G.R. No.
205428 cost of the one-storey semi-concrete residential house erected on the
REPUBLIC OF THE PHILIPPINES, represented by the DEPARTMENT
OF PUBLIC WORKS AND HIGHWAYS (DPWH), Petitioners
vs
SPOUSES SENANDO F. SALVADOR and JOSEFINA R.
SALVADOR, Respondents
DECISION
DEL CASTILLO, J.:
We resolve the Petition for Review on Certiorari under Rule 45 of the
Rules of Court, assailing the August 23, 2012 Decision 1 and the January
10, 2013 Order 2 of the Regional Trial Court (RTC), Branch 270,
Valenzuela City, in Civil Case No. 17 5-V-11 which directed petitioner
Republic of the Philippines (Republic) to pay respondents spouses
Senando F. Salvador and Josefina R. Salvador consequential damages
equivalent to the value of the capital gains tax and other taxes necessary
for the transfer of the expropriated property in the Republic's name.
The Antecedent Facts
Respondents are the registered owners of a parcel of land with a total
land area of 229 square meters, located in Kaingin
Street, Barangay Parada, Valenzuela City, and covered by Transfer
Certificate of Title No.V-77660. 3
On November 9, 2011, the Republic, represented by the Department of -
Public Works and Highways (DPWH), filed a verified Complaint 4 before
the RTC
for the expropriation of 83 square meters of said parcel of land (subject
property), as well as the improvements thereon, for the construction of
the C-5 Northern Link Road Project Phase 2 (Segment 9) from the North
Luzon Expressway (NLEX) to McArthur Highway. 5
On February 10, 2012, respondents received two checks from the DPWH
representing 100% of the zonal value of the subject property and the
property amounting to ₱l61,850.00 6 and
₱523,449.22, respectively. The
7 8 RTC thereafter issued the
corresponding Writ of Possession in favor of the Republic. 9
On the same day, respondents signified in open court that they
recognized the purpose for which their property is being expropriated
and interposed no objection thereto. 10 They also manifested that they
have already received the total sum of ₱685,349.22 from the DPWH and
are therefore no longer intending to claim any just compensation. 11
Ruling of the Regional Trial Court
In its Decision12 dated August 23, 2012, the RTC rendered judgment in
favor of the Republic condemning t1Je subject property for the purpose
of implementing the construction of the C-5 Northern Link Road Project
Phase 2 (Segment 9) from NLEX to McArthur Highway, Valenzuela
City. 13
The RTC likewise directed the Republic to pay respondents
consequential damages equivalent to the value of the capital gains tax
and other taxes necessary for the transfer of the subject property in the
Republic's name. 14
The Republic moved for partial reconsideration, 15 specifically on the
issue relating to the payment of the capital gains tax, but the RTC denied
the motion in its Order16 dated January 10, 2013 for having been
belatedly filed. The RTC also found no justifiable basis to reconsider its
award of Consequential damages in favor of respondents, as the
payment of capital gains tax and other transfer taxes is but a
consequence of the expropriation proceedings.17
As a result, the Republic filed the present Petition for Review
on Certiorari assailing the RTC's August 23, 2012 Decision and January
10, 2013 Order.
Issues
1
In the present Petition, the Republic raises the following issues for the
Court's resolution: first, whether the RTC correctly denied the Republic's
Motion for Partial Reconsideration for having been filed out of
time; 18 and second, whether the capital gains tax on the transfer of the
expropriated property can be considered as consequential damages that
may be awarded to respondents. 19
The Court's Ruling
The Petition is impressed with merit.
"Section 3, Rule 13 of the Rules of Court provides that if a pleading is
filed by registered mail, x x x the date of mailing shall be considered as
the date of filing. It does not matter when the court actually receives the
mailed pleading."20
In this case, the records show that the Republic filed its Motion for
Partial Reconsideration before the RTC via registered mail on September
28, 2012.21 Although the trial cou1treceived the Republic's motion only
on October 5, 2012,22 it should have considered the pleading to have
been filed on September 28, 2012, the date of its mailing, which is clearly
within the reglementary period of 15 days to file said motion, 23 counted
from September 13, 2012, or the date of the Republic's receipt of the
assailed Decision.24
Given these circumstances, we hold that the RTC erred in denying the
Republic's Motion for Partial Reconsideration for having been filed out
of time.1âwphi1
We likewise rule that the RTC committed a serious error when it
directed the Republic to pay respondents consequential damages
equivalent to the value of the capital gains tax and other taxes necessary
for the transfer of the subject property.
"Just compensation [is defined as] the full and fair equivalent of the
property sought to be expropriated.x x x The measure is not the taker's
gain but the owner's loss. [The compensation, to be just,] must be fair
not only to the owner but also to the taker."25
In order to determine just compensation, the trial court should first
ascertain the market value of the property by considering the cost of
acquisition, the current value of like properties, its actual or potential
uses, and in the particular case of lands, their size, shape, location, and
the tax declarations thereon. 26 if as a result of the expropriation, the
remaining lot suffers from an impairment or decrease in value,
consequential damages may be awarded by the trial court, provided that
the consequential benefits which may arise from the expropriation do
not exceed said damages suffered by the owner of the property. 27
While it is true that "the determination of the amount of just
compensation is within the court's discretion, it should not be done
arbitrarily or capriciously. [Rather,] it must [always] be based on all
established rules, upon correct legal principles and competent
evidence." 28 The court cannot base its judgment on mere speculations
and surmises. 29
In the present case, the RTC deemed it "fair and just that x x x whatever
is the value of the capital gains tax and all other taxes necessary for the
transfer of the subject property to the [Republic] are but consequential
damages that should be paid by the latter."30 The RTC further explained
in its assailed Order that said award in favor of respondents is but
equitable, just, and fair, viz.:
As aptly pointed out by [respondents], they were merely forced by
circumstances to be dispossessed of [the] subject property owing to the
exercise of the State of its sovereign power to expropriate. The payment
of capital gains tax and other transfer taxes is a consequence of the
expropriation proceedings. It is in the sense of equity, justness and
fairness, and as upheld by the Supreme Court in the case of Capitol
Subdivision, Inc. vs. Province of Negros Occidental, G.R. No. L-16257,
January 31, 1963 that the assailed consequential damages was awarded
by the court. 31
This is clearly an error. It is settled that the transfer of property through
expropriation proceedings is a sale or· exchange within the meaning of
Sections 24(D) and 56(A) (3) of the National Internal Revenue Code, and
profit from the transaction constitutes capital gain. 32 Since capital gains
2
tax is a tax on passive income, it is the seller, or respondents in this case,
who are liable to shoulder the tax. 33

In fact, the Bureau of Internal Revenue (BIR), in BIR Ruling No. 476-2013
dated December 18, 2013, has constituted the DPWH as a withholding
agent tasked to withhold the 6% final withholding tax in the
expropriation of real property for infrastructure projects. 11ms, as far as
the government is concerned, the capital gains tax in expropriation
proceedings remains a liability of the seller, as it is a tax on the seller's
gain from the sale of real property. 34

Besides, as previously explained, consequential damages are only

awarded if as a result of the expropriation, the remaining property of the
owner suffersfrom an impairment or decrease in value. 35 In this case, no
evidence was submitted to prove any impairment or decrease in value of
the subject property as a result of the expropriation. More significantly,
given that the payment of capital gains tax on the transfer· of the subject
property has no effect on the increase or decrease in value of the
remaining property, it can hardly be considered as consequential
damages that may be awarded to respondents.

WHEREFORE, we GRANT the Petition for Review on Certiorari. The

Decision dated August 23, 2012 and the Order dated January 10, 2013 of
the Regional Trial Court, Branch 270, Valenzuela City, in Civil Case No.
175-V-11, are hereby MODIFIED, in that the award of consequential
damages is DELETED. In addition, spouses Senando F. Salvador and
Josefina R. Salvador are hereby ORDERED to pay for the capital gains tax
due on the transfer of the expropriated property.

SO ORDERED.

3
 Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 211666 February 25, 2015
REPUBLIC OF THE PHILIPPINES, represented by the DEPARTMENT
OF PUBLIC WORKS AND HIGHWAYS,Petitioners,
vs.
ARLENE R. SORIANO, Respondent.
DECISION
PERALTA, J.:
Before the Court is a petition for review under Rule 45 of the Rules of
Court assailing the Decision1 dated November 15, 2013 and Order2 dated
March 10, 2014 of the Regional Trial Court (RTC), Valenzuela City,
Branch 270, in Civil Case No. 140-V-10.
The antecedent facts are as follows:
On October 20, 2010, petitioner Republic of the Philippines, represented
by the Department of Public Works and Highways (DPWH), filed a
Complaint3 for expropriation against respondent Arlene R. Soriano, the
registered owner of a parcel of land consisting of an area of 200 square
meters, situated at Gen. T De Leon, Valenzuela City, and covered by
Transfer Certificate of Title (TCT) No. V-13790.4 In its Complaint,
petitioner averred that pursuant to Republic Act (RA) No. 8974,
otherwise known as "An Act to Facilitate the Acquisition of Right-Of-
Way, Site or Location for National Government Infrastructure Projects
and for other Purposes," the property sought to be expropriated shall be
used in implementing the construction of the North Luzon Expressway
(NLEX)- Harbor Link Project (Segment 9) from NLEX to MacArthur
Highway, Valenzuela City.5
Petitioner duly deposited to the Acting Branch Clerk of Court the amount
of ₱420,000.00 representing 100% of the zonal value of the subject
property. Consequently, in an Order6 dated May 27, 2011, the RTC
ordered the issuance of a Writ of Possession and a Writ of Expropriation
for failure of respondent, or any of her representatives, to appear
despite notice during the hearing called for the purpose.
In another Order7 dated June 21, 2011, the RTC appointed the following
members of the Board of Commissioners for the determination of just
compensation: (1) Ms. Eunice O. Josue, Officer-in-Charge, RTC, Branch
270, Valenzuela City; (2) Atty. Cecilynne R. Andrade, Acting Valenzuela
City Assessor,City Assessor’s Office, Valenzuela City; and (3) Engr.
Restituto Bautista, of Brgy. Bisig,Valenzuela City. However, the trial court
subsequently revoked the appointment of the Board for their failure to
submit a report as to the fair market value of the property to assist the
court in the determination of just compensation and directed the parties
to submit their respective position papers.8 Thereafter, the case was set
for hearing giving the parties the opportunity to present and identify all
evidence in support of their arguments therein. According to the RTC,
the records of the case reveal that petitioner adduced evidence to show
that the total amount deposited is just, fair, and equitable. Specifically, in
its Position Paper, petitioner alleged that pursuant to a Certification
issued by the Bureau of Internal Revenue (BIR), Revenue Region No. 5,
the zonal value of the subject property in the amount of ₱2,100.00 per
square meter is reasonable, fair, and just to compensate the defendant
for the taking of her property in the total area of 200 square meters.9 In
fact, Tax Declaration No. C-018-07994, dated November 13, 2009
submitted by petitioner, shows that the value of the subject property is
at a lower rate of ₱400.00per square meter. Moreover, as testified to by
Associate Solicitor III Julie P. Mercurio, and as affirmed by the
photographs submitted, the subject property is poorly maintained,
covered by shrubs and weeds, and not concretely-paved. It is located far
from commercial or industrial developments in an area without a proper
drainage system, can only be accessed through a narrow dirt road, and is
surrounded by adjacent dwellings of sub-standard materials.
Accordingly, the RTC considered respondent to have waived her right to
adduce evidence and to object to the evidence submitted by petitioner
for her continued absence despite being given several notices to do so.
4
On November 15, 2013, the RTC rendered its Decision, the dispositive
portion of which reads: WHEREFORE, with the foregoing determination
of just compensation, judgment is hereby rendered:
1) Declaring plaintiff to have lawful right to acquire possession of
and title to 200 square meters of defendant Arlene R. Soriano’s
parcel of land covered by TCT V-13790 necessary for the
construction of the NLEX – Harbor Link Project(Segment 9) from
NLEX to MacArthur Highway Valenzuela City;
2) Condemning portion to the extent of 200 square meters of the
above-described parcel of land including improvements thereon,
if there be any, free from all liens and encumbrances;
3) Ordering the plaintiff to pay defendant Arlene R. Soriano
Php2,100.00 per square meter or the sum of Four Hundred
Twenty Thousand Pesos (Php420,000.00) for the 200 square
meters as fair, equitable, and just compensation with legal
interest at 12% per annum from the taking of the possession of
the property, subject to the payment of all unpaid real property
taxes and other relevant taxes, if there be any;
4) Plaintiff is likewise ordered to pay the defendant
consequential damages which shall include the value of the
transfer tax necessary for the transfer of the subject property
from the name of the defendant to that of the plaintiff;
5) The Office of the Register of Deeds of Valenzuela City, Metro
Manila is directed to annotate this Decision in Transfer
Certificate of Title No. V-13790 registered under the name of
Arlene R. Soriano.
Let a certified true copy of this decision be recorded in the Registry of
Deeds of Valenzuela City.
Records of this case show that the Land Bank Manager’s Check Nos.
0000016913 dated January 21, 2011 in the amount of Php400,000.00
and 0000017263 dated April 28, 2011 in the amount of Php20,000.00
issued by the Department of Public Works and Highways (DPWH) are
already stale. Thus, the said Office is hereby directed to issue another
Manager’s Check in the total amount Php420,000.00 under the name of
the Office of the Clerk of Court, Regional Trial Court, Valenzuela City
earmarked for the instant case.10
Petitioner filed a Motion for Reconsideration maintaining that pursuant
to Bangko Sentral ng Pilipinas (BSP) Circular No. 799, Series of 2013,
which took effect on July 1, 2013, the interest rate imposed by the RTC
on just compensation should be lowered to 6% for the instant case falls
under a loan or forbearance of money.11 In its Order12 dated March 10,
2014, the RTC reduced the interest rate to 6% per annum not on the
basis of the aforementioned Circular, but on Article 2209 of the Civil
Code, viz.:
However, the case of National Power Corporation v. Honorable Zain B.
Angas is instructive.
In the aforementioned case law, which is similar to the instant case, the
Supreme Court had the occasion to rule that it is well-settled that the
aforequoted provision of Bangko Sentral ng Pilipinas Circular applies
only to a loan or forbearance of money, goods or credits. However, the
term "judgments" as used in Section 1 of the Usury Law and the previous
Central Bank Circular No. 416, should be interpreted to mean only
judgments involving loan or forbearance of money, goods or credits,
following the principle of ejusdem generis. And applying said rule on
statutory construction, the general term "judgments" can refer only to
judgments in cases involving loans or forbearance of any money, goods,
or credits. Thus, the High Court held that, Art. 2209 of the Civil Code, and
not the Central Bank Circular, is the law applicable.
Art. 2009 of the Civil Code reads:
"If the obligation consists in the payment of a sum of money, and the
debtor incurs in delay, the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of the interest agreed
upon, and in the absence of stipulation, the legal interest, which is six per
cent per annum."
5
Further in that case, the Supreme Court explained that the transaction
involved is clearly not a loan or forbearance of money, goods or credits
but expropriation of certain parcels of land for a public purpose, the
payment of which is without stipulation regarding interest, and the
interest adjudged by the trial court is in the nature of indemnity for
damages. The legal interest required to be paid on the amount of just
compensation for the properties expropriated is manifestly in the form
of indemnity for damages for the delay in the payment thereof. It
ultimately held that Art. 2209 of the Civil Code shall apply.13
On May 12, 2014, petitioner filed the instant petition invoking the
following arguments:
I.
RESPONDENT IS NOT ENTITLED TO THE LEGAL INTEREST OF
6% PER ANNUM ON THE AMOUNT OF JUST COMPENSATION OF
THE SUBJECT PROPERTY AS THERE WAS NO DELAY ON THE
PART OF PETITIONER.
II.
BASED ON THE NATIONAL INTERNAL REVENUE CODE OF 1997
AND THE LOCAL GOVERNMENT CODE, IT IS RESPONDENT’S
OBLIGATION TO PAY THE TRANSFER TAXES.
Petitioner maintains that if property is taken for public use before
compensation is deposited with the court having jurisdiction over the
case, the final compensation must include interests on its just value
computed from the time the property is taken up to the time when
compensation is actually paid or deposited with the court.14 Thus, legal
interest applies only when the property was taken prior to the deposit of
payment with the court and only to the extent that there is delay in
payment. In the instant case, petitioner posits that since it was able to
deposit with the court the amount representing the zonal value of the
property before its taking, it cannot be said to be in delay, and thus,
there can be no interest due on the payment of just
compensation.15 Moreover, petitioner alleges that since the entire
subject property was expropriated and not merely a portion thereof, it
did not suffer an impairment or decrease in value, rendering the award
of consequential damages nugatory. Furthermore, petitioner claims that
contrary to the RTC’s instruction, transfer taxes, in the nature of Capital
Gains Tax and Documentary Stamp Tax, necessary for the transfer of the
subject property from the name of the respondent to that of the
petitioner are liabilities of respondent and not petitioner.
The petition is partly meritorious.
At the outset, it must be noted that the RTC’s reliance on National Power
Corporation v. Angasis misplaced for the same has already been
overturned by our more recent ruling in Republic v. Court of
Appeals,16 wherein we held that the payment of just compensation for
the expropriated property amounts to an effective forbearance on the
part of the State, to wit:
Aside from this ruling, Republic notably overturned the Court’s previous
ruling in National Power Corporation v. Angas which held that just
compensation due for expropriated properties is not a loan or
forbearance of money but indemnity for damages for the delay in
payment; since the interest involved is in the nature of damages rather
than earnings from loans, then Art. 2209 of the Civil Code, which fixes
legal interest at 6%, shall apply.
In Republic, the Court recognized that the just compensation due to the
landowners for their expropriated property amounted to an effective
forbearance on the part of the State. Applying the Eastern Shipping Lines
ruling, the Court fixed the applicable interest rate at 12% per annum,
computed from the time the property was taken until the full amount of
just compensation was paid, in order to eliminate the issue of the
constant fluctuation and inflation of the value of the currency over time.
In the Court’s own words:
The Bulacan trial court, in its 1979 decision, was correct in imposing
interest[s] on the zonal value of the property to be computed from the
time petitioner instituted condemnation proceedings and "took" the
property in September 1969. This allowance of interest on the amount
found to be the value of the property as of the time of the taking
computed, being an effective forbearance, at 12% per annum should
6
help eliminate the issue of the constant fluctuation and inflation of the
value of the currency over time.
We subsequently upheld Republic’s 12% per annum interest rate on the
unpaid expropriation compensation in the following cases: Reyes v.
National Housing Authority, Land Bank of the Philippines v. Wycoco,
Republic v. Court of Appeals, Land Bank of the Philippines v. Imperial,
Philippine Ports Authority v. Rosales-Bondoc, and Curata v. Philippine
Ports Authority.17 Effectively, therefore, the debt incurred by the
government on account of the taking of the property subject of an
expropriation constitutes a forbearance18 which runs contrary to the
trial court’s opinion that the same is in the nature of indemnity for
damages calling for the application of Article 2209 of the Civil Code.
Nevertheless, in line with the recent circular of the Monetary Board of
the Bangko Sentral ng Pilipinas (BSP-MB) No. 799, Series of 2013,
effective July 1, 2013, the prevailing rate of interest for loans or
forbearance of money is six percent (6%) per annum, in the absence of
an express contract as to such rate of interest.
Notwithstanding the foregoing, We find that the imposition of interest in
this case is unwarranted in view of the fact that as evidenced by the
acknowledgment receipt19 signed by the Branch Clerk of Court,
petitioner was able to deposit with the trial court the amount
representing the zonal value of the property before its taking. As often
ruled by this Court, the award of interest is imposed in the nature of
damages for delay in payment which, in effect, makes the obligation on
the part of the government one of forbearance to ensure prompt
payment of the value of the land and limit the opportunity loss of the
owner.20 However, when there is no delay in the payment of just
compensation, We have not hesitated in deleting the imposition of
interest thereon for the same is justified only in cases where delay has
been sufficiently established.21
The records of this case reveal that petitioner did not delay in its
payment of just compensation as it had deposited the pertinent amount
in full due to respondent on January 24, 2011, or four (4) months before
the taking thereof, which was when the RTC ordered the issuance of a
Writ of Possession and a Writ of Expropriation on May 27, 2011. The
amount deposited was deemed by the trial court to be just, fair, and
equitable, taking into account the well-established factors in assessing
the value of land, such as its size, condition, location, tax declaration, and
zonal valuation as determined by the BIR. Considering, therefore, the
prompt payment by the petitioner of the full amount of just
compensation as determined by the RTC, We find that the imposition of
interest thereon is unjustified and should be deleted.
Similarly, the award of consequential damages should likewise be
deleted in view of the fact that the entire area of the subject property is
being expropriated, and not merely a portion thereof, wherein such
remaining portion suffers an impairment or decrease in value, as
enunciated in Republic of the Philippines v. Bank of the Philippine
Islands,22thus:
x x x The general rule is that the just compensation to which the owner
of the condemned property is entitled to is the market value. Market
value is that sum of money which a person desirous but not compelled to
buy, and an owner willing but not compelled to sell, would agree on as a
price to be paid by the buyer and received by the seller. The general rule,
however, is modified where only a part of a certain property is
expropriated. In such a case, the owner is not restricted to compensation
for the portion actually taken, he is also entitled to recover the
consequential damage, if any, to the remaining part of the property.
xxxx
No actual taking of the building is necessary to grant consequential
damages. Consequential damages are awarded if as a result of the
expropriation, the remaining property of the owner suffers from an
impairment or decrease in value. The rules on expropriation clearly
provide a legal basis for the award of consequential damages. Section 6
of Rule 67 of the Rules of Court provides:
x x x The commissioners shall assess the consequential damages to the
property not taken and deduct from such consequential damages the
consequential benefits to be derived by the owner from the public use or
public purpose of the property taken, the operation of its franchise by
the corporation or the carrying on of the business of the corporation or
person taking the property. But in no case shall the consequential
7
benefits assessed exceed the consequential damages assessed, or the
owner be deprived of the actual value of his property so taken.
In B.H. Berkenkotter & Co. v. Court of Appeals, we held that:
To determine just compensation, the trial court should first ascertain the
market value of the property, to which should be added the
consequential damages after deducting therefrom the consequential
benefits which may arise from the expropriation. If the consequential
benefits exceed the consequential damages, these items should be
disregarded altogether as the basic value of the property should be paid
in every case.23
Considering that the subject property is being expropriated in its
entirety, there is no remaining portion which may suffer an impairment
or decrease in value as a result of the expropriation. Hence, the award of
consequential damages is improper.
Anent petitioner’s contention that it cannot be made to pay the value of
the transfer taxes in the nature of capital gains tax and documentary
stamp tax, which are necessary for the transfer of the subject property
from the name of the respondent to that of the petitioner, the same is
partly meritorious.
With respect to the capital gains tax, We find merit in petitioner’s
posture that pursuant to Sections 24(D) and 56(A)(3) of the 1997
National Internal Revenue Code (NIRC), capital gains tax due on the sale
of real property is a liability for the account of the seller, to wit:
Section 24. Income Tax Rates–
xxxx
(D) Capital Gains from Sale of Real Property. –
(1) In General. – The provisions of Section 39(B) notwithstanding, a final
tax of six percent (6%) based on the gross selling price or current fair
market value as determined in accordance with Section 6(E) of this
Code, whichever is higher, is hereby imposed upon capital gains
presumed to have been realized from the sale, exchange, or other
disposition of real property located in the Philippines, classified as
capital assets, including pacto de retro sales and other forms of
conditional sales, by individuals, including estates and trusts: Provided,
That the tax liability, if any, on gains from sales or other disposition of
real property to the government or any of its political subdivisions or
agencies or to government-owned or controlled corporations shall be
determined either under Section 24(A)or under this Subsection, at the
option of the taxpayer.
xxxx
Section 56. Payment and Assessment of Income Tax for Individuals and
Corporations. – (A) Payment of Tax –
xxxx
(3) Payment of Capital Gains Tax. - The total amount of tax imposed and
prescribed under Section 24 (c), 24(D), 27(E)(2), 28(A)(8)(c) and
28(B)(5)(c) shall be paid on the date the return prescribed therefor is
filed by the person liable thereto: Provided, That if the seller submits
proof of his intention to avail himself of the benefit of exemption of
capital gains under existing special laws, no such payments shall be
required : Provided, further, That in case of failure to qualify for
exemption under such special laws and implementing rules and
regulations, the tax due on the gains realized from the original
transaction shall immediately become due and payable, subject to the
penalties prescribed under applicable provisions of this Code: Provided,
finally, That if the seller, having paid the tax, submits such proof of intent
within six (6) months from the registration of the document transferring
the real property, he shall be entitled to a refund of such tax upon
verification of his compliance with the requirements for such exemption.
Thus, it has been held that since capital gains is a tax on passive income,
it is the seller, not the buyer, who generally would shoulder the
tax.24 Accordingly, the BIR, in its BIR Ruling No. 476-2013, dated
December 18, 2013, constituted the DPWH as a withholding agent to
withhold the six percent (6%) final withholding tax in the expropriation
of real property for infrastructure projects. As far as the government is
8
concerned, therefore, the capital gains tax remains a liability of the seller
since it is a tax on the seller's gain from the sale of the real estate.25
As to the documentary stamp tax, however, this Court finds inconsistent
petitioner’s denial of liability to the same. Petitioner cites Section 196 of
the 1997 NIRC as its basis in saying that the documentary stamp tax is
the liability of the seller, viz.:
SECTION 196. Stamp Tax on Deeds of Sale and Conveyances of Real
Property. - On all conveyances, deeds, instruments, or writings, other
than grants, patents or original certificates of adjudication issued by the
Government, whereby any land, tenement or other realty sold shall be
granted, assigned, transferred or otherwise conveyed to the purchaser,
or purchasers, or to any other person or persons designated by such
purchaser or purchasers, there shall be collected a documentary stamp
tax, at the rates herein below prescribed, based on the consideration
contracted to be paid for such realty or on its fair market value
determined in accordance with Section 6(E) of this Code, whichever is
higher: Provided, That when one of the contracting parties is the
Government, the tax herein imposed shall be based on the actual
consideration: (a) When the consideration, or value received or
contracted to be paid for such realty, after making proper allowance of
any encumbrance, does not exceed One thousand pesos (₱1,000), Fifteen
pesos (₱15.00).
(b) For each additional One thousand pesos (₱1,000), or fractional part
thereof in excess of One thousand pesos (₱1,000) of such consideration
or value, Fifteen pesos (₱15.00).
When it appears that the amount of the documentary stamp tax payable
hereunder has been reduced by an incorrect statement of the
consideration in any conveyance, deed, instrument or writing subject to
such tax the Commissioner, provincial or city Treasurer, or other
revenue officer shall, from the assessment rolls or other reliable source
of information, assess the property of its true market value and collect
the proper tax thereon.
Yet, a perusal of the provision cited above does not explicitly impute the
obligation to pay the documentary stamp tax on the seller. In fact,
according to the BIR, all the parties to a transaction are primarily liable
for the documentary stamp tax, as provided by Section 2 of BIR Revenue
Regulations No. 9-2000, which reads:26
SEC. 2. Nature of the Documentary Stamp Tax and Persons Liable for the
Tax. –
(a) In General. - The documentary stamp taxes under Title VII of
the Code is a tax on certain transactions.1âwphi1 It is imposed
against "the person making, signing, issuing, accepting, or
transferring" the document or facility evidencing the aforesaid
transactions. Thus, in general, it may be imposed on the
transaction itself or upon the document underlying such act. Any
of the parties thereto shall be liable for the full amount of the tax
due: Provided, however, that as between themselves, the said
parties may agree on who shall be liable or how they may share
on the cost of the tax.
(b) Exception. - Whenever one of the parties to the taxable
transaction is exempt from the tax imposed under Title VII of the
Code, the other party thereto who is not exempt shall be the one
directly liable for the tax.27
As a general rule, therefore, any of the parties to a transaction shall be
liable for the full amount of the documentary stamp tax due, unless they
agree among themselves on who shall be liable for the same.
In this case, there is no agreement as to the party liable for the
documentary stamp tax due on the sale of the land to be expropriated.
But while petitioner rejects any liability for the same, this Court must
take note of petitioner’s Citizen’s Charter,28 which functions as a guide
for the procedure to be taken by the DPWH in acquiring real property
through expropriation under RA 8974. The Citizen’s Charter, issued by
petitioner DPWH itself on December 4,2013, explicitly provides that the
documentary stamp tax, transfer tax, and registration fee due on the
transfer of the title of land in the name of the Republic shall be
shouldered by the implementing agency of the DPWH, while the capital
gains tax shall be paid by the affected property owner.29 Thus, while
there is no specific agreement between petitioner and respondent,
9
petitioner's issuance of the Citizen's Charter serves as its notice to the
public as to the procedure it shall generally take in cases of
expropriation under RA 8974. Accordingly, it will be rather unjust for
this Court to blindly accede to petitioner's vague rejection of liability in
the face of its issuance of the Citizen's Charter, which contains a clear
and unequivocal assumption of accountability for the documentary
stamp tax. Had petitioner provided this Court with more convincing
basis, apart from a mere citation of an indefinite provision of the 1997
NIRC, showing that it should be respondent-seller who shall be liable for
the documentary stamp tax due on the sale of the subject property, its
rejection of the payment of the same could have been sustained.
WHEREFORE, premises considered, the instant pet1t10n 1s PARTIALLY
GRANTED. The Decision and Order, dated November 15, 2013 and
March 10, 2014, respectively, of the Regional Trial Court, Valenzuela
City, Branch 270, in Civil Case No. 140-V-10 are hereby MODIFIED, in
that the imposition of interest on the payment of just compensation as
well as the award of consequential damages are deleted. In addition,
respondent Arlene R. Soriano is ORDERED to pay for the capital gains tax
due on the transfer of the expropriated property, while the documentary
stamp tax, transfer tax, and registration fee shall be for the account of
petitioner.

SO ORDERED.

10
 Republic of the Philippines Upon compliance with the guidelines abovementioned, the court shall
SUPREME COURT immediately issue to the implementing agency an order to take
Manila possession of the property and start the implementation of the project.
(Emphasis and underscoring supplied)
THIRD DIVISION
Clearly, the state through the agency causing the taking complies with
G.R. No. 211666 February 25, 2015 the requirements for the issuance of a writ of possession only when it
pays the owner.
REPUBLIC OF THE PHILIPPINES, represented by the DEPARTMENT
OF PUBLIC WORKS AND HIGHWAYS,Petitioners, Of course, the owner may contest the proffered value by the agency1 or
vs. the power of the agency to exercise eminent domain, the necessity of the
ARLENE R. SORIANO, Respondent. taking, or the public character of the use for which the property is being
condemned. In such cases, the value required by Section 4(a) will be
CONCURRING OPINION deposited with the trial court with jurisdiction over the case.

LEONEN, J.: This case does not present these issues, and I am of the view that the
pronouncements should be limited only to cases where there are no
I concur in the result. objections to the taking of the property.

Republic Act No. 8974, Section 4 provides in part:
SEC. 4. Guidelines for Expropriation Proceedings. - Whenever it is
necessary to acquire real property for the right-of-way, site or location
for any national government infrastructure project through
expropriation, the appropriate implementing agency shall initiate the
expropriation proceedings before the proper court under the following
guidelines:
a. Upon the filing of the complaint, and after due notice to the defendant,
the implementing agency shall immediately pay the owner of the.
property the amount equivalent to the sum of (I) one hundred percent
(100%) of the value of the property based on the current relevant zonal
valuation of the Bureau of Internal Revenue (BIR); and (2) the value of
the improvements and/or structures as determined under Section 7
hereof;
Legal interest, whether in the form of monetary interest (for
forbearance) or compensatory interest (for damages) also does not
apply in this case. In Sun Life of Canada (Philippines), Inc. v. Sandra Tan
Kit,2 the two (2) kinds of interest rates were distinguished.3 Monetary
interest rate is determined by parties that enter into a contract of loan,
or any other contract involving the use or forbearance of money. Thus,
monetary interest represents the cost of letting another person use or
borrow money. On the other hand, compensatory interest rates are
determined by courts as a penalty or indemnity for damages in
monetary judgments.
There is no showing that the owner was denied payment of the amount
deposited by the Department of Public Works and Highways in
accordance with Republic Act No. 8974. Furthermore, there is no
complaint by the landowner of any delay in payment.1âwphi1 The
property was subject to a writ of possession dated March 27, 2011.

.... Should there be any delay, I am of the view that the value of the property
should be at the time of the taking, but the actual price paid should be
computed using the formula for present value as of the time of payment.4
11
In other words, we compute for replacement value. Monetary interest or
compensatory interest will not be relevant.

Finally, I agree that documentary stamp taxes are not necessarily for the
account of the seller. This is especially so in expropriation cases where
the sale is coerced and the owner is unwilling. I, however, doubt whether
the "Citizen's Charter" of the Department of Public Works and Highways,
published in its website, should have the effect of a regulation. At best, it
is evidence that can lead to a finding of estoppel if all the elements of
that equitable defense are alleged and proven by the proper party.

ACCORDINGLY, I concur that the Petition be PARTIALLY GRANTED. The

Decision dated November 15, 2013 and Order dated March 10, 2014 of
the Regional Trial Court in Civil Case No. 140-V-10 are hereby
MODIFIED, in that the imposition of interest on the payment of just
compensation and the award of consequential damages are deleted. In
addition, respondent is ORDERED to pay for the capital gains tax due to
the transfer of the expropriated property, while the documentary stamp
tax, transfer tax, and registration fee shall be for the account of
petitioner.

MARVIC M.V.F. LEONEN

Associate Justice

12
 Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-26284 October 8, 1986
TOMAS CALASANZ, ET AL., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and the COURT OF
TAX APPEALS, respondents.
San Juan, Africa, Gonzales & San Agustin Law Office for petitioners.
FERNAN, J.:
Appeal taken by Spouses Tomas and Ursula Calasanz from the decision
of the Court of Tax Appeals in CTA No. 1275 dated June 7, 1966, holding
them liable for the payment of P3,561.24 as deficiency income tax and
interest for the calendar year 1957 and P150.00 as real estate dealer's
fixed tax.
Petitioner Ursula Calasanz inherited from her father Mariano de Torres
an agricultural land located in Cainta, Rizal, containing a total area of
1,678,000 square meters. In order to liquidate her inheritance, Ursula
Calasanz had the land surveyed and subdivided into lots. Improvements,
such as good roads, concrete gutters, drainage and lighting system, were
introduced to make the lots saleable. Soon after, the lots were sold to the
public at a profit.
In their joint income tax return for the year 1957 filed with the Bureau
of Internal Revenue on March 31, 1958, petitioners disclosed a profit of
P31,060.06 realized from the sale of the subdivided lots, and reported
fifty per centum thereof or P15,530.03 as taxable capital gains.
Upon an audit and review of the return thus filed, the Revenue Examiner
adjudged petitioners engaged in business as real estate dealers, as
defined in Section 194 [s] 1 of the National Internal Revenue Code,
required them to pay the real estate dealer's tax 2 and assessed a
deficiency income tax on profits derived from the sale of the lots based
on the rates for ordinary income.
On September 29, 1962, petitioners received from respondent
Commissioner of Internal Revenue:
a. Demand No. 90-B-032293-57 in the amount of P160.00
representing real estate dealer's fixed tax of P150.00 and P10.00
compromise penalty for late payment; and
b. Assessment No. 90-5-35699 in the amount of P3,561.24 as
deficiency income tax on ordinary gain of P3,018.00 plus interest
of P 543.24.
On October 17, 1962, petitioners filed with the Court of Tax Appeals a
petition for review contesting the aforementioned assessments.
On June 7, 1966, the Tax Court upheld the respondent Commissioner
except for that portion of the assessment regarding the compromise
penalty of P10.00 for the reason that in this jurisdiction, the same cannot
be collected in the absence of a valid and binding compromise
agreement.
Hence, the present appeal.
The issues for consideration are:
a. Whether or not petitioners are real estate dealers liable for real
estate dealer's fixed tax; and
13
 b. Whether the gains realized from the sale of the lots are taxable in
full as ordinary income or capital gains taxable at capital gain rates.
The issues are closely interrelated and will be taken jointly.
Petitioners assail their liabilities as "real estate dealers" and seek to
bring the profits from the sale of the lots under Section 34 [b] [2] 3 of the
Tax Code.
The theory advanced by the petitioners is that inherited land is a capital
asset within the meaning of Section 34[a] [1] of the Tax Code and that an
heir who liquidated his inheritance cannot be said to have engaged in
the real estate business and may not be denied the preferential tax
treatment given to gains from sale of capital assets, merely because he
disposed of it in the only possible and advantageous way.
Petitioners averred that the tract of land subject of the controversy was
sold because of their intention to effect a liquidation. They claimed that
it was parcelled out into smaller lots because its size proved difficult, if
not impossible, of disposition in one single transaction. They pointed out
that once subdivided, certainly, the lots cannot be sold in one isolated
transaction. Petitioners, however, admitted that roads and other
improvements were introduced to facilitate its sale. 4
On the other hand, respondent Commissioner maintained that the
imposition of the taxes in question is in accordance with law since
petitioners are deemed to be in the real estate business for having been
involved in a series of real estate transactions pursued for profit.
Respondent argued that property acquired by inheritance may be
converted from an investment property to a business property if, as in
the present case, it was subdivided, improved, and subsequently sold
and the number, continuity and frequency of the sales were such as to
constitute "doing business." Respondent likewise contended that
inherited property is by itself neutral and the fact that the ultimate
purpose is to liquidate is of no moment for the important inquiry is what
the taxpayer did with the property. Respondent concluded that since the
lots are ordinary assets, the profits realized therefrom are ordinary
gains, hence taxable in full.
We agree with the respondent.
The assets of a taxpayer are classified for income tax purposes into
ordinary assets and capital assets. Section 34[a] [1] of the National
Internal Revenue Code broadly defines capital assets as follows:
[1] Capital assets.-The term 'capital assets' means property held by
the taxpayer [whether or not connected with his trade or business],
but does not include, stock in trade of the taxpayer or other property
of a kind which would properly be included, in the inventory of the
taxpayer if on hand at the close of the taxable year, or property held
by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business, or property used in the trade or
business of a character which is subject to the allowance for
depreciation provided in subsection [f] of section thirty; or real
property used in the trade or business of the taxpayer.
The statutory definition of capital assets is negative in nature. 5 If the
asset is not among the exceptions, it is a capital asset; conversely, assets
falling within the exceptions are ordinary assets. And necessarily, any
gain resulting from the sale or exchange of an asset is a capital gain or an
ordinary gain depending on the kind of asset involved in the transaction.
However, there is no rigid rule or fixed formula by which it can be
determined with finality whether property sold by a taxpayer was held
primarily for sale to customers in the ordinary course of his trade or
business or whether it was sold as a capital asset. 6 Although several
factors or indices 7 have been recognized as helpful guides in making a
determination, none of these is decisive; neither is the presence nor the
absence of these factors conclusive. Each case must in the last analysis
rest upon its own peculiar facts and circumstances. 8
Also a property initially classified as a capital asset may thereafter be
treated as an ordinary asset if a combination of the factors indubitably
tend to show that the activity was in furtherance of or in the course of
the taxpayer's trade or business. Thus, a sale of inherited real property
usually gives capital gain or loss even though the property has to be
subdivided or improved or both to make it salable. However, if the
inherited property is substantially improved or very actively sold or
14
both it may be treated as held primarily for sale to customers in the
ordinary course of the heir's business. 9
Upon an examination of the facts on record, We are convinced that the
activities of petitioners are indistinguishable from those invariably
employed by one engaged in the business of selling real estate.
One strong factor against petitioners' contention is the business element
of development which is very much in evidence. Petitioners did not sell
the land in the condition in which they acquired it. While the land was
originally devoted to rice and fruit trees, 10 it was subdivided into small
lots and in the process converted into a residential subdivision and given
the name Don Mariano Subdivision. Extensive improvements like the
laying out of streets, construction of concrete gutters and installation of
lighting system and drainage facilities, among others, were undertaken
to enhance the value of the lots and make them more attractive to
prospective buyers. The audited financial statements 11 submitted
together with the tax return in question disclosed that a considerable
amount was expended to cover the cost of improvements. As a matter of
fact, the estimated improvements of the lots sold reached P170,028.60
whereas the cost of the land is only P 4,742.66. There is authority that a
property ceases to be a capital asset if the amount expended to improve
it is double its original cost, for the extensive improvement indicates that
the seller held the property primarily for sale to customers in the
ordinary course of his business. 12
Another distinctive feature of the real estate business discernible from
the records is the existence of contracts receivables, which stood at
P395,693.35 as of the year ended December 31, 1957. The sizable
amount of receivables in comparison with the sales volume of
P446,407.00 during the same period signifies that the lots were sold on
installment basis and suggests the number, continuity and frequency of
the sales. Also of significance is the circumstance that the lots were
advertised 13 for sale to the public and that sales and collection
commissions were paid out during the period in question.
Petitioners, likewise, urge that the lots were sold solely for the purpose
of liquidation.
In Ehrman vs. Commissioner,14 the American court in clear and
categorical terms rejected the liquidation test in determining whether or
not a taxpayer is carrying on a trade or business The court observed that
the fact that property is sold for purposes of liquidation does not
foreclose a determination that a "trade or business" is being conducted
by the seller. The court enunciated further:
We fail to see that the reasons behind a person's entering into a
business-whether it is to make money or whether it is to
liquidate-should be determinative of the question of whether or
not the gains resulting from the sales are ordinary gains or capital
gains. The sole question is-were the taxpayers in the business of
subdividing real estate? If they were, then it seems indisputable
that the property sold falls within the exception in the definition
of capital assets . . . that is, that it constituted 'property held by the
taxpayer primarily for sale to customers in the ordinary course of
his trade or business.
Additionally, in Home Co., Inc. vs. Commissioner, 15 the court articulated
on the matter in this wise:
One may, of course, liquidate a capital asset. To do so, it is
necessary to sell. The sale may be conducted in the most
advantageous manner to the seller and he will not lose the
benefits of the capital gain provision of the statute unless he
enters the real estate business and carries on the sale in the
manner in which such a business is ordinarily conducted. In that
event, the liquidation constitutes a business and a sale in the
ordinary course of such a business and the preferred tax status is
lost.
In view of the foregoing, We hold that in the course of selling the
subdivided lots, petitioners engaged in the real estate business and
accordingly, the gains from the sale of the lots are ordinary income
taxable in full.
WHEREFORE, the decision of the Court of Tax Appeals is affirmed. No
costs.
15
 [G.R. No. 125508. July 19, 2000]
CHINA BANKING CORPORATION, petitioner, vs. COURT OF APPEALS,
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX
APPEALS, respondents.
DECISION
VITUG, J.:
The Commissioner of Internal Revenue denied the deduction from
gross income of "securities becoming worthless" claimed by China
Banking Corporation (CBC). The Commissioners disallowance was
sustained by the Court of Tax Appeals ("CTA"). When the ruling was
appealed to the Court of Appeals ("CA"), the appellate court upheld the
CTA. The case is now before us on a Petition for Review on Certiorari.
Sometime in 1980, petitioner China Banking Corporation made a
53% equity investment in the First CBC Capital (Asia) Ltd., a Hongkong
subsidiary engaged in financing and investment with "deposit-taking"
function. The investment amounted to P16,227,851.80, consisting of
106,000 shares with a par Value of P100 per share.
In the course of the regular examination of the financial books and
investment portfolios of petitioner conducted by Bangko Sentral in 1986,
it was shown that First CBC Capital (Asia), Ltd., has become
insolvent. With the approval of Bangko Sentral, petitioner wrote-off as
being worthless its investment in First CBC Capital (Asia), Ltd., in its
1987 Income Tax Return and treated it as a bad debt or as an ordinary
loss deductible from its gross income.
Respondent Commissioner of internal Revenue disallowed the
deduction and assessed petitioner for income tax deficiency in the
amount of P8,533,328.04, inclusive of surcharge, interest and
compromise penalty. The disallowance of the deduction was made on
the ground that the investment should not be classified as being
"worthless" and that, although the Hongkong Banking Commissioner
had revoked the license of First CBC Capital as a "deposit-taping"
company, the latter could still exercise, however, its financing and
investment activities.Assuming that the securities had indeed become
worthless, respondent Commissioner of Internal Revenue held the view
that they should then be classified as "capital loss," and not as a bad debt
expense there being no indebtedness to speak of between petitioner and
its subsidiary.
Petitioner contested the ruling of respondent Commissioner before
the CTA. The tax court sustained the Commissioner, holding that the
securities had not indeed become worthless and ordered petitioner to
pay its deficiency income tax for 1987 of P8,533,328.04 plus 20%
interest per annum until fully paid. When the decision was appealed to
the Court of Appeals, the latter upheld the CTA. In its instant petition for
review on certiorari, petitioner bank assails the CA decision.
The petition must fail.
The claim of petitioner that the shares of stock in question have
become worthless is based on a Profit and Loss Account for the Year-End
31 December 1987, and the recommendation of Bangko Sentral that the
equity investment be written-off due to the insolvency of the
subsidiary. While the matter may not be indubitable (considering that
certain classes of intangibles, like franchises and goodwill, are not
always given corresponding values in financial statements[1], there may
really be no need, however, to go of length into this issue since, even to
assume the worthlessness of the shares, the deductibility thereof would
still be nil in this particular case. At all events, the Court is not prepared
to hold that both the tax court and the appellate court are utterly devoid
of substantial basis for their own factual findings.
Subject to certain exceptions, such as the compensation income of
individuals and passive income subject to final tax, as well as income of
non-resident aliens and foreign corporations not engaged in trade or
business in the Philippines, the tax on income is imposed on the net
income allowing certain specified deductions from gross income to be
claimed by the taxpayer.Among the deductible items allowed by the
National Internal Revenue Code ("NIRC") are bad debts and losses.[2]
An equity investment is a capital, not ordinary, asset of the investor
the sale or exchange of which results in either a capital gain or a capital
loss. The gain or the loss is ordinary whenthe property sold or
exchanged is not a capital asset.[3] A capital asset is defined negatively in
Section 33(1) of the NIRC; viz:
(1) Capital assets. - The term 'capital assets' means property held by the
taxpayer (whether or not connected with his trade or business), but
does not include stock in trade of the taxpayer or other property of a
kind which would properly be included in the inventory of the taxpayer
16
if on hand at the close of the taxable year, or property held by the
taxpayer primarily for sale to customers in the ordinary course of his
trade or business, or property used in the trade or business, of a
character which is subject to the allowance for depreciation provided in
subsection (f) of section twenty-nine; or real property used in the trade
or business of the taxpayer.
Thus, shares of stock; like the other securities defined in Section
20(t)[4] of the NIRC, would be ordinary assets only to a dealer in
securities or a person engaged in the purchase and sale of, or an
active trader (for his own account) in, securities. Section 20(u) of the
NIRC defines a dealer in securities thus:
"(u) The term 'dealer in securities' means a merchant of stocks or
securities, whether an individual, partnership or corporation, with an
established place of business, regularly engaged in the purchase of
securities and their resale to customers; that is, one who as a merchant
buys securities and sells them to customers with a view to the gains and
profits that may be derived therefrom."
In the hands, however, of another who holds the shares of stock by way
of an investment, the shares to him would be capital assets. When
the shares held by such investor become worthless, the loss is
deemed to be a loss from the sale or exchange of capital
assets. Section 29(d)(4)(B) of the NIRC states:
"(B) Securities becoming worthless. - If securities as defined in Section
20 become worthless during the tax" year and are capital assets, the loss
resulting therefrom shall, for the purposes of his Title, be considered as a
loss from the sale or exchange, on the last day of such taxable year, of
capital assets."
The above provision conveys that the loss sustained by the holder of the
securities, which are capital assets (to him), is to be treated as a capital
loss as if incurred from a sale or exchange transaction. A capital gain
or a capital loss normally requires the concurrence of two conditions for
it to result: (1) There is a sale or exchange; and (2) the thing sold or
exchanged is a capital asset. When securities become worthless, there is
strictly no sale or exchange but the law deems the loss anyway to be "a
loss from the sale or exchange of capital assets.[5]A similar kind of
treatment is given, by the NIRC on the retirement of certificates of
indebtedness with interest coupons or in registered form, short sales
and options to buy or sell property where no sale or exchange strictly
exists.[6] In these cases, the NIRC dispenses, in effect, with the standard
requirement of a sale or exchange for the application of the capital gain
and loss provisions of the code.
Capital losses are allowed to be deducted only to the extent of
capital gains, i.e., gains derived from the sale or exchange of capital
assets, and not from any other income of the taxpayer.
In the case at bar, First CBC Capital (Asia), Ltd., the investee
corporation, is a subsidiary corporation of petitioner bank whose shares
in said investee corporation are not intended for purchase or sale but as
an investment. Unquestionably then, any loss therefrom would be a
capital loss, not an ordinary loss, to the investor.
Section 29(d)(4)(A), of the NIRC expresses:
"(A) Limitations. - Losses from sales or exchanges of capital assets shall
be allowed only to the extent provided in Section 33."
The pertinent provisions of Section 33 of the NIRC referred to in the
aforesaid Section 29(d)(4)(A), read:
"Section 33. Capital gains and losses. -
x x x x x x x x x.
"(c) Limitation on capital losses. - Losses from sales or exchange of
capital assets shall be allowed only to the extent of the gains from
such sales or exchanges. If a bank or trust company incorporated
under the laws of the Philippines, a substantial part of whose business is
the receipt of deposits, sells any bond, debenture, note, or certificate or
other evidence of indebtedness issued by any corporation (including
one issued by a government or political subdivision thereof), with
interest coupons or in registered form, any loss resulting from such
sale shall not be subject to the foregoing limitation an shall not be
17
included in determining the applicability of such limitation to other
losses.
The exclusionary clause found in the foregoing text of the law does
not include all forms of securities but specifically covers only bonds,
debentures, notes, certificates or other evidence of indebtedness,
with interest coupons or in registered form, which are the
instruments of credit normally dealt with in the usual lending operations
of a financial institution.Equity holdings cannot come close to being,
within the purview of "evidence of indebtedness" under the second
sentence of the aforequoted paragraph. Verily, it is for a like thesis that
the loss of petitioner bank in its equity in vestment in the Hongkong
subsidiary cannot also be deductible as a bad debt. The shares of stock
in question do not constitute a loan extended by it to its subsidiary (First
CBC Capital) or a debt subject to obligatory repayment by the latter,
essential elements to constitute a bad debt, but a long term investment
made by CBC.
One other item. Section 34(c)(1) of the NIRC , states that the entire
amount of the gain or loss upon the sale or exchange of property, as the
case may be, shall be recognized. The complete text reads:
SECTION 34. Determination of amount of and recognition of gain or
loss.-
"(a) Computation of gain or loss. - The gain from the sale or other
disposition of property shall be the excess of the amount realized
therefrom over the basis or adjusted basis for determining gain and the
loss shall be the excess of the basis or adjusted basis for determining loss
over the amount realized. The amount realized from the sale or other
disposition of property shall be to sum of money received plus the fair
market value of the property (other than money) received. (As amended
by E.O. No. 37)
"(b) Basis for determining gain or loss from sale or disposition of
property. - The basis of property shall be - (1) The cost thereof in cases
of property acquired on or before March 1, 1913, if such property was
acquired by purchase; or
"(2) The fair market price or value as of the date of acquisition if the
same was acquired by inheritance; or
"(3) If the property was acquired by gift the basis shall be the same as if
it would be in the hands of the donor or the last preceding owner by
whom it was not acquired by gift, except that if such basis is greater than
the fair market value of the property at the time of the gift, then for the
purpose of determining loss the basis shall be such fair market value; or
"(4) If the property, other than capital asset referred to in Section 21 (e),
was acquired for less than an adequate consideration in money or
moneys worth, the basis of such property is (i) the amount paid by the
transferee for the property or (ii) the transferor's adjusted basis at the
time of the transfer whichever is greater.
"(5) The basis as defined in paragraph (c) (5) of this section if the
property was acquired in a transaction where gain or loss is not
recognized under paragraph (c) (2) of this section. (As amended by E.O.
No. 37)
(c) Exchange of property.
"(1) General rule.- Except as herein provided, upon the sale or exchange
of property, the entire amount of the gain or loss, as the case may be,
shall be recognized.
"(2) Exception. - No gain or loss shall be recognized if in pursuance of a
plan of merger or consolidation (a) a corporation which is a party to a
merger or consolidation exchanges property solely for stock in a
corporation which is, a party to the merger or consolidation, (b) a
shareholder exchanges stock in a corporation which is a party to the
merger or consolidation solely for the stock in another corporation also
a party to the merger or consolidation, or (c) a security holder of a
corporation which is a party to the merger or consolidation exchanges
his securities in such corporation solely for stock or securities in another
corporation, a party to the merger or consolidation.
"No gain or loss shall also be recognized if property is transferred to a
corporation by a person in exchange for stock in such corporation of
18
which as a result of such exchange said person, alone or together with
others, not exceeding four persons, gains control of said
corporation: Provided, That stocks issued for services shall not be
considered as issued in return of property."

The above law should be taken within context on the general

subject of the determination, and recognition of gain or loss; it is not
preclusive of, let alone renders completely inconsequential, the more
specific provisions of the code. Thus, pursuant, to the same section of the
law, no such recognition shall be made if the sale or exchange is made in
pursuance of a plan of corporate merger or consolidation or, if as a result
of an exchange of property for stocks, the exchanger, alone or together
with others not exceeding four, gains control of the corporation.[7] Then,
too, how the resulting gain might be taxed, or whether or not the loss
would be deductible and how, are matters properly dealt with elsewhere
in various other sections of the NIRC.[8] At all events, it may not be amiss
to once again stress that the basic rule is still that any capital loss can
be deducted only from capital gains under Section 33(c) of the NIRC.
In sum -
(a) The equity investment in shares of stock held by CBC of
approximately 53% in its Hongkong subsidiary, the First CBC Capital
(Asia), Ltd., is not an indebtedness, and it is a capital, not an
ordinary, asset.[9]
(b) Assuming that the equity investment of CBC has indeed become
"worthless," the loss sustained is a capital, not an ordinary, loss.[10]
(c) The capital loss sustained by CBC can only be deducted from
capital gains if any derived by it during the same taxable year that the
securities have become "worthless."[11]
WHEREFORE, the Petition is DENIED. The decision of the Court of
Appeals disallowing the claimed deduction of P16,227,851.80 is
AFFIRMED.
SO ORDERED.

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