G.R. No.

30855 January 20, 1930

C. PEREZ RUBIO, plaintiff-appellee,

vs.
COLLECTOR OF INTERNAL REVENUE, defendant-appellant.

Attorney-General Jaranilla for appellant.

DeWitt, Perkins and Brady for appellee.

MALCOLM, J.:

Uncomplicated by question of fact, the appeal in this case agains submits for decision the legal question
of whether a stock divident may lawfully be taxed as income of the stockholder.

The original Income Tax Law for the Philippines was the Revenue Act of September 8, 1916, which was
expressly extended to the Philippines by the Congress of the United States (12 Public Laws, pp. 251 et
seq.). In section 2 (a) of this law, it was provided that the term "dividends" shall be held to mean "any
distribution made or ordered to be made by a corporation, joint-stock company, association, or insurance
company, 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, joint-stock company,
association, or insurance company, which stock dividend shall be considered income, to the amount of its
cash value." The Congress altered its policy with reference to the Philippines in the War Revenue Act of
October 3, 1917, section 5, the Revenue Act of February 24, 1919, section 261, and the Revenue Act of
November 23, 1921, section 261, by delegating its power to the Philippine Legislature (40 U.S. Stat. at L.,
pp. 300, 1057; 42 U.S. Stat. at L., p. 227). The last mentioned Act included the provision "That in . . . the
Philippine Islands the income tax shall be levied, assessed, collected, and paid as provided by law prior to
the passage of this Act. The . . . Philippine Legislature shall have power by due enactment to amend, alter,
modify, or repeal the income tax laws in force in . . . the Philippine Islands, . . . .

In pursuance of express authority, the Philippine Legislature enacted an Income Tax Law on March 7,
1919, by placing Act No. 2833 on the statute books. The law levied a flat rate on the incomes of
corporations and a graduated rate on the incomes of individuals. Among other things, it provided that
"the taxable net income of a person shall include gains, profits, and income derived from" various sources
including "dividends . . . or gains, profits and income derived from any source whatever" (sec. 2 [a]). Then
in section 25 (a) of the law, the Legislature included the following: "The term "dividends'"as used in this
Law shall be held to mean any distribution made or ordered to be made by a corporation, joint-stock
company, association, or insurance company, 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, joint-stock company, association, or insurance company. Stock dividend shall be considered
income, to the amount of the earnings or profits distributed. (Emphasis inserted.)

The Corporation Law, as ratified by the Congress, authorizes a corporation to issue stock for "profits
earned by it but not distributed among its stockholders or members." (Sec. 16, as amended by Act No.
3518, sec. 9.) On the other hand, section 28 of the Philippine Organic Act, the Act of Congress of August
29, 1916, provides "That all franchises or rights granted under this Act . . . shall forbid the declaring of
stock or bond dividends." A further limitation of a general nature is that found in section 3, paragraph 16,
of the Organic Act, to the effect "That the rule of taxation in said Islands shall be uniform."
There arose in connection with the Revenue Act of September 8, 1916, which, it will be recalled, was the
Act of Congress extended to the Philippine Islaands, the case of Eisner vs. Macomber ([1920], 252 U. S.,
189). It was held in the Supreme Court of the United States by a vote of five to four that Congress was
given no power by the Income Tax Amendment to the Federal Constitution to tax, without apportionment,
as income of stockholder in a corporation, a stock dividend made lawfully and in good faith against
accumulated profits earned by the corporation since the adoption of such amendment. Thereafter in the
Philippines, the case of Fisher vs. Trinidad ([1922], 43 Phil., 973) considered the question of whether stock
dividends are taxable as income under the provisions of the local law, Act No. 2833. It was held by a
divided court that stock dividends cannot be so taxed. Subsequently, the cases of Warner, Barnes & Co.
vs. Posadas, No. 24037, and Menzi vs. Posadas, No. 23499, 1 involving much the same question, were
submitted. In the meantime, the make-up of the Supreme Court having changed and one member being
disqualified, there resulted an evenly divided court. Eventually the two cases were shifted to the First
Division, and there, with one dissent, stock dividends were once more held not subject to the income tax.
These cases were taken to the United States Supreme court on writs of certiorari, and in that court it was
said that the respondents suggest no ground on which the judgments of the lower court can be sustained,
and accordingly the judgments were reversed. (Posadas vs. Warner, Barnes & Co.; Posadas vs. Menzi
[1929], 278 U. S., 588.)

While the two cases above-mentioned were under consideration in the United States Supreme Court, four
new cases involving an identical question were initiated in the Court of First Instance of Manila. All of
them had to do with the receipt by four individuals of stock dividends from the Luzon Stevedoring Co.,
Inc., and with the levy on these stock dividends by the Collector of Internal Revenue of the corresponding
income tax. The decisions in the lower court naturally respected the decisions of this court, and so gave
judgments in favor of the respective plaintiffs. On appeal, the submission of the four cases was suspended,
awaiting the pronoucements of the United States Supreme Court in the Warner, Barners & Co., and Menzi
cases. The higher court having spoken in those cases, the instant case and its companion cases are ready
for decision.

Plainly, our first duty is to determine if the decisions of the Supreme Court of the United States in the
Warner, Barnes & Co. and Menzi cases are conclusive of the case at bar.

In the Warner, Barnes & Co. case, the higher court had to deal with a corporation which was subject to a
flat tax rate under the Income Tax Law. It was definitely held (1) that the provision of the Philippine statute
was "substantially like that . . . which was held invalid in Eisner vs. Macomber;" (2) that the decision in
Eisner vs. Macomber was not controlling; (3) that, as to corporations, "the rule of uniformity was not
transgressed;" (4) that the title of the Philippine Income Tax Law was sufficient; and (5) that, although a
stock dividend is a "form of property," nevertheless the Philippine Legislature may lay a tax upon the
advantage resulting to recipients from the allotment of stock dividends. The court, through Justice Butler,
in part, said:

The petitioner admits that, strictly speaking, a stock divident is not income. But he insists, and respondent
concedes, that, in the absence of constitutional restriction, such dividends may be taxed. And the parties
agree that the tax in question is within the scope and intent of the statute.

xxx xxx xxx

Fisher vs. Trinidad merely decided that "stock dividends" are not taxable as "income" under the act.
Petitioner does not combat that view or claim that such distributions do constitute income. The Philippine
Legislature has power to lay a tax in respect of the advantage resulting to recipients from the allotment
and delivery of such dividend shares. (Swan Brewing Co. vs. Rex [1914], A. C., 231--P.C.) Respondent rightly
concedes that, there being no constitutional restriction, such dividends may be taxed and that the statute
discloses a purpose to tax them. The decision of this court in Eisner vs. Macomber rested on constitutional
provisions not applicable to the Philippine Islands.

In the Menzi case, the court had before it an individual who had received a dividend in stock. This court
had held that, as stock dividends do not constitute income, the tax is on property and that therefore the
specified graduated rates violate the rule of uniformity. The higher court dismissed the point with this
observation: "But the record does not disclose the rate at which the tax was assessed or show any facts
to support the suggestion that the required equality was lacking. In other respects, this case is the same
as No.251."

The decision in Eisner vs. Macomber, supra, and the decision in Warner, Barnes & Co. vs. Posadas, supra,
contain sign posts consisting of references to other decisions which clearly point the way. Swan Brewing
Co. vs. Rex ([1914], A.C., 231) is mentioned in both cases. This was a case which arose in Australia and
subsequently came before the Privy Council, which held that a stock dividend representing accumulated
profits was taxable like an ordinary cash dividend. The United States Supreme Court refers to the English
case in Eisner vs. Macomber by saying "There being no constitutional restriction upon the action of the
law making body, the case presented merely a question of statutory construction." In the Warner, Barnes
& Co., decision the case of Swan Brewing Co. vs. Rex, supra, is cited in support of the statement that the
Philippine Legislature possesses power to tax stock dividends.

Another case, which was discussed in Eisner vs. Macomber, supra, was that of Tax Commissioner vs.
Putnam ([1917], 227 mass., 522), in which the Supreme Court of Massachusetts held that a stock dividend
was taxable as income. Discussing this case, the United States Supreme Court stated: "The Massachusetts
court was not under an obligation, like the one which binds us, of applying a constitutional amendment
in the light of other constitutional provisions that stand in the way of extending it by construction."

In Massachusetts, it may be parenthetically, it was subsequently necessary for the legislative body to
declare that stock dividends are exempted from the income tax in order to surmount the obstacle raised
by the decision of the State Court. (See Lanning vs. Trefry [1924], 142 N. E., 829.) New York had the same
experience for after the Supreme Court had held stock dividends to be taxable under the local law,
pending consideration by the Court of Appeals, the New York Legislature amended the law by providing
that stock dividends when received by a shareholder shall not be subject to tax. (See People vs. Gilchrist
[1925], 211 N.Y.S.,679; People vs. Gilchrist [1926], 243 N. Y., 173; Equitable Trust Co. vs. Prentice [1928],
250 N.T., 1.)

It cannot be gainsaid that the Philippine Islands in its tax status is closely akin to the status of Australia
and of a state in the American Union. Proceeding within the confines of express and general authority,
the Philippine Legislature deemed it wise to classify stock dividends as income. Except for the alleged
breach of the uniformity rule, merely a question of statutory construction is accordingly involved. Such
question of statutory construction disappears, however, since the Philippine Legislature has as plainly and
unquivocally envinced the purpose to tax stock dividends as language is able to express itself.
What has been said by the United States Supreme Court would appear to relieve us from all necessity of
discussing appellee's first proposition, that stock dividends are property and not income, and hence that
the tax here in question is a property and not an income tax. Whatever the true quality of stock dividends
may be, the local Legislature has made its own definition of income, and has included in that definition
stock dividends. The Legislature had that right. It is the sole judge of the propriety of taxation and of the
subjects of taxation. The legislative classification should be respected. For the purposes of the law, there
is no sound basis for distinguishing stock dividends from cash dividends. (Note Opinion of the Justices
[1915], 77 N.H., 611; Glasgow vs. Towse [1869], 43 Mo. 479.)

As to appellee's second proposition, it is hardly incumbent upon the court to conisder seriously the
arguments centering on the want of uniformity of the Income Tax Law as affecting stock dividends, in view
of the attitude taken by the United States Supreme Court in the Warner, Barnes & Co. and Menzi cases.
Indeed the challenge goes further than stock dividends for it impugns the whole scheme of graduated
taxes on incomes. But the United States Supreme Court has held the 1913 statute constitutional,
overruling, among other things, objections to its constitutionality because the rate of the tax was
progressive (Brushaber vs. Union Pacific Railroad Co. [1915], 240 U.S.,1). Obviously, an income tax is a tax
at an arbitrary rate. Inequalities in taxation are inevitable, but such inequalities in the operation of a tax
law will not invalidate it. In the Philippine Income Tax Law, all persons are treated alike as far as they are
similarity circumstanced. Should the graduated income tax levied on the stock dividend of an individual
be found to violate the uniformity rule, the result would be that the stock dividend would not be liable to
the tax when received by an individual, but would be when received by a corporation. Such an anomalous
distinction was never intended and cannot be sustained. Concede that a stock dividend is strictly speaking
not income, and still we fail to discern any failure in uniformity.

The decisions in the Warner, Barnes & Co. and Menzi cases govern the case at bar. The Menzi case is
exactly the Rubio case. The pleadings, the facts, and the applicable legal provisions are identical. If Menzi
was subject to the tax, Rubio and others similarly situated must likewise be subject to the tax. Like in the
Menzi case, the record does not show any facts to support the suggestion that the required equality was
lacking. We propose to enforce the law as it stands.

Judgment will be reversed and the complaint will be dismissed, without costs in either instance.

Street, Villamor, Ostrand, Johns, Romualdez and Villa-Real, JJ., concur.

Johnson, J., dissents.

Footnotes

1Both promulgated December 17, 1927, not reported.

 G.R. No. 34774 September 21, 1931

EL ORIENTE FABRICA DE TABACOS, INC., plaintiff-appellant,

vs.
JUAN POSADAS, Collector of Internal Revenue, defendant-appellee.

Gibbs and McDonough and Roman Ozaeta for appellant.

Attorney-General Jaranilla for appellee.

MALCOLM, J.:

The issue in this case is whether the proceeds of insurance taken by a corporation on the life of an
important official to indemnify it against loss in case of his death, are taxable as income under the
Philippine Income Tax Law.

The parties submitted the case to the Court of First Instance of Manila for decision upon the following
agreed statement of facts:

1. That the plaintiff is a domestic corporation duly organized and existing under and by virtue of the
laws of the Philippine Islands, having its principal office at No. 732 Calle Evangelista, Manila, P.I.; and that
the defendant is the duly appointed, qualified and acting Collector of Internal Revenue of the Philippine
Islands.

2. That on March 18, 1925, plaintiff, in order to protect itself against the loss that it might suffer by
reason of the death of its manager, A. Velhagen, who had had more than thirty-five (35) years of
experience in the manufacture of cigars in the Philippine Islands, and whose death would be a serious loss
to the plaintiff, procured from the Manufacturers Life Insurance Co., of Toronto, Canada, thru its local
agent E.E. Elser, an insurance policy on the life of the said A. Velhagen for the sum of $50,000, United
States currency.

3. That the plaintiff, El Oriente, Fabrica de Tabacos, Inc., designated itself as the sole beneficiary of
said policy on the life of its said manager.

4. That during the time the life insurance policy hereinbefore referred to was in force and effect
plaintiff paid from its funds all the insurance premiums due thereon.
5. That the plaintiff charged as expenses of its business all the said premiums and deducted the same
from its gross incomes as reported in its annual income tax returns, which deductions were allowed by
the defendant upon a showing made by the plaintiff that such premiums were legitimate expenses of its
(plaintiff's) business.

6. That the said A. Velhagen, the insured, had no interest or participation in the proceeds of said life
insurance policy.

7. That upon the death of said A. Velhagen in the year 1929, the plaintiff received all the proceeds
of the said life insurance policy, together with the interests and the dividends accruing thereon,
aggregating P104,957.88.

8. That over the protest of the plaintiff, which claimed exemption under section 4 of the Income Tax
Law, the defendant Collector of Internal Revenue assessed and levied the sum of P3,148.74 as income tax
on the proceeds of the insurance policy mentioned in the preceding paragraph, which tax the plaintiff
paid under instant protest on July 2, 1930; and that defendant overruled said protest on July 9, 1930.

Thereupon, a decision was handed down which absolved the defendant from the complaint, with costs
against the plaintiff. From this judgment, the plaintiff appealed, and its counsel now allege that:

1. That trial court erred in holding that section 4 of the Income Tax Law (Act No. 2833) is not
applicable to the present case.

2. The trial court erred in reading into the law certain exceptions and distinctions not warranted by
its clear and unequivocal provisions.

3. The trial court erred in assuming that the proceeds of the life insurance policy in question
represented a net profit to the plaintiff when, as a matter of fact, it merely represented an indemnity, for
the loss suffered by it thru the death of its manager, the insured.

4. The trial court erred in refusing to hold that the proceeds of the life insurance policy in question
is not taxable income, and in absolving the defendant from the complaint.
The Income Tax Law for the Philippines is Act No. 2833, as amended. It is divided into four chapters:
Chapter I On Individuals, Chapter II On Corporations, Chapter III General Administrative Provisions, and
Chapter IV General Provisions. In chapter I On Individuals, is to be found section 4 which provides that,
"The following incomes shall be exempt from the provisions of this law: (a) The proceeds of life insurance
policies paid to beneficiaries upon the death of the insured ... ." Section 10, as amended, in Chapter II On
Corporations, provides that, There shall be levied, assessed, collected, and paid annually upon the total
net income received in the preceding calendar year from all sources by every corporation ... a tax of three
per centum upon such income ... ." Section 11 in the same chapter, provides the exemptions under the
law, but neither here nor in any other section is reference made to the provisions of section 4 in Chapter
I.

Under the view we take of the case, it is sufficient for our purposes to direct attention to the anomalous
and vague condition of the law. It is certain that the proceeds of life insurance policies are exempt. It is
not so certain that the proceeds of life insurance policies paid to corporate beneficiaries upon the death
of the insured are likewise exempt. But at least, it may be said that the law is indefinite in phraseology
and does not permit us unequivocally to hold that the proceeds of life insurance policies received by
corporations constitute income which is taxable.

The situation will be better elucidated by a brief reference to laws on the same subject in the United
States. The Income Tax Law of 1916 extended to the Philippine Legislature, when it came to enact Act No.
2833, to copy the American statute. Subsequently, the Congress of the United States enacted its Income
Tax Law of 1919, in which certain doubtful subjects were clarified. Thus, as to the point before us, it was
made clear, when not only in the part of the law concerning individuals were exemptions provided for
beneficiaries, but also in the part concerning corporations, specific reference was made to the exemptions
in favor of individuals, thereby making the same applicable to corporations. This was authoritatively
pointed out and decided by the United States Supreme Court in the case of United States vs. Supplee-
Biddle Hardware Co. ( [1924], 265 U.S., 189), which involved facts quite similar to those before us. We do
not think the decision of the higher court in this case is necessarily controlling on account of the
divergences noted in the federal statute and the local statute, but we find in the decision certain language
of a general nature which appears to furnish the clue to the correct disposition of the instant appeal.
Conceding, therefore, without necessarily having to decide, the assignments of error Nos. 1 and 2 are not
well taken, we would turn to the third assignment of error.

It will be recalled that El Oriente, Fabrica de Tabacos, Inc., took out the insurance on the life of its manager,
who had had more than thirty-five years' experience in the manufacture of cigars in the Philippines, to
protect itself against the loss it might suffer by reason of the death of its manager. We do not believe that
this fact signifies that when the plaintiff received P104,957.88 from the insurance on the life of its
manager, it thereby realized a net profit in this amount. It is true that the Income Tax Law, in exempting
individual beneficiaries, speaks of the proceeds of life insurance policies as income, but this is a very slight
indication of legislative intention. In reality, what the plaintiff received was in the nature of an indemnity
for the loss which it actually suffered because of the death of its manager.
To quote the exact words in the cited case of Chief Justice Taft delivering the opinion of the court:

It is earnestly pressed upon us that proceeds of life insurance paid on the death of the insured are in fact
capital, and cannot be taxed as income under the Sixteenth Amendment. Eisner vs. Macomber, 252 U.S.,
189, 207; Merchants' Loan & Trust Co. vs. Smietanka, 255 U.S., 509, 518. We are not required to meet this
question. It is enough to sustain our construction of the act to say that proceeds of a life insurance policy
paid on the death of the insured are not usually classed as income.

. . . Life insurance in such a case is like that of fire and marine insurance, — a contract of indemnity. Central
Nat. Bank vs. Hume, 128 U.S., 195. The benefit to be gained by death has no periodicity. It is a substitution
of money value for something permanently lost, either in a house, a ship, or a life. Assuming, without
deciding, that Congress could call the proceeds of such indemnity income, and validly tax it as such, we
think that, in view of the popular conception of the life insurance as resulting in a single addition of a total
sum to the resources of the beneficiary, and not in a periodical return, such a purpose on its part should
be express, as it certainly is not here.

Considering, therefore, the purport of the stipulated facts, considering the uncertainty of Philippine law,
and considering the lack of express legislative intention to tax the proceeds of life insurance policies paid
to corporate beneficiaries, particularly when in the exemption in favor of individual beneficiaries in the
chapter on this subject, the clause is inserted "exempt from the provisions of this law," we deem it
reasonable to hold the proceeds of the life insurance policy in question as representing an indemnity and
not taxable income.

The foregoing pronouncement will result in the judgment being reversed and in another judgment being
rendered in favor of the plaintiff and against the defendant for the sum of P3,148.74. So ordered, without
costs in either instance.

Avanceña, C.J., Street, Villamor, Ostrand, Romualdez, Villa-Real, and Imperial, JJ., concur.
 G.R. No. 95022 March 23, 1992

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
THE HON. COURT OF APPEALS, THE COURT OF TAX APPEALS, GCL RETIREMENT PLAN, represented by
its Trustee-Director, respondents.

MELENCIO-HERRERA, J.:

This case is said to be precedent setting. While the amount involved is insignificant, the Solicitor General
avers that there are about 85 claims of the same nature pending in the Court of Tax Appeals and Bureau
of Internal Revenue totalling approximately P120M.

Petitioner, the Commissioner of Internal Revenue, seeks a reversal of the Decision of respondent Court of
Appeals, dated August 27, 1990, in CA-G.R. SP No. 20426, entitled "Commissioner of Internal Revenue vs.
GCL Retirement Plan, represented by its Trustee-Director and the Court of Tax Appeals," which affirmed
the Decision of the latter Court, dated 15 December 1986, in Case No. 3888, ordering a refund, in the sum
of P11,302.19, to the GCL Retirement Plan representing the withholding tax on income from money
market placements and purchase of treasury bills, imposed pursuant to Presidential Decree No. 1959.

There is no dispute with respect to the facts. Private Respondent, GCL Retirement Plan (GCL, for brevity)
is an employees' trust maintained by the employer, GCL Inc., to provide retirement, pension, disability
and death benefits to its employees. The Plan as submitted was approved and qualified as exempt from
income tax by Petitioner Commissioner of Internal Revenue in accordance with Rep. Act No. 4917. 1

In 1984, Respondent GCL made investsments and earned therefrom interest income from which was
witheld the fifteen per centum (15%) final witholding tax imposed by Pres. Decree No. 1959, 2 which took
effect on 15 October 1984, to wit:

Date Kind of Investment Principal Income Earned 15% Tax

ACIC

12/05/84 Market Placement P236,515.32 P8,751.96 P1,312.66

10/22/84 — 234,632.75 9,815.89 1,472.38

11/19/84 — 225,886.51 10,629.22 1,594.38

11/23/84 — 344,448.64 17,313.33 2,597.00

12/05/84 — 324,633.81 15,077.44 2,261.52

COMBANK Treasury Bills 2,064.15

——————

P11,302.19

On 15 January 1985, Respondent GCL filed with Petitioner a claim for refund in the amounts of P1,312.66
withheld by Anscor Capital and Investment Corp., and P2,064.15 by Commercial Bank of Manila. On 12
February 1985, it filed a second claim for refund of the amount of P7,925.00 withheld by Anscor, stating
in both letters that it disagreed with the collection of the 15% final withholding tax from the interest
income as it is an entity fully exempt from income tax as provided under Rep. Act No. 4917 in relation to
Section 56 (b) 3 of the Tax Code.

The refund requested having been denied, Respondent GCL elevated the matter to respondent Court of
Tax Appeals (CTA). The latter ruled in favor of GCL, holding that employees' trusts are exempt from the
15% final withholding tax on interest income and ordering a refund of the tax withheld. Upon appeal,
originally to this Court, but referred to respondent Court of Appeals, the latter upheld the CTA Decision.
Before us now, Petitioner assails that disposition.

It appears that under Rep. Act No. 1983, which took effect on 22 June 1957, amending Sec. 56 (b) of the
National Internal Revenue Code (Tax Code, for brevity), employees' trusts were exempt from income tax.
That law provided:

Sec. 56 Imposition of tax. —(a) Application of tax. — The taxes imposed by this Title upon individuals shall
apply to the income of estates or of any kind of property held in trust, including —

xxx xxx xxx

(b) Exception. — The tax imposed by this Title shall not apply to employees' trust which forms a part
of a pension, stock bonus or profit-sharing plan of an employer for the benefit of some or all of his
employees (1) if contributions are made to trust by such employer, or employees, or both, for the purpose
of distributing to such employees the earnings and principal of the fund accumulated by the trust in
accordance with such

plan, . . .
On 3 June 1977, Pres. Decree No. 1156 provided, for the first time, for the withholding from the interest
on bank deposits at the source of a tax of fifteen per cent (15%) of said interest. However, it also allowed
a specific exemption in its Section 53, as follows:

Sec. 53. Withholding of tax at source. —

xxx xxx xxx

(c) Withholding tax on interest on bank deposits. — (1) Rate of withholding tax. — Every bank or
banking institution shall deduct and withhold from the interest on bank deposits (except interest paid or
credited to non-resident alien individuals and foreign corporations), a tax equal to fifteen per cent of the
said interest: Provided, however, That no withholding of tax shall be made if the aggregate amount of the
interest on all deposit accounts maintained by a depositor alone or together with another in any one bank
at any time during the taxable period does not exceed three hundred fifty pesos a year or eighty-seven
pesos and fifty centavos per quarter. For this purpose, interest on a deposit account maintained by two
persons shall be deemed to be equally owned by them.

(2) Treatment of bank deposit interest. — The interest income shall be included in the gross income
in computing the depositor's income tax liability in according with existing law.

(3) Depositors enjoying tax exemption privileges or preferential tax treatment. — In all cases where
the depositor is tax-exempt or is enjoying preferential income tax treatment under existing laws, the
withholding tax imposed in this paragraph shall be refunded or credited as the case may be upon
submission to the Commissioner of Internal Revenue of proof that the said depositor is a tax-exempt
entity or enjoys a preferential income tax treatment.

xxx xxx xxx

This exemption and preferential tax treatment were carried over in Pres. Decree No. 1739, effective on
17 September 1980, which law also subjected interest from bank deposits and yield from deposit
substitutes to a final tax of twenty per cent (20%). The pertinent provisions read:

Sec. 2. Section 21 of the same Code is hereby amended by adding a new paragraph to read as follows:
Sec. 21. Rates of tax on citizens or residents. —

xxx xxx xxx

Interest from Philippine Currency bank deposits and yield from deposit substitutes whether received by
citizens of the Philippines or by resident alien individuals, shall be subject to the final tax as follows: (a)
15% of the interest on savings deposits, and (b) 20% of the interest on time deposits and yield from deposit
substitutes, which shall be collected and paid as provided in Sections 53 and 54 of this Code. Provided,
That no tax shall be imposed if the aggregate amount of the interest on all Philippine Currency deposit
accounts maintained by a depositor alone or together with another in any one bank at any time during
the taxable period does not exceed Eight Hundred Pesos (P800.00) a year or Two Hundred Pesos (P200.00)
per quarter. Provided, further, That if the recipient of such interest is exempt from income taxation, no
tax shall be imposed and that, if the recipient is enjoying preferential income tax treatment, then the
preferential tax rates so provided shall be imposed (Emphasis supplied).

Sec. 3. Section 24 of the same Code is hereby amended by adding a new subsection (cc) between
subsections (c) and (d) to read as follows:

(cc) Rates of tax on interest from deposits and yield from deposit substitutes. — Interest on Philippine
Currency bank deposits and yield from deposit substitutes received by domestic or resident foreign
corporations shall be subject to a final tax on the total amount thereof as follows: (a) 15% of the interest
on savings deposits; and (b) 20% of the interest on time deposits and yield from deposit substitutes which
shall be collected and paid as provided in Sections 53 and 54 of this Code. Provided, That if the recipient
of such interest is exempt from income taxation, no tax shall be imposed and that, if the recipient is
enjoying preferential income tax treatment, then the preferential tax rates so provided shall be imposed
(Emphasis supplied).

Sec. 9. Section 53(e) of the same Code is hereby amended to read as follows:

Se. 53(e) Withholding of final tax on interest on bank deposits and yield from deposit substitutes.
—

(1) Withholding of final tax. — Every bank or non-bank financial intermediary shall deduct and
withhold from the interest on bank deposits or yield from deposit substitutes a final tax equal to fifteen
(15%) per cent of the interest on savings deposits and twenty (20%) per cent of the interest on time
deposits or yield from deposit substitutes: Provided, however, That no withholding tax shall be made if
the aggregate amount of the interest on all deposit accounts maintained by a depositor alone or together
with another in any one bank at any time during the taxable period does not exceed Eight Hundred Pesos
a year or Two Hundred Pesos per quarter. For this purpose, interest on a deposit account maintained by
two persons shall be deemed to be equally owned by them.

(2) Depositors or placers/investors enjoying tax exemption privileges or preferential tax treatment.
— In all cases where the depositor or placer/investor is tax exempt or is enjoying preferential income tax
treatment under existing laws, the withholding tax imposed in this paragraph shall be refunded or credited
as the case may be upon submission to the Commissioner of Internal Revenue of proof that the said
depositor, or placer/investor is a tax exempt entity or enjoys a preferential income tax treatment.

Subsequently, however, on 15 October 1984, Pres. Decree No. 1959 was issued, amending the aforestated
provisions to read:

Sec. 2. Section 21(d) of this Code, as amended, is hereby further amended to read as follows:

(d) On interest from bank deposits and yield or any other monetary benefit from deposit substitutes
and from trust fund and similar arrangements. — Interest from Philippine Currency Bank deposits and
yield or any other monetary benefit from deposit substitutes and from trust fund and similar
arrangements whether received by citizens of the Philippines, or by resident alien individuals, shall be
subject to a 15% final tax to be collected and paid as provided in Sections 53 and 54 of this Code.

Sec. 3. Section 24(cc) of this Code, as amended, is hereby further amended to read as follows:

(cc) Rates of tax on interest from deposits and yield or any other monetary benefit from deposit
substitutes and from trust fund and similar arrangements. — Interest on Philippine Currency Bank
deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and similar
arrangements received by domestic or resident foreign corporations shall be subject to a 15% final tax to
be collected and paid as provided in Section 53 and 54 of this Code.

Sec. 4. Section 53 (d) (1) of this code is hereby amended to read as follows:

Sec. 53 (d) (1). Withholding of Final Tax. — Every bank or non-bank financial intermediary or commercial.
industrial, finance companies, and other non-financial companies authorized by the Securities and
Exchange Commission to issue deposit substitutes shall deduct and withhold from the interest on bank
deposits or yield or any other monetary benefit from deposit substitutes a final tax equal to fifteen per
centum (15%) of the interest on deposits or yield or any other monetary benefit from deposit substitutes
and from trust fund and similar arrangements.

It is to be noted that the exemption from withholding tax on interest on bank deposits previously extended
by Pres. Decree No. 1739 if the recipient (individual or corporation) of the interest income is exempt from
income taxation, and the imposition of the preferential tax rates if the recipient of the income is enjoying
preferential income tax treatment, were both abolished by Pres. Decree No. 1959. Petitioner thus submits
that the deletion of the exempting and preferential tax treatment provisions under the old law is a clear
manifestation that the single 15% (now 20%) rate is impossible on all interest incomes from deposits,
deposit substitutes, trust funds and similar arrangements, regardless of the tax status or character of the
recipients thereof. In short, petitioner's position is that from 15 October 1984 when Pres. Decree No. 1959
was promulgated, employees' trusts ceased to be exempt and thereafter became subject to the final
withholding tax.

Upon the other hand, GCL contends that the tax exempt status of the employees' trusts applies to all kinds
of taxes, including the final withholding tax on interest income. That exemption, according to GCL, is
derived from Section 56(b) and not from Section 21 (d) or 24 (cc) of the Tax Code, as argued by Petitioner.

The sole issue for determination is whether or not the GCL Plan is exempt from the final withholding tax
on interest income from money placements and purchase of treasury bills required by Pres. Decree No.
1959.

We uphold the exemption.

To begin with, it is significant to note that the GCL Plan was qualified as exempt from income tax by the
Commissioner of Internal Revenue in accordance with Rep. Act No. 4917 approved on 17 June 1967. This
law specifically provided:

Sec. 1. Any provision of law to the contrary notwithstanding, the retirement benefits received by officials
and employees of private firms, whether individual or corporate, in accordance with a reasonable private
benefit plan maintained by the employer shall be exempt from all taxes and shall not be liable to
attachment, levy or seizure by or under any legal or equitable process whatsoever except to pay a debt of
the official or employee concerned to the private benefit plan or that arising from liability imposed in a
criminal action; . . . (emphasis ours).
In so far as employees' trusts are concerned, the foregoing provision should be taken in relation to then
Section 56(b) (now 53[b]) of the Tax Code, as amended by Rep. Act No. 1983, supra, which took effect on
22 June 1957. This provision specifically exempted employee's trusts from income tax and is repeated
hereunder for emphasis:

Sec. 56. Imposition of Tax. — (a) Application of tax. — The taxes imposed by this Title upon individuals
shall apply to the income of estates or of any kind of property held in trust.

xxx xxx xxx

(b) Exception. — The tax imposed by this Title shall not apply to employee's trust which forms part
of a pension, stock bonus or profit-sharing plan of an employer for the benefit of some or all of his

employees . . .

The tax-exemption privilege of employees' trusts, as distinguished from any other kind of property held
in trust, springs from the foregoing provision. It is unambiguous. Manifest therefrom is that the tax law
has singled out employees' trusts for tax exemption.

And rightly so, by virtue of the raison de'etre behind the creation of employees' trusts. Employees' trusts
or benefit plans normally provide economic assistance to employees upon the occurrence of certain
contingencies, particularly, old age retirement, death, sickness, or disability. It provides security against
certain hazards to which members of the Plan may be exposed. It is an independent and additional source
of protection for the working group. What is more, it is established for their exclusive benefit and for no
other purpose.

The tax advantage in Rep. Act No. 1983, Section 56(b), was conceived in order to encourage the formation
and establishment of such private Plans for the benefit of laborers and employees outside of the Social
Security Act. Enlightening is a portion of the explanatory note to H.B. No. 6503, now R.A. 1983, reading:

Considering that under Section 17 of the social Security Act, all contributions collected and payments of
sickness, unemployment, retirement, disability and death benefits made thereunder together with the
income of the pension trust are exempt from any tax, assessment, fee, or charge, it is proposed that a
similar system providing for retirement, etc. benefits for employees outside the Social Security Act be
exempted from income taxes. (Congressional Record, House of Representatives, Vol. IV, Part. 2, No. 57,
p. 1859, May 3, 1957; cited in Commissioner of Internal Revenue v. Visayan Electric Co., et al., G.R. No. L-
22611, 27 May 1968, 23 SCRA 715); emphasis supplied.
It is evident that tax-exemption is likewise to be enjoyed by the income of the pension trust. Otherwise,
taxation of those earnings would result in a diminution accumulated income and reduce whatever the
trust beneficiaries would receive out of the trust fund. This would run afoul of the very intendment of the
law.

The deletion in Pres. Decree No. 1959 of the provisos regarding tax exemption and preferential tax rates
under the old law, therefore, can not be deemed to extent to employees' trusts. Said Decree, being a
general law, can not repeal by implication a specific provision, Section 56(b) now 53 [b]) in relation to Rep.
Act No. 4917 granting exemption from income tax to employees' trusts. Rep. Act 1983, which excepted
employees' trusts in its Section 56 (b) was effective on 22 June 1957 while Rep. Act No. 4917 was enacted
on 17 June 1967, long before the issuance of Pres. Decree No. 1959 on 15 October 1984. A subsequent
statute, general in character as to its terms and application, is not to be construed as repealing a special
or specific enactment, unless the legislative purpose to do so is manifested. This is so even if the provisions
of the latter are sufficiently comprehensive to include what was set forth in the special act (Villegas v.
Subido, G.R. No. L-31711, 30 September 1971, 41 SCRA 190).

Notably, too, all the tax provisions herein treated of come under Title II of the Tax Code on "Income Tax."
Section 21 (d), as amended by Rep. Act No. 1959, refers to the final tax on individuals and falls under
Chapter II; Section 24 (cc) to the final tax on corporations under Chapter III; Section 53 on withholding of
final tax to Returns and Payment of Tax under Chapter VI; and Section 56 (b) to tax on Estates and Trusts
covered by Chapter VII, Section 56 (b), taken in conjunction with Section 56 (a), supra, explicitly excepts
employees' trusts from "the taxes imposed by this Title." Since the final tax and the withholding thereof
are embraced within the title on "Income Tax," it follows that said trust must be deemed exempt
therefrom. Otherwise, the exception becomes meaningless.

There can be no denying either that the final withholding tax is collected from income in respect of which
employees' trusts are declared exempt (Sec. 56 [b], now 53 [b], Tax Code). The application of the
withholdings system to interest on bank deposits or yield from deposit substitutes is essentially to
maximize and expedite the collection of income taxes by requiring its payment at the source. If an
employees' trust like the GCL enjoys a tax-exempt status from income, we see no logic in withholding a
certain percentage of that income which it is not supposed to pay in the first place.

Petitioner also relies on Revenue Memorandum Circular 31-84, dated 30 October 1984, and Bureau of
Internal Revenue Ruling No. 027-e-000-00-005-85, dated 14 January 1985, as authorities for the argument
that Pres. Decree No. 1959 withdrew the exemption of employees' trusts from the withholding of the final
tax on interest income. Said Circular and Ruling pronounced that the deletion of the exempting and
preferential tax treatment provisions by Pres. Decree No. 1959 is a clear manifestation that the single 15%
tax rate is imposable on all interest income regardless of the tax status or character of the recipient
thereof. But since we herein rule that Pres. Decree No. 1959 did not have the effect of revoking the tax
exemption enjoyed by employees' trusts, reliance on those authorities is now misplaced.

WHEREFORE, the Writ of Certiorari prayed for is DENIED. The judgment of respondent Court of Appeals,
affirming that of the Court of Tax Appeals is UPHELD. No costs.

SO ORDERED.

Narvasa, C.J., Gutierrez, Jr., Cruz, Paras, Feliciano, Padilla, Bidin, Griño-Aquino, Medialdea, Regalado,
Davide, Jr., Romero and Nocon, JJ., concur.

Footnotes

1 An Act Providing that Retirement Benefits of Employees of Private Firms shall not be subject to
Attachment, Levy, Execution, or any Tax whatsoever, promulgated June 17, 1967.

2 Entitled "Amending Certain Sections of the National Internal Revenue Code, as amended."

3 Now Section 53 (b).

 G.R. No. L-25532 February 28, 1969

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
WILLIAM J. SUTER and THE COURT OF TAX APPEALS, respondents.

Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete and
Special Attorneys B. Gatdula, Jr. and T. Temprosa Jr. for petitioner.

A. S. Monzon, Gutierrez, Farrales and Ong for respondents.

REYES, J.B.L., J.:

A limited partnership, named "William J. Suter 'Morcoin' Co., Ltd.," was formed on 30 September 1947 by
herein respondent William J. Suter as the general partner, and Julia Spirig and Gustav Carlson, as the
limited partners. The partners contributed, respectively, P20,000.00, P18,000.00 and P2,000.00 to the
partnership. On 1 October 1947, the limited partnership was registered with the Securities and Exchange
Commission. The firm engaged, among other activities, in the importation, marketing, distribution and
operation of automatic phonographs, radios, television sets and amusement machines, their parts and
accessories. It had an office and held itself out as a limited partnership, handling and carrying
merchandise, using invoices, bills and letterheads bearing its trade-name, maintaining its own books of
accounts and bank accounts, and had a quota allocation with the Central Bank.

In 1948, however, general partner Suter and limited partner Spirig got married and, thereafter, on 18
December 1948, limited partner Carlson sold his share in the partnership to Suter and his wife. The sale
was duly recorded with the Securities and Exchange Commission on 20 December 1948.

The limited partnership had been filing its income tax returns as a corporation, without objection by the
herein petitioner, Commissioner of Internal Revenue, until in 1959 when the latter, in an assessment,
consolidated the income of the firm and the individual incomes of the partners-spouses Suter and Spirig
resulting in a determination of a deficiency income tax against respondent Suter in the amount of
P2,678.06 for 1954 and P4,567.00 for 1955.

Respondent Suter protested the assessment, and requested its cancellation and withdrawal, as not in
accordance with law, but his request was denied. Unable to secure a reconsideration, he appealed to the
Court of Tax Appeals, which court, after trial, rendered a decision, on 11 November 1965, reversing that
of the Commissioner of Internal Revenue.
The present case is a petition for review, filed by the Commissioner of Internal Revenue, of the tax court's
aforesaid decision. It raises these issues:

(a) Whether or not the corporate personality of the William J. Suter "Morcoin" Co., Ltd. should be
disregarded for income tax purposes, considering that respondent William J. Suter and his wife, Julia Spirig
Suter actually formed a single taxable unit; and

(b) Whether or not the partnership was dissolved after the marriage of the partners, respondent William
J. Suter and Julia Spirig Suter and the subsequent sale to them by the remaining partner, Gustav Carlson,
of his participation of P2,000.00 in the partnership for a nominal amount of P1.00.

The theory of the petitioner, Commissioner of Internal Revenue, is that the marriage of Suter and Spirig
and their subsequent acquisition of the interests of remaining partner Carlson in the partnership dissolved
the limited partnership, and if they did not, the fiction of juridical personality of the partnership should
be disregarded for income tax purposes because the spouses have exclusive ownership and control of the
business; consequently the income tax return of respondent Suter for the years in question should have
included his and his wife's individual incomes and that of the limited partnership, in accordance with
Section 45 (d) of the National Internal Revenue Code, which provides as follows:

(d) Husband and wife. — In the case of married persons, whether citizens, residents or non-residents, only
one consolidated return for the taxable year shall be filed by either spouse to cover the income of both
spouses; ....

In refutation of the foregoing, respondent Suter maintains, as the Court of Tax Appeals held, that his
marriage with limited partner Spirig and their acquisition of Carlson's interests in the partnership in 1948
is not a ground for dissolution of the partnership, either in the Code of Commerce or in the New Civil
Code, and that since its juridical personality had not been affected and since, as a limited partnership, as
contra distinguished from a duly registered general partnership, it is taxable on its income similarly with
corporations, Suter was not bound to include in his individual return the income of the limited partnership.

We find the Commissioner's appeal unmeritorious.

The thesis that the limited partnership, William J. Suter "Morcoin" Co., Ltd., has been dissolved by
operation of law because of the marriage of the only general partner, William J. Suter to the originally
limited partner, Julia Spirig one year after the partnership was organized is rested by the appellant upon
the opinion of now Senator Tolentino in Commentaries and Jurisprudence on Commercial Laws of the
Philippines, Vol. 1, 4th Ed., page 58, that reads as follows:

A husband and a wife may not enter into a contract of general copartnership, because under the Civil
Code, which applies in the absence of express provision in the Code of Commerce, persons prohibited
from making donations to each other are prohibited from entering into universal partnerships. (2
Echaverri 196) It follows that the marriage of partners necessarily brings about the dissolution of a pre-
existing partnership. (1 Guy de Montella 58)

The petitioner-appellant has evidently failed to observe the fact that William J. Suter "Morcoin" Co., Ltd.
was not a universal partnership, but a particular one. As appears from Articles 1674 and 1675 of the
Spanish Civil Code, of 1889 (which was the law in force when the subject firm was organized in 1947), a
universal partnership requires either that the object of the association be all the present property of the
partners, as contributed by them to the common fund, or else "all that the partners may acquire by their
industry or work during the existence of the partnership". William J. Suter "Morcoin" Co., Ltd. was not
such a universal partnership, since the contributions of the partners were fixed sums of money,
P20,000.00 by William Suter and P18,000.00 by Julia Spirig and neither one of them was an industrial
partner. It follows that William J. Suter "Morcoin" Co., Ltd. was not a partnership that spouses were
forbidden to enter by Article 1677 of the Civil Code of 1889.

The former Chief Justice of the Spanish Supreme Court, D. Jose Casan, in his Derecho Civil, 7th Edition,
1952, Volume 4, page 546, footnote 1, says with regard to the prohibition contained in the aforesaid
Article 1677:

Los conyuges, segun esto, no pueden celebrar entre si el contrato de sociedad universal, pero o podran
constituir sociedad particular? Aunque el punto ha sido muy debatido, nos inclinamos a la tesis permisiva
de los contratos de sociedad particular entre esposos, ya que ningun precepto de nuestro Codigo los
prohibe, y hay que estar a la norma general segun la que toda persona es capaz para contratar mientras
no sea declarado incapaz por la ley. La jurisprudencia de la Direccion de los Registros fue favorable a esta
misma tesis en su resolution de 3 de febrero de 1936, mas parece cambiar de rumbo en la de 9 de marzo
de 1943.

Nor could the subsequent marriage of the partners operate to dissolve it, such marriage not being one of
the causes provided for that purpose either by the Spanish Civil Code or the Code of Commerce.

The appellant's view, that by the marriage of both partners the company became a single proprietorship,
is equally erroneous. The capital contributions of partners William J. Suter and Julia Spirig were separately
owned and contributed by them before their marriage; and after they were joined in wedlock, such
contributions remained their respective separate property under the Spanish Civil Code (Article 1396):

The following shall be the exclusive property of each spouse:

(a) That which is brought to the marriage as his or her own; ....

Thus, the individual interest of each consort in William J. Suter "Morcoin" Co., Ltd. did not become
common property of both after their marriage in 1948.

It being a basic tenet of the Spanish and Philippine law that the partnership has a juridical personality of
its own, distinct and separate from that of its partners (unlike American and English law that does not
recognize such separate juridical personality), the bypassing of the existence of the limited partnership as
a taxpayer can only be done by ignoring or disregarding clear statutory mandates and basic principles of
our law. The limited partnership's separate individuality makes it impossible to equate its income with
that of the component members. True, section 24 of the Internal Revenue Code merges registered general
co-partnerships (compañias colectivas) with the personality of the individual partners for income tax
purposes. But this rule is exceptional in its disregard of a cardinal tenet of our partnership laws, and can
not be extended by mere implication to limited partnerships.

The rulings cited by the petitioner (Collector of Internal Revenue vs. University of the Visayas, L-13554,
Resolution of 30 October 1964, and Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 504) as authority for disregarding
the fiction of legal personality of the corporations involved therein are not applicable to the present case.
In the cited cases, the corporations were already subject to tax when the fiction of their corporate
personality was pierced; in the present case, to do so would exempt the limited partnership from income
taxation but would throw the tax burden upon the partners-spouses in their individual capacities. The
corporations, in the cases cited, merely served as business conduits or alter egos of the stockholders, a
factor that justified a disregard of their corporate personalities for tax purposes. This is not true in the
present case. Here, the limited partnership is not a mere business conduit of the partner-spouses; it was
organized for legitimate business purposes; it conducted its own dealings with its customers prior to
appellee's marriage, and had been filing its own income tax returns as such independent entity. The
change in its membership, brought about by the marriage of the partners and their subsequent acquisition
of all interest therein, is no ground for withdrawing the partnership from the coverage of Section 24 of
the tax code, requiring it to pay income tax. As far as the records show, the partners did not enter into
matrimony and thereafter buy the interests of the remaining partner with the premeditated scheme or
design to use the partnership as a business conduit to dodge the tax laws. Regularity, not otherwise, is
presumed.
As the limited partnership under consideration is taxable on its income, to require that income to be
included in the individual tax return of respondent Suter is to overstretch the letter and intent of the law.
In fact, it would even conflict with what it specifically provides in its Section 24: for the appellant
Commissioner's stand results in equal treatment, tax wise, of a general copartnership (compañia
colectiva) and a limited partnership, when the code plainly differentiates the two. Thus, the code taxes
the latter on its income, but not the former, because it is in the case of compañias colectivas that the
members, and not the firm, are taxable in their individual capacities for any dividend or share of the profit
derived from the duly registered general partnership (Section 26, N.I.R.C.; Arañas, Anno. & Juris. on the
N.I.R.C., As Amended, Vol. 1, pp. 88-89).lawphi1.nêt

But it is argued that the income of the limited partnership is actually or constructively the income of the
spouses and forms part of the conjugal partnership of gains. This is not wholly correct. As pointed out in
Agapito vs. Molo 50 Phil. 779, and People's Bank vs. Register of Deeds of Manila, 60 Phil. 167, the fruits of
the wife's parapherna become conjugal only when no longer needed to defray the expenses for the
administration and preservation of the paraphernal capital of the wife. Then again, the appellant's
argument erroneously confines itself to the question of the legal personality of the limited partnership,
which is not essential to the income taxability of the partnership since the law taxes the income of even
joint accounts that have no personality of their own. 1 Appellant is, likewise, mistaken in that it assumes
that the conjugal partnership of gains is a taxable unit, which it is not. What is taxable is the "income of
both spouses" (Section 45 [d] in their individual capacities. Though the amount of income (income of the
conjugal partnership vis-a-vis the joint income of husband and wife) may be the same for a given taxable
year, their consequences would be different, as their contributions in the business partnership are not
the same.

The difference in tax rates between the income of the limited partnership being consolidated with, and
when split from the income of the spouses, is not a justification for requiring consolidation; the revenue
code, as it presently stands, does not authorize it, and even bars it by requiring the limited partnership to
pay tax on its own income.

FOR THE FOREGOING REASONS, the decision under review is hereby affirmed. No costs.

Concepcion, C.J., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Fernando, Capistrano and Teehankee, JJ.,
concur.

Barredo, J., took no part.

Footnotes

1V. Evangelists vs. Collector of Internal Revenue, 102 Phil 140; Collector vs. Batangas Transportation Co.,
102 Phil. 822.
 G.R. No. 96322 December 20, 1991

ACCRA INVESTMENTS CORPORATION, petitioner,

vs.
THE HONORABLE COURT OF APPEALS, COMMISSIONER OF INTERNAL REVENUE and THE COURT OF
TAX APPEALS, respondents.

Angara, Abello, Concepcion, Regala & Cruz for petitioner.

GUTIERREZ, JR., J.:p

This petition for review on certiorari presents the issue of whether or not the petitioner corporation is
barred from recovering the amount of P82,751.91 representing overpaid taxes for the taxable year 1981.

The petitioner corporation is a domestic corporation engaged in the business of real estate investment
and management consultancy.

On April 15, 1982, the petitioner corporation filed with the Bureau of Internal Revenue its annual
corporate income tax return for the calendar year ending December 31, 1981 reporting a net loss of
P2,957,142.00 (Exhibits "B", "B-1" to "B-10"). In the said return, the petitioner corporation declared as
creditable all taxes withheld at source by various withholding agents, as follows:

Withholding Agent Amount Withheld

a) Malayan Insurance Co., Inc. P1,429.97

(Exh. "C")

b) Angara Concepcion Regala

& Cruz Law Offices P73,588.00

(Exh. "D")
c) MJ Development Corp. P 1,155.00 (Exh. "E")

d) Philippine Global Communications,

Inc. (Exh. "F") 6,578.94

TOTAL P82,751.91

(CTA Decision, p. 4; Records, p. 10)

The withholding agents aforestated paid and remitted the above amounts representing taxes on rental,
commission and consultancy income of the petitioner corporation to the Bureau of Internal Revenue from
February to December 1981.

In a letter dated December 29, 1983 addressed to the respondent Commissioner of Internal Revenue (Exh.
"G"), the petitioner corporation filed a claim for refund inasmuch as it had no tax liability against which to
credit the amounts withheld.

Pending action of the respondent Commissioner on its claim for refund, the petitioner corporation, on
April 13, 1984, filed a petition for review with the respondent Court of Tax Appeals (CTA) asking for the
refund of the amounts withheld as overpaid income taxes.

On January 27, 1988, the respondent CTA dismissed the petition for review after a finding that the two-
year period within which the petitioner corporation's claim for refund should have been filed had already
prescribed pursuant to Section 292 of the National Internal Revenue Code of 1977, as amended.

Acting on the petitioner corporation's motion for reconsideration, the respondent CTA in its resolution
dated September 27, 1988 denied the same for having been filed out of time. It ruled that the reckoning
date for purposes of counting the two-year prescriptive period within which the petitioner corporation
could file a claim for refund was December 31, 1981 when the taxes withheld at source were paid and
remitted to the Bureau of Internal Revenue by its withholding agents, not April 15, 1982, the date when
the petitioner corporation filed its final adjustment return.
On January 14, 1989, the petitioner corporation filed with us its petition for review which we referred to
the respondent appellate court in our resolution dated February 15, 1990 for proper determination and
disposition.

On May 28, 1990, the respondent appellate court affirmed the decision of the respondent CTA opining
that the two-year prescriptive period in question commences "from the date of payment of the tax" as
provided under Section 292 of the Tax Code of 1977 (now Sec. 230 of the National Internal Revenue Code
of 1986), i.e., "from the end of the tax year when a taxpayer is deemed to have paid all taxes withheld at
source", and not "from the date of the filing of the income tax return" as posited by the petitioner
corporation (CA Decision, pp. 3-5; Rollo, pp. 27-29).

Its motion for reconsideration with the respondent appellate court having been denied in a resolution
dated November 20, 1990, the petitioner corporation (ACCRAIN) elevated this case to us presenting as
main arguments, to wit:

ACCRAIN'S JUDICIAL ACTION FOR RECOVERY OF CREDITABLE TAXES ERRONEOUSLY WITHHELD AT SOURCE
WAS FILED ON TIME.

II

THE RECKONING DATE FOR THE COMMENCEMENT OF THE TWO-YEAR PRESCRIPTIVE PERIOD IS 15 APRIL
1982. ACCORDINGLY, THE 13 APRIL 1984 ACTION OFACCRAIN FOR THE RECOVERY OF TAXES
ERRONEOUSLY WITHHELD AT SOURCE IN 1981 IS NOT BARRED AND ACCRAIN IS ENTITLED TO THE REFUND
OF P82,751.91 OF SUCH TAXES. (Rollo, p. 116)

We find merit in the petitioner corporation's postures.

Crucial in our resolution of the instant case is the interpretation of the phraseology "from the date of
payment of the tax" in the context of Section 230 (formerly sec. 292) of the National Internal Revenue
Code of 1986, as amended, which provides that:
Sec. 230. Recovery of tax erroneously or illegally collected. — No suit or proceeding shall be maintained
in any court for the recovery of any national internal revenue tax hereafter alleged to have been
erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without
authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a
claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be
maintained, whether or not such tax, penalty or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall begin after the expiration of two years from the date of
payment of the tax or penalty regardless of any supervening cause that may arise after payment: Provided,
however, that the Commissioner may, even without a written claim therefor, refund or credit any tax,
where on the face of the return upon which payment was made, such payment appears to have been
erroneously paid. (Emphasis supplied)

The respondent appellate court citing the case of Gibbs v. Commissioner of Internal Revenue (155 SCRA
318 [1965]), construed the phrase "from the date of payment" as to be reckoned from "the end of the tax
year" when the petitioner corporation was deemed to have paid its tax liabilities in question under the
withholding tax system. (CA Decision, pp. 4-5; Rollo, pp. 28-29)

The respondent appellate court in this case has misapplied jurisprudential law. In the Gibbs case, supra,
cited by the Court of Appeals, we have clearly stated that:

Payment is a mode of extinguishing obligations (Art. 1231, Civil Code) and it means not only the delivery
of money but also the performance, in any other manner, of an obligation (id., Art. 1231). A taxpayer,
resident or non-resident, does so not really to deposit an amount to the Commissioner of Internal
Revenue, but, in truth, to perform and extinguish his tax obligation for the year concerned. In other words,
he is paying his tax liabilities for that year. Consequently, a taxpayer whose income is withheld at source
will be deemed to have paid his tax liability end of the tax year. It is from twhen the same falls due at the
his latter date then, or when thtwo-year prescriptive period under Section 306 (now pae tax liability falls
due, that the rt of Section 230) of the Revenue Code starts to run with respect to payments effected
through the withholding tax system. ... (At p. 325; Emphasis supplied)

The aforequoted ruling presents two alternative reckoning dates, i.e., (1) the end of the tax year; and (2)
when the tax liability falls due. In the instant case, it is undisputed that the petitioner corporation's
withholding agents had paid the corresponding taxes withheld at source to the Bureau of Internal Revenue
from February to December 1981. In having applied the first alternative date - "the end of the tax year"
in order to determine whether or not the petitioner corporation's claim for refund had been seasonably
filed, the respondent appellate court failed to appreciate properly the attending circumstances of this
case.
The petitioner corporation is not claiming a refund of overpaid withholding taxes, per se. It is asking for
the recovery of the sum of P82,751.91.00, the refundable or creditable amount determined upon the
petitioner corporation's filing of the its final adjustment tax return on or before 15 April 1982 when its tax
liability for the year 1981 fell due. The distinction is essential in the resolution of this case for it spells the
difference between being barred by prescription and entitlement to a refund.

Under Section 49 of the National Internal Revenue Code of 1986, as amended, it is explicitly provided that:

Sec. 49. Payment and assessment of income tax for individuals and corporations.

(a) Payment of tax — (1) In general. —- The total amount of tax imposed by this Title shall be paid by
the person subject thereto at the time the return is filed. ...

Section 70, subparagraph (b) of the same Code states when the income tax return with respect to
taxpayers like the petitioner corporation must be filed. Thus:

Sec. 70 (b) Time of filing the income return - The corporate quarterly declaration shall be filed within sixty
(60) days following the close of each of the first three quarters of the taxable year. The final adjustment
return shall be filed on or before the 15th day of the 4th month following the close of the fiscal year, as
the case may be. The petitioner corporation's taxable year is on a calendar year basis, hence, with respect
to the 1981 taxable year, ACCRAIN had until 15 April 1982 within which to file its final adjustment return.
The petitioner corporation duly complied with this requirement. On the basis of the corporate income tax
return which ACCRAIN filed on 15 April 1982, it reported a net loss of P2,957,142.00. Consequently, as
reflected thereon, the petitioner corporation, after due computation, had no tax liability for the year 1981.
Had there been any, payment thereof would have been due at the time the return was filed pursuant to
subparagraph (c) of the aforementioned codal provision which reads:

Sec. 70 (c) - Time payment of the income tax - The income tax due on the corporate quarterly returns and
the final income tax returns computed in accordance with Sections 68 and 69 shall be paid at the time the
declaration or return is filed asprescribed by the Commissioner of Internal Revenue. If we were to uphold
the respondent appellate court in making the "date of payment" coincide with the "end of the taxable
year," the petitioner corporation at the end of the 1981 taxable year was in no position then to determine
whether it was liable or not for the payment of its 1981 income tax.
Anent claims for refund, section 8 of Revenue Regulation No. 13-78 issued by the Bureau of Internal
Revenue requires that:

Section 8. Claims for tax credit or refund — Claims for tax credit or refund of income tax deducted and
withheld on income payments shall be given due course only when it is shown on the return that the
income payment received was declared as part of the gross income and the fact of withholding is
established by a copy of the statement, duly issued by the payor to the payee (BIR Form No. 1743-A)
showing the amount paid and the amount of tax withheld therefrom.

The term "return" in the case of domestic corporations like ACCRAIN refers to the final adjustment return
as mentioned in Section 69 of the Tax Code of 1986, as amended, which partly reads:

Sec. 69. Final Adjustment Return - Every corporation liable to tax under Section 24 shall file a final
adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum
of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the
entire taxable income of that year the corporation shall either:

(a) Pay the excess tax still due; or

(b) Be refunded the excess amount paid, as the case may be.

Clearly, there is the need to file a return first before a claim for refund can prosper inasmuch as the
respondent Commissioner by his own rules and regulations mandates that the corporate taxpayer opting
to ask for a refund must show in its final adjustment return the income it received from all sources and
the amount of withholding taxes remitted by its withholding agents to the Bureau of Internal Revenue.
The petitioner corporation filed its final adjustment return for its 1981 taxable year on April 15, 1982. In
our Resolution dated April 10, 1989 in the case of Commissioner of Internal Revenue v. Asia Australia
Express, Ltd. (G. R. No. 85956), we ruled that the two-year prescriptive period within which to claim a
refund commences to run, at the earliest, on the date of the filing of the adjusted final tax return. Hence,
the petitioner corporation had until April 15, 1984 within which to file its claim for refund. Considering
that ACCRAIN filed its claim for refund as early as December 29, 1983 with the respondent Commissioner
who failed to take any action thereon and considering further that the non-resolution of its claim for
refund with the said Commissioner prompted ACCRAIN to reiterate its claim before the Court of Tax
Appeals through a petition for review on April 13, 1984, the respondent appellate court manifestly
committed a reversible error in affirming the holding of the tax court that ACCRAIN's claim for refund was
barred by prescription.
It bears emphasis at this point that the rationale in computing the two-year prescriptive period with
respect to the petitioner corporation's claim for refund from the time it filed its final adjustment return is
the fact that it was only then that ACCRAIN could ascertain whether it made profits or incurred losses in
its business operations. The "date of payment", therefore, in ACCRAIN's case was when its tax liability, if
any, fell due upon its filing of its final adjustment return on April 15, 1982.

WHEREFORE, in view of the foregoing, the petition is GRANTED. The decision of the Court of Appeals dated
May 28, 1990 and its resolution of November 20, 1990 are hereby REVERSED and SET ASIDE. The
respondent Commissioner of Internal Revenue is directed to refund to the petitioner corporation the
amount of P82,751.91.

SO ORDERED.

Feliciano, Bidin, Davide, Jr. and Romero, JJ., concur.