Republic of the Philippines Madrigal and the other half of Susana Paterno.
The general question
SUPREME COURT
Manila
EN BANC
G.R. No. L-12287 August 7, 1918
VICENTE MADRIGAL and his wife, SUSANA PATERNO,
plaintiffs-appellants,
vs.
JAMES J. RAFFERTY, Collector of Internal Revenue, and
VENANCIO CONCEPCION, Deputy Collector of Internal
Revenue, defendants-appellees.
Gregorio Araneta for appellants.
Assistant Attorney Round for appellees.
MALCOLM, J.:
This appeal calls for consideration of the Income Tax Law, a law of
American origin, with reference to the Civil Code, a law of Spanish
origin.
STATEMENT OF THE CASE.
Vicente Madrigal and Susana Paterno were legally married prior to
January 1, 1914. The marriage was contracted under the provisions of
law concerning conjugal partnerships (sociedad de gananciales). On
February 25, 1915, Vicente Madrigal filed sworn declaration on the
prescribed form with the Collector of Internal Revenue, showing, as
his total net income for the year 1914, the sum of P296,302.73.
Subsequently Madrigal submitted the claim that the said P296,302.73
did not represent his income for the year 1914, but was in fact the
income of the conjugal partnership existing between himself and his
wife Susana Paterno, and that in computing and assessing the
additional income tax provided by the Act of Congress of October 3,
1913, the income declared by Vicente Madrigal should be divided into
two equal parts, one-half to be considered the income of Vicente
had in the meantime been submitted to the Attorney-General of the
Philippine Islands who in an opinion dated March 17, 1915, held with
the petitioner Madrigal. The revenue officers being still unsatisfied, the
correspondence together with this opinion was forwarded to
Washington for a decision by the United States Treasury Department.
The United States Commissioner of Internal Revenue reversed the
opinion of the Attorney-General, and thus decided against the claim of
Madrigal.
After payment under protest, and after the protest of Madrigal had
been decided adversely by the Collector of Internal Revenue, action
was begun by Vicente Madrigal and his wife Susana Paterno in the
Court of First Instance of the city of Manila against Collector of
Internal Revenue and the Deputy Collector of Internal Revenue for the
recovery of the sum of P3,786.08, alleged to have been wrongfully and
illegally collected by the defendants from the plaintiff, Vicente
Madrigal, under the provisions of the Act of Congress known as the
Income Tax Law. The burden of the complaint was that if the income
tax for the year 1914 had been correctly and lawfully computed there
would have been due payable by each of the plaintiffs the sum of
P2,921.09, which taken together amounts of a total of P5,842.18
instead of P9,668.21, erroneously and unlawfully collected from the
plaintiff Vicente Madrigal, with the result that plaintiff Madrigal has
paid as income tax for the year 1914, P3,786.08, in excess of the sum
lawfully due and payable.
The answer of the defendants, together with an analysis of the tax
declaration, the pleadings, and the stipulation, sets forth the basis of
defendants' stand in the following way: The income of Vicente
Madrigal and his wife Susana Paterno of the year 1914 was made up of
three items: (1) P362,407.67, the profits made by Vicente Madrigal in
his coal and shipping business; (2) P4,086.50, the profits made by
Susana Paterno in her embroidery business; (3) P16,687.80, the profits
made by Vicente Madrigal in a pawnshop company. The sum of these
three items is P383,181.97, the gross income of Vicente Madrigal and
Susana Paterno for the year 1914. General deductions were claimed
and allowed in the sum of P86,879.24. The resulting net income was
P296,302.73. For the purpose of assessing the normal tax of one per
cent on the net income there were allowed as specific deductions the
following: (1) P16,687.80, the tax upon which was to be paid at
source, and (2) P8,000, the specific exemption granted to Vicente
Madrigal and Susana Paterno, husband and wife. The remainder,
P271,614.93 was the sum upon which the normal tax of one per cent
was assessed. The normal tax thus arrived at was P2,716.15.
The dispute between the plaintiffs and the defendants concerned the
additional tax provided for in the Income Tax Law. The trial court in
an exhausted decision found in favor of defendants, without costs.
ISSUES.
The contentions of plaintiffs and appellants having to do solely with
the additional income tax, is that is should be divided into two equal
parts, because of the conjugal partnership existing between them. The
learned argument of counsel is mostly based upon the provisions of the
Civil Code establishing the sociedad de gananciales. The counter
contentions of appellees are that the taxes imposed by the Income Tax
Law are as the name implies taxes upon income tax and not upon
capital and property; that the fact that Madrigal was a married man,
and his marriage contracted under the provisions governing the
conjugal partnership, has no bearing on income considered as income,
and that the distinction must be drawn between the ordinary form of
commercial partnership and the conjugal partnership of spouses
resulting from the relation of marriage.
DECISION.
From the point of view of test of faculty in taxation, no less than five
answers have been given the course of history. The final stage has been
the selection of income as the norm of taxation. (See Seligman, "The
Income Tax," Introduction.) The Income Tax Law of the United States,
extended to the Philippine Islands, is the result of an effect on the part
of the legislators to put into statutory form this canon of taxation and
of social reform. The aim has been to mitigate the evils arising from
inequalities of wealth by a progressive scheme of taxation, which
places the burden on those best able to pay. To carry out this idea,
public considerations have demanded an exemption roughly equivalent
to the minimum of subsistence. With these exceptions, the income tax
is supposed to reach the earnings of the entire non-governmental
property of the country. Such is the background of the Income Tax
Law.
Income as contrasted with capital or property is to be the test. The
essential difference between capital and income is that capital is a
fund; income is a flow. A fund of property existing at an instant of time
is called capital. A flow of services rendered by that capital by the
payment of money from it or any other benefit rendered by a fund of
capital in relation to such fund through a period of time is called an
income. Capital is wealth, while income is the service of wealth. (See
Fisher, "The Nature of Capital and Income.") The Supreme Court of
Georgia expresses the thought in the following figurative language:
"The fact is that property is a tree, income is the fruit; labor is a tree,
income the fruit; capital is a tree, income the fruit." (Waring vs. City of
Savannah [1878], 60 Ga., 93.) A tax on income is not a tax on property.
"Income," as here used, can be defined as "profits or gains." (London
County Council vs. Attorney-General [1901], A. C., 26; 70 L. J. K. B.
N. S., 77; 83 L. T. N. S., 605; 49 Week. Rep., 686; 4 Tax Cas., 265.
See further Foster's Income Tax, second edition [1915], Chapter IV;
Black on Income Taxes, second edition [1915], Chapter VIII; Gibbons
vs. Mahon [1890], 136 U.S., 549; and Towne vs. Eisner, decided by the
United States Supreme Court, January 7, 1918.)
A regulation of the United States Treasury Department relative to
returns by the husband and wife not living apart, contains the
following:
The husband, as the head and legal representative of the household and
general custodian of its income, should make and render the return of
the aggregate income of himself and wife, and for the purpose of
levying the income tax it is assumed that he can ascertain the total
amount of said income. If a wife has a separate estate managed by
herself as her own separate property, and receives an income of more
than $3,000, she may make return of her own income, and if the
husband has other net income, making the aggregate of both incomes
more than $4,000, the wife's return should be attached to the return of
her husband, or his income should be included in her return, in order
that a deduction of $4,000 may be made from the aggregate of both
incomes. The tax in such case, however, will be imposed only upon so
much of the aggregate income of both shall exceed $4,000. If either
husband or wife separately has an income equal to or in excess of
$3,000, a return of annual net income is required under the law, and
such return must include the income of both, and in such case the
return must be made even though the combined income of both be less
than $4,000. If the aggregate net income of both exceeds $4,000, an
annual return of their combined incomes must be made in the manner
stated, although neither one separately has an income of $3,000 per
annum. They are jointly and separately liable for such return and for
the payment of the tax. The single or married status of the person
claiming the specific exemption shall be determined as one of the time
of claiming such exemption which return is made, otherwise the status
at the close of the year."
With these general observations relative to the Income Tax Law in
force in the Philippine Islands, we turn for a moment to consider the
provisions of the Civil Code dealing with the conjugal partnership.
Recently in two elaborate decisions in which a long line of Spanish
authorities were cited, this court in speaking of the conjugal
partnership, decided that "prior to the liquidation the interest of the
wife and in case of her death, of her heirs, is an interest inchoate, a
mere expectancy, which constitutes neither a legal nor an equitable
estate, and does not ripen into title until there appears that there are
assets in the community as a result of the liquidation and settlement."
(Nable Jose vs. Nable Jose [1916], 15 Off. Gaz., 871; Manuel and
Laxamana vs. Losano [1918], 16 Off. Gaz., 1265.)
Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the
property of her husband Vicente Madrigal during the life of the
conjugal partnership. She has an interest in the ultimate property rights
and in the ultimate ownership of property acquired as income after
such income has become capital. Susana Paterno has no absolute right
to one-half the income of the conjugal partnership. Not being seized of
a separate estate, Susana Paterno cannot make a separate return in
order to receive the benefit of the exemption which would arise by
reason of the additional tax. As she has no estate and income, actually
and legally vested in her and entirely distinct from her husband's
property, the income cannot properly be considered the separate
income of the wife for the purposes of the additional tax. Moreover,
the Income Tax Law does not look on the spouses as individual
partners in an ordinary partnership. The husband and wife are only
entitled to the exemption of P8,000 specifically granted by the law.
The higher schedules of the additional tax directed at the incomes of
the wealthy may not be partially defeated by reliance on provisions in
our Civil Code dealing with the conjugal partnership and having no
application to the Income Tax Law. The aims and purposes of the
Income Tax Law must be given effect.
The point we are discussing has heretofore been considered by the
Attorney-General of the Philippine Islands and the United States
Treasury Department. The decision of the latter overruling the opinion
of the Attorney-General is as follows:
TREASURY
DEPARTMENT,
Washington.
Income Tax.
FRANK MCINTYRE,
Chief, Bureau of Insular Affairs, War Department,
Washington, D. C.
SIR: This office is in receipt of your letter of June 22, 1915,
transmitting copy of correspondence "from the Philippine
authorities relative to the method of submission of income tax
returns by marred person."
You advise that "The Governor-General, in forwarding the
papers to the Bureau, advises that the Insular Auditor has been
authorized to suspend action on the warrants in question until
an authoritative decision on the points raised can be secured
from the Treasury Department."
From the correspondence it appears that Gregorio Araneta,
married and living with his wife, had an income of an amount
sufficient to require the imposition of the net income was
properly computed and then both income and deductions and
the specific exemption were divided in half and two returns
made, one return for each half in the names respectively of the
husband and wife, so that under the returns as filed there would
be an escape from the additional tax; that Araneta claims the
returns are correct on the ground under the Philippine law his
wife is entitled to half of his earnings; that Araneta has
dominion over the income and under the Philippine law, the
right to determine its use and disposition; that in this case the
wife has no "separate estate" within the contemplation of the
Act of October 3, 1913, levying an income tax.
It appears further from the correspondence that upon the
foregoing explanation, tax was assessed against the entire net
income against Gregorio Araneta; that the tax was paid and an
application for refund made, and that the application for refund
was rejected, whereupon the matter was submitted to the
Attorney-General of the Islands who holds that the returns were
correctly rendered, and that the refund should be allowed; and
thereupon the question at issue is submitted through the
Governor-General of the Islands and Bureau of Insular Affairs
for the advisory opinion of this office.
By paragraph M of the statute, its provisions are extended to
the Philippine Islands, to be administered as in the United
States but by the appropriate internal-revenue officers of the
Philippine Government. You are therefore advised that upon
the facts as stated, this office holds that for the Federal Income
Tax (Act of October 3, 1913), the entire net income in this case
was taxable to Gregorio Araneta, both for the normal and
additional tax, and that the application for refund was properly
rejected.
The separate estate of a married woman within the
contemplation of the Income Tax Law is that which belongs to
her solely and separate and apart from her husband, and over
which her husband has no right in equity. It may consist of
lands or chattels.
The statute and the regulations promulgated in accordance
therewith provide that each person of lawful age (not excused
from so doing) having a net income of $3,000 or over for the
taxable year shall make a return showing the facts; that from
the net income so shown there shall be deducted $3,000 where
the person making the return is a single person, or married and
not living with consort, and $1,000 additional where the person
making the return is married and living with consort; but that
where the husband and wife both make returns (they living
together), the amount of deduction from the aggregate of their
several incomes shall not exceed $4,000.
The only occasion for a wife making a return is where she has
income from a sole and separate estate in excess of $3,000, but
together they have an income in excess of $4,000, in which the
latter event either the husband or wife may make the return but
not both. In all instances the income of husband and wife
whether from separate estates or not, is taken as a whole for the
purpose of the normal tax. Where the wife has income from a
separate estate makes return made by her husband, while the
incomes are added together for the purpose of the normal tax
they are taken separately for the purpose of the additional tax.
In this case, however, the wife has no separate income within
the contemplation of the Income Tax Law.
Respectfully,
DAVID A. GATES.
Acting Commissioner.
In connection with the decision above quoted, it is well to recall a few
basic ideas. The Income Tax Law was drafted by the Congress of the
United States and has been by the Congress extended to the Philippine
Islands. Being thus a law of American origin and being peculiarly
intricate in its provisions, the authoritative decision of the official who
is charged with enforcing it has peculiar force for the Philippines. It
has come to be a well-settled rule that great weight should be given to
the construction placed upon a revenue law, whose meaning is
doubtful, by the department charged with its execution. (U.S. vs.
Cerecedo Hermanos y Cia. [1907], 209 U.S., 338; In re Allen [1903], 2
Phil., 630; Government of the Philippine Islands vs. Municipality of
Binalonan, and Roman Catholic Bishop of Nueva Segovia [1915], 32
Phil., 634.) We conclude that the judgment should be as it is hereby
affirmed with costs against appellants. So ordered.

Torres, Johnson, Carson, Street and Fisher, JJ., concur.


Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 48532 August 31, 1992
HERNANDO B. CONWI, JAIME E. DY-LIACCO, VICENTE D. HERRERA, BENJAMIN T.
ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O. MICIANO, EDUARDO A. RIALP, LEANDRO
G. SANTILLAN, and JAIME A. SOQUES, petitioners,
vs.
THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE,
respondents.
G.R. No. 48533 August 31, 1992
ENRIQUE R. ABAD SANTOS, HERNANDO B. CONWI, TEDDY L. DIMAYUGA, JAIME E. DY-
LIACCO, MELQUIADES J. GAMBOA, JR., MANUEL L. GUZMAN, VICENTE D. HERRERA,
BENJAMIN T. ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O. MICIANO, EDUARDO A.
RIALP and JAIME A. SOQUES, petitioners,
vs.
THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE,
respondents.
Angara, Abello, Concepcion, Regala & Cruz for petitioners.
NOCON, J.:
Petitioners pray that his Court reverse the Decision of the public respondent Court of Tax Appeals,
promulgated September 26, 19771 denying petitioners' claim for tax refunds, and order the
Commissioner of Internal Revenue to refund to them their income taxes which they claim to have been
erroneously or illegally paid or collected.
As summarized by the Solicitor General, the facts of the cases are as follows:
Petitioners are Filipino citizens and employees of Procter and Gamble, Philippine
Manufacturing Corporation, with offices at Sarmiento Building, Ayala Avenue,
Makati, Rizal. Said corporation is a subsidiary of Procter & Gamble, a foreign
corporation based in Cincinnati, Ohio, U.S.A. During the years 1970 and 1971
petitioners were assigned, for certain periods, to other subsidiaries of Procter &
Gamble, outside of the Philippines, during which petitioners were paid U.S.
dollars as compensation for services in their foreign assignments. (Paragraphs
III, Petitions for Review, C.T.A. Cases Nos. 2511 and 2594, Exhs. D, D-1 to D-
19). When petitioners in C.T.A. Case No. 2511 filed their income tax returns for
the year 1970, they computed the tax due by applying the dollar-to-peso
conversion on the basis of the floating rate ordained under B.I.R. Ruling No. 70-
027 dated May 14, 1970, as follows:
From January 1 to February 20, 1970 at the conversion
rate of P3.90 to U.S. $1.00;
From February 21 to December 31, 1970 at the conversion
rate of P6.25 to U.S. $1.00
Petitioners in C.T.A. Case No. 2594 likewise used the above conversion rate in
converting their dollar income for 1971 to Philippine peso. However, on February
8, 1973 and October 8, 1973, petitioners in said cases filed with the office of the
respondent Commissioner, amended income tax returns for the above-mentioned
years, this time using the par value of the peso as prescribed in Section 48 of
Republic Act No. 265 in relation to Section 6 of Commonwealth Act No. 265 in
relation to Section 6 of Commonwealth Act No. 699 as the basis for converting
their respective dollar income into Philippine pesos for purposes of computing
and paying the corresponding income tax due from them. The aforesaid
computation as shown in the amended income tax returns resulted in the alleged
overpayments, refund and/or tax credit. Accordingly, claims for refund of said
over-payments were filed with respondent Commissioner. Without awaiting the
resolution of the Commissioner of the Internal Revenue on their claims,
petitioners filed their petitioner for review in the above-mentioned cases.
Respondent Commissioner filed his Answer to petitioners' petition for review in
C.T.A. Case No. 2511 on July 31, 1973, while his Answer in C.T.A. Case No.
2594 was filed on August 7, 1974.
Upon joint motion of the parties on the ground that these two cases involve
common question of law and facts, that respondent Court of Tax Appeals heard
the cases jointly. In its decision dated September 26, 1977, the respondent Court
of Tax Appeals held that the proper conversion rate for the purpose of reporting
and paying the Philippine income tax on the dollar earnings of petitioners are the
rates prescribed under Revenue Memorandum Circulars Nos. 7-71 and 41-71.
Accordingly, the claim for refund and/or tax credit of petitioners in the above-
entitled cases was denied and the petitions for review dismissed, with costs
against petitioners. Hence, this petition for review on certiorari. 2
Petitioners claim that public respondent Court of Tax Appeals erred in holding:
1. That petitioners' dollar earnings are receipts derived from foreign exchange transactions.
2. That the proper rate of conversion of petitioners' dollar earnings for tax purposes in the prevailing
free market rate of exchange and not the par value of the peso; and
3. That the use of the par value of the peso to convert petitioners' dollar earnings for tax purposes into
Philippine pesos is "unrealistic" and, therefore, the prevailing free market rate should be the rate used.
Respondent Commissioner of Internal Revenue, on the other hand, refutes petitioners' claims as
follows:
At the outset, it is submitted that the subject matter of these two cases are
Philippine income tax for the calendar years 1970 (CTA Case No. 2511) and
1971 (CTA Case No. 2594) and, therefore, should be governed by the provisions
of the National Internal Revenue Code and its implementing rules and
 regulations, and not by the provisions of Central Bank Circular No. 42 dated May
21, 1953, as contended by petitioners.
Section 21 of the National Internal Revenue Code, before its amendment by
Presidential Decrees Nos. 69 and 323 which took effect on January 1, 1973 and
January 1, 1974, respectively, imposed a tax upon the taxable net income
received during each taxable year from all sources by a citizen of the Philippines,
whether residing here or abroad.
Petitioners are citizens of the Philippines temporarily residing abroad by virtue of
their employment. Thus, in their tax returns for the period involved herein, they
gave their legal residence/address as c/o Procter & Gamble PMC, Ayala Ave.,
Makati, Rizal (Annexes "A" to "A-8" and Annexes "C" to "C-8", Petition for
Review, CTA Nos. 2511 and 2594).
Petitioners being subject to Philippine income tax, their dollar earnings should be
converted into Philippine pesos in computing the income tax due therefrom, in
accordance with the provisions of Revenue Memorandum Circular No. 7-71
dated February 11, 1971 for 1970 income and Revenue Memorandum Circular
No. 41-71 dated December 21, 1971 for 1971 income, which reiterated BIR
Ruling No. 70-027 dated May 4, 1970, to wit:
For internal revenue tax purposes, the free marker rate of
conversion (Revenue Circulars Nos. 7-71 and 41-71)
should be applied in order to determine the true and correct
value in Philippine pesos of the income of petitioners. 3
After a careful examination of the records, the laws involved and the jurisprudence on the matter, We
are inclined to agree with respondents Court of Tax Appeals and Commissioner of Internal Revenue
and thus vote to deny the petition.
This basically an income tax case. For the proper resolution of these cases income may be defined as
an amount of money coming to a person or corporation within a specified time, whether as payment for
services, interest or profit from investment. Unless otherwise specified, it means cash or its equivalent.
4 Income can also be though of as flow of the fruits of one's labor. 5
Petitioners are correct as to their claim that their dollar earnings are not receipts derived from foreign
exchange transactions. For a foreign exchange transaction is simply that — a transaction in foreign
exchange, foreign exchange being "the conversion of an amount of money or currency of one country
into an equivalent amount of money or currency of another." 6 When petitioners were assigned to the
foreign subsidiaries of Procter & Gamble, they were earning in their assigned nation's currency and
were ALSO spending in said currency. There was no conversion, therefore, from one currency to
another.
Public respondent Court of Tax Appeals did err when it concluded that the dollar incomes of petitioner
fell under Section 2(f)(g) and (m) of C.B. Circular No. 42. 7
The issue now is, what exchange rate should be used to determine the peso equivalent of the foreign
earnings of petitioners for income tax purposes. Petitioners claim that since the dollar earnings do not
fall within the classification of foreign exchange transactions, there occurred no actual inward
remittances, and, therefore, they are not included in the coverage of Central Bank Circular No. 289
which provides for the specific instances when the par value of the peso shall not be the conversion
rate used. They conclude that their earnings should be converted for income tax purposes using the
par value of the Philippine peso.
Respondent Commissioner argues that CB Circular No. 289 speaks of receipts for export products,
receipts of sale of foreign exchange or foreign borrowings and investments but not income tax. He also
claims that he had to use the prevailing free market rate of exchange in these cases because of the
need to ascertain the true and correct amount of income in Philippine peso of dollar earners for
Philippine income tax purposes.
A careful reading of said CB Circular No. 289 8 shows that the subject matters involved therein are
export products, invisibles, receipts of foreign exchange, foreign exchange payments, new foreign
borrowing and
investments — nothing by way of income tax payments. Thus, petitioners are in error by concluding
that since C.B. Circular No. 289 does not apply to them, the par value of the peso should be the
guiding rate used for income tax purposes.
The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter &
Gamble. It was a definite amount of money which came to them within a specified period of time of two
yeas as payment for their services.
Section 21 of the National Internal Revenue Code, amended up to August 4, 1969, states as follows:
Sec. 21. Rates of tax on citizens or residents. — A tax is hereby imposed upon
the taxable net income received during each taxable year from all sources by
every individual, whether a citizen of the Philippines residing therein or abroad or
an alien residing in the Philippines, determined in accordance with the following
schedule:
xxx xxx xxx
And in the implementation for the proper enforcement of the National Internal Revenue Code, Section
338 thereof empowers the Secretary of Finance to "promulgate all needful rules and regulations" to
effectively enforce its provisions. 9
Pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 10 and 41-71 11 were issued to
prescribed a uniform rate of exchange from US dollars to Philippine pesos for INTERNAL REVENUE
TAX PURPOSES for the years 1970 and 1971, respectively. Said revenue circulars were a valid
exercise of the authority given to the Secretary of Finance by the Legislature which enacted the
Internal Revenue Code. And these are presumed to be a valid interpretation of said code until revoked
by the Secretary of Finance himself. 12
Petitioners argue that since there were no remittances and acceptances of their salaries and wages in
US dollars into the Philippines, they are exempt from the coverage of such circulars. Petitioners forget
that they are citizens of the Philippines, and their income, within or without, and in these cases wholly
without, are subject to income tax. Sec. 21, NIRC, as amended, does not brook any exemption.
Since petitioners have already paid their 1970 and 1971 income taxes under the uniform rate of
exchange prescribed under the aforestated Revenue Memorandum Circulars, there is no reason for
respondent Commissioner to refund any taxes to petitioner as said Revenue Memorandum Circulars,
being of long standing and not contrary to law, are valid. 13
Although it has become a worn-out cliche, the fact still remains that "taxes are the lifeblood of the
government" and one of the duties of a Filipino citizen is to pay his income tax.
WHEREFORE, the petitioners are denied for lack of merit. The dismissal by the respondent Court of
Tax Appeals of petitioners' claims for tax refunds for the income tax period for 1970 and 1971 is
AFFIRMED. Costs against petitioners.
SO ORDERED.

Narvasa, C.J., Padilla and Regalado, JJ., concur.

Melo, J., took no part.


Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. Nos. L-18843 and L-18844 August 29, 1974
CONSOLIDATED MINES, INC., petitioner,
vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.
G.R. Nos. L-18853 & L-18854 August 29, 1974
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
CONSOLIDATED MINES, INC., respondent.
Office of the Solicitor General for Commissioner of Internal Revenue.
Tañada, Carreon & Tañada for Consolidated Mines, Inc.
MAKALINTAL, C.J.:p
These are appeals from the amended decision of the Court of Tax Appeals dated August 7, 1961, in
CTA Cases No. 565 and 578, both entitled "Consolidated Mines, Inc. vs. Commissioner of Internal
Revenue," ordering the Consolidated Mines, Inc., hereinafter referred to as the Company, to pay the
Commissioner of Internal Revenue the amounts of P79,812.93, P51,528.24 and P71,392.82 as
deficiency income taxes for the years 1953, 1954 and 1956, respectively, or the total sum of
P202,733.99, plus 5% surcharge and 1% monthly interest from the date of finality of the decision.
The Company, a domestic corporation engaged in mining, had filed its income tax returns for 1951,
1952, 1953 and 1956. In 1957 examiners of the Bureau of Internal Revenue investigated the income
tax returns filed by the Company because on August 10, 1954, its auditor, Felipe Ollada claimed the
refund of the sum of P107,472.00 representing alleged overpayments of income taxes for the year
1951. After the investigation the examiners reported that (A) for the years 1951 to 1954 (1) the
Company had not accrued as an expense the share in the company profits of Benguet Consolidated
Mines as operator of the Company's mines, although for income tax purposes the Company had
reported income and expenses on the accrual basis; (2) depletion and depreciation expenses had
been overcharged; and (3) the claims for audit and legal fees and miscellaneous expenses for 1953
and 1954 had not been properly substantiated; and that (B) for the year 1956 (1) the Company had
overstated its claim for depletion; and (2) certain claims for miscellaneous expenses were not duly
supported by evidence.
In view of said reports the Commissioner of Internal Revenue sent the Company a letter of demand
requiring it to pay certain deficiency income taxes for the years 1951 to 1954, inclusive, and for the
year 1956. Deficiency income tax assessment notices for said years were also sent to the Company.
The Company requested a reconsideration of the assessment, but the Commissioner refused to
reconsider, hence the Company appealed to the Court of Tax Appeals. The assessments for 1951 to
1954 were contested in CTA Case No. 565, while that for 1956 was contested in CTA Case No. 578.
Upon agreement of the parties the two cases were heard and decided jointly.
On May 6, 1961 the Tax Court rendered judgment ordering the Company to pay the amounts of
P107,846.56, P134,033.01 and P71,392.82 as deficiency income taxes for the years 1953, 1954 and
1956, respectively. The Tax Court nullified the assessments for the years 1951 and 1952 on the ground
that they were issued beyond the five-year period prescribed by Section 331 of the National Internal
Revenue Code.
However, on August 7, 1961, upon motion of the Company, the Tax Court reconsidered its decision and
further reduced the deficiency income tax liabilities of the Company to P79,812.93, P51,528.24 and
P71,382.82 for the years 1953, 1954 and 1956, respectively. In this amended decision the Tax Court
subscribed to the theory of the Company that Benguet Consolidated Mining Company, hereafter
referred to as Benguet, had no right to share in "Accounts Receivable," hence one-half thereof may not
be accrued as an expense of the Company for a given year.
Both the Company and the Commissioner appealed to this Court. The Company questions the rate of
mine depletion adopted by the Court of Tax Appeals and the disallowance of depreciation charges and
certain miscellaneous expenses (G.R. Nos.
L-18843 & L-18844). The Commissioner, on the other hand, questions what he characterizes as the
"hybrid" or "mixed" method of accounting utilized by the Company, and approved by the Tax Court, in
treating the share of Benguet in the net profits from the operation of the mines in connection with its
income tax returns (G.R. Nos. L-18853 &
L-18854).
With respect to methods of accounting, the Tax Code states:
Sec. 38. General Rules. The net income shall be computed upon the basis of the
taxpayer's annual accounting period (fiscal year or calendar year, as the case
may be) in accordance with the method of accounting regularly employed in
keeping the books of such taxpayer but if no such method of accounting has
been so employed or if the method employed does not clearly reflect the income
the computation shall be made in accordance with such methods as in the
opinion of the Commissioner of Internal Revenue does clearly reflect the
income ...
Sec. 39. Period in which items of gross income included. — The amount of all
items of gross income shall be included in the gross income for the taxable year
in which received by the taxpayer, unless, under the methods of accounting
permitted under section 38, any such amounts are to be properly accounted for
as of a different period ...
Sec. 40. Period for which deductions and credits taken. — The deductions
provided for in this Title shall be taken for the taxable year in which "paid or
accrued" or "paid or incurred" dependent upon the method of accounting upon
the basis of which the net income is computed, unless in order to clearly reflect
the income the deductions should be taken as of a different period ...
It is said that accounting methods for tax purposes1 comprise a set of rules for determining when and
how to report income and deductions. The U.S. Internal Revenue Code2 allows each taxpayer to adopt
the accounting method most suitable to his business, and requires only that taxable income generally
be based on the method of accounting regularly employed in keeping the taxpayer's books, provided
that the method clearly reflects income.3
The Company used the accrual method of accounting in computing its income. One of its expenses is
the amount-paid to Benguet as mine operator, which amount is computed as 50% of "net income." The
Company deducts as an expense 50% of cash receipts minus disbursements, but does not deduct at
the end of each calendar year what the Commissioner alleges is "50% of the share of Benguet" in the
"accounts receivable." However, it deducts Benguet's 50% if and when the "accounts receivable" are
actually paid. It would seem, therefore, that the Company has been deducting a portion of this expense
(Benguet's share as mine operator) on the "cash & carry" basis. The question is whether or not the
accounting system used by the Company justifies such a treatment of this item; and if not, whether
said method used by the Company, and characterized by the Commissioner as a "hybrid method," may
be allowed under the aforequoted provisions of our tax code.4
For a proper understanding of the situation the following facts are stated: The Company has certain
mining claims located in Masinloc, Zambales. Because it wanted to relieve itself of the work and
expense necessary for developing the claims, the Company, on July 9, 1934, entered into an
agreement (Exhibit L) with Benguet, a domestic anonymous partnership engaged in the production and
marketing of chromite, whereby the latter undertook to "explore, develop, mine, concentrate and
market" the pay ore in said mining claims.
The pertinent provisions of their agreement, as amended by the supplemental agreements of
September 14, 1939 (Exhibit L-1) and October 2, 1941 (Exhibit L-2), are as follows:
IV. Benguet further agrees to provide such funds from its own resources as are in
its judgment necessary for the exploration and development of said claims and
properties, for the purchase and construction of said concentrator plant and for
the installation of the proper transportation facilities as provided in paragraphs I,
II and III hereof until such time as the said properties are on a profit producing
basis and agrees thereafter to expand additional funds from its own resources, if
the income from the said claims is insufficient therefor, in the exploration and
development of said properties or in the enlargement or extension of said
concentration and transportation facilities if in its judgment good mining practice
requires such additional expenditures. Such expenditures from its own resources
prior to the time the said properties are put on a profit producing basis shall be
reimbursed as provided in paragraph VIII hereof. Expenditures from its own
resources thereafter shall be charged against the subsequent gross income of
the properties as provided in paragraph X hereof.
X. After Benguet has been fully reimbursed for its expenditures, advances and
disbursements as aforesaid the net profits from the operation shall be divided
between Benguet and Consolidated share and share alike, it being understood
however, that the net profits as the term is used in this agreement shall be
computed by deducting from gross income all operating expenses and all
disbursements of any nature whatsoever as may be made in order to carry out
the terms of this agreement.
XIII. It is understood that Benguet shall receive no compensation for services
rendered as manager or technical consultants in connection with the carrying out
of this agreement. It may, however, charge against the operation actual additional
expenses incurred in its Manila Office in connection with the carrying out of the
terms of this agreement including traveling expenses of consulting staff to the
mines. Such expenses, however, shall not exceed the sum of One Thousand
Pesos (P1,000.00) per month. Otherwise, the sole compensation of Benguet
shall be its proportion of the net profits of the operation as herein above set forth.
XIV. All payments due Consolidated by Benguet under the terms of this
agreement with respect to expenditures made and ore settlements received
during the preceding calendar month, shall be payable on or before the twentieth
day of each month.
There is no question with respect to the 90%-10% sharing of profits while Benguet was being
reimbursed the expenses disbursed during the period it was trying to put the mines on a profit-
producing basis.5 It appears that by 1953 Benguet had completely recouped said advances, because
they were then dividing the profits share and share alike. .
As heretofore stated the question is: Under the arrangement between the Company and Benguet,
when did Benguet's 50% share in the "Accounts Receivable
accrue?6
The following table (summary, Exhibit A, of examiner's report of January 28, 1967, Exh. 8) prepared for
the Commissioner graphically illustrates the effect of the inclusion of one-half of "Accounts Receivable"
as expense in the computation of the net income of the Company:
SUMMARY: 1951 1952 1953 1954

Original share of 1,313,640.26 3,521,751,94 2,340,624.59 2,622,968

VII. As soon as practicable after the close of each month Benguet shall furnish
Benguet
Consolidated with a statement showing its expenditures made and ore
settlements received under this agreement for the preceding month which
statement shall betaken as accepted by Consolidated unless exception is taken Additional share of 383,829.87 677,504.76 577,394.66 282,724.7
thereto or to any item thereof within ten days in writing in which case the dispute Rec'bles
shall be settled by agreement or by arbitration as provided in paragraph XXII
hereof. Total share of Benguet 1,697,470.13 4,199,256.70 2,918,009.25 2,905,693

Less: Receipts due 269,619.00 383,829.87 677,504.76 577,384.6

VIII. While Benguet is being reimbursed for all its expenditures, advances and
from prior year
disbursements hereunder as evidenced by said statements of accounts, the net
operation
profits resulting from the operation of the aforesaid claims or properties shall be
divided ninety per cent (90%) to Benguet and ten per cent (10%) to
Consolidated. Such division of net profits shall be based on the receipts, and Share of Benguet as 1,427,851.13 3,815,426.83 2,240,504.49 2,328,308
expenditures during each calendar year, and shall continue until such time as the adjusted (Acc'rd)
ninety per cent (90%) of the net profits pertaining to Benguet hereunder shall
equal the amount of such expenditures, advances and disbursements. The net Less: Participation of 1,313,640.26 3,521,751.94 2,340,624.59 2,622,968
profits shall be computed as provided in Paragraph X hereof. Benguet already
deducted

Additional Expense 114,210.87 293,674.89 (100,120.10)
(Income)
In the aforesaid table "Additional share on Rec'bles" is one-half of "Total Rec'bles minus "Total
Payables." It indicates, from the Commissioner's viewpoint, that there were years when the Company
had been overstating its income (1951 and 1952) and there were years when it had been understating
its income (1953 and 1954).7 The Commissioner is not interested in the taxes for 1951 and 1952
(which had prescribed anyway) when the Company had overstated its income, but in those for 1953
and 1954, in each of which years the amount of the "Accounts Receivable" was less than that of the
previous year, and the Company, therefore, appears to have deducted, as expense, compensation to
Benguet bigger (than what the Commissioner claims is due) by one-half of the difference between the
year's "Accounts Receivable" and the previous year's "Accounts Receivable," thus apparently
understating its income to that extent.
According to the agreement between the Company and Benguet the net profits "shall be computed by
deducting from gross income all operating expenses and all expenses of any nature whatsoever."
Periodically, Benguet was to furnish the Company with the statement of accounts for a given month "as
soon as practicable after the close" of that month. The Company had ten days from receipt of the
statement to register its objections thereto. Thereafter, the statement was considered binding on the
Company. And all payments due the Company "with respect to the expenditures made and ore
settlements received during the calendar month shall be payable on or before the twentieth of each
month."
The agreement does not say that Benguet was to share in "Accounts Receivable." But may this be
implied from the terms of the agreement? The statement of accounts (par. VIII) and the payment part
(XIV) that Benguet8 must make are both with respect to "expenditures made and ore settlements
received." "Expenditures" are payments of money.9 This is the meaning intended by the parties,
considering the provision that Benguet agreed to "provide such funds from its own resources, etc.";
and that "such expenditures from its own resources" were to be reimbursed first as provided in par.
VIII, and later as provided in par. X. "Settlement" does not necessarily mean payment or satisfaction,
though it may mean that; it frequently means adjustment or arrangement. 10 The term "settlement"
may be used in the sense of "payment," or it may be used in the sense of "adjustment" or
"ascertainment," or it may be used in the sense of "adjustment" or "ascertainment of a balance
between contending parties," depending upon the circumstances under which, and the connection in
which, use of the term is made. 11 In the term "ore settlements received," the word "settlement" was
not used in the concept of "adjustment," "arrangement" or "ascertainment of a balance between
contending parties," since all these are "made," not "received." "Payment," then, is the more
appropriate equivalent of, and interchangeable with, the term "Settlement." Hence, "ore settlements
received" means "ore payments received," which excludes "Accounts Receivable." Thus, both par. VIII
and par. XIV refer to "payment," either received or paid by Benguet.
According to par. X, the 50-50 sharing should be on "net profits;" and "net profits" shall be computed
"by deducting from gross income all operating expenses and all disbursements of any nature
whatsoever as may be made in order to carry out the terms of the agreement." The term "gross profit"
was not defined. In the accrual method of accounting "gross income" would include both "cash
receipts" and "Accounts Receivable." But the term "gross income" does not carry a definite and
inflexible meaning under all circumstances, and should be defined in such a way as to ascertain the
sense in which the parties have used it in contracting. 12 According to par. VIII 13 the "division of net
profits shall be based on the receipts and expenditures." The term "expenditures" we have already
analyzed. As used, receipts" means "money received." 14 The same par. VIII uses the term
"expenditures, advances and disbursements." "Disbursements" means "payment," 15 while the word
"advances" when used in a contract ordinarily means money furnished with an expectation that it shall
be returned. 16 It is thus clear from par. VIII that in the computation of "net profits" (to be divided on the
90%-10% sharing arrangement) only "cash payments" received and "cash disbursements" made by
Benguet were to be considered. On the presumption that the parties were consistent in the use of the
term, the same meaning must be given to "net profits" as used in par. X, and "gross income,"
accordingly, must be equated with "cash receipts." The language used by the parties show their
intention to compute Benguet's 50% share on the excess of actual receipts over disbursements,
without considering "Accounts Receivable" and "Accounts Payable" as factors in the computation.
(294,659.90)
Benguet then did not have a right to share in "Accounts Receivable," and, correspondingly, the
Company did not have the liability to pay Benguet any part of that item. And a deduction cannot be
accrued until an actual liability is incurred, even if payment has not been made. 17
Here we have to distinguish between (1) the method of accounting used by the Company in
determining its net income for tax purposes; and (2) the method of computation agreed upon between
the Company and Benguet in determining the amount of compensation that was to be paid by the
former to the latter. The parties, being free to do so, had contracted that in the method of computing
compensation the basis were "cash receipts" and "cash payments." Once determined in accordance
with the stipulated bases and procedure, then the amount due Benguet for each month accrued at the
end of that month, whether the Company had made payment or not (see par. XIV of the agreement).
To make the Company deduct as an expense one-half of the "Accounts Receivable" would, in effect,
be equivalent to giving Benguet a right which it did not have under the contract, and to substitute for
the parties' choice a mode of computation of compensation not contemplated by them. 18
Since Benguet had no right to one-half of the "Accounts Receivable," the Company was correct in not
accruing said one-half as a deduction. The Company was not using a hybrid method of accounting, but
was consistent in its use of the accrual method of accounting. The first issue raised by the Company is
with respect to the rate of mine depletion used by the Court of Tax Appeals. The Tax Code provides
that in computing net income there shall be allowed as deduction, in the case of mines, a reasonable
allowance for depletion thereof not to exceed the market value in the mine of the product thereof which
has been mined and sold during the year for which the return is made [Sec. 30(g) (1) (B)]. 19
The formula 20 for computing the rate of depletion is:
Cost of Mine Property
---------------------- = Rate of Depletion Per Unit Estimated ore Deposit of Product Mined and sold
The Commissioner and the Company do not agree as to the figures corresponding to either factor that
affects the rate of depletion per unit. The figures according to the Commissioner are:
P2,646,878.44 (mine cost) P0.59189 (rate of
------------------------- = depletion per ton)
4,471,892 tons (estimated ore deposit)
while the Company insists they are:
P4,238,974.57 (mine cost) P1.0197 (rate of
------------------------- - = depletion per ton)
4,156,888 tons (estimated
ore deposit)
They agree, however, that the "cost of the mine property" consists of (1) mine cost; and (2) expenses
of development before production. As to mine cost, the parties are practically in agreement — the
Commissioner says it is P2,515,000 (the Company puts it at P2,500,000). As to expenses of
development before production the Commissioner and the Company widely differ. The Company
claims it is P1,738,974.56, while the Commissioner says it is only P131,878.44. The Company argues
that the Commissioner's figure is "a patently insignificant and inadequate figure when one considers
the tens of millions of pesos of revenue and production that petitioner's chromite mine fields have
finally produced."
As an income tax concept, depletion is wholly a creation of the statute21 — "solely a matter of
legislative grace." 22 Hence, the taxpayer has the burden of justifying the allowance of any deduction
claimed. 23 As in connection with all other tax controversies, the burden of proof to show that a
disallowance of depletion by the Commissioner is incorrect or that an allowance made is inadequate is
upon the taxpayer, and this is true with respect to the value of the property constituting the basis of the
deduction. 24 This burden-of-proof rule has been frequently applied and a value claimed has been
disallowed for lack of evidence. 25
As proof that the amount spent for developing the mines was P1,738,974.56, the Company relies on
the testimony of Eligio S. Garcia and on Exhibits 1, 31 and 38.
Exhibit I is the Company's report to its stockholders for the year 1947. It contains the Company's
balance sheet as of December 31, 1946 (Exhibit I-1). Among the assets listed is "Mines, Improvement
& Dev." in the amount of P4,238,974.57, which, according to the Company, consisted of P2,500,000,
purchase price of the mine, and P1,738,974.56, cost of developing it. The Company also points to the
statement therein that "Benguet invested approximately P2,500,000 to put the property in operation,
the greater part of such investment being devoted to the construction of a 25-kilometer road and the
installation of port facilities." This amount of P2,500,000 was only an estimate. The Company has not
explained in detail in what this amount or the lesser amount of P1,738,974.56 consisted. Nor has it
explained how that bigger amount became P1,738,974.56 in the balance sheet for December 31,
1946.
According to the Company the total sum of P4,238,974.57 as "Mines, Improvement & Dev." was taken
from its pre-war balance sheet of December 31, 1940. As proof of this it cites the sworn certification
(Exhibit 38) executed on October 25, 1946 by R.P. Flood, in his capacity as treasurer of the Company,
and attached to other papers of the Company filed with the Securities and Exchange Commission in
compliance with the provisions of Republic Act No. 62 (An Act to require the presentation of proof of
ownership of securities and the reconstruction of corporate and partnership records, and for other
purposes). In said certification there are statements to the effect that "the Statement of Assets &
Liabilities of Consolidated Mines, Incorporated, submitted to the Securities & Exchange Commission as
a requirement for the reconstitution of the records of the said corporation, is as of September 4, 1946;"
and that "the figure P4,238,974.57 representing the value of Mines, Improvements and Developments
appearing therein, was taken from the Balance Sheet as of December 31, 1940, which is the only
available source of information of the Corporation regarding the above and consequently the
undersigned considers the stated figure to be only an estimate of the value of those items at the
present time. "This figure, the Company claims, is based on entries made in the ordinary and regular
course of its business dating as far back as before the war. The Company places reliance on Sec. 39,
Rule 130, Revised Rules of Court (formerly Sec. 34, Rule 123), which provides that entries made at, or
near the time of the transactions to which they refer, by a person deceased, outside of the Philippines
or unable to testify, who was in a position to know the facts therein stated, may be received as prima
facie evidence, if such person made the entries in his professional capacity or in the performance of
duty and in the ordinary or regular course of business or duty."
Note that Exhibit 38 is not the "entries," covered by the rule. The Company, however, urges,
unreasonably, we think, that it should be afforded the same probative value since it is based on such
"entries" meaning the balance sheet of December 31, 1940, which was not presented in evidence.
Even with the presentation of said balance sheet the Company would still have had to prove (1) that
the person who made the entry did so in his professional capacity or in the performance of a duty; (2)
that the entry was made in the ordinary course of business or duty; (3) that the entry was made at or
near the time of the transaction to which it related; (4) that the one who made it was in a position to
know the facts stated in the entry; and (5) that he is dead, outside the Philippines or unable to testify 26
A balance sheet may not be considered as "entries made in the ordinary course of business," which,
according to Moran:
means that the entries have been made regularly, as is usual, in the
management of the trade or business. It is essential, therefore, that there be
regularity in the entries. The entry which is being introduced in evidence should
appear to be part of a group of regular entries. ... The regularity of the entries
maybe proved by the form in which they appear in the corresponding book. 27
A balance sheet, as that word is uniformly used by bookkeepers and businessmen, is a paper which
shows "a summation or general balance of all accounts," but not the particular items going to make up
the several accounts; and it is therefore essentially different from a paper embracing "a full and
complete statement of all the disbursements and receipts, showing from what sources such receipts
were derived, and for what and to whom such disbursements or payments were made, and for what
object or purpose the same were made;" but such matters may find an appropriate place in an itemized
account. 28 Neither can it be said that a balance sheet complies with the third requisite, since the
entries therein were not made at or near the time of the transactions to which they related.
In order to render admissible books of account it must appear that they are books
of original entry, that the entries were made in the ordinary course of business,
contemporaneously with the facts recorded, and by one who had knowledge of
the facts. San Francisco Teaming Co v Gray (1909) 11 CA 314, 104 P 999. See
Brown v Ball (1932) 123 CA 758, 12 P2d 28, to the effect that the books must be
kept in the regular course of business. 29
A "ledger" is a book of accounts in which are collected and arranged, each under
its appropriate head, the various transactions scattered throughout the journal or
daybook, land is not a "book of original entries," within the rule making such
books competent evidence. First Nat. Building Co. v. Vanderberg, 119 P 224,
227; 29 Okl. 583. 30
Code Iowa, No. 3658, providing that "books of account" are receivable in
evidence, etc., means a book containing charges, and showing a continuous
dealing with persons generally. A book, to be admissible, must be kept as an
account book, and the charges made in the usual course of business. Security
Co. v. Graybeal, 52 NW 497, 85 Iowa 543, 39 Am St Rep 311. 31
Books of account may therefore be admissible under the rule. In tax cases, however, this Court
appears not to place too high a probative value on them, considering the statement in the case of
Collector of Internal Revenue v. Reyes 32 that "books of account do not prove per se that they are
veracious; in fact they may be more consistent than truthful." Indeed, books of account may be used to
carry out a plan of tax evasion. 33
At most, therefore, the presentation of the balance sheet of December 31, 1940 would only prove that
the figure P4,238,974.57 appears therein as corresponding to mine cost. But the Company would still
need to present proof to justify its adoption of that figure. It had burden of establishing the components
of the amount of P1,738,974.57: what were the particular expenses made and the corresponding
amount of each, so that it may be determined whether the expenses were actually made and whether
the items are properly part of cost of mine development, or are actually depreciable items.
In this connection we take up Exhibit 31 of the Commissioner. This is the memorandum of BIR
Examiner Cesar P. Aguirre to the Chief of the Investigating Division of the Bureau of Internal Revenue.
According to this report "the counsel of the taxpayer alleges that the cost of Masinloc Mine properties
and improvement is P4,238,974.56 instead of P2,646,879.44 as taken up in this report," and that the
expenses as of 1941 were as follows:
Assets subject to:
1941
1. Depletion P2,646,878.44
2. 10 years depreciation 1,188,987.76
3. 3 years depreciation 78,283.75
4. 20 years depreciation 9,143.63
5. 10% amortization 171,985.00
Less: Cost Chromite Field P4,085,277.58
Expenses by operator 2,515,000.00 P1,570,277.58
The examiner concluded that "in the light of the figures listed above, the counsel for the taxpayer fairly
stated the amount disbursed by the operator until the mine property was put to production in 1939."
The Company capitalizes on this conclusion, completely disregarding the examiner's other statements,
as follows:
The counsel, however, is not aware of the fact that the expenses made by the
operator are those which are depreciable and\or amortizable instead of
depletable expenditures. The first post-war Balance Sheet (12/31/46) of the
taxpayer shows that its Mines, Improvement & Dev. is P4,328,974.57.
Considering the expenditures incurred by Benguet Consolidated as of 1941
(P1,570,277.58); the rehabilitation expenses in 1946 (P211,223.72); and the cost
of the Masinloc Chromite Field, the total cost would only be P4,296,501.30. Of
the total expenditure of P1,570,277.58 as of 1941, P1,438,389.124 were spent
on depreciable and/or amortizable expenses and P131,878.44 were made for the
direct improvement of the mine property.
(933,180 tons) and the total reserve of shipping material pegged at 3,583,712 tons. On the other hand
the Company's estimate was arrived at by taking into consideration only the quantity shipped from
solid ore namely, 733,180 tons (deducting from the total tonnage shipped before and after the war an
estimated float of 200,000 tons), and then adding the total recoverable ore which was assessed at
3,423,708 tons.
The above-stated figures were obtained from the report 39 of geologist Paul A. Schaeffer, who had
been earlier commissioned by the Company to conduct a study of the metallurgical possibilities of the
Company's mines. In order to have a fair understanding of how the contending parties arrived at their
respective figures, We quote a pertinent portion of the geologist's report:
Milling Data
Ore mined before the war ............... 336,850 tons
Ore mined after the war ............... 1,779,350 tons
Total ........................................... 2,116,200 tons
x Ore shipped before the war ......... 337,611 tons
xx Ore shipped after the war ............ 595,569 tons

In as much as the expenditure of the operator as of 1941 and the cost of the Total ................................................ 933,180 tons
mine property were taken up in the account Mines, Improvement & Rehabilitation
in 1946, all its assets that were rightfully subject to depletion was P2,646,878.44.
Less an estimated float of .................. 200,000 tons

Because of the above qualification a large part of the amount spent by the operator 34 may not be
allowed for purpose of depletion deduction, 35 depletion being different from depreciation. 36 Total shipped from solid ore .............. 733,180 tons

The Company's balance sheet for December 31, 1947 lists the "mine cost" of P2,500,000 as Proportion shipped 733,180
"development cost" and the amount of P1,738,974.37 as "suspense account (mining properties subject -------- = -----------
to war losses)." The Company claims that its accountant, Mr. Calpo, made these errors, because he mined 2,116,200
was then new at the job. Granting that was what had happened, it does not affect the fact that the,
evidence on hand is insufficient to prove the cost of development alleged by the Company.
or approximately 35% of mine ore is shipped.

Nor can we rely on the statements of Eligio S. Garcia, who was the Company's treasurer and assistant
Dumps
secretary at the time he testified on August 14, 1959. He admitted that he did not know how the figure
P4,238,974.57 was arrived at, explaining: "I only know that it is the figure appearing on the balance
sheet as of December 31, 1946 as certified by the Company's auditors; and this we made as the basis Material on dumps now total 383,346 tons. Using the above tonnage for ore shipped from mining
of the valuation of the depletable value of the mines." (p. 94, t.s.n.) (excluding float) there should have been a total of 1,383,020 tons of waste produced of which almost
1,000,00 tons has been removed from the mining area of the hill. I believe that half still remains as
alluviuma long the three principal intermittent creeks which head in the mining area, and the remaining
We, therefore, have to rely on the Commissioner's assertion that the "development cost" was
half million has washed into the river. Of course this is pure speculation.
P131,878.44, broken down as follows: assessment, P34,092.12; development, P61,484.63;
exploration, P13,966.62; and diamond drilling, P22,335.07.
x — much was float material, probably about one half, leaving about 170.000 tons mined from the hill.
The question as to which figure should properly correspond to "mine cost" is one of fact. 37 The
findings of fact of the Tax Court, where reasonably supported by evidence, are conclusive upon the xx — some float included.
Supreme Court. 38
xxx xxx xxx
As regards the estimated ore deposit of the Company's mines, the Company's figure is "4,156,888
tons," while that of the Commissioner is the larger figure "4,471,892 tons." The difference of 315,004
tons was due to the fact that the Commissioner took into account all the ore that could probably be Ore Reserve
removed and marketed by the Company, utilizing the total tonnage shipped before and after the war
The A and B ore is considered sufficiently developed by drilling and tunnels to constitute the ore
reserve. C ore must be checked by drilling.
Tons
A . . . . . . . . . . . . . 7,729,800
B . . . . . . . . . . . . . 1,780,500
Total . . . . . . . . . . 9,510,300
C . . . . . . . . . . . . . 2,212,00
Grand Total . . . . 11,722,300
Therefore, the total ore reserve may be considered to be 9,510,300 tons. Based on past experience
35% is shipping ore.
With the present mill there is considerably more recovery. The ore is mined selectively (between dikes).
The results are about as follows:
Of 1,500 tons mined, 500 tons are sorted and shipped direct, the remaining 1,000 tons going to the mill
from which 250 tons ore recovered for shipment. Thus 50% of the selectively mined ore is recovered.
Thus for the reserve tonnage:
Total reserve . . . . . . . . . . . . . . . 9,510,300
Less 20% dike material . . . . . . . 1,902,060
7,608,240
Less 10% low grade ore . . . . . . 760,824
6,847,416
x disallowed consist mainly of depreciation expenses for the years 1953 and 1954 allegedly sustained as
.50 =
Total recoverable ore . . . . . . . . . . 3,423,708 tons
It is probable that 30% of the dump material could be recovered by milling. So
adding to the above 115,004 ore recoverable from the dumps, we get a total
reserve of shipping material of 3,538,712 tons. With the sink float section added
to the mill this should be increased by perhaps 20%.
On the basis of the above report the Company faults the Tax Court is sustaining the Commissioner's
estimate of the ore deposit. While the figures corresponding to the total gross tonnage shipped before
and after the war have not been assailed as erroneous, the Company maintains that the estimated
float 40 of 200,000 tons as reported in the geologist's study should have been deducted therefrom,
such that the combined total of the ore shipped should have been placed at a net of 733,180 tons
instead of 933,180 tons. The other figure the Company assails as having been improperly included by
the Commissioner in his statement of ore reserve refers to the "Recoverable ore from dump material —
115,004 tons." The Company's argument in this regard runs thus:
... This apparently was included by respondent by virtue of the geologist's report
that "it is probable that 30% of the dump material should be recovered by milling."
Actually, however, such recovery from dump or waste material is problematical
and is merely a contingency, and hence, the item of 115,004 tons should not be
included in the statement of the ore reserves. Taking out these two items
improperly and erroneously included in respondent Commissioner of Internal
Revenue's examiner's report, to wit, float or waste material of 200,060 tons and
supposedly recoverable ore from dump materials of 115,004 tons, totaling
315,004 tons, from the total figure of 4,471,892 tons given by him, the figure of
4,156.888 tons results as the proper statement of the total estimated ore as
correctly used by petitioner in its statement of ore reserves for purposes of
depletion. 41
We agree with the Company's observation on this point. The geological report appears clear enough:
the estimated float of 200,000 tons consisting of pieces of ore that had broken loose and become
detached by erosion from their original position could hardly be viewed as still forming part of the total
estimated ore deposit. Having already been broken up into numerous small pieces and practically
rendered useless for mining purposes, the same could not appreciably increase the ore potentials of
the Company's mines. As to the 115,004 tons which geologist Paul A. Schaeffer believed could still be
recovered by milling from the material on dumps, there are no sufficient data on which to affirm or deny
the accuracy of the said figure. It may, however, be taken as correct, considering that it came from the
Company's own commissioned geologist and that by the Company's own admission 42 by 1957 it had
mined and sold much more than its original estimated ore deposit of 4,156,888 tons. We think that
4,271,892 tons 43 would be a fair estimate of the ore deposit in the Company's mines.
The correct figures therefore are:
P2,515,000.00 (mine cost proper) + P131,878.44 (development cost)
4,271,892 (estimated ore deposit)
or
P2,646,878.44 (mine cost) = P0.6196 (rate of depletion
4,271,892 (estimated ore per ton)
deposit)
In its second assigned error, the Company questions the disallowance by the Tax Court of the
depreciation charges claimed by the Company as deductions from its gross income 44 The items thus
a result of the deterioration of some of the Company's incomplete constructions.
The initial memorandum 45 of the BIR examiner assigned to verify the income tax liabilities of the
Company pursuant to the latter's claim of having overpaid its income taxes states the basic reason why
the Company's claimed depreciation should be disallowed or re-adjusted, thus: since "..., up to its
completion (the incomplete asset) has not been and is not capable of use in the operation, the
depreciation claimed could not, in fairness to the Government and the taxpayer, be considered as
proper deduction for income tax purposes as the said asset is still under construction." Vis-a-Vis the
Commissioner's consistent position in this regard the company simply repeatedly requested for time 46
— in view of the alleged voluminous working sheets that had to be re-evaluated and recomputed to
justify its claimed depreciation items within which to submit a separate memorandum in itemized form
detailing the Company's objections to the items of depreciation adjustments or disallowances for the
years involved. Strangely enough, despite the period granted, the record is bare that the Company
ever submitted its itemized objection as proposed. Inasmuch as the taxpayer has the burden of
justifying the deductions claimed for depreciation, the Company's failure to discharge the burden
prevents this Court, from disturbing the Commissioner's computation. For taxation purposes the phrase
"out of its not being used," with reference to depreciation allowable on assets which are idle or the use
of which is temporarily suspended, should be understood to refer only to property that has once been
used in the trade or business, not to property that has never been actually devoted to the taxpayer's
business, particularly incomplete assets that have yet to be used. .
The Company's third assigned error assails the Court of Tax Appeals in not allowing the deduction from
its gross income of certain miscellaneous business expenditures in the course of its operation for the
years 1954 and 1956. For 1954 the deduction claimed amounted to P38,081.20, of which the Court
allowed P25,600.00 and disallowed P13,481.20, 47 "for lack of any supporting paper or evidence." For
the year 1956 the claim amounted to P20,050.00 of which the Court allowed P2,460.00, representing
the one-month salary Christmas bonus given to some of the employees, and upheld the disallowance
of P17,590.00 on the ground that the Company "failed to prove substantially that said expenses were
actually incurred and are legally deductible expenses."
Regarding the disallowed amount of P13,481.20 the year 1954, the Company submits that it consisted
of expenses supported by "vouchers and cancelled checks evidencing payments of these amounts,"
and were necessary and ordinary expenses of business for that year. On the disallowance by the Tax
Court of the sum of P17,590.00 out of a total deduction for miscellaneous expenses for 1956 among to
P20,050.00, the Company advances the same argument, namely, that the amount consisted of normal
and regular expenses for that year as evidenced by vouchers and cancelled checks.
These vouchers and cancelled checks of the Company, however, only show that the amounts claimed
had indeed been spent, and confirm the fact of disbursement, but do not necessarily prove that the
expenses for which they we're disbursed are deductible items. In the case of Collector of Internal
Revenue vs. Goodrich International Rubber Co. 48 this Court rejected the taxpayer's similar claim for
deduction of alleged representation expenses, based upon receipts issued not by the entities to which
the alleged expenses but by the officers of taxpayer corporation who allegedly paid them. It was there
stated:
If the expenses had really been incurred, receipts or chits would have been
issued by the entities to which the payments have been made, and it would have
been easy for Goodrich or its officers to produce such receipts. These receipts
issued by said officers merely attest to their claim that they had incurred and paid
said expenses. They do not establish payment of said alleged expenses to the
entities in which the same are said to have been incurred.
In the case before Us, except for the Company's own vouchers and cancelled checks, together with the
Company treasurer's lone and uncorroborated testimony regarding the purpose of said disbursements,
there is no other supporting evidence to show that the expenses were legally deductible items. We
therefore affirm the Tax Court's disallowance of the same.
In resume, this Court finds:
(1) that the Company was not using a "hybrid" method of accounting in the preparation of its income
tax returns, but was consistent in its use of the accrual method of accounting;
(2) that the rate of depletion per ton of the ore deposit mined and sold by the Company is P0.6196 per
ton 49 not P0.59189 as contended by the Commissioner nor P1.0197 as claimed by the Company;
(3) that the disallowance by the Tax Court of the depreciation charges claimed by the Company is
correct in view of the latter's failure to itemize and/or substantiate with definite proof that the
Commissioner's own method of determining depreciation is unreasonable or inaccurate;
(4) that for lack of supporting evidence to show that the Company's claimed expenses were legally
deductible items, the Tax Court's disallowance of the same is affirmed.
As recomputed then, the deficiency income taxes due from the Company are as follows:
1953
Net income as per audited return _________________ P5,193,716.89
Unallowable deductions & additional income
Depletion overcharged _________________________ P178,477.04 Depreciation adjustment
________________________ 93,862.96
Total adjustments _____________________________ 272,340.00
Net income as per investigation ___________________ 5,466,056.89
Income tax due thereon 50 _______________________ 1,522,495.92
Less amount already assessed ____________________ 1,446,241.00 DEFICIENCY TAX DUE
______________________ 76,254.92
1954
Net income as per audited return _________________ P3,320,307.68 Unallowable deductions &
additional
income
Depletion overcharged _________________________ P147,895.72 Depreciation adjustment
________________________ 11,878.12 Miscellaneous expenses ________________________
13,481.20
Total adjustments _____________________________ 173,255.04
Net income as per investigation ___________________ 3,493,562.72
Income tax due thereon _________________________ 970,197.56
Less amount already assessed ____________________ 921,686.00 DEFICIENCY TAX DUE
______________________ 48,511.56
1956
Net income as per audited return _________________ P11,504,483.97 Unallowable deductions &
additional
income
Depletion overcharged _________________________ P221,272.98 Miscellaneous expenses
________________________ 17,590.00
Total adjustments _____________________________ 238,862.98
Net income as per investigation __________________ 11,743,346.95
Income tax due thereon ________________________ 3,280,137.14
Less amount already assessed ___________________ 3,213,256.00 DEFICIENCY TAX DUE
______________________ 66,881.14
TOTAL DEFICIENCY TAXES DUE _____________ 191,647.62
WHEREFORE, the appealed decision is hereby modified by ordering Consolidated Mines, Inc. to pay
the Commissioner of Internal Revenue the amounts of P76,254.92, P48,511.56 and P66,881.14 as
deficiency income taxes for the years 1953, 1954 and 1956, respectively, or the total sum of
P191,647.62 under the terms specified by the Tax Court, without pronouncement as to costs.
Castro, Makasiar, Esguerra and Muñoz Palma, JJ., concur.
Teehankee, J., took no part.

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-66416 March 21, 1990
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
TOURS SPECIALISTS, INC., and THE COURT OF TAX
APPEALS, respondents.
Gadioma Law Offices for private respondent.
GUTIERREZ, JR., J.:
This is a petition to review on certiorari the decision of the Court
of Tax Appeals which ruled that the money entrusted to private
respondent Tours Specialists, Inc., earmarked and paid for hotel
room charges of tourists, travelers and/or foreign travel
agencies does not form part of its gross receipts subject to the
3% independent contractor's tax under the National Internal
Revenue Code of 1977.
We adopt the findings of facts of the Court of Tax Appeals as
follows:
For the years 1974 to 1976, petitioner (Tours
Specialists, Inc.) had derived income from its
activities as a travel agency by servicing the needs
of foreign tourists and travelers and Filipino
"Balikbayans" during their stay in this country.
Some of the services extended to the tourists
consist of booking said tourists and travelers in
local hotels for their lodging and board needs;
transporting these foreign tourists from the airport
to their respective hotels, and from the latter to the
airport upon their departure from the Philippines,
transporting them from their hotels to various
embarkation points for local tours, visits and
excursions; securing permits for them to visit
places of interest; and arranging their cultural
entertainment, shopping and recreational
activities.
In order to ably supply these services to the
foreign tourists, petitioner and its correspondent
counterpart tourist agencies abroad have agreed
to offer a package fee for the tourists. Although the
fee to be paid by said tourists is quoted by the
petitioner, the payments of the hotel room
accommodations, food and other personal
expenses of said tourists, as a rule, are paid
directly either by tourists themselves, or by their
foreign travel agencies to the local hotels (pp. 77,
t.s.n., February 2, 1981; Exhs. O & O-1, p. 29,
CTA rec.; pp. 2425, t.s.n., ibid) and restaurants or
shops, as the case may be.
It is also the case that some tour agencies abroad
request the local tour agencies, such as the
petitioner in the case, that the hotel room charges,
in some specific cases, be paid through them.
(Exh. Q, Q-1, p. 29 CTA rec., p. 25, T.s.n., ibid, pp.
5-6, 17-18, t.s.n., Aug. 20, 1981.; See also Exh.
"U", pp. 22-23, t.s.n., Oct. 9, 1981, pp. 3-4, 11.,
t.s.n., Aug. 10, 1982). By this arrangement, the
foreign tour agency entrusts to the petitioner Tours
Specialists, Inc., the fund for hotel room
accommodation, which in turn is paid by petitioner
tour agency to the local hotel when billed. The
procedure observed is that the billing hotel sends
the bill to the petitioner. The local hotel identifies
the individual tourist, or the particular groups of
tourists by code name or group designation and
also the duration of their stay for purposes of
payment. Upon receipt of the bill, the petitioner
then pays the local hotel with the funds entrusted
to it by the foreign tour correspondent agency.
Despite this arrangement, respondent
Commissioner of Internal Revenue assessed
petitioner for deficiency 3% contractor's tax as
independent contractor by including the entrusted
hotel room charges in its gross receipts from
services for the years 1974 to 1976. Consequently,
on December 6, 1979, petitioner received from
respondent the 3% deficiency independent
contractor's tax assessment in the amount of
P122,946.93 for the years 1974 to 1976, inclusive,
computed as follows:
1974 deficiency percentage tax
per investigation P 3,995.63
15% surcharge for late payment 998.91
—————
P 4,994.54
14% interest computed by quarters
up to 12-28-79 3,953.18 P 8,847.72
1975 deficiency percentage tax
per investigation P 8,427.39
25% surcharge for late payment 2,106.85
—————
P 10,534.24
14% interest computed by quarters
up to 12-28-79 6,808.47 P 17,342.71
1976 deficiency percentage
per investigation P 54,276.42
25% surcharge for late payment 13,569.11
—————
P 67,845.53
14% interest computed by quarters
up to 12-28-79 28,910.97 P 96,756.50
————— —————
Total amount due P 122,946.93
=========
In addition to the deficiency contractor's tax of
P122,946.93, petitioner was assessed to pay a
compromise penalty of P500.00.
Subsequently on December 11, 1979, petitioner
formally protested the assessment made by
respondent on the ground that the money received
and entrusted to it by the tourists, earmarked to
pay hotel room charges, were not considered and
have never been considered by it as part of its
taxable gross receipts for purposes of computing
and paying its constractor's tax.
During one of the hearings in this case, a witness,
Serafina Sazon, Certified Public Accountant and in
charge of the Accounting Department of petitioner,
had testified, her credibility not having been
destroyed on cross examination, categorically
stated that the amounts entrusted to it by the
foreign tourist agencies intended for payment of
hotel room charges, were paid entirely to the hotel
concerned, without any portion thereof being
diverted to its own funds. (t.s.n., Feb. 2, 1981, pp.
7, 25; t.s.n., Aug. 20, 1981, pp. 5-9, 17-18). The
testimony of Serafina Sazon was corroborated by
Gerardo Isada, General Manager of petitioner,
declaring to the effect that payments of hotel
accommodation are made through petitioner
without any increase in the room charged (t.s.n.,
Oct. 9, 1981, pp. 21-25) and that the reason why
tourists pay their room charge, or through their
foreign tourists agencies, is the fact that the room
charge is exempt from hotel room tax under P.D.
31. (t.s.n., Ibid., pp. 25-29.) Witness Isada stated,
on cross-examination, that if their payment is
made, thru petitioner's tour agency, the hotel cost
or charges "is only an act of accomodation on our
(its) part" or that the "agent abroad instead of
sending several telexes and saving on bank
charges they take the option to send money to us
to be held in trust to be endorsed to the hotel." (pp.
3-4, t.s.n. Aug. 10, 1982.)
Nevertheless, on June 2, 1980, respondent,
without deciding the petitioner's written protest,
caused the issuance of a warrant of distraint and
levy. (p. 51, BIR Rec.) And later, respondent had
petitioner's bank deposits garnished. (pp. 49-50,
BIR Rec.)
Taking this action of respondent as the adverse
and final decision on the disputed assessment,
petitioner appealed to this Court. (Rollo, pp. 40-45)
The petitioner raises the lone issue in this petition as follows:
WHETHER AMOUNTS RECEIVED BY A LOCAL
TOURIST AND TRAVEL AGENCY INCLUDED IN
A PACKAGE FEE FROM TOURISTS OR
FOREIGN TOUR AGENCIES, INTENDED OR
EARMARKED FOR HOTEL ACCOMMODATIONS
FORM PART OF GROSS RECEIPTS SUBJECT
TO 3% CONTRACTOR'S TAX. (Rollo, p. 23)
The petitioner premises the issue raised on the following
assumptions:
Firstly, the ruling overlooks the fact that the
amounts received, intended for hotel room
accommodations, were received as part of the
package fee and, therefore, form part of "gross
receipts" as defined by law.
Secondly, there is no showing and is not
established by the evidence. that the amounts
received and "earmarked" are actually what had
been paid out as hotel room charges. The mere
possibility that the amounts actually paid could be
less than the amounts received is sufficient to
destroy the validity of the ruling. (Rollo, pp. 26-27)
In effect, the petitioner's lone issue is based on alleged error in
the findings of facts of the respondent court.
The well-settled doctrine is that the findings of facts of the Court
of Tax Appeals are binding on this Court and absent strong
reasons for this Court to delve into facts, only questions of law
are open for determination. (Nilsen v. Commissioner of
Customs, 89 SCRA 43 [1979]; Balbas v. Domingo, 21 SCRA
444 [1967]; Raymundo v. De Joya, 101 SCRA 495 [1980]). In correct. The evidence is clear to the effect that the amounts
the recent case of Sy Po v. Court of Appeals, (164 SCRA 524 entrusted to the private respondent were exclusively for
[1988]), we ruled that the factual findings of the Court of Tax payment of hotel room charges of foreign tourists entrusted to it
Appeals are binding upon this court and can only be disturbed by foreign travel agencies.
on appeal if not supported by substantial evidence.
As regards the petitioner's second assumption, the respondent
In the instant case, we find no reason to disregard and deviate court stated:
from the findings of facts of the Court of Tax Appeals.
. . . [C]ontrary to the contention of respondent, the
As quoted earlier, the Court of Tax Appeals sufficiently explained records show, firstly, in the Examiners' Worksheet
the services of a local travel agency, like the herein private (Exh. T, p. 22, BIR Rec.), that from July to
respondent, rendered to foreign customers. The respondent December 1976 alone, the following sums made
differentiated between the package fee — offered by both the up the hotel room accommodations:
local travel agency and its correspondent counterpart tourist
agencies abroad and the requests made by some tour agencies July 1976 P 102,702.97
abroad to local tour agencies wherein the hotel room charges in
some specific cases, would be paid to the local hotels through Aug. 1976 121,167.19
them. In the latter case, the correspondent court found as a fact
". . . that the foreign tour agency entrusts to the petitioner Tours Sept. 1976 53,209.61
Specialists, Inc. the fund for hotel room accommodation, which
in turn is paid by petitioner tour agency to the local hotel when —————
billed." (Rollo, p. 42) The following procedure is followed: The
billing hotel sends the bill to the respondent; the local hotel then P 282,079.77
identifies the individual tourist, or the particular group of tourist
by code name or group designation plus the duration of their =========
stay for purposes of payment; upon receipt of the bill the private
respondent pays the local hotel with the funds entrusted to it by Oct. 1976 P 71,134.80
the foreign tour correspondent agency.
Nov. 1976 409,019.17
Moreover, evidence presented by the private respondent shows
that the amounts entrusted to it by the foreign tourist agencies to Dec. 1976 142,761.55
pay the room charges of foreign tourists in local hotels were not
diverted to its funds; this arrangement was only an act of —————
accommodation on the part of the private respondent. This
evidence was not refuted. 622,915.51

In essence, the petitioner's assertion that the hotel room —————

charges entrusted to the private respondent were part of the
package fee paid by foreign tourists to the respondent is not
 Grand Total P 904,995.29
=========
It is not true therefore, as stated by respondent,
that there is no evidence proving the amounts
earmarked for hotel room charges. Since the BIR
examiners could not have manufactured the above
figures representing "advances for hotel room
accommodations," these payments must have
certainly been taken from the records of petitioner,
such as the invoices, hotel bills, official receipts
and other pertinent documents. (Rollo, pp. 48-49)
The factual findings of the respondent court are supported by
substantial evidence, hence binding upon this Court.
With these clarifications, the issue to be threshed out is as
stated by the respondent court, to wit:
. . . [W]hether or not the hotel room charges held
in trust for foreign tourists and travelers and/or
correspondent foreign travel agencies and paid to
local host hotels form part of the taxable gross
receipts for purposes of the 3% contractor's tax.
(Rollo, p. 45)
The petitioner opines that the gross receipts which are subject
to the 3% contractor's tax pursuant to Section 191 (Section 205
of the National Internal Revenue Code of 1977) of the Tax Code
include the entire gross receipts of a taxpayer undiminished by
any amount. According to the petitioner, this interpretation is in
consonance with B.I.R. Ruling No. 68-027, dated 23 October,
1968 (implementing Section 191 of the Tax Code) which states
that the 3% contractor's tax prescribed by Section 191 of the Tax
Code is imposed of the gross receipts of the contractor, "no
deduction whatever being allowed by said law." The petitioner
contends that the only exception to this rule is when there is a
law or regulation which would exempt such gross receipts from
being subjected to the 3% contractor's tax citing the case of
Commissioner of Internal Revenue v. Manila Jockey Club, Inc.
(108 Phil. 821 [1960]). Thus, the petitioner argues that since
there is no law or regulation that money entrusted, earmarked
and paid for hotel room charges should not form part of the
gross receipts, then the said hotel room charges are included in
the private respondent's gross receipts for purposes of the 3%
contractor's tax.
In the case of Commissioner of Internal Revenue v. Manila
Jockey Club, Inc. (supra), the Commissioner appealed two
decisions of the Court of Tax Appeals disapproving his levy of
amusement taxes upon the Manila Jockey Club, a duly
constituted corporation authorized to hold horse races in Manila.
The facts of the case show that the monies sought to be taxed
never really belonged to the club. The decision shows that
during the period November 1946 to 1950, the Manila Jockey
Club paid amusement tax on its commission but without
including the 5-1/2% which pursuant to Executive Order 320 and
Republic Act 309 went to the Board of Races, the owner of
horses and jockeys. Section 260 of the Internal Revenue Code
provides that the amusement tax was payable by the operator
on its "gross receipts". The Manila Jockey Club, however, did
not consider as part of its "gross receipts" subject to amusement
tax the amounts which it had to deliver to the Board on Races,
the horse owners and the jockeys. This view was fully sustained
by three opinions of the Secretary of Justice, to wit:
There is no question that the Manila Jockey, Inc.,
owns only 7-1/2% of the total bets registered by
the Totalizer. This portion represents its share or
commission in the total amount of money it
handles and goes to the funds thereof as its own
property which it may legally disburse for its own
purposes. The 5% does not belong to the club. It is
merely held in trust for distribution as prizes to the
owners of winning horses. It is destined for no
other object than the payment of prizes and the
club cannot otherwise appropriate this portion
 without incurring liability to the owners of winning
horses. It cannot be considered as an item of
expense because the sum used for the payment of
prizes is not taken from the funds of the club but
from a certain portion of the total bets especially
earmarked for that purpose.
In view of all the foregoing, I am of the opinion that
in the submission of the returns for the amusement
tax of 10% (now it is 20% of the "gross receipts",
provided for in Section 260 of the National Internal
Revenue Code), the 5% of the total bets that is set
aside for prizes to owners of winning horses
should not be included by the Manila Jockey Club,
Inc.
The Collector of the Internal Revenue, however had a different
opinion on the matter and demanded payment of amusement
taxes. The Court of Tax Appeals reversed the Collector.
We affirmed the decision of the Court of Tax Appeals and stated:
The Secretary's opinion was correct. The
Government could not have meant to tax as gross
receipt of the Manila Jockey Club the 1/2% which
it directs same Club to turn over to the Board on
Races. The latter being a Government institution,
there would be double taxation, which should be
avoided unless the statute admits of no other
interpretation. In the same manner, the
Government could not have intended to consider
as gross receipt the portion of the funds which it
directed the Club to give, or knew the Club would
give, to winning horses and jockeys — admittedly
5%. It is true that the law says that out of the total
wager funds 12-1/2% shall be set aside as the
"commission" of the race track owner, but the law
itself takes official notice, and actually approves or
directs payment of the portion that goes to owners
of horses as prizes and bonuses of jockeys, which
portion is admittedly 5% out of that 12-1/2%
commission. As it did not at that time contemplate
the application of "gross receipts" revenue
principle, the law in making a distribution of the
total wager funds, took no trouble of separating
one item from the other; and for convenience,
grouped three items under one common
denomination.
Needless to say, gross receipts of the proprietor of
the amusement place should not include any
money which although delivered to the
amusement place has been especially earmarked
by law or regulation for some person other than
the proprietor. (The situation thus differs from one
in which the owner of the amusement place, by a
private contract, with its employees or partners,
agrees to reserve for them a portion of the
proceeds of the establishment. (See Wong & Lee
v. Coll. 104 Phil. 469; 55 Off. Gaz. [51] 10539; Sy
Chuico v. Coll., 107 Phil., 428; 59 Off. Gaz., [6]
896).
In the second case, the facts of the case are:
The Manila Jockey Club holds once a year a so
called "special Novato race", wherein only
"novato" horses, (i.e. horses which are running for
the first time in an official [of the club] race), may
take part. Owners of these horses must pay to the
Club an inscription fee of P1.00, and a declaration
fee of P1.00 per horse. In addition, each of them
must contribute to a common fund (P10.00 per
horse). The Club contributes an equal amount
P10.00 per horse) to such common fund, the total
amount of which is added to the 5% participation
of horse owners already described herein-above in
the first case.
 Since the institution of this yearly special novato
race in 1950, the Manila Jockey Club never paid
amusement tax on the moneys thus contributed by
horse owners (P10.00 each) because it
entertained the belief that in accordance with the
three opinions of the Secretary of Justice herein-
above described, such contributions never formed
part of its gross receipts. On the inscription fee of
the P1.00 per horse, it paid the tax. It did not on
the declaration fee of P1.00 because it was
imposed by the Municipal Ordinance of Manila and
was turned over to the City officers.
The Collector of Internal Revenue required the
Manila Jockey Club to pay amusement tax on
such contributed fund P10.00 per horse in the
special novato race, holding they were part of its
gross receipts. The Manila Jockey Club protested
and resorted to the Court of Tax Appeals, where it
obtained favorable judgment on the same grounds
sustained by said Court in connection with the 5%
of the total wager funds in the herein-mentioned
first case; they were not receipts of the Club.
We resolved the issue in the following manner:
We think the reasons for upholding the Tax Court's
decision in the first case apply to this one. The ten-
peso contribution never belonged to the Club. It
was held by it as a trust fund. And then, after all,
when it received the ten-peso contribution, it at the
same time contributed ten pesos out of its own
pocket, and thereafter distributed both amounts as
prizes to horse owners. It would seem
unreasonable to regard the ten-peso contribution
of the horse owners as taxable receipt of the Club,
since the latter, at the same moment it received
the contribution necessarily lost ten pesos too.
As demonstrated in the above-mentioned case, gross receipts
subject to tax under the Tax Code do not include monies or
receipts entrusted to the taxpayer which do not belong to them
and do not redound to the taxpayer's benefit; and it is not
necessary that there must be a law or regulation which would
exempt such monies and receipts within the meaning of gross
receipts under the Tax Code.
Parenthetically, the room charges entrusted by the foreign travel
agencies to the private respondent do not form part of its gross
receipts within the definition of the Tax Code. The said receipts
never belonged to the private respondent. The private
respondent never benefited from their payment to the local
hotels. As stated earlier, this arrangement was only to
accommodate the foreign travel agencies.
Another objection raised by the petitioner is to the respondent
court's application of Presidential Decree 31 which exempts
foreign tourists from payment of hotel room tax. Section 1
thereof provides:
Sec. 1. — Foreign tourists and travelers shall be
exempt from payment of any and all hotel room tax
for the entire period of their stay in the country.
The petitioner now alleges that P.D. 31 has no relevance to the
case. He contends that the tax under Section 191 of the Tax
Code is in the nature of an excise tax; that it is a tax on the
exercise of the privilege to engage in business as a contractor
and that it is imposed on, and collectible from the person
exercising the privilege. He sums his arguments by stating that
"while the burden may be shifted to the person for whom the
services are rendered by the contractor, the latter is not relieved
from payment of the tax." (Rollo, p. 28)
The same arguments were submitted by the Commissioner of
Internal Revenue in the case of Commissioner of Internal
Revenue v. John Gotamco & Son., Inc. (148 SCRA 36 [1987]),
to justify his imposition of the 3% contractor's tax under Section
191 of the National Internal Revenue Code on the gross receipts
John Gotamco & Sons, Inc., realized from the construction of
the World Health Organization (WHO) office building in Manila.
We rejected the petitioner's arguments and ruled:
We agree with the Court of Tax Appeals in
rejecting this contention of the petitioner. Said the
respondent court:
"In context, direct taxes are those
that are demanded from the very
person who, it is intended or desired,
should pay them; while indirect taxes
are those that are demanded in the
first instance from one person in the
expectation and intention that he can
shift the burden to someone else.
(Pollock v. Farmers, L & T Co., 1957
US 429, 15 S. Ct. 673, 39 Law. ed.
759). The contractor's tax is of
course payable by the contractor but
in the last analysis it is the owner of
the building that shoulders the
burden of the tax because the same
is shifted by the contractor to the
owner as a matter of self-
preservation. Thus, it is an indirect
tax. And it is an indirect tax on the
WHO because, although it is payable
by the petitioner, the latter can shift
its burden on the WHO. In the last
analysis it is the WHO that will pay
the tax indirectly through the
contractor and it certainly cannot be
said that 'this tax has no bearing
upon the World Health
Organization.'"
Petitioner claims that under the authority of the
Philippine Acetylene Company versus
Commissioner of Internal Revenue, et al., (127
Phil. 461) the 3% contractor's tax falls directly on
Gotamco and cannot be shifted to the WHO. The
Court of Tax Appeals, however, held that the said
case is not controlling in this case, since the Host
Agreement specifically exempts the WHO from
"indirect taxes." We agree. The Philippine
Acetylene case involved a tax on sales of goods
which under the law had to be paid by the
manufacturer or producer; the fact that the
manufacturer or producer might have added the
amount of the tax to the price of the goods did not
make the sales tax "a tax on the purchaser." The
Court held that the sales tax must be paid by the
manufacturer or producer even if the sale is made
to tax-exempt entities like the National Power
Corporation, an agency of the Philippine
Government, and to the Voice of America, an
agency of the United States Government.
The Host Agreement, in specifically exempting the
WHO from "indirect taxes," contemplates taxes
which, although not imposed upon or paid by the
Organization directly, form part of the price paid or
to be paid by it.
Accordingly, the significance of P.D. 31 is clearly established in
determining whether or not hotel room charges of foreign
tourists in local hotels are subject to the 3% contractor's tax. As
the respondent court aptly stated:
. . . If the hotel room charges entrusted to
petitioner will be subjected to 3% contractor's tax
as what respondent would want to do in this case,
that would in effect do indirectly what P.D. 31
would not like hotel room charges of foreign
tourists to be subjected to hotel room tax.
 Although, respondent may claim that the 3%
contractor's tax is imposed upon a different
incidence i.e. the gross receipts of petitioner tourist
agency which he asserts includes the hotel room
charges entrusted to it, the effect would be to
impose a tax, and though different, it nonetheless
imposes a tax actually on room charges. One way
or the other, it would not have the effect of
promoting tourism in the Philippines as that would
increase the costs or expenses by the addition of a
hotel room tax in the overall expenses of said
tourists. (Rollo, pp. 51-52)

WHEREFORE, the instant petition is DENIED. The decision of

the Court of Tax Appeals is AFFIRMED. No pronouncement as
to costs.

SO ORDERED.

Fernan, C.J., Narvasa, Melencio-Herrera, Cruz, Paras,

Feliciano, Gancayco, Padilla, Bidin, Sarmiento, Cortes, Griño-
Aquino, Medialdea and Regalado, JJ., concur.

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 78953 July 31, 1991
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MELCHOR J. JAVIER, JR. and THE COURT OF TAX
APPEALS, respondents.
Elison G. Natividad for accused-appellant.
SARMIENTO, J.:
Central in this controversy is the issue as to whether or not a taxpayer
who merely states as a footnote in his income tax return that a sum of
money that he erroneously received and already spent is the subject of
a pending litigation and there did not declare it as income is liable to
pay the 50% penalty for filing a fraudulent return.
This question is the subject of the petition for review before the Court
of the portion of the Decision1 dated July 27, 1983 of the Court of Tax
Appeals (CTA) in C.T.A. Case No. 3393, entitled, "Melchor J. Javier,
Jr. vs. Ruben B. Ancheta, in his capacity as Commissioner of Internal
Revenue," which orders the deletion of the 50% surcharge from
Javier's deficiency income tax assessment on his income for 1977.
The respondent CTA in a Resolution2 dated May 25, 1987, denied the
Commissioner's Motion for Reconsideration3 and Motion for New
Trial4 on the deletion of the 50% surcharge assessment or
imposition.
The pertinent facts as are accurately stated in the petition of
private respondent Javier in the CTA and incorporated in the
assailed decision now under review, read as follows:
xxx xxx xxx
2. That on or about June 3, 1977, Victoria L. Javier, the
wife of the petitioner (private respondent herein),
received from the Prudential Bank and Trust Company in
Pasay City the amount of US$999,973.70 remitted by her
sister, Mrs. Dolores Ventosa, through some banks in the
United States, among which is Mellon Bank, N.A.
3. That on or about June 29, 1977, Mellon Bank, N.A.
filed a complaint with the Court of First Instance of Rizal
(now Regional Trial Court), (docketed as Civil Case No.
26899), against the petitioner (private respondent herein),
his wife and other defendants, claiming that its remittance
of US$1,000,000.00 was a clerical error and should have
been US$1,000.00 only, and praying that the excess
amount of US$999,000.00 be returned on the ground that
the defendants are trustees of an implied trust for the
benefit of Mellon Bank with the clear, immediate, and
continuing duty to return the said amount from the
moment it was received.
4. That on or about November 5, 1977, the City Fiscal of
Pasay City filed an Information with the then Circuit
Criminal Court (docketed as CCC-VII-3369-P.C.)
charging the petitioner (private respondent herein) and
his wife with the crime of estafa, alleging that they
misappropriated, misapplied, and converted to their own
personal use and benefit the amount of US$999,000.00
which they received under an implied trust for the benefit
of Mellon Bank and as a result of the mistake in the
remittance by the latter.
 5. That on March 15, 1978, the petitioner (private
respondent herein) filed his Income Tax Return for the
taxable year 1977 showing a gross income of P53,053.38
and a net income of P48,053.88 and stating in the
footnote of the return that "Taxpayer was recipient of
some money received from abroad which he presumed to
be a gift but turned out to be an error and is now subject
of litigation."
6. That on or before December 15, 1980, the petitioner
(private respondent herein) received a letter from the
acting Commissioner of Internal Revenue dated
November 14, 1980, together with income assessment
notices for the years 1976 and 1977, demanding that
petitioner (private respondent herein) pay on or before
December 15, 1980 the amount of P1,615.96 and
P9,287,297.51 as deficiency assessments for the years
1976 and 1977 respectively. . . .
7. That on December 15, 1980, the petitioner (private
respondent herein) wrote the Bureau of Internal Revenue
that he was paying the deficiency income assessment for
the year 1976 but denying that he had any undeclared
income for the year 1977 and requested that the
assessment for 1977 be made to await final court
decision on the case filed against him for filing an
allegedly fraudulent return. . . .
8. That on November 11, 1981, the petitioner (private
respondent herein) received from Acting Commissioner of
Internal Revenue Romulo Villa a letter dated October 8,
1981 stating in reply to his December 15, 1980 letter-
protest that "the amount of Mellon Bank's erroneous
remittance which you were able to dispose, is definitely
taxable." . . .5
The Commissioner also imposed a 50% fraud penalty against
Javier.
Disagreeing, Javier filed an appeal6 before the respondent
Court of Tax Appeals on December 10, 1981.
The respondent CTA, after the proper proceedings, rendered
the challenged decision. We quote the concluding portion:
We note that in the deficiency income tax assessment
under consideration, respondent (petitioner here) further
requested petitioner (private respondent here) to pay
50% surcharge as provided for in Section 72 of the Tax
Code, in addition to the deficiency income tax of
P4,888,615.00 and interest due thereon. Since petitioner
(private respondent) filed his income tax return for
taxable year 1977, the 50% surcharge was imposed, in
all probability, by respondent (petitioner) because he
considered the return filed false or fraudulent. This
additional requirement, to our mind, is much less called
for because petitioner (private respondent), as stated
earlier, reflected in as 1977 return as footnote that
"Taxpayer was recipient of some money received from
abroad which he presumed to be gift but turned out to be
an error and is now subject of litigation."
From this, it can hardly be said that there was actual and
intentional fraud, consisting of deception willfully and
deliberately done or resorted to by petitioner (private
respondent) in order to induce the Government to give up
some legal right, or the latter, due to a false return, was
placed at a disadvantage so as to prevent its lawful
agents from proper assessment of tax liabilities. (Aznar
vs. Court of Tax Appeals, L-20569, August 23, 1974, 56
(sic) SCRA 519), because petitioner literally "laid his
cards on the table" for respondent to examine. Error or
mistake of fact or law is not fraud. (Insular Lumber vs.
Collector, L-7100, April 28, 1956.). Besides, Section 29 is
not too plain and simple to understand. Since the
question involved in this case is of first impression in this
jurisdiction, under the circumstances, the 50% surcharge
 imposed in the deficiency assessment should be
deleted.7
The Commissioner of Internal Revenue, not satisfied with the
respondent CTA's ruling, elevated the matter to us, by the
present petition, raising the main issue as to:
WHETHER OR NOT PRIVATE RESPONDENT IS LIABLE FOR
THE 50% FRAUD PENALTY?8
On the other hand, Javier candidly stated in his Memorandum,9
that he "did not appeal the decision which held him liable for the
basic deficiency income tax (excluding the 50% surcharge for
fraud)." However, he submitted in the same memorandum "that
the issue may be raised in the case not for the purpose of
correcting or setting aside the decision which held him liable for
deficiency income tax, but only to show that there is no basis for
the imposition of the surcharge." This subsequent disavowal
therefore renders moot and academic the posturings articulated
in as Comment10 on the non-taxability of the amount he
erroneously received and the bulk of which he had already
disbursed. In any event, an appeal at that time (of the filing of
the Comments) would have been already too late to be
seasonable. The petitioner, through the office of the Solicitor
General, stresses that:
xxx xxx xxx
The record however is not ambivalent, as the record
clearly shows that private respondent is self-convinced,
and so acted, that he is the beneficial owner, and of
which reason is liable to tax. Put another way, the studied
insinuation that private respondent may not be the
beneficial owner of the money or income flowing to him
as enhanced by the studied claim that the amount is
"subject of litigation" is belied by the record and clearly
exposed as a fraudulent ploy, as witness what transpired
upon receipt of the amount.
Here, it will be noted that the excess in the amount
erroneously remitted by MELLON BANK for the amount
of private respondent's wife was $999,000.00 after
opening a dollar account with Prudential Bank in the
amount of $999,993.70, private respondent and his wife,
with haste and dispatch, within a span of eleven (11)
electric days, specifically from June 3 to June 14, 1977,
effected a total massive withdrawal from the said dollar
account in the sum of $975,000.00 or P7,020,000.00. . . .
11
In reply, the private respondent argues:
xxx xxx xxx
The petitioner contends that the private respondent
committed fraud by not declaring the "mistaken
remittance" in his income tax return and by merely
making a footnote thereon which read: "Taxpayer was the
recipient of some money from abroad which he presumed
to be a gift but turned out to be an error and is now
subject of litigation." It is respectfully submitted that the
said return was not fraudulent. The footnote was
practically an invitation to the petitioner to make an
investigation, and to make the proper assessment.
The rule in fraud cases is that the proof "must be clear
and convincing" (Griffiths v. Comm., 50 F [2d] 782), that
is, it must be stronger than the "mere preponderance of
evidence" which would be sufficient to sustain a judgment
on the issue of correctness of the deficiency itself apart
from the fraud penalty. (Frank A. Neddas, 40 BTA 672).
The following circumstances attendant to the case at bar
show that in filing the questioned return, the private
respondent was guided, not by that "willful and deliberate
intent to prevent the Government from making a proper
assessment" which constitute fraud, but by an honest
doubt as to whether or not the "mistaken remittance" was
subject to tax.
First, this Honorable Court will take judicial notice of the
fact that so-called "million dollar case" was given very,
very wide publicity by media; and only one who is not in
his right mind would have entertained the idea that the
BIR would not make an assessment if the amount in
question was indeed subject to the income tax.
Second, as the respondent Court ruled, "the question
involved in this case is of first impression in this
jurisdiction" (See p. 15 of Annex "A" of the Petition). Even
in the United States, the authorities are not unanimous in
holding that similar receipts are subject to the income tax.
It should be noted that the decision in the Rutkin case is
a five-to-four decision; and in the very case before this
Honorable Court, one out of three Judges of the
respondent Court was of the opinion that the amount in
question is not taxable. Thus, even without the footnote,
the failure to declare the "mistaken remittance" is not
fraudulent.
Third, when the private respondent filed his income tax
return on March 15, 1978 he was being sued by the
Mellon Bank for the return of the money, and was being
prosecuted by the Government for estafa committed
allegedly by his failure to return the money and by
converting it to his personal benefit. The basic tax
amounted to P4,899,377.00 (See p. 6 of the Petition) and
could not have been paid without using part of the
mistaken remittance. Thus, it was not unreasonable for
the private respondent to simply state in his income tax
return that the amount received was still under litigation.
If he had paid the tax, would that not constitute estafa for
using the funds for his own personal benefit? and would
the Government refund it to him if the courts ordered him
to refund the money to the Mellon Bank?12
xxx xxx xxx
Under the then Section 72 of the Tax Code (now Section 248 of
the 1988 National Internal Revenue Code), a taxpayer who files
a false return is liable to pay the fraud penalty of 50% of the tax
due from him or of the deficiency tax in case payment has been
made on the basis of the return filed before the discovery of the
falsity or fraud.
We are persuaded considerably by the private respondent's
contention that there is no fraud in the filing of the return and
agree fully with the Court of Tax Appeals' interpretation of
Javier's notation on his income tax return filed on March 15,
1978 thus: "Taxpayer was the recipient of some money from
abroad which he presumed to be a gift but turned out to be an
error and is now subject of litigation that it was an "error or
mistake of fact or law" not constituting fraud, that such notation
was practically an invitation for investigation and that Javier had
literally "laid his cards on the table."13
In Aznar v. Court of Tax Appeals,14 fraud in relation to the filing
of income tax return was discussed in this manner:
. . . The fraud contemplated by law is actual and not
constructive. It must be intentional fraud, consisting of
deception willfully and deliberately done or resorted to in
order to induce another to give up some legal right.
Negligence, whether slight or gross, is not equivalent to
the fraud with intent to evade the tax contemplated by
law. It must amount to intentional wrong-doing with the
sole object of avoiding the tax. It necessarily follows that
a mere mistake cannot be considered as fraudulent
intent, and if both petitioner and respondent
Commissioner of Internal Revenue committed mistakes
in making entries in the returns and in the assessment,
respectively, under the inventory method of determining
tax liability, it would be unfair to treat the mistakes of the
petitioner as tainted with fraud and those of the
respondent as made in good faith.
Fraud is never imputed and the courts never sustain findings of
fraud upon circumstances which, at most, create only suspicion
and the mere understatement of a tax is not itself proof of fraud
for the purpose of tax evasion.15

A "fraudulent return" is always an attempt to evade a tax,

but a merely "false return" may not be, Rick v. U.S., App.
D.C., 161 F. 2d 897, 898.16

In the case at bar, there was no actual and intentional fraud

through willful and deliberate misleading of the government
agency concerned, the Bureau of Internal Revenue, headed by
the herein petitioner. The government was not induced to give
up some legal right and place itself at a disadvantage so as to
prevent its lawful agents from proper assessment of tax
liabilities because Javier did not conceal anything. Error or
mistake of law is not fraud. The petitioner's zealousness to
collect taxes from the unearned windfall to Javier is highly
commendable.1âwphi1 Unfortunately, the imposition of the fraud
penalty in this case is not justified by the extant facts. Javier
may be guilty of swindling charges, perhaps even for greed by
spending most of the money he received, but the records lack a
clear showing of fraud committed because he did not conceal
the fact that he had received an amount of money although it
was a "subject of litigation." As ruled by respondent Court of Tax
Appeals, the 50% surcharge imposed as fraud penalty by the
petitioner against the private respondent in the deficiency
assessment should be deleted.

WHEREFORE, the petition is DENIED and the decision

appealed from the Court of Tax Appeals is AFFIRMED. No
costs.

SO ORDERED.

Melencio-Herrera, Padilla and Regalado, JJ., concur.

Paras, J., took no part.
 At the conclusion of the Second World War, the tenants who have all
Republic of the Philippines been tilling the lands in Nasugbu for generations expressed their desire
SUPREME COURT to purchase from Roxas y Cia. the parcels which they actually
Manila occupied. For its part, the Government, in consonance with the
constitutional mandate to acquire big landed estates and apportion
EN BANC them among landless tenants-farmers, persuaded the Roxas brothers to
part with their landholdings. Conferences were held with the farmers
G.R. No. L-25043 April 26, 1968 in the early part of 1948 and finally the Roxas brothers agreed to sell
13,500 hectares to the Government for distribution to actual occupants
ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., in for a price of P2,079,048.47 plus P300,000.00 for survey and
their own respective behalf and as judicial co-guardians of JOSE subdivision expenses.
ROXAS, petitioners,
vs. It turned out however that the Government did not have funds to cover
COURT OF TAX APPEALS and COMMISSIONER OF the purchase price, and so a special arrangement was made for the
INTERNAL REVENUE, respondents. Rehabilitation Finance Corporation to advance to Roxas y Cia. the
amount of P1,500,000.00 as loan. Collateral for such loan were the
Leido, Andrada, Perez and Associates for petitioners. lands proposed to be sold to the farmers. Under the arrangement,
Office of the Solicitor General for respondents. Roxas y Cia. allowed the farmers to buy the lands for the same price
but by installment, and contracted with the Rehabilitation Finance
BENGZON, J.P., J.: Corporation to pay its loan from the proceeds of the yearly
amortizations paid by the farmers.
Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects,
transmitted to their grandchildren by hereditary succession the In 1953 and 1955 Roxas y Cia. derived from said installment payments
following properties: a net gain of P42,480.83 and P29,500.71. Fifty percent of said net gain
was reported for income tax purposes as gain on the sale of capital
(1) Agricultural lands with a total area of 19,000 hectares, asset held for more than one year pursuant to Section 34 of the Tax
situated in the municipality of Nasugbu, Batangas province; Code.

(2) A residential house and lot located at Wright St., Malate,
Manila; and
(3) Shares of stocks in different corporations.
To manage the above-mentioned properties, said children, namely,
Antonio Roxas, Eduardo Roxas and Jose Roxas, formed a partnership
called Roxas y Compania.
RESIDENTIAL HOUSE
During their bachelor days the Roxas brothers lived in the residential
house at Wright St., Malate, Manila, which they inherited from their
grandparents. After Antonio and Eduardo got married, they resided
somewhere else leaving only Jose in the old house. In fairness to his
brothers, Jose paid to Roxas y Cia. rentals for the house in the sum of
P8,000.00 a year.

AGRICULTURAL LANDS ASSESSMENTS

On June 17, 1958, the Commissioner of Internal Revenue demanded 1953
from Roxas y Cia the payment of real estate dealer's tax for 1952 in the
amount of P150.00 plus P10.00 compromise penalty for late payment, Tickets for Banquet in honor of
P 40.00
and P150.00 tax for dealers of securities for 1952 plus P10.00 S. Osmeña
compromise penalty for late payment. The assessment for real estate Gifts of San Miguel beer 28.00
dealer's tax was based on the fact that Roxas y Cia. received house
rentals from Jose Roxas in the amount of P8,000.00. Pursuant to Sec. Contributions to —
194 of the Tax Code, an owner of a real estate who derives a yearly
Philippine Air Force Chapel 100.00
rental income therefrom in the amount of P3,000.00 or more is
considered a real estate dealer and is liable to pay the corresponding Manila Police Trust Fund 150.00
fixed tax.
Philippines Herald's fund for
The Commissioner of Internal Revenue justified his demand for the Manila's neediest families
fixed tax on dealers of securities against Roxas y Cia., on the fact that 100.00
said partnership made profits from the purchase and sale of securities. 1955

In the same assessment, the Commissioner assessed deficiency income Contributions to Contribution to
taxes against the Roxas Brothers for the years 1953 and 1955, as Our Lady of Fatima Chapel,
follows: FEU 50.00
ANTONIO ROXAS:
1953 1955
Antonio Roxas P7,010.00 P5,813.00 1953
Eduardo Roxas 7,281.00 5,828.00 Contributions to —
Jose Roxas 6,323.00 5,588.00
Pasay City Firemen Christmas Fund 25.00
The deficiency income taxes resulted from the inclusion as income of Pasay City Police Dept. X'mas fund
Roxas y Cia. of the unreported 50% of the net profits for 1953 and 50.00
1955 derived from the sale of the Nasugbu farm lands to the tenants, 1955
and the disallowance of deductions from gross income of various
business expenses and contributions claimed by Roxas y Cia. and the Contributions to —
Roxas brothers. For the reason that Roxas y Cia. subdivided its Baguio City Police Christmas fund
Nasugbu farm lands and sold them to the farmers on installment, the 25.00
Commissioner considered the partnership as engaged in the business of Pasay City Firemen Christmas fund 25.00
real estate, hence, 100% of the profits derived therefrom was taxed.
Pasay City Police Christmas fund 50.00
The following deductions were disallowed:
EDUARDO ROXAS:
ROXAS Y CIA.:
 1953 Cia. in the sense that it should pay only P150.00, as real estate
dealer's tax. With costs against petitioners.
Contributions to —
Hijas de Jesus' Retiro de Manresa Not satisfied, Roxas y Cia. and the Roxas brothers appealed to this
450.00 Court. The Commissioner of Internal Revenue did not appeal.
Philippines Herald's fund for
Manila's neediest families The issues:
100.00
1955 (1) Is the gain derived from the sale of the Nasugbu farm lands
an ordinary gain, hence 100% taxable?
Contributions to Philippines
Herald's fund for Manila's (2) Are the deductions for business expenses and contributions
neediest families 120.00 deductible?
JOSE ROXAS:
(3) Is Roxas y Cia. liable for the payment of the fixed tax on
1955 real estate dealers?
Contributions to Philippines
Herald's fund for Manila's The Commissioner of Internal Revenue contends that Roxas y Cia.
neediest families 120.00 could be considered a real estate dealer because it engaged in the
business of selling real estate. The business activity alluded to was the
act of subdividing the Nasugbu farm lands and selling them to the
The Roxas brothers protested the assessment but inasmuch as said
farmers-occupants on installment. To bolster his stand on the point, he
protest was denied, they instituted an appeal in the Court of Tax
cites one of the purposes of Roxas y Cia. as contained in its articles of
Appeals on January 9, 1961. The Tax Court heard the appeal and
partnership, quoted below:
rendered judgment on July 31, 1965 sustaining the assessment except
the demand for the payment of the fixed tax on dealer of securities and
4. (a) La explotacion de fincas urbanes pertenecientes a la
the disallowance of the deductions for contributions to the Philippine
misma o que pueden pertenecer a ella en el futuro,
Air Force Chapel and Hijas de Jesus' Retiro de Manresa. The Tax
alquilandoles por los plazos y demas condiciones, estime
Court's judgment reads:
convenientes y vendiendo aquellas que a juicio de sus gerentes
no deben conservarse;
WHEREFORE, the decision appealed from is hereby affirmed
with respect to petitioners Antonio Roxas, Eduardo Roxas, and
The above-quoted purpose notwithstanding, the proposition of the
Jose Roxas who are hereby ordered to pay the respondent
Commissioner of Internal Revenue cannot be favorably accepted by
Commissioner of Internal Revenue the amounts of P12,808.00,
Us in this isolated transaction with its peculiar circumstances in spite
P12,887.00 and P11,857.00, respectively, as deficiency income
of the fact that there were hundreds of vendees. Although they paid for
taxes for the years 1953 and 1955, plus 5% surcharge and 1%
their respective holdings in installment for a period of ten years, it
monthly interest as provided for in Sec. 51(a) of the Revenue
would nevertheless not make the vendor Roxas y Cia. a real estate
Code; and modified with respect to the partnership Roxas y
dealer during the ten-year amortization period.
It should be borne in mind that the sale of the Nasugbu farm lands to
the very farmers who tilled them for generations was not only in
consonance with, but more in obedience to the request and pursuant to
the policy of our Government to allocate lands to the landless. It was
the bounden duty of the Government to pay the agreed compensation
after it had persuaded Roxas y Cia. to sell its haciendas, and to
subsequently subdivide them among the farmers at very reasonable
terms and prices. However, the Government could not comply with its
duty for lack of funds. Obligingly, Roxas y Cia. shouldered the
Government's burden, went out of its way and sold lands directly to
the farmers in the same way and under the same terms as would have
been the case had the Government done it itself. For this magnanimous
act, the municipal council of Nasugbu passed a resolution expressing
the people's gratitude.
The power of taxation is sometimes called also the power to destroy.
Therefore it should be exercised with caution to minimize injury to the
proprietary rights of a taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kill the "hen that lays the golden egg".
And, in order to maintain the general public's trust and confidence in
the Government this power must be used justly and not treacherously.
It does not conform with Our sense of justice in the instant case for the
Government to persuade the taxpayer to lend it a helping hand and
later on to penalize him for duly answering the urgent call.
In fine, Roxas y Cia. cannot be considered a real estate dealer for the
sale in question. Hence, pursuant to Section 34 of the Tax Code the
lands sold to the farmers are capital assets, and the gain derived from
the sale thereof is capital gain, taxable only to the extent of 50%.
DISALLOWED DEDUCTIONS
Roxas y Cia. deducted from its gross income the amount of P40.00 for
tickets to a banquet given in honor of Sergio Osmena and P28.00 for
San Miguel beer given as gifts to various persons. The deduction were
claimed as representation expenses. Representation expenses are
deductible from gross income as expenditures incurred in carrying on a
trade or business under Section 30(a) of the Tax Code provided the
taxpayer proves that they are reasonable in amount, ordinary and
necessary, and incurred in connection with his business. In the case at
bar, the evidence does not show such link between the expenses and
the business of Roxas y Cia. The findings of the Court of Tax Appeals
must therefore be sustained.
The petitioners also claim deductions for contributions to the Pasay
City Police, Pasay City Firemen, and Baguio City Police Christmas
funds, Manila Police Trust Fund, Philippines Herald's fund for
Manila's neediest families and Our Lady of Fatima chapel at Far
Eastern University.
The contributions to the Christmas funds of the Pasay City Police,
Pasay City Firemen and Baguio City Police are not deductible for the
reason that the Christmas funds were not spent for public purposes but
as Christmas gifts to the families of the members of said entities.
Under Section 39(h), a contribution to a government entity is
deductible when used exclusively for public purposes. For this reason,
the disallowance must be sustained. On the other hand, the
contribution to the Manila Police trust fund is an allowable deduction
for said trust fund belongs to the Manila Police, a government entity,
intended to be used exclusively for its public functions.
The contributions to the Philippines Herald's fund for Manila's
neediest families were disallowed on the ground that the Philippines
Herald is not a corporation or an association contemplated in Section
30 (h) of the Tax Code. It should be noted however that the
contributions were not made to the Philippines Herald but to a group
of civic spirited citizens organized by the Philippines Herald solely for
charitable purposes. There is no question that the members of this
group of citizens do not receive profits, for all the funds they raised
were for Manila's neediest families. Such a group of citizens may be
classified as an association organized exclusively for charitable
purposes mentioned in Section 30(h) of the Tax Code.
Rightly, the Commissioner of Internal Revenue disallowed the
contribution to Our Lady of Fatima chapel at the Far Eastern
University on the ground that the said university gives dividends to its
stockholders. Located within the premises of the university, the chapel
in question has not been shown to belong to the Catholic Church or
any religious organization. On the other hand, the lower court found
that it belongs to the Far Eastern University, contributions to which are Amount understated P 7,113.69
not deductible under Section 30(h) of the Tax Code for the reason that
the net income of said university injures to the benefit of its Contributions disallowed 115.00
stockholders. The disallowance should be sustained.
P 7,228.69
Lastly, Roxas y Cia. questions the imposition of the real estate dealer's
fixed tax upon it, because although it earned a rental income of Less 1/3 share of contributions
P8,000.00 per annum in 1952, said rental income came from Jose amounting to P21,126.06
Roxas, one of the partners. Section 194 of the Tax Code, in disallowed from partnership but
considering as real estate dealers owners of real estate receiving rentals allowed to partners 7,042.02 186.67
of at least P3,000.00 a year, does not provide any qualification as to
the persons paying the rentals. The law, which states: 1äwphï1.ñët Net income per review P315,663.26
. . . "Real estate dealer" includes any person engaged in the Less: Exemptions 4,200.00
business of buying, selling, exchanging, leasing or renting
property on his own account as principal and holding himself
Net taxable income P311,463.26
out as a full or part-time dealer in real estate or as an owner of
rental property or properties rented or offered to rent for an Tax due 154,169.00
aggregate amount of three thousand pesos or more a year: . . .
(Emphasis supplied) . Tax paid 154,060.00

is too clear and explicit to admit construction. The findings of the Deficiency P 109.00
Court of Tax Appeals or, this point is sustained.1äwphï1.ñët ==========

To Summarize, no deficiency income tax is due for 1953 from Antonio EDUARDO ROXAS
Roxas, Eduardo Roxas and Jose Roxas. For 1955 they are liable to pay P
deficiency income tax in the sum of P109.00, P91.00 and P49.00, Net income per return
304,166.92
respectively, computed as follows: *
Add: 1/3 share, profits in Roxas y
P 153,249.15
Cia
ANTONIO ROXAS
Less profits declared 146,052.58
Net income per return P315,476.59
Add: 1/3 share, profits in Roxas y
P 153,249.15 Amount understated P 7,196.57
Cia.
Less 1/3 share in contributions 7,042.02 155.55
Less amount declared 146,135.46
amounting to P21,126.06
disallowed from partnership but
allowed to partners
Deficiency P 49.00
===========
Net income per review P304,322.47
Less: Exemptions 4,800.00 WHEREFORE, the decision appealed from is modified. Roxas y Cia.
is hereby ordered to pay the sum of P150.00 as real estate dealer's
Net taxable income P299,592.47 fixed tax for 1952, and Antonio Roxas, Eduardo Roxas and Jose Roxas
are ordered to pay the respective sums of P109.00, P91.00 and P49.00
Tax Due P147,250.00 as their individual deficiency income tax all corresponding for the year
1955. No costs. So ordered.
Tax paid 147,159.00
Reyes, J.B.L., Dizon, Makalintal, Sanchez, Castro, Angeles and
Deficiency P91.00 Fernando, JJ., concur.
=========== Zaldivar, J., took no part.
Concepcion, C.J., is on leave.
JOSE ROXAS
Net income per return P222,681.76
Add: 1/3 share, profits in Roxas y
P153,429.15
Cia.
Less amount reported 146,135.46

Amount understated 7,113.69

Less 1/3 share of contributions
disallowed from partnership but
allowed as deductions to partners 7,042.02 71.67

Net income per review P222,753.43

Less: Exemption 1,800.00

Net income subject to tax P220,953.43

Tax due P102,763.00
Tax paid 102,714.00

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-17518 October 30, 1922
FREDERICK C. FISHER, plaintiff-appellant,
vs.
WENCESLAO TRINIDAD, Collector of Internal Revenue,
defendant-appellee.
Fisher and De Witt and Antonio M. Opisso for appellants.
Acting Attorney-General Tuason for appellee.
JOHNSON, J.:
The only question presented by this appeal is: Are the "stock
dividends" in the present case "income" and taxable as such under the
provisions of section 25 of Act No. 2833? While the appellant presents
other important questions, under the view which we have taken of the
facts and the law applicable to the present case, we deem it
unnecessary to discuss them now.
The defendant demurred to the petition in the lower court. The facts
are therefore admitted. They are simple and may be stated as follows:
That during the year 1919 the Philippine American Drug Company
was a corporation duly organized and existing under the laws of the
Philippine Islands, doing business in the City of Manila; that he
appellant was a stockholder in said corporation; that said corporation,
as result of the business for that year, declared a "stock dividend"; that
the proportionate share of said stock divided of the appellant was
P24,800; that the stock dividend for that amount was issued to the
appellant; that thereafter, in the month of March, 1920, the appellant,
upon demand of the appellee, paid under protest, and voluntarily, unto
the appellee the sum of P889.91 as income tax on said stock dividend.
For the recovery of that sum (P889.91) the present action was
instituted. The defendant demurred to the petition upon the ground that
it did not state facts sufficient to constitute cause of action. The
demurrer was sustained and the plaintiff appealed.
To sustain his appeal the appellant cites and relies on some decisions
of the Supreme Court of the United States as will as the decisions of
the supreme court of some of the states of the Union, in which the
questions before us, based upon similar statutes, was discussed.
Among the most important decisions may be mentioned the following:
Towne vs. Eisner, 245 U.S., 418; Doyle vs. Mitchell Bors. Co., 247
U.S., 179; Eisner vs. Macomber, 252 U.S., 189; Dekoven vs Alsop,
205 Ill., 309; 63 L.R.A., 587; Kaufman vs. Charlottesville Woolen
Mills, 93 Va., 673.
In each of said cases an effort was made to collect an "income tax"
upon "stock dividends" and in each case it was held that "stock
dividends" were capital and not an "income" and therefore not subject
to the "income tax" law.
The appellee admits the doctrine established in the case of Eisner vs.
Macomber (252 U.S., 189) that a "stock dividend" is not "income" but
argues that said Act No. 2833, in imposing the tax on the stock
dividend, does not violate the provisions of the Jones Law. The
appellee further argues that the statute of the United States providing
for tax upon stock dividends is different from the statute of the
Philippine Islands, and therefore the decision of the Supreme Court of
the United States should not be followed in interpreting the statute in
force here.
For the purpose of ascertaining the difference in the said statutes
( (United States and Philippine Islands), providing for an income tax in
the United States as well as that in the Philippine Islands, the two
statutes are here quoted for the purpose of determining the difference,
if any, in the language of the two statutes.
Chapter 463 of an Act of Congress of September 8, 1916, in its title 1
provides for the collection of an "income tax." Section 2 of said Act
attempts to define what is an income. The definition follows:
 That the term "dividends" as used in this title shall be held to
mean any distribution made or ordered to made by a
corporation, . . . which stock dividend shall be considered
income, to the amount of its cash value.
Act No. 2833 of the Philippine Legislature is an Act establishing "an
income tax." Section 25 of said Act attempts to define the application
of the income tax. The definition follows:
The term "dividends" as used in this Law shall be held to mean
any distribution made or ordered to be made by a corporation, .
. . out of its earnings or profits accrued since March first,
nineteen hundred and thirteen, and payable to its shareholders,
whether in cash or in stock of the corporation, . . . . Stock
dividend shall be considered income, to the amount of the
earnings or profits distributed.
It will be noted from a reading of the provisions of the two laws above
quoted that the writer of the law of the Philippine Islands must have
had before him the statute of the United States. No important argument
can be based upon the slight different in the wording of the two
sections.
It is further argued by the appellee that there are no constitutional
limitations upon the power of the Philippine Legislature such as exist
in the United States, and in support of that contention, he cites a
number of decisions. There is no question that the Philippine
Legislature may provide for the payment of an income tax, but it
cannot, under the guise of an income tax, collect a tax on property
which is not an "income." The Philippine Legislature can not impose a
tax upon "property" under a law which provides for a tax upon
"income" only. The Philippine Legislature has no power to provide a
tax upon "automobiles" only, and under that law collect a tax upon a
carreton or bull cart. Constitutional limitations, that is to say, a statute
expressly adopted for one purpose cannot, without amendment, be
applied to another purpose which is entirely distinct and different. A
statute providing for an income tax cannot be construed to cover
property which is not, in fact income. The Legislature cannot, by a
statutory declaration, change the real nature of a tax which it imposes.
A law which imposes an important tax on rice only cannot be
construed to an impose an importation tax on corn.
It is true that the statute in question provides for an income tax and
contains a further provision that "stock dividends" shall be considered
income and are therefore subject to income tax provided for in said
law. If "stock dividends" are not "income" then the law permits a tax
upon something not within the purpose and intent of the law.
It becomes necessary in this connection to ascertain what is an
"income in order that we may be able to determine whether "stock
dividends" are "income" in the sense that the word is used in the
statute. Perhaps it would be more logical to determine first what are
"stock dividends" in order that we may more clearly understand their
relation to "income." Generally speaking, stock dividends represent
undistributed increase in the capital of corporations or firms, joint
stock companies, etc., etc., for a particular period. They are used to
show the increased interest or proportional shares in the capital of each
stockholder. In other words, the inventory of the property of the
corporation, etc., for particular period shows an increase in its capital,
so that the stock theretofore issued does not show the real value of the
stockholder's interest, and additional stock is issued showing the
increase in the actual capital, or property, or assets of the corporation,
etc.
To illustrate: A and B form a corporation with an authorized capital of
P10,000 for the purpose of opening and conducting a drug store, with
assets of the value of P2,000, and each contributes P1,000. Their entire
assets are invested in drugs and put upon the shelves in their place of
business. They commence business without a cent in the treasury.
Every dollar contributed is invested. Shares of stock to the amount of
P1,000 are issued to each of the incorporators, which represent the
actual investment and entire assets of the corporation. Business for the
first year is good. Merchandise is sold, and purchased, to meet the
demands of the growing trade. At the end of the first year an inventory
of the assets of the corporation is made, and it is then ascertained that
the assets or capital of the corporation on hand amount to P4,000, with
no debts, and still not a cent in the treasury. All of the receipts during
the year have been reinvested in the business. Neither of the
stockholders have withdrawn a penny from the business during the
year. Every peso received for the sale of merchandise was immediately
used in the purchase of new stock — new supplies. At the close of the
year there is not a centavo in the treasury, with which either A or B
could buy a cup of coffee or a pair of shoes for his family. At the
beginning of the year they were P2,000, and at the end of the year they
were P4,000, and neither of the stockholders have received a centavo
from the business during the year. At the close of the year, when it is
discovered that the assets are P4,000 and not P2,000, instead of selling
the extra merchandise on hand and thereby reducing the business to its
original capital, they agree among themselves to increase the capital
they agree among themselves to increase the capital issued and for that
purpose issue additional stock in the form of "stock dividends" or
additional stock of P1,000 each, which represents the actual increase
of the shares of interest in the business. At the beginning of the year
each stockholder held one-half interest in the capital. At the close of
the year, and after the issue of the said stock dividends, they each still
have one-half interest in the business. The capital of the corporation
increased during the year, but has either of them received an income?
It is not denied, for the purpose of ordinary taxation, that the taxable
property of the corporation at the beginning of the year was P2,000,
that at the close of the year it was P4,000, and that the tax rolls should
be changed in accordance with the changed conditions in the business.
In other words, the ordinary tax should be increased by P2,000.
Another illustration: C and D organized a corporation for agricultural
purposes with an authorized capital stock of P20,000 each contributing
P5,000. With that capital they purchased a farm and, with it, one
hundred head of cattle. Every peso contributed is invested. There is no
money in the treasury. Much time and labor was expanded during the
year by the stockholders on the farm in the way of improvements.
Neither received a centavo during the year from the farm or the cattle.
At the beginning of the year the assets of the corporation, including the
farm and the cattle, were P10,000, and at the close of the year and
inventory of the property of the corporation is made and it is then
found that they have the same farm with its improvements and two
hundred head of cattle by natural increase. At the end of the year it is
also discovered that, by reason of business changes, the farm and the
cattle both have increased in value, and that the value of the corporate
property is now P20,000 instead of P10,000 as it was at the beginning
of the year. The incorporators instead of reducing the property to its
original capital, by selling off a part of its, issue to themselves "stock
dividends" to represent the proportional value or interest of each of the
stockholders in the increased capital at the close of the year. There is
still not a centavo in the treasury and neither has withdrawn a peso
from the business during the year. No part of the farm or cattle has
been sold and not a single peso was received out of the rents or profits
of the capital of the corporation by the stockholders.
Another illustration: A, an individual farmer, buys a farm with one
hundred head of cattle for the sum of P10,000. At the end of the first
year, by reason of business conditions and the increase of the value of
both real estate and personal property, it is discovered that the value of
the farm and the cattle is P20,000. A, during the year, has received
nothing from the farm or the cattle. His books at the beginning of the
year show that he had property of the value of P10,000. His books at
the close of the year show that he has property of the value of P20,000.
A is not a corporation. The assets of his business are not shown
therefore by certificates of stock. His books, however, show that the
value of his property has increased during the year by P10,000, under
any theory of business or law, be regarded as an "income" upon which
the farmer can be required to pay an income tax? Is there any
difference in law in the condition of A in this illustration and the
condition of A and B in the immediately preceding illustration? Can
the increase of the value of the property in either case be regarded as
an "income" and be subjected to the payment of the income tax under
the law?
Each of the foregoing illustrations, it is asserted, is analogous to the
case before us and, in view of that fact, let us ascertain how
lexicographers and the courts have defined an "income." The New
Standard Dictionary, edition of 1915, defines an income as "the
amount of money coming to a person or corporation within a specified
time whether as payment or corporation within a specified time
whether as payment for services, interest, or profit from investment."
Webster's International Dictionary defines an income as "the receipt,
salary; especially, the annual receipts of a private person or a
corporation from property." Bouvier, in his law dictionary, says that an
"income" in the federal constitution and income tax act, is used in its
common or ordinary meaning and not in its technical, or economic
sense. (146 Northwestern Reporter, 812) Mr. Black, in his law
dictionary, says "An income is the return in money from one's
business, labor, or capital invested; gains, profit or private revenue."
"An income tax is a tax on the yearly profits arising from property ,
professions, trades, and offices."
The Supreme Court of the United States, in the case o Gray vs.
Darlington (82 U.S., 653), said in speaking of income that mere
advance in value in no sense constitutes the "income" specified in the
revenue law as "income" of the owner for the year in which the sale of
the property was made. Such advance constitutes and can be treated
merely as an increase of capital. (In re Graham's Estate, 198 Pa., 216;
Appeal of Braun, 105 Pa., 414.)
Mr. Justice Hughes, later Associate Justice of the Supreme Court of the
United States and now Secretary of State of the United States, in his
argument before the Supreme Court of the United States in the case of
Towne vs. Eisner, supra, defined an "income" in an income tax law,
unless it is otherwise specified, to mean cash or its equivalent. It does
not mean choses in action or unrealized increments in the value of the
property, and cites in support of the definition, the definition given by
the Supreme Court in the case of Gray vs. Darlington, supra.
In the case of Towne vs. Eisner, supra, Mr. Justice Holmes, speaking
for the court, said: "Notwithstanding the thoughtful discussion that the
case received below, we cannot doubt that the dividend was capital as
well for the purposes of the Income Tax Law. . . . 'A stock dividend
really takes nothing from the property of the corporation, and adds
nothing to the interests of the shareholders. Its property is not
diminished and their interest are not increased. . . . The proportional
interest of each shareholder remains the same. . . .' In short, the
corporation is no poorer and the stockholder is no richer then they
were before." (Gibbons vs. Mahon, 136 U.S., 549, 559, 560; Logan
County vs. U.S., 169 U.S., 255, 261).
In the case of Doyle vs. Mitchell Bros. Co. (247 U.S., 179, Mr. Justice
Pitney, speaking for the court, said that the act employs the term
"income" in its natural and obvious sense, as importing something
distinct from principal or capital and conveying the idea of gain or
increase arising from corporate activity.
Mr. Justice Pitney, in the case of Eisner vs. Macomber (252 U.S., 189),
again speaking for the court said: "An income may be defined as the
gain derived from capital, from labor, or from both combined,
provided it be understood to include profit gained through a sale or
conversion of capital assets."
For bookkeeping purposes, when stock dividends are declared, the
corporation or company acknowledges a liability, in form, to the
stockholders, equivalent to the aggregate par value of their stock,
evidenced by a "capital stock account." If profits have been made by
the corporation during a particular period and not divided, they create
additional bookkeeping liabilities under the head of "profit and loss,"
"undivided profits," "surplus account," etc., or the like. None of these,
however, gives to the stockholders as a body, much less to any one of
them, either a claim against the going concern or corporation, for any
particular sum of money, or a right to any particular portion of the
asset, or any shares sells or until the directors conclude that dividends
shall be made a part of the company's assets segregated from the
common fund for that purpose. The dividend normally is payable in
money and when so paid, then only does the stockholder realize a
profit or gain, which becomes his separate property, and thus derive an
income from the capital that he has invested. Until that, is done the
increased assets belong to the corporation and not to the individual
stockholders.
When a corporation or company issues "stock dividends" it shows that
the company's accumulated profits have been capitalized, instead of
distributed to the stockholders or retained as surplus available for
distribution, in money or in kind, should opportunity offer. Far from
being a realization of profits of the stockholder, it tends rather to
postpone said realization, in that the fund represented by the new stock
has been transferred from surplus to assets, and no longer is available
for actual distribution. The essential and controlling fact is that the
stockholder has received nothing out of the company's assets for his
separate use and benefit; on the contrary, every dollar of his original
investment, together with whatever accretions and accumulations
resulting from employment of his money and that of the other
stockholders in the business of the company, still remains the property
of the company, and subject to business risks which may result in
wiping out of the entire investment. Having regard to the very truth of
the matter, to substance and not to form, the stockholder by virtue of
the stock dividend has in fact received nothing that answers the
definition of an "income." (Eisner vs. Macomber, 252 U.S., 189, 209,
211.)
The stockholder who receives a stock dividend has received nothing
but a representation of his increased interest in the capital of the
corporation. There has been no separation or segregation of his
interest. All the property or capital of the corporation still belongs to
the corporation. There has been no separation of the interest of the
stockholder from the general capital of the corporation. The
stockholder, by virtue of the stock dividend, has no separate or
individual control over the interest represented thereby, further than he
had before the stock dividend was issued. He cannot use it for the
reason that it is still the property of the corporation and not the
property of the individual holder of stock dividend. A certificate of
stock represented by the stock dividend is simply a statement of his
proportional interest or participation in the capital of the corporation.
For bookkeeping purposes, a corporation, by issuing stock dividend,
acknowledges a liability in form to the stockholders, evidenced by a
capital stock account. The receipt of a stock dividend in no way
increases the money received of a stockholder nor his cash account at
the close of the year. It simply shows that there has been an increase in
the amount of the capital of the corporation during the particular
period, which may be due to an increased business or to a natural
increase of the value of the capital due to business, economic, or other
reasons. We believe that the Legislature, when it provided for an
"income tax," intended to tax only the "income" of corporations, firms
or individuals, as that term is generally used in its common
acceptation; that is that the income means money received, coming to
a person or corporation for services, interest, or profit from
investments. We do not believe that the Legislature intended that a
mere increase in the value of the capital or assets of a corporation,
firm, or individual, should be taxed as "income." Such property can be
reached under the ordinary from of taxation.
Mr. Justice Pitney, in the case of the Einer vs. Macomber, supra, said
in discussing the difference between "capital" and "income": "That the
fundamental relation of 'capital' to 'income' has been much discussed
by economists, the former being likened to the tree or the land, the
latter to the fruit or the crop; the former depicted as a reservoir
supplied from springs; the latter as the outlet stream, to be measured
by its flow during a period of time." It may be argued that a
stockholder might sell the stock dividend which he had acquired. If he
does, then he has received, in fact, an income and such income, like
any other profit which he realizes from the business, is an income and
he may be taxed thereon.
There is a clear distinction between an extraordinary cash dividend, no
matter when earned, and stock dividends declared, as in the present
case. The one is a disbursement to the stockholder of accumulated
earnings, and the corporation at once parts irrevocably with all interest
thereon. The other involves no disbursement by the corporation. It
parts with nothing to the stockholder. The latter receives, not an actual
dividend, but certificate of stock which simply evidences his interest in
the entire capital, including such as by investment of accumulated
profits has been added to the original capital. They are not income to
him, but represent additions to the source of his income, namely, his
invested capital. (DeKoven vs. Alsop, 205, Ill., 309; 63 L.R.A. 587).
Such a person is in the same position, so far as his income is
concerned, as the owner of young domestic animal, one year old at the
beginning of the year, which is worth P50 and, which, at the end of the
year, and by reason of its growth, is worth P100. The value of his
property has increased, but has had an income during the year? It is
true that he had taxable property at the beginning of the year of the
value of P50, and the same taxable property at another period, of the
value of P100, but he has had no income in the common acceptation of
that word. The increase in the value of the property should be taken
account of on the tax duplicate for the purposes of ordinary taxation,
but not as income for he has had none.
The question whether stock dividends are income, or capital, or assets
has frequently come before the courts in another form — in cases of
inheritance. A is a stockholder in a large corporation. He dies leaving a
will by the terms of which he give to B during his lifetime the
"income" from said stock, with a further provision that C shall, at B's
death, become the owner of his share in the corporation. During B's
life the corporation issues a stock dividend. Does the stock dividend
belong to B as an income, or does it finally belong to C as a part of his
share in the capital or assets of the corporation, which had been left to
him as a remainder by A? While there has been some difference of
opinion on that question, we believe that a great weight of authorities
hold that the stock dividend is capital or assets belonging to C and not
an income belonging to B. In the case of D'Ooge vs. Leeds (176 Mass.,
558, 560) it was held that stock dividends in such cases were regarded
as capital and not as income (Gibbons vs. Mahon, 136 U.S., 549.)
In the case of Gibbson vs. Mahon, supra, Mr. Justice Gray said: "The
distinction between the title of a corporation, and the interest of its
members or stockholders in the property of the corporation, is familiar
and well settled. The ownership of that property is in the corporation,
and not in the holders of shares of its stock. The interest of each
stockholder consists in the right to a proportionate part of the profits
whenever dividends are declared by the corporation, during its
existence, under its charter, and to a like proportion of the property
remaining, upon the termination or dissolution of the corporation, after
payment of its debts." (Minot vs. Paine, 99 Mass., 101; Greeff vs.
Equitable Life Assurance Society, 160 N. Y., 19.) In the case of
Dekoven vs. Alsop (205 Ill ,309, 63 L. R. A. 587) Mr. Justice Wilkin
said: "A dividend is defined as a corporate profit set aside, declared,
and ordered by the directors to be paid to the stockholders on demand
or at a fixed time. Until the dividend is declared, these corporate
profits belong to the corporation, not to the stockholders, and are liable
for corporate indebtedness.
There is a clear distinction between an extraordinary cash dividend, no
matter when earned, and stock dividends declared. The one is a
disbursement to the stockholders of accumulated earning, and the
corporation at once parts irrevocably with all interest thereon. The
other involves no disbursement by the corporation. It parts with
nothing to the stockholders. The latter receives, not an actual dividend,
but certificates of stock which evidence in a new proportion his
interest in the entire capital. When a cash becomes the absolute
property of the stockholders and cannot be reached by the creditors of
the corporation in the absence of fraud. A stock dividend however, still
being the property of the corporation and not the stockholder, it may
be reached by an execution against the corporation, and sold as a part
of the property of the corporation. In such a case, if all the property of
the corporation is sold, then the stockholder certainly could not be
charged with having received an income by virtue of the issuance of
the stock dividend. Until the dividend is declared and paid, the
corporate profits still belong to the corporation, not to the
stockholders, and are liable for corporate indebtedness. The rule is
well established that cash dividend, whether large or small, are
regarded as "income" and all stock dividends, as capital or assets
(Cook on Corporation, Chapter 32, secs. 534, 536; Davis vs. Jackson,
152 Mass., 58; Mills vs. Britton, 64 Conn., 4; 5 Am., and Eng. Encycl.
of Law, 2d ed., p. 738.)
If the ownership of the property represented by a stock dividend is still
in the corporation and to in the holder of such stock, then it is difficult
to understand how it can be regarded as income to the stockholder and
not as a part of the capital or assets of the corporation. (Gibbsons vs.
Mahon, supra.) the stockholder has received nothing but a
representation of an interest in the property of the corporation and, as a
matter of fact, he may never receive anything, depending upon the
final outcome of the business of the corporation. The entire assets of
the corporation may be consumed by mismanagement, or eaten up by
debts and obligations, in which case the holder of the stock dividend
will never have received an income from his investment in the
corporation. A corporation may be solvent and prosperous today and
issue stock dividends in representation of its increased assets, and
tomorrow be absolutely insolvent by reason of changes in business
conditions, and in such a case the stockholder would have received
nothing from his investment. In such a case, if the holder of the stock
dividend is required to pay an income tax on the same, the result
would be that he has paid a tax upon an income which he never
received. Such a conclusion is absolutely contradictory to the idea of
an income. An income subject to taxation under the law must be an
actual income and not a promised or prospective income.
The appelle argues that there is nothing in section 25 of Act No 2833
which contravenes the provisions of the Jones Law. That may be
admitted. He further argues that the Act of Congress (U.S. Revenue
Act of 1918) expressly authorized the Philippine Legislatures to
provide for an income tax. That fact may also be admitted. But a
careful reading of that Act will show that, while it permitted a tax upon
income, the same provided that income shall include gains, profits, and
income derived from salaries, wages, or compensation for personal
services, as well as from interest, rent, dividends, securities, etc. The
appellee emphasizes the "income from dividends." Of course, income
received as dividends is taxable as an income but an income from
"dividends" is a very different thing from receipt of a "stock dividend."
One is an actual receipt of profits; the other is a receipt of a
representation of the increased value of the assets of corporation.
In all of the foregoing argument we have not overlooked the decisions
of a few of the courts in different parts of the world, which have
reached a different conclusion from the one which we have arrived at
in the present case. Inasmuch, however, as appeals may be taken from
this court to the Supreme Court of the United States, we feel bound to
follow the same doctrine announced by that court.
Having reached the conclusion, supported by the great weight of the
authority, that "stock dividends" are not "income," the same cannot be
taxes under that provision of Act No. 2833 which provides for a tax
upon income. Under the guise of an income tax, property which is not
an income cannot be taxed. When the assets of a corporation have
increased so as to justify the issuance of a stock dividend, the increase
of the assets should be taken account of the Government in the
ordinary tax duplicates for the purposes of assessment and collection
of an additional tax. For all of the foregoing reasons, we are of the
opinion, and so decide, that the judgment of the lower court should be
revoked, and without any finding as to costs, it is so ordered.
Araullo, C.J. Avanceña, Villamor and Romualdez, JJ., concur.
Separate Opinions
STREET, J., concurring:
I agree that the trial court erred in sustaining the demurrer, and the
judgment must be reversed. Instead of demurring the defendant should
have answered and alleged, if such be the case, that the stock dividend
which was the subject of taxation represents the amount of earnings or
profits distributed by means of the issuance of said stock dividend; and
the case should have been tried on that question of fact.
In this connection it will be noted that section 25 (a) of Act No. 2833,
of the Philippine Legislature, under which this tax was imposed, does
not levy a tax generally on stock dividends to the extend of the part of
the stock nor even to the extend of its value, but declares that stock
dividends shall be considered as income to the amount of the earnings
or profits distributed. Under provision, before the tax can be lawfully
assessed and collected, it must appear that he stock dividend represents
earning or profits distributed; and the burden of proof is on the
Collector of Internal Revenue to show this.
The case of Eisner vs. Macomber (252 U.S., 189; 64 L. ed., 521), has
been cited as authority for the proposition that it is incompetent for the
Legislature to tax as income any property which by nature is really
capital — as a stock dividend is there said to be. In that case the
Supreme Court of the United States held that a Congressional Act
taxing stock dividends as income was repugnant to that provision of
the Constitution of the United States which required that direct taxes
upon property shall be apportioned for collection among the several
states according to population and that the Sixteenth Amendment, in
authorizing the imposition by Congress of taxes upon income, had not
vested Congress with the power to levy direct taxes, on property under
the guise of income taxes. But the resolution embodied in that decision
was evidently reached because of the necessity of harmonizing two
different provisions of the Constitution of the United States, as
amended. In this jurisdiction our Legislature has full authority to levy
both taxes on property and income taxes; and there is no organic
provision here in force similar to that which, under the Constitution of
the United States, requires direct taxes on property to be levied in a
particular way.
It results, under the statute here in force, there being no constitutional
restriction upon the action of the law making body, that the case before
us presents merely a question of statutory construction. That the
problem should be viewed in this light, in a case where there is no
restriction upon the legislative body, is pointed our in Eisner vs.
Macomber, supra, where in the course of his opinion Mr. Justice
Pitney refers to the cases of the Swan Brewery Co. vs. Rex ([1914] A.
C. 231), and Tax Commissioner vs. Putnam (227 Mass., 522), as being
distinguished from Eisner vs. Macomber by the very circumstance that
in those cases the law making body, or bodies were under no
restriction as to the method of levying taxes. Such is the situation here.
OSTRAND, J., dissenting:
In its final analysis the opinion of the court rests principally, if not
entirely on the decision of the United States Supreme Court in the case
of Eisner vs. Macomber (252 U.S., 189), a decision which, for at least
two reasons, is entirely inapplicable to the present case.
In the first place, there is a radical difference between the definition of
a taxable stock dividend given in the United States Income Tax Law of
September 8, 1916, construed in the case of Eisner vs. Macomber, and
that given in Act No. 2833 of the Philippine Legislature, the Act with
which we are concerned in the present case. The former provides that
"stock dividend shall be considered income, to the amount of its cash
value;" the Philippine Act provides that "Stock dividend shall be
considered income, to the amount of the earnings or profits
distributed." The United State statute made stock dividends based
upon an advance in the value of the property or investment taxable as
income whether resulting from earning or not; our statute make stock
dividends taxable only to the amount of the earning and profits
distributed, and stock dividends based on the increment income and
are not taxable. Though the difference would seem sufficiently
obvious, we will endeavor to make it still clearer by borrowing one of
the illustrations with which the opinion of the court is provided. The
court says:
A, an individual farmer, buys a farm with one hundred head of
cattle for the sum of P10,000. At the end of the first year, by
reason of business conditions and the increase of the value of
both real estate and personal property, it is discovered that the
value of the farm and the cattle is P20,000. A, during the year
has received nothing from the farm or the cattle. His books at
the beginning of the year show that he had property of the
value of P10,000. His books at the close of the year show that
he has property of the value of P20,000. A is not a corporation.
The assets of his business are not shown therefore by certificate
of stock. His books, however, show that the value of his
property has increased during the year by P10,000. Can the
P10,000, under any theory of business or law, be regarded as an
"income" upon which the farmer can be required to pay an
income tax? Is there any difference in law in the conditions of
A in this illustration and the conditions of A and B in the
immediately preceding illustration? Can the increase of the
value of the property in either case be regarded as an 'income'
and be subjected to the payment of the income tax under the
law?
I answer no. And while the increment if in the form of a stock dividend
would have been regarded as income under the United States statute
and taxes as such, it is not regarded as income and cannot be so taxes
under our statute because it is not based on earnings or profits. That is
precisely the difference between the two statutes and that is the reason
the illustration is not in point in this case, though it would have been
entirely appropriate in the Eisner vs. Macomber case. It is also one of
the reasons why that case is inapplicable here and why most of the
arguments in the majority opinion are beside the mark.
But let us suppose that A had sold the products of the farm during the
year for P10,000 over and above his expense, and had invested the
money in buildings and improvements on the farm, thus increasing its
value to P20,000. Why would not the P10,000 earned during the year
and so invested in improvements still be income for the year? And why
would not a tax on these earnings be an income tax under the
definition given in Black's Law Dictionary, and quoted with approval
in the decision of the court, that "An income tax is a tax on the yearly
profits arising from the property, professions, trades, and offices?"
There can be but one answer. There is no reason whatever why the
gains derived from the sale of the products of the farm should not be
regarded as income whether reinvested in improvements upon the farm
or not and there is no reason way a tax levied thereon cannot be
considered an income tax.
Moreover, to constitute income, profits, or earnings need not
necessarily be converted into cash. Black's Law Dictionary says —
and I am again quoting from the decision of the court — "An income
is the return in money from one's business, labor, or capital invested;
gains profits, or private revenue." As will be seen in the secondary
sense of the word, income need not consist in money; upon this point
there is no divergence of view among the lexicographers. If a farmer
stores the gain produced upon his farm without selling, it may none the
less be regarded as income.
In the Eisner vs. Macomber case, the United States supreme Court felt
bound to give the word "income" a strict interpretation. Under article
1, paragraph 2, clause 3, and paragraph 9, clause 4 of the original
Constitution of the United States, Congress could not impose direct
taxes without apportioning them among the States according to
population. As it was thought desirable to impose Federal taxes upon
incomes and as a levy of such taxes by appointment among the States
in proportion to population would lead to an unequal distribution of the
tax with reference to the amount of taxable incomes, the Sixteenth
Amendment was adopted and which provided that "The Congress shall
have power to lay and collect taxes on incomes, from whatever source
derived, without apportionment among the several states, and without
regard to any census or enumeration."
The United States Supreme Court therefore says in the Eisner vs.
Macomber case:
A proper regard for its generis, as well as its very clear
language, requires also that this Amendment shall not be
extended by loose construction, so as to repeal or modify,
except as applied to income, those provisions of the
Constitution that require an apportionment according to
population for direct taxes upon property, real and personal.
This limitation still has an appropriate and important functions,
and is not to be overridden by Congress or disregarded by the
courts.
In order, therefore, that the clauses cited from Article I of the
constitution may have proper force and effect, save only as
modified by the Amendment, and that the latter also may have
proper effect, it becomes essential to distinguish between what
is and what is not "income," as the term is there used; and to
apply the distinction as cases arise, according to truth and
substance, without regard to form. Congress cannot by any
definition it may adopt conclude the matter, since it cannot by
legislation alter the Constitution, from which alone it derives
its power to legislate, and within whose limitations alone that
power can be lawfully exercised.
That, in the absence of the peculiar restrictions placed by the
Constitution upon taxing power of Congress, the decision of the court
might have been different is clearly indicated by the following
language:
Two recent decisions, proceeding from courts of high
jurisdiction, are cited in support of the position of the
Government.
Sean Brewery Co. vs. Rex ([1914] A. C., 231), arose under the
Dividend Duties Act of Western Australia, which provided that
"dividend" should include "every dividend, profit, advantage,
or gain intended to be paid or credited to or distributed among
any members or director of any company," except etc. There
was a stock dividend, the new shares being alloted among the
shareholders pro rata; and the question was whether this was a
distribution of a dividend within the meaning of the act. The
Judicial Committee of the Privy Council sustained the dividend
duty upon the ground that, although "in ordinary language the
new shares would not be distribution of a dividend," yet within
the meaning of the act, such new share were an "advantage" to
the recipients. There being no constitutional restriction upon
 the action of the lawmaking body, the case presented merely a
question of statutory construction, and manifestly the decision
is not a precedent for the guidance of this court when acting
under a duty to test an act of Congress by the limitations of a
written Constitution having superior force.
In Tax Commissioner vs. Putnam (1917], 227 Mass., 522), it
was held that the 44th Amendment to the constitution of
Massachusetts, which conferred upon the legislature full power
to tax incomes, "must be interpreted as including every item
which by any reasonable understanding can fairly be regarded
as income" (pp. 526, 531); and that under it a stock dividend
was taxable as income. . . . Evidently, in order to give a
sufficiently broad sweep to the new taxing provision, it was
deemed necessary to take the symbol for the substance,
accumulation for distribution, capital accretion for its opposite;
while a case where money is paid into the hand of the
stockholder with an option to buy new shares with it, followed
by acceptance of the option, was regarded as identical in
substance with a case where the stockholder receives no money
and has no option. The Massachusetts court was not under an
obligation, like the one which binds us, of applying a
constitutional provisions that stand in the way of extending it
by construction.
The Philippine Legislature has full power to levy taxes both on capital
or property and on income, subject only to the provisions of the
Organic Act that "the rule of taxation shall be uniform." In providing
for the income tax the Legislature is therefore entirely free to employ
the term "income" in its widest sense and is in nowise limited or
hampered by organic limitations such as those imposed upon Congress
by the Constitution of the United States. This is the second reason why
the rule laid down in Eisner vs. Macomber has no application here.
The majority opinion in discussing this question, says:
There is no question that the Philippine Legislature may
provide for the payment of an income tax, but it cannot, under
the guise of an income tax, collect a tax on property which is
not an "income." The Philippine Legislature cannot impose a
tax upon "income" only . The Philippine Legislature has no
power to provide a tax upon "automobiles," only, and under
that law collect a tax upon a carreton or bull cart.
Constitutional limitations upon the power of the Legislature are
not stronger than statutory limitations, that is to say, a statute
expressly adopted for one purpose cannot, without amendment,
be applied to another purpose which is entirely distinct and
different. A statute providing for an income tax cannot be
construed to cover property which is not, in fact, income. The
Legislature cannot, by a statutory declaration, change the real
of a nature of a tax which it imposes. A law which imposes an
importation tax on rice only cannot be construed to impose an
importation tax on corn.
These assertions while in the main true are, perhaps, a little to broadly
stated; much will depend on the circumstances of each particular case.
If the Legislature cannot do the things enumerate it must be by reason
of the limitation imposed by the Organic Act, "That no bill which may
be enacted into law shall embrace more than on subject, and that
subject shall be expressed in the title of the bill." Similar provisions
are contained in most State Constitutions, their object being to prevent
"log-rolling" and the passing of undesirable measures without their
being brought properly to the attention of the legislators. Where the
prevention of this mischief is not involved, the courts have uniformly
given such provisions a very liberal construction and there are few, if
any, cases where a statute has been declared unconstitutional for
dealing with several cognate subjects in the same Act and under the
same title. (Lewis Sutherland on Statutory Construction, 2d ed., pars
109 et seq.: Government of the Philippine Island vs. Municipality of
Binalonan and Roman Catholic Bishop of Nueva Segovia, 32, Phil.,
634). Certainly no income tax statute would be declared
unconstitutional on that ground for treating dividends as income and
providing for their taxation as such.
Reverting to the question of the nature of income, it is argued that a
stock certificate has no intrinsic value and that, therefore, even it is
based on earnings instead of increment in capital it cannot be regarded
as income. But neither has a bank check or a time deposit certificate
any intrinsic value, yet it may be negotiated, or sold, or assigned and it
represents a cash value. So also does a stock certificate. A lawyer
might take his fee in stock certificates instead of in money. Would it be
seriously contended that he had received no fee and that his efforts had
brought no income?1awph!l.net
Some of the members of the court agree that stock dividends based on
earnings or profits may be taxed as income, but take the view that in an
action against the Collector of the Internal Revenue for recovering
back taxes paid on non-taxable stock dividends, the plaintiff need not
allege that the stock dividends are not base on earnings or profits
distributed, but that question of the taxability or non-taxability of the
stock dividends is a matter of defense and should be set up by the
defendant by way of answer.
I think this view is erroneous. If some stock dividends are taxable and
others are not, an allegation that stock dividends in general have been
taxed is not sufficient and does not state a cause of action. the
presumption is that the tax has been legally collected and the burden is
upon the plaintiff both to allege and prove facts showing that the
collection is unlawfully or irregular. (Code of Civil Procedure, sec.
334, subsec. 14 and 31.)
Malcolm, J., concurs.
————
JOHNS, J., dissenting:
We have studied and analyzed with care the able and exhaustive
majority opinion written by Mr. Justice Johnson.
In the final analysis, the question involved is whether the words
"which stock dividend shall be considered income, to the amount of its
cash value" are to be construed as meaning the same things as the
words "stock dividend shall be considered income, to the amount of
the earnings or profits distributed," as the majority opinion says. The
first is an Act of Congress defining what is a stock dividend, and that
the word dividend shall be construed as income to the amount of its
cash value. It is upon that construction and that definition that the
majority opinion is founded. That is the definition of the words as used
in an Act of Congress. The other is an Act defining the meaning of the
words as used in an Act of Congress. The other is an Act defining the
meaning of the words by the Legislature of the Philippine Islands, and
it says: "Stock dividend shall be considered income, to the amount of
the earnings or profits distributed."
It is true, as the majority opinion says, that in enacting the Income Tax
Law of the Philippine Islands, the Legislature had before it the Act of
Congress. But it is also true that by the Act of the Philippine
Legislature "Stock dividend shall be considered income, to the amount
of the earnings or profits distributed." One law is founded upon the
actual cash value of the stock and the other is founded upon distributed
earnings and profits.
Much is said in the textbooks and by the numerous decisions cited in
the majority opinion as to the meaning of the word income, and the
decision in the United States are founded upon the meaning of that
word, as it is used in the Act of Congress, and to the effect that the
word is to be construed in its usual and ordinary meaning. But
assuming that to be true, it must also be conceded that the Legislature
of the Philippine Islands has a legal right to define the meaning of the
word "income" by a legislative act, and when its meaning is defined by
legislative act, it is the duty of the courts to follow that definition
regardless of whether it is the usual and ordinary meaning of the word,
and therein lies the distinction between the two acts and the reason
why the authorities cited in the majority opinion are not in point. Act
No. 2833 of the Philippine Legislature specifically says that "Stock
dividend shall be considered income, to the amount of the earnings or
profits distributed." The Act of Congress is founded upon the "cash
value of the stock," and the Act in question is founded upon "the
amount of the earnings or profits distributed."
Hence, then, we have the meaning of the words defined in the
legislative act, and it is very apparent that the purpose and intent of the
legislative act was to avoid the meaning and construction of such
words which is now given to them in the majority opinion. The
Legislature had the power to define the meaning of the words, did
define them, and it is the duty of the courts to follow and adopt the
meaning and definition of the words given to them in the legislative
act.

As pointed out in the opinion of Mr. Justice Street, the constitutional

limitations upon the legislative power for taxation purposes, which
exist in the United States, does not exist in the Philippine Islands.
There is no organic law here similar to the provisions of the
Constitution of the United States which require direct taxes on
property to be levied in a specific way, in other words, the restrictions
and limitations placed on the power to levy an income tax under the
Constitution of the United States do not exist in the Philippine Islands.
Hence, it must follow that the authorities cited in the majority opinion
are not in point the instant case. They are founded upon different
language, different organic powers, different conditions, and the
different meaning of the same words as defined in the different
legislative acts. The Philippine Legislature had a legal right to define
the meaning of the words "dividend" and "income," and it expressly
says "Stock dividend shall be considered income, to the amount of the
earnings or profits distributed." In the instant case, the earnings and
profits of the corporation were distributed among the existing
stockholders of the company upon a pro rata basis, and they were
made exclusively out of "distributed earnings and profits." The
declaring of the dividend was a matter in the sole discretion of the
stockholders, but when such a dividend is made from and out of
"earnings or profits distributed," it then becomes and is an income
within the meaning of Act No. 2833, and should be subject to an
income tax.

For such reason, I dissent.

 Its real properties consist of several lots and buildings, mostly situated
Republic of the Philippines in Manila and in Pasay City, all of which were acquired from said
SUPREME COURT Isabelo P. Lim and his mother, Vicente Pantangco Vda. de Lim.
Manila
Petitioner corporation duly filed its 1956 and 1957 income tax returns,
EN BANC reporting therein net incomes of P3,287.81 and P11,098.36,
respectively, for which it paid the corresponding taxes therefor in the
G.R. No. L-21570 July 26, 1966 sums of P657.00 and P2,220.00.

LIMPAN INVESTMENT CORPORATION, petitioner, Sometime in 1958 and 1959, the examiners of the Bureau of Internal
vs. Revenue conducted an investigation of petitioner's 1956 and 1957
COMMISSIONER OF INTERNAL REVENUE, ET AL., income tax returns and, in the course thereof, they discovered and
respondents. ascertained that petitioner had underdeclared its rental incomes by
P20,199.00 and P81,690.00 during these taxable years and had claimed
Vicente L. San Luis for petitioner. excessive depreciation of its buildings in the sums of P4,260.00 and
Office of the Solicitor General A. A. Alafriz, Assistant Solicitor P16,336.00 covering the same period. On the basis of these findings,
General F. B. Rosete, Solicitor A. B. Afurong and Atty. V. G. Saldajeno respondent Commissioner of Internal Revenue issued its letter-
for respondents. assessment and demand for payment of deficiency income tax and
surcharge against petitioner corporation, computed as follows:
REYES, J.B.L., J.:
90-AR-C-348-58/56
Appeal interposed by petitioner Limpan Investment Corporation
against a decision of the Court of Tax Appeals, in its CTA Case No. Net income per audited return P 3,287.81
699, holding and ordering it (petitioner) to pay respondent Add: Unallowable deductions:
Commissioner of Internal Revenue the sums of P7,338.00 and
P30,502.50, representing deficiency income taxes, plus 50% surcharge Undeclared Rental Receipt
and 1% monthly interest from June 30, 1959 to the date of payment, (Sched. A) . . . . . . . . . . . . . . . . . . . . P20,199.00
with cost.
Excess Depreciation (Sched. B) . . . . . . . . . . . . . .
P24,459.00
The facts of this case are: . . . 4,260.00
Net income per investigation P27,746.00
Petitioner, a domestic corporation duly registered since June 21, 1955,
is engaged in the business of leasing real properties. It commenced Tax due thereon P5,549.00
actual business operations on July 1, 1955. Its principal stockholders
Less: Amount already assessed 657.00
are the spouses Isabelo P. Lim and Purificacion Ceñiza de Lim, who
own and control ninety-nine per cent (99%) of its total paid-up capital. Balance P4,892.00
Its president and chairman of the board is the same Isabelo P.
Lim.1äwphï1.ñët Add: 50% Surcharge 2,446.00
 DEFICIENCY TAX DUE P7,338.00 petitioner corporation in said year but did so only in 1959; that a
certain tenant (Go Tong) deposited in court his rentals amounting to
90-AR-C-1196-58/57 P10,800.00, over which the corporation had no actual or constructive
Net income per audited return P11,098.00 control; and that a sub-tenant paid P4,200.00 which ought not be
declared as rental income.
Add: Unallowable deductions:
Petitioner likewise alleged in its petition that the rates of depreciation
Undeclared Rental Receipt (Sched. A) . . . . . . . .
applied by respondent Commissioner of its buildings in the above
P81,690.00
assessment are unfair and inaccurate.
Excess Depreciation (Sched. B) . . . . . . . . . . . . . .
P98,028.00
. 16,338.00 Sole witness for petitioner corporation in the Tax Court was its
Secretary-Treasurer, Vicente G. Solis, who admitted that it had omitted
Net income per investigation P109,126.00
to report the sum of P12,100.00 as rental income in its 1956 tax return
Tax due thereon P22,555.00 and also the sum of P29,350.00 as rental income in its 1957 tax return.
However, with respect to the difference between this omitted income
Less: Amount already assessed 2,220.00 (P12,100.00) and the sum (P20,199.00) found by respondent
Balance 20,335.00 Commissioner as undeclared in 1956, petitioner corporation, through
the same witness (Solis), tried to establish that it did not collect or
Add: 50% Surcharge 10,167.50 receive the same because, in view of the refusal of some tenants to
DEFICIENCY TAX DUE P30,502.50 recognize the new owner, Isabelo P. Lim and Vicenta Pantangco Vda.
de Lim, the former owners, on one hand, and the same Isabelo P. Lim,
as president of petitioner corporation, on the other, had verbally agreed
Petitioner corporation requested respondent Commissioner of Internal
in 1956 to turn over to petitioner corporation six per cent (6%) of the
Revenue to reconsider the above assessment but the latter denied said
value of all its properties, computed at P21,630.00, in exchange for
request and reiterated its original assessment and demand, plus 5%
whatever rentals the Lims may collect from the tenants. And, with
surcharge and the 1% monthly interest from June 30, 1959 to the date
respect to the difference between the admittedly undeclared sum of
of payment; hence, the corporation filed its petition for review before
P29,350.00 and that found by respondent Commissioner as unreported
the Tax Appeals court, questioning the correctness and validity of the
rental income, (P81,690.00) in 1957, the same witness Solis also tried
above assessment of respondent Commissioner of Internal Revenue. It
to establish that petitioner corporation did not receive or collect the
disclaimed having received or collected the amount of P20,199.00, as
same but that its president, Isabelo P. Lim, collected part thereof and
unreported rental income for 1956, or any part thereof, reasoning out
may have reported the same in his own personal income tax return;
that 'the previous owners of the leased building has (have) to collect
that same Isabelo P. Lim collected P13,500.00, which he turned over to
part of the total rentals in 1956 to apply to their payment of rental in
petitioner in 1959 only; that a certain tenant (Go Tong deposited in
the land in the amount of P21,630.00" (par. 11, petition). It also denied
court his rentals (P10,800.00), over which the corporation had no
having received or collected the amount of P81,690.00, as unreported
actual or constructive control and which were withdrawn only in 1958;
rental income for 1957, or any part thereof, explaining that part of said
and that a sub-tenant paid P4,200.00 which ought not be declared as
amount totalling P31,380.00 was not declared as income in its 1957
rental income in 1957.
tax return because its president, Isabelo P. Lim, who collected and
received P13,500.00 from certain tenants, did not turn the same over to
With regard to the depreciation which respondent disallowed and
deducted from the returns filed by petitioner, the same witness tried to
establish that some of its buildings are old and out of style; hence, they
are entitled to higher rates of depreciation than those adopted by
respondent in his assessment.
Isabelo P. Lim was not presented as witness to corroborate the above
testimony of Vicente G. Solis.
On the other hand, Plaridel M. Mingoa, one of the BIR examiners who
personally conducted the investigation of the 1956 and 1957 income
tax returns of petitioner corporation, testified for the respondent that he
personally interviewed the tenants of petitioner and found that these
tenants had been regularly paying their rentals to the collectors of
either petitioner or its president, Isabelo P. Lim, but these payments
were not declared in the corresponding returns; and that in applying
rates of depreciation to petitioner's buildings, he adopted Bulletin "F"
of the U.S. Federal Internal Revenue Service.
On the basis of the evidence, the Tax Court upheld respondent
Commissioner's assessment and demand for deficiency income tax
which, as above stated in the beginning of this opinion, petitioner has
appealed to this Court.
Petitioner corporation pursues, the same theory advocated in the court
below and assigns the following alleged errors of the trial court in its
brief, to wit:
I. The respondent Court erred in holding that the petitioner had
an unreported rental income of P20,199.00 for the year 1956.
II. The respondent Court erred in holding that the petitioner had
an unreported rental income of P81,690.00 for the year 1957.
III. The respondent Court erred in holding that the depreciation
in the amount of P20,598.00 claimed by petitioner for the years
1956 and 1957 was excessive.
and prays that the appealed decision be reversed.
This appeal is manifestly unmeritorious. Petitioner having admitted,
through its own witness (Vicente G. Solis), that it had undeclared more
than one-half (1/2) of the amount (P12,100.00 out of P20,199.00)
found by the BIR examiners as unreported rental income for the year
1956 and more than one-third (1/3) of the amount (P29,350.00 out of
P81,690.00) ascertained by the same examiners as unreported rental
income for the year 1957, contrary to its original claim to the revenue
authorities, it was incumbent upon it to establish the remainder of its
pretensions by clear and convincing evidence, that in the case is
lacking.
With respect to the balance, which petitioner denied having unreported
in the disputed tax returns, the excuse that Isabelo P. Lim and Vicenta
Pantangco Vda. de Lim retained ownership of the lands and only later
transferred or disposed of the ownership of the buildings existing
thereon to petitioner corporation, so as to justify the alleged verbal
agreement whereby they would turn over to petitioner corporation six
percent (6%) of the value of its properties to be applied to the rentals
of the land and in exchange for whatever rentals they may collect from
the tenants who refused to recognize the new owner or vendee of the
buildings, is not only unusual but uncorroborated by the alleged
transferors, or by any document or unbiased evidence. Hence, the first
assigned error is without merit.
As to the second assigned error, petitioner's denial and explanation of
the non-receipt of the remaining unreported income for 1957 is not
substantiated by satisfactory corroboration. As above noted, Isabelo P.
Lim was not presented as witness to confirm accountant Solis nor was
his 1957 personal income tax return submitted in court to establish that
the rental income which he allegedly collected and received in 1957
were reported therein.
The withdrawal in 1958 of the deposits in court pertaining to the 1957
rental income is no sufficient justification for the non-declaration of
said income in 1957, since the deposit was resorted to due to the
refusal of petitioner to accept the same, and was not the fault of its
tenants; hence, petitioner is deemed to have constructively received
such rentals in 1957. The payment by the sub-tenant in 1957 should
have been reported as rental income in said year, since it is income just
the same regardless of its source.

On the third assigned error, suffice it to state that this Court has
already held that "depreciation is a question of fact and is not
measured by theoretical yardstick, but should be determined by a
consideration of actual facts", and the findings of the Tax Court in this
respect should not be disturbed when not shown to be arbitrary or in
abuse of discretion (Commissioner of Internal Revenue vs. Priscila
Estate, Inc., et al., L-18282, May 29, 1964), and petitioner has not
shown any arbitrariness or abuse of discretion in the part of the Tax
Court in finding that petitioner claimed excessive depreciation in its
returns. It appearing that the Tax Court applied rates of depreciation in
accordance with Bulletin "F" of the U.S. Federal Internal Revenue
Service, which this Court pronounced as having strong persuasive
effect in this jurisdiction, for having been the result of scientific
studies and observation for a long period in the United States, after
whose Income Tax Law ours is patterned (M. Zamora vs. Collector of
internal Revenue & Collector of Internal Revenue vs. M. Zamora; E.
Zamora vs. Collector of Internal Revenue and Collector of Internal
Revenue vs. E. Zamora, Nos. L-15280, L-15290, L-15289 and L-
15281, May 31, 1963), the foregoing error is devoid of merit.

Wherefore, the appealed decision should be, as it is hereby, affirmed.

With costs against petitioner-appellant, Limpan Investment
Corporation.

Concepcion, C.J., Barrera, Dizon, Regala, Makalintal, Bengzon, J.P.,

Zaldivar, Sanchez and Castro, JJ., concur.

Commissioner of Internal