233 Phil.

406

MELENCIO-HERRERA, J.:
Petitioner Commissioner of Internal Revenue (CIR) seeks a review on Certiorari of the joint Decision of
the Court of Tax Appeals (CTA) in CTA Cases Nos. 2373 and 2561, dated 26 January 1983, which set aside
petitioner's assessment of deficiency income taxes against respondent British Overseas Airways
Corporation (BOAC) for the fiscal years 1959 to 1967, 1968-69 to 1970-71, respectively, as well as its
Resolution of 18 November, 1983 denying reconsideration.

BOAC is a 100% British Government-owned corporation organized and existing under the laws of the
United Kingdom. It is engaged in the international airline business and is a member-signatory of the
Interline Air Transport Association (IATA). As such, it operates air transportation service and sells
transportation tickets over the routes of the other airline members. During the periods covered by the
disputed assessments, it is admitted that BOAC had no landing rights for traffic purposes in the
Philippines, and was not granted a Certificate of public convenience and necessity to operate in the
Philippines by the Civil Aeronautics Board (CAB), except for a nine-month period, partly in 1961 and
partly in 1962, when it was granted a temporary landing permit by the CAB. Consequently, it did not
carry passengers and/or cargo to or from the Philippines, although during the period covered by the
assessments, it maintained a general sales agent in the Philippines Warner Barnes and Company, Ltd.,
and later Qantas Airways which was responsible for selling BOAC tickets covering passengers and
cargoes.[1]

G. R. NO. 65773 (CTA Case No. 2373, the First Case)

On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity) assessed BOAC the
aggregate amount of P2,498,358.56 for deficiency income taxes covering the years 1959 to 1963. This
was protested by BOAC. Subsequent investigation resulted in the issuance of a new assessment, dated
16 January 1970 for the years 1959 to 1967 in the amount of P858,307.79. BOAC paid this new
assessment under protest.

On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79, which claim was denied
by the CIR on 16 February 1972. But before said denial, BOAC had already filed a petition for review
with the Tax Court on 27 January 1972, assailing the assessment and praying for the refund of the
amount paid.

G. R. NO. 65774 (CTA Case No. 2561, the Second Case)

On 17 November 1971, BOAC was assessed deficiency income taxes, interests, and penalty for the fiscal
years 1968-1969 to 1970-1971 in the aggregate amount of P549,327.43, and the additional amounts of
P1,000.00 and P1,800.00 as compromise penalties for violation of Section 46 (requiring the filing of
corporation returns) penalized under Section 74 of the National Internal Revenue Code (NIRC).

On 25 November 1971, BOAC requested that the assessment be countermanded and set aside. In a
letter, dated 16 February 1972, however, the CIR not only denied the BOAC request for refund in the
First Case but also re-issued in the Second Case the deficiency income tax assessment for P534,132.08
for the years 1969 to 1970-71 plus P1,000.00 as compromise penalty under Section 74 of the Tax Code.
BOAC's request for reconsideration was denied by the CIR on 24 August 1973. This prompted BOAC to
file the Second Case before the Tax Court praying that it be absolved of liability for deficiency income tax
for the years 1969 to 1971.

This case was subsequently tried jointly with the First Case.

On 26 January 1983, the Tax Court rendered the assailed joint Decision reversing the CIR. The Tax Court
held that the proceeds of sales of BOAC passage tickets in the Philippines by Warner Barnes and
Company, Ltd., and later by Qantas Airways, during the period in question, do not constitute BOAC
income from Philippine sources "since no service of carriage of passengers or freight was performed by
BOAC within the Philippines" and, therefore, said income is not subject to Philippine income tax. The
CTA position was that income from transportation is income from services so that the place where
services are rendered determines the source. Thus, in the dispositive portion of its Decision, the Tax
Court ordered petitioner to credit BOAC with the sum of P858,307.79, and to cancel the deficiency
income tax assessments against BOAC in the amount of P534,132.08 for the fiscal years 1968-69 to
1970-71.

Hence, this petition for Review on Certiorari of the Decision of the Tax Court.

The Solicitor General, in representation of the CIR, has aptly defined the issues, thus:

"1. Whether or not the revenue derived by private respondent British Overseas Airways Corporation
(BOAC) from sales of tickets in the Philippines for air transportation, while having no landing rights here,
constitute income of BOAC from Philippine sources, and, accordingly, taxable.

"2. Whether or not during the fiscal years in question BOAC is a resident foreign corporation doing
business in the Philippines or has an office or place of business in the Philippines.

"3. In the alternative that private respondent may not be considered a resident foreign corporation but
a non-resident foreign corporation, then it is liable to Philippine income tax at the rate of thirty-five per
cent (35%) of its gross income received from all sources within the Philippines."
Under Section 20 of the 1977 Tax Code:

"(h) the term 'resident foreign corporation' applies to a foreign corporation engaged in trade or
business within the Philippines or having an office or place of business therein.

"(i) The term 'non-resident foreign corporation' applies to a foreign corporation not engaged in trade or
business within the Philippines and not having any office or place of business therein."
It is our considered opinion that BOAC is a resident foreign corporation. There is no specific criterion as
to what constitutes "doing" or "engaging in" or "transacting" business. Each case must be judged in the
light of its peculiar environmental circumstances. The term implies a continuity of commercial dealings
and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise
of some of the functions normally incident to, and in progressive prosecution of commercial gain or for
the purpose and object of the business organization.[2] "In order that a foreign corporation may be
regarded as doing business within a State, there must be continuity of conduct and intention to
establish a continuous business, such as the appointment of a local agent, and not one of a temporary
character'.[3]

BOAC, during the periods covered by the subject assessments, maintained a general sales agent in the
Philippines. That general sales agent, from 1959 to 1971, "was engaged in (1) selling and issuing tickets;
(2) breaking down the whole trip into series of trips each trip in the series corresponding to a different
airline company; (3) receiving the fare from the whole trip; and (4) consequently allocating to the
various airline companies on the basis of their participation in the services rendered through the mode
of interline settlement as prescribed by Article VI of the Resolution No. 850 of the IATA
Agreement."[4] Those activities were in exercise of the functions which are normally incident to, and are
in progressive pursuit of, the purpose and object of its organization as an international air carrier. In
fact, the regular sale of tickets, its main activity, is the very lifeblood of the airline business, the
generation of sales being the paramount objective. There should be no doubt then that BOAC was
"engaged in" business in the Philippines through a local agent during the period covered by the
assessments. Accordingly, it is a resident foreign corporation subject to tax upon its total net income
received in the preceding taxable year from all sources within the Philippines.[5]

"Sec. 24. Rates of tax on corporations. x x x

"(b) Tax on foreign corporations. x x x

"(2) Resident corporations. A corporation organized, authorized, or existing under the laws of any
foreign country, except a foreign life insurance company, engaged in trade or business within the
Philippines, shall be taxable as provided in subsection (a) of this section upon the total net income
received in the preceding taxable year from all sources within the Philippines. (Italics ours)
Next, we address ourselves to the issue of whether or not the revenue from sales of tickets by BOAC in
the Philippines constitutes income from Philippine sources and, accordingly, taxable under our income
tax laws.

The Tax Code defines "gross income" thus:

"'Gross income' includes gains, profits, and income derived from salaries, wages or compensation for
personal service of whatever kind and in whatever form paid, or from profession, vocations,
trades, business, commerce, sales, or dealings in property, whether real or personal, growing out of the
ownership or use of or interest in such property; also from interests, rents, dividends, securities, or the
transactions of any business carried on for gain or profit, or gains, profits, and income derived from any
source whatever" (Sec. 29[3]; Italics supplied)
The definition is broad and comprehensive to include proceeds from sales of transport documents. "The
words 'income from any source whatever' disclose a legislative policy to include all income not expressly
exempted within the class of taxable income under our laws". Income means "cash received or its
equivalent"; it is the amount of money coming to a person within a specific time x x x; it means
something distinct from principal or capital. For, while capital is a fund, income is a flow. As used in our
income tax law, "income" refers to the flow of wealth.[6]

The records show that the Philippine gross income of BOAC for the fiscal years 1968-69 to 1970-71
amounted to P10,428,368.00.[7]

Did such "flow of wealth" come from "sources within the Philippines"?

The source of an income is the property, activity or service that produced the income.[8] For the source
of income to be considered as coming from the Philippines, it is sufficient that the income is derived
from activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity
that produces the income. The tickets exchanged hands here and payments for fares were also made
here in Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth
proceeded from, and occurred within, Philippine territory, enjoying the protection accorded by the
Philippine government. In consideration of such protection, the flow of wealth should share the burden
of supporting the government.

A transportation ticket is not a mere piece of paper. When issued by a common carrier, it constitutes
the contract between the ticket-holder and the carrier. It gives rise to the obligation of the purchaser of
the ticket to pay the fare and the corresponding obligation of the carrier to transport the passenger
upon the terms and conditions set forth thereon. The ordinary ticket issued to members of the
travelling public in general embraces within its terms all the elements to constitute it a valid contract,
binding upon the parties entering into the relationship.[9]

True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources within the
Philippines, namely: (1) interest, (2) dividends, (3) service, (4) rentals and royalties, (5) sale of real
property, and (6) sale of personal property, does not mention income from the sale of tickets for
international transportation. However, that does not render it less an income from sources within the
Philippines. Section 37, by its language, does not intend the enumeration to be exclusive. It merely
directs that the types of income listed therein be treated as income from sources within the Philippines.
A cursory reading of the section will show that it does not state that it is an all-inclusive enumeration,
and that no other kind of income maybe so considered.[10]

BOAC, however, would impress upon this Court that income derived from transportation is income for
services, with the result that the place where the services are rendered determines the source; and
since BOAC's service of transportation is performed outside the Philippines, the income derived is from
sources without the Philippines and, therefore, not taxable under our income tax laws. The Tax Court
upholds that stand in the joint Decision under review.

The absence of flight operations to and from the Philippines is not determinative of the source of
income or the situs of income taxation. Admittedly, BOAC was an off-line international airline at the
time pertinent to this case. The test of taxability is the "source", and the source of an income is that
activity x x x which produced the income.[11] Unquestionably, the passage documentations in these cases
were sold in the Philippines and the revenue therefrom was derived from a business activity regularly
pursued within the Philippines. And even if the BOAC tickets sold covered the "transport of passengers
and cargo to and from foreign cities"[12], it cannot alter the fact that income from the sale of tickets was
derived from the Philippines. The word "source" conveys one essential idea, that of origin, and the
origin of the income herein is the Philippines.[13]

It should be pointed out, however, that the assessments upheld herein apply only to the fiscal years
covered by the questioned deficiency income tax assessments in these cases, or, from 1959 to 1967,
1968-69 to 1970-71. For, pursuant to Presidential Decree No. 69, promulgated on 24 November, 1972,
international carriers are now taxed as follows:

"x x x Provided, however, That international carriers shall pay a tax of 2-1/2 percent on their gross
Philippine billings." (Sec. 24[b][2], Tax Code).
Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory definition of the term
"gross Philippine billings", thus:
"x x x 'Gross Philippine billings' includes gross revenue realized from uplifts anywhere in the world by
any international carrier doing business in the Philippines of passage documents sold therein, whether
for passenger, excess baggage or mail, provided the cargo or mail originates from the Philippines. x x x"
The foregoing provision ensures that international airlines are taxed on their income from Philippine
sources. The 2 1/2% tax on gross Philippine billings is an income tax. If it had been intended as an
excise or percentage tax it would have been placed under Title V of the Tax Code covering Taxes on
Business.

Lastly, we find as untenable the BOAC argument that the dismissal for lack of merit by this Court of the
appeal in JAL vs. Commissioner of Internal Revenue (G.R. No. L-30041) on February 3, 1969, is res
judicata to the present case. The ruling by the Tax Court in that case was to the effect that the mere
sale of tickets, unaccompanied by the physical act of carriage of transportation, does not render the
taxpayer therein subject to the common carrier's tax. As elucidated by the Tax Court, however, the
common carrier's tax is an excise tax, being a tax on the activity of transporting, conveying or removing
passengers and cargo from one place to another. It purports to tax the business of
transportation.[14] Being an excise tax, the same can be levied by the State only when the acts, privileges
or businesses are done or performed within the jurisdiction of the Philippines. The subject matter of the
case under consideration is income tax, a direct tax on the income of persons and other entities "of
whatever kind and in whatever form derived from any source." Since the two cases treat of a different
subject matter, the decision in one cannot be res judicata to the other.

WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby SET ASIDE. Private
respondent, the British Overseas Airways Corporation (BOAC), is hereby ordered to pay the amount of
P534,132.08 as deficiency income tax for the fiscal years 1968-69 to 1970-71 plus 5% surcharge, and 1%
monthly interest from April 16, 1972 for a period not to exceed three (3) years in accordance with the
Tax Code. The BOAC claim for refund in the amount of P858,307.79 is hereby denied. Without costs.

SO ORDERED.

38 Phil. 414

Madrid v Rafferty

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 a 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 Madrigal and the other half the income of
Susana Paterno. The general question 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 the 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 assessed and 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
and payable by each of the plaintiffs the sum of P2,921.09, which taken together amounts to 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 for 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 it
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 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 in 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 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 besi^ 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 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 as 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 retutn
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 of the time of claiming such exemption if
such claim be made within the year for 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 ah 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 married
persons.'
"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 additional tax provided by the statute;
that 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 that 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, or where the husband and wife neither separately have an income of $3,000, but
together they have an income in excess of $4,000, in which 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 and makes return thereof, or where her income is separately shown in the 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 E1903J, 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.
124 Phil. 97

Limpan Investment
REYES, J.B.L., J.:
Appeal interposed by petitioner Limpan Investment Corporation against a decision of the Court of Tax
Appeals, in its CTA Case No. 699, holding and ordering it (petitioner) to pay respondent Commissioner of
Internal Revenue the sums of P7,338.00 and P30,502.50, representing deficiency income taxes, plus
50% surcharge for the years 1956, and 1957, respectively, plus 5% surcharge and 1% monthly interest
from June 30, 1959 to the date of payment, with costs.

The facts of this case are:

Petitioner, a domestic corporation duly registered since June 21, 1955, is engaged in the business of
leasing real properties. It commenced actual business operations on July 1, 1955. Its principal
stockholders are the spouses Isabelo P. Lim and Purificacion Cañiza de Lim, who own and control ninety-
nine per cent (99%) of its total paid-up capital. Its president and chairman of the board is the same
Isabelo P. Lim.

Its real properties consist of several lots and buildings, mostly situated in Manila and in Pasay City, all of
which were acquired from said Isabelo P. Lim and his mother, Vicenta Pantangco Vda. de Lim.

Petitioner corporation duly filed its 1956 and 1957 income tax returns, reporting therein net incomes of
P3,287.81 and P11,098.36 respectively, for which it paid the corresponding taxes therefor in the sums of
P657.00 and P2.220.00.

Sometime in 1958 and 1959, the examiners of the Bureau of Internal Revenue conducted an
investigation of petitioner's 1956 and 1957 income tax returns and, in the course thereof, they
discovered and ascertained that petitioner had undeclared its rental incomes by P20,199.00 and
P81,690.00 during these taxable years and had claimed excessive depreciation of its buildings in the
sums of P4,260 and P16,338.00 covering the same period. On the basis of these findings, respondent
Commissioner of Internal Revenue issued its letter-assessment and demand for payment of deficiency
income tax and surcharge against petitioner corporation, computed as follows:

90-AR-C-348-58/56

Net income per audited return P3,287.81

Add: Unallowable deductions:
Undeclared Rental Receipt
(Schedule A)
P20,199.00
Excess Depreciation (Sched. B) 4,260.00 P24,459.00
_________
Net income per investigation 27,746.00
_________
Tax due thereon 5,549.00
Less: Amount already assessed 657.00
_________
Balance 4,892.00
Add: 50% Surcharge 2,446.00
_________
DEFICIENCY TAX DUE 7,338.00
========

90-AR-C-1196-58/57

Net income per audited return

P11,098.00
Add: Unallowable deductions:
Undeclared Rental Receipt
(Schedule A)
P81,690.00
Excess Depreciation (Sched. B) 16,338.00 P98,028.00
_________ _________
Net income per investigation 109,126.00
_________
Tax due thereon 22,555.00
Less: Amount already assessed 2,220.00
 _________
Balance 20,335.00
Add: 50% Surcharge 10,167.50
_________
DEFICIENCY TAX DUE P30,502.50
========
Petitioner corporation requested respondent Commissioner of Internal Revenue to reconsider the above
assessment but the latter denied said request and reiterated its original assessment and demand, plus
5% surcharge and the 1% monthly interest from June 30, 1959 to the date of payment; hence, the
corporation filed its petition for review before the Tax Appeals Court, questioning the correctness and
validity of the above assessment of respondent Commissioner of Internal Revenue. It disclaimed having
received or collected the amount of P20,199.00, as unreported rental income for 1956, or any part
thereof, reasoning out that "the previous owners of the leased buildings has (have) to collect part of the
total rentals in 1956 to apply to their payment of rental in the land in the amount of P21,630.00" (par.
11, petition). It also denied having received or collected the amount of P81,690.00, as unreported rental
income for 1957, or any part thereof, explaining that part of said amount totalling P31,380.00 was not
declared as income in its 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 petitioner corporation in said
year but did so only in 1959; that a certain tenant (Go Tong) deposited in court his rentals amounting to
P10,800.00, over which the corporation had no actual or constructive control; and that a sub-tenant
paid P4,200.00 which ought not be declared as rental income.

Petitioner likewise alleged in its petition that the rates of depreciation applied by respondent
Commissioner to its buildings in the above assessment are unfair and inaccurate.

Sole witness for petitioner corporation in the Tax Court was its Secretary-Treasurer, Vicente G. Solis,
who admitted that it had omitted to report the sum of P12,100.00 as rental income in its 1956 tax
return 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 (P12,100.00) and the sum (P20,199.00) found by
respondent Commissioner as undeclared in 1956, petitioner corporation through the same witness
(Solis), tried to establish that it did not collect or receive the same because, in view of the refusal of
some tenant to 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
hand, had verbally agreed in 1956 to turn over to petitioner corporation six per cent (6%) of the value of
all its properties, computed at P21,630.00, in exchange for whatever rentals the Lims may collect from
the tenants. And, with respect to the difference between the admittedly undeclared sum of P29,350.00
and that found by respondent Commissioner as unreported rental income (P81,690.00) in 1957, the
same witness Solis also tried to establish that petitioner corporation did not receive or collect the same
but that its president, Isabelo P. Lim, collected part thereof and may have reported the same in his own
personal income tax return; that same Isabelo P. Lim collected P13,500.00, which he turned over to
petitioner in 1959 only; that a certain tenant (Go Tong) deposited in court his rentals (P10,800.00), over
which the corporation had no actual or constructive control and which were withdrawn only in 1958;
and that a subtenant paid P4,200.00 which ought not be declared as rental income in 1957.

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 return, 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 corroborate. As above noted, Isabelo P.
Lim was not presented as a witness to confirm accountant Sol is 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 subtenant 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 on 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 & Collector of Internal Revenue vs. E. Zamora, Nos. L-15280, 15290, 15289 & 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.

Concepción, C. J., Barrera, Dizon. Regala, Makalintal, Bengzon, J. P. Zaldivar, Sanchez and Ruiz Castro,
JJ., concur.

Decision affirmed.

124 Phil. 1493

[ GR No. 21108, Nov 29, 1966 ]

REPUBLIC v. LEONOR DE LA RAMA +

DECISION

ZALDIVAR. J.:
This is an appeal from the decision of the Court of First Instance of Manila, dated December 23, 1961, in
its Civil Case No. 46494, dismissing the complaint of the Republic of the Philippines against the heirs of
the late Esteban de la Rama for the collection of 956,032.50 as deficiency income tax, inclusive of 50%
surcharge, for the year 1950.
The estate of the late Esteban de la Rama was the subject of Special Proceedings No. 401 of the Court of
First Instance of Iloilo. The executor-administrator, Eliseo Hervas, filed on March 12, 1951, income tax
returns of the estate corresponding to the taxable year 1950, declaring a net income of 922,796.59, on
the basis of which the amount of P3,919.00 was assessed and was paid by the estate as income tax. The
Bureau of Internal Revenue later claimed that it had found out that there had been received by the
estate in 1950 from the De la Rama Steamship Company, Inc. cash dividends amounting to 966,800.00,
which amount was not declared in the income tax return of the estate for the year 1950. The Bureau of
Internal Revenue then, on March 7, 1956, made an assessment as deficiency income tax against the
estate in the sum of 956,032.50, of which amount 937,355.00 was the deficiency and 918,677.50 was
the 50% surcharge.
The Collector of Internal Revenue wrote a letter, dated February 29, 1956, to Mrs. Lourdes de la Rama-
Osmeña informing her of the deficiency income tax and asking payment thereof. On March 13, 1956 the
letter's counsel wrote to the Collector acknowledging receipt of the assessment, but contended that
Lourdes de la Rama-Osmeña had no authority to represent the estate, and that the assessment should
be sent to Leonor de la Rama who was pointed to by said counsel as the administratrix of the estate of
her late father. On the basis of this information the Deputy Collector of Internal Revenue, on November
22, 1956, sent a letter to Leonor de la Rama as administratrix of the estate, asking payment. The tax, as
assessed, not having been paid, the Deputy Commissioner of Internal Revenue, on September 7, 1959,
wrote another letter to Mrs. Lourdes de la Rama-Osmeña demanding, through her, upon the heirs, the
payment of the deficiency income tax within the period of thirty days from receipt thereof. The counsel
of Lourdes de la Rama-Osmeña, in a letter dated September 25, 1959, insisted that the letter should be
sent to Leonor de la Rama. The Deputy Commissioner of Internal Revenue wrote to Leonor de
la Ramaanother letter, dated February 11, 1960, demanding, through her as administratrix, upon the
heirs of Este-ban de la Rama, the payment of the sum of P56,032.50, as deficiency income tax including
the 50% surcharge, to the City Treasurer of Pasay City within thirty days from receipt thereof.
The deficiency income tax not having been paid, the Republic of the Philippines filed on March 6,
1961 with the Court of First Instance of Manila a complaint against the heirs of Esteban de la Rama,
Making to collect from each heir his/her proportionate share in the income tax liability of the estate. An
amended complaint dated August 31, 1961, was admitted by the court.
The defendants-appellees, Lourdes de la Rama-Osmeña, Leonor de la Rama, Estefanla de la Rama-
Pirovano, Dolores de la Rama-Lopez, Charles Miller, and Aniceta de la Rama-Sian, thru counsel, filed
their respective answers, the gist of their allegations and/or defenses being (1) that no cash dividends of
966,800.00 had been paid to the estate; (2) that the administration of the estate had been extended by
the probate court precisely for the purpose of collecting said dividends; (3) that Leonor de la Rama had
never been administratrix of the estate; (4) that the executor of the estate, Eliseo Hervas, had never
been given notice of the assessment, and consequently the assessment had never become final; and (5)
that the collection of the alleged deficiency income tax had prescribed. Fausto F. Gonzales, Jr., one of
the defendants, not having filed an answer, was declared in default.
From the evidence introduced at the trial, both oral and documentary, the lower court found that the
dividend of 966,800.00 declared by the De la Rama Steamship Co. in favor of the late Esteban de
la Rama was applied to the obligation of the estate to the company declaring the dividends;
that Leonor de la Rama was not the administratrix of the estate, but it was the late Eliseo Hervas who
was the executor-administrator; that the administration of the estate was extended for the purpose of
recovering for the estate said dividends from the De la Rama Steamship Co., Inc; and that the question
of whether the deceased Esteban de la Rama was a debtor to the entity known as the Hijosde I. de
la Rama, which was also indebted to the De la Rama Steamship Co., Inc., was not a settled one.
After trial, the lower court rendered its decision, dated December 23, 1961, dismissing the complaint.
The Republic of the Philippinesappealed from said decision to the Court of Appeals, but the appeal was
later certified to this Court because only questions of law are involved.
Plaintiff-appellant contends that the trial court erred (1) in holding that there was no basis for the
assessment upon the ground that it waanot proved that the income in question was received by the
estate of Esteban de la Rama or by his heirs; (2) in not holding that the income was constructively
received by the estate of the late Esteban de la Rama; (3) in not holding that the heirs and legatees of
the late Esteban de la Rama were liable for the payment of the deficiency income tax; (4) in not holding
that the assessment involved in the case had long become final; (5) in not holding that the service of the
notice of assessment on Lourdes de la Rama-Osmeña and Leonor de la Rama was proper and valid; and
(6) in not holding that said court had no jurisdiction to take cognizance of appellees1 defense that the
assessment in question was erroneous.
Plaintiff-appellant argues that the deficiency income tax in this case was assessed in the sum of 986,800.
00 representing cash dividends declared in 1950 by the De la Rama Steamship Co., Inc. in favor of the
late Esteban de la Rama and was applied as payment of the latter's account with the former. The
application of payment appears in the books of said creditor company as follows:
"Against accounts receivable due from Esteban de
P25,255.24
la Rama. . . . . . . . . .
"Against the account due from Hijos de I. de la Rama, Inc.,
of which Don Esteban de la Rama was the principal owner P61,544.76
.....................
Total . . . . . . . . .P86,800.00"
The plaintiff-appellant maintains that this crediting of accounts in the books of the company constituted
a constructive receipt by the estate or the heirs of Esteban de la Rama of the dividends, and this
dividend was an income of the estate and was therefore, taxable.
It is not disputed that the dividends in question were not actually paid either to the estate, or to the
heirs, of the late Esteban de la Rama. The question to be resolved is whether or not the said application
of the dividends to the personal accounts of the deceased Esteban de la Rama constituted constructive
payment to, and hence, constructively received by, the estate or the heirs. If the debts to which the
dividends were applied really existed, and were legally demandable and chargeable against the
deceased, there was constructive receipt of the dividends; if there were no such debts, then there was
no constructive receipt.
The first debt, as above Indicated, had been contested by the executor-administrator of the estate. It
does not even appear that the De la Rama Steamship Co., Inc. had ever filed a claim against the estate in
connection with that indebtedness. The existence and the validity of the debt is, therefore, in dispute,
and there was no proof adduced to show the existence and validity of the debt.
The second debt to which the dividends were partly applied were accounts "due from Hijos de I. de
la Rama, Inc." The alleged debtor here was an entity separate and distinct from the deceased. If that was
so, its debts could not be charged against the deceased, even if the deceased was the principal owner
thereof, in the absence of proof of substitution of debtor. There is no evidence in the instant case that
the late Esteban de la Rama substituted the "Hijos de I. de la Rama" as debtor to the De
la Rama Steamship Co., Inc.; nor was there evidence that the estate of the late Esteban de
la Rama owned the "Hijos de I. de la Rama, Inc.," this fact being, as found by the lower court, not a
settled question because the same was denied by the administrator.
Under the National Internal Revenue Code, income tax is assessed on income that has been received.
Thus, Section 21 of the Code requires that the income must be received by an individual before a tax can
be levied thereon.
"Sec. 21. Rates of tax on citizens or residents. There shall be levied, collected, and paid annually upon
the entire income received in the preceding taxable year from all sources by every individual, or citizen
or resident of the Philippines, x x x."

Section 56 also requires receipt of income by an estate before an Income tax can be assessed thereon. It
provides:
"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
(3) Income received by estate of deceased persons during the period of administration or settlement of
the estate; x x x."

Hence, if income has not been received, no income tax can be assessed thereon. Inasmuch as the
income was not received either by the estate, or by the heirs, neither the estate nor the heirs can be
liable for the payment of income tax therefor.
The trial court, therefore, did not err when it held in its decision that:
"After a study of the proofs, the Court is constrained to sustain the position of the defendants on the
fundamental issue that there could have been no correct and real basis for the assessment or that there
is no proof that the income in question had been received; it was not actually delivered unto the Estate
since it was retained by the De la Rama Steamship Co., Inc.; which applied said dividends to certain
accounts receivable due from the deceased allegedly, Exh. A-l; now if truly there had been such
indebtedness owing from the deceased unto said De la Rama Steamship Co., Inc., the Court will agree
with plaintiff that the offsetting of the dividends against such indebtedness amounted to constructive
delivery; but here has not been presented any proof to that effect, i.e., that there was such an
indebtedness due from deceased; on the contrary what the evidence shows is that the former
administrator of the Estate had challenged the validity of said indebtedness, Exh. D, motion of 4 June,
1951; this being the case, there is no clear showing that income in the form of said dividends had really
been received, which is the verb used in Section 21 of the Internal Revenue Code, by the Estate whether
actually or constructively; and the income tax being collected by the Government on income received,
the Government's position is here without a clear basis; the position becomes worse when it be
considered that it is not even the Estate that is being sued but the heirs themselves, who admittedly had
not received any of said dividends themselves; the fiction of transfer of ownership by succession from
the death of the decedant will have to give way to. acttual fact that the dividends have not been
adjudicated at all to the heirs up to now at least so far as the evidence shows. This being the conclusion
of the Court, there will be no need to discuss the question of whether the action has or has not
prescribed."

The factual findings of the trial court, as stated in the above-quoted portion of the decision, is decisive in
the determination of the legal issues in this case.
Appellant cites the case of Herbert v. Conmissloner of Internal Revenue 81 F (2d) 912 as authority that
the crediting of dividends against accounts constitutes payment and constructive receipt of the
dividends. The citation of authority misses the point in issue. In that case the existence of the
indebtedness of Leon S. Herbert to the corporation that declared the dividends and against which
indebtedness the dividends were applied, was never put in issue, and was admitted. In the instant case,
the existence of the obligations has been disputed and, as the trial court found, has not been proved. It
having been shown in the instant case that there was no basis for the assessment of the income tax, the
assessment itself and the sending of notices regarding the assessment would neither have basis, and so
the assessment and the notices produced no legal effect that would warrant the collection of the tax.
The appellant also contends that the assessment had become final, because the decision of the Collector
of Internal Revenue was sent in a letter dated February 11, 1960 and addressed to the heirs of the late
Esteban de la Rama, through Leonor de la Rama as administratrix of the estate, and was not disputed or
contested by way of appeal within thirty days from receipt thereof to the Court of Tax Appeals. This
contention is untenable. The lower court found that Leonor de la Rama was not the administratrix of the
estate of Esteban de la Rama. The alleged deficiency income tax for 1950 was chargeable against the
estate of the deceased Esteban de la Rama. On December 5, 1955, when the letter of notice for the
assessment of the deficiency income tax was first sent to Leonor de la Rama (See Annex "A" of Answer
of defendant Lourdes de la Rama-Osmeña, pp. 16-17, Record on Appeal), the administration
proceedings, in Special Proceedings No. 401 of the Court of First Instance of Iloilo, were still open with
respect to the controverted matter regarding the cash dividends upon which the deficiency assessment
was levied. This is clear from the order dated June 21, 1951 (Exhibit "E") of the Court of First Instance of
Iloilo which in part provides:
"El albacea-administrador hace constar, sin
embargo, que quedan por cobrar ciertos dividendos declarados y devengados por lasacciones del finado
Esteban de la Rama en The De la Rama Steamship Co., Inc., que los funcionarios de dicha corporation
x x x no nan pagado aun x x x y que por tales motivos habria necesidad de prolongar la administracion, s
olamente para que esta continúeatendiendo, con autorizacion, a tales menesteres.
"Se ordena el cierre de la Administración; pero se provee, sin embargo, la extensión de
la misma, solamente para el proposito deiniciar y proseguir hasta eu terminacion una accion contra The
De la Rama Steamship Co.,
Inc. para el cobro de dividendosdeclarados por dicha corporación en Diciembre 31,
1950 sobre las 869 acciones del finado Esteban de la Rama en la misma x x x.
"Y finalmente, queda relevado al Administrador Sr. Eliseo Hervas de toda responsibilidad en relaci&ón c
on su administración, excepto en lo que respecta al cobro de dividendos x x x."

The estate was still under the administration of Eliseo Hervas as regards the collection of said dividends.
The administrator was the representative of the estate, whose duty it was to pay and discharge all debts
and charges on the estate and to perform all orders of the court by him to be performed (Rule 81,
Section 1), and to pay the taxes and assessments due to the Government or any branch or subdivision
thereof (Section 7, Rule 89, Old Rules of Court). The tax must be collected from the estate of the
deceased, md it is the administrator who is under obligation to pay such claim (Estate of Claude
E. Haygood, Collector of Internal Revenue v. Haygood, 65 Phil., 520). The notice of assessment,
therefore, should have been sent to the administrator. In this case, notice was first sent to Lourdes de
la Rama-Osmeña on February 29, 1956, and later to Leonor de la Rama on November 27, 1956, neither
of whom had authority to represent the estate. As the lower court said in its decision: "Leonor de
la Rama was not the administratrix of the estate of the late Esteban de la Rama and as such the demand
unto her, Exh. Def. 8, p. 112, was not a correct demand before November 27, 1956, because the real
administrator was the late Eliseo Hervas; x x x." (p. 45, Record on Appeal) The notice was not sent to the
taxpayer for the purpose of giving effect to the assessment, and said notice could not produce any
effect. In the case of Bautista and Corrales Tan v. Collector of Internal Revenue, L-12259, May 27, 1959,
this Court had occasion to state that "the assessment is deemed made when the notice to this effect is
released, mailed or sent to the taxpayer for the purpose of giving effect to said assessment." It
appearing that the person liable for the payment of the tax did not receive the assessment, the
assessment could not become final and executory (R. A. 1125, Section 11).
Plaintiff-appellant also contends that the lower court could not take cognizance of the defense that the
assessment was erroneous, this being a matter that is within the exclusive jurisdiction of the Court of
Tax Appeals. This contention has no merit. According to Republic Act 1125, the Court of Tax Appeals has
exclusive jurisdiction to review by appeal decisions of the Collector of Internal Revenue in cases
involving disputed assessments, and the disputed assessment must be appealed by the person adversely
affected by the decision within thirty days after the receipt of the decision. In the instant case, the
person adversely affected should have been the administrator of the estate, and the notice of the
assessment should have been sent to him. The administrator had not received the notice of assessment,
and he could not appeal the assessment to the Court of Tax Appeals within 30 days from notice. Hence
the assessment did not fall within the exclusive jurisdiction of the Court of Tax Appeals.
IN VIEW OF THE FOREGOING, the decision appealed from should be, as it is hereby, affirmed, without
costs.
279 Phil. 499

PARAS, J.:
This petition for review seeks the reversal of the decision[*] of the Court of Tax Appeals in CTA Case No.
2480 promulgated on January 15, 1982 which set aside petitioner's assessment of deficiency income tax
inclusive of interest and surcharge as well as compromise penalty for violation of bookkeeping
regulations charged against respondent.

The antecedental facts of the case are as follows:

Respondent Japan Air Lines, Inc. (hereinafter referred to as JAL for brevity), is a foreign corporation
engaged in the business of international air carriage. From 1959 to 1963, JAL did not have planes that
lifted or landed passengers and cargo in the Philippines as it had not been granted then by the Civil
Aeronautics Board (CAB) a certificate of public convenience and necessity to operate here. However,
since mid-July, 1957, JAL had maintained an office at the Filipinas Hotel, Roxas Boulevard, Manila. Said
office did not sell tickets but was maintained merely for the promotion of the company's public relations
and to hand out brochures, literature and other information playing up the attractions of Japan as a
tourist spot and the services enjoyed in JAL planes.

On July 17, 1957, JAL constituted the Philippine Air Lines (PAL), as its general sales agent in the
Philippines. As an agent, PAL, among other things, sold for and in behalf of JAL, plane tickets and
reservations for cargo spaces which were used by the passengers or customers on the facilities of JAL.

On June 2, 1972, JAL received deficiency income tax assessment notices and a demand letter from
petitioner Commissioner of Internal Revenue (hereinafter referred to as Commissioner for brevity), all
dated February 28, 1972, for a total amount of P2,099,687.52 inclusive of 50% surcharge and interest,
for years 1959 through 1963, computed as follows:

1959 1960 1961

Net income per

P472,025.16 P476,671.48 P734,812.77
investigation
Tax due thereon 133,608.00 135,001.00 212,444.00
Add: 50% surch. 66,804.00 67,500.50 106,222.00
1/2% mo. int. (3 yrs.) 24,049.44 24,300.18 38,239.92
___________ ___________ ___________
Total due
P224,461.44 P226,801.68 P356,905.92
========= ========= =========

1962 1963 SUMMARY

Net income per

P1,065,641.63 P1,550,230.48 P224,461.44
investigation
Tax due thereon 311,692.00 457,069.00 226,801.68
Add: 50%. surch. 155,846.00 228,534.50 356,905.92
1/2% mo. int. 523,642.56
(3 yrs.) 56,104.56 82,272.42 767,875.92
___________ ___________ ___________
Total due P 523,642.56 P 767,875.92 P2,099,687.52
========= ========= =========

Compromise Penalty P 1,500.00

On June 19, 1972, JAL protested said assessments alleging that as a non-resident foreign corporation, it
was taxable only on income from Philippine sources as determined under Section 37 of the Tax Code,
and there being no such income during the period in question, it was not liable for the deficiency income
tax liabilities assessed (Rollo, pp. 53-55). The Commissioner resolved otherwise and in a letter-decision
dated December 21, 1972, denied JAL's request for cancellation of the assessment (Ibid., p. 29).

JAL therefore, elevated the case to the Court of Tax Appeals which, in turn, reversed the decision (Ibid.,
pp. 51-76) and thereafter denied the motion for reconsideration filed by the Commissioner (Ibid., p. 77).
Hence, this petition.

Petitioner raises two issues in this wise:

1. WHETHER OR NOT PROCEEDS FROM SALES OF JAPAN AIR LINES TICKETS SOLD IN THE
PHILIPPINES ARE TAXABLE AS INCOME FROM SOURCES WITHIN THE PHILIPPINES.

2. WHETHER OR NOT JAPAN AIR LINES IS A FOREIGN CORPORATION ENGAGED IN TRADE OR

BUSINESS IN THE PHILIPPINES.
The petition is impressed with merit.

The issues in the case at bar have already been laid to rest in no less than three cases resolved by this
Court. Anent the first issue, the landmark case of Commissioner of Internal Revenue vs. British Overseas
Airways Corporation (G.R. Nos-65773-74, April 30, 1987, 149 SCRA 395) has categorically ruled:

"The Tax Code defines 'gross income' thus:

"'Gross income' includes gains, profits, and income derived from salaries, wages or compensation for
personal service of whatever kind and in whatever form paid, or from profession, vocations, trades,
business, commerce, sales, or dealings in property, whether real or personal, growing out of the
ownership or use of or interest in such property; also from interests, rents, dividends, securities, or the
transaction of any business carried on for gain or profit, or gains, profits and income derived from any
source whatever" (Sec. 29(3); Italics supplied)

"The definition is broad and comprehensive to include proceeds from sales of transport documents. The
words 'income from any source whatever' disclose a legislative policy to include all income not expressly
exempted within the class of taxable income under our laws. Income means 'cash received or its
equivalent'; it is the amount of money coming to a person within a specific time x x x; it means
something distinct from principal or capital. For, while capital is a fund, income is a flow. As used in our
income tax law, 'income' refers to the flow of wealth (Madrigal and Paternol vs. Rafferty and
Concepcion, 38 Phil. 414 [1918]).

"x x x xxx xxx

"The source of an income is the property, activity or service that produced the income. For the source
of income to be considered as coming from the Philippines, it is sufficient that the income is derived
from activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity
that produces the income. The tickets exchanged hands here and payments for fares were also made
here in Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth
proceeded from, and occurred within, Philippine territory, enjoying the protection accorded by the
Philippine government. In consideration of such protection, the flow of wealth should share the burden
of supporting the government.

"x x x xxx xxx

"True, Section 37(a) of he Tax Code, which enumerates items of gross income from sources within the
Philippines, namely: (1) interest, (2) dividends, (3) service, (4) rentals and royalties, (5) sale of real
property, and (6) sale of personal property, does not mention income from the sale of tickets for
international transportation. However, that does not render it less an income from sources within the
Philippines. Section 37, by its language does not intend the enumeration to be exclusive. It merely
directs that the types of income listed therein be treated as income from sources within the Philippines.
A cursory reading of the section will show that it does not state that it is an all-inclusive enumeration,
and that no other kind of income may be so considered (British Traders Insurance Co., Ltd. vs.
Commissioner of Internal Revenue, 13 SCRA 719 [1965]).

"x x x xxx xxx

"The absence of flight operations to and from the Philippines is not determinative of the source of
income or the situs of income taxation. x x x The test of taxability is the 'source'; and the source of an
income is that activity x x x which produced the income (Howden & Co., Ltd. vs. Collector of Internal
Revenue, 13 SCRA 601 [1965]). Unquestionably, the passage documentations in these cases were sold in
the Philippines and the revenue therefrom was derived from a business activity regularly pursued within
the Philippines. x x x The word 'source' conveys one essential idea, that of origin, and the origin of the
income herein is the Philippines (Manila Gas Corporation vs. Collector of Internal Revenue, 62 Phil. 895
[1935])."
The above ruling was adopted en toto in the subsequent case of Commissioner of Internal Revenue vs.
Air India and the Court of Tax Appeals (G.R. No. 72443, January 29, 1988, 157 SCRA 648) holding that the
revenue derived from the sales of airplane tickets through its agent Philippine Air Lines, Inc., here in the
Philippines, must be considered taxable income, and more recently, in the case of Commissioner of
Internal Revenue vs. American Airlines, Inc. and Court of Tax Appeals (G.R. No. 67938, December 19,
1989, 180 SCRA 274), it was likewise declared that for the source of income to be considered as coming
from the Philippines, it is sufficient that the income is derived from activities within this country
regardless of the absence of flight operations within Philippine territory.

Verily, JAL is a resident foreign corporation under Section 84 (g) of the National Internal Revenue Code
of 1939. Definition of what a resident foreign corporation is was likewise reproduced under Section 20
of the 1977 Tax Code.

The BOAC Doctrine has expressed in unqualified terms:

"Under Section 20 of the 1977 Tax Code:

"(h) the term 'resident foreign corporation' applies to a foreign corporation engaged in trade or business
within the Philippines or having an office or place of business therein.

"(i) the term 'non-resident foreign corporation' applies to a foreign corporation not engaged in trade or
business within the Philippines and not having any office or place of business therein."

"x x x. There is no specific criterion as to what constitutes 'doing' or 'engaging in' or 'transacting'
business. Each case must be judged in the light of its peculiar environmental circumstances. The term
implies continuity of commercial dealings and arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the functions normally incident to, and in
progressive prosecution of commercial gain or for the purpose and object of the business organization
(The Mentholatum Co., Inc., et al. vs. Anacleto Mangaliman, et al., 72 Phil. 524 (1941); Section 1, R.A.
No. 5455). In order that a foreign corporation may be regarded as doing business within a State, there
must be continuity of conduct and intention to establish a continuous business, such as the
appointment of a local agent, and not one of a temporary character (Pacific Micronesian Line, Inc. vs. Del
Rosario and Peligon, 96 Phil. 23, 30, citing Thompson on Corporations, Vol. 8, 3rd ed., pp. 844-847 and
Fisher's Philippine Law of Stock Corporation, p. 415).
There being no dispute that JAL constituted PAL as local agent to sell its airline tickets, there can be no
conclusion other than that JAL is a resident foreign corporation, doing business in the Philippines.
Indeed, the sale of tickets is the very lifeblood of the airline business, the generation of sales being the
paramount objective (Commissioner of Internal Revenue vs. British Overseas Airways Corporation,
supra). The case of CIR vs. American Airlines, Inc. (supra) sums it up as follows:
"x x x, foreign airline companies which sold tickets in the Philippines through their local agents, whether
called liaison offices, agencies or branches, were considered resident foreign corporations engaged in
trade or business in the country. Such activities show continuity of commercial dealings or
arrangements and performance of acts or works or the exercise of some functions normally incident to
and in progressive prosecution of commercial gain or for the purpose and object of the business
organization."
Under Section 24 of Commonwealth Act No. 466 otherwise known as the "National Infernal Revenue
Code of 1939", the applicable law in the case at bar, resident foreign corporations are taxed thirty
percentum (30%) upon the amount by which their total net income exceed one hundred thousand
pesos. JAL is liable to pay 30% of its total net income for the years 1959 through 1963 as
contradistinguished from the computation arrived at by the Commissioner as shown in the assessment.
Apparently, the Commissioner failed to specify the tax base on the total net income of JAL in figuring out
the total income due, i.e., whether 25% or 30% level.

Having established the tax liability of respondent JAL, the only thing left to determine is the propriety of
the 50% surcharge imposed by petitioner. It appears that this must be answered in the negative. As
held in the case of CIR vs. Air India (supra):

"The 50% surcharge or fraud penalty provided in Section 72 of the National Internal Revenue Code is
imposed on a delinquent taxpayer who willfully neglects to file the required tax return within the period
prescribed by the law, or who willfully files a false or fraudulent tax return, x x x.

"x x x xxx xxx

"On the other hand, the same Section provides that if the failure to file the required tax return is not
due to willful neglect, a penalty of 25% is to be added to the amount of the tax due from the taxpayer."
Nowhere in the records of the case can be found that JAL deliberately failed to file its income tax returns
for the years covered by the assessment. There was not even an attempt by petitioner to prove the
same or justify the imposition of the 50% surcharge. All that petitioner did was to cite the provision of
law upon which the surcharge was based without explaining why it was applicable to respondent's case.
Such cannot be countenanced for mere allegations are definitely not acceptable. The willful neglect to
file the required tax return or the fraudulent intent to evade the payment of taxes, considering that the
same is accompanied by legal consequences, cannot be presumed (CIR vs. Air India, supra). The fraud
contemplated by law is actual and 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 the law. It must amount to intentional wrongdoing with the sole object of evading the
tax (Aznar v. Court of Tax Appeals, G.R. No. L-20569, August 23, 1974, 58 SCRA 519). This was not
proven to be so in the case of JAL as it believed in good faith that it need not file the tax return for it had
no taxable income then. The element of fraud is lacking. At most, only negligence may be imputed to
JAL for not ascertaining the dispensability of filing the tax returns. As such, JAL may be subjected only to
the 25% surcharge prescribed by the aforequoted law.

As to the ½% interest per month, the same finds basis in Section 51(d) of the Tax Code then in force
which states:

"(d) Interest on deficiency. Interest upon the amount determined as a deficiency shall be assessed at
the same time as the deficiency and shall be paid upon notice and demand from the Commissioner of
Internal Revenue; and shall be collected as a part of the tax, at the rate of six per centum per annum
from the date prescribed for the payment of the tax . . .; PROVIDED, That the maximum amount that
may be collected as interest on deficiency shall in no case exceed the amount corresponding to a period
of three years, the present provisions regarding prescription to the contrary notwithstanding."
The 6% interest per annum is the same as 1/2% interest per month and petitioner correctly computed
such interest equivalent to three years which is the maximum set by the law.

On the other hand, the compromise penalty amounting to P1,500.00 for violation of bookkeeping
regulations appears to be without support. The particular provision in the said regulations allegedly
violated was not even specified. Furthermore, the term "compromise penalty" itself is not found among
the penal provisions of the Bookkeeping Regulations (Revenue Regulations No. V-1, as amended, March
17, 1947, pp. 836-837, Revenue Regulations Updated by Prof. Eustaquio Ordono, 1984). The
compromise penalty is therefore, improperly imposed.

In sum, the following schedule as recomputed illustrates the total tax liability of the private respondent
for the years 1959 through 1963

Add 6% interest
30% of Net per Summary of Total
Add 25%
Income as annum for a Tax Due from the
surcharge
Net Income Income Tax Due maximum of Private
under Sec. 72
under Secs. 24(a) 3 years under Respondent
NIRC of 1939
and (b) (2) Sec. 51(d) NIRC of 1939
NIRC of 1939
1959 P 472,025.16 P 141,607.54 P 35,401.88 P 25,489.35 P 202,498.77
1960 476,671.48 143,001.44 35,750.36 25,740.25 204,492.05
1961 734,812.77 220,443.83 55,110.95 39,679.88 315,234.66
1962 1,065,641.63 319,692.48 79,923.12 399,615.60
1963 1,550,230.48 465,069.14 116,267.28 581,336.42
____________
P1,703,177.40
Accordingly, private respondent is liable for unpaid taxes and charges in the total amount of ONE
MILLION SEVEN HUNDRED THREE THOUSAND ONE HUNDRED SEVENTY SEVEN AND FORTY CENTAVOS
(P1,703,177.40) The dismissal for lack of merit by this Court of the appeal in JAL v. Commissioner of
Internal Revenue (G.R. No. L-30041) on February 3, 1969 is not res judicata to the present case. The Tax
Court ruled in that case that the mere sale of tickets, unaccompanied by the physical act of carriage of
transportation, does not render the taxpayer therein subject to the common carrier's tax. The common
carrier's tax is an excise tax, being a tax on the activity of transporting, conveying or removing
passengers and cargo from one place to another. It purports to tax the business of transportation.
Being an excise tax, the same can be levied by the State only when the acts, privileges or businesses are
done or performed within the jurisdiction of the Philippines (Commissioner of Internal Revenue v. British
Overseas Airways Corporation, supra).

The subject matter of the case under consideration is income tax, a direct tax on the income of persons
and other entities "of whatever kind and in whatever form derived from any source." Since the two
cases treat of a different subject matter, the decision in G.R. No. L-30041 cannot be res judicata with
respect to this case.
PREMISES CONSIDERED, (a) the petition is GRANTED; (b) the decision of the Court of Tax Appeals in CTA
Case No. 2480 is SET ASIDE; and (c) private respondent JAL is ordered to pay the amount of
P1,703,177.40 as deficiency taxes for the fiscal years 1959 to 1963 inclusive of interest and surcharges.

SO ORDERED.

Fernan, C.J., Melencio-Herrera, Padilla, Bidin, Sarmiento, Griño-Aquino, Medialdea, and Regalado, JJ.,
concur.
Narvasa, J., I join Mr. Justice Feliciano in his dissent.
Gutierrez, Jr., J., I join in the dissenting.
Cruz, J., I join Justice Feliciano's dissent in the BOAC case.
Feliciano, J., please see dissenting opinion.
Davide, Jr., J., I join Mr. Justice Feliciano in his dissent.
Gancayco, J., retired.

[*]
Penned by Presiding Judge Amante Filler and concurred in by Associate Judges Constante C. Roaquin
and Alex Z. Reyes

DISSENTING OPINION

FELICIANO, J.:

As my learned brother Mr. Justice Paras has indicated in his opinion for the majority in this case, the
basic issues raised by this case were dealt with in Commissioner of Internal Revenue v. British Overseas
Airways Corp. (BOAC) (149 SCRA 397 [1987]), a decision reached en banc. The majority rule in BOAC has
been reiterated in two (2) cases: Commissioner of Internal Revenue v. Air India (157 SCRA 648
[1988]),[*] decided by the First Division of the Court; and Commissioner of Internal Revenue v. American
Air Lines, et al. (180 SCRA 274 [1989]), rendered by the Second Division of the Court. Since the case at
bar appears to be the first en banc case raising the same questions as BOAC, I would like to reiterate, in
very summary fashion, the principal points made in my dissenting opinion in BOAC.[**] Since these points
were developed at some length in the BOAC dissent, there is no necessity for once more referring to or
quoting the detailed statutory bases of the conclusions here reiterated (i.e., provisions of the National
Internal Revenue Code [NIRC] and Revenue Regulations No. 2 issued by the Secretary of Finance).
1. Whether or not Japan Air Lines (JAL) is a resident foreign corporation doing business in the
Philippines, is not a relevant consideration under the statutory provisions here involved, as they existed
during the taxable years from 1959 through to 1963. Whether a foreign corporation be a resident one
doing business in the Philippines, or a non-resident not doing business in the Philippines, is subject to
Philippine income tax only in respect of its Philippine-source income. The critical issue, in other words, is
always whether or not JAL was, during the taxable years involved, deriving income from sources within
the Philippines.

2. The tax involved here is the tax on income: we are not concerned with a sales tax nor with an excise
or privilege tax. For purposes of income taxation, I respectfully submit, the "source of income" relates
not to the physical sourcing of a flow of money or the physical situs of payment, but rather to the
"property, activity or service which produced the income" (Howden and Co. Ltd. v. Collector of Internal
Revenue, 13 SCRA 601 [1965]; British Traders Insurance Co. Ltd. v. Commissioner of Internal Revenue, 13
SCRA 719 [1965]; and Commissioner of Internal Revenue v. Phoenix Assurance Co. Ltd. 14 SCRA 52
[1965]. Also: 8 Mertens, Law of Federal Income Taxation, Section 45.27 [1957]).

3. The problem is, therefore, one of appropriate characterization of the transactions involved, that is,
identifying or determining "the activity or service which produced the income" and the situs or physical
location of such activity or service.

In my view, the activity or service giving rise to income, in the present case, is not the sale of personal
property (so-called "sale of airline tickets"); the generative activity is rather entering into and performing
a contract of service or carriage from one point of the globe (outside the Philippines) to another point in
the globe (also outside the Philippines). This was explained in the BOAC dissenting opinion in the
following terms:

"The appropriate characterization, in my opinion, of the BOAC transactions is that of entering into
contracts of service, i.e., carriage of passengers or cargo between points located outside the Philippines.

The phrase 'sale of airline tickets,' while widely used in popular parlance, does not appear to be correct
as a matter of tax law. The airline ticket in and of itself has no monetary value, even as scrap paper. The
value of the ticket lies wholly in the right acquired by the 'purchaser' the passenger to demand a
prestation from BOAC, which prestation consists of the carriage of the 'purchaser' or passenger from
one point to another outside the Philippines. The ticket is really the evidence of the contract of
carriage entered into between BOAC and the passenger. The money paid by the passenger changes
hands in the Philippines. But the passenger does not receive in the Philippines the consideration
therefor the service undertaken to be delivered by BOAC. The 'purchase price of the airline ticket' is
quite different from the purchase price of a physical good or commodity such as a pair of shoes or a
refrigerator or an automobile; it is really the compensation paid for the undertaking of BOAC to
transport the passenger or cargo outside the Philippines. [Underscoring in the original]

The characterization of the BOAC transactions either as sales of personal property or as purchases and
sales of personal property, appear entirely inappropriate from another viewpoint. Consider first
purchases and sales: is BOAC properly regarded as engaged in trading in the purchase and sale personal
property? Certainly, BOAC was not purchasing tickets outside the Philippines and selling them in the
Philippines. Consider next sales: can BOAC be regarded as 'selling' personal property produced or
manufactured by it?In a popular or journalistic sense, BOAC might be described as 'selling' 'a product' its
services. However, for the technical purposes of the law on income taxation, BOAC is in fact entering
into contracts of service or carriage. The very existence of 'source rules' specifically and precisely
applicable to the rendition of services must preclude the application here of 'source rules' applying
generally to sales, and purchases and sales of personal property which can be invoked only by the grace
of popular language. x x x" (149 SCRA at 421-422; italics supplied)

4. When the BOAC and JAL transactions are appropriately characterized as contracts of carriage or
service, the ordinary "source rule" under our NIRC and Revenue Regulations No. 2 relating to contracts
of service or carriage that the income generated is sourced or earned in the place where the contract is
performed becomes applicable. Applying this "source rule," it will be seen that the income earned by
BOAC or JAL by transporting persons and goods between two (2) points both outside the Philippines,
must be regarded as non-Philippine source income, and hence not taxable to a foreign corporation.

5. The unfairness arising from characterizing the transactions here as sales of personal property is
obvious, when one recalls that a corporate tax payer subject to income taxation is entitled to deduct
business expenses necessarily incurred in carrying out the activity or service generating the
income. If the issuance of airline passage documents is properly determined as a sale of personal
property, then all the tax payer can deduct are logically the cost of paper and printing of the air passage
documents, as well as the salaries of the sales personnel, office rentals, cost of utilities and similar
items. But what about the cost of rendering the service that the carrier becomes bound to deliver "to
the buyer" of the "airline ticket," the depreciation of the aircraft, the cost of aircraft maintenance and
repairs, the cost of high octane aviation fuel, the salaries of the pilots and cabin crew members, landing
fees, interest paid on borrowed capital, etc. In other words, the price paid for the "airline ticket" even
after deducting the cost of printing the documents and the salaries of the sales personnel is far from
pure profit. I believe this is the very reason why the law in respect of taxation of international carriers
was changed from taxation of net income (involving normal income tax rates of 25%-35%) to a gross
receipts or excise or privilege tax of 2.5% on "gross Philippine billings," i.e., to avoid unfairness to
international carriers and to cure what appeared to be a conspicuous lack of economic realism.

6. Finally, we should note the provisions of the Convention between the Philippines and the United
States of America with respect to taxes on income, signed on 1 October 1976 (Text in 7 Philippine Treaty
Series 523) and which went into force and effect on 16 October 1982, upon ratification by both
governments and exchange of instruments of ratification. Under Article 9 of the RP-US Tax Convention,
profits derived by a resident of one of the Contracting States from sources within the other Contracting
State "from the operation of ships in international traffic" or "from operation of aircraft in international
traffic" may be taxed. Article 4, entitled "Source of Income", of the Convention provides as follows:

"(7) Gross revenue from the operation of ships or aircraft in international traffic shall be treated as
income from sources within a Contracting State to the extent they are derived from outgoing traffic
originating in that State." (Italics supplied)

It seems to me that the foregoing reflects the understanding of both States Parties as to the correct
source rule applicable for income taxation of revenues derived from the operation in international
traffic of aircraft: that is, that they are sourced within a contracting state only to the extent that such
revenues arise "from outgoing traffic originating in that state," or, in terms of the present case, only to
the extent that they are derived from passengers and cargo transported from the Philippines to some
other part of the world. This is entirely in line with the view respectfully submitted in the BOAC
dissenting opinion and here reiterated.
I vote to deny the Petition for Review and to affirm the Decision of the Court of Tax Appeals in CTA Case
No. 2480.

Western Minolco Corp v CIR & CTA

209 Phil. 90

GUTIERREZ; JR., J.:

This is a petition for review on certiorari of a Court of Tax Appeals' decision
denying the petitioner's claim for the refund of P1,317,801.03, representing
money market transaction taxes which the petitioner paid from June 3,
1977to August 5, 1977, and the resolution denying its motion for
reconsideration.
Petitioner is a domestic corporation engaged in mining, particularly copper
concentrates for export mined from mineral lands
in Atok and Kibungan, Benguet.
In October 1972, upon application for tax exemption filed with the Bureau
of Mines, the petitioner was granted Certificate of Qualification for Tax
Exemption No. 34.
On December 24, 1976, the petitioner was also granted by the Securities
and Exchange Commission, under Certificate of Renewal No. R-1056,
authority to borrow money and issue commercial papers. Pursuant to this
authority, the petitioner borrowed funds from several financial institutions
from June, 1977 to October 1977 and paid the corresponding 35%
transaction tax due thereon in the amount of P1,317,801.03. The tax was
paid pursuant to Section 210(b) of the National Internal Revenue Code of
1977.
On February 16, 1978, the petitioner applied for the refund of the
P1,317,801.03 alleging that it was not liable to pay the 35% transaction tax
under its Certificate of Qualification for Tax Exemption No.
34 issued by the Secretary of Agriculture and Natural Resources, and
pursuant to Section 79-A of Commonwealth Act No. 137, otherwise known
as The Mining Act and Presidential Decree No. 463, the Mineral Resources
Development Decree of 1974, as implemented by Consolidated Mines
Administrative Order of the Secretary of Natural Resources dated May 17,
1974.
On February 19, 1979, the respondent Commissioner of Internal Revenue
denied the petitioner's claim for refund.
On May 29, 1979, the petitioner filed a petition for review with the
respondent Court of Tax Appeals. On August 28, 1979, the Commissioner of
Internal Revenue filed his answer alleging inter alia that:
xxx xxx xxx
"(a) The 35% transaction tax is actually a tax on the interest earnings of the
lender who is actually the taxpayer on whose income, the tax is imposed;
"(b) Petitioner did not pay the 35% transaction tax in its own behalf, as this
liability has been fully shifted to and paid for the account of the lender;
"(c) Petitioner merely acted as withholding agent in paying the
35% transaction tax based on the gross interest income of the lender;
"(d) Petitioner's exemption from taxes granted under Sections 52 and 53 of
Presidential Decree No. 463 relates to importations of machineries, tools
and equipment to be used in the mining operations and taxes on mining
claims, improvement thereon and mineral products, whereas the 35%
transaction tax is levied on transactions pertaining to commercial
papers issued in the primary money market as principal instruments; in
other words, Sections 52 and 53 of P.D. 463 do not apply to this case of
petitioner."
After due hearing but before the respondent court could render its
decision, the petitioner filed a pleading entitled "Request for Judicial
Notice and Request for Admission" alleging that the subject tax was paid in
the nature of a business tax, that petitioner's claim for refund is based on its
exemption from business taxes, and that its exemption is protected by
existing tax exemptions granted it under the mining law.
On January 29, 1982, the respondent court denied the petitioner's "Request
for Judicial Notice and Request for Admission."
On May 21, 1982, the respondent court rendered its decision dismissing the
petition for review for lack of merit.
The petitioner raised the following assignments of errors:
Assignment of Error No. 1
THAT THE TAX COURT ERRONEOUSLY CONCLUDED BY
SUPPORTING RESPONDENT COMMISSIONER'S CONTENTION
THAT THE 35% TRANSACTION TAX ON COMMERCIAL PAPER
(INVOLVED IN THIS CASE) IS AN INCOME TAX IMPOSED UPON THE
INTEREST EARNINGS OF THE MONEY LENDER WHO (ACCORDING
TO THE TAX COURT) IS ACTUALLY THE TAXPAYER
ON WHOSE INCOME THE 35% TAX IS IMPOSED.
Assignment of Error No. 2
THAT THE TAX COURT ERRED IN THAT ITS CONCLUSIONS
CONTRAVENE THE MANDATES IN SAID P.D. NO. 1154 (particularly
SEC. 2 OF WHICH) AMENDING SECTION 29(b) OF THE 1977 REVENUE
CODE BY 'EXCLUDING FROM GROSS INCOME' THE 'INTEREST
EARNED ON COMMERCIAL PAPER ISSUED IN THE PRIMARY
MARKET (WHICH) SHALL NOT BE INCLUDED IN THE
DETERMINATION OF GROSS INCOME OF THE LENDER FOR
PURPOSES OF INCOME TAXATION.
Assignment of Error No. 3
THAT THE TAX COURT ERRED IN CONFUSING TWO DISTINCT AND
SEPARATE ASPECTS OF THE TAXATION AND PERSONS OF
THE TAXPAYER AS IF THEY ARE ONE AND THE SAME PERSON,
WHEN THE LAW TREATS THEM AS DISTINCT AND SEPARATE
PERSONS AND ASPECTS THEREOF: - NAMELY: - (A) THE
INCIDENCE OF THE TAX AND THE PERSON LEGALLY LIABLE FOR
THE TAX; AND THE (B) 'ACTUAL PAYOR' OR 'RESULTING PAYOR' OF
THE 35% TRANSACTION TAX.
Assignment of Error No. 4
THAT THE TAX COURT ERRED IN RULING THAT THE 35%
TRANSACTION TAX IS AN INCOME TAX FROM WHICH
MINOLCO IS NOT EXEMPT AND NOT A BUSINESS TAX.
Assignment of Error No. 5
THAT THE TAX COURT ERRED IN CONFUSING THE 'INCIDENCE OF
THE TAX' AND THE 'ACTUAL PAYOR' OR 'RESULTING PAYOR' OF THE
35% TRANSACTION TAX; THAT CONFUSION OF THE TWO SEPARATE
PERSONS HAS RESULTED INTO THE ERRONEOUS CONCLUSION
THAT THE 35% TRANSACTION TAX IS AN INCOME TAX IMPOSED
UPON THE INTEREST EARNED BY THE MONEY LENDER INVOLVED
IN THE ISSUANCE OF THE COMMERCIAL PAPER UPON WHICH
INTEREST INCOME IS PAID OR COLLECTED; THAT THIS ERROR HAS
RESULTED IN RESPONDENT COMMISSIONER'S (AND THE TAX
COURT'S) VIEW THAT PETITIONER MINOLCO IS A
WITHHOLDING AGENT IN RESPECT OF THE INCOME TAX DUE TO BE
WITHHELD ON INTEREST INCOME OF MONEY LENDER.
Assignment of Error No. 6
THAT THE TAX COURT ERRED IN FAILING TO RECOGNIZE THAT
PETITIONER MINOLCO IS A QUALIFIED MINING LESSEE AND
DEVELOPER UNDER THE MINING LAW (C.A. No. 137, As Amended),
AND UNDER THE MINERAL RESOURCE DEVELOPMENT DECREE OF
1974 (P.D. No. 463, As Amended); THAT AS
SUCH, PETITIONER IS EXEMPTED FROM ALL TAXES (EXEMPT
INCOME TAX) PURSUANT TO THE LAW AND THE IMPLEMENTING
REGULATIONS THEREOF (CONSOLIDATED
MINES ADMINISTRATIVE ORDER, DATED AND EFFECTIVE MAY 17,
1975); FURTHER, THAT THE TAX COURT HAS ERRONEOUSLY RULED
TO IMPOSE THE INCOME TAX UPON MINOLCO, WHICH IS ON BASED
ON SECTION 24 OF THE REVENUE CODE AND MAY NOT BE
THE SUBJECT OF THE LITIGATION AS PART OF
PETITIONER'S APPEAL BEFORE THE TAX COURT.
Assignment of Error No. 7
THAT RESPONDENT HAVE FAILED TO CONSIDER THE 'WHEREAS
CLAUSES' OF THE ENABLYING ACT IMPOSING THE 35%
TRANSACTION TAX LAW (P.D. NO. 1154) IN THE APPLICATION
OF THE LAW, TOGETHER WITH THE IMPLEMENTING REGULATIONS
THEREOF AS WELL AS THE 'WHEREAS CLAUSES' OF THE
REPEALING LAW (P.D. NO. 1739) WHICH RECOGNIZES PETITIONER'S
RIGHT OF RELIEF AGAINST THE TRANSACTION TAX (SEE PEOPLE
VS. PURISIMA, L-42050-66; NOV. 20, 1978; 86 SCRA 542).
The errors raised by the petitioner are grounded on one main issue,
whether or not the petitioner is exempt from the 35% transaction tax.
We find the alleged errors without merit.
The petitioner claims exemption from the 35% transaction tax on the basis
of the following statutory provisions:
(1) Sec. 1 of Republic Act No. 3823, amending Commonwealth Act No. 137,
otherwise known as the "Mining Act" which reads:
"Section 1. There is hereby inserted after Section seventy-nine, Chapter VI
of the Mining Act, a new section which shall read as follows:
" 'Sec. 79-A. However, new mines, and old mines which
resume operation, when certified to as such by the Secretary of Agriculture
and Natural Resources upon the recommendation of the Director of Mines,
shall be granted five years complete tax exemptions, except income tax,
from the time of its actual bona fide orders for equipment for commercial
production.
"If any of the tax-exempt articles acquired under this provision are sold,
transferred or otherwise disposed of within a period of five years from such
tax-exempt acquisition, all taxes and duties which would have been due at
the time of such acquisition shall become due and payable, together with all
interests and surcharges, and which amount shall constitute a lien on these
properties."
(2) Sec. 1 of Presidential Decree No. 237, amending the Tax Code, which
reads:
"Section. 1. The last paragraph of Section One hundred ninety of
Commonwealth Act Numbered Four hundred sixty-six, otherwise known as
the 'National Internal Revenue Code' is further amended to read as follows:
" 'Sec. 190. Compensating Tax. -
xxx xxx xxx
"The provisions of existing laws to the contrary notwithstanding exemption
from this tax shall be limited to the following:
xxx xxx xxx
"4. Machineries, equipment, tools for production, plants to convert mineral
ores into saleable form, spare parts, supplies, materials, accessories,
explosives, chemicals, and transportation and communication facilities
imported by and for the use of new mines and old mines which resume
operations, when certified, to as such by the Secretary of Agriculture and
Natural Resources upon the recommendation of the Director of Mines, for a
period ending five (5) years from the first date of actual commercial
production of saleable mineral products: Provided, That such articles are
not locally available in reasonable quantity, quality and price and are
necessary or incidental in the proper operation of the mine;
xxx xxx xxx
(3) Sec. 1 of P.D. No. 238, further amending the Tax Code, which reads:
"Section 1. Section One hundred five of Republic Act Numbered Nineteen
hundred and thirty-seven, otherwise known as the 'Tariff and Customs
Code of the Philippines,' is further amended by inserting two new
paragraphs '(u)' and '(v)' therein after paragraph (t) thereof which shall
read as follows:
"Sec. 105. Conditionally-Free Importations.
xxx xxx xxx
" 'x x x Machineries, equipment, tools for production, plants to convert
mineral ores into saleable form, spare parts, supplies, materials,
accessories, explosives, chemicals, and transportation and communication
facilities imported by and for the use of new mines and old mines which
resume operations, when certified to as such by the Secretary of Agriculture
and Natural Resources upon the recommendation of the Director of Mines,
for a period ending five (5) years from the first date of actual commercial
production of saleable mineral product; Provided, That such articles are not
locally available in reasonable quantity, quality and price and are necessary
or incidental in the proper operation of the mine."
(4) Secs. 52 and 53 of Presidential Decree No. 463, amending Section 79-A,
Commonwealth Act No. 137, which read:
"Sec. 52. Power to Levy Taxes on Mines. Mining Operations and
Mineral Products. - Any law to the contrary notwithstanding, no province,
city, municipality, barrio or municipal district shall levy and collect taxes,
fees, rentals royalties or charges of any kind whatosever on mines, mining
claims, mineral products, or on any operation, process or activity connected
therewith.
"Sec. 53. Tax Exemptions. ? Machineries, equipment, tools for production,
plants to convert mineral ores into saleable form, spare parts, supplies,
materials, accessories, explosives, chemicals and transportation and
communication facilities imported by and for the use of new mines and old
mines which resume operation, when certified as such by the Secretary
upon recommendation of the Director, are exempt from the payment of
customs duties and all taxes except income tax for a period starting from
exploration and ending five (5) years from the first date of actual
commercial production of saleable mineral products: Provided, That such
articles are not locally available in reasonable quantity, quality and price
and are necessary or incidental in the proper operation of the mine.
xxx xxx xxx
"All mining claims, improvements thereon and mineral products
derived therefrom shall likewise be exempt from the payment of all taxes,
except income tax, for the same period provided for in the first paragraph
of this section."
xxx xxx xxx
The statutory provisions on tax exemptions clearly exclude the 35%
transaction tax.
Section 1 of Presidential Decree No. 237 on Compensating Tax, Section 1 of
P.D. No. 238 on Conditionally Free Importations, and Section 53 of P. D.
No. 463 all refer to tax exemptions for importations of machineries, tools
for production, plants to convert mineral ores into saleable form, spare
parts, supplies, materials, accessories, explosives, chemicals and
transportation and communication facilities, to be used in mining
operations. Section 53 of P.D. No. 463 likewise refers to tax exemptions for
mining claims and improvements thereon, and mineral products, except
income tax. The petitioner's Certificate of Qualification for Tax Exemption
No. 34 exempts "x x x from payment of all taxes except income tax, payable
by him in the conduct of his business and in the importation of
machineries, spare parts and/or equipment listed in the stamped "Annex I"
which are considered to be indispensable in the operation and will be used
by said operator/lessee exclusively in the mineral land mentioned above.
Clearly, the transaction tax of P1,317,801.03 paid by the petitioner was not
actually imposed upon it in the conduct of its mining business or in the
importation of machinery, spare parts and/or equipment listed in the
stamped "ANNEX I" of its certificate of qualification for tax exemption and
which are indispensable in the operation and used exclusively on
petitioner's mineral land.
Petitioner submits that inasmuch as taxes in general constitute allowable
deductions from gross income in the determination of taxable net income,
the 35% transaction tax is a business tax and not an income tax because the
Revenue Code itself classifies it as "Business Tax" under Title V, and that P.
D. No. 1154 expressly states that the transaction tax shall be allowed as a
deductible item for purposes of determining the borrower's taxable
income."
The petitioner's contentions deserve scant consideration. The 35%
transaction tax is imposed on interest income from commercial papers
issued in the primary money market. Being a tax on interest, it is a tax on
income.
As correctly ruled by the respondent Court of Tax Appeals:
"'Accordingly, we need not and do not think it necessary to discuss further
the nature of the transaction tax more than to say that the incipient scheme
in the issuance of Letter of Instructions No. 340 on November 24, 1975
(O.G. Dec. 15, 1975), i.e., to achieve operational simplicity and effective
administration in capturing the interest-income 'windfall' from money
market operations as anew source of revenue, has lost none of its animating
principle in parturition of amendatory Presidential Decree No. 1154, now
Section 210 (b) of the Tax Code. The tax thus imposed is actually a tax
on interest earnings of the lenders or placers who are actually the taxpayers
in whose income is imposed. Thus, 'the borrower withholds the tax of 35%
from the interest he would have to pay thelender so that he (borrower) can
pay the 35% of the interest to the Goverment.' (President Marcos, Times
Journal, June 17, 1977 cited in Respondent's Memorandum, p.
6). x x x. Suffice it to state that the broad concensus of fiscal and monetary
authorities is that 'even if nominally, the borrower is made to pay the tax,
actually, the tax is on the interest earning of the immediate and all
priorlenders/placers of the money.' x x x." (Rollo, pp. 36-37)
The 35% transaction tax is an income tax on interest earnings of the
lenders or placers. The latter are actually the taxpayers. Therefore, the tax
cannot be a tax imposed upon the petitioner. In other words, the petitioner
who borrowed funds from several financial institutions by issuing
commercial papers merely withheld the 35% transaction tax before paying
to the financial institutions the interests earned by them and later remitted
the same to the respondent Commissioner of Internal Revenue. The tax
could have been collected by a different procedure but the statute chose this
method. Whatever collecting procedure is adopted does not change the
nature of the tax.
Furthermore, whether or not certain taxes are on income is not necessarily
determined by their deductibility or non-deductibility from gross income.
As correctly observed by the Solicitor General, income in the form of
dividends, capital gains on real property pursuant to Batas Pambansa Blg.
37, shares of stock pursuant to Presidential Decree 1739, and interests on
savings in bank accounts, for instance, are incomes, yet they are not
includible in the gross income when income taxes are paid because these
are subject to final withholding taxes.
The petitioner also submits that the 35% transaction tax is a business tax
because it is imposed under Title V, entitled "Taxes on Business" and
classified specially under Chapter II, entitled "Tax on Business."
The location of the 35% tax in the Tax Code does not necessarily determine
its nature. Again, we agree with the Solicitor General that the legislative
body must have realized later that the subject tax was inappropriately
included among the taxes on business because Section 210 of the Tax Code
has been repealed by Presidential Decree No. 1739, which now imposes a
tax of 20% on interests from deposits and yields from deposit substitutes
such as commercial papers issued in the primary market as principal
instrument and provides for them in Section 24(cc), under Chapter III, Tax
on Corporations, Title II - Income Tax.
Petitioner Western Minolco Corporation has failed to justify its
claimed exemption from the 35% transaction tax. The decision of the
Commissioner of Internal Revenue denying the petitioner's claim for
refund is affirmed. It bears repeating that the law looks with disfavor on tax
exemptions and he who would seek to be thus privileged must justify it by
words too plain to be mistaken and too categorical to be
misinterpreted. (Commissioner of Internal Revenue v. P.
J. Kiener Company Ltd., International Construction Corporation, et al., L-
24754, July 18, 1975, 65 SCRA 142).
WHEREFORE, the instant petition is DENIED for lack of merit. The
decision of the respondent Court of Tax Appeals is AFFIRMED in toto.
SO ORDERED.

G.R. No. L-12954 February 28, 1961

COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
ARTHUR HENDERSON, respondent.

x---------------------------------------------------------x

G.R. No. L-13049 February 28, 1961

ARTHUR HENDERSON, petitioner,
vs.
COLLECTOR OF INTERNAL REVENUE, respondent.

Office of the Solicitor General for petitioner.

Formilleza & Latorre for respondent.

PADILLA, J.:

These are petitioner filed by the Collector of Internal Revenue (G.R. No. L-12954) and by Arthur
Henderson (G.R. No. L-13049) under the provisions of section 18, Republic Act No. 1125, for review
of a judgment dated 26 June 1957 and a resolution dated 28 September 1957 rendered and adopted
by the Court of Tax Appeals in Case No. 237.

The spouses Artuhur Henderson and Marie B. Henderson (later referred to as the taxpayers) filed
with the Bureau of Internal Revenue returns of annual net income for the years 1948 to 1952,
inclusive, where the following net incomes, personal exemptions and amounts subject to tax appear:

1948:
Net Income P29,573.79
.......................................................
Less:Personal Exemption 2,500.00
..............................
Amount subject to tax P27,073.79
.......................................
1949:
Net Income P31,817.66
.......................................................
Less:Personal Exemption 2,500.00
..............................
Amount subject to tax P29,317.66
.......................................
1950:
Net Income P34,815.74
.......................................................
Less:Personal Exemption 3,000.00
..............................
Amount subject to tax P31,815.74
.......................................
1951:
Net Income P32,605.83
........................................................
Less:Personal Exemption 3,000.00
..............................
Amount subject to tax P29,605.83
.......................................
 1952:
Net Income P36,780.11
.......................................................
Less:Personal Exemption 3,000.00
..............................
Amount subject to tax P33,780.11
.......................................

(Exhibits 1, 3, 5, 7, 9, A, F, J, N, R). In due time the taxpayers received from the Bureau of Internal
Revenue assessment notices Nos. 15804-48, 25450-49, 15255-50, 25705-51 and 22527-52 and
paid the amounts assessed as follows:

1948:
14 May 1949, O.R. No. 52991, Exhibit B P2,068.12
....………..
12 September 1950, O.R. No. 160473, Exhibit B-1 2,068.11
.
Total Paid ......................................................... P4,136.23
1949:
13 May 1950, O.R. No. 232366, Exhibit G P2,314.95
...........…
15 September 1950, O.R. No. 247918, Exhibit G- 2,314.94
1.
Total Paid ......................................................... P4,629.89
1950:
27 April 1951, O.R. No. 323173, Exhibit K P7,273.00
...……….
1951:
Amount withheld from salary and paid by P5,780.40
employer .
15 May 1952, O.R. No. 33250, Exhibit O 360.50
.................
15 August 1952, O.R. No. 383318, Exhibit O-1 361.20
..…..
Total Paid ......................................................... P6,502.10
1952:
Amount withheld from salary and paid by P5,660.40
employer .
18 May 1953, O.R. No. 438026, Exhibit T 1,160.30
..…………
13 August 1953, O.R. No. 443483, Exhibit T-1 1,160.30
...…..
Total Paid ......................................................... P7,981.00
On 28 November 1953, after investigation and verification, the Bureay of Internal Revenue
reassessed the taxpayers'income for the years 1948 to 1952, inclusive, as follows:

1948:
Net income per return
..................................……………………… P29,573.79
Add:
Rent expense
.........................................................…….. 7,200.00
Additional bonus for 1947 received May 13, 1948 6,500.00
.………
Other income:
Manager's residential expense (2/29/48 a/c/#4.51) 1,400.00
Manager's residential expense (refer to 1948 P & L) 1,849.32
..
Entrance fee — Marikina Gun & Country Club
..…….. 200.00
Net income per investigation P46,723.11
.........................................………...
Less: Personal exemption
...............................................………. 2,500.00
Net taxable income
..........................................................……… P44,223.11
Tax due thereon
...............................................................……… P8,562.47
Less: Amount of tax already paid per OR #52991 &
160473
..……………………………………………………… 4,136.23
Deficiency tax still due & assessable ............................ P4,426.24

1949:
Net income per return
..................................……………………… P31,817.66
Add: disallowances —
Capital loss (no capital gain)
................... P3,248.84
Undeclared bonus
...................………….. 3,857.75
Rental allowance from A.I.U.
................... 1,800.00
Subsistence allowance from A.I.U.
.…….. 6,051.30 14,958.09
Net income per investigation P46,775.75
.........................................………...
Less: Personal exemption 2,500.00
...............................................………..
Amount of income subject to tax 43,275.75
..................................………….
Tax due thereon P8,292.21
...............................................................……….
Less: tax already assessed & paid per OR Nos. 232366 & 4,629.89
247918
Deficiency tax due P3,662.23
............................................................……….
(Should be) ...................................................................... 3,662.32

1950:
Net income per return
..................................……………………… P34,815.74
Add:
Rent, electricity, water allowances
.......................……….. 8,373.73
Net income per investigation P43,189.47
.........................................………...
Less: Personal exemption 3,000.00
...............................................………..
Net taxable income P40,189.47
..........................................................………..
Tax due thereon P10,296.00
...............................................................……….
Less: tax already paid per OR No. #323173 7,273.00
Deficiency tax due & assessable P3,023.00
.................……………………..

1951:
Net income per return
..................................……………………… P32,605.83
Add: house rental allowance from AIU 5,782.91
Net income per investigation
.........................................………... P83,388.74
Less: Personal exemption
...............................................……….. 3,000.00
Amount of income subject to tax
..................................………….. P35,388.74
Tax due thereon
...............................................................………. P 8,560.00
Less: tax already assessed and paid per O.R. Nos. A33250
& 383318 .......................……………………………………… 6,502.00
 Deficiency tax due
.................………………………………………. P2,058.00

1952:
Net income per return
..................................……………………… P36,780.11
Add:
Withholding tax paid by company
..................................... 600.00
Travelling allowances
....................................................... 3,247.40
Allowances for rent, telephone, water, electricity, etc.
..... 7,044.67
Net income per investigation P47,672.18
.........................................………...
Less: Personal exemption 3,000.00
...............................................………..
Net taxable income P44,672.18
..................................…………………………
Tax due thereon P12,089.00
...............................................................……….
Less: Tax already withheld P5,660.40

Tax already paid per O.R. Nos. #438026, 443484 2,320.60 7,981.00
Deficiency tax still due & collectible P4,108.00
...............................…………

(Exhibits 2, 4, 6, 8, 10) and demanded payment of thedeficiency taxes on or before 28 February

1954 with respectto those due for the years 1948, 1949, 1950 and 1952and on or before 15
February 1954 with respect to thatdue for the year 1951 (Exhibits B-2, H, L, P, S).

In the foregoing assessments, the Bureau of InternalRevenue considered as part of their taxable
income thetaxpayer-husband's allowances for rental, residential expenses,subsistence, water,
electricity and telephone; bonuspaid to him; withholding tax and entrance fee to the Marikinagun and
Country Bluc paid by his employer for hisaccount; and travelling allowance of his wife. On 26 and27
January 1954 the taxpayers asked for reconsiderationof the foregoing assessment (pp. 29, 31, BIR
rec.) andon 11 Februayr 1954 and 28 February 1955 stated thegrounds and reasons in support of
their request for reconsideration (pp. 36-38, 62-66, BIR rec.). The claimthat as regards the husband-
taxpayer's allowances forrental and utilities such as water, electricity and telephone,he did not
receive the money for said allowances, but thatthey lieved in the apartment furnished and paid for
byhis employer for its convenience; that they had no choicebut live in the said apartment furnished
by his employer,otherwise they would have lived in a less expensive one;that as regards his
allowances for rental of P7,200 andresidential expenses of P1,400 and P1,849.32 in 1948, rentalof
P1,800 and subsistence of P6,051.50 (the latter merelyconsisting of allowances for rent and utilities
such as light,water, telephone, etc.) in 1949 rental, electricity and waterof P8,373.73 in 1950, rental
of P5,782.91 in 1951 and rental,telephone, water, electricity, etc. of P7,044.67 in 1952, onlythe
amount of P3,900 for each year, which is the amountthey would have spent for rental of an
apartment includingutilities, should be taxed; that as regards the amount ofP200 representing
entrance fee to the Marikina Gun andCountry Club paid for him by his employer in 1948, thesame
should not be considered as part of their income forit was an expense of his employer and his
membershiptherein was merely incidental to his duties of increasingand sustaining the business of
his employer; and that asregards the wife-taxpayer's travelling allowance of P3,247.40 in 1952, it
should not be considered as part of theirincome because she merely accompanied him in his
businesstrip to New York as his secretary and, at the behestof her husband's employer, to study and
look into the detailsof the plans and decorations of the building intendedto be constructed byn his
employer in its property at DeweyBoulevard. On 15 and 27 February 1954, the taxpayerspaid the
deficiency taxes assessed under Official ReceiptsNos. 451841, 451842, 451843, 451748 and
451844 (ExhibitsC, I, M, Q, and Y). After hearing conducted by theConference Staff of the Bureau of
Internal Revenue on5 October 1954 (pp. 74-85, BIR rec.), on 27 May 1955the Staff recommended to
the Collector of Internal Revenuethat the assessments made on 28 November 1953 (Exhibits2, 4, 6,
8, 10) be sustained except that the amountof P200 as entrance fee to the Marikina Gun and
CountryClub paid for the husband-taxpayer's account by his employerin 1948 should not be
considered as part of thetaxpayers' taxable income for that year (pp. 95-107, BIRrec.). On 14 July
1955, in line with the recommendationof the Conference Staff, the Collector of Internal
Revenuedenied the taxpayers' request for reconsideration, exceptas regards the assessment of their
income tax due for theyear 1948, which was modified as follows:

Net income per return P29,573.79

Add: Rent expense 7,200.00
Additional bonus for 1947
received on May 13, 1948 6,500.00
Manager's residential expense
(2/29/48 a/c #4.41) 1,400.00
Manager's residential expense
(1948 profit and loss) 1,849.32
Net income per investigation P46,523.11
Less: Personal exemption 2,500.00
Net taxable income P44,023.11
Tax due thereon P 8,506.47
Less; Amount already paid 4,136.23
Deficiency tax still due P 4,370.24

and demanded payment of the deficiency taxes of P4,370.24for 1948, P3,662.23 for 1949, P3,023
for 1950, P2,058 for1951 and P4,108 for 1952, 5% surcharge and 1% monthlyinterest thereon from
1 March 1954 to the date of paymentand P80 as administrative penalty for late payment,to the City
Treasurer of Manila not later than 31 July1955 (Exhibit 14). On 30 January 1956 the taxpayersagain
sought a reconsideration of the denial of their requestfor reconsideration and offered to settle the
case ona more equitable basis by increasing the amount of thetaxable portion of the husband-
taxpayer's allowances forrental, etc. from P3,000 yearly to P4,800 yearly, which "isthe value to the
employee of the benefits he derived therefrommeasured by what he had saved on account thereof'in
the ordinary course of his life ... for which hewould have spent in any case'". The taxpayers also
reiteratedtheir previous stand regarding the transportationallowance of the wife-taxpayer of
P3,247.40 in 1952 andrequested the refund of the amounts of P3,477.18, P569.33,P1,294, P354
and P2,164, or a total of P7,858.51, (Exhibit Z). On 10 February 1956 the taxpayers again
requestedthe Collector of Internal Revenue to refund to them theamounts allegedly paid in excess
as income taxes for theyears 1948 to 1952, inclusive (Exhibit Z-1). The Collectorof Internal Revenue
did not take any action on the taxpayers'request for refund.
On 15 February 1956 the taxpayers filed in the Courtof Tax Appeals a petition to review the decision
of theCollector of Internal Revenue (C.T.A. Case No. 237). Afterhearing, on 26 June 1957 the Court
rendered judgmentholding "that the inherent nature of petitioner's(the husband-taxpayer)
employment as president of theAmerican International Underwriters as president of theAmerican
International Underwriters of the Philippines,Inc. does not require him to occupy the apartments
suppliedby his employer-corporation;" that, however, onlythe amount of P4,800 annually, the ratable
value to him ofthe quarters furnished constitutes a part of taxable income;that since the taxpayers
did not receive any benefitout of the P3,247.40 traveling expense allowance grantedin 1952 to the
wife-taxpayer and that she merely undertookthe trip abroad at the behest of her husband's
employer,the same could not be considered as income; andthat even if it were considered as such,
still it could not besubject to tax because it was deductible as travel expense;and ordering the
Collector of Internal Revenue to refundto the taxpayers the amount of P5,109.33 with interestfrom 27
February 1954, without pronouncement as tocosts. The taxpayers filed a motion for
reconsiderationclaiming that the amount of P5,986.61 is the amount refundableto them because the
amounts of P1,400 and P1,849.32 as manager's residential expenses in 1948 shouldnot be included
in their taxable net income for the reasonthat they are of the same nature as the rentals for
theapartment, they being mainly expenses for utilities aslight, water and telephone in the apartment
furnished bythe husbant-taxpayer's employer. The Collector of InternalRevenue filed an opposition
to their motion for reconsideration.He also filed a separate motion for reconsiderationof the decision
claiming that his assessmentunder review was correct and should have been affirmed.The taxpayers
filed an opposition to this motion for reconsiderationof the Collector of Internal Revenue; thelatter, a
reply thereto. On 28 September 1957 the Courtdenied both motions for reconsideration. On 7
October1957 the Collector of Internal Revenue filed a notice ofappeal in the Court of Tax Appeals
and on 21 October1957, within the extension of time previously granted bythis Court, a petition for
review (G.R. No. L-12954). On29 October 1957 the taxpayers filed a notice of appealin the Court of
Tax Appeals and a petition for review inthis Court (G.R. No. L-13049).

The Collector of Internal Revenue had assigned the followingerrors allegedly committed by the Court
of TaxAppeals:

I. The Court of Tax Appeals erred in finding that theherein respondent did not have any
choice in the selection ofthe living quarters occupied by him.

II. The Court of Tax Appeals erred in not consideringthe fact that respondent is not a minor
company official butthe President of his employer-corporation, in the appreciationof
respondent's alleged lack of choice in the matter of the selectionof the quarters occupied by
him.

III. The Court of Tax Appeals erred in giving full weightand credence to respondent's
allegation, a self-serving and unsupported declaration that the ratable value to him of the
living quarters and subsistence allowance was only P400.00 a month.

IV. The Court of Tax Appeals erred in holding that only the ratable value of P4,800.00 per
annum, or P400.00 a month constitutes income to respondent.

V. The Court of Tax Appeals erred in arbitrarily fixing the amount of P4,800.00 per annum, or
P400.00 a month as the only amount taxable aganst respondent during the five tax years in
question.

VI. The Court of Tax Appeals erred in not finding that travelling allowance in the amount of
P3,247.40 constituted income to respondent and, therefore, subject to the income tax.
 VII. The Court of Tax Appeals erred in ordering the refund of the sum of P5,109.33 with
interest from February 17, 1954. (G.R. No. L-12954.)

The taxpayers have assigned the following errors allegedly committed by the Court of Tax Appeals:

I. The Court of Tax Appeals erred in its computation of the 1948 income tax and
consequently in the amount that should be refunded for that year.

II. The Court of Tax Appeals erred in denying our motion for reconsideration as contained in
its resolution dated September 28, 1957. (G.R. No. L-13049.)

The Government's appeal:

The Collector of Internal Revenue raises questions of fact. He claims that the evidence is not
sufficient to support the findings and conclusion of the Court of Tax Appeals that the quarters
occupied by the taxpayers were not of their choice but that of the husband-taxpayer's employer; that
it did not take into consideration the fact that the husband-taxpayer is not a mere minor company
official, but the highest executive of his employer-corporation; and that the wife-taxpayer's trip
abroad in 1952 was not, as found by the Court, a business but a vacation trip. In Collector of Internal
Revenue vs. Aznar, 56, Off. Gaz. 2386, this Court held that in petitions for review under section 18,
Republic Act No. 1125, it may review the findings of fact of the Court of Tax Appeals.

The determination of the main issue in the case requires a review of the evidence. Are the
allowances for rental of the apartment furnished by the husband-taxpayer's employer-corporation,
including utilities such as light, water, telephone, etc. and the allowance for travel expenses given by
his employer-corporation to his wife in 1952 part of taxable income? Section 29, Commonwealth Act
No. 466, National Internal Revenue Code, provides:

"Gross income" includes gains, profits, and income derived from salaries, wages, or
compensation for personal service of whatever kind and in whatever form paid, or from
professions, vocations, trades, businesses, commerce, sales, or dealings in property,
whether real or personal, growing out of the ownership or use of or interest in such property;
also from interest, rents dividend, securities, or the transaction of any business carried on for
gain or profit, or gains, profits, and income derived from any source whatever. (Emphasis
ours.)

The Court of Tax Appeals found that the husband-taxpayer "is the president of the American
International Underwriters for the Philippines, Inc., a domestic corporation engaged in insurance
business;" that the taxpayers "entertained officials, guests and customers of his employer-
corporation, in apartments furnished by the latter and successively occupied by him as president
thereof; that "In 1952, petitioner's wife, Mrs. Marie Henderson, upon request o Mr. C. V. Starr,
chairman of the parent corporation of the American International Underwriters for the Philippines,
Inc., undertook a trip to New York in connection with the purchase of a lot in Dewey Boulevardby
petitioner's employer-corporatio, the construction of a building thereon, the drawing of prospectus
and plans for said building, and other related matters."

Arthur H. Henderson testified that he is the President of American International Underwriters for the
Philippines, Inc., which representa a group of American insurance companies engagad in the
business of general insurance except life insurance; that he receives a basic annual salary of
P30,000 and allowance for house rental and utilities like light, water, telephone, etc.; that he and his
wife are childless and are the only two in the family; that during the years 1948 to 1952, they lived in
apartments chosen by his employer; that from 1948 to the early part of 1950, they lived at the
Embassy Apartments on Dakota Street, Manila, where they had a large sala, three bedrooms, dining
room, two bathrooms, kitchen and a large porch, and from the early part of 1950 to 1952, they lived
at the Rosaria Apartments on the same street where they had a kitchen, sala, dining room two
bedrooms and bathroom; that despite the fact that they were the only two in the family, they had to
live in apartments of the size beyond their personal needs because as president of the corporation,
he and his wife had to entertain and put up houseguests; that during all those years of 1948 to 1952,
inclusive, they entertained and put up houseguests of his company's officials, guests and customers
such as the president of C, V. Starr & Company, Inc., who spent four weeks in his apartment,
Thomas Cocklin, a lawyer from Washington, D.C., and Manuel Elizalde, a stockholder of AIUPI; that
were he not required by his employer to live in those apartments furnished to him, he and his wife
would have chosen an apartment only large enough for them and spend from P300 to P400 monthly
for rental; that of the allowances granted to him, only the amount of P4,800 annually, the maximum
they would have spent for rental, should be considered as taxable income and the excess treated as
expense of the company; and that the trip to New York undertaken by his wife in 1952, for which she
was granted by his employer-corporation travelling expense allowance of P3,247.40, was made at
the behest of his employer to assist its architect in the preparation of the plans for a proposed
building in Manila and procurement of supplies and materials for its use, hence the said amount
should not be considered as part of taxable income. In support of his claim, letters written by his wife
while in New York concerning the proposed building, inquiring about the progress made in the
acquisition of the lot, and informing him of the wishes of Mr. C. V. Starr, chairman of the board of
directors of the parent-corporation (Exhibits U-1, U-1-A, V, V-1 and W) and a letter written by the
witness to Mr. C. V. Starr concerning the proposed building (Exhibits X, X-1) were presented in
evidence.

Mrs. Marie Henderson testified that for almost three years, she and her husband gave parties every
Friday night at their apartment for about 18 to 20 people; that their guests were officials of her
husband's employer-corporation and other corporations; that during those parties movies for the
entertainment of the guests were shown after dinner; that they also entertained during luncheons
and breakfasts; that these involved and necessitated the services of additional servants; and that in
1952 she was asked by Mr. C. V. Starr to come to New York to take up problems concerning the
proposed building and entertainment because her husband could not make the trip himself, and
because "the woman of the family is closer to those problems."

The evidence presented at the hearing of the case substantially supports the findings of the Court of
Tax Appeals. The taxpayers are childless and are the only two in the family. The quarters, therefore,
that they occupied at the Embassy Apartments consisting of a large sala, three bedrooms, dining
room, two bathrooms, kitchen and a large porch, and at the Rosaria Apartments consisting of a
kitchen, sala dining room, two bedrooms and a bathroom, exceeded their personal needs. But the
exigencies of the husband-taxpayer's high executive position, not to mention social standing,
demanded and compelled them to live in amore spacious and pretentious quarters like the ones they
had occupied. Although entertaining and putting up houseguests and guests of the husbnad-
taxpayer's employer-corporation were not his predominand occupation as president, yet he and his
wife had to entertain and put up houseguests in their apartments. That is why his employer-
corporation had to grant him allowances for rental and utilities in addition to his annual basic salary
to take care of those extra expenses for rental and utilities in excess of their personal needs. Hence,
the fact that the taxpayers had to live or did not have to live in the apartments chosen by the
husband-taxpayer's employer-corporation is of no moment, for no part of the allowances in question
redounded to their personal benefit or was retained by them. Their bills for rental and utilities were
paid directly by the employer-corporation to the creditors (Exhibit AA to DDD, inclusive; pp. 104,
170-193, t.s.n.). Neverthelss, as correctly held by the Court of Tax Appeals, the taxpayers are
entitled only to a ratable value of the allowances in question, and only the amount of P4,800
annually, the reasonable amount they would have spent for house rental and utilities such as light,
water, telephone, etc., should be the amount subject to tax, and the excess considered as expenses
of the corporation.

Likewise, the findings of the Court of Tax Appeals that the wife-taxpayer had to make the trip to New
York at the behest of her husband's employer-corporation to help in drawing up the plans and
specificatins of a proposed building, is also supported by the evidence. The parts of the letters
written by the wife-taxpayer to her husband while in New York and the letter written by the husband-
taxpayer to Mr. C. V. Starr support the said findings (Exhibits U-2, V-1, W-1, X). No part of the
allowance for travellking expenses redounded to the benefit of the taxpayers. Neither was a part
thereof retained by them. The fact that she had herself operated on for tumors while in New York
wsa but incidental to her stay there and she must have merely taken advantage of her presence in
that city to undergo the operation.

The taxpayers' appeal:

The taxpayers claim that the Court of Tax Appeals erred in considering the amounts of P1,400 and
P1,849.32, or a total of P3,249.32, for "manager's residential expense" in 1948 as taxable income
despite the fact "that they were of the same nature as the rentals for the apartment, they being
expenses for utilities, such as light, water and telephone necessarily incidental to the apartment
furnished to him by his employer."

Mrs. Crescencia Perez Ramos, an examiner of the Bureau of Internal Revenue who examined the
books of accound of the American International Underwriters for the Philippines, Inc., testified that
he total amount of P3,249.32 was reflected in its books as "living expenses of Mr. and Mrs. Arthur
Henderson in the quarters they occupied in 1948;" and that "the amount of P1,400 was included as
manager's residential expense while the amount of P1,849.32 was entered as profit and loss
account."

Buenaventura Loberiza, acting head of the accouting department of the American International
Underwriters for the Philippines, Inc., testified that rentals, utilities, water, telephone and electric bills
of executives of the corporation were entered in the books of account as "subsistence allowances
and expenses;" that there was a separate account for salaries and wages of employees and officers;
and that expenses for rentals and other utilities were not charged to salary accounts.

The taxpayers' claim is supported by the evidence. The total amount of P3,249.32 "for manager's
residential expense" in 1948 should be treated as rentals for apartments and utilities and should not
form part of the ratable value subject to tax.

The computation made by the taxpayers is correct. Adding to the amount of P29,573.79, their net
income per return, the amount of P6,500, the bonus received in 1948, and P4,800, the taxable
ratable value of the allowances, brings up their gross income to P40,873.79. Deducting therefrom
the amount of P2,500 for personal exemption, the amount of P38,373.79 is the amount subject to
income tax. The income tax due on this amount is P6,957.19 only. Deducting the amount of income
tax due, P6,957.19, from the amount already paid, P8,562.47 (Exhibits B, B-1, C), the amount of
P1,605.28 is the amount refundable to the taxpayers. Add this amount to P563.33, P1,294.00,
P354.00 and P2,154.00, refundable to the taxpayers for 1949, 1950, 1951 and 1952 and the total is
P5,986.61.

The judgment under review is modified as above indicated. The Collector of Internal Revenue is
ordered to refund to the taxpayers the sum of P5,986.61, without pronouncement as to costs.
Bengzon, Actg. C.J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera, Paredes and
Dizon, JJ.,concur.

G.R. No. L-23041 July 31, 1969

E. RODRIGUEZ, INC., petitioner,

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

Tolentino and Garcia and D. R. Cruz for petitioner.

Office of the Solicitor General Arturo A. Alafriz, Solicitor Alejandro B. Afurong and Special Attorney
Salvador D. David for respondents.

BARREDO, J.:

This is a petition for review of the decision of the Court of Tax Appeals in its CTA Case No. 849,
affirming the decision of the respondent Collector (now Commissioner) of Internal Revenue holding
petitioner E. Rodriguez, Inc. liable for deficiency income tax in the sum of P63,880.00 for the year
1950.

The records of the case show that on July 17, 1948, Congress enacted Republic Act No. 333, 1
pursuant to which the Republic of the Philippines sued the petitioner, among four other defendants,
in Civil Case No. Q-54 of the Court of First Instance of Quezon City, for the expropriation of about
1,360,000 square meters of land owned by it and situated within the area delimited for the new
capital city site. After due trial, the said court rendered a decision in the case, dated February 21,
1950, with the following dispositive portion:

WHEREFORE, judgment is hereby rendered, declaring plaintiff entitled to retain and

appropriate the property involved in this proceeding, as site for the development and
establishment of the new capital city of the Philippines in accordance with our condemnation
order dated September 19, 1949; and ordering plaintiff to pay defendants, as just
compensation for the lands to be taken from them, the following amounts, to wit: to
defendant Eulogio Rodriguez, Sr., the sum of THIRTY-NINE THOUSAND SEVEN
HUNDRED SEVENTY-SIX PESOS (P39,776.00); to defendant E. Rodriguez, Inc., the sum
of ONE MILLION FOUR HUNDRED EIGHTEEN THOUSAND SIX HUNDRED FOUR
(P1,418,604.00) PESOS; to defendant Luzon Investment & Development Co., the sum of
FIVE THOUSAND TWO HUNDRED EIGHTY (P5,280.00) PESOS; and to defendants
Enrique Manaloto and Canuto G. Manuel, the sum of SIXTEEN THOUSAND SEVEN
HUNDRED TWENTY (P16,720.00) PESOS, with interest at the rate of 6% per annum on the
said amounts from September 19, 1949, the date the plaintiff entered upon the possession of
the lands in question until payment, plus the costs.

Following the issuance of the above-mentioned decision, however, a series of negotiations were had
between petitioner and the Government, represented by the Capital City Planning Commission, after
which, the said parties entered into a compromise agreement under date of May 11, 1950,
providing, inter alia, as follows:

(1) That the parties will accept the decision laid down in said case by the Court of First
Instance of Rizal (Quezon City Branch) with the following stipulations:

a. That the defendants mentioned above hereby waive all interest due on the
adjudged value of the expropriated properties;
 b. That the defendants above-named hereby donate 207,006 square meters out of
Lots Nos. 41-C-3 and 39, object of expropriation in Civil Case No. Q-54;

c. That defendant Eulogio Rodriguez, Inc. obligates itself to donate as it hereby

donates the land object of expropriation in Civil Case No. Q-90, in favor of the
Republic of the Philippines, containing an area of 15,200 square meters, which is a
portion of Lot No. 41-C-3 as indicated in the plan attached to the complaint therein;
said defendant Eulogio Rodriguez, Inc. binding itself to execute the necessary deed
of donation thereof;

d. That defendants named above agree to the payment of the price awarded by the
Court subject to the foregoing stipulations in the total sum of ONE MILLION TWO
HUNDRED FIFTY THOUSAND SIX HUNDRED THIRTY-ONE PESOS and EIGHTY
CENTAVOS (P1,250,631.80) payable in the following manner:

1) SIX HUNDRED TWENTY-FIVE THOUSAND THREE HUNDRED

FIFTEEN PESOS AND NINETY CENTAVOS (P625,315.90) in government
bonds in favor of Eulogio Rodriguez, Sr. and E. Rodriguez, Inc., payable
within five (5) years at not less than three percent (3%) per annum;

2) THREE HUNDRED THOUSAND PESOS (P300,000.00) to be given to the

Philippine National Bank in payment of the mortgage indebtedness of
defendants E. Rodriguez, Sr. and E. Rodriguez, Inc.; and

3) the balance of THREE HUNDRED TWENTY-FIVE THOUSAND TWO

HUNDRED FIFTEEN PESOS AND NINETY CENTAVOS (P325,215.90) in
cash to be paid to all defendants abovenamed, through Eulogio Rodriguez,
Sr., within a reasonable time.

(2) That after approval of this compromise by the Court, the parties herein agree not to
interpose an approval from the judgment of the Court of First Instance of Rizal (Quezon City
Branch) which shall be considered final and executory under the Rules of Court;

(3) And, finally, that the said parties will submit this compromise agreement to the Court for
its approval and/or its consideration in the decision rendered in this case.

This compromise agreement was duly approved by the Court of First Instance of Rizal (Quezon City
Branch) on May 12, 1950, and pursuant to the terms thereof, the Government paid to petitioner the
sum of P1,238,204.00, of which P625,315.90 were in Government Bonds.

On March 1, 1951, petitioner filed its income tax return for the year 1950, showing on the face
thereof a loss of P17,982.06. In said return, petitioner did not include the sum of P625,315.90
received by it from the government in the form of bonds in payment of its expropriated properties, in
the belief that the said amount was free or exempt from taxation. When this return was later
examined by an agent of the Bureau of Internal Revenue, the Collector of said bureau assessed
against petitioner a deficiency income tax of P63,880.00, computed as follows:

Net income per return (loss)

P17,982.06
..................................
Amount received for
P1,238,204.00
property .....
 Less: Cost of Land 827,279.82
...................
Gain
P410,924.18
..............................................
Undeclared gain
P410,924.18
..............................................
Accounts receivable charged off as bad
debts but not forming part of gross income
.......................... 1,860.00
Miscellaneous expenses not connected with
4,450.00
the business
..................................................................
Net Income
P399,252.12
..............................................................
Tax due on P399,262.12
P63,980.00
.........................................
==========

A series of communications between petitioner and respondent Collector of Internal Revenue

followed the foregoing assessment, with the former protesting against and requesting the
cancellation of the deficiency income tax assessed against it, and the latter maintaining its accuracy
and demanding payment thereof. As petitioner, did not past, on July 6, 1959, the Collector of Internal
Revenue sought the collection of said deficiency income tax of P63,880.00, plus 5% surcharge and
1% monthly interest thereon from, March 11, 1956, by means of an action in the Court of First
Instance of Manila.

On June 8,k 1960, petitioner offered by way of compromise to pay the amount of P30,676.25 in full
settlement of its disputed deficiency income tax liability for 1950. This offer was rejected by the
Collector of Internal Revenue; whereupon, under date of June 24, 1960, petitioner filed a petition for
review of the assessment in question before the respondent Court of Tax Appeals which, after trial
on the merits, rendered its decision affirming the assessment in question. Hence, this appeal by
petitioner thru the instant petition for review of the said decision of respondent of Court of Tax
Appeals, with the following assigned errors:

I. THE RESPONDENT COURT ERRED IN HOLDING THAT THE EXEMPTION

CONTEMPLATED BY THE BONDS IN QUESTION APPLIES ONLY TO DOCUMENTARY
STAMP TAX AND TAX ON INTEREST DERIVED FROM SUCH BONDS, AND THAT SUCH
EXEMPTION CONSTITUTES SUFFICIENT INDUCEMENT FOR PETITIONER TO ACCEPT
SAID BONDS.

II. THE RESPONDENT COURT ERRED IN AFFIRMING THE ORDER OF THE

RESPONDENT COLLECTOR HOLDING PETITIONER LIABLE FOR INCOME TAX ON THE
EXCHANGE OF ITS PROPERTIES FOR GOVERNMENT TAX-EXEMPT BONDS UNDER
REPUBLIC ACT NO. 333.

As petitioner correctly puts it, the only question to decide here is whether or not in determining the
profit realized from the payment of the purchase price of its (petitioner's) expropriated property, for
income tax purposes portion of the purchase price paid in the form of tax-exempt bonds issued
under Republic Act No. 333 should be included.
The pertinent provisions of law involved are found in Section 9 of the Act abovementioned which
reads as follows:1äw phï1.ñët

SEC. 9. The President of the Philippines is authorized to issue, in the name and behalf of the
Republic of the Philippines, bonds in an amount of twenty million pesos, the proceeds of
which shall be used as a revolving fund for the acquisition of private estates, the subdivision
of the area, and the construction of streets, bridges, waterworks, sewerage and other
municipal improvements in the Capital City of the Philippines.

The bonds so authorized to be issued shall bear such date and in such form as the President
of the Philippines may determine and shall bear such rate of interest and run for such length
of time as may be determined by the President. Both principal and interest shall be payable
in Philippine currency or its equivalent in the United States currency, in the discretion of the
Secretary of Finance, at the Treasury of the Philippines, and the interest shall be payable at
such periods as the President of the Philippines may determine.

Said bonds shall be exempt from taxation by the Government of the Republic of the
Philippines or by any political or municipal subdivisions thereof, which fact shall be stated
upon their face, in accordance with this Act, under which the said bonds are issued.
[Emphasis supplied]

Petitioner maintains that the portion (paid in tax-exempt Government Bonds) of the profit it derived
from the expropriation of its property should not be made subject to income tax, for the reasons that:
(1) the Republic of the Philippines gave no concession to petitioner in the compromise agreement
involved in this case except that, as testified to by the lawyer who represented petitioner in the
negotiations which led to the compromise agreement in question, it was understood between the
parties, and it was precisely the only inducement, according to the witness, that made petitioner
accept payment of P625,315.90 in Government Bonds instead of cash, that said bonds would be
"tax-free"; now, it is argued that by "tax-free" is meant that by acceptance of the bonds rather than
cash, petitioner would not also have to pay income tax on the exchange gain from said bonds; 2 (2)
that the third paragraph of Section 9 of the Act granting tax exemption on bonds issued thereunder
was inserted in the law as a further inducement to private land owners within the new capital site to
part away with their properties in favor of the Government other than for cash, which legislative
history of the law allegedly sustains the position of petitioner; and (3) Congress must have really
intended such income tax exemption under Republic Act No. 333, since, similar provisions in
Republic Act No. 1400, 3 likewise involving the expropriation of private estates, expressly declare that
the price paid by the Government for the lands acquired for resale to tenants under the authority of
said Act (Republic Act No. 1400) shall not be considered as income of the landowner for purposes of
the income tax. This reasoning was brushed aside by the respondent Court of Tax Appeals in its
decision under review, on the following rationale:

Petitioner contends that since the Government bonds which it received as part payment of
the price of its lot were exempt from taxation, the deficiency assessment made by
respondent against it is not in order. On the other hand, respondent claims that the
exemption of Government bonds refers only the documentary stamps on the bonds and does
not include income tax on the income derived by petitioner which was paid to him in the form
of bonds.

The pertinent portion of Section 9 of Republic Act No. 333, which is the sole basis of
petitioner's claim for exemption, provides:1äwphï1.ñët
 Said bonds shall be exempt from taxation by the Government of the Republic of the
Philippines or by any political or municipal subdivision thereof, which fact shall be
stated upon their face, in accordance with this Act, under which the said bonds are
issued.

There can be no question that petitioner is taxable on its income derived from the sale of its
property to the Government. The fact that a portion of the purchase price of the property was
paid by the Government in the form of tax exempt bonds does not operate to exempt said
income from income tax. The income from the sale of the land in question and the bond are
two different and distinct taxable items so that the exemption of one does not operate to
exempt the other, unless the law expressly so provides.

It is alleged that to deny exemption from income tax on the amount represented by the said
bonds would be to nullify the purpose of the law in granting exemption. The question has
been asked: If income or gain derived from the acceptance of such bonds in exchange for
private estates would be taxed, what inducement did such provision of Republic Act No. 333
give to landowners to accept payment in bonds for their properties in the proposed site of the
Capital City? To our mind, there is sufficient inducement, and that is, the exemption not only
of the bonds from documentary stamp tax but also of the interest derived from such bonds.
Section 29(b) (4) of the National Internal Revenue Code exempts interest derived from such
bonds from income tax to the extent provided in the law authorizing the issue thereof.

Counsel for petitioner also alleged that the prevailing rule obtaining in the United States
before removal of exemptions of government obligations was to exempt such bonds from
income tax both as to principal and interest. To quote from the memorandum of counsel:

... Actually, most of the Federal Treasury Bonds issued by the U.S. Government from
1921 to 1941, or before the Public Debt Acts of 1941 and 1942, that removed tax
exemptions on obligations issued by the United States and its agencies and its
instrumentalities, were —

'exempt, both as to principal and interest, from all taxation now or hereafter imposed
by the United States, any States, or any of the possessions of the United States, or
by any local taxing authority, except (a) estate or inheritance taxes, and (b)
graduated additional income taxes, known as surtaxes and excess profits and war
profits taxes, now or hereafter imposed by the United States, upon the income or
profits of individuals, partnerships, associations, or corporations. (I Mertens, Law of
Federal Income Taxation, pp. 297-313).' [See page 12, Memorandum of counsel for
petitioner, March 20, 1963.]

Apparently the import of the ruling quoted above from the book of Mertens has not been
clearly understood. We think that the exemption referred to therein of both principal and
interest has reference to the exemption from income tax of the income derived from the sale
or exchange of the bonds and the interest paid by the U.S. Government on such bonds. The
opinion quoted from Mertens is inapplicable to the instant case because it does not refer to
any income derived by petitioner from the sale or exchange of bonds received by petitioner
from the Government under Republic Act No. 333. The tax here involved is on the income
derived from the sale of petitioner's property to the Government, not the income derived from
the sale or exchange of the bonds.

Mention has been made of Republic Act No. 1400, Section 22 of which provides that 'the
purchase price paid by the Government for any agricultural land acquired for resale to
 tenants under the authority of this Act, whether by negotiation or expropriation, shall not be
considered as income of the landowner concerned for purposes of the income tax.' It is
argued that since Republic Acts Nos. 333 and 1400 are in pari materia both should be
construed together, and since Republic Act No. 1400 exempts income derived from the sale
of property to the Government under said Act, the same exemption should also apply to
income derived from the sale of property to the Government under Republic Act No. 333. It is
precisely because Republic Act No. 1400 contains an express exemption from income tax of
the income derived by property owners from the sale of their lands under said Act and the
absence of a similarly provision in Republic Act No. 333 which indicates plainly that
Congress intended not to grant such exemption to landowners under Republic Act No. 333. If
Congress had intended to grant exemption from income tax with respect to income derived
by a person from the sale of his property under Republic Act No. 333, it should have
expressly made an express provision to that effect as it did in Republic Act No. 1400; that it
did not, is a clear indication that its purpose was to withhold such exemption.

We find no cogent reasons to disturb the above holding of the Court of Tax Appeals. It has been the
constant and uniform holding of this Court that exemption from taxation is not favored and is never
presumed; in fact, if it is granted, the grant must be strictly construed against the
taxpayer. 4 Affirmatively put, the law requires courts to frown on alleged exemptions from taxation,
hence, an exempting provision in a legislative enactment should be construed in strictissimi
juris 5 against the taxpayer and liberally in favor of the taxing authority. 6 This Court has been most
consistent in this holding. In Asiatic Petroleum Co. vs. Llanes, 7 it was explained beyond any
possibility of miscomprehension that: .

... Exemptions from taxation are highly disfavored, so much so that they may almost be said
to be odious to the law. He who claims an exemption must be able to point to some positive
provision of law creating the right. It cannot be allowed to exist upon a vague implication ...
The books are full of very strong expressions on this point. As was said by the Supreme
Court of Tennessee in Memphis vs. U & P. Bank (91 Tenn. 546, 550), 'The right of taxation is
inherent in the State. It is a prerogative essential to the perpetuity of the government; and he
who claims an exemption from the common burden, must justify his claim by the clearest
grant of organic or statute law.' Other utterances equally or more emphatic come readily to
hand from the highest authority. In Ohio Life Ins. and Trust Co. vs. Debolt (16 Howard 416),
it was said by Chief Justice Taney, that the right of taxation will not be held to have been
surrendered, 'unless the intention to surrender is manifested by words too plain to be
mistaken.' In the case of the Delaware Railroad Tax (18 Wallace 206, 226), the Supreme
Court of the United States said that the surrender, when claimed, must be shown by clear,
unambiguous language, which will admit of no reasonable construction consistent with the
reservation of the power. If a doubt arises as to the intent of the legislature, that doubt must
be resolved in favor of the State. In Erie Railway Company vs. Commonwealth of
Pennsylvania (21 Wallace 492, 499), Mr. Justice Hunt, speaking of exemptions, observed
that the State cannot strip itself of the most essential power of taxation by doubtful words. 'It
cannot by ambiguous language, be deprived of this highest attribute of sovereignty.'
In Tennessee vs. Whitworth (117 U.S. 129, 136), it was said: 'In all cases of this kind the
question is as to the intent of the legislature, the presumption always being against any
surrender of the taxing power.' In Farrington vs. Tennessee and County of Shelby (95 U.S.
679, 686), Mr. Justice Swayne said: '... When exemption is claimed it must be shown
indubitably to exist. At the outset every presumption is against it. A well-founded doubt is
fatal to the claim. It is only when the terms of the concession are too explicit to admit fairly of
any other construction that the proposition can be supported.'

The above rules should be applied to the case at bar where the law invoked (Section 9 of Republic
Act No. 333) does not make any reference whatsoever to exemption of income derived from sale of
expropriated property thereunder unlike under Republic Act No. 1400 where relative to the price paid
by the Government for any agricultural land acquired for resale to tenants there is an express
declaration that the same "shall not be considered as income of the landowner concerned for
purposes of the income tax." Nor are We convinced by the argument that the particular provision of
Republic Act No. 333 relied upon which grants exemption on bonds issued thereunder for purposes
of inducement to private landowners within the new capital site to part away with their properties in
favor of the Government other than for cash should be taken to mean that said property owners
need not pay income tax on their income derived from the sale of such properties. The pertinent
Congressional Record of the proceedings held during the consideration of the bill which later
became Republic Act No. 333, 8 does not show that Congress had intended to exempt said property
owners from the payment of income tax on the proceeds of the sale of their properties when the
same is paid in government bonds issued under the said law. Likewise even were We to assume for
the sake of argument, that the Capital City Planning Commission and other officials of the
government did make some assurance or promise to herein petitioner that the portion of the price of
its expropriated property paid in tax-exempt government bonds would not be made subject to
income tax payment, such assurance or promise, made without statutory sanction, cannot bind the
Government. The same amounts to a surrender of the State's power to require payment of income
tax, which in this case is not explicitly granted by Republic Act No. 333. It is a well-known rule that
erroneous application and enforcement of the law by public officers do not block subsequent correct
application of the statute, 9 and that the Government is never estopped by mistake or error on the
part of its agents. 10 In the present circumstances, the Collector of Internal Revenue is right in
assessing against petitioner the deficiency income tax in question, consonant with the proposition
that income from expropriation proceedings is income from sales or exchange and therefore
taxable. 11

FOR THE FOREGOING CONSIDERATIONS, the decision of the Court of Tax Appeals under review
is affirmed, with costs against herein petitioner.
1äwphï1.ñët

Concepcion, C.J., Dizon, Sanchez, Castro, Fernando and Teehankee, JJ., concur.
Reyes, J.B.L., Makalintal and Zaldivar, JJ., took no part.
Capistrano, J., took no part.

Footnotes

1An act to establish the capital of the Philippines and the permanent seat of the National
Government, to create a Capital City Planning Commission, to appropriate funds for the
acquisition of private estates within the boundary limits of said city, and to authorize the
issuance of bonds of the National Government for the acquisition of private estates, for the
construction of streets, bridges, waterworks, sewerage and other municipal improvements in
the said capital city.

2 Per testimony of Atty. Jose A. Garcia, TSN, pp. 31-33.

3 Section 22 of Republic Act No. 1400, relied upon, reads:

SEC. 22. Exemption from tax. — All land certificates issued by authority of this Act shall be
exempt from all forms of taxes. The purchase price paid by the Government for any
agricultural land acquired for resale to tenants under the authority of this Act, whether
through negotiation or expropriation, shall not be considered as income of the landowner
concerned for purposes of the income tax."
 4See Commissioner of Internal Revenue vs. Guerrero, L-20812, Sept. 221967, 21 SCRA
180, 183, and the numerous cases therein cited. 1äw phï1.ñët

5 Id., citing Philippine Guaranty Co. vs. Commissioner, L-22074, Sept. 6, 1965.

6Esso Standard Eastern, Inc. vs. Actg. Commissioner of Customs, L-21841, Oct. 28, 1966,
18 SCRA 488, citing cases.

7 49 Phil. 466, 471.

Consideration of House Bill No. 2003, Congressional Record, House of Representatives,

8

Vol. III, Nos. 1-9, June 14-24, 1948, p. 323, et seq.

9
Philippine Long Distance Telephone Co. vs. Collector of Internal Revenue, 90 Phil. 674,
680; Republic of the Philippine Long Distance Telephone Company, L-18841, January 27,
1969, 26 SCRA 620, 631.

Pineda vs. Court of First Instance of Tayabas, 52 Phil. 803, 807; Benguet Consolidated
10

Mining Company vs. Pineda, 98 Phil. 711, 724; Central Azucarera de Tarlac vs. Collector, et
al., 104 Phil. 653, 656; Philippine American Drug Co. vs. Collector of Internal Revenue, et al.,
106 Phil. 161, 168; Koppel (Phil.) Inc. vs. Collector of Internal Revenue, L-10550, September
19, 1961; Luzon Stevedoring Corporation vs. Court of Tax Appeals, L-21005, October 22,
1966, 18 SCRA 436, 440; Tan Guan vs. Court of Tax Appeals, L-23676, April 27, 1967, 19
SCRA 903, 907; Republic vs. Philippine Long Distance Telephone Co., supra.

11 Gutierrez, et al., vs. Court of Tax Appeals, 101 Phil. 713, 722.

276 Phil. 914

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 Decision[1] 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 Resolution[2] dated May 25, 1987, denied the
Commissioner's Motion for Reconsideration[3] and Motion for New
Trial[4] 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 banksin 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 asCCC-VII-
2369-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. x x x
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. x x x
8. That on November 11, 1981, the petitioner (private respondent herein)
received from Acting Commissioner of Internal Revenue RomuloVilla 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."x x x[5]
The Commissioner also imposed a 50% fraud penalty against Javier.
Disagreeing, Javier filed an appeal[6] 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 his 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 his
Comment[10] 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 for 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 dollaraccount 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 x x x.[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 572). 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 "mistake
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:
xxx 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 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. 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, (Chairman), Padilla, and Regalado, JJ., concur.
Paras, J., no part. Participated in CA involving same accused in bank
incident.

Annex "A", Petition; Presiding Judge Amante Filler, Ponente, Associate

[1]

Judge Alex Z. Reyes, Concurring; and Judge Constante C. Roaquin,

Concurring and Dissenting.
[2] Annex "D", Petition.
[3] Annex "B", Petition.
[4] Annex "C", Petition.
Court of Tax Appeals Decision, Case No. 3393, promulgated on July 27,
[5]

1983, 2-3; Rollo, 35-36.

[6] Annex "F", Petition.
[7] Court of Tax Appeals Decision, supra; rollo, 47-49.
[8] Petition, 7; rollo, 22.
[9] Respondents' Memorandum, rollo, 156.
[10] Rollo, 120.
[11] Id., 25-26.
[12] Respondents' Memorandum, 10-11; rollo, 164-165.
[13] Rollo, 47-48.
[14] L-20569, promulgated on August 23, 1974, 58 SCRA 519.
Yutivo Sons Hardware Co. vs. Court of Tax Appeals, L-13203,
[15]

promulgated on January 28, 1961, 1 SCRA 160.

[16] WORDS AND PHRASES; (1958 ed.), Vol. 17A, 210.