when it filed its
1988 Income Tax Return on April 14, 1989) the income tax liability for 1988 of ₱28,127.00
and the income tax liability for 1989 of ₱27,653.00, leaving a balance refundable of
₱25,623.00 subject of C.T.A. Case No. 4439, the ₱92,750.00 (₱64,623.00 plus ₱28,127.00,
since this second amount was already applied to the amount refundable of ₱81,403.00) should
be the refundable amount. But since the taxpayer again used part of it to satisfy its income tax
liability of ₱33,240.00 for 1990, the amount refundable was ₱59,510.00, which is the amount
prayed for in the claim for refund and also in the petitioner (sic) for review.
That the present claim for refund already consolidates its claims for refund for 1988, 1989, and
1990, when it filed a claim for refund of ₱59,510.00 in this case (CTA Case No. 4528). Hence,
the present claim should be resolved together with the previous claims.23
The confusion as to petitioner’s entitlement to a refund could altogether have been avoided
had it presented its tax return for 1990. Such return would have shown whether petitioner
actually applied its 1989 tax credit of ₱172,477.00, which includes the ₱54,104.00 creditable
taxes withheld for 1989 subject of the instant claim for refund, against its 1990 tax liability as
it had elected in its 1989 return, or at least, whether petitioner’s tax credit of ₱172,477.00 was
applied to its approved refunds as it claims.
The return would also have shown whether there remained an excess credit refundable to
petitioner after deducting its tax liability for 1990. As it is, we only have petitioner’s allegation
that its tax due for 1990 was ₱33,240.00 and that this was applied against its remaining tax
credits using its own "first in, first out" method of computation.
It would have been different had petitioner not included the ₱54,104.00 creditable taxes for
1989 in the total amount it elected to apply against its 1990 tax liabilities. Then, all that would
have been required of petitioner are: proof that it filed a claim for refund within the two (2)-
year prescriptive period provided under Section 230 of the NIRC; evidence that the income
46
upon which the taxes were withheld was included in its return; and to establish the fact of
withholding by a copy of the statement (BIR Form No. 1743.1) issued by the payor 24 to the
payee showing the amount paid and the amount of tax withheld therefrom. However, since
petitioner opted to apply its aggregate excess credits as tax credit for 1990, it was incumbent
upon it to present its tax return for 1990 to show that the claimed refund had not been
automatically credited and applied to its 1990 tax liabilities.
The grant of a refund is founded on the assumption that the tax return is valid, i.e., that the
facts stated therein are true and correct.25 Without the tax return, it is error to grant a refund
since it would be virtually impossible to determine whether the proper taxes have been
assessed and paid.
Why petitioner failed to present such a vital piece of evidence confounds the Court. Petitioner
could very well have attached a copy of its final adjustment return for 1990 when it filed its
claim for refund on November 13, 1991. Annex "B" of its Petition for Review26 dated
December 26, 1991 filed with the CTA, in fact, states that its annual tax return for 1990 was
submitted in support of its claim. Yet, petitioner’s tax return for 1990 is nowhere to be found
in the records of this case.
Had petitioner presented its 1990 tax return in refutation of respondent Commissioner’s
allegation that it did not present evidence to prove that its claimed refund had already been
automatically credited against its 1990 tax liability, the CTA would not have reconsidered its
earlier Decision. As it is, the absence of petitioner’s 1990 tax return was the principal basis of
the CTA’s Resolution reconsidering its earlier Decision to grant petitioner’s claim for refund.
Petitioner could even still have attached a copy of its 1990 tax return to its petition for review
before the Court of Appeals. The appellate court, being a trier of facts, is authorized to receive
it in evidence and would likely have taken it into account in its disposition of the petition.
In BPI-Family Savings Bank v. Court of Appeals,27 although petitioner failed to present its
1990 tax return, it presented other evidence to prove its claim that it did not apply and could
not have applied the amount in dispute as tax credit. Importantly, petitioner therein attached a
copy of its final adjustment return for 1990 to its motion for reconsideration before the CTA
buttressing its claim that it incurred a net loss and is thus entitled to refund. Considering this
fact, the Court held that there is no reason for the BIR to withhold the tax refund.
In this case, petitioner’s failure to present sufficient evidence to prove its claim for refund is
fatal to its cause. After all, it is axiomatic that a claimant has the burden of proof to establish
the factual basis of his or her claim for tax credit or refund. Tax refunds, like tax exemptions,
are construed strictly against the taxpayer.28
Section 69, Chapter IX, Title II of the National Internal Revenue Code of the Philippines
(NIRC) provides: Sec. 69. Final Adjustment Return.—Every corporation liable to tax under
Section 24 shall file a final adjustment return covering the total net income for the preceding
calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable
year is not equal to the total tax due on the entire taxable net income of that year the
corporation shall either: (a) Pay the excess tax still due; or (b) Be refunded the excess amount
paid, as the case may be.
In case the corporation is entitled to a refund of the excess estimated quarterly income
taxes paid, the refundable amount shown on its final adjustment return may be credited
against the estimated quarterly income tax liabilities for the taxable quarters of the
succeeding taxable year. [Emphasis supplied]
Revenue Regulation No. 10-77 of the Bureau of Internal Revenue clarifies: SEC. 7. Filing of
final or adjustment return and final payment of income tax. A final or an adjustment return on
B.I.R. Form No. 1702 covering the total taxable income of the corporation for the preceding
calendar or fiscal year shall be filed on or before the 15th day of the fourth month following
the close of the calendar or fiscal year. The return shall include all the items of gross income
and deductions for the taxable year. The amount of income tax to be paid shall be the balance
of the total income tax shown on the final or adjustment return after deducting therefrom the
total quarterly income taxes paid during the preceding first three quarters of the same calendar
or fiscal year.
Any excess of the total quarterly payments over the actual income tax computed and shown in
the adjustment or final corporate income tax return shall either (a) be refunded to the
corporation, or (b) may be credited against the estimated quarterly income tax liabilities for the
quarters of the succeeding taxable year. The corporation must signify in its annual corporate
adjustment return its intention whether to request for refund of the overpaid income tax or
claim for automatic credit to be applied against its income tax liabilities for the quarters of the
succeeding taxable year by filling up the appropriate box on the corporate tax return.
[Emphasis supplied]
As clearly shown from the above-quoted provisions, in case the corporation is entitled to a
refund of the excess estimated quarterly income taxes paid, the refundable amount shown on
its final adjustment return may be credited against the estimated quarterly income tax
liabilities for the taxable quarters of the succeeding year. The carrying forward of any excess
or overpaid income tax for a given taxable year is limited to the succeeding taxable year only.
In the recent case of AB Leasing and Finance Corporation v. Commissioner of Internal
Revenue,29 where the Court declared that "[T]he carrying forward of any excess or overpaid
income tax for a given taxable year then is limited to the succeeding taxable year only," we
ruled that since the case involved a claim for refund of overpaid taxes for 1993, petitioner
could only have applied the 1993 excess tax credits to its 1994 income tax liabilities. To
further carry-over to 1995 the 1993 excess tax credits is violative of Section 69 of the NIRC.
In this case, petitioner included its 1988 excess credit of ₱146,026.00 in the computation of its
total excess credit for 1989. It indicated this amount, plus the 1989 creditable taxes withheld of
₱54,104.00 or a total of ₱172,477.00, as its total excess credit to be applied as tax credit for
1990. By its own disclosure, petitioner effectively combined its 1988 and 1989 tax credits and
applied its 1990 tax due of ₱33,240.00 against the total, and not against its creditable taxes for
1989 only as allowed by Section 69. This is a clear admission that petitioner’s 1988 tax credit
was incorrectly and illegally applied against its 1990 tax liabilities.
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Parenthetically, while a taxpayer is given the choice whether to claim for refund or have its
excess taxes applied as tax credit for the succeeding taxable year, such election is not final.
Prior verification and approval by the Commissioner of Internal Revenue is required. The
availment of the remedy of tax credit is not absolute and mandatory. It does not confer an
absolute right on the taxpayer to avail of the tax credit scheme if it so chooses. Neither does it
impose a duty on the part of the government to sit back and allow an important facet of tax
collection to be at the sole control and discretion of the taxpayer.30
Contrary to petitioner’s assertion however, the taxpayer’s election, signified by the ticking of
boxes in Item 10 of BIR Form No. 1702, is not a mere technical exercise. It aids in the proper
management of claims for refund or tax credit by leading tax authorities to the direction they
should take in addressing the claim.
Had this provision been in effect when the present claim for refund was filed, petitioner’s
excess credits for 1988 could have been properly applied to its 1990 tax liabilities.
Unfortunately for petitioner, this is not the case.
Taxation is a destructive power which interferes with the personal and property rights of the
people and takes from them a portion of their property for the support of the government. And
since taxes are what we pay for civilized society, or are the lifeblood of the nation, the law
frowns against exemptions from taxation and statutes granting tax exemptions are thus
construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority. A
claim of refund or exemption from tax payments must be clearly shown and be based on
language in the law too plain to be mistaken. Elsewise stated, taxation is the rule, exemption
therefrom is the exception.32

The amendment of Section 69 by what is now Section 76 of Republic Act No. WHEREFORE, the instant petition is DENIED. The challenged decision of the Court of
842431 emphasizes that it is imperative to indicate in the tax return or the final adjustment Appeals is hereby AFFIRMED. No pronouncement as to costs. SO ORDERED.
return whether a tax credit or refund is sought by making the taxpayer’s choice irrevocable.
Section 76 provides:

SEC. 76. Final Adjustment Return.—Every corporation liable to tax under Section 27 shall file
a final adjustment return covering the total taxable income for the preceding calendar or fiscal
year. If the sum of the quarterly tax payments made during the said taxable year is not equal to
the total tax due on the entire taxable income of that year, the corporation shall either: (A) Pay
the balance of the tax still due; or (B) Carry-over the excess credit; or (C) Be credited or
refunded with the excess amount paid, as the case may be.

In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly
income taxes paid, the excess amount shown on its final adjustment return may be carried over
and credited against the estimated quarterly income tax liabilities for the taxable quarters of
the succeeding taxable years. Once the option to carry-over and apply the excess quarterly
income tax against income tax due for the taxable quarters of the succeeding taxable
years has been made, such option shall be considered irrevocable for that taxable period
and no application for cash refund or issuance of a tax credit certificate shall be allowed
therefore. [Emphasis supplied]

As clearly seen from this provision, the taxpayer is allowed three (3) options if the sum of its
quarterly tax payments made during the taxable year is not equal to the total tax due for that
year: (a) pay the balance of the tax still due; (b) carry-over the excess credit; or (c) be credited
or refunded the amount paid. If the taxpayer has paid excess quarterly income taxes, it may be
entitled to a tax credit or refund as shown in its final adjustment return which may be carried
over and applied against the estimated quarterly income tax liabilities for the taxable quarters
of the succeeding taxable years. However, once the taxpayer has exercised the option to carry-
over and to apply the excess quarterly income tax against income tax due for the taxable
quarters of the succeeding taxable years, such option is irrevocable for that taxable period and
no application for cash refund or issuance of a tax credit certificate shall be allowed.

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