G.R. No. 35667. October 30, 1933
PHILIPPINE TELEPHONE & TELEGRAPH COMPANY, PLAINTIFF AND APPELLANT, VS. COLLECTOR OF INTERNAL REVENUE, DEFENDANT AND APPELLEE.
IMPERIAL, J.:
is an appeal interposed by the plaintiff corporation, Philippine
Telephone & Telegraph Company, from the decision of the Court of
First Instance of Manila, the dispositive part of which reads as
follows:
“For the foregoing reasons, the
defendant is absolved from the complaint, and plaintiff is condemned to
pay the defendant on the first counterclaim the sum of fifteen thousand
fifty-seven pesos and fifty-nine centavos (P15,057,59) and on the
second counterclaim the sum of forty-two thousand three hundred sixty
pesos and eighty-two centavos (P42,360.82), making a total of
fifty-seven thousand four hundred eighteen pesos and forty-one centavos
(P57,418.41) with legal interest in each case from the date of the
filing of defendant’s counterclaim, on November 28, 1930.“The plaintiff will pay the costs.
“Let judgment be entered accordingly. It is so ordered.”
The plaintiff, a domestic corporation organized in accordance with the
laws now in force, with its main office in the City of Manila, brought
an action against the Collector of Internal Revenue to recover the sum
of P30,421.65, which had been collected from it as income tax
corresponding to the years 1927, 1928 and 1929 on the total sum of
P1,014,055, which was paid and delivered by said appellant to the
foreign corporations, Philippine Islands Telephone & Telegraph
Company and Telephone Investment Corporation, in the form of dividends
distributed by it in said years, and as shares dividends corresponding
to the aforesaid foreign corporations as stockholders.
In
his answer the appellee substantially admitted the facts above stated,
but denied the right invoked by the appellant; and, as his first
counterclaim, he sought to recover from it the sum of P15,057.59, this
amount having been received by the appellant, which was then a foreign
corporation and the biggest stockholder of the Philippine Islands
Telephone & Telegraph Co., from the latter as annual dividends,
which said Philippine Islands Telephone & Telegraph Co., having
authority to engage in business and in fact engaged in business in the
Philippines as a holder of the franchise created by Act No. 1368,
failed to deduct, as it was its duty to deduct, as income tax for the
years 1919, 1920 and 1921, from the earnings obtained in said years,
amounting to P613,559.34; and as a second and last counterclaim the
appellee sought to recover from the appellant the sum of P42,360.82,
which the latter was bound to pay as income tax on the sum of
P1,412,027.26, paid and delivered by it to the Philippine Islands
Telephone & Telegraph Co. as dividends corresponding to the years
1923 to 1926, and from which said appellant had acquired at the
beginning of the year 1923 the franchise granted by said Act.
The case was submitted for decision on the following:
“STIPULATION OF FACTS
“The
plaintiff and the defendant, by their undersigned attorneys, hereby
stipulate and agree that the following are the facts of this case, and
that judgment may be entered thereon.“With respect to plaintiff’s complaint the admitted facts are as follows:
”
‘1. Plaintiff is a domestic corporation duly organized and existing
under the laws of the Philippine Islands with its principal office in
the City of Manila therein, and the defendant is the Collector of
Internal Revenue of the Philippine Islands.” ‘2.
Plaintiff was, during all the times set forth in the complaint,
transacting the business of furnishing telephone service in the Island
of Luzon, in the Philippine Islands, under and by virtue of a special
franchise granted by the Philippine Commission in Act No. 1368, which
it had duly acquired.” ‘3. It is provided in section 5
of said Act No. 1368, the franchise under which the plaintiff is and
has been transacting business, as aforesaid, among other things, that
the grantees, their successors or assigns, should pay to the Insular
Treasurer each year, two per centum (2%) of their gross receipts from
the telephone, telegraph or other electrical transmission business
transacted under said franchise, and that said percentage should be in
lieu of all taxes on the franchise or earnings thereof.”
‘4. During the years 1927, 1928 and 1929, as well as during the years
prior thereto, the plaintiff corporation duly paid to the Insular
Treasurer the full percentages corresponding to said years, under and
in pursuance of the terms of the franchise referred to in the last
preceding paragraph.” ‘5. Among the stockholders
holding stock in the plaintiff corporation during the said years 1927,
1928 and 1929, and who received dividends from the plaintiff out of its
operations under said franchise, were the Philippine Islands Telephone
& Telegraph Company and the Telephone Investment Corporation, both
of which said stockholders are foreign corporations domiciled in the
United States, not engaged in business or trade within the Philippine
Islands, and not having any office or place of business therein.” ‘6. During the aforesaid years 1927, 1928 and 1929, plaintiff paid to
the stockholder corporations mentioned in the last preceding paragraph,
as dividends duly and lawfully declared by the plaintiff for said years
the aggregate sum of P1,014,055 as follows:
P. I. Telephone and Telegraph Company Telephone Investment Corporation ” ‘7. The defendant, acting under the provisions of sections 9(b) and 13(f)
of the Income Tax Law (Act No. 2833 as amended), levied and assessed
against the plaintiff, and demanded of the latter the payment of the
sum of P30,421.65 as income taxes on the aforesaid amount of
P1,014,055, the dividends paid by the plaintiff as stated in paragraph
6 hereof, notwithstanding the tax exemption or commutation granted to
plaintiff by its charter stated in paragraph 3 hereof.”
‘8. On September 11, 1930, the plaintiff, having no other recourse in
the matter and to avoid the distraint of its goods and the payment of
fines and penalties, under duress, against its will, under due written
protests, paid to the defendant the said sum of P30,421.65, the amount
levied and assessed by defendant against the plaintiff as aforesaid.” ‘9. Said payment mentioned in the last preceding paragraph was made
under five separate protests. A copy of the first protest is set out in
paragraph VIII of the complaint, and is hereby made a part hereof. The
second protest is in all respects like the first, except that it is in
connection with the tax on dividends for 1928 paid to the Philippine
Islands Telephone & Telegraph Company, said tax being in the amount
of P10,576.80. The third protest is in all respects like the first,
except that it is in connection with the tax on dividends for 1928 paid
to the Telephone Investment Corporation, said tax being in the amount
of P198. The fourth protest is in all respects like the first, except
that it is in connection with the tax on dividends for 1929 paid to the
Philippine Islands Telephone & Telegraph Company, said tax being in
the amount of P10,754.85. The fifth protest is in all respects like the
first, except that it is in connection with the tax on dividends for
1929 paid to the Telephone Investment Corporation, said tax being in
the amount of P294.” ’10. On September 13, 1930, the
defendant, in a communication addressed to plaintiff’s attorneys,
overruled and denied each and all of plaintiff’s protests.’“With respect to the first counterclaim of the defendant, the admitted facts are as follows:
”
‘1. During the years 1919, 1920, 1921 and 1922, the Philippine Islands
Telephone and Telegraph Company, a corporation, organized in the United
States and duly authorized to transact business in the Philippine
Islands, transacted the business of furnishing telephone service on the
Island of Luzon under the franchise granted by Act No. 1368 of the
Philippine Commission, hereinabove mentioned, which it had previously
duly acquired.” ‘2. During said years 1919, 1920, 1921
and 1922, the principal stockholder of the said the Philippine Islands
Telephone & Telegraph Company was the Philippine Telephone &
Telegraph Corporation, a non-resident foreign corporation organized and
existing in the United States.” ‘3. During said years
1919, 1920, 1921 and 1922, the said Philippine Islands Telephone &
Telegraph Company delivered to the said Philippine Telephone &
Telegraph Corporation, as the latter’s share in the yearly profits or
dividends duly declared by the former for said years the aggregate sum
of P613,559.34 as follows:
For the year 1919 ………………………………………………….. For the year 1920 ………………………………………………….. For the year 1921 ………………………………………………….. For the year 1922 ………………………………………………….. ………………………………………………….. ” ‘4. In delivering the amounts mentioned in the last preceding
paragraph the Philippine Islands Telephone & Telegraph Company did
not deduct and withhold therefrom and did not make return of the sum of
P15,057.59 which amount is equivalent to a normal tax on the aforesaid
sum of P613,559.34, as follows:
2% normal tax on …………………………………………….. 3% normal tax on …………………………………………….. 3% normal tax on …………………………………………….. 3% normal tax on …………………………………………….. …………………………………………….. ” ‘5. At the beginning of the year 1923 the plaintiff purchased and
acquired all the assets, liabilities and franchises of the said
Philippine Islands Telephone & Telegraph Company, and has since,
during all the time covered by the complaint, been operating a
telephone system on the Island of Luzon under the franchise granted by
Act No. 1368 of the Philippine Commission, as aforesaid.” ‘6. The defendant has demanded of plaintiff the payment of the said
sum of P15,057.59 but the plaintiff refuses to pay the same, alleging
as a reason for its refusal that it is exempt from the payment of said
normal tax amounting to P15,057.59 by virtue of the tax exemption or
commutation provided for in section 5 of its franchise, Act No. 1368 of
the Philippine Commission.’“With respect to the second counterclaim of the defendant, the admitted facts are as follows:
”
‘1. At the beginning of the year 1923, the plaintiff purchased and
acquired from the Philippine Islands Telephone & Telegraph Company,
a corporation organized in the United States and authorized to transact
business in the Philippine Islands, the latter’s franchise granted by
Act No. 1368 of the Philippine Commission, and all property
appertaining thereto; and since then during all the period of time
covered by the complaint the plaintiff has been operating a telephone
system on the Island of Luzon.” ‘2. After thus
transferring its property and franchise to the plaintiff as aforesaid,
the said Philippine Islands Telephone and Telegraph Company ceased to
do business in the Philippine Islands and became a non-resident foreign
corporation, and a majority stockholder in the plaintiff corporation.” ‘3. During the years 1923 to 1926, the plaintiff delivered and paid
over to the Philippine Islands Telephone & Telegraph Company, then
a non-resident foreign corporation, and a stockholder in plaintiff
corporation, as aforesaid, as its share in the yearly dividends or
profits duly declared by plaintiff for the said years, the aggregate
sum of P1,412,027.26, as follows:
1923 ………………………………………………………………… 1924]
1925]………………………………………………………………… 1926 ………………………………………………………………… ”
‘4. In making delivery of the amounts mentioned in the last preceding
paragraph, the plaintiff did not deduct and withhold from the said sum
of P1,412,027.26 and did not make return of the sum of P42,360.82,
which the latter amount is equivalent to a normal tax on the said
aggregate sum of P1,412,027.26, as follows:
3% normal tax on …………………………………………….. 3% normal tax on …………………………………………….. 3% normal tax on …………………………………………….. …………………………………………….. ”
‘5. The defendant has made demand upon the plaintiff for the payment of
the aforesaid sum of P42,360.82, but plaintiff has refused to pay
defendant the said sum, alleging, as a reason for its refusal, that it
is exempt from the payment of said normal tax amounting to P42,360.82
by virtue of the tax exemption or commutation provided for in section 5
of its franchise, Act No. 1368, of the Philippine Commission.’
“Manila, P. I., February 2, 1931. “DEWITT, PERKINS & BRADY “By ____________________________ “DELFIN JARANILLA “By: _______________________
On the foregoing facts we are of the opinion that the only question
submitted for our determination is whether the appellant is bound to
pay said taxes in view of the exemption granted in its favor by section
5 of Act No. 1368 of the Philippine Commission establishing said
franchise.
However, before we proceed with the discussion of
the legal aspect of the case, as above stated, we must first determine
the law upon which the appellee bases his right to collect the income
tax in question, and also whether the dividends of a domestic
corporation, which are distributed and delivered to foreign
corporations, are subject to said tax.
The appellee invokes in support of his authority sections 9 (par. b) and 13 (par. f) of Act No. 2833, as amended otherwise known as Income Tax Law, which reads as follows:
“Sec. 9. (a) *******
“(b) All persons, corporations, joint-stock companies, partnerships, joint accounts (cuentas en participacion), associations, insurance companies, and general copartnerships (compañias colectivas),
in whatever capacity acting, including lessees or mortgagors of
personal property, trustees acting in any trust capacity, executors,
administrators, receivers, conservators, employers, and all officers
and employees of the Government of the Philippine Islands having the
control, receipt, custody, disposal, or payment of interests, rents,
salaries, wages, premiums, annuities, compensations, remunerations,
emoluments, or other fixed or determinable annual or periodical gains,
profits, and income of any nonresident alien individual, other than
income derived from dividends or net profits subject to the tax
established in subsection (a) of section ten are hereby
authorized and required to deduct and withhold from such annual or
periodical gains, profits, and income such sum as will be sufficient to
pay the normal tax thereon, and shall make return thereof on or before
March first of each year, and, on or before the time fixed by law for
the payment of the tax, shall pay the amount withheld to the officer of
the Government of the Philippine Islands authorized to receive the
same; and they are each hereby made personally liable for such tax, and
they are each hereby indemnified against every person, corporation,
joint-stock company, partnership, joint-account (cuenta en participacion), association, or insurance company, or demand whatsoever by reason of the payment of the said tax.”“Sec. 13. *******
“(f)
Likewise, all the provisions of this Law relating to the tax required
to be deducted and withheld and paid to the officer of the Government
of the Philippine Islands authorized to receive the same from the
income of non-resident alien individuals from sources within the
Philippine Islands shall be made applicable to income derived from
dividends upon the capital stock or from the net earnings of domestic
or other resident corporations, joint-stock companies, partnerships,
joint-accounts (cuentas en participacion), associations, and
insurance companies by nonresident alien firms, corporations,
joint-stock companies, partnerships, joint-accounts (cuentas en participacion),
associations, and insurance companies, not engaged in business or trade
within the Philippine Islands and not having any office or place of
business therein.”
In the light of the
provisions of said sections there seems to be no question that the
dividends of a domestic corporation, which are paid and delivered in
cash to foreign corporations as stockholders, are subject to the
payment of said tax.
“An ordinary dividend
on corporate stock, paid in money or its equivalent, and representing a
distribution to stockholders of profits of the corporation, as
distinguished from a stock dividend representing a capitalization of
profits or of an increase in the value of corporate assets, and from
distributions of capital and liquidating dividends, is in- Come of the
recipients, within the meaning of a statute imposing a tax upon
incomes, and accordingly is taxable as such, unless specifically
exempted or excepted by the statute; and the taxability of a dividend
is not affected by the fact that the profits out of which it is
declared have in whole or in part accrued to or been accumulated by the
corporation during a long period of time or even before taxes on
incomes were imposed by law, since corporate profits first become
income of the stockholders when they are distributed as dividends.” (61
C. J., pp. 1572, 1573 and cases cited therein.)
The same rule applies to dividends which are paid and delivered to the stockholders in the form of stock dividends:
“Except
where a statute imposing a tax upon incomes otherwise specifically
provides1, it has been held that a stock dividend in the ordinary
sense, being a dividend on corporate stock paid in newly issued stock
of the corporation, as distinguished from one paid in treasury stock or
in stock of a subsidiary or other corporation, is income, within the
meaning of the statute, and so is subject to taxation thereunder,
whether it represents earnings or profits of the corporation or an
increase in the value of corporate assets, although on the latter point
there is also authority to the contrary.” (61 C. J., 1573 and cases
therein cited.)
In the cases of Posadas vs. Warner, Barnes & Co., and Posadas vs. Menzi (73 Law. ed., 339 et seq.) the Supreme Court of the United States, among other things, said:
“*
* * The Philippine Legislature has power to lay a tax in respect of the
advantage resulting to recipients from the allotment and delivery of
such dividend shares. (Swan Brewing Co. vs. Rex [1914], A. C,
231-P. C.) Respondent rightly concedes that, there being no
constitutional restriction, such dividends may be taxed and that the
statute discloses a purpose to tax them. * * *.”
Reference is herein made to said cases, coming from this court, only
for the purpose of showing that if stock dividends are subject to
income tax, a fortiori the dividends paid and delivered in cash to stockholders should be subject thereto.
We shall now proceed with the consideration of the main question. The
appellant vigorously contends that it is exempted from the payment of
said tax, by virtue of the provisions of section 5 of Act No. 1368,
which reads as follows:
“Sec. 5. The
grantees, their successors or assigns, shall be liable to pay the same
taxes on their real estate, buildings, and personal property exclusive
of the franchise as other persons or corporations are now or hereafter
may be required by law to pay. The grantees, their successors or
assigns, shall further pay to the Insular Treasurer each year, within
ten days after the audit and approval of the accounts as prescribed in
section four of this Act, two per centum of all gross receipts of the
telephone, telegraph, or other electrical transmission business
transacted under this franchise by the grantees, their successors or
assigns, and the said percentage shall be in lieu of all taxes on the
franchise or earnings thereof.”
Section 14 of the same Act, containing some reference to the same subject, reads as follows:
“Sec.
14. The grantees may transfer, sell, or assign this franchise to any
corporation formed, organized, or existing under the laws of the
Philippine Islands or of any State of the United States and such
corporation shall have the right to buy and to own said franchise. Any
corporation to which this franchise is sold, transferred, or assigned
shall be subject to the corporation laws of the Philippine Islands now
existing or hereafter enacted and shall be subject to all the terms,
conditions, restrictions, and limitations of this franchise as fully
and completely and to the same extent as if the franchise had been
originally granted to said corporation.”
It
is contended that the exemption provided by law includes all taxes to
be paid by the appellant on all of its earnings from the business for
which the franchise was granted, with the exception of the 2 per cent
fixed by it. If this contention is correct there is no doubt that the
dividends delivered by the appellant and those which are the subject
matter of the counterclaims are exempted from the payment of income
tax. We hold, however, that such interpretation of the law is
untenable. As the law clearly provides, the exemption only relates to
the income and earnings of the franchise and it should not be construed
as including those which cease to belong to the franchise or to the
corporation holding it, for they have been delivered to its
stockholders as their own. The law did not exempt from the payment of
said tax those dividends paid and delivered to stockholders, because
they ceased to be the property of the corporation and became of the
stockholders; and evidently it was not the intention of the Philippine
Commission to extend such privilege to parties other than the original
holders of the franchise and their grantee.
It is a well
known principle that the States of the Union possess full authority to
collect an income tax from individuals and corporations, in the absence
of any constitutional prohibition, and that the exemptions are to be
given strict interpretation. The Philippine Legislature has the same
authority and may levy taxes on income in the absence of any
prohibition or limitation in the Organic Law, and the same rule of
construction must be adopted. In the instant case the exemption is
evidently limited, and we find no justification for extending it to
dividends received by the stockholders of a corporation after they have
become their exclusive property.
“Since
taxation is necessary to the existence and continuance of government,
there are no implied exemptions from its burdens, and a relinquishment
of such right by the state will not be presumed, unless a deliberate
purpose to relinquish it appears. (Trimble vs. City of Seattle,
116 P., 647; 64 Wash., 102, judgment affirmed 34 S. Ct., 218; 231 U.
S., 683; 58 Law. ed., 435.)” (Am. Dig., 2d Dec, Vol. 21, p. 604.)
The appellant, in its endeavor to show that the dividends received and
delivered to it are included in the exemption, invokes the ruling in
the case of Farrington vs. Tennessee (95 U. S., 679). In order
to determine whether or not the doctrine laid down in said case is
applicable, we quote herein the facts and reasoning given in the
decision, to wit:
“The Union and Planters’
Bank of Memphis was duly organized under a charter granted by the
Legislature of Tennessee, by two acts, bearing date respectively on the
20th of March, 1858, and the 12th of February, 1869. Since its
organization, it has been doing a regular banking business. Its capital
stock subscribed and paid in amounts to $675,000, divided into six
thousand seven hundred and fifty shares of $100 each. Farrington, the
plaintiff in error, was, throughout the year 1872, the owner of one
hundred and fifty shares, of the value of $15,000.“The
tenth section of the charter of the bank declares ‘that the said
company shall pay to the State an annual tax of one half of one per
cent on each share of the capital stock subscribed, which shall be in
lieu of all other taxes.’“The State of Tennessee and the
county of Shelby claiming the right, under the revenue Laws of the
State, to tax the stock of the plaintiff in error, assessed and taxed
it for the year 1872. It was assessed at its par value. The tax imposed
by the State was forty cents on the $100, making the State tax $60. The
county tax was $1.20 on the $100, making the county tax $180.* * * * * * *
“The shares of the capital stock are usually represented by certificates. Every holder is a cestui que trust
to the extent of his ownership. The shares are held and may be bought
and sold and taxed like other property. Each share represents an
aliquot part of the capital stock. But the holder cannot touch a dollar
of the principal. He is entitled only to share in the dividends and
profits. Upon the dissolution of the institution, each shareholder is
entitled to a proportionate share of the residuum after satisfying all
liabilities. The liens of all creditors are prior to his. The
corporation, though holding and owning the capital stock, cannot vote
upon it. It is the right and duty of the shareholders to vote. They in
this way give continuity to the life of the corporation, and may thus
control and direct its management and operations. The capital stock and
the shares may both be taxed, and it is not double taxation. The bank
may be required to pay the tax out of its corporate funds, or be
authorized to deduct the amount paid for each stockholder out of this
dividend. (Ang. & A. Corp., secs. 556, 557; Bank vs. State, 9 Yerg. [Tenn.], 490; Van Allen vs. Assessors, supra; Bradley vs. People, 4 Wall., 459; 71 U. S., XVIII, 433; Queen vs. Arnaud, supra; Bank vs. Commonwealth, 9 Wall., 353; 76 U. S., XIX, 701; State vs. Branin, 3 Zab. [N. J.], 484; M’Culloch vs. Maryland, 4 Wheat, 316.)* * * * * * *
“There
is no question before us as to the tax imposed on the shares by the
charter. But the State has by her revenue law imposed another and an
additional tax on these same shares. This is one of those ‘other taxes’
which it had stipulated to forego. The identity of the thing doubly
taxed is not affected by the fact that in one case the tax is to be
paid vicariously by the bank, and in the other by the owner of the
share himself. The thing thus taxed is still the same, and the second
tax is expressly forbidden by the contract of the parties. After the
most careful consideration, we can come to no other conclusion. Such,
we think, must have been the understanding and intent of the parties
when the charter was granted and the bank was organized. Any other view
would ignore the covenant that the tax specified should be ‘in lieu of
all other taxes.’ It would blot those terms from the context, and
construe it as if they were not a part of it.”
The inapplicability of the principles enunciated in that case becomes readily apparent by taking into consideration:
(a)
that the exemption established by the State of Tennessee was of a
general character, whereas the exemption contained in section 5 of Act
No. 1368 is clearly limited, and (b) that in said case the tax
was levied on 150 shares of the banking corporation, while in the
instant case the same was levied and assessed upon dividends delivered
to corporate stockholders, it being evident, therefore, that the two
cases, are not in pari materia.
The foregoing
considerations, made in connection with the merits’ of the appellant’s
complaint, may be reiterated and applied with equal force to the
appellee’s counterclaims. The dividens in question, at the time they
were paid and delivered by the appellant, as well as when they were
received by it, were subject to the payment of income tax, and we are
convinced that the court a quo correctly applied the law on the point at issue.
For the foregoing reasons, the decision appealed from is affirmed, with costs against the appellant. So ordered.
Avanceña, C. J., Street, Malcolm, Villa-Real, Hull, and Butte, JJ., concur.
DISSENTING
ABAD SANTOS, J.:
As I view it, this case is important not only because of the amount
involved, but because it affects the faith and credit of the Government
of the Philippine Islands. It seems too clear to require any citation
of authorities that Act No. 1368 is a contract between the Government,
on the one hand, and the grantees of the franchise, their successors or
assigns, on the other. Under the contract it was agreed that, in lieu
of all taxes on the franchise or earnings thereof, the grantees, their
successors or assigns should pay to the Government two per centum of
the gross receipts of the business transacted under the franchise. The
Government has thus pledged to exempt the holders of the franchise from
the payment of any taxes on such franchise or earnings thereof. There
is no dispute on this point.
The specific question involved
in this appeal is whether such exemption applies to dividends declared
and distributed by the appellant corporation among its stockholders.
Counsel for the appellant contend that it does, while counsel for the
appellee maintains that it does not. In determining the extent of the
exemption, it is well to bear in mind the purpose thereof, which was to
invite and encourage the investment of capital for the establishment
and maintenance of the telephone, telegraph, or other electrical trans-
mission systems in the Island of Luzon. Viewed in this light, it is, I
think, fair to conclude that it was the intention of the contracting
parties to have the exemption redound to the benefit of those who would
actually risk their capital in the proposed enterprise. In other words,
the exemption was intended to confer substantial benefits not to any
artificial person, such as a corporation, but to real, natural persons,
such as those who compose a stock corporation—its stockholders. That
is, in my opinion, the nature of the obligation of the contract created
by Act No. 1368, which can neither be impaired by subsequent
legislation, nor circumvented by resorting to a legal fiction.
I am of opinion that the judgment appealed from should be reversed.