G.R. No. 20780. November 09, 1923

STATEMENT

The plaintiff is a domestic banking corporation, with its principal office
and place of business in the City of Manila, operating under a special charter
granted by the Philippine Legislature, known as Act No. 1790.

The defendant is the duly appointed, qualified, and acting Collector of
Internal Revenue of the Philippine Islands.

For cause of action, plaintiff alleges that article 26 of its Charter
provides:

“The bank shall be held to renounce all claim to the exclusive privilege of
issuing notes in the Philippine Islands, or to any other exclusive privilege not
set forth in this Act; but no laws or regulations shall be made or enforced
affecting the bank, or imposing charges or taxation upon it, which shall not
apply equally to other banks of a similar type operating under similar
conditions, and no bank shall be authorized to issue circulating notes in the
Philippine Islands with a paid-up capital less than two million pesos; but this
provision shall not preclude the Government from granting special privileges to
agricultural banks, savings banks, mortgage banks, or other institutions of
special types whose principal business is not commercial
banking.”

That after it was granted by Act No. 2612 on February 4, 1916, the
Legislature of the Philippine Islands granted a charter to the Philippine
National Bank, by section 18 of which authority is given the bank to issue
circulating notes, and that in such section it was provided that:

“* * * Said circulating notes shall be exempt from any and all taxes levied
or assessed by the Philippine Government, or any department, division or
subdivision thereof.”

That, through the Collector of Internal Revenue, the Government has always
claimed and exercised the right to collect from the plaintiff internal revenue
taxes upon its circulating notes issued by the plaintiff under the authority of
its charter for one-twelfth of one per cent upon the average amount of its
circulation, and compelled the plaintiff to pay such taxes, and that it has paid
such taxes; that the enactment of the provisions of article 26 above quoted was
in violation of the contract entered into between the plaintiff and the
Philippine Government; that the defendant has not collected taxes upon the
circulation of the Philippine National Bank, and that, by reason of the fact
above stated, the plaintiff was and is entitled to the same exemptions and
privileges as the Philippine National Bank, it being a bank of similar type and
operating under similar conditions; that the defendant wrongfully and unlawfully
demanded and collected from the plaintiff upon its circulation the following
sums upon the following dates, to wit:

“On October 27, 1919, the sum
of	P15,170.72
On April 30, 1920, the sum of	20,884.75
On October 30, 1920, the sum
of	22,415.58
On April 30, 1921, the sum of	22,460.00
On October 31, 1921, the sum
of	22,458.56
	_________
	103,389.61	“

That the interest upon such taxes from the time of the filing of the
complaint amounts to P5,728.32; that each year the plaintiff paid the taxes
under protest, and that demand therefor has been made and payment refused.

Wherefore, the plaintiff prays judgment against the defendant for the sum of
P109,117.93, with interest from November 1, 1921, with costs.

December 21, 1921, the defendant filed a demurrer to the complaint upon the
ground that it did not state facts sufficient to constitute a cause of
action.

After arguments, the lower court sustained the demurrer, from which the
plaintiff appealed to this Court.

In an opinion written by Mr. Justice Johnson, to which three members
dissented, the judgment of the lower court was reversed,^[1] and remanded with leave to the defendant to
answer.

The defendant, without waiving the legal point raised in his demurrer, then
filed an answer, admitting the formal part of the complaint, and alleging the
collection of the taxes as alleged, and specifically denies all of the other
material allegations of the complaint, and, as a special defense, alleges:
(a) That the plaintiff is a private corporation organized for private
purposes, and is exclusively owned and managed by private interest; and that the
Philippine National Bank is a Government institution established to promote the
public interests and welfare of the Government, which owned more than one-half
of the capital stock, and which has supervision and control over the bank;
(b) that the plaintiff is not a bank of similar type operating under
similar conditions to the National Bank, nor is it entitled to the same
exemptions and privileges as the National Bank; (c) that at the time the
taxes mentioned in the first paragraph were paid by the plaintiff, Act No. 2612
of the Philippine Legislature was no longer in force, and that it was amended
and superseded by Acts Nos. 2747 and 2938; that under the provisions of section
14 of Act No. 2747 and section 15 of Act No. 2938, the circulating notes of the
Philippine National Bank, with the exception of those issued against gold coin
of the United States, are not exempt from taxes, and the defendant has
heretofore levied and collected the taxes due on the circulating notes of the
National Bank; that the plaintiff has no note circulation issued against gold
coin of the United States, and the circulating notes upon which the taxes were
paid were of the same kind and type on which the National Bank was paying taxes;
that Acts Nos. 2747 and 2938 are not laws or regulations affecting the plaintiff
bank or imposing charges or taxation upon it; (d) that the plaintiff paid
the taxes voluntarily without any compulsion or demand by the defendant;
(e) that the charter of the plaintiff bank has not in any way been
violated, and that the taxes paid by the plaintiff were legally due the
Government.

It is then alleged that the action to recover the taxes paid on October 27,
1919, is barred by the statute of limitations.

Upon such issues, the parties entered into the following stipulation of
facts:

“It is hereby stipulated and agreed by and between the parties hereto that
the following facts are true and that the same may be used upon trial with the
same force and effect as though given as evidence before the court:

“That the plaintiff is a domestic corporation, as alleged in the complaint,
organized for a private end and benefit and operating under Act No. 1790 of the
Philippine Commission with its outstanding capital stock owned by private
individuals and corporations;

“That the activities of the plaintiff and the business done by it is such as
permitted and set forth in said Act No. 1790;

“That the Philippine National Bank is a banking corporation organized under
Acts Nos. 2612, 2747, and 2938 of said Legislature;

“That 92 per cent of its outstanding capital stock is owned by the Government
of the Philippine Islands and 8 per cent by individuals and corporations;

“That the activities and business of said Philippine National Bank are such
as are permitted and set forth in said last above-mentioned acts;

“That the payment of taxes upon its circulation made by the plaintiff,
alleged by the complaint and admitted by the defendant in his answer, were made
under due and timely protest, but without any compulsion or previous demand from
the defendant, and such payments were made to avoid payment of penalties in case
of non-payment;

“That heretofore and on the 9th day of March, 1922, and after the beginning
of this action, the defendant made demand upon the Philippine National Bank for
the payment of taxes under its circulation;

“That the amount of said circulation issued under Act No. 2924 from October
7, 1919, to October 31, 1921, was P10,926,300, as is more fully shown by Exhibit
A attached hereto and made a part hereof;

“That the amount of circulation issued against its capital stock by said
Philippine National Bank from October 7, 1919, to October 31, 1921, was
P19,299,500, as is more fully shown by Exhibit B attached hereto and made a part
hereof;

“That heretofore and on the 15th day of July, 1922, the said Philippine
National Bank paid the defendant as taxes upon its circulations shown in Exhibit
B, the sum of P519,043.03; and on the 2d day of August, 1922, said bank paid the
defendant further the sum of P129,760.77, being 25 per cent surcharge upon the
taxes paid as last above-mentioned ; that the Philippine National Bank has not
since its organization issued any circulating notes against gold coin of the
United States held in the bank’s own vault or to its order in the Treasury of
the Philippine Islands or of the United States or in solvent National Banks of
the United States or in any Federal Reserve Bank thereof;

“That both of said payments were made under due and timely protest and that
the Board of Directors of the said Philippine National Bank has resolved to
bring an action against the defendant for the recovery of said sums if the
Secretary of Justice, to whom the matter has been referred for advice, should,
in his capacity as ex-officio attorney for the Bank, approve of such action;

“That the payments made by the Philippine National Bank of taxes on its
circulation are more fully shown in Exhibit C which is attached hereto and made
a part hereof;

“That plaintiff’s action was filed in Court on November 1, 1921;

“That on January 28, 1922, the Attorney-General of the Philippine Islands
rendered an opinion on the taxability of the circulating notes of the Philippine
National Bank, a copy of which will be submitted to the Court by
defendant.”

The plaintiff also offered the oral testimony of two witnesses as experts in
the knowledge of banking, for the purpose of showing that the two banks were of
similar type and operating under similar conditions, to which offer the
defendant objected, and the objection was sustained.

Upon such issues and the
stipulated facts, the lower court rendered judgment for the defendant, from
which the plaintiff appeals, contending that the court erred in rejecting the
testimony of the two witnesses as to the similarity of the banks; “in finding
that the statement of agreed facts submitted by the parties admitted that ‘on
the other hand, the Philippine National Bank was created to promote the general
interests of the country, etc.;’ in finding that said agreed statement of facts
admitted ‘That, in accordance with the law, the Philippine National Bank pays
the corresponding tax upon notes put in circulation, etc.’ and omitting the
facts as set forth in said statement in that regard; in finding that section 18
of Act No. 2612 contains a provision that does not affect plaintiff but refers
exclusively to the Philippine National Bank;” in finding the law to be as stated
in the dissenting opinion upon the demurrer in the former appeal; in finding
that because the Philippine National Bank paid taxes upon its circulating notes,
plaintiff’s cause of action was not proven; and in rendering judgment for the
defendant.

---

^[1] Bank of the Philippine Islands
vs. Trinidad, G. R. No. 18747, promulgated September 23, 1922, not
reported.

JOHNS, J.:

The Banco Español Filipino was incorporated under a charter granted by the
Kingdom of Spain by which certain rights and privileges were conferred upon it,
and specially that of the exclusive right of issuing and circulating notes of
the bank to an amount equal to three times of its capital stock. After the
Treaty of Paris, a dispute arose between the bank and the Government authorities
as to the powers, rights and privileges of the bank under its then charter,
resulting in the enactment of Act No. 1790 by the Philippine Commission October
12, 1907, in and by which certain rights and privileges under the Spanish
charter were surrendered and the powers of the bank were specifically defined,
and article 26 above quoted, upon which the plaintiff now relies, was then
enacted.

By the terms of the Act, the corporate name of the bank was changed to that
of Bank of the Philippine Islands.

This was followed by Act No. 2612 of the Philippine Legislature creating what
is known as the Philippine National Bank, in and by which, under section 18
thereof, it is provided that the circulating notes of that bank “shall be exempt
from any and all taxes levied or assessed by the Philippine Government, or any
department, division or subdivision thereof.”

Plaintiff contends that the Philippine National Bank is a bank of a similar
type to it, and that it is operated under similar conditions, and that the
exemption in favor of the Philippine National Bank under section 18 of its
charter, was in violation of, and is in direct conflict with, the provisions of
article 26 of plaintiff’s charter. It will be noted that section 18 above quoted
further provides for the issuance of circulating notes, specifying the amount,
the redemption of securities, and that—

“The said securities described in section eleven and the proceeds thereof
shall be held inviolable for the payment and redemption of said circulating
notes. Said circulating notes shall be engraved and shall be payable on demand
to the bearer in lawful money of the Philippine Islands. There shall at all
times be held by said bank a sum not less than thirty-three and one-third per
cent of the total amount of said circulating notes outstanding in lawful money
of the Philippine Islands. Said sum shall be available only for the purpose of
redeeming the circulating notes herein provided for.”

February 20, 1918, the Legislature of the Philippine Islands passed Act No.
2747, entitled:

“An Act to amend in certain particulars Act Numbered Twenty-six hundred and
twelve, entitled ‘An Act creating the Philippine National Bank.’
“

Section 48 of which provides that—

“All Acts or parts of Acts inconsistent or incompatible with the provisions
of this Act are hereby repealed.”

Section 15 of Act No. 2747 provides for the issuance of circulating notes,
and further—

“There shall at all times be held by said National Bank a sum not less than
thirty-three and one-third per cent of the total amount of said circulating
notes issued and outstanding and not covered by gold coin of the United States
as herein provided for in lawful money of the Philippine Islands.

*             *             *             *             *       
     *             *

“It is hereby further provided that in addition to the circulating notes
above provided for, said National Bank shall have authority to issue its
circulating notes against gold coin of the United States to the full value
thereof: Provided, however, That such gold coin against which circulating
notes have been issued shall be held by said bank and used for no other purpose
except the redemption of said circulating notes. The said bank, however, shall
have the privilege of redeeming said circulating notes in any lawful money of
the Philippine Islands. Such circulating notes shall be exempt from any and all
taxes levied or assessed by the Philippine Government, or any department,
division or subdivision thereof.

“The said circulating notes shall be receivable by the Philippine Government
in payment of all taxes, dues or other claims due or owing to said Government,
and shall be redeemed by the bank on demand, in lawful money * *
*.”

January 30, 1921, the Philippine Legislature enacted Act No. 2938,
entitled:

“An Act to amend Act Numbered Twenty-six hundred and twelve, entitled ‘An Act
creating the Philippine National Bank,’ as amended by Act Numbered Twenty-seven
hundred and forty-seven.”

The provisions of section 14 of Act No. 2938, as to circulating notes and
exemption from taxation, are identical with the provisions of section 15 above
quoted of Act No. 2747.

Both Acts Nos. 2747 and 2938 expressly provide:

“That in addition to the circulating notes above provided for, said National
Bank shall have authority to issue its circulating notes against gold coin of
the United States to the full value thereof: Provided, however, That such
gold coin against which circulating notes have been issued shall be held by said
Bank and used for no other purpose except the redemption of said circulating
notes. The said bank, however, shall have the privilege of redeeming said
circulating notes in any lawful money of the Philippine Islands. Such
circulating notes shall be exempt from any and all taxes levied or assessed by
the Philippine Government, or any department, division or subdivision thereof.”
And there is no provision in Act No. 2612 for the issuance of circulating notes
of the bank “against gold coin of the United States to the full value thereof,”
or that “such gold coin against which circulating notes have been issued shall
be held by said bank and used for no other purpose except the redemption of said
circulating notes.”

Assuming, without deciding, that, in so far as it exempts the Philippine
National Bank from certain taxes, Act No. 2612 is in conflict with plaintiff’s
charter, such exemption provisions are left out of both Acts Nos. 2747 and 2938.
That is to say, that, as to the question of exemption from taxation, there is no
provision in either Act No. 2747 or Act No. 2938, which is in conflict with the
provisions of plaintiff’s charter. The conflict, if any, which did exist ceased
to exist on February 20, 1918, when Act No. 2747 became a law.

Under the stipulated facts, among others, it is agreed:

“That the Philippine National Bank has not since its organization issued any
circulating notes against gold coin of the United States held in the Bank’s own
vault or to its order in the Treasury of the Philippine Islands or of the United
States or in solvent National Banks of the United States or in any Federal
Reserve Bank thereof.”

As the Attorney-General points out, all of the taxes here involved, and which
the plaintiff now seeks to recover, accrued and were paid after Act No. 2747
became a law, and upon the question here presented Acts Nos. 2747 and 2938 are
identical.

It appears in the Act itself that Act No. 1790, granting the plaintiff its
charter, was in the nature of a compromise of conflicting claims and rights, and
plaintiff’s cause of action is founded upon the theory that it is a contract
between it and the Government, and that Act No. 2612, incorporating the
Philippine National Bank, was a violation of that contract.

Assuming that to be true, and that at the time Act No. 2612 became a law it
had a just cause of grievance, the treatment of which it now complains arose and
the taxes, which it now seeks to recover, accrued after Act No. 2612 was amended
and repealed by Act No. 2747. For such reason, its alleged grievance comes
under, and must be construed by, the terms and provisions of Act No. 2747. In
other words, plaintiff’s cause of action is founded upon an alleged breach of
contract arising from, and growing out of, the granting of a charter to the
Philippine National Bank by Act No. 2612, which contains the provisions above
quoted, and the legislative records show that Act No. 2612 was amended and
repealed by Act No. 2747, and that the last Act became the law of the land on
February 20, 1918, and that the payment of the taxes, of which plaintiff now
complains, accrued on and after October 27, 1919.

It is further contended that prior to the time this action was commenced, the
Philippine National Bank had not paid or been requested to pay any tax upon its
circulating notes, and, for such reasons, the plaintiff is entitled to the
refund of the taxes which it has paid upon its circulating notes. The taxes in
question were levied and assessed under section 1499 of the Administrative Code
of 1917, which, among other things, provides:

“SEC. 1499. Tax on capital, deposits, and circulation of
banks.—Subject to the exemptions herein made there shall be collected from
banks the following taxes on capital, deposits, and circulation:

*             *             *             *             *       
     *             *

“(c) Upon the average amount of circulation issued by the bank,
including as circulation all notes and other obligations calculated or intended
to circulate or be used as money, but not including such as may be retained in
the vault of the bank or redeemed and on deposit for said bank, for each month,
one-twelfth of one per centum.”

The section itself defines the meaning of the word “bank,” as follows:

“Includes every incorporated or other bank, and every person, association, or
company having a place of business where credits are opened by the deposit or
collection of money or currency subject to be paid or remitted upon draft,
check, or order, or where money is advanced or loaned on stocks, bonds, bullion,
bills of exchange, or promissory notes are received for discount or for
sale.”

It must be conceded that, unless otherwise exempt, the plaintiff comes under
the terms and provisions of that section.

The fact that one person may not have paid or been required to pay his taxes
does not exempt another from the payment of his legal taxes, or legally entitle
him to a refund of any taxes which he has paid.

In the final analysis, plaintiff’s cause of action is founded upon an alleged
breach of contract, and the breach, if any, which plaintiff alleges, did not
exist at the time the plaintiff paid the taxes, which it now seeks to
recover.

Again, it appears from the stipulation of facts that after this action was
commenced, and on the 15th day of July, 1922, the Philippine National Bank,
under protest, paid the defendant the sum of P519,043.03 as taxes upon its
circulation, and that on the 2d of August, 1922, it paid the further sum of
P129,760.77, the amount of the 25 per cent surcharge upon such taxes. Although
such taxes were paid under protest in and by which the legal rights, if any, of
the Philippine National Bank were fully protected, the fact remains that the
defendant demanded the payment of such taxes from that bank, and that it paid
such taxes, and that in the absence of proof or allegation, this court has no
right to assume that the demand for payment was not made in good faith, or that
it was not founded upon a legal right.

Under this view, it is not necessary to decide the question as to whether the
plaintiff and the Philippine National Bank are of a “similar type” or operated
“under similar conditions.”

From what has been said, it follows that the judgment of the lower court must
be affirmed. Neither party to recover costs. So ordered.

Malcolm,
Avanceña, Villamor, and Romualdez, JJ., concur.
Johnson,
J., dissents.

---

STREET, J.:

I am of the opinion that the clause in the charter of the Bank of the
Philipine Islands to the effect that no law shall be made or enforced imposing a
charge or taxation upon said bank which shall not apply equally to other banks
of a similar type operating under similar conditions has all the sanctity of a
contract or solemn treaty; and, so far as this clause is concerned, I am of the
opinion that the Philippine National Bank is a bank of similar type to that of
the Bank of the Philippine Islands and operating under similar conditions. From
this it must follow that any subsequent law passed by the Philippine
Legislature, conferring upon the Philippine National Bank the privilege of
issuing tax-exempt notes for circulation as money, must have the effect of
exonerating the Bank of the Philippine Islands from the burden of paying taxes
upon its circulating notes to the same extent.

If therefore the Bank of the
Philippine Islands were to issue circulating notes against gold coin of the
United States held by the bank for no other purpose than their redemption, such
notes would undoubtedly be tax-exempt. But it does not appear that the Bank of
the Philippine Islands has issued any such notes. On the contrary it is to be
assumed that the circulating notes upon which the appellant bank has been taxed
were issued against its capital or against securities deposited with the
Treasurer of the Philippine Islands as contemplated in Article XXIV of its
Charter (Act No. 1790). The circumstance that the Philippine National Bank has
been granted the privilege of issuing tax-exempt notes against gold coin held in
deposit upon trust for their redemption does not exonerate the appellant bank
wholly from tax liability upon all of its issue but only from tax liability upon
such notes as might be issued against gold coin similarly held. The charter
provision upon which the appellant bank relies secures to it equal privileges
only, not better privileges than those conferred upon other banks.