Taxation Law Rev1

TAXATION LAW REVIEW

UNIVERSITY OF THE EAST COLLEGE OF LAW

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G.R. No. L-17725 February 28, 1962

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.

MAMBULAO LUMBER COMPANY, ET AL., defendants-appellants.

From the decision of the Court of First Instance of Manila (in Civil Case No. 34100) ordering it to

pay to plaintiff Republic of the Philippines the sum of P4,802.37 with 6% interest thereon from

the date of the filing of the complaint until fully paid, plus costs, defendant Mambulao Lumber

Company interposed the present appeal.1

The facts of the case are briefly stated in the decision of the trial court, to wit: .

The facts of this case are not contested and may be briefly summarized as follows: (a)

under the first cause of action, for forest charges covering the period from September 10,

1952 to May 24, 1953, 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, on

February 21, 1957 letter Exh. 1, in paragraph 4 of which said defendant requested "that

our account with your bureau be credited with all the reforestation charges that you have

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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 on March 12, 1957, marked Exh. 2, 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 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

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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. ... (80 C.J.S. 73-74. ) .

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.)

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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-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.

This is a petition for certiorari and mandamus against the Judge of the Court of First Instance of

Leyte, Ron. Lorenzo C. Garlitos, presiding, seeking to annul certain orders of the court and for an

order in this Court directing the respondent court below to execute the judgment in favor of the

Government against the estate of Walter Scott Price for internal revenue taxes.

It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-14674, January

30, 1960, 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." In order to enforce the claims against the estate

the fiscal presented a petition dated June 21, 1961, 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 dated August 20, 1960 and September 28, 1960,

respectively, are as follows:

Atty. Benedicto submitted a copy of the contract between Mrs. Simeona K. Price,

Administratrix of the estate of her late husband Walter Scott Price and Director Zoilo

Castrillo of the Bureau of Lands dated September 19, 1956 and acknowledged before

Notary Public Salvador V. Esguerra, legal adviser in Malacaang to Executive Secretary De

Leon dated December 14, 1956, the note of His Excellency, Pres. Carlos P. Garcia, to

Director Castrillo dated August 2, 1958, 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 K. 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 on

July 5, 1960 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

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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, G.R. No. L-2360, Dec.

29, 1949, 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 mayissue

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:

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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.

G.R. No. L-22369 October 15, 1966

IN THE MATTER OF THE TESTATE ESTATE OF PATRICIO PONFERRADA, deceased.

JOAQUIN CORDERO, administrator-appellee,

vs.

JOSE GONDA, in his capacity as Representative of the Commissioner of Internal

Revenue, claimant-appellant.

On September 18, 1953, a demand by letter was made on Patricio Ponferrada by the Bureau of

Internal Revenue1for the payment of P3,805.88, covering forest charges for the period from

November 2, 1946 to January 29, 1949.2 Ponferrada made a partial payment of

P262.37,3 leaving a balance of P3,543.51.

Ponferrada died on November 25, 1957. In the Testate Estate proceedings,4 Joaquin Cordero

was named Administrator.

On July 29, 1959, the BIR, thru respondent Jose Gonda, filed in the proceedings just mentioned

a claim for the said sum of P3,543.51. The Administrator opposed. Ground: Prescription.5

Upon a stipulation of facts, the probate court, on August 28, 1963, declared that said claim of

P3,543.51 had prescribed.6

BIR now appeals direct to this Court.7

1. Our Tax Code8 provides for two main periods of prescription. The first refers to

assessment,9 the second to the remedies of collection.

10 Not concerned with the first, we are with

the second.

That an assessment has here been, made, we do not doubt. By the very fact that, on September

18, 1953, a formal demand was made by the government upon the deceased Patricio Ponferrada

for the payment of forest charges in a definite amount P3,805.88 assessment is deemed to have been made.

11

September 18, 1953 then is a safe starting point for the statutory limitation to commence

collection suit. Here, the court claim was filed on July 29, 1959. From September 18, 1953 to July

29, 1959, a period of 5 years, 10 months and 11 days has passed. The five-year prescriptive

period had thus elapsed. Section 332 (c) of the Tax Code reads:

(c) Where the assessment of any internal-revenue tax has been made within the period of

limitation above prescribed such tax may be collected by distraint or levy or by a

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proceeding in court, but only if begun (1)within five years after the assessment of the tax,

or (2) prior to the expiration of any period for collection agreed upon in writing by the

Commissioner of Internal Revenue and the taxpayer before the expiration of such five-

year. The period so agreed upon may be extended by subsequent agreements in

writing made before the expiration of the period previously agreed upon.12

We note the narrowly-confined restriction of time within which a proceeding in court may be

brought: "but only if begun (1) within five years after the assessment of the tax". Implicit in the

words but only is that, unless otherwise authorized by statute, the 5-year period is absolute.

The Code itself recognizes but one exception: If suit is started "prior to the expiration of any

period for collectionagreed upon in writing by the Commissioner of Internal Revenue and the

taxpayer before the expiration of such five-year period" which may be extended by subsequent written agreements made "before the expiration of the period previously agreed

upon". In Collector of Internal Revenue vs. Pineda, etc., L-14522, May 31, 1961, this Court13 said

in terms equally pertinent here, that: "the only agreement that could have suspended the running

of the prescriptive period for the collection of the tax in question is, . . . a written agreement

between Solano (the taxpayer) and the Collector, entered into before the expiration of the five-

year prescriptive period, extending the period of limitation prescribed by law (Sec. 332 [c],

N.I.R.C.)." No such written agreement exists here. The original five-year limit governs.

2. Appellant's brief draws our attention to jurisprudence where a taxpayer may not avail of the

limitations statute.14 These cases are inapposite. In Arcache, delay in tax collection was excused

because of "his [taxpayer's] own repeated requests for re-investigation and similarly repeated

requests of extension of time to pay". In Sison, "the taxpayer's petition for reconsideration or

reinvestigation had stopped the running of the five-year limitation period". In Capitol

Subdivision, the pendency of a taxpayer's petition for clarification interrupted said period. None

of these situations obtains here.

The government also urges that partial payment is "acknowledgment of the tax obligation",

hence, a "waiver of the defense of prescription". But partial payment would not prevent the

government from suing the taxpayer. Because, by such act of payment, the government is

not thereby "persuaded to postpone collection to make him feel that the demand was not

unreasonable or that no harrassment or injustice is meant". Which, as stated in Collector vs. Suyoc

Consolidated Mining Co., et al., L-11527, November 25, 1958, is the underlying reason behind

the rule that prescriptive period is arrested by the taxpayer's request for reexamination or

reinvestigation even if he "has not previously waived it [prescription] in writing". And, partial payment is no waiver "in writing". Particularly is this true here where, out of the claim of

P3,805.88, but P262.27 were paid; and in reference to the other claim of P6,220.65,15 appellee

made a substantial payment of P6,000.00 and acknowledged liability of P220.65.

3. The government leans heavily upon the Barretto case16 to strengthen its claim that the action

had not yet prescribed. Because, this Court there said:

. . . Moreover, as already stated in the decision, forest charges and surcharges

are payments for timber taken from public forests, and they are considered as internal

revenue taxes only in the sense that they are to be collected by the Collector of Internal

Revenue and the regulations for their collection are contained in the National Internal

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Revenue Code. Forest products are obtained under licenses issued by the Government

and forest charges are in a sense contractual in origin. No prescriptive period having been

prescribed by law for this case, Sec. 43 of the Code of Civil Procedure should apply . . . .17

This opinion was planted on the views of the Tax Commission (1939), as follows:

Forest charges, which are not property taxes but rather the price paid for exploiting

national resources, need to be revised18 to make them more in harmony with present-day

conditions in the industry and with public policies.

Forest charges are to be distinguished from taxes. They are, strictly speaking, the price

which the Government charges for the privilege granted to concessionaires to exploit the

public domain, rather than a tax imposed to support the general services of the

government . . . .19

Compelling reasons there are which constrain us to revise the views expressed in

the Barretto case.

By law, forest charges have always been categorized as internal revenue taxes for all purposes. Our statute books say so.

We start with the Tax Code. Forest charges appear below the heading "TITLE VIII MISCELLANEOUS TAXES", under Chapter V, along with such others as tax on banks (Chapter I),

taxes on receipts of insurance companies (Chapter II), franchise tax (Chapter III), and amusement

taxes (Chapter IV). And Section 18 of the same Code, includes "charges on forest products" in the

list of those that "are deemed to be national internal revenue taxes", thus:

SEC. 18. Sources of revenue.The following taxes, fees and charges are deemed to be national internal revenue taxes:

(a) Income tax;

(b) Estate, inheritance and gift taxes;

(c) Specific taxes on certain articles;

(d) Privilege taxes on business or occupation;

(e) Documentary stamp taxes;

(f) Mining taxes;

(g) Miscellaneous taxes, fees and charges, namely, taxes on banks and insurance

companies, franchise taxes, taxes on amusements, charges on forest products, fees for

sealing weights and measures, firearms license fees, tobacco inspection fees, and water

rentals. (As amended by Rep. Act No. 1476, approved June 15, 1956.)20

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With the exception of radio registration fees, which were eliminated, the foregoing is a

reproduction in toto of the original Section 18 of the Tax Code approved on June 15, 1939.

Section 1438, Administrative Code of 1917, the law which Section 18 of the Tax Code of 1939

replaced, states in part:

SEC. 1438. Sources of taxes.The following taxes, fees, and charges in the nature of tax are deemed to be internal revenue taxes:

xxx xxx xxx

(f) Charges for forest products.

xxx xxx xxx

Section 1438 of the Administrative Code, in turn, proceeded from Section 21, Act 2339 of the

Philippine Legislature known as the Internal Revenue Law of 1914, which provides:

ARTICLE I. Sources of internal revenue.

SEC. 21. Sources of taxes.The following taxes, fees, and charges in the nature of tax are deemed to be internal-revenue taxes:

xxx xxx xxx

(f) Charges for forest products;

xxx xxx xxx

Predecessor of this provision is Section 25 of Act 1189, known as the Internal Revenue Law of

1904, which reads:

SEC. 25. The following sources of revenue shall be included in the internal revenue for

the Philippine Islands, and the taxes imposed shall be collected by the Collector of

Internal Revenue . . . and the revenue obtained therefrom shall be devoted to the

support of the several provinces and of the Insular and municipal governments in the

manner in this Act provided:

xxx xxx xxx

1. Tax on forestry products.

xxx xxx xxx

4. Now, the law on prescription in the Tax Code does not make any distinction at all as to the

sources of taxes to which it is made applicable. Its broad sweep is articulated in the terms

"internal-revenue taxes"21 and "any internal-revenue tax".

22 Since "charges on forest products" are

"internal-revenue taxes", they are within the coverage of the law on prescription of actions to

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collect "internal-revenue taxes" or "any internal-revenue tax". Had the Tax Code intended that

forest charges be outside the operational rule on prescription, that statute should have so

provided. We cannot insert therein any such exception now. Clearly, that is intrusion into the

legislative domain in violation of a definite proscription in the Constitution.

5. Authorities are not wanting to bring home the point that forest charges are in reality internal

revenue taxes, as such subject to the other provisions of internal revenue law. As early as

1918,23

this Court held that forest charges are in the nature of an internal revenue tax on property

["forest products removed from the public forest"] and a distress warrant may be issued thereon.

One month before the Barretto decision came the Lacson case.24 There, this Court made mention

of the observations of the Tax Commission [heretofore textually copied], which recommended

the enactment of the 1939 Internal Revenue Code. However, this Court sustained the views of

the dissenting judge of the Court of Tax Appeals, thus:

. . . There appears to be no legal basis for not considering forest charges as taxes when

respondent considers them as taxes under Republic Act No. 304, as amended, thus

enabling holders of backpay certificates to pay forest charges out of their backpay (B.I.R.

ruling, November 22, 1955, Ex. B), and as internal revenue tax under Chapter II, Title IX,

of the Revenue Code, so as to authorize collection of said charges by distraint and levy

(Op. Atty. Gen., Oct. 27, 1922). The argument that forest charges are not taxes because

they are the price paid for the sale by the Government of forest products overlooks the

fact that some forest charges are impose on forest products cut and removed from

unregistered private lands. (See Sec. 266, Revenue Code). The Government cannot sell

forest products which it does not own. From this it may be inferred that forest charges

are not in reality the price paid for the sale by the Government of forest products; they

are essentially taxes for the privilege of cutting and removing forest products . . . They

stand on the same footing as the mining taxes imposed under Title VII of the Revenue

Code . . . .25

Even the Chairman of the 1939 Tax Commission later on (November 20, 1939), in a decision he

rendered as Secretary of Finance, in the case of the Dulagan Mining Interests Co., Inc.,

covering forest charges, adverted to the ruling in the Hongkong and Shanghai Banking

Corporation case, supra. He applied Section 1588 of the Administrative Code and declared that

every internal revenue tax which includes forest charges is a lien on the property for which that tax is imposed.

26

51 Am. Jur. p. 1072 is authority for the statement that:

Taxes which, although imposed under statutes containing many variations as to their

precise phraseology, are directed generally against the production, or severance from the

soil, of such natural resources astimber, oil, natural gas, ores, or the like, and are normally

measured according to the quantity or value of the articles produced or severed, are

usually, although not invariably, regarded as excise rather than property taxes.27

The view that forest charges are much like ad valorem taxes in mining, finds jurisprudential

support. In Cebu Portland Cement Company vs. Commissioner of Internal Revenue, L-18649,

February 27, 1965, we said that thisad valorem tax (on minerals used for cement) "is a tax not on

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the minerals, but upon the privilege of severing or extracting the same from the earth, the

government's right to exact the said impost springing from the Regalian theory of State

ownership of its natural resources".28 So saying, this Court there applied Section 306,29 under the

Administrative Provisions [of the Tax Code] which include prescription of actions for tax

collection.

In another case,30

upon the premise that forest charges "are in the coffers of the government as

taxes collected", the pronouncement was that internal revenue taxes cannot be the subject of

compensation: Reason: government and taxpayer "are not mutually creditors and debtors of

each other" under Article 1278 of the Civil Code and a "claim for taxes is not such a debt,

demand, contract or judgment as is allowed to be set-off." This decision inferentially takes forest

charges out of the Barretto rule, because they are taxes not "in a sense contractual in origin."

The thoughts expressed in the authorities just cited funnel down to one idea: forest charges are

internal revenue taxes, whether one labels them taxes on property, or excise taxes, i.e., taxes

upon the privilege of cutting and carting away timber and forest products. And they fall under

the philosophy of taxation to support the general services of government. They go into the general fund.

31

6. The provisions on prescription fall under Title IX, entitled General Administrative Provisions.

This title applies to all taxes, fees, and charges collected under the Code. In this title's first

provision (Section 305), injunction is unavailing to a forest concessionaire "to restrain the

collection of any national internal-revenue tax, fee, or chargeimposed by this Code". By Section

306, the concessionaire, may only sue for tax refunds within two years from the date of

payment.32

Section 316 defines the "civil remedies for the collection of internal revenue taxes,

fees, orcharges" to be distraint and levy, and judicial action.33

In Section 337, the forest concessionaire34

like all other taxpayers is obligated to preserve his books of account for a period of five years "from the date of the last entry in each book."

Why? Because the government is given a like period of five years within which to make

assessment. If forest charges were "in a sense contractual in origin", then the concessionaire should

be required to keep his accounting records not for five years only, but for ten years, to jibe with

the 10-year prescriptive period in the Civil Code.35

In sum, here is the situation of a man called upon to pay forest charges. Applicable to him are the

Tax Code provisions on distraint and levy; the two-year period for refund; the prohibition

against injunction; the duty to keep his books for five years. But, if we were to adhere to

the Barretto decision, then the law on prescription in the Code of Civil Procedure [now Art.

1144, Civil Code]36

must have to be scissored and pasted over Sections 331 and 332 of the Tax

Code. Uniformity in the application of the Tax Code provisions would suggest that we veer

away from this view.

7. Our stand is even fortified by the facts set forth in the Barretto case. Assessment was not there

based on a return. The judgment on prescription therein was grounded on fraud. Because, from

an examination of the books, it was found that "many purchases of logs were without invoices

and sales under declared". The "deficiencies amounting to fraud were discovered" in 1953. And

applying the provisions of the Code of Civil Procedure, it was there declared that the period for

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prescription should be reckoned" from 1953. But the situation presented in said case is precisely

covered by Section 332(a) of the Tax Code, which reads:

(a) In the case of a false or fraudulent 37 return with intent to evade tax or of a failure to

file a return, the tax may be assessed, or a proceeding in court for the collection of such

tax may be begun without assessment, at any time within ten years after the discovery of

the falsity, fraud, or omission.38

Our conclusion, therefore, is that the overwhelming implication from the text of the Tax Code

leaves no other reasonable construction except that: Forest charges come within the compass of

the prescriptive periods set forth therein.

The net result still is: From September 18, 1953 (when demand for payment was made) to July

29, 1953 (when court claim was filed), more than five (5) years have elapsed. By the terms of

Article 332(c) of the Tax Code,supra, action to collect has prescribed.

Upon the premises, the judgment appealed from is affirmed. No costs. So ordered.

G.R. No. L-25299 July 29, 1969

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.

ITOGON-SUYOC MINES, INC., and THE COURT OF TAX APPEALS, respondents.

The question presented for determination in this petition for the review of a decision of the

Court of Tax Appeals, one that is of first impression, would not have arisen had respondent

Itogon-Suyoc Mines, Inc., the taxpayer involved, duly paid in full its liability according to its

income tax return for the fiscal year 1960-61. Instead, it deducted right away the amount

represented by claim for refund filed eight (8) months back, for the previous year's income tax,

for which it was not liable at all, so it alleged, as it suffered a loss instead, a claim subsequently

favorably acted on by petitioner Commissioner of Internal Revenue but after the date of such

payment of the 1960-1961 tax. Accordingly, an interest in the amount of P1,512.83 was charged

by petitioner Commissioner of Internal Revenue on the sum withheld on the ground that no

deduction on such refund should be allowed before its approval. When the matter was taken up

before the Court of Tax Appeals, the above assessment representing interest was set aside in the

decision of September 30, 1965. That is the decision now an appeal by petitioner Commissioner

of Internal Revenue. We sustain the Court of Tax Appeals.

Respondent Itogon-Suyoc Mines, Inc., a mining corporation duly organized and existing in

accordance with the laws of the Philippines, filed on January 13, 1961, its income tax return for

the fiscal year 1959-1960. It declared a taxable income of P114,368.04 and a tax due thereon

amounting to P26,310.41, for which it paid on the same day, the amount of P13,155.20 as the

first installment of the income tax due. On May 17, 1961, petitioner filed an amended income tax

return, reporting therein a net loss of P331,707.33. It thus sought a refund from the

Commissioner of Internal Revenue, now the petitioner.

On February 14, 1962, respondent Itogon-Suyoc Mines, Inc. filed its income tax return for the

fiscal year 1960-1961, setting forth its income tax liability to the tune of P97,345.00, but

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deducting the amount of P13,155.20 representing alleged tax credit for overpayment of the

preceding fiscal year 1959-1960. 0n December 18, 1962, petitioner Commissioner of Internal

Revenue assessed against the respondent the amount of P1,512.83 as 1% monthly interest on the

aforesaid amount of P13,155.20 from January 16, 1962 to December 31, 1962. The basis for such

an assessment was the absence of legal right to deduct said amount before the refund or tax

credit thereof was approved by petitioner Commissioner of Internal Revenue. 1

Such an assessment was contested by respondent before the Court of Tax Appeals. As already

noted, it prevailed. The decision of September 30, 1965, now on appeal, explains why. Thus:

"Respondent assessed against the petitioner the amount of P1,512.83 as 1% monthly interest on

the sum of P13,155.20 from January 16, 1962 to December 31, 1962 on the ground that

petitioner had no legal right to deduct the said amount from its income tax liability for the fiscal

year 1960-1961 until the refund or tax credit thereof has been approved by respondent. As

aforestated, petitioner paid the amount of P13,155.20 as first installment on its reported income

tax liability for the fiscal year 1959-1960. But, it turned out that instead of deriving a net gain, it

sustained a net loss during the said fiscal year. Accordingly, it filed an amended income tax return

and a claim for the refund of the sum of P13,155.20, which sum it subsequently, deducted from

its income tax liability for the succeeding fiscal year 1960-1961. The overpayment for the fiscal

year 1959-1960 and the deduction of the overpaid amount from its 1960-1961 tax liability are not

denied by respondent. In this circumstance, we find it unfair and unjust for the Commissioner to

exact an interest on the said sum of P13,155.20, which, after all, was paid to and received by the

government even before the incidence of the tax in question." 2

That is the question before us in this petition for review by the Commissioner of Internal

Revenue. He argues that the Court of Tax Appeals should not have absolved respondent

corporation "from liability to pay the sum of P1,512.83 as 1% monthly interest for delinquency in

the payment of income tax for the fiscal year 1960-1961." 3As noted at the outset, we find such

contention far from persuasive.

It could not be error for the Court of Tax Appeals, considering the admitted fact of

overpayment, entitling respondent to refund, to hold that petitioner should not repose an

interest on the aforesaid sum of P13,155.20 "which after all was paid to and received by the

government even before the incidence of the tax in question." It would be, according to the

Court of Tax Appeals, "unfair and unjust" to do so. We agree but we go farther. The imposition

of such an interest by petitioner is not supported by law.

The National Internal Revenue Code provides that interest upon the amount determined as a

deficiency shall be assessed and shall be paid upon notice and demand from the Commissioner of

Internal Revenue at the specified.4 It is made clear, however, in an earlier provision found in the

same section that if in any preceding year, the taxpayer was entitled to a refund of any amount

due as tax, such amount, if not yet refunded, may be deducted from the tax to be paid. 5

There is no question respondent was entitled to a refund. Instead of waiting for the sum involved

to be delivered to it, it deducted the said amount from the tax that it had to pay. That it had a

right to do according to the law. It is true a doubt could have arisen due to the fact that as of the

time such a deduction was made, the Commissioner of Internal Revenue had not as yet approved

such a refund. It is an admitted fact though that respondent was clearly entitled to it, and

petitioner did not allege otherwise. Nor could he do so. Under all the circumstances disclosed

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therefore, the applicability of the legal provision allowing such a deduction from the amount of

the tax to be paid cannot be disputed.

This conclusion is in accordance with the principle announced in Castro v. Collector of Internal

Revenue. 6 While the case is not directly in point, it yields an implication that makes even more

formidable the case for respondent taxpayer. As there held, the imposition of the monthly

interest was considered as not constituting a penalty "but a just compensation to the state for the

delay in paying the tax, and for the concomitant use by the taxpayer of funds that rightfully

should be in the government's hands ...."

What is therefore sought to be avoided is for the taxpayer to make use of funds that should have

been paid to the government. Here, in view of the overpayment for the fiscal year 1959-1960,

the sum of P13,155.20 had already formed part of the public funds. It cannot be said, therefore,

that respondent taxpayer was guilty of any delay enabling it to utilize a sum of money that

should have been in the government treasury.

How then, as a matter of pure law, even if we lay to one side the demands of fairness and

justice, which to the Court of Tax Appeals seem to be uppermost, can its decision be overturned?

Accordingly, we find no valid ground for this appeal.

WHEREFORE, the decision of September 30, 1965 of the Court of Tax Appeals is affirmed.

Without pronouncement as to costs.

G.R. No. L-67649 June 28, 1988

ENGRACIO FRANCIA, petitioner,

vs.

INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.

The petitioner invokes legal and equitable grounds to reverse the questioned decision of the

Intermediate Appellate Court, to set aside the auction sale of his property which took place on

December 5, 1977, and to allow him to recover a 203 square meter lot which was, sold at public

auction to Ho Fernandez and ordered titled in the latter's name.

The antecedent facts are as follows:

Engracio Francia is the registered owner of a residential lot and a two-story house built upon it

situated at Barrio San Isidro, now District of Sta. Clara, Pasay City, Metro Manila. The lot, with

an area of about 328 square meters, is described and covered by Transfer Certificate of Title No.

4739 (37795) of the Registry of Deeds of Pasay City.

On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by the

Republic of the Philippines for the sum of P4,116.00 representing the estimated amount

equivalent to the assessed value of the aforesaid portion.

Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5,

1977, his property was sold at public auction by the City Treasurer of Pasay City pursuant to

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Section 73 of Presidential Decree No. 464 known as the Real Property Tax Code in order to

satisfy a tax delinquency of P2,400.00. Ho Fernandez was the highest bidder for the property.

Francia was not present during the auction sale since he was in Iligan City at that time helping his

uncle ship bananas.

On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In re: Petition

for Entry of New Certificate of Title" filed by Ho Fernandez, seeking the cancellation of TCT No.

4739 (37795) and the issuance in his name of a new certificate of title. Upon verification through

his lawyer, Francia discovered that a Final Bill of Sale had been issued in favor of Ho Fernandez

by the City Treasurer on December 11, 1978. The auction sale and the final bill of sale were both

annotated at the back of TCT No. 4739 (37795) by the Register of Deeds.

On March 20, 1979, Francia filed a complaint to annul the auction sale. He later amended his

complaint on January 24, 1980.

On April 23, 1981, the lower court rendered a decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered dismissing

the amended complaint and ordering:

(a) The Register of Deeds of Pasay City to issue a new Transfer

Certificate of Title in favor of the defendant Ho Fernandez over

the parcel of land including the improvements thereon, subject to

whatever encumbrances appearing at the back of TCT No. 4739

(37795) and ordering the same TCT No. 4739 (37795) cancelled.

(b) The plaintiff to pay defendant Ho Fernandez the sum of

P1,000.00 as attorney's fees. (p. 30, Record on Appeal)

The Intermediate Appellate Court affirmed the decision of the lower court in toto.

Hence, this petition for review.

Francia prefaced his arguments with the following assignments of grave errors of law:

I

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.

II

RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND SERIOUS

ERROR IN NOT HOLDING THAT PETITIONER WAS NOT PROPERLY AND DULY NOTIFIED

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THAT AN AUCTION SALE OF HIS PROPERTY WAS TO TAKE PLACE ON DECEMBER 5, 1977

TO SATISFY AN ALLEGED TAX DELINQUENCY OF P2,400.00.

III

RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A SERIOUS

ERROR AND GRAVE ABUSE OF DISCRETION IN NOT HOLDING THAT THE PRICE OF

P2,400.00 PAID BY RESPONTDENT HO FERNANDEZ WAS GROSSLY INADEQUATE AS TO

SHOCK ONE'S CONSCIENCE AMOUNTING TO FRAUD AND A DEPRIVATION OF PROPERTY

WITHOUT DUE PROCESS OF LAW, AND CONSEQUENTLY, THE AUCTION SALE MADE

THEREOF IS VOID. (pp. 10, 17, 20-21, Rollo)

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;

xxx xxx xxx

(3) that the two debts be due.

xxx xxx xxx

This principal contention of the petitioner has no merit. We have consistently ruled that there

can be no off-setting of taxes against the claims that the taxpayer may have against the

government. A person cannot refuse to pay a tax on the ground that the government owes him

an amount equal to or greater than the tax being collected. The collection of a tax cannot await

the results of a lawsuit against the government.

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:

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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 (18 SCRA 331) 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 ... .(Petition for

Review, Rollo p. 18; 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 (11 Phil. 492) laid down the doctrine that:

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xxx xxx xxx

... [D]ue process of law to be followed in tax proceedings must be established by

proof and thegeneral rule is that the 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, 29 Phil. 437); Denoga v.

Insular Government, 19 Phil. 261). 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 can not, however, deny that he did receive the notice for the

auction sale. The records sustain the lower court's finding that:

[T]he 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 dated November 21, 1977 (Exhibit "I") as

shown by his signature (Exhibit "I-A") thereof. He claimed further that he was not

present on December 5, 1977 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 can not be assailed ... .

We quote the following testimony of the petitioner on cross-examination, to wit:

Q. My question to you is this letter marked as Exhibit I for Ho

Fernandez notified you that the property in question shall be sold

at public auction to the highest bidder on December 5, 1977

pursuant to Sec. 74 of PD 464. Will you tell the Court whether you

received the original of this letter?

A. I just signed it because I was not able to read the same. It was

just sent by mail carrier.

Q. So you admit that you received the original of Exhibit I and you

signed upon receipt thereof but you did not read the contents of it?

A. Yes, sir, as I was in a hurry.

Q. After you received that original where did you place it?

A. I placed it in the usual place where I place my mails.

Petitioner, therefore, 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.

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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, 36 SCRA 567; Ponce de Leon v.

Rehabilitation Finance Corporation, 36 SCRA 289; Tolentino v. Agcaoili, 91 Phil. 917 Unrep.).

See also Barrozo Vda. de Gordon v. Court of Appeals (109 SCRA 388) 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 (5 SCRA 985), this Court held:

... [R]espondent 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. (188 Wash. 162, 61 P. 2d, 1290):

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 (2nd Ed.) 238, 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, 32 Wash. 307, 73 P. 367, 369).

In this case now before us, we can aptly use the language of McGuire, et al. v. Bean, et al. (267

P. 555):

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.

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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-35238 April 21, 1989

REPUBLIC OF THE PHILIPPINES, petitioner,

vs.

HON. JUDGE VICENTE G. ERICTA and SAMPAGUITA PICTURES, INC., respondents.

This case has to do with the so-called "back pay certificates" issued by the Philippine Government

in the aftermath of the Pacific War, pursuant to Republic Act No. 304, as amended by Republic

Act No. 800. These enactments generally recognized the right of persons who at the outbreak of

the war were employed in the classified and unclassified civil service as well as in government-

owned or controlled corporations, and those who had served in the free local civil governments

organized for purposes of resistance against the invaders, to salaries, wages, emoluments, per

diems, not received by them by reason of the war. The Treasurer of the Philippines was

empowered to receive applications for back pay and to issue in favor of the applicants certificates

of indebtedness redeemable by the Government within ten years for the amounts determined to

be justly due them.

It appears that in relation to its business of producing motion pictures, Sampaguita Pictures, Inc.,

hereafter simply Sampaguita, came to incur an obligation for percentage, withholding and

amusement taxes in the amount of P10,268.41 in favor of the Republic of the Philippines. 1 In

satisfaction thereof, and of another obligation of the same nature due from Vera-Perez

Corporation, Sampaguita Pictures, Inc. tendered and delivered to the Office of the Municipal

Treasurer of Bocaue, Bulacan, on June 9, 1961, sixteen (16) back pay negotiable certificates of

indebtedness in the aggregate sum of P16,763.60, which had earlier been negotiated to them by

the original holders thereof, and official receipts therefor were duly issued. 2

Thirteen (13) days later, however, the Assistant Regional Director of the BIR wrote to Vera-Perez

Corporation (his letter is dated June 22, 1961) advising that the acceptance of the Negotiable

Certificates of Indebtedness in payment of amusement, percentage and withholding taxes (in the

total sum of P16,753.50) was erroneous and the payment was invalid, because actually said

certificates were "not acceptable as payments of internal revenue taxes in accordance with the

provisions of .. General Circular No. V-289 dated May 8, 1959." Request was thus made for the

payment of the tax liabilities in cash. 3 Evidently neither corporations responded one way or the

other to this letter. Anyway, the next letter adverted to by the Government is that dated August

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18, 1967, written by the Acting Deputy Commissioner of Internal Revenue to both Sampaguita

and Vera-Perez Corporation. 4 That letter gave the corporations "a last 15-day period within

which to pay the said amount of P16,763.50 in cash or certified check." Again, no acceptable

response seems to have been made by the corporations. So on June 9, 1969, eight (8) years to

the day when the negotiable certificates of indebtedness were accepted in payment of taxes by

the Municipal Treasurer at Bocaue, Bulacan, the Solicitor General brought suit in behalf of the

Republic of the Philippines in relation thereto. 5 The case was docketed as Civil Case No. Q-

13270 of the Court of First Instance at Quezon City, and assigned to Branch XVIII thereof, then

presided over by herein respondent, Hon. Vicente G. Ericta. 6

The Solicitor General's complaint 7 impleaded only Sampaguita as defendant. Why he excluded

the other corporation is not disclosed by the record. In his complaint he alleged that Sampaguita's

essayed payment was void since it was "not the original holder of the .. certificates .. but .. only a

mere assignee thereof," and tinder the law," only original holders of back pay certificates .. are

allowed to use the same in payment of their own taxes," invoking this Court's decision to that

effect in de Borja v. Gella 8 promulgated on July 31, 1963.

Sampaguita's answer admitted the basic facts, but asserted that the plaintiffs cause of action had

already prescribed; that the tender of the certificates in 1961 had been "made in absolute good

faith," "prior to the promulgation of the decision .. (in) de Borja vs. Vicente Gella et al. on July

31, 1963;" that the certificates "having duly matured .. in the year 1958, (and) plaintiff .. (being

then) already duty bound to redeem them and pay for their value," Sampaguita and the Republic

became "mutual creditors and debtors of each other for the amount of P10,268.41" with the

result that their obligations were extinguished by legal compensation." These averments

were inter alia reproduced and set up also as a counterclaim, with the additional plea that "in the

remote possibility that ..(it [Sampaguita 1) be still required .. to pay plaintiff the amount of

P10,268.41 for alleged unpaid taxes, the plaintiff be ordered to pay the defendant the same

amount of Pl 0,268.41 representing the face value of the negotiable certificates of indebtedness."

On December 29, 1971, judgment was rendered by the Trial Judge "dismissing both the

complaint and the counterclaim without pronouncement as to costs." 9 His Honor held that

delivery of the back pay certificates by Sampaguita had not produced the effect of payment in

view of the doctrine in Borja v. Gella 10 that "the right to use backpay certificates of indebtedness

in the settlement of taxes is given only to original holders and not to mere assignees thereof;" this

notwithstanding, Sampaguita, as assignee of the certificates of indebtedness, had "succeeded to

the original rights of the holders thereof," and was therefore authorized to demand payment by

the Republic of the indebtedness thereby represented; and while there was "opinion that (legal)

compensation cannot take place against the Republic with respect to taxes, fees, duties and

similar forced contributions due to it (Civil Code, Volume IV, p. 349, Tolentino; Gasperi 204; 2

Von Tuhr Obligaciones, p. 165), there could be no gainsaying the proposition that, under the

facts, Sampaguita was entitled to judgment upon its counterclaim for the payment by the

Republic of its indebtedness in virtue of the back pay certificates in question, with the "ultimate

result .. that the claim and counter-claim of the plaintiff and the defendant, respectively will

offset each other."

The Solicitor General presented a motion of reconsideration. When this was denied, he appealed

to this Court by certiorari positing reversible legal error on the part of respondent Judge in

holding that (1) the Republic's claim is offset by Sampaguita's counterclaim, and (2) the negotiable

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certificates of indebtedness in question were "long overdue and redeemable." The petitioner's

postulations are untenable.

1. The Trial Court ruled that the taxes sought to be collected by the Republic from

Sampaguita were still unpaid, its tender of the certificates of indebtedness in

question not constituting payment; hence, it ought properly to be sentenced to

pay the taxes. It also ruled that even assuming the contrary, legal compensation as

a mode of extinguishing an obligation to pay taxes was nonetheless unavailing

against the government, conformably with de Borja v. Gella.

On the other hand, according to the Trial Court, at least as of date of judgment, more than 10

years from June 18, 1958, the date when, as expressly stated in the certificates of indebtedness,

the same were redeemable, the obligation thereby evidenced was unquestionably already due

and payable; hence, Sampaguita was entitled to a judgment against the Republic for the payment

of the face value of the certificates, the same having already been presented and surrendered

within the said period of ten years (on June 9, 1961) to the Treasurer of the Philippines (thru the

Municipal Treasurer of Bocaue, Bulacan ) 11 This is correct. In other words, even if as the Solicitor

General points out, "there is no certainty when the certificates are actually redeemable" because

the law say "that they are redeemable .. within ten years from the date of issuance " 12 there can

be no question that after the lapse of ten (10) years from the declared date of redeemability,

payment of the indebtedness was already exigible The Trial Court was saying in effect that while

judgment should be rendered in favor of the Republic against Sampaguita for unpaid taxes in the

amount of P10,268.41, judgment ought at the same time to issue for Sampaguita commanding

payment to it by the Republic of the same sum, representing the face value of the certificates of

indebtedness assigned to it and for recovery of which it had specifically prayed in its

counterclaim.

2. What has just been said confutes the petitioner's second argument that

redemption of the certificates of indebtedness was not yet demandable of it

because "there is no certainty when the certificates are actually redeemable, within

the meaning of the law." It is true that, as the Solicitor General contends, "the law

does not say that they are redeemable from its approval on June 18, 1958 but

'within ten years from the date of issuance' of the certificates, " 13 the ineludible

ineluctable fact is that more than ten (10) years have already elapsed since their

issuance and demand for payment had been made within said 10-year period. It is

useless to quibble about the precise time "within ten years" when an obligation

becomes demandable, when that period of ten years has already expired.

Whatever inexactitude might inhere in the phrase, "within ten years," as fixing the

time of exibility of the obligation in question, there can be no debate about the

proposition that the obligation became due and demandable after ten years. It

would be absurd and unfair to sanction the theory subsumed in the Republic's

petition that its obligation was not demandable within ten years because of

inexactitude yet became time-barred upon the lapse of that self-same period.

WHEREFORE, the petition is DENIED, and the judgment subject thereof, being in accord with the

facts and the law, is AFFIRMED in toto. No costs.

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[G.R. Nos. 28508-9. July 7, 1989.]

ESSO STANDARD EASTERN, INC., (formerly, Standard-Vacuum Oil Company), Petitioner, v.

THE COMMISSIONER OF INTERNAL REVENUE, Respondent.

SYLLABUS

1. STATUTORY CONSTRUCTION; LEGISLATIVE HISTORY OF AN ACT RESORTED TO ONLY

WHERE THE LANGUAGE OF THE STATUTE IS AMBIGUOUS. Only in extremely doubtful matters of interpretation does the legislative history of an act of Congress become important. As

a matter of fact, there may be no resort to the legislative history of the enactment of a statute,

the language of which is plain and unambiguous, since such legislative history may only be

resorted to for the purpose of solving doubt, not for the purpose of creating it. [50 Am. Jur.

328.]

2. TAXATION; REPUBLIC ACT NO. 2009, MARGIN FEE; NOT A TAX BUT AN EXACTION. A margin fee is not a tax but an exaction designed to curb the excessive demands upon our

international reserve. (Caltex [Phil.] Inc. v. Acting Commissioner of Customs, 22 SCRA 779;

Chamber of Agriculture and Natural Resources of the Philippines v. Central Bank, 14 SCRA 630).

3. ID.; ID.; AN EXERCISE OF POLICE POWER. The margin fee under Republic Act No. 2009 was imposed by the State in the exercise of its police power and not the power of taxation.

4. ID.; ID.; NOT A DEDUCTIBLE EXPENSE; REASON. The fees were paid for the remittance by ESSO as part of the profits to the head office in the United States. Such remittance was an

expenditure necessary and proper for the conduct of its corporate affairs. As stated in the Lopez

case, the margin fees are not expenses in connection with the production or earning of

petitioners incomes in the Philippines. They were expenses incurred in the disposition of said incomes; expenses for the remittance of funds after they have already been earned by petitioners branch in the Philippines for the disposal of its Head Office in New York which is already another

distinct and separate income taxpayer.

5. ID.; NATIONAL INTERNAL REVENUE CODE; INCOME TAX ON BUSINESS; CONDITIONS

FOR DEDUCTIBILITY OF EXPENSE. We come, then, to the statutory test of deductibility where it is axiomatic that to be deductible as a business expense, three conditions are imposed,

namely: (1) the expense must be ordinary and necessary, (2) it must be paid or incurred within

the taxable year, and (3) it must be paid or incurred in carrying on a trade or business. In

addition, not only must the taxpayer meet the business test, he must substantially prove by

evidence or records the deductions claimed under the law, otherwise, the same will be

disallowed. The mere allegation of the taxpayer that an item of expense is ordinary and

necessary does not justify its deduction. (Atlas Consolidated Mining and Development

Corporation v. Commissioner of Internal Revenue, 102 SCRA 246)

6. ID.; ID.; CLAIMS FOR DEDUCTIONS, A MATTER OF LEGISLATIVE GRACE AND

CONSTRUED STRICTLY AGAINST THE TAXPAYER. The paramount rule is that claims for deductions are a matter of legislative grace and do not turn on mere equitable considerations. . .

. The taxpayer in every instance has the burden of justifying the allowance of any deduction

claimed.

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On appeal before us is the decision of the Court of Tax Appeals 1 denying petitioners claims for refund of overpaid income taxes of P102,246.00 for 1959 and P434,234.93 for 1960 in CTA

Cases No. 1251 and 1558 respectively.

I

In CTA Case No. 1251, petitioner ESSO deducted from its gross income for 1959, as part of its

ordinary and necessary business expenses, the amount it had spent for drilling and exploration of

its petroleum concessions. This claim was disallowed by the respondent Commissioner of Internal

Revenue on the ground that the expenses should be capitalized and might be written off as a loss

only when a "dry hole" should result. ESSO then filed an amended return where it asked for the

refund of P323,279.00 by reason of its abandonment as dry holes of several of its oil wells. Also

claimed as ordinary and necessary expenses in the same return was the amount of P340,822.04,

representing margin fees it had paid to the Central Bank on its profit remittances to its New York

head office.

On August 5, 1964, the CIR granted a tax credit of P221,033.00 only, disallowing the claimed

deduction for the margin fees paid.

In CTA Case No. 1558, the CR assessed ESSO a deficiency income tax for the year 1960, in the

amount of P367,994.00, plus 18% interest thereon of P66,238.92 for the period from April 18,

1961 to April 18, 1964, for a total of P434,232.92. The deficiency arose from the disallowance of

the margin fees of P1,226,647.72 paid by ESSO to the Central Bank on its profit remittances to its

New York head office.

ESSO settled this deficiency assessment on August 10, 1964, by applying the tax credit of

P221,033.00 representing its overpayment on its income tax for 1959 and paying under protest

the additional amount of P213,201.92. On August 13, 1964, it claimed the refund of P39,787.94

as overpayment on the interest on its deficiency income tax. It argued that the 18% interest

should have been imposed not on the total deficiency of P367,944.00 but only on the amount

of P146,961.00, the difference between the total deficiency and its tax credit of P221,033.00.

This claim was denied by the CIR, who insisted on charging the 18% interest on the entire

amount of the deficiency tax. On May 4, 1965, the CIR also denied the claims of ESSO for refund

of the overpayment of its 1959 and 1960 income taxes, holding that the margin fees paid to the

Central Bank could not be considered taxes or allowed as deductible business expenses.

ESSO appealed to the CTA and sought the refund of P102,246.00 for 1959, contending that the

margin fees were deductible from gross income either as a tax or as an ordinary and necessary

business expense. It also claimed an overpayment of its tax by P434,232.92 in 1960, for the same

reason. Additionally, ESSO argued that even if the amount paid as margin fees were not legally

deductible, there was still an overpayment by P39,787.94 for 1960, representing excess interest.

After trial, the CTA denied petitioners claim for refund of P102,246.00 for 1959 and P434,234.92 for 1960 but sustained its claim for P39,787.94 as excess interest. This portion of

the decision was appealed by the CIR but was affirmed by this Court in Commissioner of Internal

Revenue v. ESSO, G.R. No. L-28502-03, promulgated on April 18, 1989. ESSO for its part

appealed the CTA decision denying its claims for the refund of the margin fees P102,246.00 for

1959 and P434,234.92 for 1960. That is the issue now before us.

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II

The first question we must settle is whether R.A. 2009, entitled An Act to Authorize the Central

Bank of the Philippines to Establish a Margin Over Banks Selling Rates of Foreign Exchange, is a police measure or a revenue measure. If it is a revenue measure, the margin fees paid by the

petitioner to the Central Bank on its profit remittances to its New York head office should be

deductible from ESSOs gross income under Sec. 30(c) of the National Internal Revenue Code. This provides that all taxes paid or accrued during or within the taxable year and which are

related to the taxpayers trade, business or profession are deductible from gross income.

The petitioner maintains that margin fees are taxes and cites the background and legislative

history of the Margin Fee Law showing that R.A. 2609 was nothing less than a revival of the 17%

excise tax on foreign exchange imposed by R.A. 601. This was a revenue measure formally

proposed by President Carlos P. Garcia to Congress as part of, and in order to balance, the

budget for 1959-1960. It was enacted by Congress as such and, significantly, properly originated

in the House of Representatives. During its two and a half years of existence, the measure was

one of the major sources of revenue used to finance the ordinary operating expenditures of the

government. It was, moreover, payable out of the General Fund.

On the claimed legislative intent, the Court of Tax Appeals, quoting established principles,

pointed out that

We are not unmindful of the rule that opinions expressed in debates, actual proceedings of the

legislature, steps taken in the enactment of a law, or the history of the passage of the law through

the legislature, may be resorted to as an aid in the interpretation of a statute which is ambiguous

or of doubtful meaning. The courts may take into consideration the facts leading up to, confident

with, and in any way connected with, the passage of the act, in order that they may properly

interpret the legislative intent. But it is also well-settled jurisprudence that only in extremely

doubtful matters of interpretation does the legislative history of an act of Congress become

important. As a matter of fact, there may be no resort to the legislative history of the enactment

of a statute, the language of which is plain and unambiguous, since such legislative history may

only be resorted to for the purpose of solving doubt, not for the purpose of creating it. [50 Am.

Jur. 328.]

Apart from the above consideration, there are at least two cases where we have held that a

margin fee is not a tax but an exaction designed to curb the excessive demands upon our

international reserve.

In Caltex (Phil.) Inc. v. Acting Commissioner of Customs, 2 the Court stated through Justice Jose

P. Bengzon.

A margin levy on foreign exchange is a form of exchange control or restriction designed to

discourage imports and encourage exports, and ultimately, `curtail any excessive demand upon

the international reserve in order to stabilize the currency. Originally adopted to cope with balance of payment pressures, exchange restrictions have come to serve various purposes, such as

limiting non-essential imports, protecting domestic industry and when combined with the use of multiple currency rates providing a source of revenue to the government, and are in many developing countries regarded as a more or less inevitable concomitant of their economic

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development programs. The different measures of exchange control or restriction cover different

phases of foreign exchange transactions, i.e., in quantitative restriction, the control is on the

amount of foreign exchange allowable. In the case of the margin levy, the immediate impact is

on the rate of foreign exchange; in fact, its main function is to control the exchange rate without

changing the par value of the peso as fixed in the Bretton Woods Agreement Act. For a member

nation is not supposed to alter its exchange rate (at par value) to correct a merely temporary

disequilibrium in its balance of payments. By its nature, the margin levy is part of the rate of

exchange as fixed by the government.

As to the contention that the margin levy is a tax on

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