G.R. No.

L-19342May 25, 1972

LORENZO T. OA and HEIRS OF JULIA BUALES, namely:

RODOLFO B. OA, MARIANO B. OA, LUZ B. OA, VIRGINIA B.
OA and LORENZO B. OA, JR., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.

Orlando Velasco for petitioners.

Office of the Solicitor General Arturo A. Alafriz, Assistant

Solicitor General Felicisimo R. Rosete, and Special Attorney
Purificacion Ureta for respondent.

BARREDO, J.:p

Petition for review of the decision of the Court of Tax Appeals

in CTA Case No. 617, similarly entitled as above, holding that
petitioners have constituted an unregistered partnership and
are, therefore, subject to the payment of the deficiency
corporate income taxes assessed against them by respondent
Commissioner of Internal Revenue for the years 1955 and
1956 in the total sum of P21,891.00, plus 5% surcharge and
1% monthly interest from December 15, 1958, subject to the
provisions of Section 51 (e) (2) of the Internal Revenue Code,
as amended by Section 8 of Republic Act No. 2343 and the
costs of the suit, 1 as well as the resolution of said court
denying petitioners' motion for reconsideration of said
decision.

The facts are stated in the decision of the Tax Court as follows:

Julia Buales died on March 23, 1944, leaving as heirs her

surviving spouse, Lorenzo T. Oa and her five children. In
1948, Civil Case No. 4519 was instituted in the Court of First
Instance of Manila for the settlement of her estate. Later,
Lorenzo T. Oa the surviving spouse was appointed
administrator of the estate of said deceased (Exhibit 3, pp. 34-
41, BIR rec.). On April 14, 1949, the administrator submitted
the project of partition, which was approved by the Court on
May 16, 1949 (See Exhibit K). Because three of the heirs,
namely Luz, Virginia and Lorenzo, Jr., all surnamed Oa, were
still minors when the project of partition was approved,
Lorenzo T. Oa, their father and administrator of the estate,
filed a petition in Civil Case No. 9637 of the Court of First
Instance of Manila for appointment as guardian of said minors.
On November 14, 1949, the Court appointed him guardian of
the persons and property of the aforenamed minors (See p. 3,
BIR rec.).

The project of partition (Exhibit K; see also pp. 77-70, BIR rec.)
shows that the heirs have undivided one-half (1/2) interest in
ten parcels of land with a total assessed value of P87,860.00,
six houses with a total assessed value of P17,590.00 and an
undetermined amount to be collected from the War Damage
Commission. Later, they received from said Commission the
amount of P50,000.00, more or less. This amount was not
divided among them but was used in the rehabilitation of
properties owned by them in common (t.s.n., p. 46). Of the ten
parcels of land aforementioned, two were acquired after the
death of the decedent with money borrowed from the
Philippine Trust Company in the amount of P72,173.00 (t.s.n.,
p. 24; Exhibit 3, pp. 31-34 BIR rec.).

The project of partition also shows that the estate shares

equally with Lorenzo T. Oa, the administrator thereof, in the
obligation of P94,973.00, consisting of loans contracted by the
latter with the approval of the Court (see p. 3 of Exhibit K; or
see p. 74, BIR rec.).

Although the project of partition was approved by the Court on

May 16, 1949, no attempt was made to divide the properties
therein listed. Instead, the properties remained under the
management of Lorenzo T. Oa who used said properties in
business by leasing or selling them and investing the income
derived therefrom and the proceeds from the sales thereof in
real properties and securities. As a result, petitioners'
properties and investments gradually increased from
P105,450.00 in 1949 to P480,005.20 in 1956 as can be
gleaned from the following year-end balances:

Year

Investment

Land
Building

Account

Account

Account

1949

P87,860.00

P17,590.00

1950

P24,657.65

128,566.72

96,076.26
1951

51,301.31

120,349.28

110,605.11

1952

67,927.52

87,065.28

152,674.39

1953

61,258.27

84,925.68

161,463.83
1954

63,623.37

99,001.20

167,962.04

1955

100,786.00

120,249.78

169,262.52

1956

175,028.68

135,714.68

169,262.52

(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)
From said investments and properties petitioners derived such
incomes as profits from installment sales of subdivided lots,
profits from sales of stocks, dividends, rentals and interests
(see p. 3 of Exhibit 3; p. 32, BIR rec.; t.s.n., pp. 37-38). The
said incomes are recorded in the books of account kept by
Lorenzo T. Oa where the corresponding shares of the
petitioners in the net income for the year are also known.
Every year, petitioners returned for income tax purposes their
shares in the net income derived from said properties and
securities and/or from transactions involving them (Exhibit 3,
supra; t.s.n., pp. 25-26). However, petitioners did not actually
receive their shares in the yearly income. (t.s.n., pp. 25-26, 40,
98, 100). The income was always left in the hands of Lorenzo
T. Oa who, as heretofore pointed out, invested them in real
properties and securities. (See Exhibit 3, t.s.n., pp. 50, 102-
104).

On the basis of the foregoing facts, respondent (Commissioner

of Internal Revenue) decided that petitioners formed an
unregistered partnership and therefore, subject to the
corporate income tax, pursuant to Section 24, in relation to
Section 84(b), of the Tax Code. Accordingly, he assessed
against the petitioners the amounts of P8,092.00 and
P13,899.00 as corporate income taxes for 1955 and 1956,
respectively. (See Exhibit 5, amended by Exhibit 17, pp. 50
and 86, BIR rec.). Petitioners protested against the assessment
and asked for reconsideration of the ruling of respondent that
they have formed an unregistered partnership. Finding no
merit in petitioners' request, respondent denied it (See Exhibit
17, p. 86, BIR rec.). (See pp. 1-4, Memorandum for
Respondent, June 12, 1961).
The original assessment was as follows:

1955

Net income as per investigation ................ P40,209.89

Income tax due thereon ............................... 8,042.00

25% surcharge .............................................. 2,010.50
Compromise for non-filing .......................... 50.00
Total ............................................................... P10,102.50

1956

Net income as per investigation ................ P69,245.23

Income tax due thereon ............................... 13,849.00

25% surcharge .............................................. 3,462.25
Compromise for non-filing .......................... 50.00
Total ............................................................... P17,361.25

(See Exhibit 13, page 50, BIR records)

Upon further consideration of the case, the 25% surcharge was

eliminated in line with the ruling of the Supreme Court in
Collector v. Batangas Transportation Co., G.R. No. L-9692, Jan.
6, 1958, so that the questioned assessment refers solely to the
income tax proper for the years 1955 and 1956 and the
"Compromise for non-filing," the latter item obviously referring
to the compromise in lieu of the criminal liability for failure of
petitioners to file the corporate income tax returns for said
years. (See Exh. 17, page 86, BIR records). (Pp. 1-3, Annex C
to Petition)

Petitioners have assigned the following as alleged errors of the

Tax Court:

I.

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE

PETITIONERS FORMED AN UNREGISTERED PARTNERSHIP;

II.

THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT

THE PETITIONERS WERE CO-OWNERS OF THE PROPERTIES
INHERITED AND (THE) PROFITS DERIVED FROM TRANSACTIONS
THEREFROM (sic);

III.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT
PETITIONERS WERE LIABLE FOR CORPORATE INCOME TAXES
FOR 1955 AND 1956 AS AN UNREGISTERED PARTNERSHIP;

IV.

ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED

AN UNREGISTERED PARTNERSHIP, THE COURT OF TAX APPEALS
ERRED IN NOT HOLDING THAT THE PETITIONERS WERE AN
UNREGISTERED PARTNERSHIP TO THE EXTENT ONLY THAT
THEY INVESTED THE PROFITS FROM THE PROPERTIES OWNED
IN COMMON AND THE LOANS RECEIVED USING THE INHERITED
PROPERTIES AS COLLATERALS;

V.

ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED

PARTNERSHIP, THE COURT OF TAX APPEALS ERRED IN NOT
DEDUCTING THE VARIOUS AMOUNTS PAID BY THE
PETITIONERS AS INDIVIDUAL INCOME TAX ON THEIR
RESPECTIVE SHARES OF THE PROFITS ACCRUING FROM THE
PROPERTIES OWNED IN COMMON, FROM THE DEFICIENCY TAX
OF THE UNREGISTERED PARTNERSHIP.

In other words, petitioners pose for our resolution the following

questions: (1) Under the facts found by the Court of Tax
Appeals, should petitioners be considered as co-owners of the
properties inherited by them from the deceased Julia Buales
and the profits derived from transactions involving the same,
or, must they be deemed to have formed an unregistered
partnership subject to tax under Sections 24 and 84(b) of the
National Internal Revenue Code? (2) Assuming they have
formed an unregistered partnership, should this not be only in
the sense that they invested as a common fund the profits
earned by the properties owned by them in common and the
loans granted to them upon the security of the said properties,
with the result that as far as their respective shares in the
inheritance are concerned, the total income thereof should be
considered as that of co-owners and not of the unregistered
partnership? And (3) assuming again that they are taxable as
an unregistered partnership, should not the various amounts
already paid by them for the same years 1955 and 1956 as
individual income taxes on their respective shares of the
profits accruing from the properties they owned in common be
deducted from the deficiency corporate taxes, herein involved,
assessed against such unregistered partnership by the
respondent Commissioner?

Pondering on these questions, the first thing that has struck

the Court is that whereas petitioners' predecessor in interest
died way back on March 23, 1944 and the project of partition
of her estate was judicially approved as early as May 16, 1949,
and presumably petitioners have been holding their respective
shares in their inheritance since those dates admittedly under
the administration or management of the head of the family,
the widower and father Lorenzo T. Oa, the assessment in
question refers to the later years 1955 and 1956. We believe
this point to be important because, apparently, at the start, or
in the years 1944 to 1954, the respondent Commissioner of
Internal Revenue did treat petitioners as co-owners, not liable
to corporate tax, and it was only from 1955 that he considered
them as having formed an unregistered partnership. At least,
there is nothing in the record indicating that an earlier
assessment had already been made. Such being the case, and
We see no reason how it could be otherwise, it is easily
understandable why petitioners' position that they are co-
owners and not unregistered co-partners, for the purposes of
the impugned assessment, cannot be upheld. Truth to tell,
petitioners should find comfort in the fact that they were not
similarly assessed earlier by the Bureau of Internal Revenue.

The Tax Court found that instead of actually distributing the

estate of the deceased among themselves pursuant to the
project of partition approved in 1949, "the properties remained
under the management of Lorenzo T. Oa who used said
properties in business by leasing or selling them and investing
the income derived therefrom and the proceed from the sales
thereof in real properties and securities," as a result of which
said properties and investments steadily increased yearly from
P87,860.00 in "land account" and P17,590.00 in "building
account" in 1949 to P175,028.68 in "investment account,"
P135.714.68 in "land account" and P169,262.52 in "building
account" in 1956. And all these became possible because,
admittedly, petitioners never actually received any share of
the income or profits from Lorenzo T. Oa and instead, they
allowed him to continue using said shares as part of the
common fund for their ventures, even as they paid the
corresponding income taxes on the basis of their respective
shares of the profits of their common business as reported by
the said Lorenzo T. Oa.

It is thus incontrovertible that petitioners did not, contrary to

their contention, merely limit themselves to holding the
properties inherited by them. Indeed, it is admitted that during
the material years herein involved, some of the said properties
were sold at considerable profit, and that with said profit,
petitioners engaged, thru Lorenzo T. Oa, in the purchase and
sale of corporate securities. It is likewise admitted that all the
profits from these ventures were divided among petitioners
proportionately in accordance with their respective shares in
the inheritance. In these circumstances, it is Our considered
view that from the moment petitioners allowed not only the
incomes from their respective shares of the inheritance but
even the inherited properties themselves to be used by
Lorenzo T. Oa as a common fund in undertaking several
transactions or in business, with the intention of deriving profit
to be shared by them proportionally, such act was tantamonut
to actually contributing such incomes to a common fund and,
in effect, they thereby formed an unregistered partnership
within the purview of the above-mentioned provisions of the
Tax Code.

It is but logical that in cases of inheritance, there should be a

period when the heirs can be considered as co-owners rather
than unregistered co-partners within the contemplation of our
corporate tax laws aforementioned. Before the partition and
distribution of the estate of the deceased, all the income
thereof does belong commonly to all the heirs, obviously,
without them becoming thereby unregistered co-partners, but
it does not necessarily follow that such status as co-owners
continues until the inheritance is actually and physically
distributed among the heirs, for it is easily conceivable that
after knowing their respective shares in the partition, they
might decide to continue holding said shares under the
common management of the administrator or executor or of
anyone chosen by them and engage in business on that basis.
Withal, if this were to be allowed, it would be the easiest thing
for heirs in any inheritance to circumvent and render
meaningless Sections 24 and 84(b) of the National Internal
Revenue Code.

It is true that in Evangelista vs. Collector, 102 Phil. 140, it was

stated, among the reasons for holding the appellants therein
to be unregistered co-partners for tax purposes, that their
common fund "was not something they found already in
existence" and that "it was not a property inherited by them
pro indiviso," but it is certainly far fetched to argue therefrom,
as petitioners are doing here, that ergo, in all instances where
an inheritance is not actually divided, there can be no
unregistered co-partnership. As already indicated, for tax
purposes, the co-ownership of inherited properties is
automatically converted into an unregistered partnership the
moment the said common properties and/or the incomes
derived therefrom are used as a common fund with intent to
produce profits for the heirs in proportion to their respective
shares in the inheritance as determined in a project partition
either duly executed in an extrajudicial settlement or approved
by the court in the corresponding testate or intestate
proceeding. The reason for this is simple. From the moment of
such partition, the heirs are entitled already to their respective
definite shares of the estate and the incomes thereof, for each
of them to manage and dispose of as exclusively his own
without the intervention of the other heirs, and, accordingly he
becomes liable individually for all taxes in connection
therewith. If after such partition, he allows his share to be held
in common with his co-heirs under a single management to be
used with the intent of making profit thereby in proportion to
his share, there can be no doubt that, even if no document or
instrument were executed for the purpose, for tax purposes, at
least, an unregistered partnership is formed. This is exactly
what happened to petitioners in this case.
In this connection, petitioners' reliance on Article 1769,
paragraph (3), of the Civil Code, providing that: "The sharing
of gross returns does not of itself establish a partnership,
whether or not the persons sharing them have a joint or
common right or interest in any property from which the
returns are derived," and, for that matter, on any other
provision of said code on partnerships is unavailing. In
Evangelista, supra, this Court clearly differentiated the
concept of partnerships under the Civil Code from that of
unregistered partnerships which are considered as
"corporations" under Sections 24 and 84(b) of the National
Internal Revenue Code. Mr. Justice Roberto Concepcion, now
Chief Justice, elucidated on this point thus:

To begin with, the tax in question is one imposed upon

"corporations", which, strictly speaking, are distinct and
different from "partnerships". When our Internal Revenue Code
includes "partnerships" among the entities subject to the tax
on "corporations", said Code must allude, therefore, to
organizations which are not necessarily "partnerships", in the
technical sense of the term. Thus, for instance, section 24 of
said Code exempts from the aforementioned tax "duly
registered general partnerships," which constitute precisely
one of the most typical forms of partnerships in this
jurisdiction. Likewise, as defined in section 84(b) of said Code,
"the term corporation includes partnerships, no matter how
created or organized." This qualifying expression clearly
indicates that a joint venture need not be undertaken in any of
the standard forms, or in confirmity with the usual
requirements of the law on partnerships, in order that one
could be deemed constituted for purposes of the tax on
corporation. Again, pursuant to said section 84(b),the term
"corporation" includes, among others, "joint accounts,(cuentas
en participacion)" and "associations", none of which has a
legal personality of its own, independent of that of its
members. Accordingly, the lawmaker could not have regarded
that personality as a condition essential to the existence of the
partnerships therein referred to. In fact, as above stated, "duly
registered general co-partnerships" which are possessed of
the aforementioned personality have been expressly
excluded by law (sections 24 and 84[b]) from the connotation
of the term "corporation." ....

xxx xxx xxx

Similarly, the American Law

... provides its own concept of a partnership. Under the term

"partnership" it includes not only a partnership as known in
common law but, as well, a syndicate, group, pool, joint
venture, or other unincorporated organization which carries on
any business, financial operation, or venture, and which is not,
within the meaning of the Code, a trust, estate, or a
corporation. ... . (7A Merten's Law of Federal Income Taxation,
p. 789; emphasis ours.)

The term "partnership" includes a syndicate, group, pool, joint

venture or other unincorporated organization, through or by
means of which any business, financial operation, or venture is
carried on. ... . (8 Merten's Law of Federal Income Taxation, p.
562 Note 63; emphasis ours.)
For purposes of the tax on corporations, our National Internal
Revenue Code includes these partnerships with the
exception only of duly registered general copartnerships
within the purview of the term "corporation." It is, therefore,
clear to our mind that petitioners herein constitute a
partnership, insofar as said Code is concerned, and are subject
to the income tax for corporations.

We reiterated this view, thru Mr. Justice Fernando, in Reyes vs.

Commissioner of Internal Revenue, G. R. Nos. L-24020-21, July
29, 1968, 24 SCRA 198, wherein the Court ruled against a
theory of co-ownership pursued by appellants therein.

As regards the second question raised by petitioners about the

segregation, for the purposes of the corporate taxes in
question, of their inherited properties from those acquired by
them subsequently, We consider as justified the following
ratiocination of the Tax Court in denying their motion for
reconsideration:

In connection with the second ground, it is alleged that, if

there was an unregistered partnership, the holding should be
limited to the business engaged in apart from the properties
inherited by petitioners. In other words, the taxable income of
the partnership should be limited to the income derived from
the acquisition and sale of real properties and corporate
securities and should not include the income derived from the
inherited properties. It is admitted that the inherited properties
and the income derived therefrom were used in the business
of buying and selling other real properties and corporate
securities. Accordingly, the partnership income must include
not only the income derived from the purchase and sale of
other properties but also the income of the inherited
properties.

Besides, as already observed earlier, the income derived from

inherited properties may be considered as individual income of
the respective heirs only so long as the inheritance or estate is
not distributed or, at least, partitioned, but the moment their
respective known shares are used as part of the common
assets of the heirs to be used in making profits, it is but proper
that the income of such shares should be considered as the
part of the taxable income of an unregistered partnership.
This, We hold, is the clear intent of the law.

Likewise, the third question of petitioners appears to have

been adequately resolved by the Tax Court in the
aforementioned resolution denying petitioners' motion for
reconsideration of the decision of said court. Pertinently, the
court ruled this wise:

In support of the third ground, counsel for petitioners alleges:

Even if we were to yield to the decision of this Honorable Court

that the herein petitioners have formed an unregistered
partnership and, therefore, have to be taxed as such, it might
be recalled that the petitioners in their individual income tax
returns reported their shares of the profits of the unregistered
partnership. We think it only fair and equitable that the various
amounts paid by the individual petitioners as income tax on
their respective shares of the unregistered partnership should
be deducted from the deficiency income tax found by this
Honorable Court against the unregistered partnership. (page 7,
Memorandum for the Petitioner in Support of Their Motion for
Reconsideration, Oct. 28, 1961.)

In other words, it is the position of petitioners that the taxable

income of the partnership must be reduced by the amounts of
income tax paid by each petitioner on his share of partnership
profits. This is not correct; rather, it should be the other way
around. The partnership profits distributable to the partners
(petitioners herein) should be reduced by the amounts of
income tax assessed against the partnership. Consequently,
each of the petitioners in his individual capacity overpaid his
income tax for the years in question, but the income tax due
from the partnership has been correctly assessed. Since the
individual income tax liabilities of petitioners are not in issue in
this proceeding, it is not proper for the Court to pass upon the
same.

Petitioners insist that it was error for the Tax Court to so rule
that whatever excess they might have paid as individual
income tax cannot be credited as part payment of the taxes
herein in question. It is argued that to sanction the view of the
Tax Court is to oblige petitioners to pay double income tax on
the same income, and, worse, considering the time that has
lapsed since they paid their individual income taxes, they may
already be barred by prescription from recovering their
overpayments in a separate action. We do not agree. As We
see it, the case of petitioners as regards the point under
discussion is simply that of a taxpayer who has paid the wrong
tax, assuming that the failure to pay the corporate taxes in
question was not deliberate. Of course, such taxpayer has the
right to be reimbursed what he has erroneously paid, but the
law is very clear that the claim and action for such
reimbursement are subject to the bar of prescription. And
since the period for the recovery of the excess income taxes in
the case of herein petitioners has already lapsed, it would not
seem right to virtually disregard prescription merely upon the
ground that the reason for the delay is precisely because the
taxpayers failed to make the proper return and payment of the
corporate taxes legally due from them. In principle, it is but
proper not to allow any relaxation of the tax laws in favor of
persons who are not exactly above suspicion in their conduct
vis-a-vis their tax obligation to the State.

IN VIEW OF ALL THE FOREGOING, the judgment of the Court of

Tax Appeals appealed from is affirm with costs against
petitioners.

G.R. No. L-9996 October 15, 1957

EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and

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

Santiago F. Alidio and Angel S. Dakila, Jr., for petitioner.

Office of the Solicitor General Ambrosio Padilla, Assistant
Solicitor General Esmeraldo Umali and Solicitor Felicisimo R.
Rosete for Respondents.
CONCEPCION, J.:

This is a petition filed by Eufemia Evangelista, Manuela

Evangelista and Francisca Evangelista, for review of a decision
of the Court of Tax Appeals, the dispositive part of which
reads:

FOR ALL THE FOREGOING, we hold that the petitioners are

liable for the income tax, real estate dealer's tax and the
residence tax for the years 1945 to 1949, inclusive, in
accordance with the respondent's assessment for the same in
the total amount of P6,878.34, which is hereby affirmed and
the petition for review filed by petitioner is hereby dismissed
with costs against petitioners.

It appears from the stipulation submitted by the parties:

1. That the petitioners borrowed from their father the sum of

P59,1400.00 which amount together with their personal
monies was used by them for the purpose of buying real
properties,.

2. That on February 2, 1943, they bought from Mrs. Josefina

Florentino a lot with an area of 3,713.40 sq. m. including
improvements thereon from the sum of P100,000.00; this
property has an assessed value of P57,517.00 as of 1948;
3. That on April 3, 1944 they purchased from Mrs. Josefa
Oppus 21 parcels of land with an aggregate area of 3,718.40
sq. m. including improvements thereon for P130,000.00; this
property has an assessed value of P82,255.00 as of 1948;

4. That on April 28, 1944 they purchased from the Insular

Investments Inc., a lot of 4,353 sq. m. including improvements
thereon for P108,825.00. This property has an assessed value
of P4,983.00 as of 1948;

5. That on April 28, 1944 they bought form Mrs. Valentina

Afable a lot of 8,371 sq. m. including improvements thereon
for P237,234.34. This property has an assessed value of
P59,140.00 as of 1948;

6. That in a document dated August 16, 1945, they

appointed their brother Simeon Evangelista to 'manage their
properties with full power to lease; to collect and receive rents;
to issue receipts therefor; in default of such payment, to bring
suits against the defaulting tenants; to sign all letters,
contracts, etc., for and in their behalf, and to endorse and
deposit all notes and checks for them;

7. That after having bought the above-mentioned real

properties the petitioners had the same rented or leases to
various tenants;

8. That from the month of March, 1945 up to an including

December, 1945, the total amount collected as rents on their
real properties was P9,599.00 while the expenses amounted to
P3,650.00 thereby leaving them a net rental income of
P5,948.33;

9. That on 1946, they realized a gross rental income of in the

sum of P24,786.30, out of which amount was deducted in the
sum of P16,288.27 for expenses thereby leaving them a net
rental income of P7,498.13;

10. That in 1948, they realized a gross rental income of

P17,453.00 out of the which amount was deducted the sum of
P4,837.65 as expenses, thereby leaving them a net rental
income of P12,615.35.

It further appears that on September 24, 1954 respondent

Collector of Internal Revenue demanded the payment of
income tax on corporations, real estate dealer's fixed tax and
corporation residence tax for the years 1945-1949, computed,
according to assessment made by said officer, as follows:

INCOME TAXES

1945

14.84

1946

1,144.71
1947

10.34

1948

1,912.30

1949

1,575.90

Total including surcharge and compromise

P6,157.09

REAL ESTATE DEALER'S FIXED TAX

1946

P37.50

1947
150.00

1948

150.00

1949

150.00

Total including penalty

P527.00

RESIDENCE TAXES OF CORPORATION

1945

P38.75

1946

38.75

1947
38.75

1948

38.75

1949

38.75

Total including surcharge

P193.75

TOTAL TAXES DUE

P6,878.34.

Said letter of demand and corresponding assessments were

delivered to petitioners on December 3, 1954, whereupon they
instituted the present case in the Court of Tax Appeals, with a
prayer that "the decision of the respondent contained in his
letter of demand dated September 24, 1954" be reversed, and
that they be absolved from the payment of the taxes in
question, with costs against the respondent.
After appropriate proceedings, the Court of Tax Appeals the
above-mentioned decision for the respondent, and a petition
for reconsideration and new trial having been subsequently
denied, the case is now before Us for review at the instance of
the petitioners.

The issue in this case whether petitioners are subject to the

tax on corporations provided for in section 24 of
Commonwealth Act. No. 466, otherwise known as the National
Internal Revenue Code, as well as to the residence tax for
corporations and the real estate dealers fixed tax. With respect
to the tax on corporations, the issue hinges on the meaning of
the terms "corporation" and "partnership," as used in section
24 and 84 of said Code, the pertinent parts of which read:

SEC. 24. Rate of tax on corporations.There shall be levied,

assessed, collected, and paid annually upon the total net
income received in the preceding taxable year from all sources
by every corporation organized in, or existing under the laws
of the Philippines, no matter how created or organized but not
including duly registered general co-partnerships (compaias
colectivas), a tax upon such income equal to the sum of the
following: . . .

SEC. 84 (b). The term 'corporation' includes partnerships, no

matter how created or organized, joint-stock companies, joint
accounts (cuentas en participacion), associations or insurance
companies, but does not include duly registered general
copartnerships. (compaias colectivas).
Article 1767 of the Civil Code of the Philippines provides:

By the contract of partnership two or more persons bind

themselves to contribute money, properly, or industry to a
common fund, with the intention of dividing the profits among
themselves.

Pursuant to the article, the essential elements of a partnership

are two, namely: (a) an agreement to contribute money,
property or industry to a common fund; and (b) intent to divide
the profits among the contracting parties. The first element is
undoubtedly present in the case at bar, for, admittedly,
petitioners have agreed to, and did, contribute money and
property to a common fund. Hence, the issue narrows down to
their intent in acting as they did. Upon consideration of all the
facts and circumstances surrounding the case, we are fully
satisfied that their purpose was to engage in real estate
transactions for monetary gain and then divide the same
among themselves, because:

1. Said common fund was not something they found already

in existence. It was not property inherited by them pro
indiviso. They created it purposely. What is more they jointly
borrowed a substantial portion thereof in order to establish
said common fund.

2. They invested the same, not merely not merely in one

transaction, but in a series of transactions. On February 2,
1943, they bought a lot for P100,000.00. On April 3, 1944,
they purchased 21 lots for P18,000.00. This was soon followed
on April 23, 1944, by the acquisition of another real estate for
P108,825.00. Five (5) days later (April 28, 1944), they got a
fourth lot for P237,234.14. The number of lots (24) acquired
and transactions undertaken, as well as the brief interregnum
between each, particularly the last three purchases, is strongly
indicative of a pattern or common design that was not limited
to the conservation and preservation of the aforementioned
common fund or even of the property acquired by the
petitioners in February, 1943. In other words, one cannot but
perceive a character of habitually peculiar to business
transactions engaged in the purpose of gain.

3. The aforesaid lots were not devoted to residential

purposes, or to other personal uses, of petitioners herein. The
properties were leased separately to several persons, who,
from 1945 to 1948 inclusive, paid the total sum of P70,068.30
by way of rentals. Seemingly, the lots are still being so let, for
petitioners do not even suggest that there has been any
change in the utilization thereof.

4. Since August, 1945, the properties have been under the

management of one person, namely Simeon Evangelista, with
full power to lease, to collect rents, to issue receipts, to bring
suits, to sign letters and contracts, and to indorse and deposit
notes and checks. Thus, the affairs relative to said properties
have been handled as if the same belonged to a corporation or
business and enterprise operated for profit.

5. The foregoing conditions have existed for more than ten

(10) years, or, to be exact, over fifteen (15) years, since the
first property was acquired, and over twelve (12) years, since
Simeon Evangelista became the manager.
6. Petitioners have not testified or introduced any evidence,
either on their purpose in creating the set up already adverted
to, or on the causes for its continued existence. They did not
even try to offer an explanation therefor.

Although, taken singly, they might not suffice to establish the

intent necessary to constitute a partnership, the collective
effect of these circumstances is such as to leave no room for
doubt on the existence of said intent in petitioners herein.
Only one or two of the aforementioned circumstances were
present in the cases cited by petitioners herein, and, hence,
those cases are not in point.

Petitioners insist, however, that they are mere co-owners, not

copartners, for, in consequence of the acts performed by
them, a legal entity, with a personality independent of that of
its members, did not come into existence, and some of the
characteristics of partnerships are lacking in the case at bar.
This pretense was correctly rejected by the Court of Tax
Appeals.

To begin with, the tax in question is one imposed upon

"corporations", which, strictly speaking, are distinct and
different from "partnerships". When our Internal Revenue Code
includes "partnerships" among the entities subject to the tax
on "corporations", said Code must allude, therefore, to
organizations which are not necessarily "partnerships", in the
technical sense of the term. Thus, for instance, section 24 of
said Code exempts from the aforementioned tax "duly
registered general partnerships which constitute precisely one
of the most typical forms of partnerships in this jurisdiction.
Likewise, as defined in section 84(b) of said Code, "the term
corporation includes partnerships, no matter how created or
organized." This qualifying expression clearly indicates that a
joint venture need not be undertaken in any of the standard
forms, or in conformity with the usual requirements of the law
on partnerships, in order that one could be deemed
constituted for purposes of the tax on corporations. Again,
pursuant to said section 84(b), the term "corporation"
includes, among other, joint accounts, (cuentas en
participation)" and "associations," none of which has a legal
personality of its own, independent of that of its members.
Accordingly, the lawmaker could not have regarded that
personality as a condition essential to the existence of the
partnerships therein referred to. In fact, as above stated, "duly
registered general copartnerships" which are possessed of
the aforementioned personality have been expressly
excluded by law (sections 24 and 84 [b] from the connotation
of the term "corporation" It may not be amiss to add that
petitioners' allegation to the effect that their liability in
connection with the leasing of the lots above referred to, under
the management of one person even if true, on which we
express no opinion tends to increase the similarity between
the nature of their venture and that corporations, and is,
therefore, an additional argument in favor of the imposition of
said tax on corporations.

Under the Internal Revenue Laws of the United States,

"corporations" are taxed differently from "partnerships". By
specific provisions of said laws, such "corporations" include
"associations, joint-stock companies and insurance
companies." However, the term "association" is not used in the
aforementioned laws.
. . . in any narrow or technical sense. It includes any
organization, created for the transaction of designed affairs, or
the attainment of some object, which like a corporation,
continues notwithstanding that its members or participants
change, and the affairs of which, like corporate affairs, are
conducted by a single individual, a committee, a board, or
some other group, acting in a representative capacity. It is
immaterial whether such organization is created by an
agreement, a declaration of trust, a statute, or otherwise. It
includes a voluntary association, a joint-stock corporation or
company, a 'business' trusts a 'Massachusetts' trust, a
'common law' trust, and 'investment' trust (whether of the
fixed or the management type), an interinsuarance exchange
operating through an attorney in fact, a partnership
association, and any other type of organization (by whatever
name known) which is not, within the meaning of the Code, a
trust or an estate, or a partnership. (7A Mertens Law of Federal
Income Taxation, p. 788; emphasis supplied.).

Similarly, the American Law.

. . . provides its own concept of a partnership, under the term

'partnership 'it includes not only a partnership as known at
common law but, as well, a syndicate, group, pool, joint
venture or other unincorporated organizations which carries on
any business financial operation, or venture, and which is not,
within the meaning of the Code, a trust, estate, or a
corporation. . . (7A Merten's Law of Federal Income taxation, p.
789; emphasis supplied.)
The term 'partnership' includes a syndicate, group, pool, joint
venture or other unincorporated organization, through or by
means of which any business, financial operation, or venture is
carried on, . . .. ( 8 Merten's Law of Federal Income Taxation, p.
562 Note 63; emphasis supplied.) .

For purposes of the tax on corporations, our National Internal

Revenue Code, includes these partnerships with the
exception only of duly registered general copartnerships
within the purview of the term "corporation." It is, therefore,
clear to our mind that petitioners herein constitute a
partnership, insofar as said Code is concerned and are subject
to the income tax for corporations.

As regards the residence of tax for corporations, section 2 of

Commonwealth Act No. 465 provides in part:

Entities liable to residence tax.-Every corporation, no matter

how created or organized, whether domestic or resident
foreign, engaged in or doing business in the Philippines shall
pay an annual residence tax of five pesos and an annual
additional tax which in no case, shall exceed one thousand
pesos, in accordance with the following schedule: . . .

The term 'corporation' as used in this Act includes joint-stock

company, partnership, joint account (cuentas en
participacion), association or insurance company, no matter
how created or organized. (emphasis supplied.)
Considering that the pertinent part of this provision is
analogous to that of section 24 and 84 (b) of our National
Internal Revenue Code (commonwealth Act No. 466), and that
the latter was approved on June 15, 1939, the day
immediately after the approval of said Commonwealth Act No.
465 (June 14, 1939), it is apparent that the terms "corporation"
and "partnership" are used in both statutes with substantially
the same meaning. Consequently, petitioners are subject, also,
to the residence tax for corporations.

Lastly, the records show that petitioners have habitually

engaged in leasing the properties above mentioned for a
period of over twelve years, and that the yearly gross rentals
of said properties from June 1945 to 1948 ranged from P9,599
to P17,453. Thus, they are subject to the tax provided in
section 193 (q) of our National Internal Revenue Code, for "real
estate dealers," inasmuch as, pursuant to section 194 (s)
thereof:

'Real estate dealer' includes any person engaged in the

business of buying, selling, exchanging, leasing, or renting
property or his own account as principal and holding himself
out as a full or part time dealer in real estate or as an owner of
rental property or properties rented or offered to rent for an
aggregate amount of three thousand pesos or more a year. . .
(emphasis supplied.)

Wherefore, the appealed decision of the Court of Tax appeals

is hereby affirmed with costs against the petitioners herein. It
is so ordered.
Bengzon, Paras, C.J., Padilla, Reyes, A., Reyes, J.B.L., Endencia
and Felix, JJ., concur.

BAUTISTA ANGELO, J., concurring:

I agree with the opinion that petitioners have actually

contributed money to a common fund with express purpose of
engaging in real estate business for profit. The series of
transactions which they had undertaken attest to this. This
appears in the following portion of the decision:

2. They invested the same, not merely in one transaction,

but in a series of transactions. On February 2, 1943, they
bought a lot for P100,000. On April 3, 1944, they purchase 21
lots for P18,000. This was soon followed on April 23, 1944, by
the acquisition of another real state for P108,825. Five (5) days
later (April 28, 1944), they got a fourth lot for P237,234.14.
The number of lots (24) acquired and transactions undertaken,
as well as the brief interregnum between each, particularly the
last three purchases, is strongly indicative of a pattern or
common design that was not limited to the conservation and
preservation of the aforementioned common fund or even of
the property acquired by the petitioner in February, 1943, In
other words, we cannot but perceive a character of habitually
peculiar to business transactions engaged in for purposes of
gain.

I wish however to make to make the following observation:

Article 1769 of the new Civil Code lays down the rule for
determining when a transaction should be deemed a
partnership or a co-ownership. Said article paragraphs 2 and
3, provides:

(2) Co-ownership or co-possession does not of itself establish

a partnership, whether such co-owners or co-possessors do or
do not share any profits made by the use of the property;

(3) The sharing of gross returns does not of itself establish

partnership, whether or not the person sharing them have a
joint or common right or interest in any property from which
the returns are derived;

From the above it appears that the fact that those who agree
to form a co-ownership shared or do not share any profits
made by the use of property held in common does not convert
their venture into a partnership. Or the sharing of the gross
returns does not of itself establish a partnership whether or
not the persons sharing therein have a joint or common right
or interest in the property. This only means that, aside from
the circumstance of profit, the presence of other elements
constituting partnership is necessary, such as the clear intent
to form a partnership, the existence of a judicial personality
different from that of the individual partners, and the freedom
to transfer or assign any interest in the property by one with
the consent of the others (Padilla, Civil Code of the Philippines
Annotated, Vol. I, 1953 ed., pp. 635- 636).

It is evident that an isolated transaction whereby two or more

persons contribute funds to buy certain real estate for profit in
the absence of other circumstances showing a contrary
intention cannot be considered a partnership.

Persons who contribute property or funds for a common

enterprise and agree to share the gross returns of that
enterprise in proportion to their contribution, but who severally
retain the title to their respective contribution, are not thereby
rendered partners. They have no common stock or capital, and
no community of interest as principal proprietors in the
business itself which the proceeds derived. (Elements of the
law of Partnership by Floyd R. Mechem, 2n Ed., section 83, p.
74.)

A joint venture purchase of land, by two, does not constitute a

copartnership in respect thereto; nor does not agreement to
share the profits and loses on the sale of land create a
partnership; the parties are only tenants in common. (Clark vs.
Sideway, 142 U.S. 682, 12 S Ct. 327, 35 L. Ed., 1157.)

Where plaintiff, his brother, and another agreed to become

owners of a single tract of reality, holding as tenants in
common, and to divide the profits of disposing of it, the
brother and the other not being entitled to share in plaintiff's
commissions, no partnership existed as between the parties,
whatever relation may have been as to third parties. (Magee
vs. Magee, 123 N. E. 6763, 233 Mass. 341.)

In order to constitute a partnership inter sese there must be:

(a) An intent to form the same; (b) generally a participating in
both profits and losses; (c) and such a community of interest,
as far as third persons are concerned as enables each party to
make contract, manage the business, and dispose of the whole
property. (Municipal Paving Co. vs Herring, 150 P. 1067, 50 Ill.
470.)

The common ownership of property does not itself create a

partnership between the owners, though they may use it for
purpose of making gains; and they may, without becoming
partners, agree among themselves as to the management and
use of such property and the application of the proceeds
therefrom. (Spurlock vs. Wilson, 142 S. W. 363, 160 No. App.
14.)

This is impliedly recognized in the following portion of the

decision: "Although, taken singly, they might not suffice to
establish the intent necessary to constitute a partnership, the
collective effect of these circumstances (referring to the series
of transactions) such as to leave no room for doubt on the
existence of said intent in petitioners herein."

SECOND DIVISION

[G.R. Nos. L-27856-57. February 28, 1979.]

RUSTICO PASCUAL, ALBERTO JOSE, ELADIO

GREGORIO, REDENTOR V. SOTTO, RODRIGO V.
SOTTO, MARIANO HERRANZ, MARINA DAVILA,
EDUARDO OCAMPO, PEDRO ASENSI, FRANCISCO
PADUA, JUANITO SAN MIGUEL, RAFAEL
FRANCISCO, ELISEO LIZADA; FEDERICO DE LANGE,
CESAR VICTORIANO, ALCIBIADES JOSE, FLORITA
DEL ROSARIO, et al., petitioners, vs. COURT OF
 INDUSTRIAL RELATIONS; JOSE C ESPINAS and PAN
AMERICAN WORLD AIRWAYS, INC., respondents.

Mario R. Silva for petitioners.

Benjamin C. Espinas for respondent Jose C. Espinas.
Salcedo, Del Rosario, Bito, Misa & Lozada for respondent
Pan American World Airways, Inc.

SYNOPSIS

Respondent counsel represented the PANAMEA, a union of

rank and file employees, and obtained a 15% increase in the
salary of the union members. When the management
extended this benefit to petitioners who were not rank and file
union members as they occupy supervisory, junior executive
and confidential positions, respondent counsel moved for the
approval of attorney's lien of 20% against petitioners on the
ground that they benefited from the result of his work. The
labor court granted the motion. Hence this petition.
The Supreme Court held that the benefits that accrue to non-
union members by reason of collective bargaining agreement
cannot be termed as "unjust enrichment"; that attorney's fees
cannot be granted where there is no lawyer-client relationship;
that counsel for the rank and file union cannot demand
attorney's fees against supervisors, junior executives and
confidential employees who are ineligible to join such union;
and that the powers of the Court of Industrial Relations under
Section 17 of Com. Act 103 are not unlimited and are confined
only to matters incidental or related to the original or main
case and not where the new controversy has absolutely no
relation or is alien to the original case.

SYLLABUS
1. LABOR RELATIONS; COLLECTIVE BARGAINING AGREEMENT;
QUASI-CONTRACT; BENEFITS DUE NON-UNION MEMBERS BY
REASON OF A BARGAINING AGREEMENT NOT UNJUST
ENRICHMENT. Respondent counsel based his claim for
attorney's fees against petitioners on the allegation that his
work benefited not only members of the union represented by
him but also petitioners who were not members of the rank
and file union. In effect, he claims that petitioners should be
made to pay on the principle of quasi-contract as defined in
Article 2142 of the Civil Code, thus: "Certain lawful, voluntary
and unilateral acts give rise to the judicial relation of quasi-
contract to the end that no one shall be unjustly enriched or
benefited at the expense of another." However, benefits that
accrue to non-members by reason of a collective bargaining
agreement can hardly be termed 'unjust enrichment' because
the same are extended to them to avoid discrimination among
employees.
2. ID.; ATTORNEY AND CLIENT; ATTORNEY'S FEES; COLLECTION
OF. Where the company extended to the supervisory
employees similar wage increased obtain by the rank and file
union members in order to maintain equilibrium in the
company, not because of the efforts exerted by counsel for the
rank and file union, said counsel cannot collect attorney's fees
from the supervisory employees who were not his clients in
the absence of a lawyer-client relationship or special efforts or
services rendered which resulted in special benefits to
supervisory employees or any circumstance that would imply
that they encouraged or supported his efforts.
3. ID.; ID.; ID.; COUNSEL FOR THE RANK AND FILE UNION
CANNOT COLLECT ATTORNEY'S FEES FROM EMPLOYEES
INELIGIBLE TO JOIN THE UNION. Exemption of non-union
members who benefited from the award obtained by the union
members from sharing in the payment of the attorney's fees
would run counter to the general policy of the law to
encourage unionism to enable the employees to bargain with
the employer upon a more or less equal footing because it
would tend to encourage a substantial portion of the employee
force of any corporation not to affiliate with the union that has
a collective bargaining agreement with the company and sit
idly while the union members are fighting to secure benefits
that are later extended not only to them but also to all other
employees of the company. But this rationale does not apply
to a case where the employees sought to be taxed with
attorney's fees are all supervisors, junior executives and
confidential employees who are ineligible to become members
of the rank and file union that originally obtained the benefits.
4. ID.; COURT OF INDUSTRIAL RELATIONS; POWERS UNDER
SECTION 17 OF COM. ACT NO. 103. The power of the Court
of Industrial Relations under Section 17 of Com. Act 103 to
alter, modify in whole or in part, or set aside any award, order
or decision or reopen any question involved therein during the
effectiveness of an award is not unlimited. It must be confined
to matters involved in the award which resolved the labor
dispute. Such power applies only where the subsequent matter
is incidental or related to the original or main case and not
where the new controversy has absolutely no relation or is
alien to the original or main case. To hold otherwise would be
to grant to the labor court excessive or broad powers, not
conferred or contemplated by the statute.

DECISION

ABAD SANTOS, J p:
The question in this case is whether or not a lawyer may
collect attorney's fees from non-union members who were not
his clients but were extended by the employer salary increases
similar to those given to union members in settlement of a
labor dispute prosecuted by said lawyer.
The petitioners, namely: Rustico Pascual, Alberto Jose, Eladio
Gregorio, Redentor V. Sotto, Rodrigo V. Sotto, Mariano Herranz,
Marina Davila, Eduardo Ocampo, Pedro Asensi, Francisco
Padua, Juanito San Miguel, Rafael Francisco, Eliseo Lizada,
Federico de Lange, Cesar Victoriano, Alcibiades Jose, Florita del
Rosario, et al., were supervisors, junior executives or
confidential employees of Pan American World Airways, Inc.
(respondent Company) at the time this special civil action was
commenced in July, 1967, and were, therefore, ineligible to
join the union of the rank and file employees, the Pan
American Employees Association PANAMEA. cdll
Respondent Atty. Jose C. Espinas represented PANAMEA in a
labor dispute with respondent Company which arose
connection with a provision, Art. 6(d), in the collective
bargaining contract between PANAMEA and respondent
Company concluded on March 17, 1960, which stipulated that
if "a law diminishing the value of Philippine currency is
enacted and as result thereof the company is granted the
necessary authority to increase its rates, either party may,
upon written notice to the other, re-open this agreement for
negotiation of wage rates . . ." PANAMEA made a demand on
July 8, 1960, for negotiation of wage increases pursuant to the
above-quoted provision and negotiations were had but when
no agreement was reached a strike was called by PANAMEA on
August 1, 1960.
On August 3, 1960, the dispute was certified by the President
of the Philippines to respondent Court of Industrial
Relations,CIR, are the case was docketed therein as Case No.
30-IPA. On August 4, 1960, respondent Atty. Espinas entered
the case as lawyer for the union. A Return to Work Agreement
was made with the submission of the case to respondent CIR.
On November 22, 1960, respondent CIR ordered the parties to
negotiate on wages. An appeal from this order was made to
this Court and docketed as G.R. No. L-18345, entitled PanAm
World Airways vs. PAA Employees Association and CIR. This
Court affirmed the order of the CIR.
While Case No. 30-IPA was pending resolution, another labor
dispute resulting in a strike arose between PANAMEA and
respondent Company. This second case was also certified by
the respondent CIR on September 4, 1963, and docketed as
Case No. 44-IPA.
On July 14, 1964, PANAMEA, for the third time, went on strike.
A solution was finally reached on July 24, 1964, when
PANAMEA and respondent Company framed a new agreement
which was embodied in an Order of the CIR dated July 27,
1964, wherein respondent Company agreed to "increase the
present salary of each employee, member of the Petitioner
Union by fifteen per cent (15%)" effective March 1, 1963. This
ended the strike and terminated the two cases, except the
wage adjustment issue for the period covered by the old
contract, which the parties agreed to submit to arbitration.
They did so in September, 1964.
On June 21, 1965, Judge Arsenio I. Martinez of the CIR, Acting
as Arbitrator, rendered an award the dispositive portion of
which states as follows:
"After a careful consideration of the arguments and
the evidence of both parties, we believe and so hold
that a sum equivalent to four (4) months salary of
the employees concerned based on the pay rates as
of February 28, 1963, payable in two installments,
would be a fair and reasonable settlement of the
claim for wage adjustment for a period covering the
effectivity of the collective contract executed on
March 17, 1960."
It appears that respondent Company extended all the wage
increase benefits awarded to PANAMEA in the two CIR cases to
all its employees, including petitioners who, as aforesaid,
occupy supervisory, junior executive, and confidential
positions. LLpr
In a motion dated June 30, 1965, Atty. Espinas asked for the
approval of attorney's lien of 20% against the benefits that
were extended to employees who were not members of the
union. This was opposed by respondent Company in an Answer
dated July 2, 1965.
On November 16, 1965, a "Clarification of Arbitration Award"
was issued by Judge Arsenio R. Martinez, again acting as
Arbitrator, where the question of attorney's lien was passed
upon in the following manner:
"Incidentally, several actions have been filed
regarding the question of attorney's fees. As shown
by the records, it is with respect to the benefits to be
received by the supervisors of the respondent
company that attorney's lien are being sought to be
imposed, as well as upon certain non-union members
of the rank and file. Nevertheless, the Arbitrator can
not see its way clear on these issues. The terms are
the Agreement is for the Presiding Judge to act as
Arbitrator on the question of the wage adjustment.
Whatever action has been made so far is on account
and solely because of this designation. However, to
solve the issue once and for all on the assumption
that matter is interrelated to all others, considering
that just as the workers are entitled to the benefits,
their lawyers too, by all standard of fairness, are
equally entitled, this arbitrator feels that it can take
cognizance of. Consequently, all those who stand to
profit by the award must pay attorney's fees based
on the agreement as to the amount."
In the dispositive portion of the clarification, Judge Martinez
directed "(c) As to attorney's fees, let the parties be guided
accordingly in pursuance thereof."
Nothing happened until April 18, 1967, when Judge Joaquin M.
Salvador, acting as Associate Judge of the respondent CIR,
issued an order granting the motion of Atty. Espinas.
On April 24, 1967, petitioners filed a Special Appearance and
Motion to Dismiss, questioning the award of attorney's fees,
claiming that they are supervisors, junior executives
confidential employees of the respondent Company and are
therefore expressly excluded from bring members of
PANAMEA; that they did not derive any benefit from the
agreement between PANAMEA and respondent Company; and
that they had not been made parties directly or indirectly in
Cases Nos. 30-IPA And 44-IPA, nor had they come within the
jurisdiction of respondent Company to act in their behalf.
Respondent Company, for its part, also filed a Motion for
Reconsideration to Set Aside the grant of attorney's fees. The
respondent Court en banc denied the motion on May 22, 1967.
Hence, this petition for certiorari and prohibition, with
preliminary injunction to declare the Order of
respondent CIR null and void and to prohibit respondents,
particularly the CIR and Atty. Jose C. Espinas, from undertaking
further proceedings against petitioners.
This Court granted the writ of preliminary injunction prayed
for.
Respondent Company admits in its Answer all the allegations
of fact in the petition as well as the allegations in support of
the petition for preliminary injunction.
Respondent Espinas, after filing his Answer, entered a Motion
before this Court on September 13, 1967, for deposit of his
attorney's fees in the two labor cases computed by the CIR as
amounting to P68,317.36. Cdpr
Respondent Company countered that the amount of
P68,317.36 sought as deposit constitutes the 20% of the
benefits received by all of the employees of the respondents
Company, including the rank and file employees who are
members of the Union and from whom respondent Espinas is
not claiming a lien and those who are no longer employed by
the Company. It manifested on September 29, 1967, that 20%
of the benefits received by petitioners amounts only to
P25,988.21.
Petitioners opposed the Motion to Deposit on October 2, 1967,
on the ground that claim for attorney's fees is enforceable only
by writ of execution. On December 8, 1967, this Court denied
the Motion.
The foregoing recitation of facts shows the following salient
points: first, petitioners were never made parties in Cases Nos.
30-IPA and 44-IPA and had never come within the jurisdiction
of respondent CIR except when they filed a special appearance
to contest the award of attorney's fees against them: second,
Atty. Espinas has no contract for lawyer's services with the
petitioners; third, it does not appear that Atty. Espinas
performed any special service for petitioners in the two cases
that were filed with the CIR; and, fourth, petitioners were at
that time supervisors, junior executives, or confidential
employees while Atty. Espinas represented a union composed
of the rank and file.
It is admitted by respondent Espinas that:
"There is no dispute here that respondent Atty.
Espinas has no contract for legal services with the
petitioners. There is also no dispute that the
petitioners were never the clients of respondent
Espinas. Neither is it disputed by the respondent that
there is a lack of attorney and client relationship
between the petitioners and respondent Espinas."
(Rollo, p. 171.).
The question, therefore, is whether his claim for attorney's
fees can be supported on other grounds.
Respondent Espinas bases his claim on the allegation that his
work benefited not only the union members but also those not
members of the union. In effect he claims that the latter
should be made to pay on the principle of quasi-contract.
Quasi-contracts are defined in Art. 2142 of the Civil Code thus:
"Certain lawful, voluntary and unilateral acts give rise to the
juridical relation of quasi-contract to the end that no one shall
be unjustly enriched or benefited that expense of another."
However, the principle of quasi-contract cannot be applied in
this case. For as pointed out in National Brewery and Allied
Industries Labor Union of the Philippines vs. San Miguel
Brewery Inc., L-18170, August 31, 1963, 8 SCRA 806, where
the same principle was invoked: "But the benefits that accrue
to nonmembers by reason of a collective bargaining
agreement can hardly be termed "unjust enrichment' because,
as already pointed out, the same are extended to them
precisely to avoid discrimination among employees.
[International Oil Factory Workers' Union (FFW) vs. Martinez, et
al., G.R. No. L-15560, Dec. 31, 1960]." (At pp. 811-812.) See
also Philippine Air Lines Supervisors Assn. vs. Jimenez, L-
26622, May 31, 1974, 57 SCRA 260.
In this case, respondent Company extended to the petitioners
similar wage increases that had been won by PANAMEA in
order to maintain equilibrium in the Company not because
of the efforts that respondent Espinas exerted. In fact,
petitioners allege, and this stands uncontradicted, that
respondent Company had in fact offered higher wage
increases but because the union and Espinas decided to go on
strike, the resulting award was much less. Petitioners also
allege this they had long been due for merit increases which
did not however, materialize because the respondent
Company was to avoid a union strike and a suit for unfair labor
practice. cdrep
The questioned order relies on two cases where the Supreme
Court allowed attorney's fees to be collected against non-
union members: Union Empleados De Trenes vs. Kapisanan ng
mga Manggagawa, MRR et al., 110 Phil. 309, and Martinez et
al. vs. Union de Maquinista Fogoneros y Motormen, et al., L-
19455-56, Jan. 30, 1967, 19 SCRA 167.
The ruling in the case of Union de Empleados de Trenes
Kapisanan ng mga Manggagawa sa M.R.R. Co., et al. supra is
inapplicable as the factual setting of that case is different from
that of the case at hand. There, the lawyer, Atty. Gregorio E.
Fajardo, had filed a petition for additional compensation night
work in favor of Kapisanan ng mga Manggagawa M.R.R. Co.
Subsequently, another case seeking the same relief was filed
by Union de Empleados de Trenes. The latter allowed to
intervene in the first case and even offered to pay Atty. Fajardo
5% attorney's fees. In February 1950, Atty. Fajardo was able to
secure a 25% additional compensation for night work for
Kapisanan and the award was also made applicable by the
Court of Industrial Relations to all employees and workers of
the Manila Railroad Company, whether members of any union
or not. At this point, Atty. Fajardo dismissed by Kapisanan.
Thereafter, in June 1950, the Union de Empleados de Trenes
agreed to abide by the decision of the Court Industrial
Relations in the first case. As the company was not then in a
financial condition to comply with the award, proceedings for
the execution of the award obtained by Atty. Fajardo were
initiated by another lawyer only in 1956, where the issue
of attorney's fees also came up. This time the Union de
Empleados de Trenes asked to be excluded from the first case
contending that it derived its benefits in the second case in
order to avoid payment of attorney's fees. The Court of
Industrial Relations did not sustain its stand and this Court
upheld the award of attorney's fees against the Union de
Empleados de Trenes. Clearly, an implied lawyer-client
relationship existed between Union de Empleados de Trenes
and the lawyers for Kapisanan, binding the Union to pay
attorney's fees.
Moreover, this Court, in the case of Philippine Air Lines
Supervisors' Assn. vs. Jimenez, supra, observed that in the
case ofUnion de Empleados de Trenes "the benefits obtained
for all workers would not have materialized were it not for
thespecial efforts and successful prosecution by the claimant
union and its attorneys of the suit for special benefits and
hence the industrial court deemed it just and equitable that all
employees benefited by the hardearned judicial award share in
the fees and expenses." (At p. 272.).
There is nothing in this case that would justify a conclusion
that Atty. Espinas rendered special legal service which resulted
in special benefits to petitioners nor is there even
circumstance that would imply that petitioners encourage and
supported the efforts of Atty. Espinas. Petitioners received
what they did, not because of Espinas' efforts, but because of
respondent Company's policy of non-discrimination.
The case of Martinez et al. vs. Union de Maquinistas Fogoneros
y Motormen et al. supra, also involves a different set of facts.
In that case, two unions in the Manila Railroad Company,
namely, the Union de Maquinistas Fogoneros Motormen,
designated as the sole representative of Maquinistas,
Fogoneros and Motormen, and the Union de Empleados de
Trenes, the sole representative of all the conductors, route
agents and porters, demanded wage increases. After the
unions struck, the case was certified by the President of the
Philippines to the Court of Industrial Relations. The Kapisanan
ng mga Manggagawa sa M.R.R. Co., which was designated as
the sole representative of the rest of the company's personnel,
was allowed to intervene in the case. After several
negotiations and hearings, the Court of Industrial Relations
awarded a permanent wage increase and made the same
applicable to every employee of the Manila Railroad Company.
In view of this, the attorneys who represented the three unions
filed a motion to have their lien for attorney's fees extended to
the increase received by all other employees who were not
members of the unions. The industrial court granted the
motion. cdrep
In affirming the grant of attorney's fees against the non-union
members, this Court considered it pertinent that "the general
policy of the law is to encourage unionism to enable
employees to bargain with the employer upon a more or less
equal footing." The Court was of the view that exemption of
the non-union members who benefited from the award would
run "counter to this policy because it tends to encourage a
substantial portion of the employee force of any corporation
not to affiliate with the Union that has a collective bargaining
agreement with the Company, and is idly while the union
members are fighting to secure benefits that are later
extended not only to them but also to all other employees of
the company." (At p. 171) This rationale does not apply in the
case at hand where the employees sought to be taxes with
attorney's fees are all supervisors, junior executives, and
confidential employees, and, therefore, could never become
members of the union that originally obtained benefits.

This Court is mindful of the comprehensive character of the

power of the CIR under Section 17 of C.A. No. 103 to "alter or
modify in whole or in part or set aside any such award, order
decision or reopen any question involved therein" during the
effectiveness of an award. As aptly stated by Senior Justice
Fernando in Philippine Association of Free Labor
Unions(PAFLU) vs. Salvador, L-29471, September 28, 1968, 25
SCRA 393: "The power of the Court of Industrial Relations
which as thus phrased, is comprehensive in character, has
been given an interpretation by us consistent with the well-
nigh sweeping reach of its language. It has never been
construed in a niggardly sense; the recognition of such
authority has been full and sympathetic, never grudging
However, the power of the CIR under that section is not
unlimited; it must be confined to matters involved in the award
which resolves the labor dispute. The jurisdiction of the CIR in
the two labor cases was acquired upon presidential
certification and this covers only the labor dispute between
PANAMEA and respondent Company over the wage adjustment
issue under the old collective bargaining agreement, as well as
wage increases that were the subject of a new agreement. Its
authority, therefore, was confined to the parties to the dispute.
The salary increases granted to petitioners by respondent
Company were not related to the labor dispute nor part of the
award made in the two cases. Perforce, a claim for attorney's
fees against petitioners is not related to the two cases certified
to the industrial court.
In the case of Northwest Airline vs. Northwest Airline Sales
Employees Association, L-17378, April 20, 1962, 4 SCRA 1265,
this Court placed in proper perspective the power of
the CIR under Section 17 to reopen any question during the
effectiveness of an award when it held:
"But this applies only where the subsequent matter is
incidental or related to the original or main case and
not where, as in the instant case, the new
controversy has absolutely no relation or is alien to
the original or main case. To hold otherwise would be
to grant to respondent Court excessive or broad
powers, not conferred or contemplate by the
statute." (At p. 1271).
WHEREFORE, the petition for a writ of certiorari and prohibition
is hereby granted and the questioned order dated April 18,
1967, is set aside as null and void. The writ preliminary
injunction issued is hereby made permanent. No costs.
SO ORDERED.
||| (Pascual v. Court of Industrial Relations, G.R. Nos. L-27856-
57, [February 28, 1979], 177 PHIL 596-607)
 THIRD DIVISION

[G.R. No. 112675. January 25, 1999.]

AFISCO INSURANCE CORPORATION; CCC

INSURANCE CORPORATION; CHARTER
INSURANCE CO., INC.; CIBELES INSURANCE
CORPORATION; COMMONWEALTH INSURANCE
COMPANY; CONSOLIDATED INSURANCE CO.,
INC.; DEVELOPMENT INSURANCE & SURETY
CORPORATION; DOMESTIC INSURANCE
COMPANY OF THE PHILIPPINES; EASTERN
ASSURANCE COMPANY & SURETY CORP.;
EMPIRE INSURANCE COMPANY; EQUITABLE
INSURANCE CORPORATION; FEDERAL
INSURANCE CORPORATION INC.; FGU
INSURANCE CORPORATION; FIDELITY & SURETY
COMPANY OF THE PHILS., INC.; FILIPINO
MERCHANTS' INSURANCE CO., INC.;
GOVERNMENT SERVICE INSURANCE SYSTEM;
MALAYAN INSURANCE CO., INC.; MALAYAN
ZURICH INSURANCE CO., INC.; MERCANTILE
INSURANCE CO., INC.; METROPOLITAN
INSURANCE COMPANY; METRO-TAISHO
INSURANCE CORPORATION; NEW ZEALAND
INSURANCE CO., LTD.; PAN-MALAYAN
INSURANCE CORPORATION; PARAMOUNT
INSURANCE CORPORATION; PEOPLE'S TRANS-
EAST ASIA INSURANCE CORPORATION; PERLA
COMPANIA DE SEGUROS, INC.; PHILIPPINE
BRITISH ASSURANCE CO., INC.; PHILIPPINE
FIRST INSURANCE CO., INC.; PIONEER
INSURANCE & SURETY CORP.; PIONEER
INTERCONTINENTAL INSURANCE CORPORATION;
 PROVIDENT INSURANCE COMPANY OF THE
PHILIPPINES; PYRAMID INSURANCE CO., INC.;
RELIANCE SURETY & INSURANCE COMPANY;
RIZAL SURETY & INSURANCE COMPANY;
SANPIRO INSURANCE CORPORATION;
SEABOARD-EASTERN INSURANCE CO., INC.;
SOLID GUARANTY, INC.; SOUTH SEA SURETY &
INSURANCE CO., INC.; STATE BONDING &
INSURANCE CO., INC.; SUMMA INSURANCE
CORPORATION; TABACALERA INSURANCE CO.,
INC. all assessed as "POOL OF MACHINERY
INSURERS," petitioners, vs. COURT OF APPEALS,
COURT OF TAX APPEALS and COMMISSIONER
OF INTERNAL REVENUE, respondents.

Angara Abello Concepcion Regala for petitioners.

SYNOPSIS

This is a Petition For Review on Certiorari assailing the

Decision of the Court of Appeals dismissing petitioners' appeal
of the Decision of the Court of Tax Appeals which had
sustained petitioners' liability for deficiency income tax,
interest and withholding tax. Petitioners contended that the
Court of Appeals erred in finding that the pool or clearing
house was an informal partnership, which was taxable as a
corporation under the NIRC. Petitioners further claimed that
the remittances of the pool to the ceding companies and
Munich are not dividends subject to tax. They insisted that
taxing such remittances contravene Sections 24 (b) (I) and
263 of the 1977 NIRC and would be tantamount to an illegal
double taxation. Moreover, petitioners argued that since
Munich was not a signatory to the Pool Agreement, the
remittances it received from the pool cannot be deemed
dividends. However, even if such remittances were treated as
dividends, they would have been exempt under the previously
mentioned sections of the 1977 NIRC,as well as Article 7 of
paragraph 1 and Article 5 of the RP-West German Tax Treaty.
Petitioners likewise contended that the Internal Revenue
Commissioner was already barred by prescription from making
an assessment.
In the present case, the ceding companies entered into a Pool
Agreement or association that would handle all the insurance
businesses covered under their quota-share reinsurance treaty
and surplus reinsurance treaty with Munich. AScHCD
Petitioner's allegation of double taxation is untenable. The pool
is a taxable entity distinct from the individual corporate
entities of the ceding companies. The tax on its income is
different from the tax on the dividends received by the said
companies. The tax exemptions claimed by petitioners cannot
be granted. The sections of the 1977 NIRC which petitioners
cited are inapplicable, because these were not yet in effect
when the income was earned and when the subject
information return for the year ending 1975 was filed.
Petitioners' claim that Munich is tax-exempt based on the RP-
West German Tax Treaty is likewise unpersuasive, because the
Internal Revenue Commissioner assessed the pool for
corporate taxes on the basis of the information return it had
submitted for the year ending 1975, a taxable year when said
treaty was not yet in effect. Petitioners likewise failed to
comply with the requirement of Section 333 of the NIRC for the
suspension of the prescriptive period. The Resolutions of the
Court of Appeals are affirmed.

SYLLABUS

1. REMEDIAL LAW; EVIDENCE; RULING OF THE COMMISSION OF

INTERNAL REVENUE IS ACCORDED WEIGHT AND EVEN
FINALITY IN THE ABSENCE OF SHOWING THAT IT IS PATENTLY
WRONG. The opinion or ruling of the Commission of Internal
Revenue, the agency tasked with the enforcement of tax laws,
is accorded much weight and even finality, when there is no
showing that it is patently wrong, particularly in this case
where the findings and conclusions of the internal revenue
commissioner were subsequently affirmed by the CTA, a
specialized body created for the exclusive purpose of
reviewing tax cases, and the Court of Appeals. Indeed, "[I]t has
been the long standing policy and practice of this Court to
respect the conclusions of quasi-judicial agencies, such as the
Court of Tax Appeals which, by the nature of its functions, is
dedicated exclusively to the study and consideration of tax
problems and has necessarily developed an expertise on the
subject, unless there has been an abuse or improvident
exercise of its authority." TIAEac
2. CIVIL LAW; PARTNERSHIP; REQUISITES. Article 1767 of the
Civil Code recognizes the creation of a contract of partnership
when "two or more persons bind themselves to contribute
money, property, or industry to a common fund, with the
intention of dividing the profits among themselves." Its
requisites are: "(1) mutual contribution to a common stock,
and (2) a joint interest in the profits." In other words, a
partnership is formed when persons contract "to devote to a
common purpose either money, property, or labor with the
intention of dividing the profits between themselves."
Meanwhile, an association implies associates who enter into a
"joint enterprise . . . for the transaction of business."
3. ID.; ID.; INSURANCE POOL IN CASE AT BAR DEEMED
PARTNERSHIP OR ASSOCIATION TAXABLE AS A CORPORATION
UNDER SECTION 24 OF THE NIRC. In the case before us, the
ceding companies entered into a Pool Agreement or an
association that would handle all the insurance businesses
covered under their quota-share reinsurance treaty and
surplus reinsurance treaty with Munich. The following
unmistakably indicates a partnership or an association covered
by Section 24 of the NIRC: (1) The pool has a common fund,
consisting of money and other valuables that are deposited in
the name and credit of the pool. This common fund pays for
the administration and operation expenses of the pool. (2) The
pool functions through an executive board, which resembles
the board of directors of a corporation, composed of one
representative for each of the ceding companies. (3) True, the
pool itself is not a reinsurer and does not issue any insurance
policy; however, its work is indispensable, beneficial and
economically useful to the business of the ceding companies
and Munich, because without it they would not have received
their premiums. The ceding companies share "in the business
ceded to the pool" and in the "expenses" according to a "Rules
of Distribution" annexed to the Pool Agreement. Profit motive
or business is, therefore, the primordial reason for the pool's
formation.
4. TAXATION; NIRC; SECTION 24 THEREOF, UNREGISTERED
PARTNERSHIPS AND ASSOCIATIONS ARE CONSIDERED AS
CORPORATIONS FOR TAX PURPOSES. This Court rules that
the Court of Appeals, in affirming the CTA which had previously
sustained the internal revenue commissioner, committed no
reversible error. Section 24 of the NIRC,as worded in the year
ending 1975, provides: "SEC. 24. Rate of tax on corporations.
(a) Tax on domestic corporations. A tax is hereby
imposed upon the taxable net income received during each
taxable year from all sources by every corporation organized
in, or existing under the laws of the Philippines, no matter how
created or organized, but not including duly registered general
co-partnership (compaias colectivas), general professional
partnerships, private educational institutions, and building and
loan associations . . . ." Ineludibly, the Philippine legislature
included in the concept of corporations those entities that
resembled them such as unregistered partnerships and
associations. Parenthetically, the NLRC's inclusion of such
entities in the tax on corporations was made even clearer by
the Tax Reform Act of 1997, which amended the Tax Code.The
Court of Appeals did not err in applying Evangelista, which
involved a partnership that engaged in a series of transactions
spanning more than ten years, as in the case before us.
5. ID.; DOUBLE TAXATION; DEFINED; NO DOUBLE TAXATION IN
CASE AT BAR. Double taxation means taxing the same
property twice when it should be taxed only once. That is, ". . .
taxing the same person twice by the same jurisdiction for the
same thing." In the instant case, the pool is a taxable entity
distinct from the individual corporate entities of the ceding
companies. The tax on its income is obviously different from
the tax on the dividends received by the said companies.
Clearly, there is no double taxation here.
6. ID.; TAX EXEMPTION; GRANT THEREOF NOT JUSTIFIED IN
CASE AT BAR; REASONS. The tax exemptions claimed by
petitioners cannot be granted, since their entitlement thereto
remains unproven and unsubstantiated. It is axiomatic in the
law of taxation that taxes are the lifeblood of the nation.
Hence, "exemptions therefrom are highly disfavored in law and
he who claims tax exemption must be able to justify his claim
or right." Petitioners have failed to discharge this burden of
proof. The sections of the 1977 NIRC which they cite are
inapplicable, because these were not yet in effect when the
income was earned and when the subject information return
for the year ending 1975 was filed. Referring to the 1975
version of the counterpart sections of the NIRC,the Court still
cannot justify the exemptions claimed. Section 255 provides
that no tax shall ". . . be paid upon reinsurance by any
company that has already paid the tax . . . ." This cannot be
applied to the present case because, as previously discussed,
the pool is a taxable entity distinct from the ceding
companies; therefore, the latter cannot individually claim the
income tax paid by the former as their own. EDSAac

7. ID.; ID.; CANNOT BE CLAIMED BY NON-RESIDENT FOREIGN

INSURANCE CORPORATION IN CASE AT BAR; REASONS; TAX
EXEMPTION CONSTRUED STRICTISSIMI JURIS. Section 24 (b)
(1) pertains to tax on foreign corporations; hence, it cannot be
claimed by the ceding companies which are domestic
corporations. Nor can Munich, a foreign corporation, be
granted exemption based solely on this provision of the Tax
Code because the same subsection specifically taxes
dividends, the type of remittances forwarded to it by the pool.
Although not a signatory to the Pool Agreement, Munich is
patently an associate of the ceding companies in the entity
formed, pursuant to their reinsurance treaties which required
the creation of said pool. Under its pool arrangement with the
ceding companies, Munich shared in their income and loss.
This is manifest from a reading of Articles 3 and 10 of the
Quota-Share Reinsurance Treaty and Articles 3 and 10 of the
Surplus Reinsurance Treaty. The foregoing interpretation of
Section 24 (b) (1) is in line with the doctrine that a tax
exemption must be construed strictissimi juris, and the
statutory exemption claimed must be expressed in a language
too plain to be mistaken.
8. ID.; ID.; BASED ON TAX TREATY NOT APPLICABLE IN CASE AT
BAR; REASON. The petitioners' claim that Munich is tax-
exempt based on the RP-West German Tax Treaty is likewise
unpersuasive, because the internal revenue commissioner
assessed the pool for corporate taxes on the basis of the
information return it had submitted for the year ending 1975,
a taxable year when said treaty was not yet in effect. Although
petitioners omitted in their pleadings the date of effectivity of
the treaty, the Court takes judicial notice that it took effect
only later, on December 14, 1984.
9. ID.; ASSESSMENT AND COLLECTION OF TAX; PRESCRIPTION;
CHANGE IN THE ADDRESS OF THE TAXPAYER WILL NOT TOLL
THE RUNNING OF THE PRESCRIPTIVE PERIOD UNLESS THE
COMMISSIONER OF INTERNAL REVENUE HAS BEEN INFORMED
OF SAID CHANGE. The CA and the CTA categorically found
that the prescriptive period was tolled under then Section 333
of the NIRC,because "the taxpayer cannot be located at the
address given in the information return filed and for which
reason there was delay in sending the assessment." Indeed,
whether the government's right to collect and assess the tax
has prescribed involves facts which have been ruled upon by
the lower courts. It is axiomatic that in the absence of a clear
showing of palpable error or grave abuse of discretion, as in
this case, this Court must not overturn the factual findings of
the CA and the CTA. Furthermore, petitioners admitted in their
Motion for Reconsideration before the Court of Appeals that
the pool changed its address, for they stated that the pool's
information return filed in 1980 indicated therein its "present
address." The Court finds that this falls short of the
requirement of Section 333 of the NIRC for the suspension of
the prescriptive period. The law clearly states that the said
period will be suspended only "if the taxpayer informs the
Commissioner of Internal Revenue of any change in the
address."

DECISION

PANGANIBAN, J p:
Pursuant to "reinsurance treaties," a number of local insurance
firms formed themselves into a "pool" in order to facilitate the
handling of business contracted with a nonresident foreign
reinsurance company. May the "clearing house" or "insurance
pool" so formed be deemed a partnership or an association
that is taxable as a corporation under the National Internal
Revenue Code (NIRC)? Should the pool's remittances to the
member companies and to the said foreign firm be taxable as
dividends? Under the facts of this case, has the government's
right to assess and collect said tax prescribed? cdasia
The Case
These are the main questions raised in the Petition for Review
on Certiorari before us, assailing the October 11, 1993
Decision 1 of the Court of Appeals 2 in CA-GR SP 29502, which
dismissed petitioners' appeal of the October 19, 1992
Decision 3 of the Court of Tax Appeals 4 (CTA) which had
previously sustained petitioners' liability for deficiency income
tax, interest and withholding tax. The Court of Appeals ruled:
"WHEREFORE, the petition is DISMISSED, with costs
against petitioners." 5
The petition also challenges the November 15, 1993 Court of
Appeals (CA) Resolution 6 denying reconsideration.
The Facts
The antecedent facts, 7 as found by the Court of Appeals, are
as follows:
"The petitioners are 41 non-life insurance
corporations, organized and existing under the laws
of the Philippines. Upon issuance by them of
Erection, Machinery Breakdown, Boiler Explosion and
Contractors' All Risk insurance policies, the
petitioners on August 1, 1965 entered into a Quota
Share Reinsurance Treaty and a Surplus Reinsurance
Treaty with the Munchener Ruckversicherungs-
Gesselschaft (hereafter called Munich), a non-
resident foreign insurance corporation. The
reinsurance treaties required petitioners to form a
[p]ool. Accordingly, a pool composed of the
petitioners was formed on the same day.
"On April 14, 1976, the pool of machinery insurers
submitted a financial statement and filed an
"Information Return of Organization Exempt from
Income Tax" for the year ending in 1975, on the basis
of which it was assessed by the Commissioner of
Internal Revenue deficiency corporate taxes in the
amount of P1,843,273.60, and withholding taxes in
the amount of P1,768,799.39 and P89,438.68 on
dividends paid to Munich and to the petitioners,
respectively. These assessments were protested by
the petitioners through its auditors Sycip, Gorres,
Velayo and Co.
"On January 27, 1986, the Commissioner of Internal
Revenue denied the protest and ordered the
petitioners, assessed as "Pool of Machinery Insurers,"
to pay deficiency income tax, interest, and
with[h]olding tax, itemized as follows:
Net income per information return P3,737,370.00
===========
Income tax due thereon P1,298,080.00
Add: 14% Int. fr. 4/15/76
to 4/15/79 545,193.60

TOTAL AMOUNT DUE & P1,843,273.60
COLLECTIBLE ===========
Dividend paid to Munich
Reinsurance Company P3,728,412.00
===========
35% withholding tax at source due
thereon P1,304,944.20
Add: 25% surcharge 326,236.05
14% interest from
1/25/76 to 1/25/79 137,019.14
Compromise
penalty-non-filing of return 300.00
late payment 300.00

TOTAL AMOUNT DUE & P1,768,799.39
COLLECTIBLE ===========
Dividend paid to Pool Members P655,636.00
===========
10% withholding tax at
source due thereon P65,563.60
Add: 25% surcharge 16,390.90
14% interest from
1/25/76 to 1/25/79 6,884.18
Compromise
penalty-non-filing of return 300.00
late payment 300.00

TOTAL AMOUNT DUE & P89,438.68
COLLECTIBLE ==========" 8
The CA ruled in the main that the pool of machinery insurers
was a partnership taxable as a corporation, and that the
latter's collection of premiums on behalf of its members, the
ceding companies, was taxable income. It added that
prescription did not bar the Bureau of Internal Revenue (BIR)
from collecting the taxes due, because "the taxpayer cannot
be located at the address given in the information return
filed." Hence, this Petition for Review before us. 9
The Issues
Before this Court, petitioners raise the following issues:
"1. Whether or not the Clearing House, acting as a
mere agent and performing strictly administrative
functions, and which did not insure or assume any
 risk in its own name, was a partnership or association
subject to tax as a corporation;
"2. Whether or not the remittances to petitioners and
MUNICHRE of their respective shares of reinsurance
premiums, pertaining to their individual and separate
contracts of reinsurance, were "dividends" subject to
tax; and
"3. Whether or not the respondent Commissioner's
right to assess the Clearing House had already
prescribed." 10
The Court's Ruling
The petition is devoid of merit. We sustain the ruling of the
Court of Appeals that the pool is taxable as a corporation, and
that the government's right to assess and collect the taxes
had not prescribed.
First Issue:
Pool Taxable as a Corporation
Petitioners contend that the Court of Appeals erred in finding
that the pool or clearing house was an informal partnership,
which was taxable as a corporation under the NIRC. They point
out that the reinsurance policies were written by them
"individually and separately," and that their liability was
limited to the extent of their allocated share in the original
risks thus reinsured. 11 Hence, the pool did not act or earn
income as a reinsurer. 12 Its role was limited to its principal
function of "allocating and distributing the risk(s) arising from
the original insurance among the signatories to the treaty or
the members of the pool based on their ability to absorb the
risk(s) ceded[;] as well as the performance of incidental
functions, such as records, maintenance, collection and
custody of funds, etc." 13
Petitioners belie the existence of a partnership in this case,
because (1) they, the reinsurers, did not share the same risk or
solidary liability; 14 (2) there was no common fund; 15 (3) the
executive board of the pool did not exercise control and
management of its funds, unlike the board of directors of a
corporation; 16 and (4) the pool or clearing house "was not
and could not possibly have engaged in the business of
reinsurance from which it could have derived income for
itself." 17
The Court is not persuaded. The opinion or ruling of the
Commission of Internal Revenue, the agency tasked with the
enforcement of tax laws, is accorded much weight and even
finality, when there is no showing that it is patently
wrong, 18particularly in this case where the findings and
conclusions of the internal revenue commissioner were
subsequently affirmed by the CTA, a specialized body created
for the exclusive purpose of reviewing tax cases, and the Court
of Appeals.19 Indeed,

"[I]t has been the long standing policy and practice

of this Court to respect the conclusions of quasi-
judicial agencies, such as the Court of Tax Appeals
which, by the nature of its functions, is dedicated
exclusively to the study and consideration of tax
problems and has necessarily developed an expertise
on the subject, unless there has been an abuse or
improvident exercise of its authority." 20
This Court rules that the Court of Appeals, in affirming the CTA
which had previously sustained the internal revenue
commissioner, committed no reversible error. Section 24 of
the NIRC,as worded in the year ending 1975, provides:
"SEC. 24. Rate of tax on corporations. (a) Tax on
domestic corporations. A tax is hereby imposed
upon the taxable net income received during each
taxable year from all sources by every corporation
organized in, or existing under the laws of the
 Philippines, no matter how created or organized, but
not including duly registered general co-partnership
(compaias colectivas), general professional
partnerships, private educational institutions, and
building and loan associations . . . ."
Ineludibly, the Philippine legislature included in the concept of
corporations those entities that resembled them such as
unregistered partnerships and associations. Parenthetically,
the NLRC's inclusion of such entities in the tax on corporations
was made even clearer by the Tax Reform Act of
1997, 21 which amended the Tax Code.Pertinent provisions of
the new law read as follows:
"SEC. 27. Rates of Income Tax on Domestic
Corporations.
(A) In General. Except as otherwise provided in
this Code, an income tax of thirty-five percent (35%)
is hereby imposed upon the taxable income derived
during each taxable year from all sources within and
without the Philippines by every corporation, as
defined in Section 22 (B) of this Code, and taxable
under this Title as a corporation . . . ."
"SEC. 22. Definition. When used in this Title:
xxx xxx xxx
(B) The term 'corporation' shall include
partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en
participacion), associations, or insurance companies,
but does not include general professional
partnerships [or] a joint venture or consortium
formed for the purpose of undertaking construction
projects or engaging in petroleum, coal, geothermal
and other energy operations pursuant to an
operating or consortium agreement under a service
contract without the Government. 'General
 professional partnerships' are partnerships
formed by persons for the sole purpose of exercising
their common profession, no part of the income of
which is derived from engaging in any trade or
business. LLphil
xxx xxx xxx."
Thus, the Court in Evangelista v. Collector of Internal
Revenue 22 held that Section 24 covered these unregistered
partnerships and even associations or joint accounts, which
had no legal personalities apart from their individual
members. 23 The Court of Appeals astutely
applied Evangelista: 24
". . . Accordingly, a pool of individual real property
owners dealing in real estate business was
considered a corporation for purposes of the tax in
Sec. 24 of the Tax Code in Evangelista v. Collector of
Internal Revenue, supra. The Supreme Court said:
'The term 'partnership' includes a syndicate,
group, pool, joint venture or other
unincorporated organization, through or by
means of which any business, financial
operation, or venture is carried on . . . (8
Merten's Law of Federal Income Taxation, p. 562
Note 63)'"
Article 1767 of the Civil Code recognizes the creation of a
contract of partnership when "two or more persons bind
themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among
themselves." 25 Its requisites are: "(1) mutual contribution to
a common stock, and (2) a joint interest in the profits." 26 In
other words, a partnership is formed when persons contract
"to devote to a common purpose either money, property, or
labor with the intention of dividing the profits between
themselves." 27 Meanwhile, an association implies associates
who enter into a "joint enterprise . . . for the transaction of
business." 28
In the case before us, the ceding companies entered into a
Pool Agreement 29 or an association 30 that would handle all
the insurance businesses covered under their quota-share
reinsurance treaty 31 and surplus reinsurance treaty 32 with
Munich. The following unmistakably indicates a partnership or
an association covered by Section 24 of the NIRC:
(1) The pool has a common fund, consisting of money and
other valuables that are deposited in the name and credit of
the pool. 33 This common fund pays for the administration
and operation expenses of the pool. 34
(2) The pool functions through an executive board, which
resembles the board of directors of a corporation, composed of
one representative for each of the ceding companies. 35
(3) True, the pool itself is not a reinsurer and does not issue
any insurance policy; however, its work is indispensable,
beneficial and economically useful to the business of the
ceding companies and Munich, because without it they would
not have received their premiums. The ceding companies
share "in the business ceded to the pool" and in the
"expenses" according to a "Rules of Distribution" annexed to
the Pool Agreement. 36 Profit motive or business is, therefore,
the primordial reason for the pool's formation. As aptly found
by the CTA:
". . . The fact that the pool does not retain any profit
or income does not obliterate an antecedent fact,
that of the pool being used in the transaction of
business for profit. It is apparent, and petitioners
admit, that their association or coaction was
indispensable [to] the transaction of the business. . .
If together they have conducted business, profit must
have been the object as, indeed, profit was earned.
Though the profit was apportioned among the
 members, this is only a matter of consequence, as it
implies that profit actually resulted." 37
The petitioners' reliance on Pascual v. Commissioner 38 is
misplaced, because the facts obtaining therein are not on all
fours with the present case. In Pascual, there was no
unregistered partnership, but merely a co-ownership which
took up only two isolated transactions. 39 The Court of
Appeals did not err in applying Evangelista, which involved a
partnership that engaged in a series of transactions spanning
more than ten years, as in the case before us.
Second Issues:
Pool's Remittances Are Taxable
Petitioners further contend that the remittances of the pool to
the ceding companies and Munich are not dividends subject to
tax. They insist that taxing such remittances contravene
Sections 24 (b) (I) and 263 of the 1977 NIRC and "would be
tantamount to an illegal double taxation, as it would result in
taxing the same premium income twice in the hands of the
same taxpayer." 40 Moreover, petitioners argue that since
Munich was not a signatory to the Pool Agreement, the
remittances it received from the pool cannot be deemed
dividends. 41 They add that even if such remittances were
treated as dividends, they would have been exempt under the
previously mentioned sections of the 1977 NIRC,42 as well
as Article 7 of paragraph 1 43 and Article 5 of paragraph
5 44 of the RP-West German Tax Treaty. 45
Petitioners are clutching at straws. Double taxation means
taxing the same property twice when it should be taxed only
once. That is, ". . . taxing the same person twice by the same
jurisdiction for the same thing." 46 In the instant case, the
pool is a taxable entity distinct from the individual corporate
entities of the ceding companies. The tax on its income is
obviously different from the tax on the dividends received by
the said companies. Clearly, there is no double taxation here.
The tax exemptions claimed by petitioners cannot be granted,
since their entitlement thereto remains unproven and
unsubstantiated. It is axiomatic in the law of taxation that
taxes are the lifeblood of the nation. Hence, "exemptions
therefrom are highly disfavored in law and he who claims tax
exemption must be able to justify his claim or
right." 47Petitioners have failed to discharge this burden of
proof. The sections of the 1977 NIRC which they cite are
inapplicable, because these were not yet in effect when the
income was earned and when the subject information return
for the year ending 1975 was filed.
Referring to the 1975 version of the counterpart sections of
the NIRC,the Court still cannot justify the exemptions
claimed.Section 255 provides that no tax shall ". . . be paid
upon reinsurance by any company that has already paid the
tax . . . ." This cannot be applied to the present case because,
as previously discussed, the pool is a taxable entity distinct
from the ceding companies; therefore, the latter cannot
individually claim the income tax paid by the former as their
own.
On the other hand, Section 24 (b) (1) 48 pertains to tax on
foreign corporations; hence, it cannot be claimed by the
ceding companies which are domestic corporations. Nor can
Munich, a foreign corporation, be granted exemption based
solely on this provision of the Tax Code,because the same
subsection specifically taxes dividends, the type of
remittances forwarded to it by the pool. Although not a
signatory to the Pool Agreement, Munich is patently an
associate of the ceding companies in the entity formed,
pursuant to their reinsurance treaties which required the
creation of said pool.
Under its pool arrangement with the ceding companies,
Munich shared in their income and loss. This is manifest from a
reading of Articles 3 49 and 10 50 of the Quota-Share
Reinsurance Treaty and Articles 3 51 and 10 52 of the Surplus
Reinsurance Treaty. The foregoing interpretation of Section 24
(b) (1) is in line with the doctrine that a tax exemption must be
construed strictissimi juris, and the statutory exemption
claimed must be expressed in a language too plain to be
mistaken. 53

Finally, the petitioners' claim that Munich is tax-exempt based

on the RP-West German Tax Treaty is likewise unpersuasive,
because the internal revenue commissioner assessed the pool
for corporate taxes on the basis of the information return it
had submitted for the year ending 1975, a taxable year when
said treaty was not yet in effect. 54 Although petitioners
omitted in their pleadings the date of effectivity of the treaty,
the Court takes judicial notice that it took effect only later, on
December 14, 1984. 55
Third Issue:
Prescription
Petitioners also argue that the government's right to assess
and collect the subject tax had prescribed. They claim that the
subject information return was filed by the pool on April 14,
1976. On the basis of this return, the BIR telephoned
petitioners on November 11, 1981, to give them notice of its
letter of assessment dated March 27, 1981. Thus, the
petitioners contend that the five-year statute of limitations
then provided in the NIRC had already lapsed, and that the
internal revenue commissioner was already barred by
prescription from making an assessment. 56
We cannot sustain the petitioners. The CA and the CTA
categorically found that the prescriptive period was tolled
under then Section 333 of the NIRC,57 because " the taxpayer
cannot be located at the address given in the information
return filed and for which reason there was delay in sending
the assessment." 58 Indeed, whether the government's right
to collect and assess the tax has prescribed involves facts
which have been ruled upon by the lower courts. It is
axiomatic that in the absence of a clear showing of palpable
error or grave abuse of discretion, as in this case, this Court
must not overturn the factual findings of the CA and the CTA.
Furthermore, petitioners admitted in their Motion for
Reconsideration before the Court of Appeals that the pool
changed its address, for they stated that the pool's information
return filed in 1980 indicated therein its "present address." The
Court finds that this falls short of the requirement of Section
333 of the NIRC for the suspension of the prescriptive period.
The law clearly states that the said period will be suspended
only "if the taxpayer informs the Commissioner of Internal
Revenue of any change in the address."
WHEREFORE, the petition is DENIED. The Resolutions of the
Court of Appeals dated October 11, 1993 and November 15,
1993 are hereby AFFIRMED. Costs against petitioners. cdasia
SO ORDERED.
||| (Afisco Insurance Corp. v. Court of Appeals, G.R. No.
112675, [January 25, 1999], 361 PHIL 671-691)

FIRST DIVISION

[G.R. No. L-9692. January 6, 1958.]

COLLECTOR OF INTERNAL
REVENUE, petitioner, vs. BATANGAS
TRANSPORTATION COMPANY and LAGUNA -
TAYABAS BUS COMPANY, respondents.

Solicitor General Ambrosio Padilla, Solicitor Conrado T.

Limcaoco and Zoilo R. Zandoval for petitioner.
Ozaeta, Lichauco & Picazo for respondents.
 SYLLABUS

1. TAXATION; WHAT CONSTITUTE CORPORATION WITHIN

THE MEANING OF THE TAX CODE; LIABILITY FOR INCOME
TAX; CASE AT BAR. The Tax Code defines the term
"corporation" as including partnership no matter how
created or organized, thereby indicating a joint venture need
not be undertaken in any of the standards forms, or in
conformity with the usual requirements of the law on
partnership, in order that one could be deemed constituted
for the purposes of the tax on corporations. In the case at
bar, while the two respondent companies were registered
and operating separately, they were placed under one sole
management called the "Joint Emergency Operation" for the
purpose of economizing in overhead expenses. Although no
legal personality may have been created by the Joint
Emergency Operation, nevertheless, said joint management
operated the business affairs of the two companies as
though they constituted a single entity, company or
partnership, thereby obtaining substantial economy and
profits in the operation. The joint venture, therefore, falls
under the provisions of section 84 (b) of the Internal
Revenue Code, and consequently, it is liable to income tax
provided for in Section 24 of the same Code.
2. ID.; APPEAL FROM THE DECISION OF COLLECTOR;
AUTHORITY TO INCREASE ASSESSMENT AFTER APPEAL HAS
BEEN PERFECTED. The Collector of Internal Revenue, after
appeal from his decision to the Court of Tax Appeals has
been perfected, and after the Tax Court has acquired
jurisdiction over the appeal, but before the answer is filed
with the court, may still modify his assessment, subject of
the appeal, by increasing the same. If the Collector of
Internal Revenue is not allowed to amend his assessment
before the Court of Tax Appeals, and since he may make a
subsequent reassessment to collect additional sums within
the same subject of his original assessment, provided it is
done within the prescriptive period, that would lead to
multiplicity of suit which the law does not encourage.
3. ID.; PENALTY; FAILURE TO FILE INCOME TAX RETURN
FOR AND IN BEHALF OF AN ENTITY, WHEN JUSTIFIED.
Where the failure to file an income tax return for and in
behalf of an entity which is later found to be a corporation
within the meaning of Section 84 (b) of the Tax Code was
due to a reasonable cause, such as an honest belief based
on the advice of its attorneys and accountants, a penalty in
the form of a surcharge should not to be imposed and
collected.

DECISION

MONTEMAYOR, J p:
This is an appeal from the decision of the Court of Tax
Appeals (C.T.A.), which reversed the assessment and
decision of petitioner Collector of Internal Revenue, later
referred to as Collector, assessing and demanding from the
respondents Batangas Transportation Company, later
referred to as Batangas Transportation, and Laguna Tayabas
Bus Company, later referred to as Laguna Bus, the amount
of P54,143.54, supposed to represent the deficiency income
tax and compromise for the years 1946 to 1949, inclusive,
which amount, pending appeal in the C.T.A., but before the
Collector filed his answer in said court, was increased to
P148,890.14.
The following facts are undisputed: Respondent
companies are two distinct and separate corporations
engaged in the business of land transportation by means of
motor buses, and operating distinct and separate lines.
Batangas Transportation was organized in 1918, while
Laguna Bus was organized in 1928. Each company now has
a fully paid up capital of P1,000,000. Before the last war,
each company maintained separate head offices, that of
Batangas Transportation being in Batangas, Batangas, while
the Laguna Bus had its head office in San Pablo Laguna.
Each company also kept and maintained separate books,
fleets of buses, management, personnel, maintenance and
repair shops, and other facilities. Joseph Benedict managed
the Batangas Transportation, while Martin Olson was the
manager of the Laguna Bus. To show the connection and
close relation between the two companies, it should be
stated that Max Blouse was the President of both
corporations and owned about 30 per cent of the stock in
each company. During the war, the American officials of
these two corporations were interned in Santo Tomas, and
said companies ceased operations. They also lost their
respective properties and equipment. After Liberation,
sometime in April, 1945, the two companies were able to
acquire 56 auto buses from the United States Army, and the
two companies divided said equipment equally between
themselves, registering the same separately in their
respective names. In March, 1947, after the resignation of
Martin Olson as Manager of the Laguna Bus, Joseph
Benedict, who was then managing the Batangas
Transportation, was appointed Manager of both companies
by their respective Board of Directors. The head office of the
Laguna Bus in San Pablo City was made the main office of
both corporations. The placing of the two companies under
one sole management was made by Max Blouse, President
of both companies, by virtue of the authority granted him by
resolution of the Board of Directors of the Laguna Bus on
August 10, 1945, and ratified by the Boards of the two
companies in their respective resolutions of October 27,
1947.
According to the testimony of joint Manager Joseph
Benedict, the purpose of the joint management, which was
called "Joint Emergency Operation", was to economize in
overhead expenses; that by means of said joint operation,
both companies had been able to save the salaries of one
manager, one assistant manager, fifteen inspectors, special
agents, and one set of office clerical force, the savings in
one year amounting to about P200,000 or about P100,000
for each company. At the end of each calendar year, all
gross receipts and expenses of both companies were
determined and the net profits were divided fifty-fifty, and
transferred to the books of accounts of each company, and
each company "then prepared its own income tax return
from this fifty per centum of the gross receipts and
expenditures, assets and liabilities thus transferred to it from
the 'Joint Emergency Operation' and paid the corresponding
income taxes thereon separately".
Under the theory that the two companies had pooled
their resources in the establishment of the Joint Emergency
Operation, thereby forming a joint venture, the Collector
wrote the bus companies that there was due from them the
amount of P422,210.89 as deficiency income tax and
compromise for the years 1946 to 1949, inclusive. Since the
Collector caused to be restrained, seized, and advertised for
sale all the rolling stock of the two corporations, respondent
companies had to file a surety bond in the same amount of
P422,210.89 to guarantee the payment of the income tax
assessed by him.
After some exchange of communications between the
parties, the Collector, on January 8, 1955, informed the
respondents "that after crediting the overpayment made by
them of their alleged income tax liabilities for the aforesaid
years, pursuant to the doctrine of equitable recoupment, the
income tax due from the 'Joint Emergency Operation' for the
years 1946 to 1949, inclusive, is in the total amount of
P54,143.54." The respondent companies appealed from said
assessment of P54,143.54 to the Court of Tax Appeals, but
before filing his answer, the Collector set aside his original
assessment of P54,143.54 and reassessed the alleged
income tax liability of respondents of P148,890.14, claiming
that he had later discovered that said companies had been
"erroneously credited in the last assessment with 100 per
cent of their income taxes paid when they should in fact
have been credited with only 75 per cent thereof, since
under Section 24 of the Tax Code dividends received by
them from the Joint Emergency Operation as a domestic
corporation are returnable to the extent of 25 per cent".
That corrected and increased reassessment was embodied
in the answer filed by the Collector with the Court of Tax
Appeals.
The theory of the Collector is the Joint Emergency
Operation was a corporation distinct from the two
respondent companies, as defined in section 84 (b), and so
liable to income tax under section 24, both of the National
Internal Revenue Code. After hearing, the C.T.A. found and
held, citing authorities, that the Joint Emergency Operation
or joint management of the two companies "is not a
corporation within the contemplation of section 84 (b) of the
National Internal Revenue Code much less a partnership,
association or insurance company", and therefore was not
subject to the income tax under the provisions of section 24
of the same Code, separately and independently of
respondent companies; so, it reversed the decision of the
Collector assessing and demanding from the two companies
the payment of the amount of P54,143.54 and/or the
amount of P148,890.14. The Tax Court did not pass upon the
question of whether or not in the appeal taken to it by
respondent companies, the Collector could change his
original assessment by increasing the same from P54,143.14
to P148,890.14, to correct an error committed by him in
having credited the Joint Emergency Operation, totally or
100 per cent of the income taxes paid by the respondent
companies for the years 1946 to 1949, inclusive, by reason
of the principle of equitable recoupment, instead of only 75
per cent.
 The two main and most important questions involved in
the present appeal are: (1) whether the two transportation
companies herein involved are liable to the payment of
income tax as a corporation on the theory that the Joint
Emergency Operation organized and operated by them is a
corporation within the meaning of Section 84 of the Revised
Internal Revenue Code, and (2) whether the Collector of
Internal Revenue, after the appeal from his decision has
been perfected, and after the Court of Tax Appeals has
acquired jurisdiction over the same, but before said Collector
has filed his answer with that court, may still modify his
assessment subject of the appeal by increasing the same, on
the ground that he had committed error in good faith in
making said appealed assessment.

The first question has already been passed upon and

determined by this Tribunal in the case of Eufemia
Evangelista et al., vs. Collector of Internal Revenue et
al., * G. R. No. L-9996, promulgated on October 15, 1957.
Considering the views and rulings embodied in our decision
in that case penned by Mr. Justice Roberto Concepcion, we
deem it unnecessary to extensively discuss the point.
Briefly, the facts in that case are as follows: The three
Evangelista sisters borrowed from their father about P59,000
and adding thereto their own personal funds, bought real
properties, such as a lot with improvements thereon for the
sum of P100,000 in 1943, parcels of land with a total area of
almost 4,000 square meters with improvements thereon for
P18,000 in 1944, another lot for P108,000 in the same year,
and still another lot for P237,000 in the same year. The
relatively large amounts invested may be explained by the
fact that purchases were made during the Japanese
occupation, apparently in Japanese military notes. In 1945,
the sisters appointed their brother to manage their
properties, with full power to lease, to collect and receive
rents, on default of such payment, to bring suits against the
defaulting tenants, to sign all letters and contracts, etc. The
properties therein involved were rented to various tenants,
and the sisters, through their brother as manager, realized a
net rental income of P5,948 in 1945, P7,498 in 1946, and
P12,615 in 1948. In 1954, the Collector of Internal Revenue
demanded of them among other things, payment of income
tax on corporations from the year 1945 to 1949, in the total
amount of P6,157, including surcharge and compromise.
Dissatisfied with the said assessment, the three sisters
appealed to the Court of Tax Appeals, which court decided in
favor of the Collector of Internal Revenue. On appeal to us,
we affirmed the decision of the Tax Court. We found and held
that considering all the facts and circumstances surrounding
the case, the three sisters had the purpose to engage in real
estate transactions for monetary gain and then divide the
same among themselves; that they contributed to a
common fund which they invested in a series of
transactions; that the properties bought with this common
fund had been under the management of one person with
full power to lease, to collect rents, issue receipts, bring
suits, sign letters and contracts, etc., in such a manner that
the affairs relative to said properties have been handled as if
the same belonged to a corporation or business enterprise
operated for profit; and that the said sisters had the
intention to constitute a partnership within the meaning of
the tax law. Said sisters in their appeal insisted that they
were mere co-owners, not co-partners, for the reason that
their acts did not create a personality independent of them,
and that some of the characteristics of partnerships were
absent, but we held that when the Tax Code includes
"partnerships" among the entities subject to the tax on
corporations, it must refer to organizations which are not
necessarily partnerships in the technical sense of the term,
and that furthermore, said law defined the term
"corporation" as including partnerships no matter how
created or organized, thereby indicating that "a joint venture
need not be undertaken in any of the standard forms, or in
conformity with the usual requirements of the law on
partnerships, in order that one could be deemed constituted
for purposes of the tax on corporations"; that besides, said
section 84 (b) provides that the term "corporation" includes
"joint accounts" (cuentas en participacion) and
"associations", none of which has a legal personality
independent of that of its members. The decision cites 7A
Merten's Law of Federal Income Taxation.
In the present case, the two companies contributed
money to a common fund to pay the sole general manager,
the accounts and office personnel attached to the office of
said manager, as well as for the maintenance and operation
of a common maintenance and repair shop. Said common
fund was also used to buy spare parts, and equipment for
both companies, including tires. Said common fund was also
used to pay all the salaries of the personnel of both
companies, such as drivers, conductors, helpers and
mechanics, and at the end of each year, the gross income or
receipts of both companies were merged, and after
deducting therefrom the gross expenses of the two
companies, also merged, the net income was determined
and divided equally between them, wholly and utterly
disregarding the expenses incurred in the maintenance and
operation of each company and of the individual income of
said companies.
From the standpoint of the income tax law, this
procedure and practice of determining the net income of
each company was arbitrary and unwarranted, disregarding
as it did the real facts in the case. There can be no question
that the gross receipts and gross expenses of two, distinct
and separate companies operating different lines and in
some cases, different territories, and different equipment
and personnel at least in value and in the amount of
salaries, can at the end of each year be equal or even
approach equality. Those familiar with the operation of the
business of land transportation can readily see that there
are many factors that enter into said operation. Much
depends upon the number of lines operated and the length
of each line, including the number of trips made each day.
Some lines are profitable, others break above even, while
still others are operated at a loss, at least for a time,
depending, of course, upon the volume of traffic, both
passenger and freight. In some lines, the operator may enjoy
a more or less exclusive operation, while in others, the
competition is intense, sometimes even what they call
"cutthroat competition". Sometimes, the operator is involved
in litigation, not only as the result of money claims based on
physical injuries or deaths occasioned by accidents or
collisions, but litigations before the Public Service
Commission, initiated by the operator itself to acquire new
lines or additional service and equipment on the lines
already existing, or litigations forced upon said operator by
its competitors. Said litigation naturally causes expense to
the operator. At other times, the operator is denounced by
competitors before the Public Service Commission for
violation of its franchise or franchises, for making
unauthorized trips, for temporary abandonment of said lines
or of scheduled trips, etc. In view of this, and considering
that the Batangas Transportation and the Laguna Bus
operated different lines, sometimes in different provinces or
territories, under different franchises, with different
equipment and personnel, it cannot possibly be true and
correct to say that at the end of each year, the gross
receipts and income and the gross expenses of two
companies are exactly the same for purposes of the
payment of income tax. What was actually done in this case
was that, although no legal personality may have been
created by the Joint Emergency Operation, nevertheless,
said Joint Emergency Operation, joint venture, or joint
management operated the business affairs of the two
companies as though they constituted a single entity,
company or partnership, thereby obtaining substantial
economy and profits in the operation.
For the foregoing reasons, and in the light of our ruling
in the Evangelista vs. Collector of Internal Revenue
case,supra, we believe and hold that the Joint Emergency
Operation or sole management or joint venture in this case
falls under the provisions of section 84 (b) of the Internal
Revenue Code, and consequently, it is liable to income tax
provided for in section 24 of the same code.
The second important question to determine is whether
or not the Collector of Internal Revenue, after appeal from
his decision to the Court of Tax Appeals has been perfected,
and after the Tax Court has acquired jurisdiction over the
appeal, but before the Collector has filed his answer with the
court, may still modify his assessment, subject of the
appeal, by increasing the same. This legal point, interesting
and vital to the interests of both the Government and the
taxpayer, provoked considerable discussion among the
members of this Tribunal, a minority of which the writer of
this opinion forms part, maintaining that for the information
and guidance of the taxpayer, there should be a definite and
final assessment on which he can base his decision whether
or not to appeal; that when the assessment is appealed by
the taxpayer to the Court of Tax Appeals, the Collector loses
control and jurisdiction over the same, the jurisdiction being
transferred automatically to the Tax Court, which has
exclusive appellate jurisdiction over the same; that the
jurisdiction of the Tax Court is not revisory but only
appellate, and therefore, it can act only upon the amount of
assessment subject of the appeal to determine whether it is
valid and correct from the standpoint of the taxpayer-
appellant; that the Tax Court may only correct errors
committed by the Collector against the taxpayer, but not
those committed in his favor, unless the Government itself is
also an appellant; and that unless this be the rule, the
Collector of Internal Revenue and his agents may not
exercise due care, prudence and pay too much attention in
making tax assessments, knowing that they can at any time
correct any error committed by them even when due to
negligence, carelessness or gross mistake in the
interpretation or application of the tax law, by increasing the
assessment, naturally to the prejudice of the taxpayer who
would not know when his tax liability has been completely
and definitely met and complied with, this knowledge being
necessary for the wise and proper conduct and operation of
his business; and that lastly, while in the United States of
America, on appeal from the decision of the Commissioner
of Internal Revenue to the Board or Court of Tax Appeals, the
Commissioner may still amend or modify his assessment,
even increasing the same, the law in that jurisdiction
expressly authorizes the Board or Court of Tax Appeals
to redetermine and revise the assessment appealed to it.

The majority, however, holds, not without valid

arguments and reasons, that the Government is not bound
by the errors committed by its agents and tax collectors in
making tax assessments, specially when due to a
misinterpretation or application of the tax laws, more so
when done in good faith; that the tax laws provide for a
prescriptive period within which the tax collectors may make
assessments and reassessments in order to collect all the
taxes due to the Government, and that if the Collector of
Internal Revenue is not allowed to amend his assessment
before the Court of Tax Appeals, and since he may make a
subsequent reassessment to collect additional sums within
the same subject of his original assessment, provided it is
alone within the prescriptive period, that would lead to
multiplicity of suits which the law does not encourage; that
since the Collector of Internal Revenue, in modifying his
assessment, may not only increase the same, but may also
reduce it, if he finds that he has committed an error against
the taxpayer, and may even make refunds of amounts
erroneously and illegally collected, the taxpayer is not
prejudiced; that the hearing before the Court of Tax Appeals
partakes of a trial de novo and the Tax Court is authorized to
receive evidence, summon witnesses, and give both parties,
the Government and the taxpayer, opportunity to present
and argue their sides, so that the true and correct amount of
the tax to be collected may be determined and decided,
whether resulting in the increase or reduction of the
assessment appealed to it. The result is that the ruling and
doctrine now being laid by this Court is, that pending appeal
before the Court of Tax Appeals, the Collector of Internal
Revenue may still amend his appealed assessment, as he
has done in the present case.
There is a third question raised in the appeal before the
Tax Court and before this Tribunal, namely, the liability of the
two respondent transportation companies for 25 per cent
surcharge due to their failure to file an income tax return for
the Joint Emergency Operation, which we hold to be a
corporation within the meaning of the Tax Code. We
understand that said 25 per cent surcharge is included in the
assessment of P148,890.14. The surcharge is being imposed
by the Collector under the provisions of Section 72 of the Tax
Code, which read as follows:
"The Collector of Internal Revenue shall assess
all income taxes. In case of willful neglect to file the
return or list within the time prescribed by law, or in
case a false or fraudulent return or list is willfully
made the collector of internal revenue shall add to
the tax or to the deficiency tax, in case any payment
has been made on the basis of such return before the
discovery of the falsity or fraud, a surcharge of fifty
 per centum of the amount of such tax or deficiency
tax. In case of any failure to make and file a return or
list within the time prescribed by law or by the
Collector or other internal revenue officer, not due to
willful neglect, the Collector, shall add to the tax
twenty-five per centum of its amount, except that,
when the return is voluntarily and without notice
from the Collector or other officer filed after such
time, it is shown that the failure was due to a
reasonable cause, no such addition shall be made to
the tax. The amount so added to any tax shall be
collected at the same time in the same manner and
as part of the tax unless the tax has been paid before
the discovery of the neglect, falsity, or fraud, in
which case the amount so added shall be collected in
the same manner as the tax."
We are satisfied that the failure to file an income tax return
for the Joint Emergency Operation was due to a reasonable
cause, the honest belief of respondent companies that there
was no such corporation within the meaning of the Tax Code,
and that their separate income tax return was sufficient
compliance with the law. That this belief was not entirely
without foundation and that it was entertained in good faith,
is shown by the fact that the Court of Tax Appeals itself
subscribed to the idea that the Joint Emergency Operation
was not a corporation, and so sustained the contention of
respondents. Furthermore, there are authorities to the effect
that belief in good faith, on advice of reputable tax
accountants and attorneys, that a corporation was not a
personal holding company taxable as such constitutes
"reasonable cause" for failure to file holding company surtax
returns, and that in such a case, the imposition of penalties
for failure to file return, is not warranted. 1
In view of the foregoing, and with the reversal of the
appealed decision of the Court of Tax Appeals, judgment is
 hereby rendered, holding that the Joint Emergency
Operation involved in the present case is a corporation
within the meaning of section 84 (b) of the Internal Revenue
Code, and so is liable to income tax under section 24 of the
same code; that pending appeal in the Court of Tax Appeals
of an assessment made by the Collector of Internal Revenue,
the Collector, pending hearing before said court, may amend
his appealed assessment and include the amendment in his
answer before the court, and the latter may, on the basis of
the evidence presented before it, redetermine the
assessment; that where the failure to file an income tax
return for and in behalf of an entity which is later found to
be a corporation within the meaning of section 84 (b) of the
Tax Code was due to a reasonable cause, such as an honest
belief based or the advice of its attorneys and accountants,
a penalty in the form of a surcharge should not be imposed
and collected. The respondents are therefore ordered to pay
the amount of the reassessment made by the Collector of
Internal Revenue before the Tax Court, minus the amount of
25 per cent surcharge. No costs.
||| (Collector of Internal Revenue v. Batangas Transportation
Co., G.R. No. L-9692, [January 6, 1958], 102 PHIL 822-835)

EN BANC

[G.R. No. 45425. April 29, 1939.]

JOSE GATCHALIAN, ET AL., plaintiffs-

appellants, vs. THE COLLECTOR OF INTERNAL
REVENUE, defendant-appellee.

Guillermo B. Reyes for appellants.

Solicitor-General Tuason for appellee.
 SYLLABUS

1. PARTNERSHIP OF A CIVIL NATURE; COMMUNITY OF

PROPERTY; SWEEPSTAKES; INCOME TAX. According to the
stipulated facts the plaintiffs organized a partnership of a
civil nature because each of them put up money to buy a
sweepstakes ticket for the sole purpose of dividing equally
the prize which they may win, as they did in fact in the
amount of P60,000 (article 166C, Civil Code). The
partnership was not only formed, but upon the organization
thereon and the winning of the prize, J. G. personally
appeared in the office of the Philippine Charity Sweepstakes,
in his capacity as co-partner, as such collected the prize, the
office issued the check for P60,000 in favor of J. G. and
company, and the said partner, in the same capacity,
collected the check. All these circumstances repel the idea
that the plaintiffs organized and formed a community of
property only.
2. ID.; ID.; ID.; ID. Having organized and constituted a
partnership of a civil nature, the said entity is the one bound
to pay the income tax which the defendant collected under
the aforesaid section 10 (a) of Act No. 2833, as amended by
section 2 of Act No. 3761. There is no merit in plaintiffs'
contention that the tax should be prorated among them and
paid individually, resulting in their exemption from the tax.

DECISION

IMPERIAL, J p:
The plaintiff brought this action to recover from the
defendant Collector of Internal Revenue the sum of
P1,863.44, with legal interest thereon, which they paid
under protest by way of income tax. They appealed from the
decision rendered in the case on October 23, 1936 by the
 Court of First Instance of the City of Manila, which dismissed
the action with the costs against them.
The case was submitted for decision upon the following
stipulation of facts:
"Come now the parties to the above-mentioned
case, through their respective undersigned attorneys,
and hereby agree to respectfully submit to this
Honorable Court the case upon the following
statement of facts:
"1. That plaintiffs are all residents of the
municipality of Pulilan, Bulacan, and that defendant
is the Collectorof Internal Revenue of the Philippines;
"2. That prior to December 15, 1934 plaintiffs, in
order to enable them to purchase one sweepstakes
ticket valued at two pesos (P2), subscribed and paid
therefor the amounts as follows:

1. Jose Gatchalian P0.18

2. Gregoria Cristobal .18
3. Saturnina Silva .08
4. Guillermo Tapia .13
5. Jesus Legaspi .15
6. Jose Silva .07
7. Tomasa Mercado .08
8. Julio Gatchalian .18
9. Emiliana Santiago .18
10. Maria C. Legaspi .16
11. Francisco Cabral .13
12. Gonzalo Javier .14
13. Maria Santiago .17
14. Buenaventura Guzman .13
15. Mariano Santos .14

Total 2.00
 "3. That immediately thereafter but prior to
December 16, 1934, plaintiffs purchased, in the
ordinary course of business, from one of the duly
authorized agents of the National Charity
Sweepstakes Office one ticket bearing No. 178637 for
the sum of two pesos (P2) and that the said ticket
was registered in the name of Jose Gatchalian and
Company;
"4. That as a result of the drawing of the
sweepstakes on December 15, 1934, the above-
mentioned ticket bearing No. 178637 won one of the
third prizes in the amount of P50,000 and that the
corresponding check covering the above-mentioned
prize of P50,000 was drawn by the National Charity
Sweepstakes Office in favor of JoseGatchalian &
Company against the Philippine National Bank, which
check was cashed during the latter part of
December, 1934 by Jose Gatchalian & Company;
"5 That on December 29, 1934,
Jose Gatchalian was required by income tax examiner
Alfredo David to file the corresponding income tax
return covering the prize won by Jose Gatchalian &
Company and that on December 29, 1934, the said
return was signed by Jose Gatchalian, a copy of
which return is enclosed as Exhibit A and made a
part hereof;
"6. That on January 8, 1935, the defendant made
an assessment against Jose Gatchalian & Company
requesting the payment of the sum of P1,499.94 to
the deputy provincial treasurer of Pulilan, Bulacan,
giving to said Jose Gatchalian & Company until
January 20, 1935 within which to pay the said
amount of P1,499.94, a copy of which letter marked
Exhibit B is inclosed and made a part hereof;
 "7. That on January 20, 1935, the plaintiffs,
through their attorney, sent to defendant a reply, a
copy of which marked Exhibit C is attached and
made a part hereof, requesting exemption from the
payment of the income tax to which reply there were
enclosed fifteen (15) separate individual income tax
returns filed separately by each one of the plaintiffs,
copies of which returns are attached and marked
Exhibits D-1 to D-15, respectively, in order of their
names listed in the caption of this case and made
parts hereof; a statement of sale signed by
Jose Gatchalian showing the amounts put up by each
of the plaintiffs to cover up the cost price of P2 of
said ticket, copy of which statement is attached and
marked as Exhibit E and made a part hereof; and a
copy of the affidavit signed by Jose Gatchalian dated
December 29, 1934 is attached and marked Exhibit F
and made part hereof;
"8. That the defendant in his letter dated January
28, 1935, a copy of which marked Exhibit G is
enclosed, denied plaintiffs' request of January 20,
1935, for exemption from the payment of tax and
reiterated his demand for the payment of the sum of
P1,499.94 as income tax and gave plaintiffs until
February 10, 1935 within which to pay the said tax;
"9. That in view of the failure of the plaintiffs to
pay the amount of tax demanded by the defendant,
notwithstanding subsequent demand made by
defendant upon the plaintiffs through their attorney
on March 23, 1935, a copy of which marked Exhibit H
is enclosed, defendant on May 13, 1935 issued a
warrant of distraint and levy against the property of
the plaintiffs, a copy of which warrant marked Exhibit
I is enclosed and made a part hereof;
 "10. That to avoid embarrassment arising from
the embargo of the property of the plaintiffs, the said
plaintiffs on June 15, 1935, through Gregoria
Cristobal, Maria C. Legaspi and Jesus Legaspi, paid
under protest the sum of P601.51 as part of the tax
and penalties to the municipal treasurer of Pulilan,
Bulacan, as evidenced by official receipt No. 7454879
which is attached and marked Exhibit J and made a
part hereof, and requested defendant that plaintiffs
be allowed to pay under protest the balance of the
tax and penalties by monthly installments;
"11. That plaintiffs' request to pay the balance of
the tax and penalties was granted by defendant
subject to the condition that plaintiffs file the usual
bond secured by two solvent persons to guarantee
prompt payment of each installments as it becomes
due;
"12. That on July 16, 1935, plaintiff filed a bond,
a copy of which marked Exhibit K is inclosed and
made a part hereof, to guarantee the payment of the
balance of the alleged tax liability by monthly
installments at the rate of P118.70 a month, the first
payment under protest to be effected on or before
July 31, 1935;
"13. That on July 16, 1935 the said plaintiffs
formally protested against the payment of the sum of
P602.51, a copy of which protest is attached and
marked Exhibit L but that defendant in his letter
dated August 1, 1936 overruled the protest and
denied the request for refund of the plaintiffs;
"14. That, in view of the failure of the plaintiffs to
pay the monthly installments in accordance with the
terms and conditions of the bond filed by them, the
defendant in his letter dated July 23, 1935, copy of
which is attached and marked Exhibit M, ordered the
 municipal treasurer of Pulilan, Bulacan to execute
within five days the warrant of distraint and levy
issued against the plaintiffs on March 13, 1935;
"15. That in order to avoid annoyance and
embarrassment arising from the levy of their
property, the plaintiffs on August 28, 1936, through
Jose Gatchalian, Guillermo Tapia, Maria Santiago and
Emiliano Santiago, paid under protest to the
municipal treasurer of Pulilan, Bulacan. the sum of
P1,260.93 representing the unpaid balance of the
income tax and penalties demanded by defendant as
evidenced by income tax receipt No. 35811 which is
attached and marked Exhibit N and made a part
hereof; and that on September 3, 1936, the plaintiffs
formally protested to the defendant against the
payment of said amount and requested the refund
thereof, copy of which is attached and marked
Exhibit O and made part hereof; but that on
September 4, 1936, the defendant overruled the
protest and denied the refund thereof; copy of which
is attached and marked Exhibit P and made a part
hereof; and
"16. That plaintiffs demanded upon defendant
the refund of the total sum of one thousand eight
hundred and sixty-three pesos and forty-four
centavos (P1,863.44) paid under protest by them but
that defendant refused and still refuses to refund ,the
said amount notwithstanding the plaintiffs' demands.
"17. The parties hereto reserve the right to
present other and additional evidence if necessary."
Exhibit E referred to in the stipulation is of the following
tenor:
"To whom it my concern:
 "I, Jose Gatchalian, a resident of Pulilan, Bulacan,
married, of age, hereby certify, that on the 11th day
of August, 1934, I sold parts of my share on ticket
No. 178637 to the persons and for the amount
indicated below and the part of my share remaining
is also shown to wit:

Purchaser Amount Address

1. Mariano Santos P0.14 Pulilan, Bulacan.

2. Buenaventura Guzman .13 Do.
3. Maria Santiago .17 Do.
4. Gonzalo Javier .14 Do.
5. Francisco Cabral .13 Do.
6. Maria C. Legaspi .16 Do.
7. Emiliana Santiago .13 Do.
8. Julio Gatchalian .13 Do.
9. Jose Silva .07 Do.
10. Tomasa Mercado .08 Do.
11. Jesus Legaspi .16 Do.
12. Guillermo Tapia .18 Do.
13. Saturnina Silva .08 Do.
14. Gregoria Cristobal .18 Do.
15. Jose Gatchalian .18 Do.

2.00
Total cost of said ticket; and that, therefore, the
persons named above are entitled to the parts of
whatever prize that might be won by said ticket.
"Pulilan, Bulacan, P. I.
(Sgd.) "JOSE GATCHALIAN"
And a summary of Exhibits D-1 to D-15 inserted in the
bill of exceptions as follows:
 "RECAPITULATIONS OF 15 INDIVIDUAL INCOME TAX
RETURNS FOR 1934 ALL DATED JANUARY 19, 1935
SUBMITTED TO THE COLLECTOR OF INTERNAL
REVENUE.

Exhibi Purchas
Price Net
t e
Expense
Name No. Price won prize
s

1. Jose Gatchalian D-1 P0.18 P4,425 P480 3,945

2. Gregoria Cristobal D-2 .18 4,575 2,000 2,575
3. Saturnina Silva D-3 .08 1,875 360 1,515
4. Guillermo Tapia D-4 .13 3,325 360 2,965
Jesus Legaspi by
5.
Maria
Cristobal D-5 .15 3,825 720 3,105
6. Jose Silva D-6 .08 1,875 360 1,615
7. Tomasa Mercado D-7 .07 1,875 360 1,515
Julio Gatchalian by
8.
Bea
triz Guzman D-8 .13 3,150 240 2,910
9. Emiliana Santiago D-9 .13 3,325 360 2,966
10
Maria C. Legaspi D-10 .16 4,100 960 3,140
.
11
Francisco Cabral D-11 .13 3,325 360 2965
.
12
Gonzalo Javier D-12 .14 3,325 360 2,965
.
13
Maria Santiago D-13 .17 4,350 360 3,990
.
14 Buenaventura
D-14 .13 3,325 360 2,965
. Guzman
15
Mariano Santos D-15 .14 3,325 360 2,965
.

50,000
2.00
"

The legal questions raised in plaintiffs-appellants' five

assigned errors may properly be reduced to the two
following: (1) Whether the plaintiffs formed a partnership, or
merely a community of property without a personality of its
own; in the first case it is admitted that the partnership thus
formed is liable for the payment of income tax, whereas if
there was merely a community of property, they are exempt
from such payment; and (2) whether they should pay the tax
collectively or whether the latter should be prorated among
them and paid individually.
The Collector of Internal Revenue collected the tax
under section 10 of Act No. 2833, as last amended by
section 2 of Act No. 3761, reading as follows:
"SEC. 10. (a) There shall be levied, assessed,
collected, and paid annually upon the total net
income received in the preceding calendar year from
all sources by every corporation, joint-stock
company, partnership, joint account (cuenta en
participacion), association or insurance company,
organized in the Philippine Islands, no matter how
created or organized, but not including duly
registered general co-partnerships (compaias
colectivas), a tax of three per centum upon such
income; and a like tax shall be levied, assessed,
collected, and paid annually upon the total net
income received in the preceding calendar year from
all sources within the Philippine Islands by every
corporation, joint-stock company, partnership, joint
account (cuenta en participacion), association, or
insurance company organized, authorized, or existing
 under the laws of any foreign country, including
interest on bonds, notes, or other interest-bearing
obligations of residents, corporate or
otherwise: Provided, however, That nothing in this
section shall be construed as permitting the taxation
of the income derived from dividends or net profits
on which the normal tax has been paid.
"The gain derived or loss sustained from the sale
or other disposition by a corporation, joint-stock
company, partnership, joint account (cuenta en
participacion), association, or insurance company, or
property, real, personal, or mixed, shall be
ascertained in accordance with subsections (c) and
(d) of section two of Act Numbered Two thousand
eight hundred and thirty-three, as amended by Act
Numbered Twenty-nine hundred and twenty-six.
"The foregoing tax rate shall apply to the net
income received by every taxable corporation, joint-
stock company, partnership, joint account (cuenta en
participacion), associations or insurance company in
the calendar year nineteen hundred and twenty and
in each year thereafter."
There is no doubt that if the plaintiffs merely formed a
community of property the latter is exempt from the
payment of income tax under the law. But according to the
stipulated facts the plaintiffs organized a partnership of a
civil nature because each of them put up money to buy a
sweepstakes ticket for the sole purpose of dividing equally
the prize which they may win, as they did in fact in the
amount of P50,000 (article 1665, Civil Code). The
partnership was not only formed, but upon the organization
thereof and the winning of the prize,
Jose Gatchalian personally appeared in the office of the
Philippine Charity Sweepstakes, in his capacity as co-
partner, as such collected the prize, the office issued the
 check for P50,000 in favor of Jose Gatchalian and company,
and the said partner. in the same capacity, collected the
said check. All these circumstances repel the idea that the
plaintiffs organized and formed a community of property
only.
Having organized and constituted a partnership of a civil
nature, the said entity is the one bound to pay the income
tax which the defendant collected under the aforesaid
section 10 (a) of Act No. 2833, as amended by section 2 of
Act No. 3761. There is no merit in plaintiffs' contention that
the tax should be prorated among them and paid
individually, resulting in their exemption from the tax.
In view of the foregoing, the appealed decision is
affirmed, with the costs of this instance to the plaintiff.
appellants. So ordered.
Avancea, C.J., Villa-Real, Diaz, Laurel,
Concepcionand Moran, JJ., concur.
||| (Gatchalian v. Collector of Internal Revenue, G.R. No.
45425, [April 29, 1939], 67 PHIL 666-674)

reyes vs. commissioner 24 scra 198

xxxx

THIRD DIVISION

[G.R. No. 148187. April 16, 2008.]

PHILEX MINING CORPORATION, petitioner, vs.

COMMISSIONER OF INTERNAL
REVENUE, respondent.
 DECISION

YNARES-SANTIAGO, J p:
This is a petition for review on certiorari of the June 30, 2000
Decision 1 of the Court of Appeals in CA-G.R. SP No. 49385,
which affirmed the Decision 2 of the Court of Tax Appeals in
C.T.A. Case No. 5200. Also assailed is the April 3, 2001
Resolution 3 denying the motion for reconsideration. ECHSDc
The facts of the case are as follows:
On April 16, 1971, petitioner Philex Mining Corporation (Philex
Mining), entered into an agreement 4 with Baguio Gold Mining
Company ("Baguio Gold") for the former to manage and
operate the latter's mining claim, known as the Sto. Nio mine,
located in Atok and Tublay, Benguet Province. The parties'
agreement was denominated as "Power of Attorney" and
provided for the following terms:
4. Within three (3) years from date thereof, the
PRINCIPAL (Baguio Gold) shall make available to the
MANAGERS (Philex Mining) up to ELEVEN MILLION
PESOS (P11,000,000.00), in such amounts as from
time to time may be required by the MANAGERS
within the said 3-year period, for use in the
MANAGEMENT of the STO. NINO MINE. The said
ELEVEN MILLION PESOS (P11,000,000.00) shall be
deemed, for internal audit purposes, as the owner's
account in the Sto. Nino PROJECT. Any part of any
income of the PRINCIPAL from the STO. NINO MINE,
which is left with the Sto. Nino PROJECT, shall be
added to such owner's account. HCDAac
5. Whenever the MANAGERS shall deem it necessary
and convenient in connection with the MANAGEMENT
of the STO. NINO MINE, they may transfer their own
funds or property to the Sto. Nino PROJECT, in
accordance with the following arrangements:
(a) The properties shall be appraised and, together
with the cash, shall be carried by the Sto. Nino
PROJECT as a special fund to be known as the
MANAGERS' account.
(b) The total of the MANAGERS' account shall not
exceed P11,000,000.00, except with prior approval of
the PRINCIPAL; provided, however, that if the
compensation of the MANAGERS as herein provided
cannot be paid in cash from the Sto. Nino PROJECT,
the amount not so paid in cash shall be added to the
MANAGERS' account. ECaTDc
(c) The cash and property shall not thereafter be
withdrawn from the Sto. Nino PROJECT until
termination of this Agency.
(d) The MANAGERS' account shall not accrue interest.
Since it is the desire of the PRINCIPAL to extend to
the MANAGERS the benefit of subsequent
appreciation of property, upon a projected
termination of this Agency, the ratio which the
MANAGERS' account has to the owner's account will
be determined, and the corresponding proportion of
the entire assets of the STO. NINO MINE, excluding
the claims, shall be transferred to the MANAGERS,
except that such transferred assets shall not include
mine development, roads, buildings, and similar
property which will be valueless, or of slight value, to
the MANAGERS. The MANAGERS can, on the other
hand, require at their option that property originally
transferred by them to the Sto. Nino PROJECT be re-
transferred to them. Until such assets are transferred
to the MANAGERS, this Agency shall remain
subsisting. TAaEIc
 xxx xxx xxx
12. The compensation of the MANAGER shall be fifty
per cent (50%) of the net profit of the Sto. Nino
PROJECT before income tax. It is understood that the
MANAGERS shall pay income tax on their
compensation, while the PRINCIPAL shall pay income
tax on the net profit of the Sto. Nino PROJECT after
deduction therefrom of the MANAGERS'
compensation.
xxx xxx xxx
16. The PRINCIPAL has current pecuniary obligation
in favor of the MANAGERS and, in the future, may
incur other obligations in favor of the MANAGERS.
This Power of Attorney has been executed as security
for the payment and satisfaction of all such
obligations of the PRINCIPAL in favor of the
MANAGERS and as a means to fulfill the same.
Therefore, this Agency shall be irrevocable while any
obligation of the PRINCIPAL in favor of the
MANAGERS is outstanding, inclusive of the
MANAGERS' account. After all obligations of the
PRINCIPAL in favor of the MANAGERS have been paid
and satisfied in full, this Agency shall be revocable by
the PRINCIPAL upon 36-month notice to the
MANAGERS. CHaDIT
17. Notwithstanding any agreement or
understanding between the PRINCIPAL and the
MANAGERS to the contrary, the MANAGERS may
withdraw from this Agency by giving 6-month notice
to the PRINCIPAL. The MANAGERS shall not in any
manner be held liable to the PRINCIPAL by reason
alone of such withdrawal. Paragraph 5(d) hereof shall
be operative in case of the MANAGERS' withdrawal.
xxx xxx xxx 5
In the course of managing and operating the project, Philex
Mining made advances of cash and property in accordance
with paragraph 5 of the agreement. However, the mine
suffered continuing losses over the years which resulted to
petitioner's withdrawal as manager of the mine on January 28,
1982 and in the eventual cessation of mine operations on
February 20, 1982. 6
Thereafter, on September 27, 1982, the parties executed a
"Compromise with Dation in Payment" 7 wherein Baguio Gold
admitted an indebtedness to petitioner in the amount of
P179,394,000.00 and agreed to pay the same in three
segments by first assigning Baguio Gold's tangible assets to
petitioner, transferring to the latter Baguio Gold's equitable
title in its Philodrill assets and finally settling the remaining
liability through properties that Baguio Gold may acquire in the
future.TDcAaH
On December 31, 1982, the parties executed an "Amendment
to Compromise with Dation in Payment" 8 where the parties
determined that Baguio Gold's indebtedness to petitioner
actually amounted to P259,137,245.00, which sum included
liabilities of Baguio Gold to other creditors that petitioner had
assumed as guarantor. These liabilities pertained to long-term
loans amounting to US$11,000,000.00 contracted by Baguio
Gold from the Bank of America NT & SA and Citibank N.A. This
time, Baguio Gold undertook to pay petitioner in two segments
by first assigning its tangible assets for P127,838,051.00 and
then transferring its equitable title in its Philodrill assets for
P16,302,426.00. The parties then ascertained that Baguio Gold
had a remaining outstanding indebtedness to petitioner in the
amount of P114,996,768.00.
Subsequently, petitioner wrote off in its 1982 books of account
the remaining outstanding indebtedness of Baguio Gold by
charging P112,136,000.00 to allowances and reserves that
were set up in 1981 and P2,860,768.00 to the 1982
operations.DEScaT
In its 1982 annual income tax return, petitioner deducted from
its gross income the amount of P112,136,000.00 as "loss on
settlement of receivables from Baguio Gold against reserves
and allowances." 9 However, the Bureau of Internal Revenue
(BIR) disallowed the amount as deduction for bad debt and
assessed petitioner a deficiency income tax of
P62,811,161.39.
Petitioner protested before the BIR arguing that the deduction
must be allowed since all requisites for a bad debt deduction
were satisfied, to wit: (a) there was a valid and existing debt;
(b) the debt was ascertained to be worthless; and (c) it was
charged off within the taxable year when it was determined to
be worthless.
Petitioner emphasized that the debt arose out of a valid
management contract it entered into with Baguio Gold. The
bad debt deduction represented advances made by petitioner
which, pursuant to the management contract, formed part of
Baguio Gold's "pecuniary obligations" to petitioner. It also
included payments made by petitioner as guarantor of Baguio
Gold's long-term loans which legally entitled petitioner to be
subrogated to the rights of the original creditor. IaHDcT
Petitioner also asserted that due to Baguio Gold's irreversible
losses, it became evident that it would not be able to recover
the advances and payments it had made in behalf of Baguio
Gold. For a debt to be considered worthless, petitioner claimed
that it was neither required to institute a judicial action for
collection against the debtor nor to sell or dispose of collateral
assets in satisfaction of the debt. It is enough that a taxpayer
exerted diligent efforts to enforce collection and exhausted all
reasonable means to collect.
On October 28, 1994, the BIR denied petitioner's protest for
lack of legal and factual basis. It held that the alleged debt
was not ascertained to be worthless since Baguio Gold
remained existing and had not filed a petition for bankruptcy;
and that the deduction did not consist of a valid and subsisting
debt considering that, under the management contract,
petitioner was to be paid fifty percent (50%) of the project's
net profit. 10
Petitioner appealed before the Court of Tax Appeals (CTA)
which rendered judgment, as follows:
WHEREFORE, in view of the foregoing, the instant
Petition for Review is hereby DENIED for lack of
merit. The assessment in question, viz: FAS-1-82-88-
003067 for deficiency income tax in the amount of
P62,811,161.39 is hereby AFFIRMED. SEcTHA
ACCORDINGLY, petitioner Philex Mining Corporation is
hereby ORDERED to PAY respondent Commissioner of
Internal Revenue the amount of P62,811,161.39, plus
20% delinquency interest due computed from
February 10, 1995, which is the date after the 20-day
grace period given by the respondent within which
petitioner has to pay the deficiency amount . . . up to
actual date of payment.
SO ORDERED. 11
The CTA rejected petitioner's assertion that the advances it
made for the Sto. Nino mine were in the nature of a loan. It
instead characterized the advances as petitioner's investment
in a partnership with Baguio Gold for the development and
exploitation of the Sto. Nino mine. The CTA held that the
"Power of Attorney" executed by petitioner and Baguio Gold
was actually a partnership agreement. Since the advanced
amount partook of the nature of an investment, it could not be
deducted as a bad debt from petitioner's gross
income. HcaDIA

The CTA likewise held that the amount paid by petitioner for
the long-term loan obligations of Baguio Gold could not be
allowed as a bad debt deduction. At the time the payments
were made, Baguio Gold was not in default since its loans were
not yet due and demandable. What petitioner did was to pre-
pay the loans as evidenced by the notice sent by Bank of
America showing that it was merely demanding payment of
the installment and interests due. Moreover, Citibank imposed
and collected a "pre-termination penalty" for the pre-payment.
The Court of Appeals affirmed the decision of the
CTA. 12 Hence, upon denial of its motion for
reconsideration, 13 petitioner took this recourse under Rule 45
of the Rules of Court, alleging that:
I.
The Court of Appeals erred in construing that the
advances made by Philex in the management of the
Sto. Nino Mine pursuant to the Power of Attorney
partook of the nature of an investment rather than a
loan. ICaDHT
II.
The Court of Appeals erred in ruling that the 50%-
50% sharing in the net profits of the Sto. Nino Mine
indicates that Philex is a partner of Baguio Gold in
the development of the Sto. Nino Mine
notwithstanding the clear absence of any intent on
the part of Philex and Baguio Gold to form a
partnership.
III.
The Court of Appeals erred in relying only on the
Power of Attorney and in completely disregarding the
Compromise Agreement and the Amended
Compromise Agreement when it construed the
nature of the advances made by Philex.
IV.
 The Court of Appeals erred in refusing to delve upon
the issue of the propriety of the bad debts write-
off. 14
Petitioner insists that in determining the nature of its business
relationship with Baguio Gold, we should not only rely on the
"Power of Attorney", but also on the subsequent "Compromise
with Dation in Payment" and "Amended Compromise with
Dation in Payment" that the parties executed in 1982. These
documents, allegedly evinced the parties' intent to treat the
advances and payments as a loan and establish a creditor-
debtor relationship between them. AcHCED
The petition lacks merit.
The lower courts correctly held that the "Power of Attorney" is
the instrument that is material in determining the true nature
of the business relationship between petitioner and Baguio
Gold. Before resort may be had to the two compromise
agreements, the parties' contractual intent must first be
discovered from the expressed language of the primary
contract under which the parties' business relations were
founded. It should be noted that the compromise agreements
were mere collateral documents executed by the parties
pursuant to the termination of their business relationship
created under the "Power of Attorney". On the other hand, it is
the latter which established the juridical relation of the parties
and defined the parameters of their dealings with one another.
The execution of the two compromise agreements can hardly
be considered as a subsequent or contemporaneous act that is
reflective of the parties' true intent. The compromise
agreements were executed eleven years after the "Power of
Attorney" and merely laid out a plan or procedure by which
petitioner could recover the advances and payments it made
under the "Power of Attorney". The parties entered into the
compromise agreements as a consequence of the dissolution
of their business relationship. It did not define that relationship
or indicate its real character. AIHECa
An examination of the "Power of Attorney" reveals that a
partnership or joint venture was indeed intended by the
parties. Under a contract of partnership, two or more persons
bind themselves to contribute money, property, or industry to
a common fund, with the intention of dividing the profits
among themselves. 15 While a corporation, like petitioner,
cannot generally enter into a contract of partnership unless
authorized by law or its charter, it has been held that it may
enter into a joint venture which is akin to a particular
partnership:
The legal concept of a joint venture is of common law
origin. It has no precise legal definition, but it has
been generally understood to mean an organization
formed for some temporary purpose. . . . It is in fact
hardly distinguishable from the partnership, since
their elements are similar community of interest in
the business, sharing of profits and losses, and a
mutual right of control. . . . The main distinction cited
by most opinions in common law jurisdictions is that
the partnership contemplates a general business
with some degree of continuity, while the joint
venture is formed for the execution of a single
transaction, and is thus of a temporary nature. . . .
This observation is not entirely accurate in this
jurisdiction, since under the Civil Code,a partnership
may be particular or universal, and a particular
partnership may have for its object a specific
undertaking. . . . It would seem therefore that under
Philippine law, a joint venture is a form of partnership
and should be governed by the law of partnerships.
The Supreme Court has however recognized a
distinction between these two business forms, and
has held that although a corporation cannot enter
 into a partnership contract, it may however engage
in a joint venture with others. . . . (Citations
omitted) 16
Perusal of the agreement denominated as the "Power of
Attorney" indicates that the parties had intended to create a
partnership and establish a common fund for the purpose.
They also had a joint interest in the profits of the business as
shown by a 50-50 sharing in the income of the mine. CaESTA
Under the "Power of Attorney", petitioner and Baguio Gold
undertook to contribute money, property and industry to the
common fund known as the Sto. Nio mine. 17 In this regard,
we note that there is a substantive equivalence in the
respective contributions of the parties to the development and
operation of the mine. Pursuant to paragraphs 4 and 5 of the
agreement, petitioner and Baguio Gold were to contribute
equally to the joint venture assets under their respective
accounts. Baguio Gold would contribute P11M under its
owner's account plus any of its income that is left in the
project, in addition to its actual mining claim. Meanwhile,
petitioner's contribution would consist of its expertise in the
management and operation of mines, as well as the manager's
account which is comprised of P11M in funds and property
and petitioner's "compensation" as manager that cannot be
paid in cash.
However, petitioner asserts that it could not have entered into
a partnership agreement with Baguio Gold because it did not
"bind" itself to contribute money or property to the project;
that under paragraph 5 of the agreement, it was only optional
for petitioner to transfer funds or property to the Sto. Nio
project "(w)henever the MANAGERS shall deem it necessary
and convenient in connection with the MANAGEMENT of the
STO. NIO MINE." 18
The wording of the parties' agreement as to petitioner's
contribution to the common fund does not detract from the
fact that petitioner transferred its funds and property to the
project as specified in paragraph 5, thus rendering effective
the other stipulations of the contract, particularly paragraph 5
(c) which prohibits petitioner from withdrawing the advances
until termination of the parties' business relations. As can be
seen, petitioner became bound by its contributions once the
transfers were made. The contributions acquired an obligatory
nature as soon as petitioner had chosen to exercise its option
under paragraph 5. cEAaIS
There is no merit to petitioner's claim that the prohibition in
paragraph 5 (c) against withdrawal of advances should not be
taken as an indication that it had entered into a partnership
with Baguio Gold; that the stipulation only showed that what
the parties entered into was actually a contract of agency
coupled with an interest which is not revocable at will and not
a partnership.
In an agency coupled with interest, it is the agency that
cannot be revoked or withdrawn by the principal due to an
interest of a third party that depends upon it, or the mutual
interest of both principal and agent. 19 In this case, the non-
revocation or non-withdrawal under paragraph 5 (c) applies to
the advances made by petitioner who is supposedly
theagent and not the principal under the contract. Thus, it
cannot be inferred from the stipulation that the parties'
relation under the agreement is one of agency coupled with an
interest and not a partnership.
Neither can paragraph 16 of the agreement be taken as an
indication that the relationship of the parties was one of
agency and not a partnership. Although the said provision
states that "this Agency shall be irrevocable while any
obligation of the PRINCIPAL in favor of the MANAGERS is
outstanding, inclusive of the MANAGERS' account", it does not
necessarily follow that the parties entered into an agency
contract coupled with an interest that cannot be withdrawn by
Baguio Gold. SaCIDT
It should be stressed that the main object of the "Power of
Attorney" was not to confer a power in favor of petitioner to
contract with third persons on behalf of Baguio Gold but to
create a business relationship between petitioner and Baguio
Gold, in which the former was to manage and operate the
latter's mine through the parties' mutual contribution of
material resources and industry. The essence of an agency,
even one that is coupled with interest, is the agent's ability to
represent his principal and bring about business relations
between the latter and third persons. 20 Where representation
for and in behalf of the principal is merely incidental or
necessary for the proper discharge of one's paramount
undertaking under a contract, the latter may not necessarily
be a contract of agency, but some other agreement depending
on the ultimate undertaking of the parties. 21
In this case, the totality of the circumstances and the
stipulations in the parties' agreement indubitably lead to the
conclusion that a partnership was formed between petitioner
and Baguio Gold. SAcCIH

First, it does not appear that Baguio Gold was unconditionally

obligated to return the advances made by petitioner under the
agreement. Paragraph 5 (d) thereof provides that upon
termination of the parties' business relations, "the ratio which
the MANAGER'S account has to the owner's account will be
determined, and the corresponding proportion of the entire
assets of the STO. NINO MINE, excluding the claims" shall be
transferred to petitioner. 22 As pointed out by the Court of Tax
Appeals, petitioner was merely entitled to a proportionate
return of the mine's assets upon dissolution of the parties'
business relations. There was nothing in the agreement that
would require Baguio Gold to make payments of the advances
to petitioner as would be recognized as an item of obligation
or "accounts payable" for Baguio Gold.
Thus, the tax court correctly concluded that the agreement
provided for a distribution of assets of the Sto. Nio mine upon
termination, a provision that is more consistent with a
partnership than a creditor-debtor relationship. It should be
pointed out that in a contract of loan, a person who receives a
loan or money or any fungible thing acquires ownership
thereof and is bound to pay the creditor an equal amount of
the same kind and quality. 23 In this case, however, there was
no stipulation for Baguio Gold to actually repay petitioner the
cash and property that it had advanced, but only the return of
an amount pegged at a ratio which the manager's account had
to the owner's account. EScIAa
In this connection, we find no contractual basis for the
execution of the two compromise agreements in which Baguio
Gold recognized a debt in favor of petitioner, which supposedly
arose from the termination of their business relations over the
Sto. Nio mine. The "Power of Attorney" clearly provides that
petitioner would only be entitled to the return of a
proportionate share of the mine assets to be computed at a
ratio that the manager's account had to the owner's account.
Except to provide a basis for claiming the advances as a bad
debt deduction, there is no reason for Baguio Gold to hold
itself liable to petitioner under the compromise agreements,
for any amount over and above the proportion agreed upon in
the "Power of Attorney".
Next, the tax court correctly observed that it was unlikely for a
business corporation to lend hundreds of millions of pesos to
another corporation with neither security, or collateral, nor a
specific deed evidencing the terms and conditions of such
loans. The parties also did not provide a specific maturity date
for the advances to become due and demandable, and the
manner of payment was unclear. All these point to the
inevitable conclusion that the advances were not loans but
capital contributions to a partnership. EHACcT
The strongest indication that petitioner was a partner in the
Sto Nio mine is the fact that it would receive 50% of the net
profits as "compensation" under paragraph 12 of the
agreement. The entirety of the parties' contractual stipulations
simply leads to no other conclusion than that petitioner's
"compensation" is actually its share in the income of the joint
venture.
Article 1769 (4) of the Civil Code explicitly provides that the
"receipt by a person of a share in the profits of a business
isprima facie evidence that he is a partner in the business."
Petitioner asserts, however, that no such inference can be
drawn against it since its share in the profits of the Sto Nio
project was in the nature of compensation or "wages of an
employee", under the exception provided in Article 1769 (4)
(b). 24
On this score, the tax court correctly noted that petitioner was
not an employee of Baguio Gold who will be paid "wages"
pursuant to an employer-employee relationship. To begin with,
petitioner was the manager of the project and had put
substantial sums into the venture in order to ensure its
viability and profitability. By pegging its compensation to
profits, petitioner also stood not to be remunerated in case the
mine had no income. It is hard to believe that petitioner would
take the risk of not being paid at all for its services, if it were
truly just an ordinary employee. ITADaE
Consequently, we find that petitioner's "compensation" under
paragraph 12 of the agreement actually constitutes its share
in the net profits of the partnership. Indeed, petitioner would
not be entitled to an equal share in the income of the mine if it
were just an employee of Baguio Gold. 25 It is not surprising
that petitioner was to receive a 50% share in the net profits,
considering that the "Power of Attorney" also provided for an
almost equal contribution of the parties to the St. Nio mine.
The "compensation" agreed upon only serves to reinforce the
notion that the parties' relations were indeed of partners and
not employer-employee.
All told, the lower courts did not err in treating petitioner's
advances as investments in a partnership known as the Sto.
Nio mine. The advances were not "debts" of Baguio Gold to
petitioner inasmuch as the latter was under no unconditional
obligation to return the same to the former under the "Power
of Attorney". As for the amounts that petitioner paid as
guarantor to Baguio Gold's creditors, we find no reason to
depart from the tax court's factual finding that Baguio Gold's
debts were not yet due and demandable at the time that
petitioner paid the same. Verily, petitioner pre-paid Baguio
Gold's outstanding loans to its bank creditors and this
conclusion is supported by the evidence on record. 26
In sum, petitioner cannot claim the advances as a bad debt
deduction from its gross income. Deductions for income tax
purposes partake of the nature of tax exemptions and are
strictly construed against the taxpayer, who must prove by
convincing evidence that he is entitled to the deduction
claimed. 27 In this case, petitioner failed to substantiate its
assertion that the advances were subsisting debts of Baguio
Gold that could be deducted from its gross income.
Consequently, it could not claim the advances as a valid bad
debt deduction. IDTSEH
WHEREFORE, the petition is DENIED. The decision of the Court
of Appeals in CA-G.R. SP No. 49385 dated June 30, 2000, which
affirmed the decision of the Court of Tax Appeals in C.T.A. Case
No. 5200 is AFFIRMED. Petitioner Philex Mining Corporation is
ORDERED to PAY the deficiency tax on its 1982 income in the
amount of P62,811,161.31, with 20% delinquency interest
computed from February 10, 1995, which is the due date given
for the payment of the deficiency income tax, up to the actual
date of payment.
SO ORDERED.
||| (Philex Mining Corp. v. Commissioner of Internal Revenue,
G.R. No. 148187, [April 16, 2008], 574 PHIL 571-586)

SECOND DIVISION

[G.R. No. 169507. January 11, 2016.]

AIR CANADA, petitioner, vs. COMMISSIONER OF

INTERNAL REVENUE, respondent.

DECISION

LEONEN, J p:
An offline international air carrier selling passage tickets
in the Philippines, through a general sales agent, is a
resident foreign corporation doing business in the
Philippines. As such, it is taxable under Section 28 (A) (1),
and not Section 28 (A) (3) of the 1997 National Internal
Revenue Code, subject to any applicable tax treaty to which
the Philippines is a signatory. Pursuant to Article 8 of
the Republic of the Philippines-Canada Tax Treaty, Air
Canada may only be imposed a maximum tax of 1 1/2 % of
its gross revenues earned from the sale of its tickets in the
Philippines.
This is a Petition for Review 1 appealing the August 26,
2005 Decision 2 of the Court of Tax Appeals En Banc, which
in turn affirmed the December 22, 2004 Decision 3 and April
8, 2005 Resolution 4 of the Court of Tax Appeals First
Division denying Air Canada's claim for refund.
Air Canada is a "foreign corporation organized and
existing under the laws of Canada[.]" 5 On April 24, 2000, it
was granted an authority to operate as an offline carrier by
the Civil Aeronautics Board, subject to certain conditions,
which authority would expire on April 24, 2005. 6 "As an off-
line carrier, [Air Canada] does not have flights originating
from or coming to the Philippines [and does not] operate any
airplane [in] the Philippines[.]" 7
On July 1, 1999, Air Canada engaged the services of
Aerotel Ltd., Corp. (Aerotel) as its general sales agent in the
Philippines. 8 Aerotel "sells [Air Canada's] passage
documents in the Philippines." 9
For the period ranging from the third quarter of 2000 to
the second quarter of 2002, Air Canada, through Aerotel,
filed quarterly and annual income tax returns and paid the
income tax on Gross Philippine Billings in the total amount of
P5,185,676.77, 10 detailed as follows:
Applicable Date Amount of
Quarter[/]Year Filed/Paid Tax

November 29,
3rd Qtr 2000 P395,165.00
2000
Annual ITR 2000 April 16, 2001 381,893.59
1st Qtr 2001 May 30, 2001 522,465.39
August 29,
2nd Qtr 2001 1,033,423.34
2001
November 29,
3rd Qtr 2001 765,021.28
2001
Annual ITR 2001 April 15, 2002 328,193.93
1st Qtr 2002 May 30, 2002 594,850.13
August 29,
2nd Qtr 2002 1,164,664.11
2002


P5,185,676.7
TOTAL
7 11
========
=====
 On November 28, 2002, Air Canada filed a written claim
for refund of alleged erroneously paid income taxes
amounting to P5,185,676.77 before the Bureau of Internal
Revenue, 12 Revenue District Office No. 47-East
Makati. 13 It found basis from the revised definition 14 of
Gross Philippine Billings under Section 28 (A) (3) (a) of
the 1997 National Internal Revenue Code:
SEC. 28. Rates of Income Tax on Foreign
Corporations.
(A) Tax on Resident Foreign Corporations.
xxx xxx xxx
(3) International Carrier. An international
carrier doing business in the Philippines
shall pay a tax of two and one-half percent
(2 1/2%) on its 'Gross Philippine Billings' as
defined hereunder:
(a) International Air Carrier. 'Gross
Philippine Billings' refers to the amount
of gross revenue derived from carriage
of persons, excess baggage, cargo and
mail originating from the Philippines
in a continuous and uninterrupted
flight, irrespective of the place of sale
or issue and the place of payment of
the ticket or passage document:
Provided, That tickets revalidated,
exchanged and/or indorsed to another
international airline form part of the Gross
Philippine Billings if the passenger boards a
plane in a port or point in the Philippines:
Provided, further, That for a flight which
originates from the Philippines, but
transshipment of passenger takes place at
 any port outside the Philippines on another
airline, only the aliquot portion of the cost
of the ticket corresponding to the leg flown
from the Philippines to the point of
transshipment shall form part of Gross
Philippine Billings. (Emphasis
supplied) TIADCc
To prevent the running of the prescriptive period, Air
Canada filed a Petition for Review before the Court of Tax
Appeals on November 29, 2002. 15 The case was docketed
as C.T.A. Case No. 6572. 16
On December 22, 2004, the Court of Tax Appeals First
Division rendered its Decision denying the Petition for
Review and, hence, the claim for refund. 17 It found that Air
Canada was engaged in business in the Philippines through
a local agent that sells airline tickets on its behalf. As such, it
should be taxed as a resident foreign corporation at the
regular rate of 32%. 18 Further, according to the Court of
Tax Appeals First Division, Air Canada was deemed to have
established a "permanent establishment" 19 in the
Philippines under Article V (2) (i) of the Republic of the
Philippines-Canada Tax Treaty 20 by the appointment of the
local sales agent, "in which [the] petitioner uses its premises
as an outlet where sales of [airline] tickets are made[.]" 21
Air Canada seasonably filed a Motion for
Reconsideration, but the Motion was denied in the Court of
Tax Appeals First Division's Resolution dated April 8, 2005 for
lack of merit. 22 The First Division held that while Air
Canada was not liable for tax on its Gross Philippine Billings
under Section 28 (A) (3), it was nevertheless liable to pay
the 32% corporate income tax on income derived from the
sale of airline tickets within the Philippines pursuant to
Section 28 (A) (1). 23
 On May 9, 2005, Air Canada appealed to the Court of
Tax Appeals En Banc. 24 The appeal was docketed as CTA
EB No. 86. 25
In the Decision dated August 26, 2005, the Court of Tax
Appeals En Banc affirmed the findings of the First
Division.26 The En Banc ruled that Air Canada is subject to
tax as a resident foreign corporation doing business in the
Philippines since it sold airline tickets in the
Philippines. 27 The Court of Tax Appeals En Banc disposed
thus:
WHEREFORE, premises considered, the instant
petition is hereby DENIED DUE COURSE, and
accordingly,DISMISSED for lack of merit. 28
Hence, this Petition for Review 29 was filed.
The issues for our consideration are:
First, whether petitioner Air Canada, as an offline
international carrier selling passage documents through a
general sales agent in the Philippines, is a resident foreign
corporation within the meaning of Section 28 (A) (1) of
the1997 National Internal Revenue Code;
Second, whether petitioner Air Canada is subject to the
2 1/2% tax on Gross Philippine Billings pursuant to Section
28 (A) (3). If not, whether an offline international carrier
selling passage documents through a general sales agent
can be subject to the regular corporate income tax of
32% 30 on taxable income pursuant to Section 28 (A) (1);
Third, whether the Republic of the Philippines-Canada
Tax Treaty applies, specifically:
a. Whether the Republic of the Philippines-Canada Tax
Treaty is enforceable;
b. Whether the appointment of a local general sales
agent in the Philippines falls under the definition of
"permanent establishment" under Article V (2) (i) of
 the Republic of the Philippines-Canada Tax Treaty;
and
Lastly, whether petitioner Air Canada is entitled to the
refund of P5,185,676.77 pertaining allegedly to erroneously
paid tax on Gross Philippine Billings from the third quarter of
2000 to the second quarter of 2002.
Petitioner claims that the general provision imposing the
regular corporate income tax on resident foreign
corporations provided under Section 28 (A) (1) of the 1997
National Internal Revenue Code does not apply to
"international carriers," 31 which are especially classified
and taxed under Section 28 (A) (3). 32 It adds that the fact
that it is no longer subject to Gross Philippine Billings tax as
ruled in the assailed Court of Tax Appeals Decision "does not
render it ipso facto subject to 32% income tax on taxable
income as a resident foreign corporation." 33 Petitioner
argues that to impose the 32% regular corporate income tax
on its income would violate the Philippine government's
covenant under Article VIII of the Republic of the Philippines-
Canada Tax Treaty not to impose a tax higher than 1 1/2% of
the carrier's gross revenue derived from sources within the
Philippines. 34 It would also allegedly result in "inequitable
tax treatment of on-line and off-line international air
carriers[.]" 35
Also, petitioner states that the income it derived from
the sale of airline tickets in the Philippines was income from
services and not income from sales of personal
property. 36 Petitioner cites the deliberations of the
Bicameral Conference Committee on House Bill No. 9077
(which eventually became the 1997 National Internal
Revenue Code), particularly Senator Juan Ponce Enrile's
statement, 37 to reveal the "legislative intent to treat the
revenue derived from air carriage as income from services,
and that the carriage of passenger or cargo as the activity
that generates the income." 38 Accordingly, applying the
principle on the situs of taxation in taxation of services,
petitioner claims that its income derived "from services
rendered outside the Philippines [was] not subject to
Philippine income taxation." 39 AIDSTE
Petitioner further contends that by the appointment of
Aerotel as its general sales agent, petitioner cannot be
considered to have a "permanent establishment" 40 in the
Philippines pursuant to Article V (6) of the Republic of the
Philippines-Canada Tax Treaty. 41 It points out that Aerotel is
an "independent general sales agent that acts as such for. . .
other international airline companies in the ordinary course
of its business." 42 Aerotel sells passage tickets on behalf of
petitioner and receives a commission for its
services. 43 Petitioner states that even the Bureau of
Internal Revenue through VAT Ruling No. 003-04 dated
February 14, 2004 has conceded that an offline
international air carrier, having no flight operations to and
from the Philippines, is not deemed engaged in business in
the Philippines by merely appointing a general sales
agent. 44 Finally, petitioner maintains that its "claim for
refund of erroneously paid Gross Philippine Billings cannot
be denied on the ground that [it] is subject to income tax
under Section 28 (A) (1)" 45 since it has not been assessed
at all by the Bureau of Internal Revenue for any income tax
liability. 46
On the other hand, respondent maintains that petitioner
is subject to the 32% corporate income tax as a resident
foreign corporation doing business in the Philippines.
Petitioner's total payment of P5,185,676.77 allegedly shows
that petitioner was earning a sizable income from the sale of
its plane tickets within the Philippines during the relevant
period. 47 Respondent further points out that this court
in Commissioner of Internal Revenue v. American Airlines,
Inc., 48which in turn cited the cases involving the British
Overseas Airways Corporation and Air India, had already
settled that "foreign airline companies which sold tickets in
the Philippines through their local agents. . . [are]
considered resident foreign corporations engaged in trade or
business in the country." 49 It also cites Revenue
Regulations No. 6-78 dated April 25, 1978, which defined the
phrase "doing business in the Philippines" as including
"regular sale of tickets in the Philippines by off-line
international airlines either by themselves or through their
agents." 50
Respondent further contends that petitioner is not
entitled to its claim for refund because the amount of
P5,185,676.77 it paid as tax from the third quarter of 2000
to the second quarter of 2001 was still short of the 32%
income tax due for the period. 51 Petitioner cannot allegedly
claim good faith in its failure to pay the right amount of tax
since the National Internal Revenue Code became operative
on January 1, 1998 and by 2000, petitioner should have
already been aware of the implications of Section 28 (A) (3)
and the decided cases of this court's ruling on the taxability
of offline international carriers selling passage tickets in the
Philippines. 52
I
At the outset, we affirm the Court of Tax Appeals' ruling
that petitioner, as an offline international carrier with no
landing rights in the Philippines, is not liable to tax on Gross
Philippine Billings under Section 28 (A) (3) of the 1997
National Internal Revenue Code:
SEC. 28. Rates of Income Tax on Foreign
Corporations.
(A) Tax on Resident Foreign Corporations.
xxx xxx xxx
(3) International Carrier. An international
carrier doing business in the Philippines
shall pay a tax of two and one-half percent
 (2 1/2%) on its 'Gross Philippine Billings' as
defined hereunder:
(a) International Air Carrier. 'Gross
Philippine Billings' refers to the amount of
gross revenue derived from carriage of
persons, excess baggage, cargo and mail
originating from the Philippines in a
continuous and uninterrupted flight,
irrespective of the place of sale or issue
and the place of payment of the ticket or
passage document: Provided, That tickets
revalidated, exchanged and/or indorsed to
another international airline form part of
the Gross Philippine Billings if the
passenger boards a plane in a port or point
in the Philippines: Provided, further, That for
a flight which originates from the
Philippines, but transshipment of passenger
takes place at any port outside the
Philippines on another airline, only the
aliquot portion of the cost of the ticket
corresponding to the leg flown from the
Philippines to the point of transshipment
shall form part of Gross Philippine Billings.
(Emphasis supplied)
Under the foregoing provision, the tax attaches only
when the carriage of persons, excess baggage, cargo, and
mail originated from the Philippines in a continuous and
uninterrupted flight, regardless of where the passage
documents were sold.
Not having flights to and from the Philippines, petitioner
is clearly not liable for the Gross Philippine Billings tax.
II
 Petitioner, an offline carrier, is a resident foreign
corporation for income tax purposes. Petitioner falls within
the definition of resident foreign corporation under Section
28 (A) (1) of the 1997 National Internal Revenue Code, thus,
it may be subject to 32% 53 tax on its taxable income:
SEC. 28. Rates of Income Tax on Foreign
Corporations.
(A) Tax on Resident Foreign Corporations.
(1) In General. Except as otherwise
provided in this Code, a corporation
organized, authorized, or existing
under the laws of any foreign country,
engaged in trade or business within
the Philippines, shall be subject to an
income tax equivalent to thirty-five
percent (35%) of the taxable income
derived in the preceding taxable year
from all sources within the Philippines:
Provided, That effective January 1, 1998,
the rate of income tax shall be thirty-four
percent (34%); effective January 1, 1999,
the rate shall be thirty-three percent (33%);
and effective January 1, 2000 and
thereafter, the rate shall be thirty-two
percent (32%). 54 (Emphasis supplied)
The definition of "resident foreign corporation" has not
substantially changed throughout the amendments of
theNational Internal Revenue Code. All versions refer to "a
foreign corporation engaged in trade or business within the
Philippines."
Commonwealth Act No. 466, known as the National
Internal Revenue Code and approved on June 15, 1939,
defined "resident foreign corporation" as applying to "a
foreign corporation engaged in trade or business within the
Philippines or having an office or place of business
therein." 55
Section 24 (b) (2) of the National Internal Revenue Code,
as amended by Republic Act No. 6110, approved on August
4, 1969, reads:
Sec. 24. Rates of tax on corporations. . . .
(b) Tax on foreign corporations. . . .
(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. 56 (Emphasis
supplied)
Presidential Decree No. 1158-A took effect on June 3,
1977 amending certain sections of the 1939 National
Internal Revenue Code. Section 24 (b) (2) on foreign resident
corporations was amended, but it still provides that "[a]
corporation organized, authorized, or existing under the laws
of any foreign country, 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[.]" 57
As early as 1987, this court in Commissioner of Internal
Revenue v. British Overseas Airways Corporation 58declared
British Overseas Airways Corporation, an international air
carrier with no landing rights in the Philippines, as a resident
foreign corporation engaged in business in the Philippines
through its local sales agent that sold and issued tickets for
the airline company. 59 This court discussed that: acEHCD
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. "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.["]
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." 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. 60 (Emphasis supplied, citations
omitted)
Republic Act No. 7042 or the Foreign Investments Act of
1991 also provides guidance with its definition of "doing
business" with regard to foreign corporations. Section 3 (d)
of the law enumerates the activities that constitute doing
business:
d. the phrase "doing business" shall
include soliciting orders, service contracts,
opening offices, whether called "liaison" offices
or branches; appointing representatives or
distributors domiciled in the Philippines or who in
any calendar year stay in the country for a
period or periods totalling one hundred eighty
(180) days or more; participating in the
management, supervision or control of any
domestic business, firm, entity or corporation in
the Philippines; and any other act or acts that
imply a continuity of commercial dealings
or arrangements, and contemplate 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 of the
purpose and object of the business
organization: Provided, however, That the
phrase "doing business" shall not be deemed to
include mere investment as a shareholder by a
foreign entity in domestic corporations duly
 registered to do business, and/or the exercise of
rights as such investor; nor having a nominee
director or officer to represent its interests in
such corporation; nor appointing a
representative or distributor domiciled in the
Philippines which transacts business in its own
name and for its own account[.] 61 (Emphasis
supplied)
While Section 3 (d) above states that "appointing a
representative or distributor domiciled in the Philippines
which transacts business in its own name and for its own
account" is not considered as "doing business," the
Implementing Rules and Regulations of Republic Act No.
7042 clarifies that "doing business" includes "appointing
representatives or distributors, operating under full
control of the foreign corporation, domiciled in the
Philippines or who in any calendar year stay in the country
for a period or periods totaling one hundred eighty (180)
days or more[.]" 62
An offline carrier is "any foreign air carrier not
certificated by the [Civil Aeronautics] Board, but who
maintains office or who has designated or appointed agents
or employees in the Philippines, who sells or offers for sale
any air transportation in behalf of said foreign air carrier
and/or others, or negotiate for, or holds itself out by
solicitation, advertisement, or otherwise sells, provides,
furnishes, contracts, or arranges for such transportation." 63
"Anyone desiring to engage in the activities of an off-line
carrier [must] apply to the [Civil Aeronautics] Board for such
authority." 64 Each offline carrier must file with the Civil
Aeronautics Board a monthly report containing information
on the tickets sold, such as the origin and destination of the
passengers, carriers involved, and commissions received. 65
Petitioner is undoubtedly "doing business" or "engaged
in trade or business" in the Philippines.
 Aerotel performs acts or works or exercises functions
that are incidental and beneficial to the purpose of
petitioner's business. The activities of Aerotel bring direct
receipts or profits to petitioner. 66 There is nothing on
record to show that Aerotel solicited orders alone and for its
own account and without interference from, let alone
direction of, petitioner. On the contrary, Aerotel cannot
"enter into any contract on behalf of [petitioner Air Canada]
without the express written consent of [the latter,]" 67 and
it must perform its functions according to the standards
required by petitioner. 68 Through Aerotel, petitioner is able
to engage in an economic activity in the Philippines.
Further, petitioner was issued by the Civil Aeronautics
Board an authority to operate as an offline carrier in the
Philippines for a period of five years, or from April 24, 2000
until April 24, 2005. 69
Petitioner is, therefore, a resident foreign corporation
that is taxable on its income derived from sources within the
Philippines. Petitioner's income from sale of airline tickets,
through Aerotel, is income realized from the pursuit of its
business activities in the Philippines. SDHTEC
III
However, the application of the regular 32% tax rate
under Section 28 (A) (1) of the 1997 National Internal
Revenue Code must consider the existence of an effective
tax treaty between the Philippines and the home country of
the foreign air carrier.
In the earlier case of South African Airways v.
Commissioner of Internal Revenue, 70 this court held that
Section 28 (A) (3) (a) does not categorically exempt all
international air carriers from the coverage of Section 28 (A)
(1). Thus, if Section 28 (A) (3) (a) is applicable to a taxpayer,
then the general rule under Section 28 (A) (1) does not
apply. If, however, Section 28 (A) (3) (a) does not apply, an
international air carrier would be liable for the tax under
Section 28 (A) (1). 71
This court in South African Airways declared that the
correct interpretation of these provisions is that:
"international air carrier[s] maintain[ing] flights to and from
the Philippines. . . shall be taxed at the rate of 2 1/2% of its
Gross Philippine Billings[;] while international air carriers
that do not have flights to and from the Philippines but
nonetheless earn income from other activities in the country
[like sale of airline tickets] will be taxed at the rate of 32% of
such [taxable] income." 72
In this case, there is a tax treaty that must be taken into
consideration to determine the proper tax rate.
A tax treaty is an agreement entered into between
sovereign states "for purposes of eliminating double taxation
on income and capital, preventing fiscal evasion, promoting
mutual trade and investment, and according fair and
equitable tax treatment to foreign residents or
nationals." 73 Commissioner of Internal Revenue v. S.C.
Johnson and Son, Inc. 74 explained the purpose of a tax
treaty:
The purpose of these international agreements is to
reconcile the national fiscal legislation of the
contracting parties in order to help the taxpayer
avoid simultaneous taxation in two different
jurisdictions. More precisely, the tax conventions are
drafted with a view towards the elimination
of international juridical double taxation, which is
defined as the imposition of comparable taxes in
two or more states on the same taxpayer in respect
of the same subject matter and for identical periods.
The apparent rationale for doing away with double
taxation is to encourage the free flow of goods and
services and the movement of capital, technology
 and persons between countries, conditions deemed
vital in creating robust and dynamic economies.
Foreign investments will only thrive in a fairly
predictable and reasonable international investment
climate and the protection against double taxation
is crucial in creating such a climate. 75 (Emphasis in
the original, citations omitted)
Observance of any treaty obligation binding upon the
government of the Philippines is anchored on the
constitutional provision that the Philippines "adopts the
generally accepted principles of international law as part of
the law of the land[.]" 76 Pacta sunt servanda is a
fundamental international law principle that requires
agreeing parties to comply with their treaty obligations in
good faith. 77
Hence, the application of the provisions of the National
Internal Revenue Code must be subject to the provisions of
tax treaties entered into by the Philippines with foreign
countries.
In Deutsche Bank AG Manila Branch v. Commissioner of
Internal Revenue, 78 this court stressed the binding effects
of tax treaties. It dealt with the issue of "whether the failure
to strictly comply with [Revenue Memorandum Order] RMO
No. 1-2000 79 will deprive persons or corporations of the
benefit of a tax treaty." 80 Upholding the tax treaty over the
administrative issuance, this court reasoned thus:
Our Constitution provides for adherence to the
general principles of international law as part of
the law of the land. The time-honored
international principle of pacta sunt servanda
demands the performance in good faith of treaty
obligations on the part of the states that enter into
the agreement. Every treaty in force is binding upon
the parties, and obligations under the treaty must
be performed by them in good faith. More
importantly, treaties have the force and effect
of law in this jurisdiction.
Tax treaties are entered into "to reconcile the
national fiscal legislations of the contracting parties
and, in turn, help the taxpayer avoid simultaneous
taxations in two different jurisdictions." CIR v. S.C.
Johnson and Son, Inc.further clarifies that "tax
conventions are drafted with a view towards the
elimination of international juridical double taxation,
which is defined as the imposition of comparable
taxes in two or more states on the same taxpayer in
respect of the same subject matter and for identical
periods. The apparent rationale for doing away with
double taxation is to encourage the free flow of
goods and services and the movement of capital,
technology and persons between countries,
conditions deemed vital in creating robust and
dynamic economies. Foreign investments will only
thrive in a fairly predictable and reasonable
international investment climate and the protection
against double taxation is crucial in creating such a
climate." Simply put, tax treaties are entered into to
minimize, if not eliminate the harshness of
international juridical double taxation, which is why
they are also known as double tax treaty or double
tax agreements. AScHCD
"A state that has contracted valid international
obligations is bound to make in its legislations those
modifications that may be necessary to ensure the
fulfillment of the obligations undertaken." Thus,
laws and issuances must ensure that the reliefs
granted under tax treaties are accorded to the
parties entitled thereto. The BIR must not impose
additional requirements that would negate the
availment of the reliefs provided for under
 international agreements. More so, when the RP-
Germany Tax Treaty does not provide for any pre-
requisite for the availment of the benefits under
said agreement.
xxx xxx xxx
Bearing in mind the rationale of tax treaties, the
period of application for the availment of tax treaty
relief as required by RMO No. 1-2000 should not
operate to divest entitlement to the relief as it
would constitute a violation of the duty required by
good faith in complying with a tax treaty. The denial
of the availment of tax relief for the failure of a
taxpayer to apply within the prescribed period
under the administrative issuance would impair the
value of the tax treaty. At most, the application for a
tax treaty relief from the BIR should merely operate
to confirm the entitlement of the taxpayer to the
relief.
The obligation to comply with a tax treaty must
take precedence over the objective of RMO No. 1-
2000. Logically, noncompliance with tax treaties has
negative implications on international relations, and
unduly discourages foreign investors. While the
consequences sought to be prevented by RMO No.
1-2000 involve an administrative procedure, these
may be remedied through other system
management processes, e.g., the imposition of a
fine or penalty. But we cannot totally deprive those
who are entitled to the benefit of a treaty for failure
to strictly comply with an administrative issuance
requiring prior application for tax treaty
relief. 81 (Emphasis supplied, citations omitted)
On March 11, 1976, the representatives 82 for the
government of the Republic of the Philippines and for the
government of Canada signed the Convention between the
Philippines and Canada for the Avoidance of Double Taxation
and the Prevention of Fiscal Evasion with Respect to Taxes
on Income (Republic of the Philippines-Canada Tax Treaty).
This treaty entered into force on December 21, 1977.
Article V 83 of the Republic of the Philippines-Canada
Tax Treaty defines "permanent establishment" as a "fixed
place of business in which the business of the enterprise is
wholly or partly carried on." 84
Even though there is no fixed place of business, an
enterprise of a Contracting State is deemed to have a
permanent establishment in the other Contracting State if
under certain conditions there is a person acting for it.
Specifically, Article V (4) of the Republic of the
Philippines-Canada Tax Treaty states that "[a] person acting
in a Contracting State on behalf of an enterprise of the other
Contracting State (other than an agent of independent
status to whom paragraph 6 applies) shall be deemed to be
a permanent establishment in the first-mentioned State
if . . . he has and habitually exercises in that State an
authority to conclude contracts on behalf of the enterprise,
unless his activities are limited to the purchase of goods or
merchandise for that enterprise[.]" The provision seems to
refer to one who would be considered an agent under Article
1868 85 of the Civil Code of the Philippines.
On the other hand, Article V (6) provides that "[a]n
enterprise of a Contracting State shall not be deemed to
have a permanent establishment in the other Contracting
State merely because it carries on business in that other
State through a broker, general commission agent or any
other agent of an independent status, where such
persons are acting in the ordinary course of their business."
Considering Article XV 86 of the same Treaty, which
covers dependent personal services, the term "dependent"
would imply a relationship between the principal and the
agent that is akin to an employer-employee relationship.
Thus, an agent may be considered to be dependent on
the principal where the latter exercises comprehensive
control and detailed instructions over the means and results
of the activities of the agent. 87 AcICHD
Section 3 of Republic Act No. 776, as amended, also
known as The Civil Aeronautics Act of the Philippines,
defines a general sales agent as "a person, not
a bonafide employee of an air carrier, who pursuant to an
authority from an airline, by itself or through an agent, sells
or offers for sale any air transportation, or negotiates for, or
holds himself out by solicitation, advertisement or otherwise
as one who sells, provides, furnishes, contracts or arranges
for, such air transportation." 88 General sales agents and
their property, property rights, equipment, facilities, and
franchise are subject to the regulation and control of the
Civil Aeronautics Board. 89 A permit or authorization issued
by the Civil Aeronautics Board is required before a general
sales agent may engage in such an activity. 90
Through the appointment of Aerotel as its local sales
agent, petitioner is deemed to have created a "permanent
establishment" in the Philippines as defined under
the Republic of the Philippines-Canada Tax Treaty.
Petitioner appointed Aerotel as its passenger general
sales agent to perform the sale of transportation on
petitioner and handle reservations, appointment, and
supervision of International Air Transport Association-
approved and petitioner-approved sales agents, including
the following services:
ARTICLE 7
GSA SERVICES
The GSA [Aerotel Ltd., Corp.] shall perform on behalf
of AC [Air Canada] the following services:
a) Be the fiduciary of AC and in such capacity act
solely and entirely for the benefit of AC in every
matter relating to this Agreement;
xxx xxx xxx
c) Promotion of passenger transportation on AC;
xxx xxx xxx
e) Without the need for endorsement by AC, arrange
for the reissuance, in the Territory of the GSA
[Philippines], of traffic documents issued by AC
outside the said territory of the GSA [Philippines], as
required by the passenger(s);
xxx xxx xxx
h) Distribution among passenger sales agents and
display of timetables, fare sheets, tariffs and
publicity material provided by AC in accordance with
the reasonable requirements of AC;
xxx xxx xxx
j) Distribution of official press releases provided by
AC to media and reference of any press or public
relations inquiries to AC;
xxx xxx xxx
o) Submission for AC's approval, of an annual
written sales plan on or before a date to be
determined by AC and in a form acceptable to AC;
xxx xxx xxx
q) Submission of proposals for AC's approval of
passenger sales agent incentive plans at a
reasonable time in advance of proposed
implementation.
r) Provision of assistance on request, in its relations
with Governmental and other authorities, offices
and agencies in the Territory [Philippines].
 xxx xxx xxx
u) Follow AC guidelines for the handling of baggage
claims and customer complaints and, unless
otherwise stated in the guidelines, refer all such
claims and complaints to AC. 91
Under the terms of the Passenger General Sales Agency
Agreement, Aerotel will "provide at its own expense and
acceptable to [petitioner Air Canada], adequate and suitable
premises, qualified staff, equipment, documentation,
facilities and supervision and in consideration of the
remuneration and expenses payable[,] [will] defray all costs
and expenses of and incidental to the Agency." 92 "[I]t is the
sole employer of its employees and . . . is responsible for
[their] actions . . . or those of any subcontractor." 93 In
remuneration for its services, Aerotel would be paid by
petitioner a commission on sales of transportation plus
override commission on flown revenues. 94 Aerotel would
also be reimbursed "for all authorized expenses supported
by original supplier invoices." 95
Aerotel is required to keep "separate books and records
of account, including supporting documents, regarding all
transactions at, through or in any way connected with
[petitioner Air Canada] business." 96
"If representing more than one carrier, [Aerotel must]
represent all carriers in an unbiased way." 97 Aerotel cannot
"accept additional appointments as General Sales Agent of
any other carrier without the prior written consent of
[petitioner Air Canada]." 98
The Passenger General Sales Agency Agreement "may
be terminated by either party without cause upon [no] less
than 60 days' prior notice in writing[.]" 99 In case of breach
of any provisions of the Agreement, petitioner may require
Aerotel "to cure the breach in 30 days failing which
[petitioner Air Canada] may terminate [the]
Agreement[.]" 100 TAIaHE
The following terms are indicative of Aerotel's
dependent status:
First, Aerotel must give petitioner written notice "within
7 days of the date [it] acquires or takes control of another
entity or merges with or is acquired or controlled by another
person or entity[.]" 101 Except with the written consent of
petitioner, Aerotel must not acquire a substantial interest in
the ownership, management, or profits of a passenger sales
agent affiliated with the International Air Transport
Association or a non-affiliated passenger sales agent nor
shall an affiliated passenger sales agent acquire a
substantial interest in Aerotel as to influence its commercial
policy and/or management decisions. 102 Aerotel must also
provide petitioner "with a report on any interests held by [it],
its owners, directors, officers, employees and their
immediate families in companies and other entities in the
aviation industry or . . . industries related to
it[.]" 103 Petitioner may require that any interest be
divested within a set period of time. 104
Second, in carrying out the services, Aerotel cannot
enter into any contract on behalf of petitioner without the
express written consent of the latter; 105 it must act
according to the standards required by
petitioner; 106 "follow the terms and provisions of the
[petitioner Air Canada] GSA Manual [and all] written
instructions of [petitioner Air Canada;]"107 and "[i]n the
absence of an applicable provision in the Manual or
instructions, [Aerotel must] carry out its functions in
accordance with [its own] standard practices and
procedures[.]" 108
Third, Aerotel must only "issue traffic documents
approved by [petitioner Air Canada] for all transportation
over [its] services[.]" 109 All use of petitioner's name, logo,
and marks must be with the written consent of petitioner
and according to petitioner's corporate standards and
guidelines set out in the Manual. 110
Fourth, all claims, liabilities, fines, and expenses arising
from or in connection with the transportation sold by Aerotel
are for the account of petitioner, except in the case of
negligence of Aerotel. 111
Aerotel is a dependent agent of petitioner pursuant to
the terms of the Passenger General Sales Agency Agreement
executed between the parties. It has the authority or power
to conclude contracts or bind petitioner to contracts entered
into in the Philippines. A third-party liability on contracts of
Aerotel is to petitioner as the principal, and not to Aerotel,
and liability to such third party is enforceable against
petitioner. While Aerotel maintains a certain independence
and its activities may not be devoted wholly to petitioner,
nonetheless, when representing petitioner pursuant to the
Agreement, it must carry out its functions solely for the
benefit of petitioner and according to the latter's Manual and
written instructions. Aerotel is required to submit its annual
sales plan for petitioner's approval. ICHDca
In essence, Aerotel extends to the Philippines the
transportation business of petitioner. It is a conduit or outlet
through which petitioner's airline tickets are sold. 112
Under Article VII (Business Profits) of the Republic of the
Philippines-Canada Tax Treaty, the "business profits" of an
enterprise of a Contracting State is "taxable only in that
State[,] unless the enterprise carries on business in the
other Contracting State through a permanent
establishment[.]" 113 Thus, income attributable to Aerotel
or from business activities effected by petitioner through
Aerotel may be taxed in the Philippines. However, pursuant
to the last paragraph 114 of Article VII in relation to Article
VIII 115 (Shipping and Air Transport) of the same Treaty, the
tax imposed on income derived from the operation of ships
or aircraft in international traffic should not exceed 1 1/2% of
gross revenues derived from Philippine sources.
IV
While petitioner is taxable as a resident foreign
corporation under Section 28 (A) (1) of the 1997 National
Internal Revenue Code on its taxable income 116 from sale
of airline tickets in the Philippines, it could only be taxed at
a maximum of 1 1/2% of gross revenues, pursuant to Article
VIII of the Republic of the Philippines-Canada Tax Treaty that
applies to petitioner as a "foreign corporation organized and
existing under the laws of Canada[.]" 117
Tax treaties form part of the law of the land, 118 and
jurisprudence has applied the statutory construction
principle that specific laws prevail over general ones. 119
The Republic of the Philippines-Canada Tax Treaty was
ratified on December 21, 1977 and became valid and
effective on that date. On the other hand, the applicable
provisions 120 relating to the taxability of resident foreign
corporations and the rate of such tax found in the National
Internal Revenue Code became effective on January 1,
1998.121 Ordinarily, the later provision governs over the
earlier one. 122 In this case, however, the provisions of
the Republic of the Philippines-Canada Tax Treaty are more
specific than the provisions found in the National Internal
Revenue Code.
These rules of interpretation apply even though one of
the sources is a treaty and not simply a statute.
Article VII, Section 21 of the Constitution provides:
SECTION 21. No treaty or international agreement
shall be valid and effective unless concurred in by at
least two-thirds of all the Members of the Senate.
This provision states the second of two ways through
which international obligations become binding. Article II,
Section 2 of the Constitution deals with international
obligations that are incorporated, while Article VII, Section
21 deals with international obligations that become binding
through ratification.
"Valid and effective" means that treaty provisions that
define rights and duties as well as definite prestations have
effects equivalent to a statute. Thus, these specific treaty
provisions may amend statutory provisions. Statutory
provisions may also amend these types of treaty obligations.
We only deal here with bilateral treaty state obligations
that are not international obligations erga omnes. We are
also not required to rule in this case on the effect of
international customary norms especially those with jus
cogenscharacter.
The second paragraph of Article VIII states that "profits
from sources within a Contracting State derived by an
enterprise of the other Contracting State from the operation
of ships or aircraft in international traffic may be taxed in the
first-mentioned State but the tax so charged shall not
exceed the lesser of a) one and one-half per cent of the
gross revenues derived from sources in that State; and b)
the lowest rate of Philippine tax imposed on such profits
derived by an enterprise of a third State."
The Agreement between the government of the Republic
of the Philippines and the government of Canada on Air
Transport, entered into on January 14, 1997, reiterates the
effectivity of Article VIII of the Republic of the Philippines-
Canada Tax Treaty:
ARTICLE XVI
(Taxation)
The Contracting Parties shall act in accordance with
the provisions of Article VIII of the Convention
between the Philippines and Canada for the
Avoidance of Double Taxation and the Prevention of
 Fiscal Evasion with Respect to Taxes on Income,
signed at Manila on March 31, 1976 and entered
into force on December 21, 1977, and any
amendments thereto, in respect of the operation of
aircraft in international traffic. 123 TCAScE
Petitioner's income from sale of ticket for international
carriage of passenger is income derived from international
operation of aircraft. The sale of tickets is closely related to
the international operation of aircraft that it is considered
incidental thereto.
"[B]y reason of our bilateral negotiations with [Canada],
we have agreed to have our right to tax limited to a certain
extent[.]" 124 Thus, we are bound to extend to a Canadian
air carrier doing business in the Philippines through a local
sales agent the benefit of a lower tax equivalent to 1 1/2%
on business profits derived from sale of international air
transportation.
V
Finally, we reject petitioner's contention that the Court
of Tax Appeals erred in denying its claim for refund of
erroneously paid Gross Philippine Billings tax on the ground
that it is subject to income tax under Section 28 (A) (1) of
the National Internal Revenue Code because (a) it has not
been assessed at all by the Bureau of Internal Revenue for
any income tax liability; 125 and (b) internal revenue taxes
cannot be the subject of set-off or
compensation, 126 citingRepublic v. Mambulao Lumber Co.,
et al. 127 and Francia v. Intermediate Appellate Court. 128
In SMI-ED Philippines Technology, Inc. v. Commissioner
of Internal Revenue, 129 we have ruled that "[i]n an action
for the refund of taxes allegedly erroneously paid, the Court
of Tax Appeals may determine whether there are taxes that
should have been paid in lieu of the taxes paid." 130 The
determination of the proper category of tax that should have
been paid is incidental and necessary to resolve the issue of
whether a refund should be granted. 131 Thus:
Petitioner argued that the Court of Tax Appeals
had no jurisdiction to subject it to 6% capital gains
tax or other taxes at the first instance. The Court of
Tax Appeals has no power to make an assessment.
As earlier established, the Court of Tax Appeals
has no assessment powers. In stating that
petitioner's transactions are subject to capital gains
tax, however, the Court of Tax Appeals was not
making an assessment. It was merely determining
the proper category of tax that petitioner should
have paid, in view of its claim that it erroneously
imposed upon itself and paid the 5% final tax
imposed upon PEZA-registered enterprises.
The determination of the proper category of tax
that petitioner should have paid is an incidental
matter necessary for the resolution of the principal
issue, which is whether petitioner was entitled to a
refund.
The issue of petitioner's claim for tax refund is
intertwined with the issue of the proper taxes that
are due from petitioner. A claim for tax refund
carries the assumption that the tax returns filed
were correct. If the tax return filed was not proper,
the correctness of the amount paid and, therefore,
the claim for refund become questionable. In that
case, the court must determine if a taxpayer
claiming refund of erroneously paid taxes is more
properly liable for taxes other than that paid.
In South African Airways v. Commissioner of
Internal Revenue, South African Airways claimed for
refund of its erroneously paid 2 1/2% taxes on its
gross Philippine billings. This court did not
 immediately grant South African's claim for refund.
This is because although this court found that South
African Airways was not subject to the 2 1/2% tax
on its gross Philippine billings, this court also found
that it was subject to 32% tax on its taxable income.
In this case, petitioner's claim that it
erroneously paid the 5% final tax is an admission
that the quarterly tax return it filed in 2000 was
improper. Hence, to determine if petitioner was
entitled to the refund being claimed, the Court of
Tax Appeals has the duty to determine if petitioner
was indeed not liable for the 5% final tax and,
instead, liable for taxes other than the 5% final tax.
As in South African Airways, petitioner's request for
refund can neither be granted nor denied outright
without such determination.
If the taxpayer is found liable for taxes other
than the erroneously paid 5% final tax, the amount
of the taxpayer's liability should be computed and
deducted from the refundable amount.
Any liability in excess of the refundable amount,
however, may not be collected in a case involving
solely the issue of the taxpayer's entitlement to
refund. The question of tax deficiency is distinct and
unrelated to the question of petitioner's entitlement
to refund. Tax deficiencies should be subject to
assessment procedures and the rules of
prescription. The court cannot be expected to
perform the BIR's duties whenever it fails to do so
either through neglect or oversight. Neither can
court processes be used as a tool to circumvent
laws protecting the rights of taxpayers. 132
Hence, the Court of Tax Appeals properly denied
petitioner's claim for refund of allegedly erroneously paid tax
on its Gross Philippine Billings, on the ground that it was
liable instead for the regular 32% tax on its taxable income
received from sources within the Philippines. Its
determination of petitioner's liability for the 32% regular
income tax was made merely for the purpose of ascertaining
petitioner's entitlement to a tax refund and not for imposing
any deficiency tax.
In this regard, the matter of set-off raised by petitioner
is not an issue. Besides, the cases cited are based on
different circumstances. In both cited cases, 133 the
taxpayer claimed that his (its) tax liability was off-set by his
(its) claim against the government.
Specifically, in Republic v. Mambulao Lumber Co., et al.,
Mambulao Lumber contended that the amounts it paid to
the government as reforestation charges from 1947 to 1956,
not having been used in the reforestation of the area
covered by its license, may be set off or applied to the
payment of forest charges still due and owing from
it. 134Rejecting Mambulao's claim of legal compensation,
this court ruled: cTDaEH
[A]ppellant and appellee are not mutually creditors
and debtors of each other. Consequently, the law on
compensation is inapplicable. On this point, the trial
court correctly observed:
Under Article 1278, NCC, compensation
should take place when two persons in their
own right are creditors and debtors of each
other. With respect to the forest charges
which the defendant Mambulao Lumber
Company has paid to the government, they
are in the coffers of the government as
taxes collected, and the government does
not owe anything to defendant Mambulao
Lumber Company. So, it is crystal clear that
the Republic of the Philippines and the
Mambulao Lumber Company are not
 creditors and debtors of each other,
because compensation refers to mutual
debts. . . . .
And the weight of authority is to the effect that
internal revenue taxes, such as the forest charges in
question, can not be the subject of set-off or
compensation.
A claim for taxes is not such a debt,
demand, contract or judgment as is allowed
to be set-off under the statutes of set-off,
which are construed uniformly, in the light
of public policy, to exclude the remedy in
an action or any indebtedness of the state
or municipality to one who is liable to the
state or municipality for taxes. Neither are
they a proper subject of recoupment since
they do not arise out of the contract or
transaction sued on. . . . . (80 C.J.S. 73-74.)
The general rule, based on grounds of
public policy is well-settled that no set-off is
admissible against demands for taxes
levied for general or local governmental
purposes. The reason on which the general
rule is based, is that taxes are not in the
nature of contracts between the party and
party but grow out of a duty to, and are the
positive acts of the government, to the
making and enforcing of which, the
personal consent of individual taxpayers is
not required. . . . If the taxpayer can
properly refuse to pay his tax when called
upon by the Collector, because he has a
claim against the governmental body which
is not included in the tax levy, it is plain
that some legitimate and necessary
 expenditure must be curtailed. If the
taxpayer's claim is disputed, the collection
of the tax must await and abide the result
of a lawsuit, and meanwhile the financial
affairs of the government will be thrown
into great confusion. (47 Am. Jur. 766-
767.) 135 (Emphasis supplied)
In Francia, this court did not allow legal compensation
since not all requisites of legal compensation provided under
Article 1279 were present. 136 In that case, a portion of
Francia's property in Pasay was expropriated by the national
government, 137 which did not immediately pay Francia. In
the meantime, he failed to pay the real property tax due on
his remaining property to the local government of Pasay,
which later on would auction the property on account of
such delinquency. 138 He then moved to set aside the
auction sale and argued, among others, that his real
property tax delinquency was extinguished by legal
compensation on account of his unpaid claim against the
national government. 139 This court ruled against
Francia: ITAaHc
There is no legal basis for the contention. By
legal compensation, obligations of persons, who in
their own right are reciprocally debtors and creditors
of each other, are extinguished (Art. 1278, Civil
Code). The circumstances of the case do not satisfy
the requirements provided by Article 1279, to wit:
(1) that each one of the obligors be
bound principally and that he be at the
same time a principal creditor of the other;
xxx xxx xxx
(3) that the two debts be due.
xxx xxx xxx
 This principal contention of the petitioner has
no merit. We have consistently ruled that there can
be no off-setting of taxes against the claims that the
taxpayer may have against the government. A
person cannot refuse to pay a tax on the ground
that the government owes him an amount equal to
or greater than the tax being collected. The
collection of a tax cannot await the results of a
lawsuit against the government.
xxx xxx xxx
There are other factors which compel us to rule
against the petitioner. The tax was due to the city
government while the expropriation was effected by
the national government. Moreover, the amount of
P4,116.00 paid by the national government for the
125 square meter portion of his lot was deposited
with the Philippine National Bank long before the
sale at public auction of his remaining property.
Notice of the deposit dated September 28, 1977
was received by the petitioner on September 30,
1977. The petitioner admitted in his testimony that
he knew about the P4,116.00 deposited with the
bank but he did not withdraw it. It would have been
an easy matter to withdraw P2,400.00 from the
deposit so that he could pay the tax obligation thus
aborting the sale at public auction. 140
The ruling in Francia was applied to the subsequent
cases of Caltex Philippines, Inc. v. Commission on
Audit 141and Philex Mining Corporation v. Commissioner of
Internal Revenue. 142 In Caltex, this court reiterated:
[A] taxpayer may not offset taxes due from the
claims that he may have against the government.
Taxes cannot be the subject of compensation
because the government and taxpayer are not
mutually creditors and debtors of each other and a
 claim for taxes is not such a debt, demand, contract
or judgment as is allowed to be set-
off. 143 (Citations omitted)
Philex Mining ruled that "[t]here is a material distinction
between a tax and debt. Debts are due to the Government
in its corporate capacity, while taxes are due to the
Government in its sovereign capacity." 144 Rejecting Philex
Mining's assertion that the imposition of surcharge and
interest was unjustified because it had no obligation to pay
the excise tax liabilities within the prescribed period since,
after all, it still had pending claims for VAT input
credit/refund with the Bureau of Internal Revenue, this court
explained:
To be sure, we cannot allow Philex to refuse the
payment of its tax liabilities on the ground that it
has a pending tax claim for refund or credit against
the government which has not yet been granted. It
must be noted that a distinguishing feature of a tax
is that it is compulsory rather than a matter of
bargain. Hence, a tax does not depend upon the
consent of the taxpayer. If any tax payer can defer
the payment of taxes by raising the defense that it
still has a pending claim for refund or credit, this
would adversely affect the government revenue
system. A taxpayer cannot refuse to pay his taxes
when they fall due simply because he has a claim
against the government or that the collection of the
tax is contingent on the result of the lawsuit it filed
against the government. Moreover, Philex's theory
that would automatically apply its VAT input
credit/refund against its tax liabilities can easily give
rise to confusion and abuse, depriving the
government of authority over the manner by which
taxpayers credit and offset their tax
liabilities. 145 (Citations omitted)
 In sum, the rulings in those cases were to the effect that
the taxpayer cannot simply refuse to pay tax on the ground
that the tax liabilities were off-set against any alleged claim
the taxpayer may have against the government. Such would
merely be in keeping with the basic policy on prompt
collection of taxes as the lifeblood of the government.
Here, what is involved is a denial of a taxpayer's refund
claim on account of the Court of Tax Appeals' finding of its
liability for another tax in lieu of the Gross Philippine Billings
tax that was allegedly erroneously paid.
Squarely applicable is South African Airways where this
court rejected similar arguments on the denial of claim for
tax refund: CHTAIc
Commissioner of Internal Revenue v. Court of
Tax Appeals, however, granted the offsetting of a
tax refund with a tax deficiency in this wise:
Further, it is also worth noting that the
Court of Tax Appeals erred in denying
petitioner's supplemental motion for
reconsideration alleging bringing to said
court's attention the existence of the
deficiency income and business tax
assessment against Citytrust. The fact of
such deficiency assessment is intimately
related to and inextricably intertwined with
the right of respondent bank to claim for a
tax refund for the same year. To award such
refund despite the existence of that
deficiency assessment is an absurdity and a
polarity in conceptual effects. Herein
private respondent cannot be entitled to
refund and at the same time be liable for a
tax deficiency assessment for the same
year.
 The grant of a refund is founded on the
assumption that the tax return is valid, that
is, the facts stated therein are true and
correct. The deficiency assessment,
although not yet final, created a doubt as
to and constitutes a challenge against the
truth and accuracy of the facts stated in
said return which, by itself and without
unquestionable evidence, cannot be the
basis for the grant of the refund.
Section 82, Chapter IX of the National
Internal Revenue Code of 1977, which was
the applicable law when the claim of
Citytrust was filed, provides that "(w)hen an
assessment is made in case of any list,
statement, or return, which in the opinion of
the Commissioner of Internal Revenue was
false or fraudulent or contained any
understatement or undervaluation, no tax
collected under such assessment shall be
recovered by any suits unless it is proved
that the said list, statement, or return was
not false nor fraudulent and did not contain
any understatement or undervaluation; but
this provision shall not apply to statements
or returns made or to be made in good faith
regarding annual depreciation of oil or gas
wells and mines."
Moreover, to grant the refund without
determination of the proper assessment
and the tax due would inevitably result in
multiplicity of proceedings or suits. If the
deficiency assessment should subsequently
be upheld, the Government will be forced to
institute anew a proceeding for the
recovery of erroneously refunded taxes
which recourse must be filed within the
prescriptive period of ten years after
discovery of the falsity, fraud or omission in
the false or fraudulent return involved. This
would necessarily require and entail
additional efforts and expenses on the part
of the Government, impose a burden on
and a drain of government funds, and
impede or delay the collection of much-
needed revenue for governmental
operations.
Thus, to avoid multiplicity of suits and
unnecessary difficulties or expenses, it is
both logically necessary and legally
appropriate that the issue of the deficiency
tax assessment against Citytrust be
resolved jointly with its claim for tax refund,
to determine once and for all in a single
proceeding the true and correct amount of
tax due or refundable. cHDAIS
In fact, as the Court of Tax Appeals
itself has heretofore conceded, it would be
only just and fair that the taxpayer and the
Government alike be given equal
opportunities to avail of remedies under the
law to defeat each other's claim and to
determine all matters of dispute between
them in one single case. It is important to
note that in determining whether or not
petitioner is entitled to the refund of the
amount paid, it would [be] necessary to
determine how much the Government is
entitled to collect as taxes. This would
necessarily include the determination of the
 correct liability of the taxpayer and,
certainly, a determination of this case
would constitute res judicata on both
parties as to all the matters subject thereof
or necessarily involved therein.
Sec. 82, Chapter IX of the 1977 Tax Code is now
Sec. 72, Chapter XI of the 1997 NIRC. The above
pronouncements are, therefore, still applicable
today.
Here, petitioner's similar tax refund claim
assumes that the tax return that it filed was correct.
Given, however, the finding of the CTA that
petitioner, although not liable under Sec. 28(A)(3)(a)
of the 1997 NIRC, is liable under Sec. 28(A)(1), the
correctness of the return filed by petitioner is now
put in doubt. As such, we cannot grant the prayer
for a refund. 146 (Emphasis supplied, citation
omitted)
In the subsequent case of United Airlines, Inc. v.
Commissioner of Internal Revenue, 147 this court upheld
the denial of the claim for refund based on the Court of Tax
Appeals' finding that the taxpayer had, through erroneous
deductions on its gross income, underpaid its Gross
Philippine Billing tax on cargo revenues for 1999, and the
amount of underpayment was even greater than the refund
sought for erroneously paid Gross Philippine Billings tax on
passenger revenues for the same taxable period. 148
In this case, the P5,185,676.77 Gross Philippine Billings
tax paid by petitioner was computed at the rate of 1 1/2% of
its gross revenues amounting to P345,711,806.08 149 from
the third quarter of 2000 to the second quarter of 2002. It is
quite apparent that the tax imposable under Section 28 (A)
(1) of the 1997 National Internal Revenue Code [32% of
taxable income, that is, gross income less deductions] will
exceed the maximum ceiling of 1 1/2% of gross revenues as
 decreed in Article VIII of the Republic of the Philippines-
Canada Tax Treaty. Hence, no refund is forthcoming.
WHEREFORE, the Petition is DENIED. The Decision
dated August 26, 2005 and Resolution dated April 8, 2005 of
the Court of Tax Appeals En Banc are AFFIRMED.
SO ORDERED.
||| (Air Canada v. Commissioner of Internal Revenue, G.R. No.
169507, [January 11, 2016])