G.R. No.

L-23174

September 18, 1967

CONCEPCION MACABINGKIL, petitioner,

vs.
HON. NICASIO YATCO, Judge of the Court First Instance of Rizal,
Quezon City Branch, PROVINCIAL SHERIFF OF RIZAL and SHERIFF OF
QUEZON CITY, IRENE DE LEON and her husband, VICENTE
LLANES,respondents.
Teofilo V. Ogsime for petitioner.
Lea T. Castelo for respondents.

FERNANDO, J.:
The principal legal question posed by this original petition for a writ
of certiorari and prohibition with preliminary injunction is one of
procedural due process. It arose from the applicability of an order for
demolition of April 18, 1964 to the house of petitioner, such order
arising from the finality of a judgment in Civil Case No. Q-5866 of the
Court of First Instance of Quezon City, thereafter affirmed by the Court
of Appeals in CA-G.R. No. 31169-R, petitioner contending that she has
not a party to such a case and was denied a chance to intervene
therein.
The petition for certiorari and prohibition with preliminary injunction
was filed with this Court on June 13, 1964, petitioner stating that she
was a resident of and with postal address at Block-E-148, East Avenue
Subdivision, Pinahan Area, Diliman, Quezon City, Philippines. As
respondents, she named the then acting Judge of Court of First Instance
of Rizal, Quezon City Branch, the Hon. Nicasio Yatco; the then Provincial
Sheriff of Rizal and the Sheriff of Quezon City; and respondent spouses
Irene de Leon and Vicente Llanes.1

It was then alleged that on February 26, 1964 when the Deputy Sheriff
of Quezon City served upon petitioner copy of an alias writ of
execution, she learned for the first time that a decision was rendered in
a certain Civil Case No. Q-5866 with respondent spouses, plaintiffs
therein, being the prevailing parties against the People's Homesite and
Housing Corporation (herein referred to as the PHHC), a copy of which
writ of execution as well as the final decision of the Court of Appeals
affirming the lower court decision being included as annexes.2 Then on
April 15, 1964, respondent spouses as plaintiffs in the above Civil Case
No. Q-5866 filed an ex-parte motion for a special order of demolition,
which motion was set for hearing on April 18, 1964, on which very day,
the order of the court granting the same was issued addressed to the
Sheriff of Quezon City "to demolish the houses existing in the premises
of the land in question, which have been erected or occupied by
squatters, and thereafter deliver the same to the spouses."3
Upon being served with such order of demolition on June 13, 1964,
petitioner the next day immediately filed an urgent petition to lift the
alias writ of execution and order of demolition with preliminary
injunction alleging that she "is not a squatter on the Lot in question, she
having acquired her rights and interest over the said Lot by virtue of
Resolution No. 370 dated December 18, 1959, and again by virtue of
Resolution No. 550, dated May 16, 1961, and that all of said Resolutions
were duly passed upon by the Board of Directors of defendant PHHC,
and her house having been improved by virtue of the authority of the
General Manager of the PHHC to secure for herself a building permit
from the authorities concerned, and that her rights over the said Lot in
question were acquired after due investigation of her qualification to
acquire the same with priority over any other person or persons who
are not occupants of the subject Lot," more so as to persons who are
disqualified in accordance with law and that granting arguendo that
plaintiff spouses did have a conditional contract to sell executed by
defendant PHHC, the same was obtained through fraud and

misrepresentation or in connivance with some well placed employees

of the PHHC and that such contract "is against the law," referring to the
PHHC Charter as amended, and the many established policies of the
said Government Corporation, "which facts could have been duly
proved by petitioner if, only, she was impleaded in the complaint, or
given a chance to intervene . . . ."4
It was then asserted that although "a decision was rendered in the
instant case, the same should not bind petitioner because, as already
stated, your petitioner had not been impleaded in the plaintiff's
complaint, or at least, given a chance to intervene . . . ." Petitioner, in
the said urgent petition, likewise invoked the principle that respondent
spouses did not exhaust the administrative remedies before filing the
action and that the court was in error in declaring null and void
Resolution No. 550 of the PHHC in her favor as shown by an Executive
Directive of February 20, 1964 upholding her rights and interest on the
lot in question, and ordering the cancellation of the conditional
contract to sell in favor of respondent Irene de Leon. She then
reiterated that the decision in Civil Case No. Q-5866 could not in any
way bind her for not being a party in such a case and that to allow
respondent spouses to take possession of the lot in question and
remove petitioner's house and other improvements legally constructed
thereon by virtue of such order of demolition dated April 18, 1964,
would not only cause great and irreparable injury, but would also cause
injustice to her by depriving her of her property without due process of
law. On the date originally set for the hearing of such urgent petition on
June 20, 1954, respondent spouses through counsel requested
deferment as well as permission to file a written opposition, which was
granted by the court, the hearing being reset on June 27, 1964, but on
such subsequent date, without petitioner having as yet been furnished
with such written opposition, a fact being made known to the court,
respondent Judge "without hearing the matter as alleged in said
petition and consequently without any evidence received, denied her

petition to lift alias writ of execution and order of demolition with

preliminary injunction."5
Under the above circumstances, it is petitioner's contention that she
could not be bound by the judgment and that the refusal to lift the alias
writ of execution and the order of demolition, without hearing the
matter as alleged in said petition and without receiving any evidence
and her ejectment from the lot in question of which she was in actual
possession "would constitute a deprivation of property rights without
due process of law."6 The Provincial Sheriff of Rizal and the Sheriff of
Quezon City were made respondents for they "threatened to enforce
said writ of execution and order of demolition," as a matter of fact
advising petitioner that unless a restraining order from a competent
court could be secured, her house would be demolished.7 She then
alleged that to enforce the writ of execution and order of demolition
would be "to work unwarranted hardship and irreparable damage and
injustice upon her without having been accorded her day in court,"
reiterating that thereby she would be deprived of her property rights
without due process of law as she was a stranger to such a case never
having been made a party to it.8 She then filed this petition for a writ
of certiorari and prohibition with preliminary injunction, there being no
appeal.9 She likewise expressed her willingness "to post a bond
sufficient in amount as may be determined by this Honorable Court
conditioned for the payment of damages that may be awarded in case
the writ for preliminary injunction prayed for be found
unmeritorious."10
On July 15, 1964, a resolution giving due course to the above petition
for a writ of certiorari and prohibition, likewise granting the prayer for
preliminary injunction upon posting a bond of P1,000.00, was issued by
this Court.
In the answer to the petition filed on August 7, 1964, respondents
sought to meet the due process question squarely by the allegation

that in the aforesaid Case No. Q-5866, upon the finality of which both
the writ of execution and the order of demolition were issued
"petitioner could have appealed the order . . . denying the motion for
leave to intervene . . . ." Moreover, respondents deferred to another
civil case, Q-5411, wherein respondent spouses as plaintiffs filed a
complaint against the PHHC to compel it to execute the conditional
contract to sell covering the disputed lot and restraining it from
awarding or selling the same to one of the defendants, petitioner
herein, alleging further that after they sought to have the said case
dismissed without prejudice, the defendant PHHC having executed a
conditional contract to sell in favor of the wife, respondent Irene de
Leon, which motion was granted in an order of respondent Judge
Nicasio Yatco on May 27, 1961, petitioner as defendant could have
opposed such motion or could have thereafter appealed. Accordingly,
respondents after mentioning that petitioner failed to perfect an
appeal in both instances added: "It is therefore wrong to say now that
in ejecting the petitioner from this lot, she is unjustly deprived of her
property without due process of law."11
For further clarification of the inter-relationship between petitioner and
the PHHC on the one hand and the respondent spouses and the PHHC
on the other, with reference to the disputed lot, the facts as found by
the Court of Appeals in its decision of August 31, 1963, affirming the
decision in Civil Case No. Q-5866, should prove illuminating. Thus:
The basic facts are not seriously disputed.1awphl.nt
On January 30, 1957, Plaintiff Irene de Leon filed with the People's
Homesite & Housing Corporation, PHHC for convenience, an
application to purchase the latter's lot 27, Block E-148 of the East
Avenue Subdivision, Quezon City. The application was approved
by defendant corporation on February 1, 1957, and accordingly
plaintiff was issued an order of payment requiring her to pay in
advance 10% or the sum of P1,053.00, of the total value of the

property. The advance payment required of her was made and

plaintiff was issued a passbook, after which several installments
were made.
On December 18, 1959, the PHHC Board of Directors passed and
approved Resolution No. 370 cancelling the award thus made in
favor of plaintiff De Leon and, instead, awarding the same
property to one Concepcion Makabingkil who, as a squatter on
the lot, claims to have a preferential right in the matter of awards.
But before this Resolution No. 370 could be implemented and the
property formally awarded to Makabingkil, Plaintiff De Leon filed
with the Court of First Instance of Quezon City a complaint for
injunction docketed as Civil Case No. Q-5411 against the PHHC,
Makabingkil and three others. Upon application, a Writ of
preliminary injunction was issued by that Court temporarily
enjoining the PHHC from implementing said resolution.
At a pre-trial conference in said Civil Case Q-5411, the PHHC, duly
represented by its authorized officers and representatives, agreed
to reconsider Res. 370 and to respect the award previously made
in favor of De Leon, and, pursuant thereto, passed and approved
Resolution No. 430 which authorizes the award of the lot in
dispute to plaintiff De Leon. Making good its commitment, the
PHHC on March 27, 1961, executed a Conditional Contract to Sell
the property to plaintiff Irene de Leon, who, on the basis of that
pre-trial agreement and the Contract to Sell thus executed in her
favor by the PHHC, moved to dismiss Civil Case Q-5411 without
prejudice and fulfilled partly her obligation under the Contract by
paying several installment more. Without objection on the part of
either of the defendants therein, the case, as prayed for, was
ordered dismissed without prejudice.
Shortly after the dismissal of Civil Case No. Q-5411, or on May 16,
1961, the Board again passed and approved Resolution No. 550

reconsidering altogether its commitments to plaintiff De Leon,

totally disregarding the Conditional Contract to Sell previously
executed, and reawarding the subject-property to Makabingkil.
It was precisely at that stage that the above decision of the Court of
Appeals noted that respondent spouses as plaintiffs instituted Civil Case
Q-5866 for injunction with damages "against the PHHC seeking, among
others, to enjoin the latter, its officers, representatives, agents or
persons acting for and in its behalf from implementing PHHC Board
Resolution No. 550 dated May 16, 1961, or from awarding or selling the
lot in question to Concepcion Makabingkil or any other person or
persons." What is even more noteworthy is that, as shown in the
petition, petitioner Makabingkil was at no time named a party and
could not therefore be heard on a matter wherein her vital rights were
undoubtedly involved.
From the above recital of undisputed facts, the picture clearly emerges.
Petitioner was indeed denied due process. This petition
for certiorari and prohibition possesses merit.
As far back as 1908, U.S. v. Ling Su Fan,12 this Court affixed the
imprimatur of its approval on Webster's definition of procedural due
process. Thus: "By the law of the land is more clearly intended the
general law, a law which hears before it condemns, which proceeds
upon inquiry and renders judgment only after trial."13 This Court in a
1924 decision, Lopez v. Director of Lands, after quoting the above
added that due process "contemplates notice and opportunity to be
heard before judgment is rendered, affecting one's person or
property." It is satisfied according to another leading decision: "If the
following conditions are present, namely: (1) There must be a court or
tribunal clothed with judicial power to hear and determine the matter
before it; (2) jurisdiction must be lawfully acquired over the person of
the defendant or over the property which is the subject of the

proceeding; (3) the defendant must be given an opportunity to be

heard; and (4) judgment must be rendered upon lawful hearing."14
The due process concept is thus a vital living force in our jurisprudence.
It was so announced in an impressive number of decisions, not all of
which need be recounted here. Fidelity to such a view has been
reinforced by time. Thus in Cuaycong v. Sengbengco,15 decided in 1960,
this Court through the then Justice, now Chief Justice, Concepcion
declared that "acts of Congress, as well as those of the Executive, can
deny due process only under pain of nullity, and judicial proceedings
suffering from the same flaw are subject to the same sanction, any
statutory provision to the contrary notwithstanding." Only lately, this
Court through Justice Bengzon reiterated that the due process clause
"is designed to secure justice as a living reality; not to sacrifice it by
paying undue homage to formality."16
A 1957 decision, Cruzcosa v. Concepcion,17 is even more illuminating in
so far as the availability of the remedy sought is concerned. In the
language of this Court, speaking through Justice J.B.L. Reyes: "The
petition is clearly meritorious. Petitioners were conclusively found by
the Court of Appeals to be co-owners of the building in question.
Having an interest therein, they should have been made parties to the
ejectment proceedings to give them a chance to protect their rights;
and not having been made parties thereto, they are not bound and can
not be affected by the judgment rendered therein against their coowner Catalino Cruzcosa, Jr. . . . ." Two due process cases deal
specifically with a writ of execution that could not validly be enforced
against a party who was not given his day in court, Sicat v.
Reyes,18 and Hamoy vs. Batingolo.19 According to the former: "The
above agreement, which served as basis for the ejectment of Alipio
Sicat, cannot be binding and conclusive upon the latter, who is not a
party to the case. Indeed, that order, as well as the writ for execution,
cannot legally be enforced against Alipio Sicat for the simple reason

that he was not given his day in court." From the latter: "The issue
raised in the motion to Rangar is not involved in the appeal for it
concerns a right which he claims over the property which has not so far
been litigated for the reason that he was not made a party to the case
either as plaintiff or as defendant. He only came to know of the
litigation when it was forced out of the property by the sheriff, and so
he filed the present motion to be heard and prove his title to the
property. This he has the right to do as the most expeditious manner to
protect his interest instead of filing a separate action which generally is
long, tedious and protracted."
Petitioner was therefore right in assertion that "the separate and
collective effect of the Writ of Execution and Order of Demolition . . .
and the respondent Provincial Sheriff's threat to enforce [the same] is
to work unwarranted hardship and irreparable damage and injustice
upon the Petitioner who have not been accorded her day in court." It
would as claimed be tantamount to a deprivation of her property rights
without due process of law. She is entitled to redress. This petition
for certiorari and prohibition must be granted.
Petitioner's right to due process must be respected. This Court could go
even further. This petition for certiorariand prohibition could be utilized
to determine who has the right to the disputed lot. This approach of
resolving the issue is not without precedent. Francisco v. City of
Davao,20 decided by the then Justice, now Chief Justice, Concepcion,
points the way: ". . . The ends of justice would not be served, if we now
dismiss the case over nine (9) years after it has been initiated and
bade the plaintiff to start all over again, following the procedure that
the defendants had asked the lower court, but which the latter refused,
to require. At any rate, since the legal question raised in the pleadings
has reached this Court, and the assessment complained of is manifestly
violative of the clear and express provision of the law, it is best that we
decide said question, instead of further deferring its resolution." The

records of the case however show that another litigation involving

petitioner, the PHHC, and the respondent spouses is still pending
adjudication. For that reason, any further pronouncement from this
Court would be inappropriate.
WHEREFORE, this petition for certiorari and prohibition is granted and
the preliminary injunction issued made permanent. With costs against
respondent spouses, Irene de Leon and Vicente Llanes.
G.R. No. L-77194 March 15, 1988
VIRGILIO GASTON, HORTENCIA STARKE, ROMEO GUANZON, OSCAR
VILLANUEVA, JOSE ABELLO, REMO RAMOS, CAROLINA LOPEZ, JESUS
ISASI, MANUEL LACSON, JAVIER LACSON, TITO TAGARAO, EDUARDO
SUATENGCO, AUGUSTO LLAMAS, RODOLFO SIASON, PACIFICO
MAGHARI, JR., JOSE JAMANDRE, AURELIO GAMBOA, ET
AL., petitioners,
vs.
REPUBLIC PLANTERS BANK, PHILIPPINE SUGAR COMMISSION, and
SUGAR REGULATORY ADMINISTRATION, respondents, ANGEL H.
SEVERINO, JR., GLICERIO JAVELLANA, GLORIA P. DE LA PAZ, JOEY P. DE
LA PAZ, ET AL., and NATIONAL FEDERATION OF SUGARCANE
PLANTERS, intervenors.

MELENCIO-HERRERA, J.:
Petitioners are sugar producers, sugarcane planters and millers, who
have come to this Court in their individual capacities and in
representation of other sugar producers, planters and millers, said to
be so numerous that it is impracticable to bring them all before the
Court although the subject matter of the present controversy is of

common interest to all sugar producers, whether parties in this action

or not.
Respondent Philippine Sugar Commission (PHILSUCOM, for short) was
formerly the government office tasked with the function of regulating
and supervising the sugar industry until it was superseded by its corespondent Sugar Regulatory Administration (SRA, for brevity) under
Executive Order No. 18 on May 28, 1986. Although said Executive Order
abolished the PHILSUCOM, its existence as a juridical entity was
mandated to continue for three (3) more years "for the purpose of
prosecuting and defending suits by or against it and enables it to settle
and close its affairs, to dispose of and convey its property and to
distribute its assets."
Respondent Republic Planters Bank (briefly, the Bank) is a commercial
banking corporation.
Angel H. Severino, Jr., et al., who are sugarcane planters planting and
milling their sugarcane in different mill districts of Negros Occidental,
were allowed to intervene by the Court, since they have common cause
with petitioners and respondents having interposed no objection to
their intervention. Subsequently, on January 14,1988, the National
Federation of Sugar Planters (NFSP) also moved to intervene, which the
Court allowed on February 16,1988.
Petitioners and Intervenors have come to this Court praying for a Writ
of mandamus commanding respondents:
TO IMPLEMENT AND ACCOMPLISH THE PRIVATIZATION OF
REPUBLIC PLANTERS BANK BY THE TRANSFER AND
DISTRIBUTION OF THE SHARES OF STOCK IN THE SAID BANK;
NOW HELD BY AND STILL CARRIED IN THE NAME OF THE
PHILIPPINE SUGAR COMMISSION, TO THE SUGAR
PRODUCERS, PLANTERS AND MILLERS, WHO ARE THE TRUE

BENEFICIAL OWNERS OF THE 761,416 COMMON SHARES

VALUED AT P36,548.000.00, AND 53,005,045 PREFERRED
SHARES (A, B & C) WITH A TOTAL PAR VALUE OF
P254,424,224.72, OR A TOTAL INVESTMENT OF
P290,972,224.72, THE SAID INVESTMENT HAVING BEEN
FUNDED BY THE DEDUCTION OF Pl.00 PER PICUL FROM
SUGAR PROCEEDS OF THE SUGAR PRODUCERS
COMMENCING THE YEAR 1978-79 UNTIL THE PRESENT AS
STABILIZATION FUND PURSUANT TO P.D. # 388.
Respondent Bank does not take issue with either petitioners or its
correspondents as it has no beneficial or equitable interest that may be
affected by the ruling in this Petition, but welcomes the filing of the
Petition since it will settle finally the issue of legal ownership of the
questioned shares of stock.
Respondents PHILSUCOM and SRA, for their part, squarely traverse the
petition arguing that no trust results from Section 7 of P.D. No. 388;
that the stabilization fees collected are considered government funds
under the Government Auditing Code; that the transfer of shares of
stock from PHILSUCOM to the sugar producers would be irregular, if
not illegal; and that this suit is barred by laches.
The Solicitor General aptly summarizes the basic issues thus: (1)
whether the stabilization fees collected from sugar planters and millers
pursuant to Section 7 of P.D. No. 388 are funds in trust for them, or
public funds; and (2) whether shares of stock in respondent Bank paid
for with said stabilization fees belong to the PHILSUCOM or to the
different sugar planters and millers from whom the fees were collected
or levied.
P. D. No. 388, promulgated on February 2,1974, which created the
PHILSUCOM, provided for the collection of a Stabilization Fund as
follows:

SEC. 7. Capitalization, Special Fund of the Commission,

Development and Stabilization Fund. There is hereby
established a fund for the commission for the purpose of
financing the growth and development of the sugar industry
and all its components, stabilization of the domestic market
including the foreign market to be administered in trust by
the Commission and deposited in the Philippine National
Bank derived in the manner herein below cited from the
following sources:
a. Stabilization fund shall be collected as provided for in the
various provisions of this Decree.
b. Stabilization fees shall be collected from planters and
millers in the amount of Two (P2.00) Pesos for every picul
produced and milled for a period of five years from the
approval of this Decree and One (Pl.00) Peso for every picul
produced and milled every year thereafter.
Provided: That fifty (P0.50) centavos per picul of the amount
levied on planters, millers and traders under Section 4(c) of
this Decree will be used for the payment of salaries and
wages of personnel, fringe benefits and allowances of
officers and employees for the purpose of accomplishing
and employees for the purpose of accomplishing the
efficient performance of the duties of the Commission.
Provided, further: That said amount shall constitute a lien on
the sugar quedan and/or warehouse receipts and shall be
paid immediately by the planters and mill companies, sugar
centrals and refineries to the Commission. (paragraphing
and bold supplied).

Section 7 of P.D. No. 388 does provide that the stabilization fees
collected "shall be administered in trust by the Commission." However,
while the element of an intent to create a trust is present, a resulting
trust in favor of the sugar producers, millers and planters cannot be
said to have ensued because the presumptive intention of the parties is
not reasonably ascertainable from the language of the statute itself.
The doctrine of resulting trusts is founded on the presumed
intention of the parties; and as a general rule, it arises
where, and only where such may be reasonably presumed
to be the intention of the parties, as determined from the
facts and circumstances existing at the time of the
transaction out of which it is sought to be established (89
C.J.S. 947).
No implied trust in favor of the sugar producers either can be deduced
from the imposition of the levy. "The essential Idea of an implied trust
involves a certain antagonism between the cestui que trust and the
trustee even when the trust has not arisen out of fraud nor out of any
transaction of a fraudulent or immoral character (65 CJ 222). It is not
clearly shown from the statute itself that the PHILSUCOM imposed on
itself the obligation of holding the stabilization fund for the benefit of
the sugar producers. It must be categorically demonstrated that the
very administrative agency which is the source of such regulation would
place a burden on itself (Batchelder v. Central Bank of the Philippines, L25071, July 29,1972,46 SCRA 102, citing People v. Que Po Lay, 94 Phil.
640 [1954]).
Neither can petitioners place reliance on the history of respondents
Bank. They recite that at the beginning, the Bank was owned by the
Roman-Rojas Group. Because it underwent difficulties early in the year
1978, Mr. Roberto S. Benedicto, then Chairman of the PHILSUCOM,
submitted a proposal to the Central Bank for the rehabilitation of the
Bank. The Central Bank acted favorably on the proposal at the meeting

of the Monetary Board on March 31, 1978 subject to the infusion of

fresh capital by the Benedicto Group. Petitioners maintain that this
infusion of fresh capital was accomplished, not by any capital
investment by Mr. Benedicto, but by PHILSUCOM, which set aside the
proceeds of the P1.00 per picul stabilization fund to pay for its
subscription in shares of stock of respondent Bank. It is petitioners'
submission that all shares were placed in PHILSUCOM's name only out
of convenience and necessity and that they are the true and beneficial
owners thereof.
In point of fact, we cannot see our way clear to upholding petitioners'
position that the investment of the proceeds from the stabilization fund
in subscriptions to the capital stock of the Bank were being made for
and on their behalf. That could have been clarified by the Trust
Agreement, dated May 28, 1986, entered into between PHILSUCOM, as
"Trustor" acting through Mr. Fred J. Elizalde as Officer-in-Charge, and
respondent RPB- Trust Department' as "Trustee," acknowledging that
PHILSUCOM holds said shares for and in behalf of the sugar producers,"
the latter "being the true and beneficial owners thereof." The
Agreement, however, did not get off the ground because it failed to
receive the approval of the PHILSUCOM Board of Commissioners as
required in the Agreement itself.
The SRA, which succeeded PHILSUCOM, neither approved the
Agreement because of the adverse opinion of the SRA, Resident
Auditor, dated June 25,1986, which was aimed by the Chairman of the
Commission on Audit, on January 26,1987.
On February 19, 1987, the SRA, resolved to revoke the Trust Agreement
"in the light of the ruling of the Commission on Audit that the
aforementioned Agreement is of doubtful validity."
From the legal standpoint, we find basis for the opinion of the
Commission on Audit reading:

That the government, PHILSUCOM or its successor-ininterest, Sugar Regulatory Administration, in particular,
owns and stocks. While it is true that the collected
stabilization fees were set aside by PHILSUCOM to pay its
subscription to RPB, it did not collect said fees for the
account of the sugar producers. That stabilization fees are
charges/levies on sugar produced and milled which accrued
to PHILSUCOM under PD 338, as amended. ...
The stabilization fees collected are in the nature of a tax, which is
within the power of the State to impose for the promotion of the sugar
industry (Lutz vs. Araneta, 98 Phil. 148). They constitute sugar liens
(Sec. 7[b], P.D. No. 388). The collections made accrue to a "Special
Fund," a "Development and Stabilization Fund," almost Identical to the
"Sugar Adjustment and Stabilization Fund" created under Section 6 of
Commonwealth Act 567. 1 The tax collected is not in a pure exercise of
the taxing power. It is levied with a regulatory purpose, to provide
means for the stabilization of the sugar industry. The levy is primarily in
the exercise of the police power of the State (Lutz vs. Araneta, supra.).
The protection of a large industry constituting one of the
great sources of the state's wealth and therefore directly or
indirectly affecting the welfare of so great a portion of the
population of the State is affected to such an extent by
public interests as to be within the police power of the
sovereign. (Johnson vs. State ex rel. Marey, 128 So. 857,
cited in Lutz vs. Araneta, supra).
The stabilization fees in question are levied by the State upon sugar
millers, planters and producers for a special purpose that of
"financing the growth and development of the sugar industry and all its
components, stabilization of the domestic market including the foreign
market the fact that the State has taken possession of moneys pursuant
to law is sufficient to constitute them state funds, even though they are

held for a special purpose (Lawrence vs. American Surety Co., 263 Mich
586, 249 ALR 535, cited in 42 Am. Jur. Sec. 2, p. 718). Having been
levied for a special purpose, the revenues collected are to be treated as
a special fund, to be, in the language of the statute, "administered in
trust' for the purpose intended. Once the purpose has been fulfilled or
abandoned, the balance, if any, is to be transferred to the general funds
of the Government. That is the essence of the trust intended (See 1987
Constitution, Article VI, Sec. 29(3), lifted from the 1935 Constitution,
Article VI, Sec. 23(l]). 2
The character of the Stabilization Fund as a special fund is emphasized
by the fact that the funds are deposited in the Philippine National Bank
and not in the Philippine Treasury, moneys from which may be paid out
only in pursuance of an appropriation made by law (1987) Constitution,
Article VI, Sec. 29[1],1973 Constitution, Article VIII, Sec. 18[l]).
That the fees were collected from sugar producers, planters and
millers, and that the funds were channeled to the purchase of shares of
stock in respondent Bank do not convert the funds into a trust fired for
their benefit nor make them the beneficial owners of the shares so
purchased. It is but rational that the fees be collected from them since
it is also they who are to be benefited from the expenditure of the
funds derived from it. The investment in shares of respondent Bank is
not alien to the purpose intended because of the Bank's character as a
commodity bank for sugar conceived for the industry's growth and
development. Furthermore, of note is the fact that one-half, (1/2) or
PO.50 per picul, of the amount levied under P.D. No. 388 is to be
utilized for the "payment of salaries and wages of personnel, fringe
benefits and allowances of officers and employees of PHILSUCOM"
thereby immediately negating the claim that the entire amount levied
is in trust for sugar, producers, planters and millers.
To rule in petitioners' favor would contravene the general principle that
revenues derived from taxes cannot be used for purely private

purposes or for the exclusive benefit of private persons. The

Stabilization Fund is to be utilized for the benefit of the entire sugar
industry, "and all its components, stabilization of the domestic market,"
including the foreign market the industry being of vital importance to
the country's economy and to national interest.
WHEREFORE, the Writ of mandamus is denied and the Petition hereby
dismissed. No costs.
This Decision is immediately executory.
SO ORDERED.
G.R. No. 87479 June 4, 1990
NATIONAL POWER CORPORATION, petitioner,
vs.
THE PROVINCE OF ALBAY, ALBAY GOVERNOR ROMEO R. SALALIMA,
and ALBAY PROVINCIAL TREASURER ABUNDIO M.
NUEZ, respondents.
Romulo L. Ricafort and Jesus R. Cornago for respondents.

SARMIENTO, J.:
The National Power Corporation (NAPOCOR) questions the power of
the provincial government of Albay to collect real property taxes on its
properties located at Tiwi, Albay, amassed between June 11, 1984 up to
March 10, 1987.
It appears that on March 14 and 15, 1989, the respondents caused the
publication of a notice of auction sale involving the properties of
NAPOCOR and the Philippine Geothermal Inc. consisting of buildings,
machines, and similar improvements standing on their offices at Tiwi,

Albay. The amounts to be realized from this advertised auction sale are
supposed to be applied to the tax delinquencies claimed, as and for, as
we said, real property taxes. The back taxes NAPOCOR has supposedly
accumulated were computed at P214,845,184.76.
NAPOCOR opposed the sale, interposing in support of its non-liability
Resolution No. 17-87, of the Fiscal Incentives Review Board (FIRB),
which provides as follows:
BE IT RESOLVED, AS IT IS HEREBY RESOLVED, That the tax
and duty exemption privileges of the National Power
Corporation, including those pertaining to its domestic
purchases of petroleum and petroleum products, granted
under the terms and conditions of Commonwealth Act No.
120 (Creating the National Power Corporation, defining its
powers, objectives and functions, and for other purposes),
as amended, are restored effective March 10, 1987, subject
to the following conditions: 1
as well as the Memorandum of Executive Secretary Catalino Macaraig,
which also states thus:
Pursuant to Sections 1 (f) and 2 (e) of Executive Order No.
93, series of 1986, FIRB Resolution No. 17-87, series of 1987,
restoring, subject to certain conditions prescribed therein,
the tax and duty exemption privileges of NPC as provided
under Commonwealth Act No. 120, as amended, effective
March 10, 1987, is hereby confirmed and approved. 2
On March 10, 1989, the Court resolved to issue a temporary restraining
order directing the Albay provincial government "to CEASE AND DESIST
from selling and disposing of the NAPOCOR properties subject matter
of this petition. 3 It appears, however, that "the temporary restraining
order failed to reach respondents before the scheduled bidding at

10:00 a.m. on March 30, 1989 ... [h]ence, the respondents proceeded
with the bidding wherein the Province of Albay was the highest
bidder. 4
The Court gathers from the records that:
(1) Under Section 13, of Republic Act No. 6395, amending
Commonwealth Act No. 120 (charter of NAPOCOR):
Section 13. Non-profit Character of the Corporation;
Exemption from All Taxes, Duties, Fees, Imposts and Other
Charges by the Government and Government
Instrumentalities. The Corporation shall be non-profit and
shall devote all its returns from its capital investment as well
as excess revenues from its operation, for expansion, To
enable the Corporation to pay its indebtedness and
obligations and in furtherance and effective implementation
of the policy enunciated in Section One of this Act, the
Corporation, including its subsidiaries, is hereby declared
exempt from the payment of all forms of taxes, duties, fees,
imposts as well as costs and service fees including filing fees,
appeal bonds, supersedeas bonds, in any court or
administrative proceedings. 5
(2) On August 24, 1975, Presidential Decree No. 776 was promulgated,
creating the Fiscal Incentives Review Board (FIRB). Among other things,
the Board was tasked as follows:
Section 2. A Fiscal Incentives Review Board is hereby created
for the purpose of determining what subsidies and tax
exemptions should be modified, withdrawn, revoked or
suspended, which shall be composed of the following
officials:

Chairman - Secretary of Finance

Members - Secretary of Industry
- Director General of the National Economic and
Development Authority
- Commissioner of Internal Revenue
- Commissioner of Customs
The Board may recommend to the President of the
Philippines and for reasons of compatibility with the
declared economic policy, the withdrawal, modification,
revocation or suspension of the enforceability of any of the
abovestated statutory subsidies or tax exemption grants,
except those granted by the Constitution. To attain its
objectives, the Board may require the assistance of any
appropriate government agency or entity. The Board shall
meet once a month, or oftener at the call of the Secretary of
Finance. 6
(3) On June 11, 1984, Presidential Decree No. 1931 was
promulgated, prescribing, among other things, that:
Section 1. The provisions of special or general law to the
contrary notwithstanding, all exemptions from the payment
of duties, taxes, fees, impost and other charges heretofore
granted in favor of government-owned or controlled
corporations including their subsidiaries are hereby
withdrawn. 7
(4) Meanwhile, FIRB Resolution No. 10-85 was issued, "restoring"
NAPOCOR's tax exemption effective June 11, 1984 to June 30, 1985;
(5) Thereafter, FIRB Resolution No. 1-86 was issued, granting tax
exemption privileges to NAPOCOR from July 1, 1985 and indefinitely
thereafter;

(6) Likewise, FIRB Resolution No. 17-87 was promulgated, giving

NAPOCOR tax exemption privileges effective until March 10, 1987; 8
(7) On December 17, 1986, Executive Order No. 93 was promulgated by
President Corazon Aquino, providing, among other things, as follows:
SECTION 1. The provisions of any general or special law to
the contrary notwithstanding, all tax and duty incentives
granted to government and private entities are hereby
withdrawn, except. 9
and
SECTION 2. The Fiscal Incentives Review Board created
under Presidential Decree No. 776, as amended, is hereby
authorized to:
a) restore tax and/or duty exemptions withdrawn hereunder
in whole or in part;
b) revise the scope and coverage of tax and/or duty
exemption that may be restored;
c) impose conditions for the restoration of tax and/or duty
exemption;
d) prescribe the date or period of effectivity of the
restoration of tax and/or duty exemption;
e) formulate and submit to the President for approval, a
complete system for the grant of subsidies to deserving
beneficiaries, in lieu of or in combination with the
restoration of tax and duty exemptions or preferential
treatment in taxation, indicating the source of funding
therefor, eligible beneficiaries and the terms and conditions

for the grant thereof taking into consideration the

international commitments of the Philippines and the
necessary precautions such that the grant of subsidies does
not become the basis for countervailing action. 10
(8) On October 5, 1987, the Office of the President issued the
Memorandum, confirming NAPOCOR's tax exemption aforesaid. 11
The provincial government of Albay now defends the auction sale in
question on the theory that the various FIRB issuances constitute an
undue delegation of the taxing Power and hence, null and void, under
the Constitution. It is also contended that, insofar as Executive Order
No. 93 authorizes the FIRB to grant tax exemptions, the same is of no
force and effect under the constitutional provision allowing the
legislature alone to accord tax exemption privileges.
It is to be pointed out that under Presidential Decree No. 776, the
power of the FIRB was merely to "recommend to the President of the
Philippines and for reasons of compatibility with the declared economic
policy, the withdrawal, modification, revocation or suspension of the
enforceability of any of the above-cited statutory subsidies or tax
exemption grants, except those granted by the Constitution." It has no
authority to impose taxes or revoke existing ones, which, after all,
under the Constitution, only the legislature may accomplish. 12 The
question therefore is whether or not the various tax exemptions
granted by virtue of FIRB Resolutions Nos. 10-85, 1-86, and 17-87 are
valid and constitutional.
We shall deal with FIRB No. 17-87 later, but with respect to FIRB
Resolutions Nos. 10- 85 and 1-86, we sustain the provincial government
of Albay.
As we said, the FIRB, under its charter, Presidential Decree No. 776, had
been empowered merely to "recommend" tax exemptions. By itself, it

could not have validly prescribed exemptions or restore taxability.

Hence, as of June 11, 1984 (promulgation of Presidential Decree No.
1931), NAPOCOR had ceased to enjoy tax exemption privileges.
The fact that under Executive Order No. 93, the FIRB has been given the
prerogative to "restore tax and/or duty exemptions withdrawn
hereunder in whole or in part," 13 and "impose conditions for ... tax
and/or duty exemption" 14 is of no moment. These provisions are
prospective in character and can not affect the Board's past acts.
The Court is aware that in its preamble, Executive Order No. 93 states:
WHEREAS, a number of affected entities, government and private were
able to get back their tax and duty exemption privileges through the
review mechanism implemented by the Fiscal Incentives Review Board
(FIRB); 15but by no means can we say that it has "ratified" the acts of
FIRB. It is to misinterpret the scope of FIRB's powers under Presidential
Decree No. 776 to say that it has. Apart from that, Section 2 of the
Executive Order was clearly intended to amend Presidential Decree No.
776, which means, mutatis mutandis, that FIRB did not have the right,
in the first place, to grant tax exemptions or withdraw existing ones.
Does Executive Order No. 93 constitute an unlawful delegation of
legislative power? It is to be stressed that the provincial government of
Albay admits that as of March 10, 1987 (the date Resolution No. 17-87
was affirmed by the Memorandum of the Office of the President, dated
October 5, 1987), NAPOCOR's exemption had been validly restored.
What it questions is NAPOCOR's liability in the interregnum between
June 11, 1984, the date its tax privileges were withdrawn, and March
10, 1987, the date they were purportedly restored. To be sure, it
objects to Executive Order No. 93 as alledgedly a delegation of
legislative power, but only insofar as its (NAPOCOR's) June 11, 1984 to
March 10, 1987 tax accumulation is concerned. We therefore leave the
issue of "delegation" to the future and its constitutionality when the

proper case arises. For the nonce, we leave Executive Order No. 93
alone, and so also, its validity as far as it grants tax exemptions (through
the FIRB) beginning December 17, 1986, the date of its promulgation.
NAPOCOR must then be held liable for the intervening years aforesaid.
So it has been held:
xxx xxx xxx
The last issue to be resolved is whether or not the privaterespondent is liable for the fixed and deficiency percentage
taxes in the amount of P3,025.96 (i.e. for the period from
January 1, 1946 to February 29, 1948) before the approval of
its municipal franchises. As aforestated, the franchises were
approved by the President only on February 24,1948.
Therefore, before the said date, the private respondent was
liable for the payment of percentage and fixed taxes as
seller of light, heat, and power which, as the petitioner
claims, amounted to P3,025.96. The legislative franchise
(R.A. No. 3843) exempted the grantee from all kinds of taxes
other than the 2% tax from the date the original franchise
was granted. The exemption, therefore, did not cover the
period before the franchise was granted, i.e. before
February 24, 1948. ... 16
Actually, the State has no reason to decry the taxation of NAPOCOR's
properties, as and by way of real property taxes. Real property taxes,
after all, form part and parcel of the financing apparatus of the
Government in development and nation-building, particularly in the
local government level, Thus:
SEC. 86. Distribution of proceeds. (a) The proceeds of the
real property tax, except as otherwise provided in this Code,
shall accrue to the province, city or municipality where the

property subject to the tax is situated and shall be applied

by the respective local government unit for its own use and
benefit.
(b) Barrio shares in real property tax collections. The
annual shares of the barrios in real property tax collections
shall be as follows:
(1) Five per cent of the real property tax collections of the
province and another five percent of the collections of the
municipality shall accrue to the barrio where the property
subject to the tax is situated.
(2) In the case of the city, ten per cent of the collections of
the tax shag likewise accrue to the barrio where the
property is situated.
Thirty per cent of the barrio shares herein referred to may be spent for
salaries or per diems of the barrio officials and other administrative
expenses, while the remaining seventy per cent shall be utilized for
development projects approved by the Secretary of Local Government
and Community Development or by such committee created, or
representatives designated, by him.
SEC. 87. Application of proceeds. (a) The proceeds of the
real property tax pertaining to the city and to the
municipality shall accrue entirely to their respective general
funds. In the case of the province, one-fourth thereof shall
accrue to its road and bridge fund and the remaining threefourths, to its general fund.
(b) The entire proceeds of the additional one per cent real
property tax levied for the Special Education Fund created
under R.A. No. 5447 collected in the province or city on real

property situated in their respective territorial jurisdictions

shall be distributed as follows:
(1) Collections in the provinces: Fifty per cent shall accrue to
the municipality where the property subject to the tax is
situated; twenty per cent shall accrue to the province; and
thirty per cent shall be remitted to the Treasurer of the
Philippines to be expended exclusively for stabilizing the
Special Education Fund in municipalities, cities and provinces
in accordance with the provisions of Section seven of R.A.
No. 5447.
(2) Collections in the cities: Sixty per cent shall be retained
by the city; and forty per cent shall be remitted to the
Treasurer of the Philippines to be expended exclusively for
stabilizing the special education fund in municipalities, cities
and provinces as provided under Section 7 of R.A. No. 5447.
However, any increase in the shares of provinces,
cities and municipalities from said additional tax
accruing to their respective local school boards
commencing with fiscal year 1973-74 over what
has been actually realized during the fiscal year
1971-72 which, for purposes of this Code, shall
remain as the based year, shall be divided equally
between the general fund and the special
education fund of the local government units
concerned. The Secretary of Finance may,
however, at his discretion, increase to not more
than seventy-five per cent the amount that shall
accrue annually to the local general fund.
(c) The proceeds of all delinquent taxes and penalties, as
well as the income realized from the use, lease or other

disposition of real property acquired by the province or city

at a public auction in accordance with the provisions of this
Code, and the proceeds of the sale of the delinquent real
property or, of the redemption thereof shall accrue to the
province, city or municipality in the same manner and
proportion as if the tax or taxes had been paid in regular
course.
(d) The proceeds of the additional real property tax on Idle
private lands shall accrue to the respective general funds of
the province, city and municipality where the land subject to
the tax is situated. 17
To all intents and purposes, real property taxes are funds taken by the
State with one hand and given to the other. In no measure can the
Government be said to have lost anything.
As a rule finally, claims of tax exemption are construed strongly against
the claimant. 18 They must also be shown to exist clearly and
categorically, and supported by clear legal provisions. 19
Taxes are the lifeblood of the nation. 20 Their primary purpose is to
generate funds for the State to finance the needs of the citizenry and to
advance the common weal.
WHEREFORE, the petition is DENIED. No costs. The auction sale of the
petitioner's properties to answer for real estate taxes accumulated
between June 11, 1984 through March 10, 1987 is hereby declared
valid.
SO ORDERED.

G.R. No. L-58897 December 3, 1987

LUZON STEVEDORING CORPORATION, petitioner,

vs.
COURT OF APPEALS, HIJOS DE F. ESCANO, INC., and DOMESTIC
INSURANCE COMPANY OF THE PHILIPPINES, respondents.

GANCAYCO, J.:
On May 30, 1968 at past 6:00 in the morning a maritime collision
occurred within the vicinity of the entrance to the North Harbor, Manila
between the tanker LSCO "Cavite" owned by Luzon Stevedoring
Corporation and MV "Fernando Escano" a passenger ship owned by
Hijos de F. Escano, Inc. as a result of which said passenger ship sunk. An
action in admiralty was filed by Hijos de F. Escano, Inc. and Domestic
Insurance Company of the Philippines against the Luzon Stevedoring
Company (LSC) in the Court of First Instance of Cebu. In the course of
the trial, the trial court appointed two commissioners representing the
plaintiffs and defendant to determine the value of the LSCO "CAVITE."
Said commissioners found the value thereof to be P180,000.00.
After trial on the merits, a decision was rendered on January 24, 1974
finding that LSCO "Cavite" was solely to blame for the collision, thus its
dispositive portion reads as follows:
WHEREFORE, based on all the foregoing considerations, the
Court renders judgment in favor of the plaintiffs and against
the defendant ordering the latter to pay to the plaintiff
Domestic Insurance Company of the Philippines the sum of
P514,000.00, and to the plaintiff Hijos de F. Escano, Inc. the
sum of P68,819.00, with interest on both sums at the legal
rate, from the date the complaint was filed and the further
sum of P252,346.70, with interest at the legal rate from
August 7, 1972 and the sum of P163,721.91, without

interest in trust for, and with direction that it pay the same
to, the claimants concerned.
With costs against the defendant. 1
In the penultimate paragraph of the decision the trial court held:
With respect to the defense that defendant's liability is
limited to the value of the LSCO "Cavite" and freight earned,
invoking Art. 837 of the Code of Commerce, the Court
believes and so holds that the defense has not been
established. Moreover, the evidence is such that in principle
Art. 837 does not apply here. The counterclaim of the
defendant is likewise ordered dismissed for lack of merit. 2
Not satisfied therewith the defendant interposed an appeal therefrom
to the Court of Appeals wherein in due course a decision was rendered
on June 30, 1981 affirming the decision of the court a quo in toto with
costs against appellant. The motion for reconsideration filed by the
defendant of the decision was denied in a resolution of the Court of
Appeals of November 7, 1981. Hence said defendant filed a petition for
certiorari in this Court based on the following grounds:
I
THE LOWER COURT ERRED IN FINDING THAT THE LSCO
"CAVITE" WAS THE VESSEL AT FAULT IN THE COLLISION.
II
THE LOWER COURT ERRED IN NOT FINDING THAT THE
COLLISION BETWEEN THE M/V "FERNANDO ESCANO" AND
THE LSCO "CAVITE" WAS DUE SOLELY AND EXCLUSIVELY TO
THE FAULT, NEGLIGENCE AND LACK OF SKILL OF THE
MASTER OF THE FORMER VESSEL.

III
THE LOWER COURT ERRED IN NOT RULING THAT THE CIVIL
LIABILITY OF THE PETITIONER, IF ANY THERE BE, SHOULD BE
LIMITED TO THE VALUE OF THE LSCO "CAVITE" WITH ALL ITS
APPURTENANCES AND FREIGHT- AGE WHEN THE COLLISION
TOOK PLACE. 3
In a resolution of February 26, 1982 this Court denied the petition for
lack of merit.
A motion for reconsideration of said resolution was filed by petitioner
limiting the issue to the legal question of whether under Art. 837 of the
Code of Commerce abandonment of vessel at fault is necessary in order
that the liability of owner of said vessel shall be limited only to the
extent of the value thereof, its appurtenances and freightage earned in
the voyage. After respondents submitted their comment to the motion
as required, on September 29, 1982 this Court denied the motion for
reconsideration for lack of merit.
With leave of court petitioner filed a second motion for reconsideration
of said resolution raising the following issues:
1. Whether abandonment is required under Article 837 of
the Code of Commerce. The decisions of this Honorable
Court cited by the parties in support of their respective
positions only imply the answer to the question, and the
implied answers are contradictory.
2. If abandonment is required under Article 837 of the Code
of Commerce, when should it be made? The Code of
Commerce is silent on the matter. The decision of this
Honorable Court in Yangco v. Laserna, 13 Phil. 330, left the

question open and no other decision, as far as petitioner can

ascertain, has resolved the question.
3. Is the decision of this Honorable Court in Manila
Steamship Co., Inc. v. Abdulhama,n 100 Phil. 32, wherein it
was held that "(t)he international rule to the effect that the
right of abandonment of vessels, as a legal station of a
shipowner's own fault," invoked by private respondents and
apparently a major consideration in the denial of the motion
for reconsideration, applicable to petitioner under the
circumstances of the case at bar? 4
The respondents were required to comment thereto and after said
comment was submitted petitioners submitted a reply thereto to which
the respondents filed a rejoinder.
On November 28, 1983, the Court gave due course to the petition for
review and considered the respondents' comment thereto as the
Answer. The parties were required to file their briefs. Both parties
having filed their briefs the case is now submitted for decision.
Articles 587, 590, and 837 of the Code of Commerce provide as follows:
ART. 587. The ship agent shall also be civilly liable for the
indemnities in favor of third persons which arise from the
conduct of the captain in the vigilance over the goods which
the vessel carried; but he may exempt himself therefrom by
abandoning the vessel with all her equipment and the
freight he may have earned during the voyage.
xxx xxx xxx
ART. 590. The co-owners of the vessel shall be civilly liable in
the proportion of their contribution to the common fund for

the results of the acts of the captain, referred to in Article

587.
Each co-owner may exempt himself from this liability by the
abandonment, before a notary, of that part of the vessel
belonging to him.
xxx xxx xxx
ART. 837. The civil liability incurred by the shipowners in the
cases prescribed in this section, shall be understood as
limited to the value of the vessel with all her appurtenances
and freight earned during the voyage. 5
In the case of Philippine Shipping Company vs. Garcia, 6 which is an
action for damages instituted by the Philippine Shipping Company for
the loss of Steamship "Ntra. Sra. de Lourdes" as a result of the collision
with the Steamship "Navarra" of Garcia, it was found that the "Navarra"
was responsible for the collision. The claim of the Philippine Shipping is
that the defendant should pay P18,000.00, the value of the "Navarro"
at the time of its loss, in accordance with the provision of Article 837 of
the Code of Commerce, and that it was immaterial that the "Navarro"
had been entirely lost provided the value could be ascertained since the
extent of liability of the owner of the colliding vessel resulting from the
collision is to be determined by its value.
This Court speaking through the then Chief Justice Arellano held:
Article 837 of the Code of Commerce provides: "The civil
liability contracted by the shipowners in the cases
prescribed in this section shall be understood as limited to
the value of the vessel with all her equipment and all the
freight money earned during the voyage "

"This section is a necessary consequence of the right to

abandon the vessel given to the shipowner in article 587 of
the code, and it is one of the many superfluities contained in
the code." (Lorenzo Benito, "Lecciones," 352.)
ART. 587. The agent shall also be civilly liable for the
indemnities in favor of third persons which arise from the
conduct of the captain in the care of the goods which the
vessel carried but he may exempt himself therefrom by
abandoning the vessel with all her equipments and the
freight he may have earned during the trip.
ART. 590. The part owners of a vessel shall be civilly liable, in
the proportion of their contribution to the common fund,
for the results of the acts of the captain referred to in Article
587. Each part owner may exempt himself from this liability
by the abandonment, before a notary, of the part of the
vessel belonging to him.
The "Exposicion de motivos" of the Code of Commerce
contains the following: "The present code (1829) does not
determine the juridical status of the agent where such agent
is not himself the owner of the vessel. This omission is
supplied by the proposed code, which provides in
accordance with the principles of maritime law that by agent
it is to be understood the person intrusted with the
provisioning of the vessel, or the one who represents her in
the port in which she happens to be. This person is the only
one who represents the vessel that is to say, the only one
who represents the interests of the owner of the vessel. This
provision has therefore cleared the doubt which existed as
to the extent of the liability, both of the agent and of the
owner of the vessel. Such liability is limited by the proposed

code to the value of the vessel and other things appertaining

thereto."
There is no doubt that if the Navarro had not been entirely
lost, the agent, having been held liable for the negligence of
the captain of the vessel could have abandoned her with all
her equipment and the freight money earned during the
voyage, thus bringing himself within the provisions of article
837 in so far as the subsidiary civil liability is concerned This
abandonment which would have amounted to an offer of
the value of the vessel, of her equipment, and freight money
earned could not have been refused, and the agent could
not have been personally compelled, under such
circumstances, to pay the 18,000 pesos, the estimated value
of the vessel at the time of the collision.
This is the difference which exists between the lawful acts
and lawful obligations of the captain and the liability which
he incurs on account of any unlawful act committed by him.
In the first case, the lawful acts and obligations of the
captain beneficial to the vessel may be enforced as against
the agent for the reason that such obligations arise from the
contract of agency (provided, however, that the captain
does not exceed his authority), while as to any liability
incurred by the captain through his unlawful acts, the ship
agent is simply subsidiarily civilly liable. This liability of the
agent is limited to the vessel and it does not extend further.
For this reason the Code of Commerce makes the agent
liable to the extent of the value of the vessel, as the codes of
the principal maritime nations provide, with the vessel, and
not individually. Such is also the spirit of our code.

The spirit of our code is accurately set forth in a treatise on

maritime law, from which we deem proper to quote the
following as the basis of this decision:
That which distinguishes the maritime from the civil law and
even from the mercantile law in general is the real and
hypothecary nature of the former, and the many securities
of a real nature that maritime customs from time
immemorial the laws, the codes, and the later
jurisprudence, have provided for the protection of the
various and conflicting interests which are ventured and
risked in maritime expeditions, such as the interests of the
vessel and of the agent, those of the owners of the cargo
and consignees, those who salvage the ship, those who
make loans upon the cargo, those of the sailors and
members of the crew as to their wages, and those of a
constructor as to repairs made to the vessel.
As evidence of this "real" nature of the maritime law we
have (1) the limitation of the liability of the agents to the
actual value of the vessel and the freight money, and (2) the
right to retain the cargo and the embargo and detention of
the vessel even in cases where the ordinary civil law would
not allow more than a personal action against the debtor or
person liable. It will be observed that these rights are
correlative, and naturally so, because if the agent can
exempt himself from liability by abandoning the vessel and
freight money, thus avoiding the possibility of risking his
whole fortune in the business, it is also just that his maritime
creditor may for any reason attach the vessel itself to secure
his claim without waiting for a settlement of his rights by a
final judgment, even to the prejudice of a third person.

This repeals the civil law to such an extent that, in certain

cases, where the mortgaged property is lost no personal
action lies against the owner or agent of the vessel. For
instance, where the' vessel is lost the sailors and members
of the crew can not recover their wages; in case of collision,
the liability of the agent is limited as aforesaid, and in case
of shipwreck, those who loan their money on the vessel and
cargo lose all their rights and can not claim reimbursement
under the law.
There are two reasons why it is impossible to do away with
these privileges, to wit: (1) The risk to which the thing is
exposed, and (2) the "real" nature of the maritime law,
exclusively "real," according to which the liability of the
parties is limited to a thing which is at the mercy of the
waves. If the agent is only liable with the vessel and freight
money and both may be lost through the accidents of
navigation it is only just that the maritime creditor have
some means of obviating this precarious nature of his rights
by detaining the ship, his only security, before it is lost.
The liens tacit or legal, which may exist upon the vessel and
which a purchaser of the same would be obliged to respect
and recognize are in addition to those existing in favor of
the State by virtue of the privileges which are granted to it
by all the laws pilot, tonnage, and port dues and other
similar charges, the wages of the crew earned during the last
voyage as provided in article 646 of the Code of Commerce,
salvage dues under article 842, the indemnification due to
the captain of the vessel in case his contract is terminated
on account of the voluntary sale of the ship and the
insolvency of the owner as provided in article 608, and all

other liabilities arising from collisions under Articles 837 and

838.' (Madariaga pp. 60, 62, 63, 85.
We accordingly hold that the defendant is liable for the
indemnification to which the plaintiff is entitled by reason of
the collision but he is not required to pay such
indemnification for the reason that the obligation thus
incurred has been extinguished on account of the loss of the
thing bound for the payment thereof and in this respect the
judgment of the court below is affirmed except in so far as it
requires the plaintiff to pay the costs of this action, which is
not exactly proper. No special order is made as to costs of
this appeal. After the expiration of twenty days let judgment
be entered in accordance herewith and ten days thereafter
the record be remanded to the Court of First Instance for
execution. So ordered. 7
From the foregoing the rule is that in the case of collision,
abandonment of the vessel is necessary in order to limit the liability of
the shipowner or the agent to the value of the vessel, its appurtenances
and freightage earned in the voyage in accordance with Article 837 of
the Code of Commerce. The only instance where such abandonment is
dispensed with is when the vessel was entirely lost. In such case, the
obligation is thereby extinguished.
In the case of Government of the Philippines vs. Maritime this Court
citing Philippine Shipping stated the exception thereto in that while
"the total destruction of the vessel extinguishes a maritime lien, as
there is no longer any risk to which it can attach, but the total
destruction of the vessel does not affect the liability of the owner for
repairs of the vessel completed before its loss, 8 interpreting the
provision of Article 591 of the Code of Commerce in relation with the
other Articles of the same Code.

In Ohta Development Company vs. Steamship "Pompey" 9 it appears

that at the pier sunk and the merchandise was lost due to the fault of
the steamship "Pompey" that was then docked at said pier. This Court
ruled that the liability of the owner of "Pompey" may not be limited to
its value under Article 587 of the Code of Commerce as there was no
abandonment of the ship. We also held that Article 837 cannot apply as
it refers to collisions which is not the case here. 10
In the case of Guison vs. Philippine Shipping Company 11 involving the
collision at the mouth of the Pasig river between the motor launches
Martha and Manila H in which the latter was found to be at fault, this
Court, applying Article 837 of the Code of Commerce limited the
liability of the agent to its value.
In the case of Yangco vs. Laserna 12 which involved the steamers SS
"Negros" belonging to Yangco which after two hours of sailing from
Romblon to Manila encountered rough seas as a result of which it
capsized such that many of its passengers died in the mishap, several
actions for damages were filed against Yangco, by a verified pleading,
he sought to abandon the vessel to the plaintiffs in the three cases
together with all the equipment without prejudice to the right to
appeal. This Court in resolving the issue held as follows:
Brushing aside the incidental issues, the fundamental
question here raised is: May the shipowner or agent,
notwithstanding the total loss of the vessel as a result of the
negligence of its captain, be properly held liable in damages
for the consequent death of its passengers? We are of the
opinion and so hold that this question is controlled by the
provision of article 587 of the Code of Commerce. Said
article reads:
The agent shall also be civilly liable for the indemnities in
favor of third persons which arise from the conduct of the

captain in the. care of the goods which the vessel carried;

but he may exempt himself therefrom by abandoning the
vessel with all her equipments and the freight he may have
earned during the voyage.
The provision accords a shipowner or agent the right of
abandonment; and by necessary implication, his liability is
confined to that which he is entitled as of right to -abandon
"the vessel with all her equipments and the freight it may
have earned during the voyage." It is true that the article
apears to deal only with the limited liability of shipowners or
agents for damages arising from the misconduct of the
captain in the care of the goods which the vessel carries, but
this is a mere deficiency of language and in no way indicates
the true extent of such liability. The consensus of authorities
is to the effect that notwithstanding the language of the
afore-quoted provision, the benefit of limited liability
therein provided for, applies in all cases wherein the
shipowner or agent may properly be held liable for the
negligent or illicit acts of the captain. Dr. Jose Ma. Gonzalez
de Echavarri y Vivanco commenting on said article, said:
La letra del Codigo, en el articulo 587, presenta una
gravisima cuestion. El derecho de abandono, si se atiende a
lo escrito, solo se refiere a las indemnizaciones a que diere
lugar la conducta del Capitan en la custodia de los efectos
que cargo en el buque.
Es ese el espiritu del legislador? No; habra derecho de
abandono en las responsabilidades nacidas de obligaciones
contraidas por el Capitan y de otros actos de este? Lo
reputamos evidente y, para fortalecer nuestra opinion, basta
copiar el siguiente parrafo de la Exposicion de motivos:

El proyecto, al aplicar estos principios, se inspira tambien en

los intereses del comercio maritimo que quedaran mas
asegurados ofreciendo a todo el que contrata con el naviero
o Capitan del buque, la garantia real del mismo,
cualesquiera que sean las facultades o atribuciones de que
se hallen investidos; (Echavarri, Codigo de Comercio, Tomo
4, 2. ed., pags. 483- 484.)
A cursory examination will disclose that the principle of
limited liability of a shipowner or agent is provided for in but
three articles of the Code of Commerce Article 587
aforequoted and articles 590 and 837. Article 590 merely
reiterates the principle embodied in article 587, where the
vessel is owned by several person Article 837 applies the
same principle in cases of collision and it has been observed
that said article is but 'a necessary consequence of the right
to abandon the vessel given to the shipowner in Article 587
to the Code, and it is one of the many superfluities contained
in the Code. (Lorenzo Benito, Lecciones 352, quoted in
Philippine Shipping Co. vs. Garcia, 6 Phil. 281, 282.) In effect
therefore, only Articles 587 and 590 are the provisions
contained in our Code of Commerce on the matter, and the
framers of said code had intended those provisions to
embody the universal principle of limited liability in all cases.
... . 13
In the said case We invoked our ruling in Philippine Shipping and
concluded as follows:
In the light of all the foregoing, we therefore hold that if the
shipowner or agent may in any way be held civilly liable at
all for injury to or death of passengers arising from the
negligence of the captain in cases of collisions or shipwrecks,
his liability is merely coextensive with his interest in the

vessel such that a total loss thereof results in its extinction.

In arriving at this conclusion, we have not been unmindful of
the fact that the ill-fated steamship Negros, as a vessel
engaged in interisland trade, is a common carrier (De Villata
v. Stanely 32 Phil. 541), and that the relationship between
the petitioner and the passengers who died in the mishap
rests on a contract of carriage. But assuming that petitioner
is liable for a breach of contract of carriage, the exclusively
"real and hypothecary nature" of maritime law operates to
limit such liability to the value of the vessel, or to the
insurance thereon, if any. In the instant case it does not
appear that the vessel was insured.
Whether the abandonment of the vessel sought by the
petitioner in the instant case was in accordance with law or
not, is immaterial The vessel having totally perished any act
of abandonment would be an Idle ceremony. 14
In the case of Abueg vs. San Diego,15 which involves a claim of
compensation under the Workmen's Compensation Act for the
deceased members of the crew of the MS "San Diego II" and MS
"Bartolome" which were caught by a typhoon in the vicinity of Mindoro
Island and as a consequence of which they were sunk and totally lost,
this Court held as follows:
Counsel for the appellant cite article 7837 of the Code of
Commerce which provides that if the vessel together with all
her tackle and freight money earned during the voyage are
abandoned, the agent's liability to third persons for tortious
acts of the captain in the care of the goods which the ship
carried is extinguished (Yangco vs. Laserna, 73 Phil. 330)
Article 937 of the same Code which provides that in cases of
collision, the shipowners' liability is limited to the value of
the vessel with all her equipment and freight earned during

the voyage (Philippine Shipping Company vs. Garcia, 6 Phil.

281); and Article 643 of the same Code which provides that
if the vessel and freight are totally lost, the agent's liability
for wages of the crew is extinguished. From these premises
counsel draw the conclusion that appellant's liability, as
owner of the two motor ships lost or sunk as a result of the
typhoon that lashed the island of Mindoro on October 1,
1941, was extinguished.
The real and hypothecary nature of the liability of the
shipowner or agent embodied in the provisions of the
Maritime Law, Book III, Code of Commerce, had its origin in
the prevailing conditions of the maritime trade and sea
voyages during the medieval ages, attended by innumerable
hazards and perils. To offset against these adverse
conditions and to encourage shipbuilding and maritime
commerce, it was deemed necessary to confine the liability
of the owner or agent arising from the operation of a ship to
the vessel equipment, and freight, or insurance, if any, so
that if the shipowner or agent abandoned the ship,
equipment, and freight, his liability was extinguished
But the provisions of the Code of Commerce invoked by
appellant have no room in the application of the Workmen's
Compensation Act which seeks to improve, and aims at the
amelioration of, the condition of laborers and employees. It
is not the liability for the damage or loss of the cargo or
injury to, or death of, a passenger by or through the
misconduct of the captain or master of the ship; nor the
liability for the loss of the ship as a result of collision; nor the
responsibility for wages of the crew, but a liability created by
a statute to compensate employees and laborers in cases of
injury received by or inflicted upon them, while engaged in

the performance of their work or employment, or the heirs

and dependents of such laborers and employees in the
event of death caused by their employment.Such
compensation has nothing to do with the provisions of the
Code of Commerce regarding maritime commerce. It is an
item in the cost of production which must be included in the
budget of any well managed industry.
Appellant's assertion that in the case of Enciso vs. Dy-Liaco
(57 Phil. 446), and Murillo vs. Mendoza (66 Phil. 689), the
question of the extinction of the shipowner's liability due to
abandonment of the ship by him was not fully discussed, as
in the case of Yangco vs. Laserna, supra, is not entirely
correct. In the last mentioned case, the limitation of the
shipowner's liability to the value of the ship, equipment,
freight, and insurance, if any, was the lis mota In the case of
Enciso vs. Dy-Liaco, supra, the application of the Workmen's
Compensation Act to a master or patron who perished as a
result of the sinking of the motorboat of which he was the
master, was the controversy submitted to the court for
decision. This Court held in that case that .It has been
repeatedly stated that the Workmen's Compensation Act
was enacted to abrogate the common law and our Civil Code
upon culpable acts and omissions, and that the employer
need not be guilty of neglect or fault in order that
responsibility may attach to him' (pp. 449-450); and that the
shipowner was liable to pay compensation provided for in
the Workmen's Compensation Act, notwithstanding the fact
that the motorboat was totally lost. In the case of Murillo vs.
Mendoza, supra, this Court held that 'The rights and
responsibilities defined in said Act must be governed by its
own peculiar provisions in complete disregard of other
similar provisions of the Civil as well as the mercantile law. If

an accident is compensable under the Workmen's

Compensation Act, it must be compensated even when the
workman's right is not recognized by or is in conflict with
other provisions of the Civil Code or of the Code of
Commerce. The reason behind this principle is that the
Workmen's Compensation Act was enacted by the
Legislature in abrogation of the other existing laws.' This
quoted part of the decision is in answer to the contention
that it was not the intention of the Legislature to repeal
Articles 643 and 837 of the Code of Commerce with the
enactment of the Workmen's Compensation Act. 16
In said case the Court reiterated that the liability of the shipowner or
agent under the provision of Articles 587 and 837 of the Code of
Commerce is limited to the value of the vessel with all her equivalent
and freight earned during the voyage if the shipowner or agent
abandoned the ship with all the equipment and freight. However, it
does not apply to the liability under the Workmen's Compensation Act
where even as in said case the vessel was lost the liability thereunder is
still enforceable against the employer or shipowner.
The case of Manila Steamship Company, Inc. vs. Insa Abdulhaman and
Lim Hong To 17 is a case of collision of the ML "Consuelo V" and MS
"Bowline Knot" as a result of which the ML "Consuelo V" capsized and
was lost where nine (9) passengers died or were missing and all its
cargoes were lost. In the action for damages arising from the collision,
applying Article 837 of the Code of Commerce, this Court held that in
such case where the collision was imputable to both of them, each
vessel shall suffer her own damages and both shall be solidarily liable
for the damages occasioned to their cargoes.18 Thus, We held:
In fact, it is a general principle, well established maritime
law and custom, that shipowners and ship agents are civilly
liable for the acts of the captain (Code of Commerce, Article

586) and for the indemnities due the third persons (Article
587); so that injured parties may immediately look for
reimbursement to the owner of the ship, it being universally
recognized that the ship master or captain is primarily the
representative of the owner (Standard Oil Co. vs. Lopez
Castelo, 42 Phil. 256, 260).This direct liability, moderated
and limited by the owner's right of abandonment of the
vessel and earned freight (Article 587) has been declared to
exist not only in case of breached contracts, but also in cases
of tortious negligence (Yu Biao Sontua vs. Osorio, 43 Phil.
511; 515):
xxx xxx xxx
It is easy to see that to admit the defense of due diligence of
a bonus paterfamilias (in the selection and vigilance of the
officers and crew) as exempting the shipowner from any
liability for their faults, would render nugatory the solidary
liability established by Article 827 of the Code of Commerce
for the greater protection of injured parties. Shipowners
would be able to escape liability in practically every case,
considering that the qualifications and licensing of ship
masters and officers are determined by the State, and that
vigilance is practically impossible to exercise over officers
and crew of vessels at sea. To compel the parties prejudiced
to look to the crew for indemnity and redress would be an
illusory remedy for almost always its members. are, from
captains down, mere wage earners.
We, therefore, find no reversible error in the refusal of the
Court of Appeals to consider the defense of the Manila
Steamship Co., that it is exempt from liability for the
collision with the M L "Consuelo V " due to the absence of

negligence on its part in the selection and supervision of the

officers and crew of the M/S "Bowline Knot. 19
However, insofar as respondent Lim Hong To, owner of M L "Consuelo
V" who admittedly employed an unlicensed master and engineer and
who in his application for permission to operate expressly assumed full
risk and responsibility thereby (Exh. 2) this Court held that the liability
of Lim Hong To cannot be limited to the value of his motor launch by
abandonment of the vessel as invoked in Article 587 of the Code of
Commerce, We said:
The international rule is to the effect that the right of
abandonment of vessels, as a legal limitation of a
shipowner's liability, does not apply to cases where the injury
or the average is due to shipowner's own fault. Farina
(Derecho Commercial Maritima Vol. 1, pp. 122-123), on the
authority of judicial precedents from various nations, sets
the rule to be as follows:
xxx xxx xxx 20
From the foregoing, it is clear that in case of collision of vessels, in
order to avail of the benefits of Article 837 of the Code of Commerce
the shipowner or agent must abandon the vessel. In such case the civil
liability shall be limited to the value of the vessel with all the
appurtenances and freight earned during the voyage. However, where
the injury or average is due to the ship-owner's fault as in said case, the
shipowner may not avail of his right to limited liability by abandoning
the vessel.
We reiterate what We said in previous decisions that the real and
hypothecary nature of the liability of the shipowner or agent is
embodied in the provisions of the Maritime Law, Book III, Code of
Commerce. 21 Articles 587, 590 and 837 of the same code are precisely

intended to limit the liability of the shipowner or agent to the value of

the vessel, its appurtenances and freightage earned in the voyage,
provided that owner or agent abandons the vessel. Although it is not
specifically provided for in Article 837 of the same code that in case of
collision there should be such abandonment to enjoy such limited
liability, said article on collision of vessels is a mere amplification of the
provisions of Articles 587 and 590 of same code where abandonment of
the vessel is a pre-condition. Even without said article, the parties may
avail of the provisions of Articles 587 and 590 of same code in case of
collision. This is the reason why Article 837 of the same code is
considered a superfluity. 22
Hence the rule is that in case of collision there should be abandonment
of the vessel by the shipowner or agent in order to enjoy the limited
liability provided for under said Article 837.
The exception to this rule is when the vessel is totally lost in which case
there is no vessel to abandon so abandonment is not required. Because
of such total loss the liability of the shipowner or agent for damages is
extinguished. Nevertheless, the shipowner or agent is personally liable
for claims under the Workmen's Compensation Act and for repairs of
the vessel before its loss. 23
In case of illegal or tortious acts of the captain the liability of the
shipowner and agent is subsidiary. In such instance the shipowner or
agent may avail of the provisions of Article 837 of the Code by
abandoning the vessel.24
However, if the injury or damage is caused by the shipowner's fault as
where he engages the services of an inexperienced and unlicensed
captain or engineer, he cannot avail of the provisions of Article 837 of
the Code by abandoning the vessel. 25 He is personally liable for the
damages arising thereby.

In the case now before the Court there is no question that the action
arose from a collision and the fault is laid at the doorstep of LSCO
"Cavite" of petitioner. Undeniably petitioner has not abandoned the
vessel. Hence petitioner can not invoke the benefit of the provisions of
Article 837 of the Code of Commerce to limit its liability to the value of
the vessel, all the appurtenances and freightage earned during the
voyage.
In the light of the foregoing conclusion, the issue as to when
abandonment should be made need not be resolved.
WHEREFORE, the petition is DENIED with costs against petitioner.
SO ORDERED.

G.R. No. L-30232 July 29, 1988

LUZON STEVEDORING CORPORATION, petitioner-appellant,
vs.
COURT OF TAX APPEALS and the HONORABLE COMMISSIONER OF
INTERNAL REVENUE, respondents-appellees.
H. San Luis & V.L. Simbulan for petitioner-appellant.

PARAS, J.:
This is a petition for review of the October 21, 1968 Decision * of the
Court of Tax Appeals in CTA Case No. 1484, "Luzon Stevedoring
Corporation v. Hon. Ramon Oben, Commissioner, Bureau of Internal
Revenue", denying the various claims for tax refund; and the February
20, 1969 Resolution of the same court denying the motion for
reconsideration.

Herein petitioner-appellant, in 1961 and 1962, for the repair and

maintenance of its tugboats, imported various engine parts and other
equipment for which it paid, under protest, the assessed compensating
tax. Unable to secure a tax refund from the Commissioner of Internal
Revenue, on January 2, 1964, it filed a Petition for Review (Rollo, pp.
14-18) with the Court of Tax Appeals, docketed therein as CTA Case No.
1484, praying among others, that it be granted the refund of the
amount of P33,442.13. The Court of Tax Appeals, however, in a
Decision dated October 21, 1969 (Ibid., pp. 22-27), denied the various
claims for tax refund. The decretal portion of the said decision reads:
WHEREFORE, finding petitioner's various claims for refund
amounting to P33,442.13 without sufficient legal
justification, the said claims have to be, as they are hereby,
denied. With costs against petitioner.
On January 24, 1969, petitioner-appellant filed a Motion for
Reconsideration (Ibid., pp. 28-34), but the same was denied in a
Resolution dated February 20, 1969 (Ibid., p. 35). Hence, the instant
petition.
This Court, in a Resolution dated March 13, 1969, gave due course to
the petition (Ibid., p. 40). Petitioner-appellant raised three (3)
assignments of error, to wit:
I
The lower court erred in holding that the petitionerappellant is engaged in business as stevedore, the work of
unloading and loading of a vessel in port, contrary to the
evidence on record.
II

The lower court erred in not holding that the business in

which petitioner-appellant is engaged, is part and parcel of
the shipping industry.
III
The lower court erred in not allowing the refund sought by
petitioner-appellant.
The instant petition is without merit.
The pivotal issue in this case is whether or not petitioner's tugboats"
can be interpreted to be included in the term "cargo vessels" for
purposes of the tax exemption provided for in Section 190 of the
National Internal Revenue Code, as amended by Republic Act No. 3176.
Said law provides:
Sec. 190. Compensating tax. ... And Provided further, That
the tax imposed in this section shall not apply to articles to
be used by the importer himself in the manufacture or
preparation of articles subject to specific tax or those for
consignment abroad and are to form part thereof or to
articles to be used by the importer himself as passenger
and/or cargo vessel, whether coastwise or oceangoing,
including engines and spare parts of said vessel. ....
Petitioner contends that tugboats are embraced and included in the
term cargo vessel under the tax exemption provisions of Section 190 of
the Revenue Code, as amended by Republic Act. No. 3176. He argues
that in legal contemplation, the tugboat and a barge loaded with
cargoes with the former towing the latter for loading and unloading of
a vessel in part, constitute a single vessel. Accordingly, it concludes that
the engines, spare parts and equipment imported by it and used in the

repair and maintenance of its tugboats are exempt from compensating

tax (Rollo, p. 23).
On the other hand, respondents-appellees counter that petitionerappellant's "tugboats" are not "Cargo vessel" because they are neither
designed nor used for carrying and/or transporting persons or goods by
themselves but are mainly employed for towing and pulling purposes.
As such, it cannot be claimed that the tugboats in question are used in
carrying and transporting passengers or cargoes as a common carrier by
water, either coastwise or oceangoing and, therefore, not within the
purview of Section 190 of the Tax Code, as amended by Republic Act
No. 3176 (Brief for Respondents-Appellees, pp. 45).
This Court has laid down the rule that "as the power of taxation is a
high prerogative of sovereignty, the relinquishment is never presumed
and any reduction or dimunition thereof with respect to its mode or its
rate, must be strictly construed, and the same must be coached in clear
and unmistakable terms in order that it may be applied." (84 C.J.S. pp.
659-800), More specifically stated, the general rule is that any claim for
exemption from the tax statute should be strictly construed against the
taxpayer (Acting Commissioner of Customs v. Manila Electric Co. et al.,
69 SCRA 469 [1977] and Commissioner of Internal Revenue v. P.J.
Kiener Co. Ltd., et al., 65 SCRA 142 [1975]).
As correctly analyzed by the Court of Tax Appeals, in order that the
importations in question may be declared exempt from the
compensating tax, it is indispensable that the requirements of the
amendatory law be complied with, namely: (1) the engines and spare
parts must be used by the importer himself as a passenger and/or
cargo, vessel; and (2) the said passenger and/or cargo vessel must be
used in coastwise or oceangoing navigation (Decision, CTA Case No.
1484; Rollo, p. 24).

As pointed out by the Court of Tax Appeals, the amendatory provisions

of Republic Act No. 3176 limit tax exemption from the compensating
tax to imported items to be used by the importer himself as operator of
passenger and/or cargo vessel (Ibid., p. 25).
As quoted in the decision of the Court of Tax Appeals, a tugboat is
defined as follows:
A tugboat is a strongly built, powerful steam or power
vessel, used for towing and, now, also used for attendance
on vessel. (Webster New International Dictionary, 2nd Ed.)
A tugboat is a diesel or steam power vessel designed
primarily for moving large ships to and from piers for towing
barges and lighters in harbors, rivers and canals.
(Encyclopedia International Grolier, Vol. 18, p. 256).
A tug is a steam vessel built for towing, synonymous with
tugboat. (Bouvier's Law Dictionary.) (Rollo, p. 24).
Under the foregoing definitions, petitioner's tugboats clearly do not fall
under the categories of passenger and/or cargo vessels. Thus, it is a
cardinal principle of statutory construction that where a provision of
law speaks categorically, the need for interpretation is obviated, no
plausible pretense being entertained to justify non-compliance. All that
has to be done is to apply it in every case that falls within its terms
(Allied Brokerage Corp. v. Commissioner of Customs, L-27641, 40 SCRA
555 [1971]; Quijano, etc. v. DBP, L-26419, 35 SCRA 270 [1970]).
And, even if construction and interpretation of the law is insisted upon,
following another fundamental rule that statutes are to be construed in
the light of purposes to be achieved and the evils sought to be
remedied (People v. Purisima etc., et al., L-42050-66, 86 SCRA 544
[1978], it will be noted that the legislature in amending Section 190 of

the Tax Code by Republic Act 3176, as appearing in the records,

intended to provide incentives and inducements to bolster the shipping
industry and not the business of stevedoring, as manifested in the
sponsorship speech of Senator Gil Puyat (Rollo, p. 26).
On analysis of petitioner-appellant's transactions, the Court of Tax
Appeals found that no evidence was adduced by petitioner-appellant
that tugboats are passenger and/or cargo vessels used in the shipping
industry as an independent business. On the contrary, petitionerappellant's own evidence supports the view that it is engaged as a
stevedore, that is, the work of unloading and loading of a vessel in port;
and towing of barges containing cargoes is a part of petitioner's
undertaking as a stevedore. In fact, even its trade name is indicative
that its sole and principal business is stevedoring and lighterage, taxed
under Section 191 of the National Internal Revenue Code as a
contractor, and not an entity which transports passengers or freight for
hire which is taxed under Section 192 of the same Code as a common
carrier by water (Decision, CTA Case No. 1484; Rollo, p. 25).
Under the circumstances, there appears to be no plausible reason to
disturb the findings and conclusion of the Court of Tax Appeals.
As a matter of principle, this Court will not set aside the conclusion
reached by an agency such as the Court of Tax Appeals, which is, by the
very nature of its function, 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 authority (Reyes v. Commissioner of Internal Revenue, 24
SCRA 199 [1981]), which is not present in the instant case.
PREMISES CONSIDERED, the instant petition is DISMISSED and the
decision of the Court of Tax Appeals is AFFIRMED.
SO ORDERED.

SECOND DIVISION
[G.R. No. 80276 : December 21, 1990.]
192 SCRA 604
HYDRO RESOURCES CONTRACTORS CORPORATION, Petitioner, vs. THE
COURT OF TAX APPEALS and THE HON. DEPUTY MINISTER OF
FINANCE, ALFREDO PIO DE RODA, Respondents.
DECISION
PARAS, J.:
This is a special civil action of Certiorari instituted by petitioner Hydro
Resources Contractors Corporation against respondents Court of Tax
Appeals and Deputy Minister of Finance which seeks to set aside the
decisions of both public respondents holding petitioner liable for a 3%
ad valorem duty in the amount of P281,591.00.
It appears that the National Irrigation Administration (referred to
hereinafter as NIA for brevity) a government owned and controlled
corporation, entered into an agreement, sometime in August 1978,
with petitioner Hydro Resources Contractors Corporation (Hydro for
short), for the construction of the Magat River Multipurpose Project in
Isabela.
Under the aforesaid contract, designated as Contract No. MPI-C-1,
petitioner was allowed to procure new construction equipment, spare
parts and tools from abroad, the payment for which was advanced by
NIA under a financing plan embodied in the contract, as follows:

a) Procurement Petitioner is required to submit to NIA for approval a

list of new construction equipment, spare parts and tools which it
intends to acquire from abroad. Petitioner shall procure these items as
an agent of NIA as all invoices shall be in the name of said government
agency. NIA undertakes to pay all import taxes, duties and all fees,
imposts and other charges that may be due on said importations.: nad
b) Ownership and delivery The equipment and spare parts imported
from abroad shall be owned by NIA and delivered to its construction
site in Isabela.
c) Repayment Petitioner shall repay NIA the costs of the above
procurement and the manner of repayment shall be through
deductions from each monthly or periodic progress payment due to
petitioner.
d) Transfer of Ownership Ownership shall be transferred to
petitioner only upon complete payment of the costs above mentioned.
The equipment imported by NIA in 1978 and 1979 for Hydro's use are

DESCRIPTION OF EQUIPMENT NET BOOK VALUE

1 Tamrock Hyd. Jumbo Drill
Ser. #18153 P1,566,116.55
3 units Cat Drill Toyo TYPR 120 278,264.25
1 unit Tamrock Hyd. Drill
16 units Air Leg Drills Toyo 1,493,834.29
1 unit Toyo Reinforcing Bar 12,000.92
3 units Toyo TYCD 10 CY Cralwer 265,421.35
2 units Scheele K-60 Pump 624,772.80
2 units New Reed Gun Mdl. IAS 67,349.90
1 unit Prota Tunnel Profile 43,340.26

2 units Wild Theodolite Surveying

Equipment 28,545.93
1 unit Toyo Mud Sub Pump 201,108.01
2 units Aichi Skymaster Truck
mounted Boom 93,622.78
2 units Grindex Sub Type Pump 140,518.35
6 units K/Worth C500 Truck Mixer 1,690,054.60
1 unit Putamesitor 201,863.77
6 units Sullair Air Comp. 588,940.53
2 units Well Air Driven Grout 20,582.40
10 units Stancom VHF Radio Tran. 32,537.70
4 units Cummins 1,055,209.20
By the terms of the contract (quoted earlier) NIA undertakes payment
of all the import duties and taxes incident to the importations
deductible from the proceeds of the contract price. HYDRO shall repay
NIA in full the value of the construction equipment out of the same
proceeds before eventual transfer or taking ownership of subject
construction equipment upon termination of the contract.
NIA reneged and failed in the compliance of its tax obligations. In the
meantime, HYDRO had fully repaid the value of the construction
equipment in the amount of P14,537,783.63 (US$1,991,477.21) so
much so that on December 6, 1982 and March 24, 1983, NIA executed
deeds of sale covering the same and transferring the ownership thereof
in favor of petitioner.
Upon the transfer of the ownership of the said equipment HYDRO was
assessed by the Bureau of Customs the corresponding customs duty
and compensating tax, respectively, as follows:
Customs Duty

P1,214,010.00

Compensating Tax 1,089,368.63

P2,303,378.63
=========
This amount was paid by HYDRO to the Bureau of Customs.
In addition, HYDRO was assessed additional 3% ad valorem duty in the
amount of P281,591.00 prescribed in Executive Order 860. HYDRO also
paid this amount but this time under protest.:-cralaw
The Collector of Customs acted favorably on petitioner's protest and
ordered the refund of the amount paid for the ad valorem duty in the
form of tax credit, ruling that
"The foregoing scheme entered into between NIA and HYDRO had
generated a contract and it will be unfair to involve new proposal as in
the imposition of 3% additional duty ad valorem which was not
obtaining at the time of the agreement nor at the time of arrival and
release of the shipment from the piers. For one thing, the scheme may
be viewed in the same light as sales of commodities to be delivered at
some future date, whose price or prices at the time of delivery may be
way above or below the sale price or prices. For another thing, HYDRO
may not be deprived of rights vested before the promulgation of
Executive Order 860 prescribing 3% additional duty ad valorem." (p. 22,
Rollo)
The Acting Commissioner of Customs affirmed the ruling of the
Collector of Customs. In his 2nd Indorsement dated June 25, 1984, (p.
25, Rollo) Acting Commissioner Ramon Farolan stated
"This Office shares the view of the Collector of Customs to the effect
that the various equipment and parts in question which the National
Irrigation Administration imported in 1978 and 1979 and subsequently
sold to Hydro Resources Construction Corporation by virtue of a
previous agreement, are subject to duties and taxes but not the

additional 3% ad valorem duty under Executive Order No. 860 which

took effect only on December 21, 1982. Moreover, the Deputy Minister
of Finance, in his 1st Indorsement to the Central Bank dated March 26,
1983, which was then reproduced by the Central Bank Governor in a
circular letter to all authorized agent banks, clarified to all authorized
agent banks, clarified that
Letters of Credit opened prior to the effectivity of P.D. 1853 and E.O.
860 are not subject to the provisions thereof even if they are amended
after the effectivity thereof.
(p. 15, Rollo).
These findings of the Collector of Customs as well as the Acting
Customs Commissioner were reversed by the Deputy Minister of
Finance.
Petitioner appealed to the Court of Tax Appeals but in its Decision
dated May 22, 1987, the said court (with a dissenting opinion) affirmed
the ruling of the Deputy Minister of Finance denying petitioner's claim
for refund.
Hence, the present recourse,
reconsideration was denied.

after

petitioner's

motion

for

In this petition, Hydro presents the following issues

I
THE PUBLIC RESPONDENT CTA HAS ACTED WITHOUT OR IN EXCESS OF
ITS JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION IN REFUSING
TO CONSIDER THE FACT THAT THE SALE OF THE NIA-FINANCED
EQUIPMENT TOOK PLACE IN 1978.
II
THE PUBLIC RESPONDENT CTA HAS ACTED WITHOUT OR IN EXCESS OF
ITS JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION IN APPLYING
EXECUTIVE ORDER NO. 860 RETROACTIVELY.

III
THE PUBLIC RESPONDENT CTA HAS ACTED WITHOUT OF IN EXCESS OF
ITS JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION IN FAILING
TO CONSIDER THAT THE IMPOSITION OF THE 3% AD VALOREM TAX ON
IMPORTATIONS MADE PRIOR TO ITS ISSUANCE IS VIOLATIVE OF THE
CONSTITUTION.
IV
THE PUBLIC RESPONDENT CTA HAS ACTED WITHOUT OF IN EXCESS OF
ITS JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION IN IMPOSING
THE AD VALOREM TAX SANS STATUTORY AND LEGAL BASIS.
The petition is meritorious.
Executive Order No. 860 which was the basis for the imposition of the
3% ad valorem duty upon the said importations, took effect on
December 21, 1982. The importations were effected in 1978 and 1979
by NIA. Nonetheless, respondent Court of Tax Appeals denied
petitioner's claim for refund because
"When NIA transferred the equipment in question supposedly 'after its
(HYDRO's) use for a number of years', it cannot be doubted that these
equipment were sold and transferred presumably 'several years' after
the equipment's importation in 1978 and 1979. It is obvious therefore
that the sale or transfer of the ownership of the equipment to
petitioner HYDRO were unquestionably made after the effectivity of PD
882 on January 20, 1976, undisputably said sale or transfer thereof was
(sic) governed by Section 4 of PD 882 and was correctly applied by
respondent. We take particular note of the fact that we cannot
pinpoint with definiteness or exactitude from the evidence, when or
what years after the years 1978 and 1979 importations were the
equipment sold or transferred by NIA to petitioner HYDRO so that we
can determine outright whether the sale or transfers are covered by
the mandatory provision of Executive Order 860 effective on December

21, 1982 imposing 3% additional ad valorem duty on such importations.

Such that if the sale or transfer of the ownership of the equipment
were effected to petitioner HYDRO after December 21, 1982, the
effective date of Executive Order No. 860, the 3% ad valorem duty is
imposable as said Executive Order 860 was applied prospectively and
rightly. If the sale or transfer of the ownership of the equipment to
HYDRO were (sic) prior to the effectivity of Executive Order No. 860,
then said Executive Order 860 is inapplicable, and petitioner is not
liable to pay the 3% ad valorem duty of P281,591.00 and is entitled to
the refund thereof.
As a rule and principle, it was incumbent upon petitioner-taxpayer
HYDRO to have shown that the sale or transfer of said equipment to it
were made before December 21, 1982, when the Executive Order No.
860 was effective in order that it shall not be subject to the imposition
of 3% additional ad valorem duty. Failing thus, its claim for refund in
the amount of P281,591.00 unquestionably fails." (pp. 37-38; Rollo).:nad
The foregoing conclusion is erroneous. The subsequent executions of
the Deeds of Sale of the equipment in question on December 6, 1982
and March 24, 1983 are not relevant and material in the consideration
of the application of Executive Order No. 860 because said Deeds of
Sale were mere formalities in the implementation of Contract No. MPIC-1 executed on August 1978, which should be reckoned and construed
as the actual date of sale. This must be so because the contract of
purchase and sale of the NIA-financed/owned equipment to Hydro took
place in 1978 when Contract No. MPI-C-1 was signed by NIA and
HYDRO wherein the contracting parties provided for their financing,
procurement, delivery, repayment, transfer of possession and
ownership. The said scheme contemplated a Contract of Sale within the
purview of Art. 1458 of the Civil Code which provides
"Art. 1458. By the contract of sale, one of the contracting parties
obligates himself to transfer the ownership of and to deliver a

determinate thing, and the other to pay thereafter a price certain in

money or its equivalent.
"A contract of sale may be absolute or conditional." (p. 11, Rollo)
This view is shared by the Collector of Customs in his decision when he
declared that there being a meeting of the minds between NIA and
HYDRO upon the object of the contract of sale and upon the price, the
contract of sale of the equipment between them was perfected in
1978. It is a perfected contract of sale subject to a suspensive
condition, the full payment by HYDRO of the consideration for the
subject of the contract is the operative act to compel NIA to effect the
transfer of absolute ownership thereof to HYDRO. And under Art. 1187
of the Civil Code, the effectivity of said contract reverts back to the
constitution of the contract, in this case August 1978.
"ART. 1187. The effects of a conditional obligation to give, once the
condition has been fulfilled, shall retroact to the day of the constitution
of the obligation." (p. 12, Rollo)
It is a cardinal rule that laws shall have no retroactive effect, unless the
contrary is provided. (Art. 4, Civil Code) Except for a statement
providing for its immediate execution, Executive Order No. 860 does
not provide for its retroactivity. Moreover, the Deputy Minister of
Finance in his 1st Indorsement to the Central Bank dated March 26,
1983 which was reproduced by the Central Bank Governor in a circular
letter to all authorized agent banks, clarified that letters of credit
opened prior to the effectivity of E.O. 860 are not subject to the
provisions thereof. Consequently, the importations in question which
arrived in 1977 and 1978 are not subject to the 3% additional ad
valorem duty, the same being imposed only on those whose letter of
credit were opened after the promulgation of Executive Order 860. In
this regard Judge Alex Reyes in his dissenting opinion correctly
observed

"Let it suffice that the procurement of the equipment, as earlier stated,

was not on a tax exempt basis as the import liabilities thereon have
been secured to be paid under the terms of the financial scheme in the
contract. The formality of vesting of title over the equipment was not
an unwarranted expectation but a matter of an implementation of a
pre-existing agreement, hence, the imported articles can only be
subject to the rates of import duties/taxes prevailing at the time of
entry or withdrawal from customs' custody (Sec. 205, TCC) in 1978 and
1979, thus foreclosing any retroactive application of the 1982 Executive
Order.:-cralaw
"Taken in the above light, it would be unfair and incongruous to hold
petitioner to an additional levy sans any statutory basis. The majority
could have fumbled into a precipitate action in taking an adverse
position on petitioner's right to a refund." (pp. 44-45, Rollo)
IN VIEW OF THE FOREGOING CONSIDERATIONS, the petition is
GRANTED; the assailed Decisions of respondents Court of Tax Appeals
and Deputy Minister of Finance are SET ASIDE and another one
rendered ordering the refund of the amount of P281,591.00
representing 3% additional ad valorem duty to petitioner Hydro
Resources Contractors Corporation in the form of tax credit.
SO ORDERED.
Melencio-Herrera, Padilla, Sarmiento and Regalado, JJ., concur.

G.R. No. L-43082

June 18, 1937

PABLO LORENZO, as trustee of the estate of Thomas Hanley,

deceased, plaintiff-appellant,
vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendantappellant.

Pablo Lorenzo and Delfin Joven for plaintiff-appellant.

Office of the Solicitor-General Hilado for defendant-appellant.
LAUREL, J.:
On October 4, 1932, the plaintiff Pablo Lorenzo, in his capacity as
trustee of the estate of Thomas Hanley, deceased, brought this action
in the Court of First Instance of Zamboanga against the defendant, Juan
Posadas, Jr., then the Collector of Internal Revenue, for the refund of
the amount of P2,052.74, paid by the plaintiff as inheritance tax on the
estate of the deceased, and for the collection of interst thereon at the
rate of 6 per cent per annum, computed from September 15, 1932, the
date when the aforesaid tax was [paid under protest. The defendant set
up a counterclaim for P1,191.27 alleged to be interest due on the tax in
question and which was not included in the original assessment. From
the decision of the Court of First Instance of Zamboanga dismissing
both the plaintiff's complaint and the defendant's counterclaim, both
parties appealed to this court.
It appears that on May 27, 1922, one Thomas Hanley died in
Zamboanga, Zamboanga, leaving a will (Exhibit 5) and considerable
amount of real and personal properties. On june 14, 1922, proceedings
for the probate of his will and the settlement and distribution of his
estate were begun in the Court of First Instance of Zamboanga. The will
was admitted to probate. Said will provides, among other things, as
follows:
4. I direct that any money left by me be given to my nephew
Matthew Hanley.
5. I direct that all real estate owned by me at the time of my
death be not sold or otherwise disposed of for a period of ten (10)
years after my death, and that the same be handled and managed
by the executors, and proceeds thereof to be given to my

nephew, Matthew Hanley, at Castlemore, Ballaghaderine, County

of Rosecommon, Ireland, and that he be directed that the same
be used only for the education of my brother's children and their
descendants.
6. I direct that ten (10) years after my death my property be given
to the above mentioned Matthew Hanley to be disposed of in the
way he thinks most advantageous.
xxx

xxx

xxx

8. I state at this time I have one brother living, named Malachi

Hanley, and that my nephew, Matthew Hanley, is a son of my said
brother, Malachi Hanley.
The Court of First Instance of Zamboanga considered it proper for the
best interests of ther estate to appoint a trustee to administer the real
properties which, under the will, were to pass to Matthew Hanley ten
years after the two executors named in the will, was, on March 8, 1924,
appointed trustee. Moore took his oath of office and gave bond on
March 10, 1924. He acted as trustee until February 29, 1932, when he
resigned and the plaintiff herein was appointed in his stead.
During the incumbency of the plaintiff as trustee, the defendant
Collector of Internal Revenue, alleging that the estate left by the
deceased at the time of his death consisted of realty valued at P27,920
and personalty valued at P1,465, and allowing a deduction of P480.81,
assessed against the estate an inheritance tax in the amount of
P1,434.24 which, together with the penalties for deliquency in payment
consisting of a 1 per cent monthly interest from July 1, 1931 to the date
of payment and a surcharge of 25 per cent on the tax, amounted to
P2,052.74. On March 15, 1932, the defendant filed a motion in the
testamentary proceedings pending before the Court of First Instance of
Zamboanga (Special proceedings No. 302) praying that the trustee,

plaintiff herein, be ordered to pay to the Government the said sum of

P2,052.74. The motion was granted. On September 15, 1932, the
plaintiff paid said amount under protest, notifying the defendant at the
same time that unless the amount was promptly refunded suit would
be brought for its recovery. The defendant overruled the plaintiff's
protest and refused to refund the said amount hausted, plaintiff went
to court with the result herein above indicated.
In his appeal, plaintiff contends that the lower court erred:
I. In holding that the real property of Thomas Hanley, deceased,
passed to his instituted heir, Matthew Hanley, from the moment
of the death of the former, and that from the time, the latter
became the owner thereof.
II. In holding, in effect, that there was deliquency in the payment
of inheritance tax due on the estate of said deceased.
III. In holding that the inheritance tax in question be based upon
the value of the estate upon the death of the testator, and not, as
it should have been held, upon the value thereof at the expiration
of the period of ten years after which, according to the testator's
will, the property could be and was to be delivered to the
instituted heir.
IV. In not allowing as lawful deductions, in the determination of
the net amount of the estate subject to said tax, the amounts
allowed by the court as compensation to the "trustees" and paid
to them from the decedent's estate.
V. In not rendering judgment in favor of the plaintiff and in
denying his motion for new trial.
The defendant-appellant contradicts the theories of the plaintiff and
assigns the following error besides:

The lower court erred in not ordering the plaintiff to pay to the
defendant the sum of P1,191.27, representing part of the interest
at the rate of 1 per cent per month from April 10, 1924, to June
30, 1931, which the plaintiff had failed to pay on the inheritance
tax assessed by the defendant against the estate of Thomas
Hanley.
The following are the principal questions to be decided by this court in
this appeal: (a) When does the inheritance tax accrue and when must it
be satisfied? (b) Should the inheritance tax be computed on the basis of
the value of the estate at the time of the testator's death, or on its
value ten years later? (c) In determining the net value of the estate
subject to tax, is it proper to deduct the compensation due to trustees?
(d) What law governs the case at bar? Should the provisions of Act No.
3606 favorable to the tax-payer be given retroactive effect? (e) Has
there been deliquency in the payment of the inheritance tax? If so,
should the additional interest claimed by the defendant in his appeal be
paid by the estate? Other points of incidental importance, raised by the
parties in their briefs, will be touched upon in the course of this
opinion.
(a) The accrual of the inheritance tax is distinct from the obligation to
pay the same. Section 1536 as amended, of the Administrative Code,
imposes the tax upon "every transmission by virtue of inheritance,
devise, bequest, giftmortis causa, or advance in anticipation of
inheritance,devise, or bequest." The tax therefore is upon transmission
or the transfer or devolution of property of a decedent, made effective
by his death. (61 C. J., p. 1592.) It is in reality an excise or privilege tax
imposed on the right to succeed to, receive, or take property by or
under a will or the intestacy law, or deed, grant, or gift to become
operative at or after death. Acording to article 657 of the Civil Code,
"the rights to the succession of a person are transmitted from the
moment of his death." "In other words", said Arellano, C. J., ". . . the

heirs succeed immediately to all of the property of the deceased

ancestor. The property belongs to the heirs at the moment of the death
of the ancestor as completely as if the ancestor had executed and
delivered to them a deed for the same before his death." (Bondad vs.
Bondad, 34 Phil., 232. See also, Mijares vs. Nery, 3 Phil., 195; Suilong &
Co., vs. Chio-Taysan, 12 Phil., 13; Lubrico vs. Arbado, 12 Phil., 391;
Innocencio vs. Gat-Pandan, 14 Phil., 491; Aliasas vs.Alcantara, 16 Phil.,
489; Ilustre vs. Alaras Frondosa, 17 Phil., 321; Malahacan vs. Ignacio, 19
Phil., 434; Bowa vs. Briones, 38 Phil., 27; Osario vs. Osario & Yuchausti
Steamship Co., 41 Phil., 531; Fule vs. Fule, 46 Phil., 317; Dais vs. Court
of First Instance of Capiz, 51 Phil., 396; Baun vs. Heirs of Baun, 53 Phil.,
654.) Plaintiff, however, asserts that while article 657 of the Civil Code
is applicable to testate as well as intestate succession, it operates only
in so far as forced heirs are concerned. But the language of article 657
of the Civil Code is broad and makes no distinction between different
classes of heirs. That article does not speak of forced heirs; it does not
even use the word "heir". It speaks of the rights of succession and the
transmission thereof from the moment of death. The provision of
section 625 of the Code of Civil Procedure regarding the authentication
and probate of a will as a necessary condition to effect transmission of
property does not affect the general rule laid down in article 657 of the
Civil Code. The authentication of a will implies its due execution but
once probated and allowed the transmission is effective as of the death
of the testator in accordance with article 657 of the Civil Code.
Whatever may be the time when actual transmission of the inheritance
takes place, succession takes place in any event at the moment of the
decedent's death. The time when the heirs legally succeed to the
inheritance may differ from the time when the heirs actually receive
such inheritance. "Poco importa", says Manresa commenting on article
657 of the Civil Code, "que desde el falleimiento del causante, hasta que
el heredero o legatario entre en posesion de los bienes de la herencia o
del legado, transcurra mucho o poco tiempo, pues la adquisicion ha de
retrotraerse al momento de la muerte, y asi lo ordena el articulo 989,

que debe considerarse como complemento del presente." (5 Manresa,

305; see also, art. 440, par. 1, Civil Code.) Thomas Hanley having died
on May 27, 1922, the inheritance tax accrued as of the date.
From the fact, however, that Thomas Hanley died on May 27, 1922, it
does not follow that the obligation to pay the tax arose as of the date.
The time for the payment on inheritance tax is clearly fixed by section
1544 of the Revised Administrative Code as amended by Act No. 3031,
in relation to section 1543 of the same Code. The two sections follow:
SEC. 1543. Exemption of certain acquisitions and transmissions.
The following shall not be taxed:
(a) The merger of the usufruct in the owner of the naked
title.
(b) The transmission or delivery of the inheritance or legacy
by the fiduciary heir or legatee to the trustees.
(c) The transmission from the first heir, legatee, or donee in
favor of another beneficiary, in accordance with the desire
of the predecessor.
In the last two cases, if the scale of taxation appropriate to the
new beneficiary is greater than that paid by the first, the former
must pay the difference.
SEC. 1544. When tax to be paid. The tax fixed in this article
shall be paid:
(a) In the second and third cases of the next preceding
section, before entrance into possession of the property.
(b) In other cases, within the six months subsequent to the
death of the predecessor; but if judicial testamentary or

intestate proceedings shall be instituted prior to the

expiration of said period, the payment shall be made by the
executor or administrator before delivering to each
beneficiary his share.
If the tax is not paid within the time hereinbefore prescribed,
interest at the rate of twelve per centum per annum shall be
added as part of the tax; and to the tax and interest due and
unpaid within ten days after the date of notice and demand
thereof by the collector, there shall be further added a surcharge
of twenty-five per centum.
A certified of all letters testamentary or of admisitration shall be
furnished the Collector of Internal Revenue by the Clerk of Court
within thirty days after their issuance.
It should be observed in passing that the word "trustee", appearing in
subsection (b) of section 1543, should read "fideicommissary" or "cestui
que trust". There was an obvious mistake in translation from the
Spanish to the English version.
The instant case does fall under subsection (a), but under subsection
(b), of section 1544 above-quoted, as there is here no fiduciary heirs,
first heirs, legatee or donee. Under the subsection, the tax should have
been paid before the delivery of the properties in question to P. J. M.
Moore as trustee on March 10, 1924.
(b) The plaintiff contends that the estate of Thomas Hanley, in so far as
the real properties are concerned, did not and could not legally pass to
the instituted heir, Matthew Hanley, until after the expiration of ten
years from the death of the testator on May 27, 1922 and, that the
inheritance tax should be based on the value of the estate in 1932, or
ten years after the testator's death. The plaintiff introduced evidence
tending to show that in 1932 the real properties in question had a

reasonable value of only P5,787. This amount added to the value of the
personal property left by the deceased, which the plaintiff admits is
P1,465, would generate an inheritance tax which, excluding deductions,
interest and surcharge, would amount only to about P169.52.
If death is the generating source from which the power of the estate to
impose inheritance taxes takes its being and if, upon the death of the
decedent, succession takes place and the right of the estate to tax vests
instantly, the tax should be measured by the vlaue of the estate as it
stood at the time of the decedent's death, regardless of any
subsequent contingency value of any subsequent increase or decrease
in value. (61 C. J., pp. 1692, 1693; 26 R. C. L., p. 232; Blakemore and
Bancroft, Inheritance Taxes, p. 137. See also Knowlton vs. Moore, 178
U.S., 41; 20 Sup. Ct. Rep., 747; 44 Law. ed., 969.) "The right of the state
to an inheritance tax accrues at the moment of death, and hence is
ordinarily measured as to any beneficiary by the value at that time of
such property as passes to him. Subsequent appreciation or
depriciation is immaterial." (Ross, Inheritance Taxation, p. 72.)
Our attention is directed to the statement of the rule in Cyclopedia of
Law of and Procedure (vol. 37, pp. 1574, 1575) that, in the case of
contingent remainders, taxation is postponed until the estate vests in
possession or the contingency is settled. This rule was formerly
followed in New York and has been adopted in Illinois, Minnesota,
Massachusetts, Ohio, Pennsylvania and Wisconsin. This rule, horever, is
by no means entirely satisfactory either to the estate or to those
interested in the property (26 R. C. L., p. 231.). Realizing, perhaps, the
defects of its anterior system, we find upon examination of cases and
authorities that New York has varied and now requires the immediate
appraisal of the postponed estate at its clear market value and the
payment forthwith of the tax on its out of the corpus of the estate
transferred. (In re Vanderbilt, 172 N. Y., 69; 69 N. E., 782; In re Huber,
86 N. Y. App. Div., 458; 83 N. Y. Supp., 769; Estate of Tracy, 179 N. Y.,

501; 72 N. Y., 519; Estate of Brez, 172 N. Y., 609; 64 N. E., 958; Estate of
Post, 85 App. Div., 611; 82 N. Y. Supp., 1079. Vide also, Saltoun vs. Lord
Advocate, 1 Peter. Sc. App., 970; 3 Macq. H. L., 659; 23 Eng. Rul. Cas.,
888.) California adheres to this new rule (Stats. 1905, sec. 5, p. 343).
But whatever may be the rule in other jurisdictions, we hold that a
transmission by inheritance is taxable at the time of the predecessor's
death, notwithstanding the postponement of the actual possession or
enjoyment of the estate by the beneficiary, and the tax measured by
the value of the property transmitted at that time regardless of its
appreciation or depreciation.
(c) Certain items are required by law to be deducted from the appraised
gross in arriving at the net value of the estate on which the inheritance
tax is to be computed (sec. 1539, Revised Administrative Code). In the
case at bar, the defendant and the trial court allowed a deduction of
only P480.81. This sum represents the expenses and disbursements of
the executors until March 10, 1924, among which were their fees and
the proven debts of the deceased. The plaintiff contends that the
compensation and fees of the trustees, which aggregate P1,187.28
(Exhibits C, AA, EE, PP, HH, JJ, LL, NN, OO), should also be deducted
under section 1539 of the Revised Administrative Code which provides,
in part, as follows: "In order to determine the net sum which must bear
the tax, when an inheritance is concerned, there shall be deducted, in
case of a resident, . . . the judicial expenses of the testamentary or
intestate proceedings, . . . ."
A trustee, no doubt, is entitled to receive a fair compensation for his
services (Barney vs. Saunders, 16 How., 535; 14 Law. ed., 1047). But
from this it does not follow that the compensation due him may
lawfully be deducted in arriving at the net value of the estate subject to
tax. There is no statute in the Philippines which requires trustees'
commissions to be deducted in determining the net value of the estate
subject to inheritance tax (61 C. J., p. 1705). Furthermore, though a

testamentary trust has been created, it does not appear that the
testator intended that the duties of his executors and trustees should
be separated. (Ibid.; In re Vanneck's Estate, 161 N. Y. Supp., 893; 175
App. Div., 363; In re Collard's Estate, 161 N. Y. Supp., 455.) On the
contrary, in paragraph 5 of his will, the testator expressed the desire
that his real estate be handled and managed by his executors until the
expiration of the period of ten years therein provided. Judicial expenses
are expenses of administration (61 C. J., p. 1705) but, in State vs.
Hennepin County Probate Court (112 N. W., 878; 101 Minn., 485), it
was said: ". . . The compensation of a trustee, earned, not in the
administration of the estate, but in the management thereof for the
benefit of the legatees or devises, does not come properly within the
class or reason for exempting administration expenses. . . . Service
rendered in that behalf have no reference to closing the estate for the
purpose of a distribution thereof to those entitled to it, and are not
required or essential to the perfection of the rights of the heirs or
legatees. . . . Trusts . . . of the character of that here before the court,
are created for the the benefit of those to whom the property
ultimately passes, are of voluntary creation, and intended for the
preservation of the estate. No sound reason is given to support the
contention that such expenses should be taken into consideration in
fixing the value of the estate for the purpose of this tax."
(d) The defendant levied and assessed the inheritance tax due from the
estate of Thomas Hanley under the provisions of section 1544 of the
Revised Administrative Code, as amended by section 3 of Act No. 3606.
But Act No. 3606 went into effect on January 1, 1930. It, therefore, was
not the law in force when the testator died on May 27, 1922. The law at
the time was section 1544 above-mentioned, as amended by Act No.
3031, which took effect on March 9, 1922.
It is well-settled that inheritance taxation is governed by the statute in
force at the time of the death of the decedent (26 R. C. L., p. 206; 4

Cooley on Taxation, 4th ed., p. 3461). The taxpayer can not foresee and
ought not to be required to guess the outcome of pending measures.
Of course, a tax statute may be made retroactive in its operation.
Liability for taxes under retroactive legislation has been "one of the
incidents of social life." (Seattle vs. Kelleher, 195 U. S., 360; 49 Law. ed.,
232 Sup. Ct. Rep., 44.) But legislative intent that a tax statute should
operate retroactively should be perfectly clear. (Scwab vs. Doyle, 42
Sup. Ct. Rep., 491; Smietanka vs. First Trust & Savings Bank, 257 U. S.,
602; Stockdale vs. Insurance Co., 20 Wall., 323; Lunch vs. Turrish, 247 U.
S., 221.) "A statute should be considered as prospective in its operation,
whether it enacts, amends, or repeals an inheritance tax, unless the
language of the statute clearly demands or expresses that it shall have
a retroactive effect, . . . ." (61 C. J., P. 1602.) Though the last paragraph
of section 5 of Regulations No. 65 of the Department of Finance makes
section 3 of Act No. 3606, amending section 1544 of the Revised
Administrative Code, applicable to all estates the inheritance taxes due
from which have not been paid, Act No. 3606 itself contains no
provisions indicating legislative intent to give it retroactive effect. No
such effect can begiven the statute by this court.
The defendant Collector of Internal Revenue maintains, however, that
certain provisions of Act No. 3606 are more favorable to the taxpayer
than those of Act No. 3031, that said provisions are penal in nature and,
therefore, should operate retroactively in conformity with the
provisions of article 22 of the Revised Penal Code. This is the reason
why he applied Act No. 3606 instead of Act No. 3031. Indeed, under Act
No. 3606, (1) the surcharge of 25 per cent is based on the tax only,
instead of on both the tax and the interest, as provided for in Act No.
3031, and (2) the taxpayer is allowed twenty days from notice and
demand by rthe Collector of Internal Revenue within which to pay the
tax, instead of ten days only as required by the old law.

Properly speaking, a statute is penal when it imposes punishment for

an offense committed against the state which, under the Constitution,
the Executive has the power to pardon. In common use, however, this
sense has been enlarged to include within the term "penal statutes" all
status which command or prohibit certain acts, and establish penalties
for their violation, and even those which, without expressly prohibiting
certain acts, impose a penalty upon their commission (59 C. J., p. 1110).
Revenue laws, generally, which impose taxes collected by the means
ordinarily resorted to for the collection of taxes are not classed as penal
laws, although there are authorities to the contrary. (See Sutherland,
Statutory Construction, 361; Twine Co. vs. Worthington, 141 U. S., 468;
12 Sup. Ct., 55; Rice vs. U. S., 4 C. C. A., 104; 53 Fed., 910; Com. vs.
Standard Oil Co., 101 Pa. St., 150; State vs. Wheeler, 44 P., 430; 25 Nev.
143.) Article 22 of the Revised Penal Code is not applicable to the case
at bar, and in the absence of clear legislative intent, we cannot give Act
No. 3606 a retroactive effect.
(e) The plaintiff correctly states that the liability to pay a tax may arise
at a certain time and the tax may be paid within another given time. As
stated by this court, "the mere failure to pay one's tax does not render
one delinqent until and unless the entire period has eplased within
which the taxpayer is authorized by law to make such payment without
being subjected to the payment of penalties for fasilure to pay his taxes
within the prescribed period." (U. S. vs. Labadan, 26 Phil., 239.)
The defendant maintains that it was the duty of the executor to pay the
inheritance tax before the delivery of the decedent's property to the
trustee. Stated otherwise, the defendant contends that delivery to the
trustee was delivery to the cestui que trust, the beneficiery in this case,
within the meaning of the first paragraph of subsection (b) of section
1544 of the Revised Administrative Code. This contention is well taken
and is sustained. The appointment of P. J. M. Moore as trustee was
made by the trial court in conformity with the wishes of the testator as

expressed in his will. It is true that the word "trust" is not mentioned or
used in the will but the intention to create one is clear. No particular or
technical words are required to create a testamentary trust (69 C. J., p.
711). The words "trust" and "trustee", though apt for the purpose, are
not necessary. In fact, the use of these two words is not conclusive on
the question that a trust is created (69 C. J., p. 714). "To create a trust
by will the testator must indicate in the will his intention so to do by
using language sufficient to separate the legal from the equitable
estate, and with sufficient certainty designate the beneficiaries, their
interest in the ttrust, the purpose or object of the trust, and the
property or subject matter thereof. Stated otherwise, to constitute a
valid testamentary trust there must be a concurrence of three
circumstances: (1) Sufficient words to raise a trust; (2) a definite
subject; (3) a certain or ascertain object; statutes in some jurisdictions
expressly or in effect so providing." (69 C. J., pp. 705,706.) There is no
doubt that the testator intended to create a trust. He ordered in his will
that certain of his properties be kept together undisposed during a
fixed period, for a stated purpose. The probate court certainly exercised
sound judgment in appointment a trustee to carry into effect the
provisions of the will (see sec. 582, Code of Civil Procedure).
P. J. M. Moore became trustee on March 10, 1924. On that date trust
estate vested in him (sec. 582 in relation to sec. 590, Code of Civil
Procedure). The mere fact that the estate of the deceased was placed
in trust did not remove it from the operation of our inheritance tax laws
or exempt it from the payment of the inheritance tax. The
corresponding inheritance tax should have been paid on or before
March 10, 1924, to escape the penalties of the laws. This is so for the
reason already stated that the delivery of the estate to the trustee
was in esse delivery of the same estate to the cestui que trust, the
beneficiary in this case. A trustee is but an instrument or agent for
thecestui que trust (Shelton vs. King, 299 U. S., 90; 33 Sup. Ct. Rep., 689;
57 Law. ed., 1086). When Moore accepted the trust and took possesson

of the trust estate he thereby admitted that the estate belonged not to
him but to hiscestui que trust (Tolentino vs. Vitug, 39 Phil.,126, cited in
65 C. J., p. 692, n. 63). He did not acquire any beneficial interest in the
estate. He took such legal estate only as the proper execution of the
trust required (65 C. J., p. 528) and, his estate ceased upon the
fulfillment of the testator's wishes. The estate then vested absolutely in
the beneficiary (65 C. J., p. 542).
The highest considerations of public policy also justify the conclusion
we have reached. Were we to hold that the payment of the tax could
be postponed or delayed by the creation of a trust of the type at hand,
the result would be plainly disastrous. Testators may provide, as
Thomas Hanley has provided, that their estates be not delivered to
their beneficiaries until after the lapse of a certain period of time. In the
case at bar, the period is ten years. In other cases, the trust may last for
fifty years, or for a longer period which does not offend the rule against
petuities. The collection of the tax would then be left to the will of a
private individual. The mere suggestion of this result is a sufficient
warning against the accpetance of the essential to the very exeistence
of government. (Dobbins vs. Erie Country, 16 Pet., 435; 10 Law. ed.,
1022; Kirkland vs. Hotchkiss, 100 U. S., 491; 25 Law. ed., 558; Lane
County vs. Oregon, 7 Wall., 71; 19 Law. ed., 101; Union Refrigerator
Transit Co. vs. Kentucky, 199 U. S., 194; 26 Sup. Ct. Rep., 36; 50 Law.
ed., 150; Charles River Bridge vs. Warren Bridge, 11 Pet., 420; 9 Law.
ed., 773.) The obligation to pay taxes rests not upon the privileges
enjoyed by, or the protection afforded to, a citizen by the government
but upon the necessity of money for the support of the state (Dobbins
vs. Erie Country, supra). For this reason, no one is allowed to object to
or resist the payment of taxes solely because no personal benefit to
him can be pointed out. (Thomas vs. Gay, 169 U. S., 264; 18 Sup. Ct.
Rep., 340; 43 Law. ed., 740.) While courts will not enlarge, by
construction, the government's power of taxation (Bromley vs.
McCaughn, 280 U. S., 124; 74 Law. ed., 226; 50 Sup. Ct. Rep., 46) they

also will not place upon tax laws so loose a construction as to permit
evasions on merely fanciful and insubstantial distictions. (U. S. vs.
Watts, 1 Bond., 580; Fed. Cas. No. 16,653; U. S. vs. Wigglesirth, 2 Story,
369; Fed. Cas. No. 16,690, followed in Froelich & Kuttner vs. Collector of
Customs, 18 Phil., 461, 481; Castle Bros., Wolf & Sons vs. McCoy, 21
Phil., 300; Muoz & Co. vs. Hord, 12 Phil., 624; Hongkong & Shanghai
Banking Corporation vs. Rafferty, 39 Phil., 145; Luzon Stevedoring Co.
vs. Trinidad, 43 Phil., 803.) When proper, a tax statute should be
construed to avoid the possibilities of tax evasion. Construed this way,
the statute, without resulting in injustice to the taxpayer, becomes fair
to the government.
That taxes must be collected promptly is a policy deeply intrenched in
our tax system. Thus, no court is allowed to grant injunction to restrain
the collection of any internal revenue tax ( sec. 1578, Revised
Administrative Code; Sarasola vs. Trinidad, 40 Phil., 252). In the case of
Lim Co Chui vs. Posadas (47 Phil., 461), this court had occassion to
demonstrate trenchment adherence to this policy of the law. It held
that "the fact that on account of riots directed against the Chinese on
October 18, 19, and 20, 1924, they were prevented from praying their
internal revenue taxes on time and by mutual agreement closed their
homes and stores and remained therein, does not authorize the
Collector of Internal Revenue to extend the time prescribed for the
payment of the taxes or to accept them without the additional penalty
of twenty five per cent." (Syllabus, No. 3.)
". . . It is of the utmost importance," said the Supreme Court of the
United States, ". . . that the modes adopted to enforce the taxes levied
should be interfered with as little as possible. Any delay in the
proceedings of the officers, upon whom the duty is developed of
collecting the taxes, may derange the operations of government, and
thereby, cause serious detriment to the public." (Dows vs. Chicago, 11

Wall., 108; 20 Law. ed., 65, 66; Churchill and Tait vs. Rafferty, 32 Phil.,
580.)
It results that the estate which plaintiff represents has been delinquent
in the payment of inheritance tax and, therefore, liable for the payment
of interest and surcharge provided by law in such cases.
The delinquency in payment occurred on March 10, 1924, the date
when Moore became trustee. The interest due should be computed
from that date and it is error on the part of the defendant to compute it
one month later. The provisions cases is mandatory (see and cf. Lim Co
Chui vs. Posadas, supra), and neither the Collector of Internal Revenuen
or this court may remit or decrease such interest, no matter how
heavily it may burden the taxpayer.
To the tax and interest due and unpaid within ten days after the date of
notice and demand thereof by the Collector of Internal Revenue, a
surcharge of twenty-five per centum should be added (sec. 1544,
subsec. (b), par. 2, Revised Administrative Code). Demand was made by
the Deputy Collector of Internal Revenue upon Moore in a
communiction dated October 16, 1931 (Exhibit 29). The date fixed for
the payment of the tax and interest was November 30, 1931.
November 30 being an official holiday, the tenth day fell on December
1, 1931. As the tax and interest due were not paid on that date, the
estate became liable for the payment of the surcharge.
In view of the foregoing, it becomes unnecessary for us to discuss the
fifth error assigned by the plaintiff in his brief.
We shall now compute the tax, together with the interest and
surcharge due from the estate of Thomas Hanley inaccordance with the
conclusions we have reached.

At the time of his death, the deceased left real properties valued at
P27,920 and personal properties worth P1,465, or a total of P29,385.
Deducting from this amount the sum of P480.81, representing
allowable deductions under secftion 1539 of the Revised Administrative
Code, we have P28,904.19 as the net value of the estate subject to
inheritance tax.
The primary tax, according to section 1536, subsection (c), of the
Revised Administrative Code, should be imposed at the rate of one per
centum upon the first ten thousand pesos and two per centum upon
the amount by which the share exceed thirty thousand pesos, plus an
additional two hundred per centum. One per centum of ten thousand
pesos is P100. Two per centum of P18,904.19 is P378.08. Adding to
these two sums an additional two hundred per centum, or P965.16, we
have as primary tax, correctly computed by the defendant, the sum of
P1,434.24.
To the primary tax thus computed should be added the sums collectible
under section 1544 of the Revised Administrative Code. First should be
added P1,465.31 which stands for interest at the rate of twelve per
centum per annum from March 10, 1924, the date of delinquency, to
September 15, 1932, the date of payment under protest, a period
covering 8 years, 6 months and 5 days. To the tax and interest thus
computed should be added the sum of P724.88, representing a
surhcarge of 25 per cent on both the tax and interest, and also P10, the
compromise sum fixed by the defendant (Exh. 29), giving a grand total
of P3,634.43.
As the plaintiff has already paid the sum of P2,052.74, only the sums of
P1,581.69 is legally due from the estate. This last sum is P390.42 more
than the amount demanded by the defendant in his counterclaim. But,
as we cannot give the defendant more than what he claims, we must
hold that the plaintiff is liable only in the sum of P1,191.27 the amount
stated in the counterclaim.

The judgment of the lower court is accordingly modified, with costs

against the plaintiff in both instances. So ordered.
Avancea, C.J., Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.
Villa-Real, J., concurs.

G.R. No. L-14880

April 29, 1960

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
FILIPINAS COMPAIA DE SEGUROS, respondent.
Assistant Solicitor General Jose P. Alejandro and Special Attorney Jaime
M. Maza for petitioner.
Ramon T. Garcia for respondent.
BARRERA, J.:
Respondent Filipinas Compaia de Seguros, an insurance company, is
also engaged in business as a real estate dealer. On January 4, 1956,
respondent, in accordance with the single rate then prescribed under
Section 182 of the National Internal Revenue Code.1 paid the amount of
P150.00 as real estate dealer's fixed annual tax for the year 1956.
Subsequently said Section 182 of the Code was amended by Republic
Act No. 1612, which took effect on August 24, 1956, by providing a
small of graduated rates: P150 if the annual income of the real estate
dealer from his business as such is P4,000, but does not exceed
P10,000; P300, if such annual income exceeds P10,000 but does not
exceed P30,000; and P500 if such annual income exceeds P30,000.
On June 17, 1957, petitioner Commissioner of Internal Revenue
assessed and demanded from respondent (whose annual income
exceeded P30,000.00) the amount of P350.00 as additional real estate

dealer's fixed annual tax for the year 1956. On July 16, 1957,
respondent wrote a letter to petitioner stating that the "records will
show that the real estate dealer's fixed tax for 1956 of this Company
was fully paid by us prior to the effectivity of Republic Act No. 1612
which amended, among other things, Sections 178 and 192 of the
National Internal Revenue Code." And, as to the retroactive effect of
said Republic Act No. 1612, respondent added that the Republic Act No.
1856 which, among other things, amended Section 182 of the National
Internal Revenue Code, Congress has clearly shown its intention when
it provided that the increase in rates of taxes envisioned by Republic
Act No. 1612 is to be made effective as of 1 January 1957".
On October 23, 1957, petitioner informed respondent that "Republic
Act No. 1856 which took effect June 22, 1957 amended the date of
effectivity of Republic Act 1612 to January 1, 1957. However, the said
amendment applies only to fixed taxes on occupation and not to fixed
taxes on business." Hence, petitioner insisted that respondent should
pay the amount of P350.00 as additional real estate dealer's fixed
annual tax for the year 1956.
On November 20, 1957, respondent filed with the Court of Tax Appeals
a petition for review. To this petition, petitioner filed his answer on
December 6, 1957. As petitioner practically admitted the material
factual allegations in the petition for review, the case was submitted for
judgment on the pleadings.
On November 22, 1958, the Court of Tax Appeals rendered a decision
sustaining the contention of respondent company and ordering the
petitioner Commissioner of Internal Revenue to desist from collecting
the P350.00 additional assessment. From this decision, petitioner
appealed to us.
As a rule, laws have no retroactive effect, unless the contrary is
provided. (Art. 4, Civil Code of the Philippines; Manila Trading and

Supply Co. vs. Santos, et al., 66 Phil., 237; La Provisora Filipina vs.
Ledda, 66 Ph 573.) Otherwise stated, a state shou!d be consider as
prospective in its operation whether it enacts, amen or repeals a tax,
unless the language of the statute clearly demands or expresses that it
shall have a retroactive effect (61 C. J. 1602, cited in Loremo vs.
Posadas, 64 Phi 353.) The rule applies with greater force to the case
bar, considering that Republic Act No. 1612, which imposes the new
and higher rates of real estate dealer's annual fixed tax, expressly
provides in Section 21 thereof the said Act "shall take effect upon its
approval" on August 24, 1956.
The instant case involves the fixed annual real estat dealer's tax for
1956. There is no dispute that before the enactment of Republic Act
No. 1612 on August 2 1956, the uniform fixed annual real estate
dealer's was P150.00 for all owners of rental properties receiving an
aggregate amount of P3,000.00 or more a year in the form of
rentals2 and that. "the yearly fixed taxes are due on the first of January
of each year" unless tendered in semi-annual or quarterly
installments.3 Since the petitioner indisputably paid in full on January 4,
1956, the total annual tax then prescribed for the year 1956, require it
to pay an additional sum of P350.00 to complete the P500.00 provided
in Republic Act No. 1612 which became effective by its very terms only
on August 24 1956, would, in the language of the Court of Tax Appeals
result in the imposition upon respondent of a tax burden to which it
was not liable before the enactment of said amendatory act, thus
rendering its operation retroactive rather than prospective, which
cannot be done, as it would contravene the aforecited Section 21 of
Republic Act No. 1612 as well as the established rule regarding
prospectivity of operation of statutes.
The view that Congress did intend to impose said increased rates of real
estate dealer's annual tax prospectively and not retroactively, finds
some affirmation in Republic Act No. 1856, approved on June 22, 1957,

which fixed the effective date of said new rates under Republic Act No.
1612 by inserting the following proviso in Section 182 of the National
Internal Revenue Code:
Provided, further, That any amount collected in excess of the rates
in effect prior to January one, nineteen hundred and fifty-seven,
shall be refunded or credited to the taxpayer concerned subject
to the provisions of section three hundred and nine of this Code.
(Sec. 182 (b) (2) (1).)
Petitioner, however, contends that the above-quoted provision refers
only to fixed taxes on occupation and does not cover fixed taxes on
business, such as the real estate dealer's fixed tax herein involved. This
is technically correct, but we note from the deliberations in the Senate,
where the proviso in question was introduced as an amendment, that
said House Bill No. 5919 which became Republic Act No. 1856 was
considered, amended, and enacted into law, in order precisely that the
"iniquitous effects" which were then being felt by taxpayers. in general,
on account of the approval of Republic Act No. 1612, Which was being
given retroactive effect by the Bureau of Internal Revenue by collecting
these taxes retroactively from January 1, 1956, be eliminated and
complaints against such action be finally settled. (See Senate
Congressional Record, May 4, 1957, pp. 10321033.)
It is also to be observed that said House Bill No. 5819 as originally
presented, was expressly intended to amend certain provisions of the
National Internal Revenue Code dealing on fixed taxes on business. The
provisions in respect of fixed tax on occupation were merely
subsequently added. This would seem to indicate that the proviso in
question was intended to cover not only fixed taxes on occupation, but
also fixed taxes on business. (Senate Congressional Record, March 7,
1957, p. 444.)The fact that said proviso was placed only at the end of
paragraph "(B) On occupation" is not, therefore, view of the

circumstances, decisive and unmistakable indication that Congress

limited the proviso to occupation taxes.
Even though the primary purpose of the proviso is to limit restrain
the general language of a statute, the legislature, unfotunately,
does not always use it with technical correctness; consequently,
where its use creates an ambiguity, it is the duty of the court to
ascertain the legislative intention, through resort to usual rules of
construction applicable to statutes, generally an give it effect even
though the statute is thereby enlarged, or the proviso made to
assume the force of an independent enactment and although a
proviso as such has no existence apart from provision which it is
designed to limit or to qualify. (Statutory Construction by E. T.
Crawford, pp. 604-605.)
. . . When construing a statute, the reason for its enactment
should be kept in mind, and the statute should be construe with
reference to its intended scope and purpose. (Id. at p. 249.)
On the general principle of prospectivity of statute on the language of
Republic Act 1612 itself, especially Section 21 thereof, and on the basis
of its intended scope and purpose as disclosed in the Congressional
Record we find ourselves in agreement with the Court of Tax Appeals.
Wherefore, the decision appealed from is hereby affirmed without
costs. So ordered.
Paras, C.J., Bengzon, Montemayor, Bautista Angelo, Labrador,
Concepcion, Endencia and Gutierrez David, JJ.concur.
G.R. No. L-29485 November 21, 1980
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.

AYALA SECURITIES CORPORATION and THE HONORABLE COURT OF

TAX APPEALS, respondents.

TEEHANKEE, J.:
Before the Court is petitioner Commissioner of Internal Revenue's
motion for reconsideration of the Court's decision of April 8, 1976
wherein the Court affirmed in toto the appealed decision of respondent
Court of Tax Appeals, the dispositive portion of which provides as
follows:
WHEREFORE, the decision of the respondent Commissioner
of Internal Revenue assessing petitioner the amount of
P758,687.04 as 25% surtax and interest is reversed.
Accordingly, said assessment of respondent for 1955 is
hereby cancelled and declared of no force and effect,
Without pronouncement as to costs.
This Court's decision under reconsideration held that the assessment
made on February 21, 1961 by petitioner against respondent
corporation (and received by the latter on March 22, 1961) in the sum
of P758,687.04 on its surplus of P2,758,442.37 for its fiscal year ending
September 30, 1955 fell under the five-year prescriptive period
provided in section 331 of the National Internal Revenue Code and that
the assessment had, therefore, been made after the expiration of the
said five-year prescriptive period and was of no binding force and effect
.
Petitioner has urged that
A perusal of Sections 331 and 332(a) will reveal that they
refer to a tax, the basis of which is required by law to be
reported in a return such as for example, income tax or sales

tax. However, the surtax imposed by Section 25 of the Tax

Code is not one such tax. Accumulated surplus are never
returned for tax purposes, as there is no law requiring that
such surplus be reported in a return for purposes of the 25%
surtax. In fact, taxpayers resort to all means and devices to
cover up the fact that they have unreasonably accumulated
surplus.
Petitioner, therefore, submits that
As there is no law requiring taxpayers to file returns of their
accumulated surplus, it is obvious that neither Section 33
nor Section 332(a) of the Tax Code applies in a case involving
the 25% surtax imposed by Section 25 of the Tax Code. ...
Petitioner cites the Court of Tax Appeals' ruling in the earlier case
of United Equipment & Supply Company vs. Commissioner of Internal
Revenue (CTA Case No. 1795, October 30, 1971) which was appealed by
petitioner taxpayer to this Court in G. R. No. L-35653 bearing the same
title, which appeal was denied by this Court en banc for lack of merit as
per its Resolution of October 25, 1972, In said case, the tax court
squarely ruled that the provisions of sections 331 and 332 of the
National Internal Revenue Code for prescriptive periods of five 5 and
ten (10) years after the filing of the return do not apply to the tax on
the taxpayer's unreasonably accumulated surplus under section 25 of
the Tax Code since no return is required to be filed by law or by
regulation on such unduly ac cumulated surplus on earnings, reasoning
as follows:
In resisting the assessment amounting to P10,864.26 as accumulated
earnings tax for 1957, petitioner also invoked the defense of
prescription against the right of respondent to assess the said tax. It is
contended that since its income tax return for 1957 was filed in 1958,
and with the clarification by respondent in his letter dated May 14,

1963, that the amount sought to be collected was petitioner's surtax

liability under Section 25 rather than deficiency corporate income tax
under Section 24 of the National Internal Revenue Code, the
assessment has already prescribed under Section 331 of the same
Code.
Section 331 of the Revenue Code provides:
SEC. 331. Period of limitation upon assessment and
collection. Except as provided in the succeeding section,
internal revenue taxes shall be assessed within five years
after the return was filed, and no proceeding in court
without assessment for the collection of such taxes shall be
begun after the expiration of such period. For the purpose of
this section a return filed before the last day prescribed by
law for the filing thereof shall be considered as filed on such
last day; Provided, That this limitation shall not apply to
cases already investigated prior to the approval of this Code.
Obviously, Section 331 applies to, assessment of National
Internal Revenue Taxes which requires the filing of returns.
A return, the filing of which is necessary to start the running
of tile five-year period for making an assessment, must be
one which is required for the particular tax. Consequently, it
has been held that the filing of an income tax return does
not start the running of the statute of limitation for
assessment of the sales tax. (Butuan Sawmill, Inc. v. Court of
Tax Appeals, G.R. No. L-20601, Feb. 28, 1966, 16 SCRA 277).
Although petitioner filed an income tax return, no return
was filed covering its surplus profits which were improperly
accumulated. In fact, no return could have been filed, and
the law could not possibly require, for obvious reasons, the
filing of a return covering unreasonable accumulation of

corporate surplus profits. A tax imposed upon unreasonable

accumulation of surplus is in the nature of a penalty.
(Helvering v. National Grocery Co., 304 U.S. 282). It would
not be proper for the law to compel a corporation to report
improper accumulation of surplus. Accordingly, Section 331
limiting the right to assess internal revenue taxes within five
years from the date the return was filed or was due does not
apply.
Neither does Section 332 apply. Said Section provides:
SEC. 332 Exceptions as to period of limitation of assessment
and collection of taxes. (a) In the case of a false or
fraudulent return with intent to evade tax or of 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.
(b) Where before the expiration of the time
prescribed in the preceding section for the
assessment of the tax, both the Commissioner of
Internal Revenue and the taxpayer have
consented in writing to its assessment after such
time, the tax may be assessed at any time prior
to the expiration of the period agreed upon. The
period so agreed upon may be extended by
subsequent agreements in writing made before
the expiration of the period previously agreed
upon.
(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 by a 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 period. The period so agreed
upon may be extended by subsequent
agreements in writing made before the
expiration of the period previously agreed upon.
It will be noted that Section 332 has reference to national
internal revenue taxes which require the filing of returns.
This is implied, from the provision that the ten-year period
for assessment specified therein treats of the filing of a false
or fraudulent return or of a failure to file a return. There can
be no failure or omission to file a return where no return is
required to be filed by law or by regulation. It is, therefore,
our opinion that the ten-year period for making in
assessment under Section 332 does not apply to internal
revenue taxes which do not require the filing of a return.
It is well settled limitations upon the right of the
government to assess and collect taxes will not be presumed
in the absence of clear legislation to the contrary. The
existence of a time limit beyond which the government may
recover unpaid taxes is purely dependent upon some
express statutory provision, (51 Am. Jur. 867; 10 Mertens
Law of Federal Income Taxation, par. 57. 02.). It follows that
in the absence of express statutory provision, the right of
the government to assess unpaid taxes is imprescriptible.
Since there is no express statutory provision limiting the
right of the Commissioner of Internal Revenue to assess the

tax on unreasonable accumulation of surplus provided in

Section 25 of the Revenue Code, said tax may be assessed at
any time. (Emphasis supplied)
Such ruling was in effect upheld by this Court en banc upon its dismissal
of the taxpayer's appeal for lack of merit as above stated.
The Court is persuaded by the fundamental principle invoked by
petitioner that limitations upon the right of the government to assess
and collect taxes will not be presumed in the absence of clear
legislation to the contrary and that where the government has not by
express statutory provision provided a limitation upon its right to assess
unpaid taxes, such right is imprescriptible.
The Court, therefore, reconsiders its ruling in its decision under
reconsideration that the right to assess and collect the assessment in
question had prescribed after five years, and instead rules that there is
no such time limit on the right of the Commissioner of Internal Revenue
to assess the 25% tax on unreasonably accumulated surplus provided in
section 25 of the Tax Code, since there is no express statutory provision
limiting such right or providing for its prescription. The underlying
purpose of the additional tax in question on a corporation's improperly
accumulated profits or surplus is as set forth in the text of section 25 of
the Tax Code itself 1 to avoid the situation where a corporation unduly
retains its surplus instead of declaring and paving dividends to its
shareholders or members who would then have to pay the income tax
due on such dividends received by them. The record amply shows that
respondent corporation is a mere holding company of its shareholders
through its mother company, a registered co-partnership then set up by
the individual shareholders belonging to the same family and that
the prima facie evidence and presumption set up by the Tax Code,
therefore applied without having been adequately rebutted by the
respondent corporation.

Thus, Mr. Lamberto J. Cabral, the accountant of the corporation,

testified before the court as follows:
Atty. Garces
The investigation, Your Honor, shows that for the
year 1955, the Ayala Securities Corporation had
175,000 outstanding shares of stock and out of
these shares of Ayala Securities Corporation, the
Ayala and Company owned 174,996 shares of
stock.
Q. Is that right, Mr. Cabral?
Atty. Ong
Objection, Your Honor, on the
materiality of the question.
Judge Alvarez
What is the materiality of the
question?
Atty. Garces
We want to prove to this honorable Court that
Ayala Securities Corporation is a holding or
investment company, the parent company being
Ayala and Company.
Judge Alvarez
Witness may answer.
A. I think so; yes.

Q. And Ayala and Company's owned almost

wholly by the Zobel Family and the Ayala Family?
Atty. Ong
If Your Honor please, objection again on the
materiality. What would counsel for the
respondent prove on this point?
Atty. Garces
Same purpose, Your If Honor to prove that Ayala
Securities corporation is a mere investment or
holding company
Atty. Ong
What is the materiality of the case if it is a mere
investment company. In fact, we are here in
court to prove the reasonableness or
unreasonableness of the accumulation of profit. I
think counsel for the respondent is trying to harp
on presumption; but actually we will not be
delving on presumption but on actual facts
proving the reasonableness of the accumulation
based on actual evidence.
Judge Alvarez
In order to determine the reasonableness or
unreasonableness, there must be a basis. witness
will have to answer the question.
A. Yes.
xxx xxx xxx

Q. As of September 30, 1955 when the Ayala

Securities Corporation tiled its income tax return,
were the officers of the Ayala Securities
Corporation and the Ayala and Company housed
in the same building?
A. Yes, sir; they were.
Q. And also are the employees of the Ayala
Securities corporation and the Ayala and
Company the same - meaning that the employees
of the Ayala Securities Corporation are also the
employees of the Ayala and Company?
A. At the time, if I remember right, Ayala and
Company was the operating company and the
employees were the employees of the Ayala and
Company; (t.s.n., pp. 32-37).
Another witness, Mr. Salvador J. Lorayes the Secretary and head of the
Legal Department of the corporation, also testified that:
Judge Alvarez questions
Q. May we know from you whether Ayala
Securities corporation is an affiliate of Ayala and
Company?
A. Yes, Your honor.
Q. Do we understand from you that Ayala and
Company is the mother corporation of this
affiliate?
A. That is correct.

Q. And that the policy of Ayala Securities

Corporation is practically governed by the officers
or partners of Ayala and company
A. They have a strong influence over the policy of
Ayala Securities Corporation.
Q. So that whatever is decided by the partners of
Ayala and Company for a certain investment or
project would also be followed by Ayala
Securities Corporation?
A. If the project is assigned to Ayala Securities
Corporation it will be followed by Ayala Securities
Corporation; if to another affiliate, no (t.s.n., pp.
149-150). ...
Respondent corporation was therefore fully shown to fall under
Revenue Regulation No. 2 implementing the provisions of the income
tax law which provides on holding and investment companies that
SEC. 20. Holding and Investment Companies. A
corporation having practically no activities except holding
property, and collecting the income therefrom or investing
therein, shall be considered a holding company within the
meaning of section 25.
Petitioner commissioner's plausible alternative contention is that even
if the 25% surtax were to be deemed subject to prescription, computed
from the filing of the income tax return in 1955, the intent to evade
payment of the surtax is an inherent quality of the violation and the
return filed must necessarily partake of a false and/or fraudulent
character which would make applicable the 10-year prescriptive period
provided in section 332(a) of the Tax Code and since the assessment

was made in 1961 (the sixth year), the assessment was clearly within
the 10-year prescriptive period. The Court sees no necessity, however,
for ruling on this point in view of its adherence to the ruling in the
earlier raise of United Equipment & Supply Co., supra, holding that the
25% surtax is not subject to any statutory prescriptive period.
ACCORDINGLY, the Court's decision of April 8, 1976 is set aside and in
lieu thereof, judgment is hereby rendered ordering respondent
corporation to pay the assessment in the sum of P758,687.04 as 25%
surtax on its unreasonably accumulated surplus, plus the 5% surcharge
and 1% monthly interest thereon, pursuant to section 51 (e) of the
National Internal Revenue Code, as amended by R. A. 2343. With Costs.
Makasiar, Fernandez, Guerrero and De Castro, JJ., concur.
Melencio-Herrera, J., took no part.

Footnotes
1 "SEC. 25. Additional tax on corporations improperly
accumulating profits or surplus.
xxx xxx xxx
(b) Prima facie evidence. The fact that any corporation is
a mere holding company shall be prima facie evidence of a
purpose to avoid the tax upon its shareholders or members
Similar presumption will lie in the case of an investment
company where at any time during the taxable year more
than fifty per centum in value of its outstanding stock is
owned, directly or indirectly by one person.

(c) Evidence determinative of a purpose. The fact that the

earnings or profits of a corporation are permitted to
accumulate beyond the reasonable needs of the business
shall
be determinative of the purpose to avoid the tax upon its
shareholders or members unless the corporation, by clear
preponderance of evidence, shall prove the contrary.
* Mr. Justice de Castro was designated to sit with the First
Division.
G.R. No. L-16441

March 31, 1965

ALFREDO BOLLOZOS, petitioner,

vs.
COURT OF TAX APPEALS and COLLECTOR OF INTERNAL
REVENUE, respondents.
Vicente Jayme for petitioner.
Office of the Solicitor General for respondents.
REGALA, J.:
This is a petition for review of the decision of the Court of Tax Appeals,
as well as of the order denying the motion for reconsideration filed
therefor, ordering the petitioner to pay the respondent Commissioner
of Internal Revenue the total sum of P3,624.77, "as deficiency fixed and
percentage taxes and surcharges covering the period from the first
quarter of 1950 up to and including the third quarter of 1955" plus
costs.
The facts of this case are set forth in the partial "Stipulation of Facts,"
dated April 15, 1959, hereunder reproduced as follows:

1. That during the years 1950 to 1955, inclusive, the petitioner

engaged in business as operator of a shop for the construction
and repair of mechanical devices at Cebu City;
2. That during the said years, the petitioner paid the fixed tax of
P10.00 a year imposed by Section 182 of the National Internal
Revenue Code, except for the year 1952;
3. That during the said years, it was ascertained by both parties
that the petitioner failed to pay all the percentage taxes imposed
by Section 191 of the Tax Code, thereby incurring deficiency
percentage tax amounting to P3,111.52, instead of P4,254.67,
computed as follows:
Year of
Quarter

Gross
Receipts

Tax Percentage Deficiency

Rate Tax Paid
Tax

1st Quarter
1950

P9,315.00

2%

P144.98

P41.32

2nd Quarter
1950

9,091.50

2%

181.83

6,930.90

2%

138.62

10,109.80

3%

269.26

34.03

3rd Quarter up
to
Sept. 21,
1950
4th Quarter
1950
Total
1st Quarter
1951

P35,447.20
==========
P 3,859.22

Total

3%

P115.78

P395.80
==========

2nd Quarter
1951

5,148.53

3%

154.46

3rd Quarter
1951

9,590.64

3%

287.72

4th Quarter
1951

6,985.30

3%

209.56

Total

P25,583.69
==========

Total

P651.74
==========

1st Quarter
1952

P6,117.96

3%

P193.54

2nd Quarter
1952

5,402.01

3%

162.06

3rd Quarter
1952

12,671.71

3%

380.15

4th Quarter
1952

5,009.48

3%

154.30

Total

P29,201.16
==========

Total

P725.75
==========

For 1953 P12,680.67

3%

P380.42

For 1954

12,680.67

3%

P380.42

For 1955

19,246.20

3%

P577.39

Total Percentage Tax

For 1953 to 1955

P1,338.23

TOTAL DEFICIENCY
PERCENTAGE TAX
For 1950 to 1955

P3,111.52

4. That the parties hereby reserve their right to present additional

evidence not covered by this stipulation of facts in support of
their respective contentions.
As stated in the decision of the Court of Tax Appeals, the petitioner and
the respondent, by way of correcting the above-reproduced stipulation,
also agreed in open court that for the year 1955, only three-fourths
(3/4) of P19,246.20 or P14,434.65 should be considered as gross
receipts in computing the percentage tax due, inasmuch as the decision
appealed from covers only the period from the first quarter to the third
quarter of 1955.
As may be observed, the petitioner admits his failure to pay the fixed
and percentage taxes for the period in question. The only issue he
raises in his appeal is his contention that the right of the Commissioner
of Internal Revenue to collect the same has already prescribed.
In a documented account of the dates and incidents relevant to the
issue raised, the appellee recites the following:
This case arose from the information received by the Provincial
Revenue Officer of Cebu City that appellant was operating a
general repair shop since 1947 in Cebu City and was irregular in
the payment of his taxes (Exhs. 1 & 2, pp. 1 & 2 BIR rec.). With this
information, the said revenue officer was assigned as agent to
investigate the business activities of the appellant at C. Padilla St.,
Cebu City. On November 29, 1955, the said revenue agent
submitted his report, together with his working sheet, on the
gross receipts of the appellant covering the period from the first

quarter of 1950 to the third quarter of 1955 (Exh. 3, pp. 3-5, BIR
rec.). On December 6, 1955, an assessment notice was sent to the
appellant (p. 6, BIR rec.) by the Regional Office in Cebu City,
signed by Group Supervisor Nestor Espenilla, requesting the
appellant to appear at the Regional Office in Cebu City and to
explain his side of the case within ten (10) days from receipt of
said letter. This request, however, was not complied with by the
appellant (p. 7, BIR rec.). Another notice was sent to the appellant
on April 19, 1956 (p. 8, BIR rec.) but he likewise failed to appear
before the Regional Office Director or his representative.
On June 13, 1956, the appellant authorized in writing Ernesto
Ante, to represent him in his pending internal revenue case, and
that said written authority was personally presented by Ernesto
Ante to the Office of the Bureau of Internal Revenue in Cebu City
on June 15, 1956 (Exh. B, p. 9, BIR rec.; pp. 6-9, t.s.n., hearing on
April 8, 1959). In view of this representation, a formal letter of
demand (No. 56-199), dated August 31, 1956, was issued to the
appellant (Exh. 4; pp. 10-100, BIR rec.), addressed and mailed on
September 1, 1956 to Ernesto Ante, the appellant's authorized
representative at C. Padilla St., Cebu City (Exh. 5; p. 37, BIR rec.).
(A copy of this letter of demand was, likewise, handed personally
to the appellant upon suggestion of the Court of Tax Appeals
during the hearing of this case on April 8, 1959; pp. 31-33, t.s.n.).
A follow-up letter was sent to said authorized representative of
the appellant by the City Treasurer of Cebu City on September 10,
1956 (pp. 14 and 48, BIR rec.). The Chief Legal Assistant and
Deputy, Office of the City Treasurer of Cebu City, made several
direct requests to the appellant to pay the deficiency taxes
assessed and demanded by the Bureau of Internal Revenue but
the latter likewise ignored the demands for the payment of said
assessment (p. 16, BIR rec., 1st indorsement dated April 25, 1958).

On June 23, 1958, a "Warrant of Distraint and Levy" was issued by

the Regional Office against the properties of the appellant (p. 19,
BIR rec.; Exh. D), thru the City Treasurer of Cebu City (Exh. D-1; p.
20, BIR rec.) bat the same was not executed in view of the
appellant's request for reinvestigation (See letters of counsel for
petitioner dated August 5, 1959 and the 3rd indorsement of
Deputy Treasurer of Cebu City dated August 8, 1958, and 2nd
indorsement of Legal Asst. & Deputy, Office of the City Treasurer
of Cebu City dated August 6, 1958, pp. 24, 22 & 21, respectively,
BIR rec.).
A waiver of the statute of limitations, signed by the appellant (pp.
17-18, BIR rec.), was executed and submitted to the Regional
Office in Cebu City but the latter refused to accept the same for
the reason that it was defective (p. 25, BIR rec.).
On December 16, 1958, Regional Office answered the letter of the
appellant's counsel dated October 18, 1958 with the information
that the assessment in question was already final, the 30-day
period within which to protest the same having elapsed (p. 29, BIR
rec.). Accordingly, on the same date, the Regional office returned
the "Warrant of Distraint & Levy," issued on June 23, 1958, to the
City Treasurer of Cebu for immediate execution (p. 30, BIR rec.).
On January 24, 1959, appellant filed a petition for review with the
Court of Tax Appeals.
In contending that prescription has set in his favor, appellant argues
that it should be assumed that the required returns were filed on the
dates they were due since the filing of the same is required by Secs. 208
and 209 of the Revenue Code and the presumption is that he has
complied with its requirements, per Sec. 99 (ee), Rule 123, Rules of
Court. (now Sec. 5[ff], Rule 131.)

Consequently, he concludes that he "did not fail to file his tax returns,
or at least, the respondent collector did not prove his failure to file his
returns." (p. 7, Petitioner's Brief.) And, proceeding from this premise
that he did not fail to file his tax returns on time, the appellant insists
that the provision applicable to this case is Sec. 331 of the Tax Code
which provides:
SEC. 331. Period of limitation upon assessment and collection.
Except as provided in the succeeding section, internal revenue
taxes shall be assessed within five years after the return filed, and
no proceeding in court without assessment for the collection on
such taxes shall be begun after the expiration of such period. For
the purpose of this section a return filed before the last day
prescribed by law for the filing thereof shall be considered as filed
on such last day: Provided, That this limitation shall not apply to
cases already investigated prior to the approval of this Code.
On the other hand, the appellees maintain that while it is true that the
law is presumed to have been complied with, per the rule cited above,
an assertion to the effect that the requirement of the law has not been
complied with sets aside the presumption and imposes upon the one
asserting compliance therewith the burden of proving his assertion. It is
claimed that in the instant case, the collector "has repelled appellant's
defense of prescription with the assertion that appellant did not
comply with the requirements of Sec. 138 (a) of the Tax Code." Such
being the case, and considering that the defense of prescription is an
affirmative defense, the burden of proof rests upon the appellant to
present evidence upon the defense he has elected to set up.
In view of their contention, therefore, the appellees maintain that,
contrary to the appellant's position, the applicable provision of the Tax
Code is Sec. 332 and not Sec. 331. Sec. 332 provides:

SEC. 332. Exceptions as to period of limitation of assessment and

collection of taxes.(a) In the case of a false or fraudulent return
with intent to evade tax or of a failure to file a return, the tax may
be assessed, or a proceeding in court for the collection of such tax
may be begun without assessment, at any time within ten years
after the discovery of the falsity, fraud, or omission. (Emphasis
supplied by appellee.)
The issue in this case is fundamentally one of fact and not of law, to wit:
Did the appellant file the return mentioned in Section 332 (a) of the tax
code? If he has, then his contention that his tax liabilities has prescribed
is meritorious. On the other hand, if he has not so filed the said return,
then this case must unquestionably be governed by the provision of the
above-mentioned Section 332 (a) to the end that appellant's claim of
prescription must be denied.
The appellant has offered no proof whatsoever that he did file the said
return. In the premises, he merely relies upon the rebuttable
presumption established by the Rules of Court that he so filed the
same. He argues that inasmuch as the respondents-appellees "did not
prove his failure to file his return," he must be deemed or presumed to
have complied with that requirement.
Against the above contention, however, is the factual finding of the
Court of Tax Appeals that "from the record of the case at bar, it appears
that the petitioner herein failed to file his tax returns, except for the
first and fourth quarters of the year 1950." Furthermore, while it is true
that the appellant is entitled to the presumption he invokes, it is
likewise true that the same presumption no longer obtains in his case
since it has been squarely and explicitly questioned or challenged. And,
not only does the appellant no longer enjoy the above presumption: He
is now charged with the burden of proving his assertion that he has
complied with the law. It must be stressed that the defense of

prescription is an affirmative allegation and the burden of proof is upon

the party laying claim to it.1wph1.t
In brief, then, as appellant's failure to file the required returns was
discovered only on November 29, 1955, the appellee has up to
November 29, 1965 within which to collect the assessment in dispute.
And, as the lower court held, "considering that the petitioner filed the
instant appeal on January 24, 1959, and the respondent submitted his
answer to the petition for review on March 13, 1959, which is
equivalent to a court proceeding to collect the deficiency fixed and
percentage taxes under review (Collector of Internal Revenue v.
Clement, G.R. No. L-12194, January 24, 1959; Collector of Internal
Revenue v. Solano, G.R. No. L-11475, July 31, 1958), We believe and so
hold that the right of the respondent to collect the disputed deficiency
assessment for the periods not covered by any tax return has not yet
prescribed (Bisaya Land Transportation Co., Inc. v. Collector of Internal
Revenue, G.R. No. L-12100, May 29, 1959)."
IN VIEW OF ALL THE FOREGOING, the appealed decision is hereby
affirmed in full, with costs against the appellant.
Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera,
Paredes, Dizon, Makalintal, Bengzon, J.P., and Zaldivar, JJ., concur.

G.R. No. L-14519

July 26, 1960

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,

vs.
LUIS G. ABLAZA, defendant-appellee.
Assistant Solicitor General Jose P. Alejandro and Special Attorneys Cirilio
R. Francisco and Santiago M. Kapunan for appellant.
Martin B. Istaro for appellee.

LABRADOR, J.:
Appeal from a judgment of the Court of First Instance of Manila, Hon.
Carmelino G. Alvendia, presiding, dismissing an action instituted by the
Government to recover income taxes from the defendant-appellee
corresponding to the years 1945, 1946, 1947 and 1948.
The record discloses that on October 3, 1951, the Collector of Internal
Revenue assessed income taxes for the years 1945, 1946, 1947 and
1948 on the income tax returns of defendant-appellee Luis G. Ablaza.
The assessments total P5,254.70 (Exhibit "I"). On October 16, 1951, the
accountants for Ablaza requested a reinvestigation of Ablaza's tax
liability, on the ground that (1) the assessment is based on third-party
information and (3) neither the taxpayer nor his accountants were
permitted to appear in person (Exh. "J"). The petition for
reinvestigation was granted in a letter of the Collector of Internal
Revenue, dated October 17, 1951. On October 30, 1951, the
accountants for Ablaza again sent another letter to the Collector of
Internal Revenue submitting a copy of their own computation (Exh.
"L"). On October 23, 1952, said accountants again submitted a
supplemental memorandum (Exh. "M"). On March 10, 1954, the
accountants for Ablaza sent a letter to the examiner of accounts and
collections of the Bureau of Internal Revenue, stating:
In this connection, we wish to state that this case is presently
under reinvestigation as per our request dated October 16, 1951,
and your letter to us dated October 17, 1951, and that said tax
liability being only a tentative assessment, we are not as yet
advised of the results of the requested reinvestigation.
In view thereof, we wish to request, in fairness to the taxpayer
concerned, that we be furnished a copy of the detailed
computation of the alleged tax liability as soon as the
reinvestigation is terminated to enable us to prove the veracity of

the taxpayer's side of the case, and if it is found out that said
assessment is proper and in order, we assure you of our
assistance in the speedy disposition of this case. (Exh. "P")
On February 11, 1957, after the reinvestigation, the Collector of
Internal Revenue made a final assessment of the income taxes of
Ablaza, fixing said income taxes for the years already mentioned at
P2,066.56 (Exh. "Q"). Notice of the said assessment was sent (Exhs. "V",
"W" and "X") and upon receipt thereof the accountants of Ablaza sent a
letter to the Collector of Internal Revenue, dated May 8, 1957,
protesting the assessments, on the ground that the income taxes are no
longer collectible for the reason that they have already prescribed. As
the Collector did not agree to the alleged claim of prescription, action
was instituted by him in the Court of First Instance to recover the
amount assessed. The Court of First Instance upheld the contention of
Ablaza that the action to collect the said income taxes had prescribed.
Against this decision the case was brought here on appeal, where it is
claimed by the Government that the prescriptive period has not fully
run at the time of the assessment, in view especially of the letter of the
accountants of Ablaza, dated March 10, 1954, pertinent provisions of
which are quoted above.
It is of course true on October 14, 1951, Ablaza's accountants
requested a reinvestigation of the assessment of the income taxes
against him, the period of prescription of action to collect the taxes was
suspended. (Sec. 333, C. A. No. 466.) The provision of law on
prescription was adopted in our statute books upon recommendation
of the tax commissioner of the Philippines which declares:
Under the former law, the right of the Government to collect the
tax does not prescribe. However, in fairness to the taxpayer, the
Government should be estopped from collecting the tax where it
failed to make the necessary investigation and assessment within
5 years after the filing of the return and where it failed to collect

the tax within 5 years from the date of assessment thereof. just as
the government is interested in the stability of its collection, so
also are the taxpayers entitled to an assurance that they will not
be subjected to further investigation for tax purposes after the
expiration of a reasonable period of time. (Vol. II, Report of the
Tax Commission of the Philippines, pp. 321-322)
The law prescribing a limitation of actions for the collection of the
income tax is beneficial both to the Government and to its citizens; to
the Government because tax officers would be obliged to act promptly
in the making of assessment, and to citizens because after the lapse of
the period of prescription citizens would have a feeling of security
against unscrupulous tax agents who will always find an excuse to
inspect the books of taxpayers, not to determine the latter's real
liability, but to take advantage of every opportunity to molest peaceful,
law-abiding citizens. Without such legal defense taxpayers would
furthermore be under obligation to always keep their books and keep
them open for inspection subject to harassment by unscrupulous tax
agents. The law on prescription being a remedial measure should be
interpreted in a way conducive to bringing about the beneficient
purpose of affording protection to the taxpayer within the
contemplation of the Commission which recommend the approval of
the law.
The question in the case at bar boils down to the interpretation of
Exhibit "P", dated March 10, 1954, quoted above. If said letter be
interpreted as a request for further investigation or a new
investigation, different and distinct from the investigation demanded or
prayed for in Ablaza's first letter, Exhibit "L", then the period of
prescription would continue to be suspended thereby. but if the letter
in question does not ask for another investigation, the result would be
just the opposite. In our opinion the letter in question, Exhibit "P", does
not ask for another investigation. Its first paragraph quoted above

shows that the reinvestigation then being conducted was by virtue of

its request of October 16, 1951. All that the letter asks is that the
taxpayer be furnished a copy of the computation. The request may be
explained in this manner: As the reinvestigation was allowed on
October 1, 1951 and on October 16, 1951, the taxpayer supposed or
expected that at the time, March, 1954 the reinvestigation was about
to be finished and he wanted a copy of the re-assessment in order to be
prepared to admit or contest it. Nowhere does the letter imply a
demand or request for a ready requested and, therefore, the said letter
may not be interpreted to authorize or justify the continuance of the
suspension of the period of limitations.
We find the appeal without merit and we hereby affirm the judgment
of the lower court dismissing the action. Without costs.
Paras, C. J., Bengzon, Montemayor, Bautista Angelo, Concepcion, Reyes,
J. B. L., Endencia, Barrera, and Gutierrez David, JJ., concur.
G.R. No. L-26521

December 28, 1968

EUSEBIO VILLANUEVA, ET AL., plaintiff-appellee,

vs.
CITY OF ILOILO, defendants-appellants.
Pelaez, Jalandoni and Jamir for plaintiff-appellees.
Assistant City Fiscal Vicente P. Gengos for defendant-appellant.
CASTRO, J.:
Appeal by the defendant City of Iloilo from the decision of the Court of
First Instance of Iloilo declaring illegal Ordinance 11, series of 1960,
entitled, "An Ordinance Imposing Municipal License Tax On Persons
Engaged In The Business Of Operating Tenement Houses," and ordering
the City to refund to the plaintiffs-appellees the sums of collected from
them under the said ordinance.

On September 30, 1946 the municipal board of Iloilo City enacted

Ordinance 86, imposing license tax fees as follows: (1) tenement house
(casa de vecindad), P25.00 annually; (2) tenement house, partly or
wholly engaged in or dedicated to business in the streets of J.M. Basa,
Iznart and Aldeguer, P24.00 per apartment; (3) tenement house, partly
or wholly engaged in business in any other streets, P12.00 per
apartment. The validity and constitutionality of this ordinance were
challenged by the spouses Eusebio Villanueva and Remedies Sian
Villanueva, owners of four tenement houses containing 34 apartments.
This Court, in City of Iloilo vs. Remedios Sian Villanueva and Eusebio
Villanueva, L-12695, March 23, 1959, declared the ordinance ultra vires,
"it not appearing that the power to tax owners of tenement houses is
one among those clearly and expressly granted to the City of Iloilo by its
Charter."
On January 15, 1960 the municipal board of Iloilo City, believing,
obviously, that with the passage of Republic Act 2264, otherwise known
as the Local Autonomy Act, it had acquired the authority or power to
enact an ordinance similar to that previously declared by this Court
as ultra vires, enacted Ordinance 11, series of 1960, hereunder quoted
in full:
AN ORDINANCE IMPOSING MUNICIPAL LICENSE TAX ON PERSONS
ENGAGED IN THE BUSINESS OF OPERATING TENEMENT HOUSES
Be it ordained by the Municipal Board of the City of Iloilo,
pursuant to the provisions of Republic Act No. 2264, otherwise
known as the Autonomy Law of Local Government, that:
Section 1. A municipal license tax is hereby imposed on
tenement houses in accordance with the schedule of payment
herein provided.

Section 2. Tenement house as contemplated in this ordinance

shall mean any building or dwelling for renting space divided into
separate apartments or accessorias.
Section 3. The municipal license tax provided in Section 1
hereof shall be as follows:
I. Tenement houses:
(a) Apartment house made of strong materials

P20.00 per
door p.a.

(b) Apartment house made of mixed materials

P10.00 per
door p.a.

II Rooming house of strong materials

P10.00 per
door p.a.

Rooming house of mixed materials

P5.00 per door

p.a.

III. Tenement house partly or wholly engaged

in or dedicated to business in the following
streets: J.M. Basa, Iznart, Aldeguer, Guanco
and Ledesma from Plazoleto Gay to Valeria. St.

P30.00 per
door p.a.

IV. Tenement house partly or wholly engaged

in or dedicated to business in any other street

P12.00 per
door p.a.

V. Tenement houses at the streets surrounding

the super market as soon as said place is
P24.00 per
declared commercial
door p.a.
Section 4. All ordinances or parts thereof inconsistent herewith
are hereby amended.

Section 5. Any person found violating this ordinance shall be

punished with a fine note exceeding Two Hundred Pesos
(P200.00) or an imprisonment of not more than six (6) months or
both at the discretion of the Court.
Section 6 This ordinance shall take effect upon approval.
ENACTED, January 15, 1960.
In Iloilo City, the appellees Eusebio Villanueva and Remedios S.
Villanueva are owners of five tenement houses, aggregately containing
43 apartments, while the other appellees and the same Remedios S.
Villanueva are owners of ten apartments. Each of the appellees'
apartments has a door leading to a street and is rented by either a
Filipino or Chinese merchant. The first floor is utilized as a store, while
the second floor is used as a dwelling of the owner of the store. Eusebio
Villanueva owns, likewise, apartment buildings for rent in Bacolod,
Dumaguete City, Baguio City and Quezon City, which cities, according to
him, do not impose tenement or apartment taxes.
By virtue of the ordinance in question, the appellant City collected from
spouses Eusebio Villanueva and Remedios S. Villanueva, for the years
1960-1964, the sum of P5,824.30, and from the appellees Pio Sian
Melliza, Teresita S. Topacio, and Remedios S. Villanueva, for the years
1960-1964, the sum of P1,317.00. Eusebio Villanueva has likewise been
paying real estate taxes on his property.
On July 11, 1962 and April 24, 1964, the plaintiffs-appellees filed a
complaint, and an amended complaint, respectively, against the City of
Iloilo, in the aforementioned court, praying that Ordinance 11, series of
1960, be declared "invalid for being beyond the powers of the
Municipal Council of the City of Iloilo to enact, and unconstitutional for
being violative of the rule as to uniformity of taxation and for depriving
said plaintiffs of the equal protection clause of the Constitution," and

that the City be ordered to refund the amounts collected from them
under the said ordinance.
On March 30, 1966,1 the lower court rendered judgment declaring the
ordinance illegal on the grounds that (a) "Republic Act 2264 does not
empower cities to impose apartment taxes," (b) the same is
"oppressive and unreasonable," for the reason that it penalizes owners
of tenement houses who fail to pay the tax, (c) it constitutes not only
double taxation, but treble at that and (d) it violates the rule of
uniformity of taxation.
The issues posed in this appeal are:
1. Is Ordinance 11, series of 1960, of the City of Iloilo, illegal
because it imposes double taxation?
2. Is the City of Iloilo empowered by the Local Autonomy Act to
impose tenement taxes?
3. Is Ordinance 11, series of 1960, oppressive and unreasonable
because it carries a penal clause?
4. Does Ordinance 11, series of 1960, violate the rule of
uniformity of taxation?
1. The pertinent provisions of the Local Autonomy Act are
hereunder quoted:
SEC. 2. Any provision of law to the contrary notwithstanding, all
chartered cities, municipalities and municipal districts shall have
authority to impose municipal license taxes or fees upon persons
engaged in any occupation or business, or exercising privileges in
chartered cities, municipalities or municipal districts by requiring
them to secure licences at rates fixed by the municipal board or
city council of the city, the municipal council of the municipality,

or the municipal district council of the municipal district; to collect

fees and charges for services rendered by the city, municipality or
municipal district; to regulate and impose reasonable fees for
services rendered in connection with any business, profession or
occupation being conducted within the city, municipality or
municipal district and otherwise to levy for public purposes, just
and uniform taxes, licenses or fees; Provided, That municipalities
and municipal districts shall, in no case, impose any percentage
tax on sales or other taxes in any form based thereon nor impose
taxes on articles subject to specific tax, except gasoline, under the
provisions of the National Internal Revenue Code;Provided,
however, That no city, municipality or municipal district may levy
or impose any of the following:
(a) Residence tax;
(b) Documentary stamp tax;
(c) Taxes on the business of persons engaged in the printing and
publication of any newspaper, magazine, review or bulletin
appearing at regular intervals and having fixed prices for for
subscription and sale, and which is not published primarily for the
purpose of publishing advertisements;
(d) Taxes on persons operating waterworks, irrigation and other
public utilities except electric light, heat and power;
(e) Taxes on forest products and forest concessions;
(f) Taxes on estates, inheritance, gifts, legacies, and other
acquisitions mortis causa;
(g) Taxes on income of any kind whatsoever;

(h) Taxes or fees for the registration of motor vehicles and for the
issuance of all kinds of licenses or permits for the driving thereof;
(i) Customs duties registration, wharfage dues on wharves owned
by the national government, tonnage, and all other kinds of
customs fees, charges and duties;
(j) Taxes of any kind on banks, insurance companies, and persons
paying franchise tax; and
(k) Taxes on premiums paid by owners of property who obtain
insurance directly with foreign insurance companies.
A tax ordinance shall go into effect on the fifteenth day after its
passage, unless the ordinance shall provide otherwise: Provided,
however, That the Secretary of Finance shall have authority to
suspend the effectivity of any ordinance within one hundred and
twenty days after its passage, if, in his opinion, the tax or fee
therein levied or imposed is unjust, excessive, oppressive, or
confiscatory, and when the said Secretary exercises this authority
the effectivity of such ordinance shall be suspended.
In such event, the municipal board or city council in the case of
cities and the municipal council or municipal district council in the
case of municipalities or municipal districts may appeal the
decision of the Secretary of Finance to the court during the
pendency of which case the tax levied shall be considered as paid
under protest.
It is now settled that the aforequoted provisions of Republic Act 2264
confer on local governments broad taxing authority which extends to
almost "everything, excepting those which are mentioned therein,"
provided that the tax so levied is "for public purposes, just and
uniform," and does not transgress any constitutional provision or is not

repugnant to a controlling statute.2 Thus, when a tax, levied under the

authority of a city or municipal ordinance, is not within the exceptions
and limitations aforementioned, the same comes within the ambit of
the general rule, pursuant to the rules of expressio unius est exclusio
alterius, and exceptio firmat regulum in casibus non excepti.
Does the tax imposed by the ordinance in question fall within any of the
exceptions provided for in section 2 of the Local Autonomy Act? For
this purpose, it is necessary to determine the true nature of the tax.
The appellees strongly maintain that it is a "property tax" or "real
estate tax,"3 and not a "tax on persons engaged in any occupation or
business or exercising privileges," or a license tax, or a privilege tax, or
an excise tax.4 Indeed, the title of the ordinance designates it as a
"municipal license tax on persons engaged in the business of operating
tenement houses," while section 1 thereof states that a
"municipal license tax is hereby imposed on tenement houses." It is the
phraseology of section 1 on which the appellees base their contention
that the tax involved is a real estate tax which, according to them,
makes the ordinance ultra vires as it imposes a levy "in excess of the
one per centum real estate tax allowable under Sec. 38 of the Iloilo City
Charter, Com. Act 158."5.
It is our view, contrary to the appellees' contention, that the tax in
question is not a real estate tax. Obviously, the appellees confuse the
tax with the real estate tax within the meaning of the Assessment
Law,6 which, although not applicable to the City of Iloilo, has
counterpart provisions in the Iloilo City Charter.7 A real estate tax is a
direct tax on the ownership of lands and buildings or other
improvements thereon, not specially exempted,8 and is payable
regardless of whether the property is used or not, although the value
may vary in accordance with such factor.9The tax is usually single or
indivisible, although the land and building or improvements erected
thereon are assessed separately, except when the land and building or

improvements belong to separate owners.10 It is a fixed proportion11 of

the assessed value of the property taxed, and requires, therefore, the
intervention of assessors.12 It is collected or payable at appointed
times,13 and it constitutes a superior lien on and is enforceable against
the property14 subject to such taxation, and not by imprisonment of the
owner.
The tax imposed by the ordinance in question does not possess the
aforestated attributes. It is not a tax on the land on which the tenement
houses are erected, although both land and tenement houses may
belong to the same owner. The tax is not a fixed proportion of the
assessed value of the tenement houses, and does not require the
intervention of assessors or appraisers. It is not payable at a designated
time or date, and is not enforceable against the tenement houses
either by sale or distraint. Clearly, therefore, the tax in question is not a
real estate tax.
"The spirit, rather than the letter, or an ordinance determines the
construction thereof, and the court looks less to its words and more to
the context, subject-matter, consequence and effect. Accordingly, what
is within the spirit is within the ordinance although it is not within the
letter thereof, while that which is in the letter, although not within the
spirit, is not within the ordinance."15 It is within neither the letter nor
the spirit of the ordinance that an additional real estate tax is being
imposed, otherwise the subject-matter would have been not merely
tenement houses. On the contrary, it is plain from the context of the
ordinance that the intention is to impose a license tax on the operation
of tenement houses, which is a form of business or calling. The
ordinance, in both its title and body, particularly sections 1 and 3
thereof, designates the tax imposed as a "municipal license tax" which,
by itself, means an "imposition or exaction on the right to use or
dispose of property, to pursue a business, occupation, or calling, or to
exercise a privilege."16.

"The character of a tax is not to be fixed by any isolated words

that may beemployed in the statute creating it, but such words
must be taken in the connection in which they are used and the
true character is to be deduced from the nature and essence of
the subject."17 The subject-matter of the ordinance is tenement
houses whose nature and essence are expressly set forth in
section 2 which defines a tenement house as "any building or
dwelling for renting space divided into separate apartments or
accessorias." The Supreme Court, in City of Iloilo vs. Remedios Sian
Villanueva, et al., L-12695, March 23, 1959, adopted the definition
of a tenement house18 as "any house or building, or portion
thereof, which is rented, leased, or hired out to be occupied, or is
occupied, as the home or residence of three families or more
living independently of each other and doing their cooking in the
premises or by more than two families upon any floor, so living
and cooking, but having a common right in the halls, stairways,
yards, water-closets, or privies, or some of them." Tenement
houses, being necessarily offered for rent or lease by their very
nature and essence, therefore constitute a distinct form of
business or calling, similar to the hotel or motel business, or the
operation of lodging houses or boarding houses. This is precisely
one of the reasons why this Court, in the said case of City of Iloilo
vs. Remedios Sian Villanueva, et al., supra, declared Ordinance
86 ultra vires, because, although the municipal board of Iloilo City
is empowered, under sec. 21, par. j of its Charter, "to tax, fix the
license fee for, and regulate hotels, restaurants, refreshment
parlors, cafes, lodging houses, boarding houses, livery garages,
public warehouses, pawnshops, theaters, cinematographs,"
tenement houses, which constitute a different business
enterprise,19 are not mentioned in the aforestated section of the
City Charter of Iloilo. Thus, in the aforesaid case, this Court
explicitly said:.

"And it not appearing that the power to tax owners of tenement

houses is one among those clearly and expressly granted to the
City of Iloilo by its Charter, the exercise of such power cannot be
assumed and hence the ordinance in question is ultra vires insofar
as it taxes a tenement house such as those belonging to
defendants." .
The lower court has interchangeably denominated the tax in question
as a tenement tax or an apartment tax. Called by either name, it is not
among the exceptions listed in section 2 of the Local Autonomy Act. On
the other hand, the imposition by the ordinance of a license tax on
persons engaged in the business of operating tenement houses finds
authority in section 2 of the Local Autonomy Act which provides that
chartered cities have the authority to impose municipal license taxes or
fees upon persons engaged in any occupation or business, or exercising
privileges within their respective territories, and "otherwise to levy for
public purposes, just and uniform taxes, licenses, or fees." .
2. The trial court condemned the ordinance as constituting "not only
double taxation but treble at that," because "buildings pay real estate
taxes and also income taxes as provided for in Sec. 182 (A) (3) (s) of the
National Internal Revenue Code, besides the tenement tax under the
said ordinance." Obviously, what the trial court refers to as "income
taxes" are the fixed taxes on business and occupation provided for in
section 182, Title V, of the National Internal Revenue Code, by virtue of
which persons engaged in "leasing or renting property, whether on
their account as principals or as owners of rental property or
properties," are considered "real estate dealers" and are taxed
according to the amount of their annual income.20.
While it is true that the plaintiffs-appellees are taxable under the
aforesaid provisions of the National Internal Revenue Code as real
estate dealers, and still taxable under the ordinance in question, the
argument against double taxation may not be invoked. The same tax

may be imposed by the national government as well as by the local

government. There is nothing inherently obnoxious in the exaction of
license fees or taxes with respect to the same occupation, calling or
activity by both the State and a political subdivision thereof.21.
The contention that the plaintiffs-appellees are doubly taxed because
they are paying the real estate taxes and the tenement tax imposed by
the ordinance in question, is also devoid of merit. It is a well-settled
rule that a license tax may be levied upon a business or occupation
although the land or property used in connection therewith is subject
to property tax. The State may collect an ad valorem tax on property
used in a calling, and at the same time impose a license tax on that
calling, the imposition of the latter kind of tax being in no sensea
double tax.22.
"In order to constitute double taxation in the objectionable or
prohibited sense the same property must be taxed twice when it
should be taxed but once; both taxes must be imposed on the
same property or subject-matter, for the same purpose, by the
same State, Government, or taxing authority, within the same
jurisdiction or taxing district, during the same taxing period, and
they must be the same kind or character of tax."23 It has been
shown that a real estate tax and the tenement tax imposed by the
ordinance, although imposed by the sametaxing authority, are not
of the same kind or character.
At all events, there is no constitutional prohibition against double
taxation in the Philippines.24 It is something not favored, but is
permissible, provided some other constitutional requirement is not
thereby violated, such as the requirement that taxes must be
uniform."25.
3. The appellant City takes exception to the conclusion of the lower
court that the ordinance is not only oppressive because it "carries a

penal clause of a fine of P200.00 or imprisonment of 6 months or both,

if the owner or owners of the tenement buildings divided into
apartments do not pay the tenement or apartment tax fixed in said
ordinance," but also unconstitutional as it subjects the owners of
tenement houses to criminal prosecution for non-payment of an
obligation which is purely sum of money." The lower court apparently
had in mind, when it made the above ruling, the provision of the
Constitution that "no person shall be imprisoned for a debt or nonpayment of a poll tax."26 It is elementary, however, that "a tax is not a
debt in the sense of an obligation incurred by contract, express or
implied, and therefore is not within the meaning of constitutional or
statutory provisions abolishing or prohibiting imprisonment for debt,
and a statute or ordinance which punishes the non-payment thereof by
fine or imprisonment is not, in conflict with that prohibition."27 Nor is
the tax in question a poll tax, for the latter is a tax of a fixed amount
upon all persons, or upon all persons of a certain class, resident within
a specified territory, without regard to their property or the
occupations in which they may be engaged.28 Therefore, the tax in
question is not oppressive in the manner the lower court puts it. On the
other hand, the charter of Iloilo City29 empowers its municipal board to
"fix penalties for violations of ordinances, which shall not exceed a fine
of two hundred pesos or six months' imprisonment, or both such fine
and imprisonment for each offense." In Punsalan, et al. vs. Mun. Board
of Manila, supra, this Court overruled the pronouncement of the lower
court declaring illegal and void an ordinance imposing an occupation
tax on persons exercising various professions in the City of
Manilabecause it imposed a penalty of fine and imprisonment for its
violation.30.
4. The trial court brands the ordinance as violative of the rule of
uniformity of taxation.

"... because while the owners of the other buildings only pay real
estate tax and income taxes the ordinance imposes aside from
these two taxes an apartment or tenement tax. It should be noted
that in the assessment of real estate tax all parts of the building or
buildings are included so that the corresponding real estate tax
could be properly imposed. If aside from the real estate tax the
owner or owners of the tenement buildings should pay apartment
taxes as required in the ordinance then it will violate the rule of
uniformity of taxation.".
Complementing the above ruling of the lower court, the appellees
argue that there is "lack of uniformity" and "relative inequality,"
because "only the taxpayers of the City of Iloilo are singled out to pay
taxes on their tenement houses, while citizens of other cities, where
their councils do not enact a similar tax ordinance, are permitted to
escape such imposition." .
It is our view that both assertions are undeserving of extended
attention. This Court has already ruled that tenement houses constitute
a distinct class of property. It has likewise ruled that "taxes are uniform
and equal when imposed upon all property of the same class or
character within the taxing authority."31 The fact, therefore, that the
owners of other classes of buildings in the City of Iloilo do not pay the
taxes imposed by the ordinance in question is no argument at all
against uniformity and equality of the tax imposition. Neither is the rule
of equality and uniformity violated by the fact that tenement taxesare
not imposed in other cities, for the same rule does not require that
taxes for the same purpose should be imposed in different territorial
subdivisions at the same time.32So long as the burden of the tax falls
equally and impartially on all owners or operators of tenement houses
similarly classified or situated, equality and uniformity of taxation is
accomplished.33 The plaintiffs-appellees, as owners of tenement houses
in the City of Iloilo, have not shown that the tax burden is not equally or

uniformly distributed among them, to overthrow the presumption that

tax statutes are intended to operate uniformly and equally.34.
5. The last important issue posed by the appellees is that since the
ordinance in the case at bar is a mere reproduction of Ordinance 86 of
the City of Iloilo which was declared by this Court in L-12695, supra,
as ultra vires, the decision in that case should be accorded the effect
of res judicata in the present case or should constitute estoppel by
judgment. To dispose of this contention, it suffices to say that there is
no identity of subject-matter in that case andthis case because the
subject-matter in L-12695 was an ordinance which dealt not only with
tenement houses but also warehouses, and the said ordinance was
enacted pursuant to the provisions of the City charter, while the
ordinance in the case at bar was enacted pursuant to the provisions of
the Local Autonomy Act. There is likewise no identity of cause of action
in the two cases because the main issue in L-12695 was whether the
City of Iloilo had the power under its charter to impose the tax levied by
Ordinance 11, series of 1960, under the Local Autonomy Act which took
effect on June 19, 1959, and therefore was not available for
consideration in the decision in L-12695 which was promulgated on
March 23, 1959. Moreover, under the provisions of section 2 of the
Local Autonomy Act, local governments may now tax any taxable
subject-matter or object not included in the enumeration of matters
removed from the taxing power of local governments.Prior to the
enactment of the Local Autonomy Act the taxes that could be legally
levied by local governments were only those specifically authorized by
law, and their power to tax was construed in strictissimi juris. 35.
ACCORDINGLY, the judgment a quo is reversed, and, the ordinance in
questionbeing valid, the complaint is hereby dismissed. No
pronouncement as to costs..
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar,
Sanchez,Fernando and Capistrano, JJ., concur..

Footnotes
1

The record discloses that the delay caused in the lower court
was due to the loss of the original record while the same was in
the possession of the late Judge Perfecto Querubin. The record
was later reconstituted under Judge Ramon Blanco..
2

Nin Bay Mining Co. vs. Mun. of Roxas, Prov. of Palawan, L-20125,
July 20, 1965, per Concepcion, J.: .
"Neither the plaintiff nor the lower court maintains that the
subject matter of the ordinance in question comes under
any of the foregoing exceptions. Hence, under the rule "expressio unius est exclusio alterius", the ordinance should
be deemed to come within the purview of the general rule.
Indeed, the sponsor of the bill, which upon its passage
became Republic Act No. 2264, explicitly informed the
House of Representatives when he urged the same to
approve it, that, under its provisions, local governments
would be "able to do everything, excepting those things
which are mentioned therein." ..." .
C.N. Hodges vs. The Mun. Board of the City of Iloilo, et al., L18276, Jan. 12, 1967, per Castro, J.: .
"... Heretofore, we have announced the doctrine that the
grant of the power to tax to chartered cities under section 2
of the Local Autonomy Act is sufficiently plenary to cover
"everything, excepting those which are mentioned therein,"
subject only to the limitation that the tax so levied is for
"public purposes, just and uniform" (Nin Bay Mining Co. vs.

Mun. of Roxas, Prov. of Palawan, G.R. No. L-20125, July 20,

1965). There is no showing, and we do not believe it is
possible to show, that the tax levied, called by any name percentage tax or sales tax - comes under any of the specific
exceptions listed in Section 2 of the Local Autonomy Act. Not
being excepted, it must be regarded as coming within the
purview of the general rule. As the maxim goes, "Exceptio
firmat regulum in casibus non excepti." Since its public
purpose, justness and uniformity of application are not
disputed, the tax so levied must be sustained as valid." (Re:
Ordinance imposing a tax on sales or real estate property
situated in the City of Iloilo, of 1/2% of 1% of the contract
price or consideration.).
Ormoc Sugar Co., Inc. vs. Mun. Board of Ormoc City, et al., L24322, July 21, 1967, per Fernando, J.: .
"In a number of decisions starting from City of Bacolod v.
Gruet, L-18290, Jan. 31, 1963, to Hodges vs. Mun. Board, L18276, Jan. 12, 1967, such broad taxing authority has been
implemented and vitalized by this Court.
"... The question before this Court is one of power. From and
after June 19, 1959, when the Local Autonomy Act was
enacted, the sphere of autonomy of a chartered city in the
enactment of taxing measures has been considerably
enlarged.
"... In the absence of a clear and specific showing that there
was a transgression of a constitutional provision or
repugnancy to a controlling statute, an objection of such a
generalized character deserves but scant sympathy from this
Court. Considering the indubitable policy expressly set forth
in the Local Autonomy Act, the invocation of such a

talismanic formula as "restraint of trade" without more no

longer suffices, assuming it ever did, to nullify a taxing
ordinance, otherwise valid." [Re: Ordinance imposing tax on
all productions of centrifugal sugar (B-sugar) locally sold or
sold within the Phil., at P.20 per picul, etc.].
3

"Taxes on property are taxes assessed on all property or on all

property of a certain class located within a certain territory on a
specified date in proportion to its value, or in accordance with
some other reasonable method of apportionment, the obligation
to pay which is absolute and unavoidable and it is not based upon
any voluntary action of the person assessed. A property tax is
ordinarily measured by the amount of property owned by the
taxpayer on a given day, and not on the total amount owned by
him during the year. It is ordinarily assessed at stated periods
determined in advance, and collected at appointed times, and its
payment is usually enforced by sale of the property taxed, and,
occassionally, by imprisonment of the person assessed." (51 Am.
Jur. 57) .
"A "real estate tax" is a tax in rem against realty without
personal liability therefor on part of owner thereof, and a
judgment recovered in proceedings for enforcement of real
estate tax is one in rem against the realty without personal
liability against the owner." (36 Words and Phrases, 286,
citing Land O'Lakes Dairy Co. vs. Wadena County, 39 N. W.
2d. 164, 171, 229 Minn. 263).
4

"The term "license tax" or "license fee" implies an imposition or

exaction on the right to use or dispose of a property, to pursue a
business, occupation, or calling, or to exercise a privilege." (33
Am. Jur. 325-v26) .

"The term "excise tax" is synonymous with "privilege tax",

and the two are often used interchangeably, and whether a
tax is characterized in the statute imposing it as a privilege
tax or an excise tax is merely a choice of synonymous words,
for an excise tax is a privilege tax." (51 Am. Jur. 62, citing
Bank of Commerce & T. Co. vs. Senter, 149 Tenn. 569, 260
SW 144) .
"Thus, it is said that an excise tax is a charge imposed upon
the performance of an act, the enjoyment of a privilege, or
the engaging in an occupation." (51 Am. Jur. 61) .
5

"SEC. 38. Annual tax and penalties. Extension and remission of

the tax. -- An annual tax of one per centum on the assessed value
of all real estate in the city subject to taxation shall be levied by
the city treasurer..." .
6

Commonwealth Act No. 470 -- "SECTION 1. Title of this Act. - This

Act shall be known as the Assessment Law. `.
`SEC. 2. Incidence of real property tax. -- Except in chartered
cities, there shall be levied, assessed, and collected an
annual ad valorem tax on real property, including land,
buildings, machinery and other improvements not
hereinafter specially exempted.".
7

Com. Act 158, sections 28 to 53.

Com. Act 158, sec. 29.

51 Am. Jur. 53: "An ad valorem property tax is invariably based

upon ownership of property, and is payable regardless of whether
the property is used or not, although of course the value may vary
in accordance with such factor." .

10

"Real estate, for purposes of taxation, includes all land within

the district by which the tax is levied, and all rights and interests
in such land, and all buildings and other structures affixed to the
land, even though as between the landlord and the tenant they
are the property of the tenant and may be removed by him at the
termination of the lease." (51 Am. Jur. 438) Sec. 31 of Com. Act
158 provides: "When it shall appear that there are separate
owners of the land and the improvements thereon, a separate
assessment of the property of each shall be made." .
11

Sec. 38 of Com. Act 158 provides: "An annual tax of one per
centum on the assessed value of all real estate in the city subject
to taxation shall be levied by the city treasurer." .
12

Secs. 28 to 34, Com. Act 158.

13

Sec. 38 of Com. Act 158 provides: "All taxes on real estate for
any year shall be due and payable on the first day of January and
from this date such taxes together with all penalties accruing
thereto shall constitute a lien on the property subject to such
taxation." .
14

Sec. 38 of Com. Act 158 provides: "Such lien shall be superior to

all other liens, mortgages or incumbrances of any kind
whatsoever, and shall be enforceable against the property
whether in the possession of the delinquent or any subsequent
owner, and can only be removed by the payment of the tax and
penalty.".
15

62 C.J.S. 845; Manila Race Horse Trainers Assn. vs. De la Fuente,

L-2947, Jan. 11, 1951, 88 Phil. 60.
16

51 Am. Jur. 59-60; 33 Am. Jur. 325-326..

17

51 Am. Jur. 56, citing Eyre v. Jacob, 14 Gratt (Va.) 422; 73 Am.
Dec. 367.
18

Webster's New International Dictionary, 2nd Ed., p. 2601.

19

City of Iloilo vs. Remedios Sian Villanueva, et al., L-12695, March

23, 1959: "As may be seen from the definition of each
establishment hereunder quoted, a tenement house is different
from hotel, lodging house, or boarding house. These are different
business enterprises. They have been established for different
purposes.
20

National Internal Revenue Code: .

"SEC. 182. Fixed taxes. -- On business ...; (3) Other fixed
taxes. -- The following fixed taxes shall be collected as
follows, the amount stated being for the whole year, when
not otherwise specified: .
XXX

XXX

XXX

"(s) Stockbrokers, dealers in securities, real estate brokers,

real estate dealers, commercial brokers, customs brokers,
and immigration brokers, one hundred and fifty pesos:
Provided, however, That in the case of real estate dealers,
the annual fixed tax to be collected shall be as follows: .
"One hundred and fifty pesos, if the annual income from
buying, selling, exchanging, leasing, or renting property
(whether on their own account as principals or as owners of
rental property or properties) is four thousand pesos or
more but not exceeding ten thousand pesos; .

"Three hundred pesos, if such annual income exceeds ten

thousand pesos but does not exceed thirty thousand pesos;
and .
"Five hundred pesos, if such annual income exceeds thirty
thousand pesos."
21

Punsalan, et al. vs. Mun. Board of the City of Manila, et al., L4817, May 26, 1954, 95 Phil. 46, per Reyes, J.: In this case the
Supreme Court upheld the validity of Ordinance 3398 of the City
of Manila, approved on July 25, 1950, imposing a municipal
occupation tax on persons exercising various professions (lawyers,
medical practitioners, public accountants, dental surgeons,
pharmacists, etc.), in the city and penalizes non-payment of the
tax by a fine of not more than P200.00 or by imprisonment of not
more than 6 months, or by both such fine and imprisonment in
the discretion of the court, although section 201 [now sec. 182(B)]
of the National Internal Revenue Code requires the payment of
taxes on occupation or professional taxes. Said Justice Reyes: "The
argument against double taxation may not be invoked where one
tax is imposed by the state and the other is imposed by the city (1
Cooley on Taxation, 4th ed., p. 492), it being widely recognized
that there is nothing obnoxious in the requirement thatlicense
fees or taxes be exacted with respect to the same occupation,
calling or activity by both the state and the political subdivision
thereof. (51 Am. Jur., 341.)" .
A month after the promulgation of the above decision,
Congress passed Rep. Act 1166, approved on June 18, 1954,
providing as follows: "Any provisions of existing laws, city
charters and ordinances, executive orders and regulations,
or parts thereof, to the contrary notwithstanding, every
professional legally authorized to practice his profession,
who has paid the corresponding annual privilege tax on

professions required by Sec. 182 of the NIRC, Com. Act No.

466,shall be entitled to practice the profession for which he
has been duly qualified under the law, in all parts of the
Philippines without being subject to any other tax, charge,
license or fee for the practice of such profession; Provided,
however, That they have paid to the office concerned the
registration fees required in their respective professions." .
22

People vs. Santiago Mendaros, et al., L-6975, May 27, 1955, 97

Phil. 958-959, per Bautista Angelo, J. Appeal from the decision of
the CFI of Zambales. Defendants-appellees were convicted by the
JP Court of Palauig, Zambales, and sentenced to pay a fine of
P5.00, for failure to pay the occupation tax imposed by a
municipal ordinance on owners of fishponds on lands of private
ownership. The Supreme Court, in sustaining the validity of the
ordinance, held:.
"The ground on which the trial court declared the municipal
ordinance invalid would seem to be that, since the land on
which the fishpond is situated is already subject to land tax,
it would be unfair and discriminatory to levy another tax on
the owner of the fishpond because that would amount to
double taxation. This view is erroneous because it is a wellsettled rule that a license tax may be levied upon a business
or occupation although the land or property used therein is
subject to property tax. It was also held that "the state may
collect an ad valorem tax on property used in a calling, and
at the same time impose a license tax on the pursuit of that
calling." The imposition of this kind of tax is in no sense
called a double tax." .
Veronica Sanchez vs. The Collector of Internal Revenue, L7521, Oct. 18, 1955, 97 Phil. 687, per Reyes, J.B.L., J.

"Considering that appellant constructed her four-door

"accessoria" purposely for rent or profit; that she has been
continuously leasing the same to third persons since its
construction in 1947; that she manages her property herself;
and that said leased holding appears to be her main source
of livelihood, she is engaged in the leasing of real estate, and
is a real estate dealer as defined in section 194(s) [now, Sec.
182(A)(3)(s)] of the Internal Revenue Code, as amended by
Rep. Act No. 42.
"Appellant argues that she is already paying real estate taxes
on her property, as well as income tax on the income
derived therefrom, so that to further subject its rentals to
the "real estate dealers" tax amounts to double taxation.
This argument has already been rejected by this Court in the
case of People vs. Mendaros et al., L-6975, promulgated
May 27, 1955, wherein we held that it is a well-settled rule
that license tax may be levied upon a business or occupation
although the land or property used therein is subject to
property tax, and that"the state may collect an ad valorem
tax on property used in a calling, and at the same time
impose a license tax on the pursuit of that calling", the
imposition of the latter kind of tax being in no sense a
double tax." ".
23

84 C.J.S. 131-132.

24

Manufacturers' Life Insurance Co. vs. Meer, L-2910, June 29,

1951; City of Manila vs. Interisland Gas Service, L-8799, Aug 31,
1956; Commissioner of Internal Revenue vs. Hawaiian-Philippine
Co., L-16315, May 30, 1964; Pepsi-Cola Bottling Co. of the
Philippines vs. City of Butuan, et al., L-22814, Aug. 28, 1968.
Pepsi-Cola Bottling Co. vs. City of Butuan, supra: .

"The second and last objections are manifestly devoid of

merit. Indeed -- independently of whether or not the tax in
question, when considered in relation to the sales tax
prescribed by Acts of Congress, amounts to double taxation,
on which we need not and do not express any opinion -double taxation, in general, is not forbidden by our
fundamental law. We have not adopted, as part thereof, the
injunction against double taxation found in the Constitution
of the United States and some States of the Union. Then,
again, the general principle against delegation of legislative
powers, in consequence of the theory of separation of
powers is subject to one well-established exception, namely;
legislative powers may be delegated to local governments to which said theory does not apply - in respect of matters
of local concern." .
25

84 C.J.S. 133-134; "Double taxation, although not favored, is

permissible in the absence of express or implied constitutional
prohibition.
"Double taxation should not be permitted unless the
legislature has authority to impose it. However, since the
taxing power is exclusively a legislative function, and since,
except as it is limited or restrained by constitutional
provisions, it is absolute and unlimited, it is generally held
that there is nothing, in the abscence of any express or
implied constitutional prohibition against double taxation, to
prevent the imposition of more than one tax on property
within the jurisdiction, as the power to tax twice is as ample
as the power to tax once. In such case whether or not there
should be double taxation is a matter within the discretion
of the legislature.

"In some states where double taxation is not expressly

prohibited, it is held that double taxation is permissible, or
not invalid or unconstitutional, or necessarily unlawful,
provided some other constitutional requirement is not
thereby violated, as a requirement that taxes must be equal
and uniform." .
The Constitution of the Philippines, Art. VI, sec. 22 (1)
provides: "The rule of taxation shall be uniform." .
26

Art. III, sec. 1, par. 12, Constitution.

27

51 Am. Jur. 860-861, citing Cousins v. State, 50 Ala. 113, 20 Am.

Rep. 290; Rosenbloom v. State, 64 Neb. 342, 89 NW 1053, 57 LRA
922; Voelkel v. Cincinnati, 112 Ohio St. 374, 147 NE 754, 40 ALR 73
(holding the provisions of an ordinance making the non-payment
of an excise tax levied in pursuance of such ordinance a
misdemeanor punishable by fine not in violation of the
constitutional prohibition against the imprisonment of any person
for "debt in a civil action, or mesne or final process"); Ex parte
Mann, 39 Tex. Crim. Rep. 491, 46 SW 828,73 Am. St. Rep. 961.
26 R.C.L. 25-26: "It is generally considered that a tax is not a
debt, and that the municipality to which the tax is payable is
not a creditor of the person assessed. A debt is a sum of
money due by certain and express agreement. It originates
in, and is founded upon, contract express or implied. Taxes,
on the other hand, do not rest upon contract, express or
implied. They are obligations imposed upon citizens to pay
the expenses of government. They are forced contributions,
and in no way dependent upon the will or contract, express
or implied, of the persons taxed." .

28

51 Am. Jur. 66-67; "Capitation or poll taxes are taxes of a fixed

amount upon all persons, or upon all the persons of a certain
class, resident within a specified territory, without regard to their
property or the occupations in which they may be engaged. Taxes
of a specified amount upon each person performing a certain act
or engaging in a certain business or profession are not, however,
poll taxes." .
29

Com. Act No. 158 (An Act Establishing a Form of Government

for the City of Iloilo), section 21: "Except as otherwise provided by
law, and subject to the conditions and limitations thereof, the
Municipal Board shall have the following legislative powers: .
"(aa) ... and to fix penalties for the violation of ordinances
which shall not exceed a fine of two hundred pesos or six
months' imprisonment, or both such fine and imprisonment,
for each offense." .
30

"To begin with the defendants' appeal, we find that the lower
court was in error in saying that the imposition of the penalty
provided for in the ordinance was without the authority of law.
The last paragraph (kk) of the very section that authorizes the
enactment of the ordinance (section 18 of the Manila Charter) in
express terms also empowers the Municipal Board to "fix
penalties for the violation of ordinances which not exceed to [sic]
two hundred pesos fine or six months' imprisonment, or both
such fine and imprisonment, for a single offense." Hence, the
pronouncement below that the ordinance in question is illegal
and void because it imposes a penalty not authorized by law is
clearly without legal basis." .
31

51 Am. Jur. 203, citing Re Page, 60 Kan. 842, 59 P 478, 47 LRA

68: "Taxes are uniform and equal when imposed upon all property
of the same character within the taxing authority." Manila Race

Horse Trainers Assn., Inc. vs. De la Fuente, L-2947, Jan. 11, 1951,
88 Phil. 60: "In the case of Eastern Theatrical Co., Inc. vs. Alfonso,
[L-1104, May 31, 1949], 46 O.G. Supp. to No. 11, p. 303, it was
said that there is equality and uniformity in taxation if all articles
or kinds of property of the same class are taxed at the same rate.
Thus, it was held in that case, that "the fact that some places of
amusement are not taxed while others, such as cinematographs,
theaters, vaudeville companies, theatrical shows, and boxing
exhibitions and other kinds of amusements or places of
amusement are taxed, is no argument at all against equality and
uniformity of the tax imposition." Applying this criterion to the
present case, there would be discrimination if some boarding
stables of the class used for the same number of horses were not
taxed or were made to pay less or more than others." Tan Kim
Kee vs. Court of Tax Appeals, et al., L-18080, April 22, 1963, per
Reyes, J.B.L., J.: "The rule of uniform taxation does not deprive
Congress of the power to classify subjects of taxation, and only
demands uniformity within the particular class.".
32

Am. Jur. 203: "153. Uniformity of Operation Throughout Tax

Unit. One requirement with respect to taxation imposed by
provisions relating to equality and uniformity, which has been
introduced into some state constitutions in express language, is
that taxation must be uniform throughout the political unit by or
with respect to which the tax is levied. This means, for example,
that a tax for a state purpose must be uniform and equal
throughout the state, a tax for a county purpose must be uniform
and equal throughout the county, anda tax for a city, village, or
township purpose must be uniform and equal throughout the city,
village, or township. It does not mean, however, that the taxes
levied by or with respect to the various political subdivisions or
taxing districts of the state must be at the same rate, or, as one
court has graphically put it, that a man in one county shall pay the

same rate of taxation for all purposes that is paid by a man in an

adjoining county. Nor does the rule require that taxes for the
same purposes shall be imposed in different territorial
subdivisions at the same time. It has also been said in this
connection that the omission to tax any particular individual who
may be liable does not render the whole tax illegal or void."
33

84 C.J.S. 77: "Equality in taxation is accomplished when the

burden of the tax falls equally and impartially on all the persons
and property subject to it [State ex rel. Haggart v. Nichols, 265
N.W. 859, 66 N.D. 355], so that no higher rate or greater levy in
proportion to value is imposed on one person or species of
property than on others similarly situated or of like character."
84 C.J.S. 79: "The rule of uniformity in taxation applies to
property of like kind and character and similarly situated,
and a tax, in order to be uniform, must operate alike on all
persons, things, or property, similarly situated. So the
requirement is complied with when the tax is levied equally
and uniformly on all subjects of the same class and kind and
is violated if particular kinds, species or items of property
are selected to bear the whole burden of the tax, while
others, which should be equally subjected to it, are left
untaxed."
34

84 C.J.S. 81: "There is a presumption the at tax statutes are

intended to operate uniformly and equally [Alaska Consol.
Canneries v. Territory of Alaska, C.C.A. Alaska, 16 F. 2d. 256], and
a liberal construction will be indulged in order to accomplish fair
and equal taxation of all property within the state."
35

Medina vs. City of Baguio, L-4060, Aug. 29, 1952; Wa Wa Yu vs.

City of Lipa, L-9167, Sept. 27, 1956; Saldana vs. City of Iloilo, 55
O.G. 10267, and the cases cited therein.

G.R. No. L-31156 February 27, 1976

PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiffappellant,
vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET
AL., defendant appellees.
Sabido, Sabido & Associates for appellant.
Provincial Fiscal Zoila M. Redona & Assistant Provincial Fiscal Bonifacio
R Matol and Assistant Solicitor General Conrado T. Limcaoco & Solicitor
Enrique M. Reyes for appellees.

MARTIN, J.:
This is an appeal from the decision of the Court of First Instance of
Leyte in its Civil Case No. 3294, which was certified to Us by the Court
of Appeals on October 6, 1969, as involving only pure questions of law,
challenging the power of taxation delegated to municipalities under the
Local Autonomy Act (Republic Act No. 2264, as amended, June 19,
1959).
On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling
Company of the Philippines, Inc., commenced a complaint with
preliminary injunction before the Court of First Instance of Leyte for
that court to declare Section 2 of Republic Act No. 2264. 1 otherwise
known as the Local Autonomy Act, unconstitutional as an undue
delegation of taxing authority as well as to declare Ordinances Nos. 23
and 27, series of 1962, of the municipality of Tanauan, Leyte, null and
void.

On July 23, 1963, the parties entered into a Stipulation of Facts, the
material portions of which state that, first, both Ordinances Nos. 23 and
27 embrace or cover the same subject matter and the production tax
rates imposed therein are practically the same, and second, that on
January 17, 1963, the acting Municipal Treasurer of Tanauan, Leyte, as
per his letter addressed to the Manager of the Pepsi-Cola Bottling Plant
in said municipality, sought to enforce compliance by the latter of the
provisions of said Ordinance No. 27, series of 1962.
Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on
September 25, 1962, levies and collects "from soft drinks producers and
manufacturers a tai of one-sixteenth (1/16) of a centavo for every
bottle of soft drink corked." 2 For the purpose of computing the taxes
due, the person, firm, company or corporation producing soft drinks
shall submit to the Municipal Treasurer a monthly report, of the total
number of bottles produced and corked during the month. 3
On the other hand, Municipal Ordinance No. 27, which was approved
on October 28, 1962, levies and collects "on soft drinks produced or
manufactured within the territorial jurisdiction of this municipality a tax
of ONE CENTAVO (P0.01) on each gallon (128 fluid ounces, U.S.) of
volume capacity." 4 For the purpose of computing the taxes due, the
person, fun company, partnership, corporation or plant producing soft
drinks shall submit to the Municipal Treasurer a monthly report of the
total number of gallons produced or manufactured during the month. 5
The tax imposed in both Ordinances Nos. 23 and 27 is denominated as
"municipal production tax.'
On October 7, 1963, the Court of First Instance of Leyte rendered
judgment "dismissing the complaint and upholding the constitutionality
of [Section 2, Republic Act No. 2264] declaring Ordinance Nos. 23 and
27 legal and constitutional; ordering the plaintiff to pay the taxes due
under the oft the said Ordinances; and to pay the costs."

From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed

to the Court of Appeals, which, in turn, elevated the case to Us
pursuant to Section 31 of the Judiciary Act of 1948, as amended.
There are three capital questions raised in this appeal:
1. Is Section 2, Republic Act No. 2264 an undue
delegation of power, confiscatory and oppressive?
2. Do Ordinances Nos. 23 and 27 constitute double
taxation and impose percentage or specific taxes?
3. Are Ordinances Nos. 23 and 27 unjust and unfair?
1. The power of taxation is an essential and inherent attribute of
sovereignty, belonging as a matter of right to every independent
government, without being expressly conferred by the people. 6 It is a
power that is purely legislative and which the central legislative body
cannot delegate either to the executive or judicial department of the
government without infringing upon the theory of separation of
powers. The exception, however, lies in the case of municipal
corporations, to which, said theory does not apply. Legislative powers
may be delegated to local governments in respect of matters of local
concern. 7 This is sanctioned by immemorial practice. 8 By necessary
implication, the legislative power to create political corporations for
purposes of local self-government carries with it the power to confer on
such local governmental agencies the power to tax. 9 Under the New
Constitution, local governments are granted the autonomous authority
to create their own sources of revenue and to levy taxes. Section 5,
Article XI provides: "Each local government unit shall have the power to
create its sources of revenue and to levy taxes, subject to such
limitations as may be provided by law." Withal, it cannot be said that
Section 2 of Republic Act No. 2264 emanated from beyond the sphere

of the legislative power to enact and vest in local governments the

power of local taxation.
The plenary nature of the taxing power thus delegated, contrary to
plaintiff-appellant's pretense, would not suffice to invalidate the said
law as confiscatory and oppressive. In delegating the authority, the
State is not limited 6 the exact measure of that which is exercised by
itself. When it is said that the taxing power may be delegated to
municipalities and the like, it is meant that there may be delegated
such measure of power to impose and collect taxes as the legislature
may deem expedient. Thus, municipalities may be permitted to tax
subjects which for reasons of public policy the State has not deemed
wise to tax for more general purposes. 10 This is not to say though that
the constitutional injunction against deprivation of property without
due process of law may be passed over under the guise of the taxing
power, except when the taking of the property is in the lawful exercise
of the taxing power, as when (1) the tax is for a public purpose; (2) the
rule on uniformity of taxation is observed; (3) either the person or
property taxed is within the jurisdiction of the government levying the
tax; and (4) in the assessment and collection of certain kinds of taxes
notice and opportunity for hearing are provided. 11 Due process is
usually violated where the tax imposed is for a private as distinguished
from a public purpose; a tax is imposed on property outside the State,
i.e., extraterritorial taxation; and arbitrary or oppressive methods are
used in assessing and collecting taxes. But, a tax does not violate the
due process clause, as applied to a particular taxpayer, although the
purpose of the tax will result in an injury rather than a benefit to such
taxpayer. Due process does not require that the property subject to the
tax or the amount of tax to be raised should be determined by judicial
inquiry, and a notice and hearing as to the amount of the tax and the
manner in which it shall be apportioned are generally not necessary to
due process of law. 12

There is no validity to the assertion that the delegated authority can be

declared unconstitutional on the theory of double taxation. It must be
observed that the delegating authority specifies the limitations and
enumerates the taxes over which local taxation may not be
exercised. 13 The reason is that the State has exclusively reserved the
same for its own prerogative. Moreover, double taxation, in general, is
not forbidden by our fundamental law, since We have not adopted as
part thereof the injunction against double taxation found in the
Constitution of the United States and some states of the
Union. 14 Double taxation becomes obnoxious only where the taxpayer
is taxed twice for the benefit of the same governmental entity 15 or by
the same jurisdiction for the same purpose, 16 but not in a case where
one tax is imposed by the State and the other by the city or
municipality. 17
2. The plaintiff-appellant submits that Ordinance No. 23 and 27
constitute double taxation, because these two ordinances cover the
same subject matter and impose practically the same tax rate. The
thesis proceeds from its assumption that both ordinances are valid and
legally enforceable. This is not so. As earlier quoted, Ordinance No. 23,
which was approved on September 25, 1962, levies or collects from soft
drinks producers or manufacturers a tax of one-sixteen (1/16) of a
centavo for .every bottle corked, irrespective of the volume contents of
the bottle used. When it was discovered that the producer or
manufacturer could increase the volume contents of the bottle and still
pay the same tax rate, the Municipality of Tanauan enacted Ordinance
No. 27, approved on October 28, 1962, imposing a tax of one centavo
(P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity. The
difference between the two ordinances clearly lies in the tax rate of the
soft drinks produced: in Ordinance No. 23, it was 1/16 of a centavo for
every bottle corked; in Ordinance No. 27, it is one centavo (P0.01) on
each gallon (128 fluid ounces, U.S.) of volume capacity. The intention of
the Municipal Council of Tanauan in enacting Ordinance No. 27 is thus

clear: it was intended as a plain substitute for the prior Ordinance No.
23, and operates as a repeal of the latter, even without words to that
effect. 18 Plaintiff-appellant in its brief admitted that defendantsappellees are only seeking to enforce Ordinance No. 27, series of 1962.
Even the stipulation of facts confirms the fact that the Acting Municipal
Treasurer of Tanauan, Leyte sought t6 compel compliance by the
plaintiff-appellant of the provisions of said Ordinance No. 27, series of
1962. The aforementioned admission shows that only Ordinance No.
27, series of 1962 is being enforced by defendants-appellees. Even the
Provincial Fiscal, counsel for defendants-appellees admits in his brief
"that Section 7 of Ordinance No. 27, series of 1962 clearly repeals
Ordinance No. 23 as the provisions of the latter are inconsistent with
the provisions of the former."
That brings Us to the question of whether the remaining Ordinance No.
27 imposes a percentage or a specific tax. Undoubtedly, the taxing
authority conferred on local governments under Section 2, Republic Act
No. 2264, is broad enough as to extend to almost "everything,
accepting those which are mentioned therein." As long as the text
levied under the authority of a city or municipal ordinance is not within
the exceptions and limitations in the law, the same comes within the
ambit of the general rule, pursuant to the rules of exclucion
attehus and exceptio firmat regulum in cabisus non excepti 19 The
limitation applies, particularly, to the prohibition against municipalities
and municipal districts to impose "any percentage tax or other taxes in
any form based thereon nor impose taxes on articles subject to specific
tax except gasoline, under the provisions of the National Internal
Revenue Code." For purposes of this particular limitation, a municipal
ordinance which prescribes a set ratio between the amount of the tax
and the volume of sale of the taxpayer imposes a sales tax and is null
and void for being outside the power of the municipality to
enact. 20 But, the imposition of "a tax of one centavo (P0.01) on each
gallon (128 fluid ounces, U.S.) of volume capacity" on all soft drinks

produced or manufactured under Ordinance No. 27 does not partake of

the nature of a percentage tax on sales, or other taxes in any form
based thereon. The tax is levied on the produce (whether sold or not)
and not on the sales. The volume capacity of the taxpayer's production
of soft drinks is considered solely for purposes of determining the tax
rate on the products, but there is not set ratio between the volume of
sales and the amount of the tax. 21
Nor can the tax levied be treated as a specific tax. Specific taxes are
those imposed on specified articles, such as distilled spirits, wines,
fermented liquors, products of tobacco other than cigars and
cigarettes, matches firecrackers, manufactured oils and other fuels,
coal, bunker fuel oil, diesel fuel oil, cinematographic films, playing
cards, saccharine, opium and other habit-forming drugs. 22 Soft drink is
not one of those specified.
3. The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of
volume capacity on all softdrinks, produced or manufactured, or an
equivalent of 1- centavos per case, 23 cannot be considered unjust and
unfair. 24 an increase in the tax alone would not support the claim that
the tax is oppressive, unjust and confiscatory. Municipal corporations
are allowed much discretion in determining the reates of imposable
taxes. 25 This is in line with the constutional policy of according the
widest possible autonomy to local governments in matters of local
taxation, an aspect that is given expression in the Local Tax Code (PD
No. 231, July 1, 1973). 26 Unless the amount is so excessive as to be
prohibitive, courts will go slow in writing off an ordinance as
unreasonable. 27 Reluctance should not deter compliance with an
ordinance such as Ordinance No. 27 if the purpose of the law to further
strengthen local autonomy were to be realized. 28
Finally, the municipal license tax of P1,000.00 per corking machine with
five but not more than ten crowners or P2,000.00 with ten but not
more than twenty crowners imposed on manufacturers, producers,

importers and dealers of soft drinks and/or mineral waters under

Ordinance No. 54, series of 1964, as amended by Ordinance No. 41,
series of 1968, of defendant Municipality, 29 appears not to affect the
resolution of the validity of Ordinance No. 27. Municipalities are
empowered to impose, not only municipal license taxes upon persons
engaged in any business or occupation but also to levy for public
purposes, just and uniform taxes. The ordinance in question (Ordinance
No. 27) comes within the second power of a municipality.
ACCORDINGLY, the constitutionality of Section 2 of Republic Act No.
2264, otherwise known as the Local Autonomy Act, as amended, is
hereby upheld and Municipal Ordinance No. 27 of the Municipality of
Tanauan, Leyte, series of 1962, re-pealing Municipal Ordinance No. 23,
same series, is hereby declared of valid and legal effect. Costs against
petitioner-appellant.
SO ORDERED.
Castro, C.J., Teehankee, Barredo, Makasiar, Antonio, Esguerra, Muoz
Palma, Aquino and Concepcion, Jr., JJ., concur.

Separate Opinions

FERNANDO, J., concurring:

The opinion of the Court penned by Justice Martin is impressed with a
scholarly and comprehensive character. Insofar as it shows adherence
to tried and tested concepts of the law of municipal taxation, I am only
in agreement. If I limit myself to concurrence in the result, it is primarily

because with the article on Local Autonomy found in the present

Constitution, I feel a sense of reluctance in restating doctrines that
arose from a different basic premise as to the scope of such power in
accordance with the 1935 Charter. Nonetheless it is well-nigh
unavoidable that I do so as I am unable to share fully what for me are
the nuances and implications that could arise from the approach taken
by my brethren. Likewise as to the constitutional aspect of the thorny
question of double taxation, I would limit myself to what has been set
forth in City of Baguio v. De Leon. 1
1. The present Constitution is quite explicit as to the power of taxation
vested in local and municipal corporations. It is therein specifically
provided: "Each local government unit shall have the power to create
its own sources of revenue and to levy taxes subject to such limitations
as may be provided by law. 2 That was not the case under the 1935
Charter. The only limitation then on the authority, plenary in character
of the national government, was that while the President of the
Philippines was vested with the power of control over all executive
departments, bureaus, or offices, he could only . It exercise general
supervision over all local governments as may be provided by law
... 3 As far as legislative power over local government was concerned,
no restriction whatsoever was placed on the Congress of the
Philippines. It would appear therefore that the extent of the taxing
power was solely for the legislative body to decide. It is true that in
1939, there was a statute that enlarged the scope of the municipal
taxing power. 4 Thereafter, in 1959 such competence was further
expanded in the Local Autonomy Act. 5 Nevertheless, as late as
December of 1964, five years after its enactment of the Local
Autonomy Act, this Court, through Justice Dizon, in Golden Ribbon
Lumber Co. v. City of Butuan, 6 reaffirmed the traditional concept in
these words: "The rule is well-settled that municipal corporations,
unlike sovereign states, after clothed with no power of taxation; that its
charter or a statute must clearly show an intent to confer that power or

the municipal corporation cannot assume and exercise it, and that any
such power granted must be construed strictly, any doubt or ambiguity
arising from the terms of the grant to be resolved against the
municipality." 7
Taxation, according to Justice Parades in the earlier case of Tan v.
Municipality of Pagbilao, 8 "is an attribute of sovereignty which
municipal corporations do not enjoy." 9 That case left no doubt either
as to weakness of a claim "based merely by inferences, implications and
deductions, [as they have no place in the interpretation of the power to
tax of a municipal corporation." 10 As the conclusion reached by the
Court finds support in such grant of the municipal taxing power, I
concur in the result. 2. As to any possible infirmity based on an alleged
double taxation, I would prefer to rely on the doctrine announced by
this Court in City of Baguio v. De Leon. 11 Thus: "As to why double
taxation is not violative of due process, Justice Holmes made clear in
this language: 'The objection to the taxation as double may be laid
down on one side. ... The 14th Amendment [the due process clause) no
more forbids double taxation than it does doubling the amount of a tax,
short of (confiscation or proceedings unconstitutional on other grouse
With that decision rendered at a time when American sovereignty in
the Philippines was recognized, it possesses more than just a persuasive
effect. To some, it delivered the coup justice to the bogey of double
taxation as a constitutional bar to the exercise of the taxing power. It
would seem though that in the United States, as with us, its ghost, as
noted by an eminent critic, still stalks the juridical stage. 'In a 1947
decision, however, we quoted with approval this excerpt from a leading
American decision: 'Where, as here, Congress has clearly expressed its
intention, the statute must be sustained even though double taxation
results. 12
So I would view the issues in this suit and accordingly concur in the
result.

Separate Opinions
FERNANDO, J., concurring:
The opinion of the Court penned by Justice Martin is impressed with a
scholarly and comprehensive character. Insofar as it shows adherence
to tried and tested concepts of the law of municipal taxation, I am only
in agreement. If I limit myself to concurrence in the result, it is primarily
because with the article on Local Autonomy found in the present
Constitution, I feel a sense of reluctance in restating doctrines that
arose from a different basic premise as to the scope of such power in
accordance with the 1935 Charter. Nonetheless it is well-nigh
unavoidable that I do so as I am unable to share fully what for me are
the nuances and implications that could arise from the approach taken
by my brethren. Likewise as to the constitutional aspect of the thorny
question of double taxation, I would limit myself to what has been set
forth in City of Baguio v. De Leon. 1
1. The present Constitution is quite explicit as to the power of taxation
vested in local and municipal corporations. It is therein specifically
provided: "Each local government unit shall have the power to create
its own sources of revenue and to levy taxes subject to such limitations
as may be provided by law. 2 That was not the case under the 1935
Charter. The only limitation then on the authority, plenary in character
of the national government, was that while the President of the
Philippines was vested with the power of control over all executive
departments, bureaus, or offices, he could only . It exercise general
supervision over all local governments as may be provided by law
... 3 As far as legislative power over local government was concerned,
no restriction whatsoever was placed on the Congress of the

Philippines. It would appear therefore that the extent of the taxing

power was solely for the legislative body to decide. It is true that in
1939, there was a statute that enlarged the scope of the municipal
taxing power. 4 Thereafter, in 1959 such competence was further
expanded in the Local Autonomy Act. 5 Nevertheless, as late as
December of 1964, five years after its enactment of the Local
Autonomy Act, this Court, through Justice Dizon, in Golden Ribbon
Lumber Co. v. City of Butuan, 6 reaffirmed the traditional concept in
these words: "The rule is well-settled that municipal corporations,
unlike sovereign states, after clothed with no power of taxation; that its
charter or a statute must clearly show an intent to confer that power or
the municipal corporation cannot assume and exercise it, and that any
such power granted must be construed strictly, any doubt or ambiguity
arising from the terms of the grant to be resolved against the
municipality." 7
Taxation, according to Justice Parades in the earlier case of Tan v.
Municipality of Pagbilao, 8 "is an attribute of sovereignty which
municipal corporations do not enjoy." 9 That case left no doubt either
as to weakness of a claim "based merely by inferences, implications and
deductions, [as they have no place in the interpretation of the power to
tax of a municipal corporation." 10 As the conclusion reached by the
Court finds support in such grant of the municipal taxing power, I
concur in the result. 2. As to any possible infirmity based on an alleged
double taxation, I would prefer to rely on the doctrine announced by
this Court in City of Baguio v. De Leon. 11 Thus: "As to why double
taxation is not violative of due process, Justice Holmes made clear in
this language: 'The objection to the taxation as double may be laid
down on one side. ... The 14th Amendment [the due process clause) no
more forbids double taxation than it does doubling the amount of a tax,
short of (confiscation or proceedings unconstitutional on other grouse
With that decision rendered at a time when American sovereignty in
the Philippines was recognized, it possesses more than just a persuasive

effect. To some, it delivered the coup justice to the bogey of double

taxation as a constitutional bar to the exercise of the taxing power. It
would seem though that in the United States, as with us, its ghost, as
noted by an eminent critic, still stalks the juridical stage. 'In a 1947
decision, however, we quoted with approval this excerpt from a leading
American decision: 'Where, as here, Congress has clearly expressed its
intention, the statute must be sustained even though double taxation
results. 12
So I would view the issues in this suit and accordingly concur in the
result.
Footnotes
1 "Sec. 2. Taxation. Any provision of law to the contrary
notwithstanding, all chartered cities, municipalities and
municipal districts shall have authority to impose municipal
license taxes or fees upon persons engaged in any
occupation or business, or exercising private in chartered
cities, municipalities and municipal districts by requiring
them to secure licenses at rates fixed by the municipal board
or city council of the city, the municipal council of the
municipality, or the municipal district council of the
municipal district to collect fees and charges for service
rendered by the city, municipality or municipal district; to
regulate and impose reasonable for services rendered in
connection with any business, profession occupation being
conducted within the city, municipality or municipal district
and otherwise to levy for public purposes, just and uniform
taxes, licenses or fees: Provided, That municipalities and
municipal districts shall, in no case, impose any percentage
tax on sales or other taxes in any form based thereon nor
impose taxes on articles subject to specific tax, except
gasoline, under the provisions of the National Internal

Revenue Code: Provided, however, That no city, municipality

or municipal district may levy or impose any of the
following:
(a) Residence tax;
(b) Documentary stamp tax;
(c) Taxes on the business of any newspaper engaged in the
printing and publication of any newspaper, magazine,
review or bulletin appearing at regular interval and having
fixed prices for subscription and sale, and which is not
published primarily for the purpose of publishing
advertisements;
(d) Taxes on persons operating waterworks, irrigation and
other public utilities except electric light, heat and power;
(e) Taxes on forest products and forest concessions;
(f) Taxes on estates, inheritance, gifts, legacies and other
acquisitions mortis causa
(g) Taxes on income of any kind whatsoever;
(h) Taxes or fees for the registration of motor vehicles and
for the issuance of all kinds of licenses or permits for the
driving thereof;
(i) Customs duties registration, wharfage on wharves owned
by the national government, tonnage and all other kinds of
customs fees, charges and dues;
(j) Taxes of any kind on banks, insurance companies, and
persons paying franchise tax:

(k) Taxes on premiums paid by owners of property who

obtain insurance directly with foreign insurance companies;
and
(i) Taxes, fees or levies, of any kind, which in effect impose a
burden on exports of Philippine finished, manufactured or
processed products and products of Philippine cottage
industries.

G.R. Nos. L-18169, L-18262 & L-21434

July 31, 1964

COMMISSIONER OF INTERNAL REVENUES, petitioner,

vs.
V.E. LEDNICKY and MARIA VALERO LEDNICKY, respondents.
Office of the Solicitor General for petitioner.
Ozaeta, Gibbs and Ozaeta for respondents.
REYES, J.B.L., J.:
The above-captioned cases were elevated to this Court under separate
petitions by the Commissioner for review of the corresponding
decisions of the Court of Tax Appeals. Since these cases involve the
same parties and issues akin to each case presented, they are herein
decided jointly.
The respondents, V. E. Lednicky and Maria Valero Lednicky, are
husband and wife, respectively, both American citizens residing in the
Philippines, and have derived all their income from Philippine sources
for the taxable years in question.
In compliance with local law, the aforesaid respondents, on 27 March
1957, filed their income tax return for 1956, reporting therein a gross

income of P1,017,287. 65 and a net income of P733,809.44 on which

the amount of P317,395.4 was assessed after deducting P4,805.59 as
withholding tax. Pursuant to the petitioner's assessment notice, the
respondents paid the total amount of P326,247.41, inclusive of the
withheld taxes, on 15 April 1957.
On 17 March 1959, the respondents Lednickys filed an amended
income tax return for 1956. The amendment consists in a claimed
deduction of P205,939.24 paid in 1956 to the United States
government as federal income tax for 1956. Simultaneously with the
filing of the amended return, the respondents requested the refund of
P112,437.90.
When the petitioner Commissioner of Internal Revenue failed to
answer the claim for refund, the respondents filed their petition with
the Tax Court on 11 April 1959 as CTA Case No. 646, which is now G. R.
No. L-18286 in the Supreme Court.
G. R. No. L-18169 (formerly CTA Case No. 570) is also a claim for refund
in the amount of P150,269.00, as alleged overpaid income tax for 1955,
the facts of which are as follows:
On 28 February 1956, the same respondents-spouses filed their
domestic income tax return for 1955, reporting a gross income of
P1,771,124.63 and a net income of P1,052,550.67. On 19 April 1956,
they filed an amended income tax return, the amendment upon the
original being a lesser net income of P1,012,554.51, and, on the basis of
this amended return, they paid P570,252.00, inclusive of withholding
taxes. After audit, the petitioner determined a deficiency of
P16,116.00, which amount, the respondents paid on 5 December 1956.
Back in 1955, however, the Lednickys filed with the U.S. Internal
Revenue Agent in Manila their federal income tax return for the years
1947, 1951, 1952, 1953, and 1954 on income from Philippine sources

on a cash basis. Payment of these federal income taxes, including

penalties and delinquency interest in the amount of P264,588.82, were
made in 1955 to the U.S. Director of Internal Revenue, Baltimore,
Maryland, through the National City Bank of New York, Manila Branch.
Exchange and bank charges in remitting payment totaled P4,143.91.
Wherefore, the parties respectfully pray that the foregoing stipulation
of facts be admitted and approved by this Honorable Court, without
prejudice to the parties adducing other evidence to prove their case not
covered by this stipulation of facts. 1wph1.t
On 11 August 1958, the said respondents amended their Philippine
income tax return for 1955 to include the following deductions:
U.S. Federal income taxes
Interest accrued up to May 15, 1955
Exchange and bank charges
Total

P471,867.32
40,333.92
4,143.91
P516,345.15

and therewith filed a claim for refund of the sum of P166,384.00, which
was later reduced to P150,269.00.
The respondents Lednicky brought suit in the Tax Court, which was
docketed therein as CTA Case No. 570.
In G. R. No. 21434 (CTA Case No. 783), the facts are similar, but refer to
respondents Lednickys' income tax return for 1957, filed on 28
February 1958, and for which respondents paid a total sum of
P196,799.65. In 1959, they filed an amended return for 1957, claiming
deduction of P190,755.80, representing taxes paid to the U.S.
Government on income derived wholly from Philippine sources. On the

strength thereof, respondents seek refund of P90 520.75 as

overpayment. The Tax Court again decided for respondents.
The common issue in all three cases, and one that is of first impression
in this jurisdiction, is whether a citizen of the United States residing in
the Philippines, who derives income wholly from sources within the
Republic of the Philippines, may deduct from his gross income the
income taxes he has paid to the United States government for the
taxable year on the strength of section 30 (C-1) of the Philippine
Internal Revenue Code, reading as follows:
SEC. 30. Deduction from gross income. In computing net
income there shall be allowed as deductions
(a) ...
(b) ...
(c) Taxes:
(1) In general. Taxes paid or accrued within the
taxable year, except
(A) The income tax provided for under this Title;
(B) Income, war-profits, and excess profits taxes
imposed by the authority of any foreign
country; but this deduction shall be allowed in the
case of a taxpayer who does not signify in his
return his desire to have to any extent the
benefits of paragraph (3) of this subsection
(relating to credit for foreign countries);
(C) Estate, inheritance and gift taxes; and

(D) Taxes assessed against local benefits of a kind

tending to increase the value of the property
assessed. (Emphasis supplied)
The Tax Court held that they may be deducted because of the
undenied fact that the respondent spouses did not "signify" in
their income tax return a desire to avail themselves of the
benefits of paragraph 3 (B) of the subsection, which reads:
Par. (c) (3) Credits against tax for taxes of foreign countries.
If the taxpayer signifies in his return his desire to have the
benefits of this paragraph, the tax imposed by this Title shall
be credited with
(A) ...;
(B) Alien resident of the Philippines. In the case of an
alien resident of the Philippines, the amount of any
such taxes paid or accrued during the taxable year to
any foreign country, if the foreign country of which
such alien resident is a citizen or subject, in imposing
such taxes, allows a similar credit to citizens of the
Philippines residing in such country;
It is well to note that the tax credit so authorized is limited under
paragraph 4 (A and B) of the same subsection, in the following
terms:
Par. (c) (4) Limitation on credit. The amount of the credit
taken under this section shall be subject to each of the
following limitations:
(A) The amount of the credit in respect to the tax paid
or accrued to any country shall not exceed the same
proportion of the tax against which such credit is

taken, which the taxpayer's net income from sources

within such country taxable under this Title bears to
his entire net income for the same taxable year; and
(B) The total amount of the credit shall not exceed the
same proportion of the tax against which such credit is
taken, which the taxpayer's net income from sources
without the Philippines taxable under this Title bears
to his entire net income for the same taxable year.
We agree with appellant Commissioner that the
Construction and wording of Section 30 (c) (1) (B) of the
Internal Revenue Act shows the law's intent that the right to
deduct income taxes paid to foreign government from the
taxpayer's gross income is given only as an alternative or
substitute to his right to claim a tax credit for such foreign
income taxes under section 30 (c) (3) and (4); so that unless
the alien resident has a right to claim such tax credit if he so
chooses, he is precluded from deducting the foreign income
taxes from his gross income. For it is obvious that in
prescribing that such deduction shall be allowed in the case
of a taxpayer who does not signify in his return his desire to
have to any extent the benefits of paragraph (3) (relating to
credits for taxes paid to foreign countries), the statute
assumes that the taxpayer in question also may signify his
desire to claim a tax credit and waive the deduction;
otherwise, the foreign taxes would always be deductible,
and their mention in the list of non-deductible items in
Section 30(c) might as well have been omitted, or at least
expressly limited to taxes on income from sources outside
the Philippine Islands.
Had the law intended that foreign income taxes could be
deducted from gross income in any event,regardless of the

taxpayer's right to claim a tax credit, it is the latter right that

should be conditioned upon the taxpayer's waiving the
deduction; in which Case the right to reduction under
subsection (c-1-B) would have been made absolute or
unconditional (by omitting foreign taxes from the
enumeration of non-deductions), while the right to a tax
credit under subsection (c-3) would have been expressly
conditioned upon the taxpayer's not claiming any deduction
under subsection (c-1). In other words, if the law had been
intended to operate as contended by the respondent
taxpayers and by the Court of Tax Appeals section 30
(subsection (c-1) instead of providing as at present:
SEC. 30. Deduction from gross income. In computing net
income there shall be allowed as deductions
(a) ...
(b) ...
(c) Taxes:
(1) In general. Taxes paid or accrued within the
taxable year, except
(A) The income tax provided for under this Title;
(B) Income, war-profits, and excess profits taxes
imposed by the authority of any foreign country;
but this deduction shall be allowed in the case of
a taxpayer who does not signify in his return his
desire to have to any extent the benefits of
paragraph (3) of this subsection (relating to credit
for taxes of foreign countries);

(C) Estate, inheritance and gift taxes; and

(D) Taxes assessed against local benefits of a kind
tending to increase the value of the property
assessed.
would have merely provided:
SEC. 30. Decision from grow income. In computing net income
there shall be allowed as deductions:
(a) ...
(b) ...
(c) Taxes paid or accrued within the taxable year, EXCEPT
(A) The income tax provided for in this Title;
(B) Omitted or else worded as follows:
Income, war profits and excess profits taxes imposed by
authority of any foreign country on income earned within
the Philippines if the taxpayer does not claim the benefits
under paragraph 3 of this subsection;
(C) Estate, inheritance or gift taxes;
(D) Taxes assessed against local benefits of a kind tending to
increase the value of the property assessed.
while subsection (c-3) would have been made conditional in the
following or equivalent terms:
(3) Credits against tax for taxes of foreign countries. If the
taxpayer has not deducted such taxes from his gross income

but signifies in his return his desire to have the benefits of this
paragraph, the tax imposed by Title shall be credited with ... (etc.).
Petitioners admit in their brief that the purpose of the law is to prevent
the taxpayer from claiming twice the benefits of his payment of foreign
taxes, by deduction from gross income (subs. c-1) and by tax credit
(subs. c-3). This danger of double credit certainly can not exist if the
taxpayer can not claim benefit under either of these headings at his
option, so that he must be entitled to a tax credit (respondent
taxpayers admittedly are not so entitled because all their income is
derived from Philippine sources), or the option to deduct from gross
income disappears altogether.
Much stress is laid on the thesis that if the respondent taxpayers are
not allowed to deduct the income taxes they are required to pay to the
government of the United States in their return for Philippine income
tax, they would be subjected to double taxation. What respondents fail
to observe is that double taxation becomes obnoxious only where the
taxpayer is taxed twice for the benefit of the same governmental
entity (cf. Manila vs. Interisland Gas Service, 52 Off. Gaz. 6579; Manuf.
Life Ins. Co. vs. Meer, 89 Phil. 357). In the present case, while the
taxpayers would have to pay two taxes on the same income, the
Philippine government only receives the proceeds of one tax. As
between the Philippines, where the income was earned and where the
taxpayer is domiciled, and the United States, where that income
was not earned and where the taxpayer did not reside, it is indisputable
that justice and equity demand that the tax on the income should
accrue to the benefit of the Philippines. Any relief from the alleged
double taxation should come from the United States, and not from the
Philippines, since the former's right to burden the taxpayer is solely
predicated on his citizenship, without contributing to the production of
the wealth that is being taxed.

Aside from not conforming to the fundamental doctrine of income

taxation that the right of a government to tax income emanates from
its partnership in the production of income, by providing the
protection, resources, incentive, and proper climate for such
production, the interpretation given by the respondents to the revenue
law provision in question operates, in its application, to place a resident
alien with only domestic sources of income in an equal, if not in a
better, position than one who has both domestic and foreign sources of
income, a situation which is manifestly unfair and short of logic.
Finally, to allow an alien resident to deduct from his gross income
whatever taxes he pays to his own government amounts to conferring
on the latter the power to reduce the tax income of the Philippine
government simply by increasing the tax rates on the alien resident.
Everytime the rate of taxation imposed upon an alien resident is
increased by his own government, his deduction from Philippine taxes
would correspondingly increase, and the proceeds for the Philippines
diminished, thereby subordinating our own taxes to those levied by a
foreign government. Such a result is incompatible with the status of the
Philippines as an independent and sovereign state.
IN VIEW OF THE FOREGOING, the decisions of the Court of Tax Appeals
are reversed, and, the disallowance of the refunds claimed by the
respondents Lednicky is affirmed, with costs against said respondentsappellees.
Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Paredes,
Regala and Makalintal, JJ., concur.