G.R. No. L-68118 October 29, 1985 dictum that the power to tax involves the power to destroy.
ower to tax involves the power to destroy. That
JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P.
OBILLOS and REMEDIOS P. OBILLOS, brothers and
sisters, petitioners
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX
APPEALS, respondents.
Demosthenes B. Gadioma for petitioners.
AQUINO, J.:
This case is about the income tax liability of four brothers and
sisters who sold two parcels of land which they had acquired from
their father.
On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas &
Co., Ltd. on two lots with areas of 1,124 and 963 square meters
located at Greenhills, San Juan, Rizal. The next day he transferred
his rights to his four children, the petitioners, to enable them to build
their residences. The company sold the two lots to petitioners for
P178,708.12 on March 13 (Exh. A and B, p. 44, Rollo). Presumably,
the Torrens titles issued to them would show that they were co-
owners of the two lots.
In 1974, or after having held the two lots for more than a year, the
petitioners resold them to the Walled City Securities Corporation
and Olga Cruz Canda for the total sum of P313,050 (Exh. C and D).
They derived from the sale a total profit of P134,341.88 or P33,584
for each of them. They treated the profit as a capital gain and paid
an income tax on one-half thereof or of P16,792.
In April, 1980, or one day before the expiration of the five-year
prescriptive period, the Commissioner of Internal Revenue required
the four petitioners to pay corporate income tax on the total profit of
P134,336 in addition to individual income tax on their shares thereof
He assessed P37,018 as corporate income tax, P18,509 as 50%
fraud surcharge and P15,547.56 as 42% accumulated interest, or a
total of P71,074.56.
Not only that. He considered the share of the profits of each
petitioner in the sum of P33,584 as a " taxable in full (not a mere
capital gain of which ½ is taxable) and required them to pay
deficiency income taxes aggregating P56,707.20 including the 50%
fraud surcharge and the accumulated interest.
Thus, the petitioners are being held liable for deficiency income
taxes and penalties totalling P127,781.76 on their profit of
P134,336, in addition to the tax on capital gains already paid by
them.
The Commissioner acted on the theory that the four petitioners had
formed an unregistered partnership or joint venture within the
meaning of sections 24(a) and 84(b) of the Tax Code (Collector of
Internal Revenue vs. Batangas Trans. Co., 102 Phil. 822).
The petitioners contested the assessments. Two Judges of the Tax
Court sustained the same. Judge Roaquin dissented. Hence, the
instant appeal.
We hold that it is error to consider the petitioners as having formed
a partnership under article 1767 of the Civil Code simply because
they allegedly contributed P178,708.12 to buy the two lots, resold
the same and divided the profit among themselves.
To regard the petitioners as having formed a taxable unregistered
partnership would result in oppressive taxation and confirm the
eventuality should be obviated.
As testified by Jose Obillos, Jr., they had no such intention. They
were co-owners pure and simple. To consider them as partners
would obliterate the distinction between a co-ownership and a
partnership. The petitioners were not engaged in any joint venture
by reason of that isolated transaction.
Their original purpose was to divide the lots for residential purposes.
If later on they found it not feasible to build their residences on the
lots because of the high cost of construction, then they had no
choice but to resell the same to dissolve the co-ownership. The
division of the profit was merely incidental to the dissolution of the
co-ownership which was in the nature of things a temporary state. It
had to be terminated sooner or later. Castan Tobeñas says:
Como establecer el deslinde entre la comunidad
ordinaria o copropiedad y la sociedad?
El criterio diferencial-segun la doctrina mas
generalizada-esta: por razon del origen, en que la
sociedad presupone necesariamente la
convencion, mentras que la comunidad puede
existir y existe ordinariamente sin ela; y por razon
del fin objecto, en que el objeto de la sociedad es
obtener lucro, mientras que el de la indivision es
solo mantener en su integridad la cosa comun y
favorecer su conservacion.
Reflejo de este criterio es la sentencia de 15 de
Octubre de 1940, en la que se dice que si en
nuestro Derecho positive se ofrecen a veces
dificultades al tratar de fijar la linea divisoria entre
comunidad de bienes y contrato de sociedad, la
moderna orientacion de la doctrina cientifica
señala como nota fundamental de diferenciacion
aparte del origen de fuente de que surgen, no
siempre uniforme, la finalidad perseguida por los
interesados: lucro comun partible en la sociedad,
y mera conservacion y aprovechamiento en la
comunidad. (Derecho Civil Espanol, Vol. 2, Part 1,
10 Ed., 1971, 328- 329).
Article 1769(3) of the Civil Code provides 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". There must be an
unmistakable intention to form a partnership or joint venture.*
Such intent was present in Gatchalian vs. Collector of Internal
Revenue, 67 Phil. 666, where 15 persons contributed small
amounts to purchase a two-peso sweepstakes ticket with the
agreement that they would divide the prize The ticket won the third
prize of P50,000. The 15 persons were held liable for income tax as
an unregistered partnership.
The instant case is distinguishable from the cases where the parties
engaged in joint ventures for profit. Thus, in Oña vs.
** This view is supported by the following rulings of respondent
Commissioner:
Co-owership distinguished from partnership.—We
find that the case at bar is fundamentally similar to
the De Leon case. Thus, like the De Leon heirs,
the Longa heirs inherited the 'hacienda' in
questionpro-indiviso from their deceased parents;
they did not contribute or invest additional ' capital
 to increase or expand the inherited properties;
they merely continued dedicating the property to
the use to which it had been put by their
forebears; they individually reported in their tax
returns their corresponding shares in the income
and expenses of the 'hacienda', and they
continued for many years the status of co-
ownership in order, as conceded by respondent,
'to preserve its (the 'hacienda') value and to
continue the existing contractual relations with the
Central Azucarera de Bais for milling purposes.
Longa vs. Aranas, CTA Case No. 653, July 31,
1963).
All co-ownerships are not deemed unregistered
pratnership.—Co-Ownership who own properties
which produce income should not automatically
be considered partners of an unregistered
partnership, or a corporation, within the purview of
the income tax law. To hold otherwise, would be
to subject the income of all
co-ownerships of inherited properties to the tax on
corporations, inasmuch as if a property does not
produce an income at all, it is not subject to any
kind of income tax, whether the income tax on
individuals or the income tax on corporation. (De
Leon vs. CI R, CTA Case No. 738, September 11,
1961, cited in Arañas, 1977 Tax Code Annotated,
Vol. 1, 1979 Ed., pp. 77-78).
Commissioner of Internal Revenue, L-19342, May 25, 1972, 45
SCRA 74, where after an extrajudicial settlement the co-heirs used
the inheritance or the incomes derived therefrom as a common fund
to produce profits for themselves, it was held that they were taxable
as an unregistered partnership.
It is likewise different from Reyes vs. Commissioner of Internal
Revenue, 24 SCRA 198, where father and son purchased a lot and
building, entrusted the administration of the building to an
administrator and divided equally the net income, and from
Evangelista vs. Collector of Internal Revenue, 102 Phil. 140, where
the three Evangelista sisters bought four pieces of real property
which they leased to various tenants and derived rentals therefrom.
Clearly, the petitioners in these two cases had formed an
unregistered partnership.
In the instant case, what the Commissioner should have
investigated was whether the father donated the two lots to the
petitioners and whether he paid the donor's tax (See Art. 1448, Civil
Code). We are not prejudging this matter. It might have already
prescribed.
WHEREFORE, the judgment of the Tax Court is reversed and set
aside. The assessments are cancelled. No costs.
SO ORDERED.
G.R. No. 148187 April 16, 2008
PHILEX MINING CORPORATION, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
YNARES-SANTIAGO, J.:
This is a petition for review on certiorari of the June 30, 2000
Decision1 of the Court of Appeals in CA-G.R. SP No. 49385, which
affirmed the Decision2 of the Court of Tax Appeals in C.T.A. Case
No. 5200. Also assailed is the April 3, 2001 Resolution3 denying the
motion for reconsideration.
The facts of the case are as follows:
On April 16, 1971, petitioner Philex Mining Corporation (Philex
Mining), entered into an agreement4 with Baguio Gold Mining
Company ("Baguio Gold") for the former to manage and operate the
latter’s mining claim, known as the Sto. Nino 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.
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.
(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.
xxxx
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.
xxxx
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.
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.
x x x x5
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.
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.
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.
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.
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 x x x 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.
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, 13petitioner 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.
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.
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.
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. x x x 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. x x x
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. x x x 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. x x x 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. x x x (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.
Under the "Power of Attorney", petitioner and Baguio Gold
undertook to contribute money, property and industry to the
common fund known as the Sto. Niño 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. Niño project "(w)henever the
MANAGERS shall deem it necessary and convenient in connection
with the MANAGEMENT of the STO. NIÑO 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.
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 the agent 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.
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.
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. 22As
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. Niño 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.
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. Nino 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.
The strongest indication that petitioner was a partner in the Sto Niño
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 is prima
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 Niño 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.
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. Nino 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. Nino 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.
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.
G.R. No. L-21906 December 24, 1968
INOCENCIA DELUAO and FELIPE DELUAO plaintiffs-appellees,
vs.
NICANOR CASTEEL and JUAN DEPRA, defendants,
NICANOR CASTEEL, defendant-appellant.
Aportadera and Palabrica and Pelaez, Jalandoni and Jamir
plaintiffs-appellees.
Ruiz Law Offices for defendant-appellant.
CASTRO, J.:
This is an appeal from the order of May 2, 1956, the decision of May
4, 1956 and the order of May 21, 1956, all of the Court of First
Instance of Davao, in civil case 629. The basic action is for specific
performance, and damages resulting from an alleged breach of
contract.
In 1940 Nicanor Casteel filed a fishpond application for a big tract of
swampy land in the then Sitio of Malalag (now the Municipality of
Malalag), Municipality of Padada, Davao. No action was taken
thereon by the authorities concerned. During the Japanese
occupation, he filed another fishpond application for the same area,
but because of the conditions then prevailing, it was not acted upon
either. On December 12, 1945 he filed a third fishpond application
for the same area, which, after a survey, was found to contain
178.76 hectares. Upon investigation conducted by a representative
of the Bureau of Forestry, it was discovered that the area applied for
was still needed for firewood production. Hence on May 13, 1946
this third application was disapproved.
Despite the said rejection, Casteel did not lose interest. He filed a
motion for reconsideration. While this motion was pending
resolution, he was advised by the district forester of Davao City that
no further action would be taken on his motion, unless he filed a
new application for the area concerned. So he filed on May 27, 1947
his fishpond application 1717.
Meanwhile, several applications were submitted by other persons
for portions of the area covered by Casteel's application.
On May 20, 1946 Leoncio Aradillos filed his fishpond application
1202 covering 10 hectares of land found inside the area applied for
by Casteel; he was later granted fishpond permit F-289-C covering
9.3 hectares certified as available for fishpond purposes by the
Bureau of Forestry.
Victor D. Carpio filed on August 8, 1946 his fishpond application 762
over a portion of the land applied for by Casteel. Alejandro Cacam's
fishpond application 1276, filed on December 26, 1946, was given
due course on December 9, 1947 with the issuance to him of
fishpond permit F-539-C to develop 30 hectares of land comprising
a portion of the area applied for by Casteel, upon certification of the
Bureau of Forestry that the area was likewise available for fishpond
purposes. On November 17, 1948 Felipe Deluao filed his own
fishpond application for the area covered by Casteel's application.
Because of the threat poised upon his position by the above
applicants who entered upon and spread themselves within the
area, Casteel realized the urgent necessity of expanding his
occupation thereof by constructing dikes and cultivating marketable
fishes, in order to prevent old and new squatters from usurping the
land. But lacking financial resources at that time, he sought financial
aid from his uncle Felipe Deluao who then extended loans totalling
more or less P27,000 with which to finance the needed
improvements on the fishpond. Hence, a wide productive fishpond
was built.
Moreover, upon learning that portions of the area applied for by him
were already occupied by rival applicants, Casteel immediately filed
the corresponding protests. Consequently, two administrative cases
ensued involving the area in question, to wit: DANR Case 353,
entitled "Fp. Ap. No. 661 (now Fp. A. No. 1717), Nicanor Casteel,
applicant-appellant versus Fp. A. No. 763, Victorio D. Carpio,
applicant-appellant"; and DANR Case 353-B, entitled "Fp. A. No.
661 (now Fp. A. No. 1717), Nicanor Casteel, applicant-protestant
versus Fp. Permit No. 289-C, Leoncio Aradillos, Fp. Permit No. 539-
C, Alejandro Cacam, Permittees-Respondents."
However, despite the finding made in the investigation of the above
administrative cases that Casteel had already introduced
improvements on portions of the area applied for by him in the form
of dikes, fishpond gates, clearings, etc., the Director of Fisheries
nevertheless rejected Casteel's application on October 25, 1949,
required him to remove all the improvements which he had
introduced on the land, and ordered that the land be leased through
public auction. Failing to secure a favorable resolution of his motion
for reconsideration of the Director's order, Casteel appealed to the
Secretary of Agriculture and Natural Resources.
In the interregnum, some more incidents occurred. To avoid
repetition, they will be taken up in our discussion of the appellant's
third assignment of error.
On November 25, 1949 Inocencia Deluao (wife of Felipe Deluao) as
party of the first part, and Nicanor Casteel as party of the second
part, executed a contract — denominated a "contract of service" —
the salient provisions of which are as follows:
That the Party of the First Part in consideration of the
mutual covenants and agreements made herein to the
Party of the Second Part, hereby enter into a contract of
service, whereby the Party of the First Part hires and
employs the Party of the Second Part on the following
terms and conditions, to wit:
That the Party of the First Part will finance as she has
hereby financed the sum of TWENTY SEVEN THOUSAND
PESOS (P27,000.00), Philippine Currency, to the Party of
the Second Part who renders only his services for the
construction and improvements of a fishpond at Barrio
Malalag, Municipality of Padada, Province of Davao,
Philippines;
That the Party of the Second Part will be the Manager and
sole buyer of all the produce of the fish that will be
produced from said fishpond;
That the Party of the First Part will be the administrator of
the same she having financed the construction and
improvement of said fishpond;
That this contract was the result of a verbal agreement
entered into between the Parties sometime in the month of
November, 1947, with all the above-mentioned conditions
enumerated; ...
On the same date the above contract was entered into, Inocencia
Deluao executed a special power of attorney in favor of Jesus
Donesa, extending to the latter the authority "To represent me in the
administration of the fishpond at Malalag, Municipality of Padada,
Province of Davao, Philippines, which has been applied for fishpond
permit by Nicanor Casteel, but rejected by the Bureau of Fisheries,
and to supervise, demand, receive, and collect the value of the fish
that is being periodically realized from it...."
On November 29, 1949 the Director of Fisheries rejected the
application filed by Felipe Deluao on November 17, 1948. Unfazed
by this rejection, Deluao reiterated his claim over the same area in
the two administrative cases (DANR Cases 353 and 353-B) and
asked for reinvestigation of the application of Nicanor Casteel over
the subject fishpond. However, by letter dated March 15, 1950 sent
to the Secretary of Commerce and Agriculture and Natural
Resources (now Secretary of Agriculture and Natural Resources),
Deluao withdrew his petition for reinvestigation.
On September 15, 1950 the Secretary of Agriculture and Natural
Resources issued a decision in DANR Case 353, the dispositive
portion of which reads as follows:
In view of all the foregoing considerations, Fp. A. No. 661
(now Fp. A. No. 1717) of Nicanor Casteel should be, as
hereby it is, reinstated and given due course for the area
indicated in the sketch drawn at the back of the last page
hereof; and Fp. A. No. 762 of Victorio D. Carpio shall
remain rejected.
On the same date, the same official issued a decision in DANR
Case 353-B, the dispositive portion stating as follows:
WHEREFORE, Fishpond Permit No. F-289-C of Leoncio
Aradillos and Fishpond Permit No. F-539-C of Alejandro
Cacam, should be, as they are hereby cancelled and
revoked; Nicanor Casteel is required to pay the
improvements introduced thereon by said permittees in
accordance with the terms and dispositions contained
elsewhere in this decision....
Sometime in January 1951 Nicanor Casteel forbade Inocencia
Deluao from further administering the fishpond, and ejected the
latter's representative (encargado), Jesus Donesa, from the
premises.
Alleging violation of the contract of service (exhibit A) entered into
between Inocencia Deluao and Nicanor Casteel, Felipe Deluao and
Inocencia Deluao on April 3, 1951 filed an action in the Court of First
Instance of Davao for specific performance and damages against
Nicanor Casteel and Juan Depra (who, they alleged, instigated
Casteel to violate his contract), praying inter alia, (a) that Casteel be
ordered to respect and abide by the terms and conditions of said
contract and that Inocencia Deluao be allowed to continue
administering the said fishpond and collecting the proceeds from the
sale of the fishes caught from time to time; and (b) that the
defendants be ordered to pay jointly and severally to plaintiffs the
sum of P20,000 in damages.
On April 18, 1951 the plaintiffs filed an ex parte motion for the
issuance of a preliminary injunction, praying among other things,
that during the pendency of the case and upon their filling the
requisite bond as may be fixed by the court, a preliminary injunction
be issued to restrain Casteel from doing the acts complained of, and
that after trial the said injunction be made permanent. The lower
court on April 26, 1951 granted the motion, and, two days later, it
issued a preliminary mandatory injunction addressed to Casteel, the
dispositive portion of which reads as follows:
POR EL PRESENTE, queda usted ordenado que, hasta
nueva orden, usted, el demandado y todos usu abogados,
agentes, mandatarios y demas personas que obren en su
ayuda, desista de impedir a la demandante Inocencia R.
Deluao que continue administrando personalmente la
pesqueria objeto de esta causa y que la misma continue
recibiendo los productos de la venta de los pescados
provenientes de dicha pesqueria, y que, asimismo, se
prohibe a dicho demandado Nicanor Casteel a desahuciar
mediante fuerza al encargado de los demandantes
 llamado Jesus Donesa de la pesqueria objeto de la
demanda de autos.
On May 10, 1951 Casteel filed a motion to dissolve the injunction,
alleging among others, that he was the owner, lawful applicant and
occupant of the fishpond in question. This motion, opposed by the
plaintiffs on June 15, 1951, was denied by the lower court in its
order of June 26, 1961.
The defendants on May 14, 1951 filed their answer with
counterclaim, amended on January 8, 1952, denying the material
averments of the plaintiffs' complaint. A reply to the defendants'
amended answer was filed by the plaintiffs on January 31, 1952.
The defendant Juan Depra moved on May 22, 1951 to dismiss the
complaint as to him. On June 4, 1951 the plaintiffs opposed his
motion.
The defendants filed on October 3, 1951 a joint motion to dismiss on
the ground that the plaintiffs' complaint failed to state a claim upon
which relief may be granted. The motion, opposed by the plaintiffs
on October 12, 1951, was denied for lack of merit by the lower court
in its order of October 22, 1951. The defendants' motion for
reconsideration filed on October 31, 1951 suffered the same fate
when it was likewise denied by the lower court in its order of
November 12, 1951.
After the issues were joined, the case was set for trial. Then came a
series of postponements. The lower court (Branch I, presided by
Judge Enrique A. Fernandez) finally issued on March 21, 1956 an
order in open court, reading as follows: .
Upon petition of plaintiffs, without any objection on the part
of defendants, the hearing of this case is hereby
transferred to May 2 and 3, 1956 at 8:30 o'clock in the
morning.
This case was filed on April 3, 1951 and under any
circumstance this Court will not entertain any other transfer
of hearing of this case and if the parties will not be ready
on that day set for hearing, the court will take the
necessary steps for the final determination of this case.
(emphasis supplied)
On April 25, 1956 the defendants' counsel received a notice of
hearing dated April 21, 1956, issued by the office of the Clerk of
Court (thru the special deputy Clerk of Court) of the Court of First
Instance of Davao, setting the hearing of the case for May 2 and 3,
1956 before Judge Amador Gomez of Branch II. The defendants,
thru counsel, on April 26, 1956 filed a motion for postponement.
Acting on this motion, the lower court (Branch II, presided by Judge
Gomez) issued an order dated April 27, 1956, quoted as follows:
This is a motion for postponement of the hearing of this
case set for May 2 and 3, 1956. The motion is filed by the
counsel for the defendants and has the conformity of the
counsel for the plaintiffs.
An examination of the records of this case shows that this
case was initiated as early as April 1951 and that the same
has been under advisement of the Honorable Enrique A.
Fernandez, Presiding Judge of Branch No. I, since
September 24, 1953, and that various incidents have
already been considered and resolved by Judge
Fernandez on various occasions. The last order issued by
Judge Fernandez on this case was issued on March 21,
1956, wherein he definitely states that the Court will not
entertain any further postponement of the hearing of this
case.
CONSIDERING ALL THE FOREGOING, the Court
believes that the consideration and termination of any
incident referring to this case should be referred back to
Branch I, so that the same may be disposed of therein.
(emphasis supplied)
A copy of the abovequoted order was served on the defendants'
counsel on May 4, 1956.
On the scheduled date of hearing, that is, on May 2, 1956, the lower
court (Branch I, with Judge Fernandez presiding), when informed
about the defendants' motion for postponement filed on April 26,
1956, issued an order reiterating its previous order handed down in
open court on March 21, 1956 and directing the plaintiffs to
introduce their evidence ex parte, there being no appearance on the
part of the defendants or their counsel. On the basis of the plaintiffs'
evidence, a decision was rendered on May 4, 1956 the dispositive
portion of which reads as follows:
EN SU VIRTUD, el Juzgado dicta de decision a favor de
los demandantes y en contra del demandado Nicanor
Casteel:
(a) Declara permanente el interdicto prohibitorio expedido
contra el demandado;
(b) Ordena al demandado entregue la demandante la
posesion y administracion de la mitad (½) del "fishpond" en
cuestion con todas las mejoras existentes dentro de la
misma;
(c) Condena al demandado a pagar a la demandante la
suma de P200.00 mensualmente en concepto de danos a
contar de la fecha de la expiracion de los 30 dias de la
promulgacion de esta decision hasta que entregue la
posesion y administracion de la porcion del "fishpond" en
conflicto;
(d) Condena al demandado a pagar a la demandante la
suma de P2,000.00 valor de los pescado beneficiados,
mas los intereses legales de la fecha de la incoacion de la
demanda de autos hasta el completo pago de la obligacion
principal;
(e) Condena al demandado a pagar a la demandante la
suma de P2,000.00, por gastos incurridos por aquella
durante la pendencia de esta causa;
(f) Condena al demandado a pagar a la demandante, en
concepto de honorarios, la suma de P2,000.00;
(g) Ordena el sobreseimiento de esta demanda, por
insuficiencia de pruebas, en tanto en cuanto se refiere al
demandado Juan Depra;
(h) Ordena el sobreseimiento de la reconvencion de los
demandados por falta de pruebas;
(i) Con las costas contra del demandado, Casteel.
The defendant Casteel filed a petition for relief from the foregoing
decision, alleging, inter alia, lack of knowledge of the order of the
court a quo setting the case for trial. The petition, however, was
denied by the lower court in its order of May 21, 1956, the pertinent
portion of which reads as follows:
The duty of Atty. Ruiz, was not to inquire from the Clerk of
Court whether the trial of this case has been transferred or
 not, but to inquire from the presiding Judge, particularly
because his motion asking the transfer of this case was not
set for hearing and was not also acted upon.
Atty. Ruiz knows the nature of the order of this Court dated
March 21, 1956, which reads as follows:
Upon petition of the plaintiff without any objection
on the part of the defendants, the hearing of this
case is hereby transferred to May 2 and 3, 1956,
at 8:30 o'clock in the morning.
This case was filed on April 3, 1951, and under
any circumstance this Court will not entertain any
other transfer of the hearing of this case, and if
the parties will not be ready on the day set for
hearing, the Court will take necessary steps for
the final disposition of this case.
In view of the order above-quoted, the Court will not
accede to any transfer of this case and the duty of Atty.
Ruiz is no other than to be present in the Sala of this Court
and to call the attention of the same to the existence of his
motion for transfer.
Petition for relief from judgment filed by Atty. Ruiz in behalf
of the defendant, not well taken, the same is hereby
denied.
Dissatisfied with the said ruling, Casteel appealed to the Court of
Appeals which certified the case to us for final determination on the
ground that it involves only questions of law.
Casteel raises the following issues:
(1) Whether the lower court committed gross abuse of
discretion when it ordered reception of the appellees'
evidence in the absence of the appellant at the trial on May
2, 1956, thus depriving the appellant of his day in court and
of his property without due process of law;
(2) Whether the lower court committed grave abuse of
discretion when it denied the verified petition for relief from
judgment filed by the appellant on May 11, 1956 in
accordance with Rule 38, Rules of Court; and
(3) Whether the lower court erred in ordering the issuance
ex parte of a writ of preliminary injunction against
defendant-appellant, and in not dismissing appellees'
complaint.
1. The first and second issues must be resolved against the
appellant.
The record indisputably shows that in the order given in open court
on March 21, 1956, the lower court set the case for hearing on May
2 and 3, 1956 at 8:30 o'clock in the morning and empathically stated
that, since the case had been pending since April 3, 1951, it would
not entertain any further motion for transfer of the scheduled
hearing.
An order given in open court is presumed received by the parties on
the very date and time of promulgation,1 and amounts to a legal
notification for all legal purposes.2 The order of March 21, 1956,
given in open court, was a valid notice to the parties, and the notice
of hearing dated April 21, 1956 or one month thereafter, was a
superfluity. Moreover, as between the order of March 21, 1956, duly
promulgated by the lower court, thru Judge Fernandez, and the
notice of hearing signed by a "special deputy clerk of court" setting
the hearing in another branch of the same court, the former's order
was the one legally binding. This is because the incidents of
postponements and adjournments are controlled by the court and
not by the clerk of court, pursuant to section 4, Rule 31 (now sec. 3,
Rule 22) of the Rules of Court.
Much less had the clerk of court the authority to interfere with the
order of the court or to transfer the cage from one sala to another
without authority or order from the court where the case originated
and was being tried. He had neither the duty nor prerogative to re-
assign the trial of the case to a different branch of the same court.
His duty as such clerk of court, in so far as the incident in question
was concerned, was simply to prepare the trial calendar. And this
duty devolved upon the clerk of court and not upon the "special
deputy clerk of court" who purportedly signed the notice of hearing.
It is of no moment that the motion for postponement had the
conformity of the appellees' counsel. The postponement of hearings
does not depend upon agreement of the parties, but upon the
court's discretion.3
The record further discloses that Casteel was represented by a total
of 12 lawyers, none of whom had ever withdrawn as counsel. Notice
to Atty. Ruiz of the order dated March 21, 1956 intransferably
setting the case for hearing for May 2 and 3, 1956, was sufficient
notice to all the appellant's eleven other counsel of record. This is a
well-settled rule in our jurisdiction.4
It was the duty of Atty. Ruiz, or of the other lawyers of record, not
excluding the appellant himself, to appear before Judge Fernandez
on the scheduled dates of hearing Parties and their lawyers have no
right to presume that their motions for postponement will be
granted.5 For indeed, the appellant and his 12 lawyers cannot
pretend ignorance of the recorded fact that since September 24,
1953 until the trial held on May 2, 1956, the case was under the
advisement of Judge Fernandez who presided over Branch I. There
was, therefore, no necessity to "re-assign" the same to Branch II
because Judge Fernandez had exclusive control of said case,
unless he was legally inhibited to try the case — and he was not.
There is truth in the appellant's contention that it is the duty of the
clerk of court — not of the Court — to prepare the trial calendar. But
the assignment or reassignment of cases already pending in one
sala to another sala, and the setting of the date of trial after the trial
calendar has been prepared, fall within the exclusive control of the
presiding judge.
The appellant does not deny the appellees' claim that on May 2 and
3, 1956, the office of the clerk of court of the Court of First Instance
of Davao was located directly below Branch I. If the appellant and
his counsel had exercised due diligence, there was no impediment
to their going upstairs to the second storey of the Court of First
Instance building in Davao on May 2, 1956 and checking if the case
was scheduled for hearing in the said sala. The appellant after all
admits that on May 2, 1956 his counsel went to the office of the
clerk of court.
The appellant's statement that parties as a matter of right are
entitled to notice of trial, is correct. But he was properly accorded
this right. He was notified in open court on March 21, 1956 that the
case was definitely and intransferably set for hearing on May 2 and
3, 1956 before Branch I. He cannot argue that, pursuant to the
doctrine in Siochi vs. Tirona,6 his counsel was entitled to a timely
notice of the denial of his motion for postponement. In the cited case
the motion for postponement was the first one filed by the
defendant; in the case at bar, there had already been a series of
postponements. Unlike the case at bar, the Siochi case was not
intransferably set for hearing. Finally, whereas the cited case did not
spend for a long time, the case at bar was only finally and
intransferably set for hearing on March 21, 1956 — after almost five
years had elapsed from the filing of the complaint on April 3, 1951.
The pretension of the appellant and his 12 counsel of record that
they lacked ample time to prepare for trial is unacceptable because
between March 21, 1956 and May 2, 1956, they had one month and
ten days to do so. In effect, the appellant had waived his right to
appear at the trial and therefore he cannot be heard to complain that
he has been deprived of his property without due process of
law.7 Verily, the constitutional requirements of due process have
been fulfilled in this case: the lower court is a competent court; it
lawfully acquired jurisdiction over the person of the defendant
(appellant) and the subject matter of the action; the defendant
(appellant) was given an opportunity to be heard; and judgment was
rendered upon lawful hearing.8
2. Finally, the appellant contends that the lower court incurred an
error in ordering the issuance ex parte of a writ of preliminary
injunction against him, and in not dismissing the appellee's
complaint. We find this contention meritorious.
Apparently, the court a quo relied on exhibit A — the so-called
"contract of service" — and the appellees' contention that it created
a contract of co-ownership and partnership between Inocencia
Deluao and the appellant over the fishpond in question.
Too well-settled to require any citation of authority is the rule that
everyone is conclusively presumed to know the law. It must be
assumed, conformably to such rule, that the parties entered into the
so-called "contract of service" cognizant of the mandatory and
prohibitory laws governing the filing of applications for fishpond
permits. And since they were aware of the said laws, it must
likewise be assumed — in fairness to the parties — that they did not
intend to violate them. This view must perforce negate the
appellees' allegation that exhibit A created a contract of co-
ownership between the parties over the disputed fishpond. Were we
to admit the establishment of a co-ownership violative of the
prohibitory laws which will hereafter be discussed, we shall be
compelled to declare altogether the nullity of the contract. This
would certainly not serve the cause of equity and justice,
considering that rights and obligations have already arisen between
the parties. We shall therefore construe the contract as one of
partnership, divided into two parts — namely, a contract of
partnership to exploit the fishpond pending its award to either Felipe
Deluao or Nicanor Casteel, and a contract of partnership to divide
the fishpond between them after such award. The first is valid, the
second illegal.
It is well to note that when the appellee Inocencia Deluao and the
appellant entered into the so-called "contract of service" on
November 25, 1949, there were two pending applications over the
fishpond. One was Casteel's which was appealed by him to the
Secretary of Agriculture and Natural Resources after it was
disallowed by the Director of Fisheries on October 25, 1949. The
other was Felipe Deluao's application over the same area which
was likewise rejected by the Director of Fisheries on November 29,
1949, refiled by Deluao and later on withdrawn by him by letter
dated March 15, 1950 to the Secretary of Agriculture and Natural
Resources. Clearly, although the fishpond was then in the
possession of Casteel, neither he nor, Felipe Deluao was the holder
of a fishpond permit over the area. But be that as it may, they were
not however precluded from exploiting the fishpond pending
resolution of Casteel's appeal or the approval of Deluao's
application over the same area — whichever event happened first.
No law, rule or regulation prohibited them from doing so. Thus,
rather than let the fishpond remain idle they cultivated it.
The evidence preponderates in favor of the view that the initial
intention of the parties was not to form a co-ownership but to
establish a partnership — Inocencia Deluao as capitalist partner and
Casteel as industrial partner — the ultimate undertaking of which
was to divide into two equal parts such portion of the fishpond as
might have been developed by the amount extended by the
plaintiffs-appellees, with the further provision that Casteel should
reimburse the expenses incurred by the appellees over one-half of
the fishpond that would pertain to him. This can be gleaned, among
others, from the letter of Casteel to Felipe Deluao on November 15,
1949, which states, inter alia:
... [W]ith respect to your allowing me to use your money,
same will redound to your benefit because you are the
ones interested in half of the work we have done so far,
besides I did not insist on our being partners in my
fishpond permit, but it was you "Tatay" Eping the one who
wanted that we be partners and it so happened that we
became partners because I am poor, but in the midst of my
poverty it never occurred to me to be unfair to you.
Therefore so that each of us may be secured, let us have a
document prepared to the effect that we are partners in the
fishpond that we caused to be made here in Balasinon, but
it does not mean that you will treat me as one of your
"Bantay" (caretaker) on wage basis but not earning wages
at all, while the truth is that we are partners. In the event
that you are not amenable to my proposition and consider
me as "Bantay" (caretaker) instead, do not blame me if I
withdraw all my cases and be left without even a little and
you likewise.
(emphasis supplied)9
Pursuant to the foregoing suggestion of the appellant that a
document be drawn evidencing their partnership, the appellee
Inocencia Deluao and the appellant executed exhibit A which,
although denominated a "contract of service," was actually the
memorandum of their partnership agreement. That it was not a
contract of the services of the appellant, was admitted by the
appellees themselves in their letter10 to Casteel dated December
19, 1949 wherein they stated that they did not employ him in his
(Casteel's) claim but because he used their money in developing
and improving the fishpond, his right must be divided between them.
Of course, although exhibit A did not specify any wage or share
appertaining to the appellant as industrial partner, he was so entitled
— this being one of the conditions he specified for the execution of
the document of partnership.11
Further exchanges of letters between the parties reveal the
continuing intent to divide the fishpond. In a letter,12dated March 24,
1950, the appellant suggested that they divide the fishpond and the
remaining capital, and offered to pay the Deluaos a yearly
installment of P3,000 — presumably as reimbursement for the
expenses of the appellees for the development and improvement of
the one-half that would pertain to the appellant. Two days later, the
appellee Felipe Deluao replied,13expressing his concurrence in the
appellant's suggestion and advising the latter to ask for a
reconsideration of the order of the Director of Fisheries disapproving
his (appellant's) application, so that if a favorable decision was
secured, then they would divide the area.
Apparently relying on the partnership agreement, the appellee
Felipe Deluao saw no further need to maintain his petition for the
reinvestigation of Casteel's application. Thus by letter14 dated March
15, 1950 addressed to the Secretary of Agriculture and Natural
Resources, he withdrew his petition on the alleged ground that he
was no longer interested in the area, but stated however that he
wanted his interest to be protected and his capital to be reimbursed
by the highest bidder.
The arrangement under the so-called "contract of service" continued
until the decisions both dated September 15, 1950 were issued by
the Secretary of Agriculture and Natural Resources in DANR Cases
353 and 353-B. This development, by itself, brought about the
dissolution of the partnership. Moreover, subsequent events
likewise reveal the intent of both parties to terminate the partnership
because each refused to share the fishpond with the other.
Art. 1830(3) of the Civil Code enumerates, as one of the causes for
the dissolution of a partnership, "... any event which makes it
unlawful for the business of the partnership to be carried on or for
the members to carry it on in partnership." The approval of the
appellant's fishpond application by the decisions in DANR Cases
353 and 353-B brought to the fore several provisions of law which
made the continuation of the partnership unlawful and therefore
caused its ipso facto dissolution.
Act 4003, known as the Fisheries Act, prohibits the holder of a
fishpond permit (the permittee) from transferring or subletting the
fishpond granted to him, without the previous consent or approval of
the Secretary of Agriculture and Natural Resources.15 To the same
effect is Condition No. 3 of the fishpond permit which states that
"The permittee shall not transfer or sublet all or any area herein
granted or any rights acquired therein without the previous consent
and approval of this Office." Parenthetically, we must observe that in
DANR Case 353-B, the permit granted to one of the parties therein,
Leoncio Aradillos, was cancelled not solely for the reason that his
permit covered a portion of the area included in the appellant's prior
fishpond application, but also because, upon investigation, it was
ascertained thru the admission of Aradillos himself that due to lack
of capital, he allowed one Lino Estepa to develop with the latter's
capital the area covered by his fishpond permit F-289-C with the
understanding that he (Aradillos) would be given a share in the
produce thereof.16
Sec. 40 of Commonwealth Act 141, otherwise known as the Public
Land Act, likewise provides that
The lessee shall not assign, encumber, or sublet his rights
without the consent of the Secretary of Agriculture and
Commerce, and the violation of this condition shall avoid
the contract; Provided, That assignment, encumbrance, or
subletting for purposes of speculation shall not be
permitted in any case:Provided, further, That nothing
contained in this section shall be understood or construed
to permit the assignment, encumbrance, or subletting of
lands leased under this Act, or under any previous Act, to
persons, corporations, or associations which under this
Act, are not authorized to lease public lands.
Finally, section 37 of Administrative Order No. 14 of the Secretary of
Agriculture and Natural Resources issued in August 1937, prohibits
a transfer or sublease unless first approved by the Director of Lands
and under such terms and conditions as he may prescribe. Thus, it
states:
When a transfer or sub-lease of area and improvement
may be allowed. — If the permittee or lessee had, unless
otherwise specifically provided, held the permit or lease
and actually operated and made improvements on the area
for at least one year, he/she may request permission to
sub-lease or transfer the area and improvements under
certain conditions.
(a) Transfer subject to approval. — A sub-lease or transfer
shall only be valid when first approved by the Director
under such terms and conditions as may be prescribed,
otherwise it shall be null and void. A transfer not previously
approved or reported shall be considered sufficient cause
for the cancellation of the permit or lease and forfeiture of
the bond and for granting the area to a qualified applicant
or bidder, as provided in subsection (r) of Sec. 33 of this
Order.
Since the partnership had for its object the division into two equal
parts of the fishpond between the appellees and the appellant after
it shall have been awarded to the latter, and therefore it envisaged
the unauthorized transfer of one-half thereof to parties other than
the applicant Casteel, it was dissolved by the approval of his
application and the award to him of the fishpond. The approval was
an event which made it unlawful for the business of the partnership
to be carried on or for the members to carry it on in partnership.
The appellees, however, argue that in approving the appellant's
application, the Secretary of Agriculture and Natural Resources
likewise recognized and/or confirmed their property right to one-half
of the fishpond by virtue of the contract of service, exhibit A. But the
untenability of this argument would readily surface if one were to
consider that the Secretary of Agriculture and Natural Resources did
not do so for the simple reason that he does not possess the
authority to violate the aforementioned prohibitory laws nor to
exempt anyone from their operation.
However, assuming in gratia argumenti that the approval of
Casteel's application, coupled with the foregoing prohibitory laws,
was not enough to cause the dissolution ipso facto of their
partnership, succeeding events reveal the intent of both parties to
terminate the partnership by refusing to share the fishpond with the
other.
On December 27, 1950 Casteel wrote17 the appellee Inocencia
Deluao, expressing his desire to divide the fishpond so that he could
administer his own share, such division to be subject to the approval
of the Secretary of Agriculture and Natural Resources. By letter
dated December 29, 1950,18 the appellee Felipe Deluao demurred
to Casteel's proposition because there were allegedly no
appropriate grounds to support the same and, moreover, the conflict
over the fishpond had not been finally resolved.
The appellant wrote on January 4, 1951 a last letter19 to the
appellee Felipe Deluao wherein the former expressed his
determination to administer the fishpond himself because the
decision of the Government was in his favor and the only reason
why administration had been granted to the Deluaos was because
he was indebted to them. In the same letter, the appellant forbade
Felipe Deluao from sending the couple's encargado, Jesus Donesa,
to the fishpond. In reply thereto, Felipe Deluao wrote a letter20 dated
January 5, 1951 in which he reiterated his refusal to grant the
administration of the fishpond to the appellant, stating as a ground
his belief "that only the competent agencies of the government are
in a better position to render any equitable arrangement relative to
the present case; hence, any action we may privately take may not
meet the procedure of legal order."
Inasmuch as the erstwhile partners articulated in the aforecited
letters their respective resolutions not to share the fishpond with
each other — in direct violation of the undertaking for which they
have established their partnership — each must be deemed to have
expressly withdrawn from the partnership, thereby causing its
dissolution pursuant to art. 1830(2) of the Civil Code which
provides, inter alia, that dissolution is caused "by the express will of
any partner at any time."
In this jurisdiction, the Secretary of Agriculture and Natural
Resources possesses executive and administrative powers with
regard to the survey, classification, lease, sale or any other form of
concession or disposition and management of the lands of the
public domain, and, more specifically, with regard to the grant or
withholding of licenses, permits, leases and contracts over portions
of the public domain to be utilized as fishponds.21, Thus, we held
in Pajo, et al. vs. Ago, et al. (L-15414, June 30, 1960), and
reiterated in Ganitano vs. Secretary of Agriculture and Natural
Resources, et al.
(L-21167, March 31, 1966), that
 ... [T]he powers granted to the Secretary of Agriculture and
Commerce (Natural Resources) by law regarding the
disposition of public lands such as granting of licenses,
permits, leases, and contracts, or approving, rejecting,
reinstating, or cancelling applications, or deciding
conflicting applications, are all executive and administrative
in nature. It is a well-recognized principle that purely
administrative and discretionary functions may not be
interfered with by the courts (Coloso v. Board of
Accountancy, G.R. No. L-5750, April 20, 1953). In general,
courts have no supervising power over the proceedings
and action of the administrative departments of the
government. This is generally true with respect to acts
involving the exercise of judgment or discretion, and
findings of fact. (54 Am. Jur. 558-559) Findings of fact by
an administrative board or official, following a hearing, are
binding upon the courts and will not be disturbed except
where the board or official has gone beyond his statutory
authority, exercised unconstitutional powers or clearly
acted arbitrarily and without regard to his duty or with grave
abuse of discretion... (emphasis supplied)
event that the appellee Deluao has received more than her lawful
credit of P27,000 (or whatever amounts have been advanced to
Casteel), plus 6% interest thereon per annum, then she should
reimburse the excess to the appellant.
ACCORDINGLY, the judgment of the lower court is set aside.
Another judgment is hereby rendered: (1) dissolving the injunction
issued against the appellant, (2) placing the latter back in
possession of the fishpond in litigation, and (3) remanding this case
to the court of origin for the reception of evidence relative to the
accounting that the parties must perforce render in the premises, at
the termination of which the court shall render judgment accordingly.
The appellant's counterclaim is dismissed. No pronouncement as to
costs.

In the case at bar, the Secretary of Agriculture and Natural

Resources gave due course to the appellant's fishpond application
1717 and awarded to him the possession of the area in question. In
view of the finality of the Secretary's decision in DANR Cases 353
and 353-B, and considering the absence of any proof that the said
official exceeded his statutory authority, exercised unconstitutional
powers, or acted with arbitrariness and in disregard of his duty, or
with grave abuse of discretion, we can do no less than respect and
maintain unfettered his official acts in the premises. It is a salutary
rule that the judicial department should not dictate to the executive
department what to do with regard to the administration and
disposition of the public domain which the law has entrusted to its
care and administration. Indeed, courts cannot superimpose their
discretion on that of the land department and compel the latter to do
an act which involves the exercise of judgment and discretion. 22

Therefore, with the view that we take of this case, and even
assuming that the injunction was properly issued because present
all the requisite grounds for its issuance, its continuation, and,
worse, its declaration as permanent, was improper in the face of the
knowledge later acquired by the lower court that it was the
appellant's application over the fishpond which was given due
course. After the Secretary of Agriculture and Natural Resources
approved the appellant's application, he became to all intents and
purposes the legal permittee of the area with the corresponding right
to possess, occupy and enjoy the same. Consequently, the lower
court erred in issuing the preliminary mandatory injunction. We
cannot overemphasize that an injunction should not be granted to
take property out of the possession and control of one party and
place it in the hands of another whose title has not been clearly
established by law.23

However, pursuant to our holding that there was a partnership

between the parties for the exploitation of the fishpond before it was
awarded to Casteel, this case should be remanded to the lower
court for the reception of evidence relative to an accounting from
November 25, 1949 to September 15, 1950, in order for the court to
determine (a) the profits realized by the partnership, (b) the share
(in the profits) of Casteel as industrial partner, (e) the share (in the
profits) of Deluao as capitalist partner, and (d) whether the amounts
totalling about P27,000 advanced by Deluao to Casteel for the
development and improvement of the fishpond have already been
liquidated. Besides, since the appellee Inocencia Deluao continued
in possession and enjoyment of the fishpond even after it was
awarded to Casteel, she did so no longer in the concept of a
capitalist partner but merely as creditor of the appellant, and
therefore, she must likewise submit in the lower court an accounting
of the proceeds of the sales of all the fishes harvested from the
fishpond from September 16, 1950 until Casteel shall have been
finally given the possession and enjoyment of the same. In the
DELUAO v. CASTEEL ISSUE:
Whether the reinstatement of Casteel over the subject land
G.R. No. L-21906; December 24, 1968 constitute a dissolution of the partnership between him and
Deluao
Ponente: J. Castro
HELD:

FACTS: Yes, the reinstatement of Casteel dissolved his partnership

In 1940 Nicanor Casteel unsuccessfully registered a fishpond
in a big tract of swampy land, 178.76 hectares, in the then
sitio of Malalag, municipality of Padada, Davao for 3
consecutive times because the Bureau of Fisheries did not
act upon his previous applications.
Despite the said rejection, Casteel did not lose interest.
Because of the threat poised upon his position by the other
applicants who entered upon and spread themselves within
the area, Casteel realized the urgent necessity of expanding
his occupation thereof by constructing dikes and cultivating
marketable fishes. But lacking financial resources at that
time, he sought financial aid from his uncle Felipe Deluao.
Moreover, upon learning that portions of the area applied
for by him were already occupied by rival applicants, Casteel
immediately filed a protest. Consequently, two
administrative cases ensued involving the area in question.
However, despite the finding made in the investigation of
the above administrative cases, the Director of Fisheries
nevertheless rejected Casteel's application on October 25,
1949, required him to remove all the improvements which
he had introduced on the land, and ordered that the land be
leased through public auction
with Deluao.
The Supreme Court ruled that the arrangement under the
so-called "contract of service" continued until the decision
both dated Sept. 15, 1950 were issued by the Secretary of
Agriculture and Natural Resources in DANR Cases 353 and
353-B.
This development, by itself, brought about the dissolution of
the partnership. Since the partnership had for its object the
division into two equal parts of the fishpond between the
appellees and the appellant after it shall have been awarded
to the latter, and therefore it envisaged the unauthorized
transfer of one half thereof to parties other than the
applicant Casteel, it was dissolved by the approval of his
application and the award to him of the fishpond.
The approval was an event which made it unlawful for the
members to carry it on in partnership. Moreover,
subsequent events likewise reveal the intent of both parties
to terminate the partnership because each refused to share
the fishpond with the other.

On November 25, 1949 Inocencia Deluao (wife of Felipe

Deluao) as party of the first part, and Nicanor Casteel as
party of the second part, executed a contract —
denominated a "contract of service". On the same date the
above contract was entered into, Inocencia Deluao executed
a special power of attorney in favor of Jesus Donesa

On November 29, 1949 the Director of Fisheries rejected the

application filed by Felipe Deluao on November 17, 1948.
Unfazed by this rejection, Deluao reiterated his claim over
the same area in the two administrative cases and asked for
reinvestigation of the application of Nicanor Casteel over the
subject fishpond.

The Secretary of Agriculture and Natural Resources

rendered a decision ordering Casteel to be reinstated in the
area and that he shall pay for the improvement made
thereupon.
Sometime in January 1951 Nicanor Casteel forbade
Inocencia Deluao from further administering the fishpond,
and ejected the latter's representative (encargado), Jesus
Donesa, from the premises.